<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
NHS Financial, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<PAGE>
NHS FINANCIAL, INC.
1050 FOURTH STREET
SAN RAFAEL, CALIFORNIA 94901
(415) 257-3783
August 12, 1996
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders of
NHS Financial, Inc. ("NHS Financial" or the "Company"), the holding company for
New Horizons Savings and Loan Association ("New Horizons" or "Association"), to
be held at the Embassy Suites, located at 101 McInnis Parkway, San Rafael,
California, on September 18, 1996, at 2:00 p.m., Pacific Time.
The primary purpose of the meeting is to consider and vote on a proposal to
approve and adopt the Agreement and Plan of Reorganization ("Reorganization
Agreement") by and among LUTHER BURBANK CORPORATION ("LBC"), a California
corporation, which is registered as a savings and loan holding company, LUTHER
BURBANK SAVINGS AND LOAN ASSOCIATION ("Luther Burbank"), a California
corporation, which is a wholly-owned subsidiary of LBC, the Company and its
wholly-owned subsidiary, New Horizons, and the transactions contemplated thereby
(the "Merger"). The Reorganization Agreement provides that the shareholders of
NHS Financial will have the right to receive $11.50 per share in cash, without
interest, for each share of NHS Financial common stock held. Upon completion of
the Merger, the existing shareholders of NHS Financial will no longer own any
stock or have any interest in NHS Financial, nor will they receive, as a result
of the Merger, any stock of LBC or Luther Burbank.
Details of the proposed Merger and other important information are described
in the accompanying Notice of Special Meeting and Proxy Statement. You are urged
to give these important documents your prompt attention.
THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE
REORGANIZATION AGREEMENT.
Approval of the Reorganization Agreement and the Merger requires the
affirmative vote of at least a majority of the outstanding shares of NHS
Financial common stock. A failure to vote, either by not returning the enclosed
proxy or by checking the "Abstain" box thereon, will have the same effect as a
vote against approval of the Reorganization Agreement (except for the purpose of
seeking to perfect any dissenters' appraisal rights, which will require an
actual vote against the merger and fulfillment of other conditions that are
described in the accompanying Proxy Statement).
THEREFORE, IN ORDER TO ENSURE THAT YOUR VOTE IS REPRESENTED AT THE MEETING,
THE BOARD OF DIRECTORS URGES YOU TO SIGN, DATE AND RETURN THE ENCLOSED PROXY
CARD IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE AS SOON AS POSSIBLE EVEN IF YOU
CURRENTLY PLAN TO ATTEND THE MEETING. THIS WILL NOT PREVENT YOU FROM VOTING IN
PERSON, BUT WILL ASSURE THAT YOUR VOTE IS COUNTED IF YOU ARE UNABLE TO ATTEND
THE MEETING.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME.
Your thoughtful attention to this Merger proposal and the support you have
given us in the past are appreciated.
Sincerely,
JAMES W. BARNETT
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
<PAGE>
NHS FINANCIAL, INC
1050 FOURTH STREET
SAN RAFAEL, CALIFORNIA 94901
(415) 257-3783
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 18, 1996
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders ("Meeting") of
NHS FINANCIAL, INC. ("NHS Financial" or the "Company") will be held at the
Embassy Suites, located at 101 McInnis Parkway, San Rafael, California, on
September 18, 1996, at 2:00 p.m., Pacific Time. A proxy card and a Proxy
Statement for the Meeting are enclosed. The Meeting is for the purpose of
considering and voting upon:
1. A proposal to approve and adopt the Agreement and Plan of
Reorganization, dated as of May 23, 1996 (the "Reorganization
Agreement"), by and among LUTHER BURBANK CORPORATION ("LBC"), a
California corporation, which is registered as a savings and loan holding
company; LUTHER BURBANK SAVINGS AND LOAN ASSOCIATION ("Luther Burbank"),
a California corporation, which is a wholly-owned subsidiary of LBC; LBC
INTERIM ("LBC Interim"), a California corporation, which is a
wholly-owned subsidiary of LBC; the Company and its wholly-owned
subsidiary, New Horizons, pursuant to which (i) a newly organized
subsidiary of LBC would merge with and into NHS Financial, with NHS
Financial surviving that merger; immediately thereafter NHS Financial
will merge into New Horizons, with New Horizons as the then surviving
corporation; and immediately thereafter, New Horizons will merge with and
into Luther Burbank, with Luther Burbank as the surviving savings and
loan association and wholly-owned subsidiary of LBC; (ii) each
outstanding share of NHS Financial common stock (other than certain
shares for which any dissenters' rights may have been perfected) would be
converted into the right to receive $11.50 in cash, without interest, all
on and subject to the terms and conditions contained in the
Reorganization Agreement, a copy of which is attached as Appendix A to
the Proxy Statement (collectively these merger transactions are known as
"the Merger"); and
2. Such other matters as may properly come before the Meeting or any
adjournments or postponements thereof.
The Board of Directors is not aware of any other business to come before the
Meeting.
Any action may be taken on the foregoing proposal at the Meeting on the date
specified above or any adjournment or postponement thereof. Shareholders of
record at the close of business on August 6, 1996 are the shareholders entitled
to vote at the Meeting and any adjournment or postponement thereof. The Board of
Directors can authorize any adjournment or postponement of the Meeting.
Upon completion of the Merger, the existing shareholders of NHS Financial
will no longer own any stock or have any interest in NHS Financial, nor will
they receive, as a result of the Merger, any stock of LBC or Luther Burbank.
ANY SHAREHOLDERS WHO WISH TO PERFECT DISSENTERS' APPRAISAL RIGHTS FOR THEIR
SHARES OF NHS FINANCIAL COMMON STOCK MUST COMPLY WITH THE REQUIREMENTS OF
SECTIONS 1300, 1301, 1302, 1303 AND 1304 OF CHAPTER 13 OF THE CALIFORNIA GENERAL
CORPORATION LAW ("CGCL"), WHICH IS SET FORTH AS APPENDIX D TO THE ACCOMPANYING
PROXY STATEMENT. SEE "PROPOSAL I -- THE MERGER -- DISSENTERS' APPRAISAL RIGHTS"
FOR A SUMMARY OF SECTIONS 1300, 1301, 1302, 1303 AND 1304 OF THE CGCL AND
APPENDIX D FOR A FULL STATEMENT OF CHAPTER 13 OF THE CGCL. A SHAREHOLDER'S
FAILURE TO FOLLOW EXACTLY THE PROCEDURES SPECIFIED WILL RESULT IN A LOSS OF SUCH
SHAREHOLDER'S DISSENTER'S APPRAISAL RIGHTS, SHOULD THEY OTHERWISE EXIST IN THE
MERGER.
The affirmative vote of the holders of a majority of the outstanding shares
of NHS Financial common stock is required to approve the proposal to adopt the
Reorganization Agreement. YOU ARE REQUESTED TO VOTE,
<PAGE>
SIGN AND DATE THE ENCLOSED FORM OF PROXY, WHICH IS SOLICITED BY THE BOARD OF
DIRECTORS, AND TO MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE. The proxy will not
be used if you attend and vote at the meeting in person.
By ORDER OF THE BOARD OF DIRECTORS:
JOANNE FABIAN
CORPORATE SECRETARY
San Rafael, California
August 12, 1996
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE EXPENSE OF FURTHER
REQUESTS FOR PROXIES IN ORDER TO INSURE A QUORUM. A POSTAGE PRE-PAID ENVELOPE IS
ENCLOSED FOR YOUR CONVENIENCE.
2
<PAGE>
NHS FINANCIAL, INC.
1050 FOURTH STREET
SAN RAFAEL, CALIFORNIA 94901
(415) 257-3783
------------------------
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
------------------------
SEPTEMBER 18, 1996
INTRODUCTION
This Proxy Statement and the accompanying proxy card are being furnished to
the holders of common stock, no par value per share ("NHS Financial Common
Stock"), of NHS Financial, Inc. ("NHS Financial" or the "Company") in connection
with the solicitation of proxies by the Board of Directors of NHS Financial for
use at a special meeting of shareholders ("Meeting") to be held on September 18,
1996, or at any adjournment or postponement thereof. The Meeting will be held at
the Embassy Suites, located at 101 McInnis Parkway, San Rafael, California on
September 18, 1996, at 2:00 p.m., Pacific Time.
This Proxy Statement and the proxy card are first being mailed on or about
August 12, 1996 to shareholders of record on August 6, 1996 ("Record Date").
At the Meeting, shareholders will be asked to consider and vote upon a
proposal to approve and adopt the Agreement and Plan of Reorganization, dated as
of May 23, 1996 (together with the annexes thereto, the "Reorganization
Agreement"), by and among NHS Financial, a California corporation which is
registered as a savings and loan holding company; New Horizons Savings and Loan
Association ("New Horizons"), a California savings and loan association, which
is a wholly-owned subsidiary of NHS Financial; Luther Burbank Corporation
("LBC"), a California Corporation, which is registered as a savings and loan
holding company; Luther Burbank Savings and Loan Association, a California
Savings and Loan Association ("Luther Burbank"), which is a wholly-owned
subsidiary of LBC; and LBC Interim ("LBC Interim"), a California corporation,
which is a wholly-owned subsidiary of LBC, formed for the purpose of
facilitating the Merger. A copy of the Reorganization Agreement is attached to
this Proxy Statement as Appendix A. Pursuant to the Reorganization Agreement:
(i) on the Effective Date, as hereinafter defined, LBC Interim will merge with
and into NHS Financial, with NHS Financial being the surviving corporation;
immediately thereafter, NHS Financial will merge with and into New Horizons,
with New Horizons as the surviving corporation; immediately thereafter, New
Horizons will merge with and into Luther Burbank; and Luther Burbank, after
completion of the three mergers, will survive as the wholly-owned subsidiary of
LBC; (ii) each share of NHS Financial Common Stock outstanding at the effective
time ("Effective Time") (as hereinafter defined) of the Merger (other than
certain shares, if any, that may be held by LBC and shares for which possible
dissenters' rights may have been perfected) will be converted into the right to
receive $11.50 in cash, without interest; and (iii) subject to obtaining any
necessary consents, each outstanding stock option granted under plans maintained
by NHS Financial will be terminated, and each grantee will be entitled to
receive in lieu thereof payment in cash of the difference between $11.50 and the
per share exercise price of such option. See "THE MERGER -- Interests of Certain
Persons in the Merger." For a more complete description of the Reorganization
Agreement and the terms of the Merger, see "THE MERGER" and Appendix A.
THIS PROXY STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT IS AUGUST 12, 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY OF PROXY STATEMENT................................................................................. 4
Parties to the Merger.................................................................................... 4
LBC.................................................................................................... 4
Luther Burbank......................................................................................... 4
LBC Interim............................................................................................ 4
NHS Financial.......................................................................................... 4
New Horizons........................................................................................... 4
The Meeting.............................................................................................. 4
Place, Time and Date; Purpose.......................................................................... 4
Record Date; Shares Entitled to Vote................................................................... 4
Vote Required.......................................................................................... 4
Revocability of Proxies................................................................................ 5
The Merger............................................................................................... 5
Directors' Approval and Recommendation of the Merger..................................................... 5
Opinion of Financial Advisor............................................................................. 6
Effective Time........................................................................................... 6
Interests of Certain Persons in the Merger............................................................... 6
Certain Federal Income Tax Consequences.................................................................. 7
Surrender of Stock Certificates.......................................................................... 7
Conditions to Consummation; Termination.................................................................. 7
Regulatory Approvals..................................................................................... 7
No Solicitation of Alternative Transactions.............................................................. 7
Stock Option Agreement................................................................................... 8
Possible Dissenters' Appraisal Rights.................................................................... 8
Accounting Treatment..................................................................................... 8
Market Prices and Dividends on NHS Financial Common Stock................................................ 9
SELECTED CONSOLIDATED FINANCIAL DATA OF NHS FINANCIAL...................................................... 10
SPECIAL MEETING OF SHAREHOLDERS............................................................................ 12
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES........................................................... 12
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF............................................................ 13
Security Ownership of Directors and Management........................................................... 13
THE MERGER................................................................................................. 14
General.................................................................................................. 14
Background of the Merger................................................................................. 15
Sales Negotiations with LBC in 1994.................................................................... 15
1995 - 1996 Sale Negotiations.......................................................................... 15
Reasons for the Merger................................................................................... 18
Factors Considered by the Board of Directors of NHS Financial............................................ 18
Opinion of Financial Advisor............................................................................. 19
Effective Date; Effective Time........................................................................... 22
Interests of Certain Persons in the Merger............................................................... 22
Employment Agreements.................................................................................. 22
Stock options.......................................................................................... 23
Directors and Officers Indemnification................................................................. 23
Interests of Certain Other Employees................................................................... 23
Certain Federal Income Tax Consequences.................................................................. 23
Surrender of Stock Certificates.......................................................................... 24
</TABLE>
2
<PAGE>
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Regulatory Approvals..................................................................................... 25
Conditions to the Merger................................................................................. 26
Conditions to Each Party's Obligations................................................................. 26
Conditions to the Obligations of LBC................................................................... 27
Conditions to the Obligations of NHS Financial......................................................... 28
Representations and Warranties......................................................................... 28
Business Pending Consummation............................................................................ 28
Waiver and Amendment..................................................................................... 31
No Solicitation of Alternative Transactions.............................................................. 31
Termination of the Reorganization Agreement.............................................................. 31
The Stock Option Agreement............................................................................... 32
Possible Dissenters' Appraisal Rights.................................................................... 35
Expenses................................................................................................. 39
Accounting Treatment..................................................................................... 39
Operations After the Merger.............................................................................. 39
BUSINESS OF THE PARTIES TO THE MERGER...................................................................... 39
NHS FINANCIAL............................................................................................ 39
LBC...................................................................................................... 39
MARKET PRICES OF AND DIVIDENDS ON NHS FINANCIAL COMMON STOCK............................................... 40
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS................................................................... 40
CERTAIN INFORMATION REGARDING NHS FINANCIAL................................................................ 40
OTHER MATTERS.............................................................................................. 41
</TABLE>
3
<PAGE>
SUMMARY OF PROXY STATEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION RELATING TO THE
MERGER CONTAINED ELSEWHERE IN THIS PROXY STATEMENT. THIS SUMMARY IS NOT INTENDED
TO BE A COMPLETE DESCRIPTION OF ALL MATERIAL FACTS REGARDING LBC OR NHS
FINANCIAL AND THE MATTERS TO BE CONSIDERED AT THE MEETING, AND IS QUALIFIED IN
ALL RESPECTS BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE HEREIN AND THE
APPENDICES HERETO. A COPY OF THE REORGANIZATION AGREEMENT IS SET FORTH AS
APPENDIX A TO THIS PROXY STATEMENT, AND REFERENCE IS MADE THERETO FOR A COMPLETE
DESCRIPTION OF THE TERMS OF THE MERGER.
PARTIES TO THE MERGER
LBC. LBC is a closely held California corporation incorporated May 14,
1991. LBC is a registered savings and loan holding company for Luther Burbank
and owns 100% of the outstanding common stock of Luther Burbank.
LUTHER BURBANK. Luther Burbank is a California stock savings and loan
association incorporated June 17, 1982 and commenced operating on October 11,
1983. Luther Burbank operates one office in Santa Rosa, California Its deposits
are insured by the Savings Association Insurance Fund ("SAIF") up to applicable
limits permitted by the Federal Deposit Insurance Corporation ("FDIC"). Luther
Burbank is a member of the Federal Home Loan Bank ("FHLB") of San Francisco. See
"-- Business Of The Parties to the Merger."
LBC INTERIM. LBC Interim is a California corporation organized by LBC
solely for the purpose of effecting the Merger and will be merged with and into
NHS Financial in the Merger. It is not anticipated that LBC Interim will conduct
any business or have any significant assets prior to the Merger.
NHS FINANCIAL. NHS Financial, a California corporation, was organized on or
about March 30, 1995, for the purpose of becoming the holding company for New
Horizons, which transaction became effective on November 1, 1995. At December
31, 1995, NHS Financial had total assets of approximately $294 million, total
deposits of approximately $247 million, and shareholders' equity of
approximately $24 million. NHS Financial's primary business activity is its
investment in the stock of New Horizons.
NEW HORIZONS. New Horizons was incorporated in 1978 as a California stock
savings and loan association and commenced operations on September 22, 1980. New
Horizons is regulated by the Office of Thrift Supervision ("OTS"), and its
deposits are insured by SAIF up to applicable limits permitted by the FDIC. New
Horizons also is a member of the FHLB of San Francisco. New Horizons operates
offices in San Rafael, Mill Valley and Novato, California.
New Horizons' business consists principally of attracting customer deposits
from the general public and investing those funds in residential, construction,
and to a lesser extent, commercial real estate loans. The principal sources of
funds for New Horizons' lending and investment activities are repayment of
loans, loan sales, customer deposits and borrowed funds. See "-- Business Of The
Parties To The Merger."
THE MEETING
PLACE, TIME AND DATE; PURPOSE. The Meeting will be held at 2:00 p.m.,
Pacific Time, on September 18, 1996, at the Embassy Suites located at 101
McInnis Parkway, San Rafael, California. The purpose of the Meeting is to
consider and vote on a proposal to approve the Reorganization Agreement.
RECORD DATE; SHARES ENTITLED TO VOTE. The presence, in person or by proxy,
of the holders of a majority of the outstanding shares of NHS Financial's Common
Stock is required for a quorum. As of the Record Date, which is August 6, 1996,
there were 2,522,827 shares of NHS Financial Common Stock issued and outstanding
and entitled to vote. At such date, shares of Common Stock were held of record
by approximately 490 persons.
VOTE REQUIRED. Approval of the Reorganization Agreement will require the
affirmative vote of the holders of a majority of the outstanding shares of NHS
Financial Common Stock entitled to be voted at the Meeting. Shareholders who
execute proxies retain the right to revoke them at any time prior to their being
voted at the Meeting. NHS Financial shareholders are entitled to one vote at the
Meeting for each share of
4
<PAGE>
NHS Financial Common Stock held of record at the close of business on the Record
Date. As of the Record Date, the directors and executive officers of NHS
Financial, together with affiliates, beneficially owned 385,587 shares of NHS
Financial Common Stock, or 14.83% of the outstanding shares, including shares
subject to outstanding options exercisable within sixty days held by such
persons. THE DIRECTORS AND EXECUTIVE OFFICERS OF NHS FINANCIAL HAVE INDICATED
THEIR INTENTION TO VOTE THEIR SHARES OF NHS FINANCIAL "FOR" APPROVAL OF THE
REORGANIZATION AGREEMENT.
If a majority of the votes eligible to be cast do not vote in favor of the
Reorganization Agreement, NHS Financial will continue to act as a separate
entity and a going concern, with New Horizons as its wholly-owned subsidiary. A
failure to vote, either by not returning the enclosed Proxy or by checking the
"Abstain" box thereon, will have the same effect as a vote against approval of
the Reorganization Agreement (EXCEPT THAT ANY SHAREHOLDER OF RECORD WHO SEEKS TO
PERFECT DISSENTERS' APPRAISAL RIGHTS MUST CAST A VOTE, IN PERSON OR BY PROXY,
AGAINST THE APPROVAL OF THE REORGANIZATION AGREEMENT). See "PROPOSAL I -- The
Merger -- Possible Dissenters' Appraisal Rights".
REVOCABILITY OF PROXIES. Shareholders who execute proxies retain the right
to revoke them at any time. Proxies may be revoked by written notice to the
Corporate Secretary of NHS Financial at 1050 Fourth Street, San Rafael,
California 94901, or, by the filing of a later dated proxy prior to a vote being
taken at the Meeting, or by attending the Meeting and voting in person.
THE MERGER
The Reorganization Agreement, a copy of which is attached hereto as Appendix
A and is hereby incorporated by reference in this Proxy Statement, provides for
the merger of LBC Interim with and into NHS Financial, with NHS Financial being
the surviving corporation; immediately thereafter the merger of NHS Financial
with and into New Horizons, with New Horizons being the surviving corporation;
and immediately thereafter the merger of New Horizons with and into Luther
Burbank with Luther Burbank as the surviving association and wholly-owned
subsidiary of LBC. For a more detailed description of the Merger, see "THE
MERGER."
At the Effective Time (as hereinafter defined) of the Merger, each of the
shares of NHS Financial Common Stock outstanding immediately prior to the
Effective Time (other than certain shares, if any, that may be held by LBC and
shares for which possible dissenters' rights have been perfected) will be
converted into the right to receive $11.50 per share in cash, without interest
(the "Merger Consideration"). As of the Record Date, there were 2,522,827 shares
of NHS Financial Common Stock issued and outstanding and outstanding stock
options to acquire 124,083 shares of NHS Financial Common Stock, for an
aggregate Merger Consideration on that date of $29,691,369. Upon completion of
the Merger, the existing shareholders of NHS Financial will no longer own any
stock or have any interest in NHS Financial, nor will they receive, as a result
of the Merger, any stock of LBC or Luther Burbank.
Pursuant to the Reorganization Agreement, NHS Financial has also agreed that
it will not pay any cash dividend, except for regular quarterly cash dividends
at a rate not in excess of $0.04 per share; provided, however, that it will not
declare any such dividend after June 30, 1996, unless the Effective Date is
extended beyond October 31, 1996. See "THE MERGER -- Business Pending
Consummation." In addition, NHS Financial and New Horizons have agreed to use
their best efforts to maintain retail deposits at a level of $225,000,000.
DIRECTORS' APPROVAL AND RECOMMENDATION OF THE MERGER
At a Board of Directors meeting held on May 22, 1996, after considering the
terms and conditions of the Reorganization Agreement and obtaining the advice of
its financial advisor, the NHS Financial Board of Directors unanimously approved
the Reorganization Agreement. The Board of Directors has concluded that the
Merger Consideration offered pursuant to the transaction is fair to the
shareholders of NHS Financial from a financial point of view and, accordingly,
unanimously recommends that shareholders of
5
<PAGE>
NHS Financial vote "FOR" approval of the Reorganization Agreement. For a
discussion of the circumstances surrounding the Merger and the factors
considered by the NHS Financial Board of Directors in making its recommendation,
see "THE MERGER -- Background of the Merger" and "-- Reasons for the Merger and
Recommendation of the Board of Directors."
OPINION OF FINANCIAL ADVISOR
The Board of Directors of NHS Financial retained the firm of Hovde
Financial, Inc., San Francisco, California ("Hovde Financial"), to assist in the
negotiation of the Merger and to act as financial advisor in connection
therewith. Hovde Financial rendered its opinion to the Board of Directors of NHS
Financial, that the Merger Consideration is fair to NHS Financial's shareholders
from a financial point of view. A copy of Hovde Financial's opinion dated August
12, 1996, is set forth as Appendix C and should be read by shareholders in its
entirety. For further information regarding the opinion of Hovde Financial, see
"THE MERGER -- Opinion of Financial Advisor."
EFFECTIVE TIME
The Merger will become effective at the time the forms of Agreement of
Merger for the three separate, consecutive mergers that are Exhibits A-1, 2 and
3 to the Reorganization Agreement (Appendix A to this Proxy Statement) are filed
with the Secretary of State of the State of California, or at such other time as
set forth in such Agreements of Merger ("Effective Time"). Assuming the timely
receipt of all regulatory and shareholder approvals, the expiration of all
statutory waiting periods and the satisfaction or waiver of all conditions in
the Reorganization Agreement, it is currently anticipated that the Merger will
be consummated on September 30, 1996.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of NHS Financial's Board of Directors with
respect to the Merger, shareholders of NHS should be aware that certain officers
of NHS have interests in the Merger that are in addition to their interests as
shareholders generally. See "THE MERGER -- Interests of Certain Persons in the
Merger."
New Horizons previously entered into Supplemental Retirement Agreements
(SERP) with James W. Barnett, Chairman of the Board of Directors, President and
Chief Executive Officer of New Horizons, and with JoAnne Fabian, Executive Vice
President and Secretary of New Horizons. See "THE MERGER -- Interests of Certain
Persons in the Merger."
Certain key employees of NHS Financial and New Horizons have been granted
options to purchase shares of NHS Financial Common Stock under the 1987 Stock
Option Plan and 1992 Stock Option Plan. The Reorganization Agreement provides
that, in consideration of the cancellation of such option, each holder of an
outstanding option (whether or not then exercisable and without regard to
whether such option expired prior to Effective Time) will receive a lump sum
cash payment equal to the product of (i) the excess of $11.50 over the exercise
price of such option and (ii) the number of shares subject to such option.
The Reorganization Agreement provides that for a period of four years after
the Effective Time, LBC shall indemnify and hold harmless present and former
directors and officers of NHS Financial and New Horizons with respect to matters
existing or occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time.
Following the Merger, an employee of NHS Financial or New Horizons (a "New
Horizons Employee") who continues as an employee of LBC will be entitled to
participate in LBC's or Luther Burbank's employee benefit plans on the same
basis as similarly situated LBC or Luther Burbank employees, with credit for
prior service with NHS Financial and New Horizons. LBC has agreed that New
Horizons employees terminated, at or within six months of the Effective Time,
will receive severance benefits consisting of two weeks of their base salary
plus one week for each year of service. See "THE MERGER -- Interests of Certain
Persons in the Merger."
6
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The exchange of shares of NHS Financial Common Stock for cash by an NHS
Financial shareholder pursuant to the Merger (or, in the case of a dissenting
shareholder pursuant to any appraisal proceedings) will be a taxable transaction
to such shareholder for federal income tax purposes. As a result of the Merger,
a shareholder of NHS Financial will generally recognize a gain or loss equal to
the difference, if any, between the amount of cash received pursuant to the
Reorganization Agreement in exchange for his or her shares of NHS Financial
Common Stock and such shareholder's adjusted tax basis in such shares (except,
in the case of any dissenting shareholders, for any amount constituting
interest, which will be taxable as ordinary income).
All shareholders should read carefully the discussion in "THE MERGER --
Certain Federal Income Tax Consequences" of this Proxy Statement. EACH
SHAREHOLDER SHOULD CONSULT WITH HIS OR HER TAX ADVISOR AS TO THE SPECIFIC
CONSEQUENCES TO THE SHAREHOLDER OF THE MERGER UNDER STATE, LOCAL, FOREIGN AND
OTHER APPLICABLE TAX LAWS.
SURRENDER OF STOCK CERTIFICATES
Within ten business days after consummation of the Merger, a paying agent
selected by LBC will mail instructions to each NHS Financial shareholder
concerning the proper method of surrendering certificates formerly representing
shares of NHS Financial Common Stock in exchange for the Merger Consideration.
DO NOT SEND STOCK CERTIFICATES AT THIS TIME.
CONDITIONS TO CONSUMMATION; TERMINATION
The respective obligations of the parties to consummate the Merger are
subject to, among other things: (i) approval of the Reorganization Agreement by
NHS Financial's shareholders holding not less than a majority of the outstanding
shares of NHS Financial Common Stock; (ii) receipt of all necessary regulatory
approvals, consents or waivers; (iii) satisfaction of the terms and conditions
of the First Bank National Association loan commitment letter dated May 13,
1996; (iv) satisfaction of all other necessary requirements prescribed by law;
(v) the absence of any order prohibiting NHS Financial or LBC to consummate the
Merger; and (vi) the absence of any enacted statute, rule, regulation, order,
injunction or decree that prohibits, restricts or makes illegal consummation of
any transaction contemplated by the Reorganization Agreement. See "THE MERGER --
Conditions to the Merger" and "-- Regulatory Approvals."
The Reorganization Agreement may be terminated at any time by mutual consent
of LBC and NHS Financial and may also be terminated by either NHS Financial or
LBC if the Merger is not consummated by December 31, 1996, or if certain
conditions set forth in the Reorganization Agreement are not met. See "THE
MERGER -- Termination of the Reorganization Agreement."
REGULATORY APPROVALS
The Merger is subject to the prior approval of the OTS. An application for
such approval was filed by LBC on June 24, 1996 and approval was granted on
August 5, 1996, subject to pre-merger certification by the chief financial
officers of LBC, Luther Burbank and New Horizons that no material adverse events
or changes have occurred with respect to the financial condition or operations
of LBC, Luther Burbank or New Horizons. An appropriate filing has also been made
by LBC and Luther Burbank with the California Department of Savings and Loan,
and the Commissioner of Savings and Loan must give his written approval to the
Merger Agreement prior to its filing with the Secretary of State of the State of
California. See "THE MERGER -- Regulatory Approvals."
NO SOLICITATION OF ALTERNATIVE TRANSACTIONS
The Reorganization Agreement provides that NHS Financial and New Horizons
will not directly or indirectly initiate, solicit or encourage any inquiries,
proposals or offers with respect to a merger, consolidation or certain similar
transactions involving NHS Financial or New Horizons or engage in any
negotiations concerning or discussions with or provide information to a person
relating to such a transaction, except if NHS Financial's Board of Directors,
upon advice from its counsel, determines that it is required to do so in the
discharge of each Director's fiduciary duty with respect to an unsolicited offer
from a third party. See"THE MERGER -- No Solicitation of Alternative
Transactions."
7
<PAGE>
STOCK OPTION AGREEMENT
As a condition to LBC's entering into the Reorganization Agreement, NHS
Financial entered into a stock option agreement with LBC ("Stock Option
Agreement"), dated as of May 23, 1996, pursuant to which NHS granted to LBC an
option to purchase up to 19.9% of the issued and outstanding shares of NHS
Common Stock, at an exercise price of $9.50 per share, subject to the terms and
conditions set forth therein. The exercise price of the stock option is equal to
the closing sale price of NHS Financial Common Stock on May 22, 1996, the last
trading day prior to the execution and delivery of the Reorganization Agreement
and the Stock Option Agreement and the public announcement thereof. The option
may be exercised in whole or in part, after regulatory and other approvals of a
third party acquisition. See "THE MERGER -- The Stock Option Agreement." The
stock option may discourage competing offers for NHS Financial and is intended
to increase the likelihood that the Merger is consummated in accordance with the
terms of the Reorganization Agreement. A copy of the Stock Option Agreement is
attached to this Proxy Statement as Appendix B.
POSSIBLE DISSENTERS' APPRAISAL RIGHTS
Chapter 13 of the California General Corporation Law ("CGCL"), which is set
forth as Appendix D to this proxy statement, provides that shareholders of
record who vote against the approval of the Reorganization Agreement, by person
or proxy, at the meeting and who have filed a written demand that has actually
been received by NHS Financial or its transfer agent not later than the date of
the Meeting for payment of a specified number of shares at a specified price
which the shareholder claims to be the fair market value of those shares, as of
May 22, 1996, may be entitled to dissenters' appraisal rights, if the following
further condition has occurred: if such written demands are properly given (and
received by NHS Financial) and votes are cast against the Merger by the holders
of record of five percent (5%) or more of the outstanding shares of Common Stock
of NHS Financial. Thereupon, dissenters' appraisal rights will be created with
respect to the Merger under the provisions of Sections 1300 and 1301 of the CGCL
and be available to such shareholders of record as to such shares, if their
rights are further perfected as required by the terms of Sections 1302, 1303 and
1304 of the CGCL. See "THE MERGER -- Possible Dissenters' Appraisal Rights" and
Appendix D for a more complete description of dissenters' rights that may be
applicable to the Merger. A SHAREHOLDER'S FAILURE TO FOLLOW EXACTLY THE
PROCEDURES SPECIFIED WILL RESULT IN A LOSS OF SUCH SHAREHOLDER'S DISSENTER'S
RIGHTS. IN VIEW OF THE COMPLICATED NATURE OF THE CALIFORNIA LAW PERTAINING TO
DISSENTERS' RIGHTS, SHAREHOLDERS DESIRING TO PERFECT THOSE RIGHTS SHOULD CONSULT
THEIR OWN LEGAL ADVISORS.
ACCOUNTING TREATMENT
The Merger will be treated as a purchase for accounting purposes.
Accordingly, under generally accepted accounting principles, the assets and
liabilities of NHS Financial will be recorded on the books of LBC at their
respective fair values at the time of consummation of the Merger.
8
<PAGE>
MARKET PRICES AND DIVIDENDS ON NHS FINANCIAL COMMON STOCK
NHS Financial Common Stock is listed on the NASDAQ National Market System
under the symbol "NHSL." The table below sets forth, for the quarters indicated,
the high and low sales prices of NHS Financial Common Stock as reported on the
NASDAQ National Market System and the dividends paid per share on NHS Financial
Common Stock in each such quarter.
<TABLE>
<CAPTION>
PRICES
-------------------- CASH DIVIDENDS
HIGH LOW PAID PER SHARE
--------- --------- -----------------
<S> <C> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1994
First Quarter................................................................. $ 10.00 8.00 $ 0.04
Second Quarter................................................................ 10.00 8.50 0.04
Third Quarter................................................................. 12.75 8.50 0.04
Fourth Quarter................................................................ 12.75 8.75 0.04
FISCAL YEAR ENDED DECEMBER 31, 1995
First Quarter................................................................. 9.75 7.75 0.04
Second Quarter................................................................ 10.00 8.00 0.04
Third Quarter................................................................. 10.25 7.75 0.04
Fourth Quarter................................................................ 10.00 8.38 0.04
FISCAL YEAR ENDED DECEMBER 31, 1996
First Quarter................................................................. 9.88 8.00 0.04
Second Quarter................................................................ 11.25 8.75 0.04
</TABLE>
The closing price per share for NHS Financial Common Stock as reported on
the NASDAQ National Market System on May 22, 1996, the last full trading day
prior to the public announcement of the execution of the Reorganization
Agreement, was $9.50. On August 8, 1996, which is the most recent date for which
it was practical to obtain market data prior to the printing of this Proxy
Statement, the closing price of NHS Financial Common Stock was $11.25. Holders
of NHS Financial Common Stock are urged to obtain current market quotations.
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA FOR NHS FINANCIAL, INC.
THE FOLLOWING TABLES SET FORTH CERTAIN INFORMATION CONCERNING THE
CONSOLIDATED FINANCIAL POSITION AND RESULTS OF OPERATIONS OF NHS FINANCIAL AT
THE DATES AND FOR THE PERIODS INDICATED. THIS INFORMATION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING AS APPENDIX E TO THIS PROXY STATEMENT.
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
---------------------- ----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION
Total assets.............................. $ 284,191 294,246 294,246 265,020 274,376 274,442 216,737
Mortgage-backed securities................ 11,151 12,884 12,884 15,264 20,753 27,224 --
Investment securities..................... 13,999 11,000 11,000 -- -- 595 8,098
Loans receivable, net..................... 245,187 257,040 257,040 239,019 241,539 234,748 196,550
Customer deposits......................... 225,818 246,952 246,952 214,396 221,412 207,477 193,035
Borrowings................................ 31,000 21,000 21,000 25,000 28,817 45,939 4,000
Stockholders' equity...................... 25,033 24,231 24,231 23,981 22,165 19,059 17,723
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Interest income........................... $ 11,883 10,515 22,258 19,629 22,351 21,327 24,401
Interest expense.......................... 7,003 6,869 14,614 10,204 11,004 11,156 14,464
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income....................... 4,880 3,646 7,644 9,425 11,347 10,171 9,937
Provision for losses on loans............. 290 1,362 2,002 -- 231 3,135 588
Non-interest income....................... 382 205 371 313 369 331 197
Non-interest expense...................... 3,123 2,402 5,464 5,410 5,908 5,871 4,880
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income tax expense.......... 1,849 87 549 4,328 5,577 1,496 4,666
Income tax expense........................ 810 36 228 1,803 2,295 620 2,014
Extraordinary item: Charge for early
extinguishment of debt, net of tax
benefit of $6............................ -- -- -- -- -- -- (8)
Cumulative effect of change in method of
accounting for income taxes.............. -- -- -- -- -- 375 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income................................ $ 1,039 51 321 2,525 3,282 1,251 2,644
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings per share*
Income before cumulative effect of
change in method of accounting for
income taxes........................... $ 0.41 0.02 0.13 1.00 1.30 0.35 1.03
Cumulative effect of change in method of
accounting for income taxes............ -- -- -- -- -- 0.15 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............................ $ 0.41 0.02 0.13 1.00 1.30 0.50 1.03
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Cash dividends declared per share......... $ 0.08 0.08 0.16 0.16 0.08 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR SIX MONTHS
ENDED JUNE 30, AT OR FOR YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER SELECTED INFORMATION
Net interest margin on earning assets:
For period.............................. 3.41% 2.65 % 2.73 % 3.58 % 4.10 % 4.38 % 4.67 %
At period end........................... 3.43 % 2.69 % 2.90 % 3.15 % 4.11 % 4.60 % 5.04 %
Ratio of G&A expenses to average assets... 2.09 % 1.68 % 1.79 % 1.95 % 1.90 % 1.85 % 2.22 %
Return on average assets.................. 0.72 % 0.04 % 0.11 % 0.94 % 1.16 % 0.53 % 1.22 %
Return on average equity.................. 8.42 % 0.42 % 1.31 % 10.86 % 15.88 % 6.51 % 16.16 %
Dividend payout ratio..................... 19.42 % N.M. 123.08 % 16.00 % 6.15 % -- --
Stockholders' equity per share*........... $ 9.92 9.55 9.60 9.51 8.79 7.56 7.25
Regulatory capital (the Association):
Tangible................................ 8.59 % 8.30 % 8.15 % 9.13 % 8.04 % 6.94 % 8.18 %
Core (leverage)......................... 8.59 % 8.30 % 8.15 % 9.13 % 8.04 % 6.94 % 8.18 %
Risk-based.............................. 14.97 % 12.56 % 14.18 % 14.49 % 14.25 % 12.34 % 12.80 %
Ratio of nonperforming assets to total
assets................................... 1.44 % 1.14 % 1.92 % 1.30 % 1.73 % 2.42 % 4.04 %
General valuation allowances to:
Gross loans............................. 1.38 % 1.15 % 1.28 % 1.04 % 1.22 % 1.25 % 0.77 %
Nonperforming loans..................... 134.49 % 124.77 % 87.5 % 123.8 % 79.9 % 82.7 % 21.2 %
Full service branch offices............... 3 3 3 3 2 2 2
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
N.M. = Not meaningful.
* All applicable per share data has been adjusted to reflect the 15% stock
dividend paid in February 1995 and 10% stock dividend paid in September
1991.
11
<PAGE>
SPECIAL MEETING OF SHAREHOLDERS
This Proxy Statement is being furnished in connection with the solicitation
of proxies by the Board of Directors of NHS Financial to be used at the Meeting
to be held at The Embassy Suites, located at 101 McInnis Parkway, San Rafael,
California, on September 18, 1996 at 2:00 p.m., Pacific Time, and at any
adjournment or postponement thereof. The accompanying Notice of Special Meeting
of Shareholders and this Proxy Statement are first being mailed to shareholders
on or about August 12, 1996.
At the Meeting, shareholders will be asked to consider and vote on a
proposal to approve the Reorganization Agreement. The Reorganization Agreement
provides for (i) the merger of LBC Interim with and into NHS Financial with NHS
Financial as the surviving corporation; (ii) immediately thereafter, the merger
of NHS Financial into New Horizons, with New Horizons as the surviving
corporation; (iii) immediately thereafter, New Horizons will merge with and into
Luther Burbank, with Luther Burbank as the surviving corporation. Pursuant to
the Reorganization Agreement, each share of NHS Financial Common Stock
outstanding immediately prior to the Effective Time of the Merger will be
canceled and converted into the right to receive $11.50 per share in cash,
without any interest thereon. See "THE MERGER" and Appendix A. The Board of
Directors of NHS Financial has concluded that the Merger is in the best interest
of NHS Financial and its shareholders and unanimously recommends that
shareholders vote "FOR" approval and adoption of the Reorganization Agreement
and the transactions contemplated thereby.
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
Shareholders of record as of the close of business on the Record Date
(August 6, 1996) are entitled to one vote for each share then held. As of the
Record Date, 2,522,827 shares of NHS Financial Common Stock were issued and
outstanding. At that date, such shares were held of record by approximately 490
shareholders. The presence, in person or by proxy, of at least a majority of the
total number of outstanding shares of NHS Financial Common Stock entitled to
vote is necessary to constitute a quorum at the Meeting.
The affirmative vote of the holders of a majority of the outstanding shares
of NHS Financial Common Stock is required in order to approve and adopt the
Reorganization Agreement. Therefore, a failure to return a properly executed
proxy card or to vote in person at the Meeting will have the same effect as a
vote against approval of the Reorganization Agreement. Abstentions will be
counted as shares present at the Meeting for purposes of determining the
presence of a quorum and will have the same effect as a vote against approval of
the Reorganization Agreement. Broker non-votes will not be considered present at
the Meeting and will have the same effect as a vote against approval of the
Reorganization Agreement. The foregoing does not pertain to perfection of any
dissenters' rights, which are described in the Proxy Statement under "THE MERGER
- -- Possible Dissenters' Appraisal Rights" and in Appendix D hereto.
As of the Record Date, the directors and executive officers of NHS Financial
(eleven persons) together with their affiliates, beneficially owned a total of
308,494 shares of NHS Financial Common Stock, or 12.23% of the outstanding
shares of NHS' Common Stock, not including 77,093 shares of NHS Financial Common
Stock subject to outstanding options held by such persons exercisable within 60
days of the Record Date. There are no agreements or understandings among LBC,
directors or executive officers of NHS Financial or any beneficial owner of more
than 5% of NHS Financial Common Stock as to how their shares will be voted.
However, the directors and executive officers of NHS Financial have indicated
their intention to vote their shares of NHS Financial Common Stock "FOR"
approval of the Reorganization Agreement.
To the best knowledge of NHS Financial, as of the Record Date, the directors
and executive officers of LBC and its subsidiaries did not own of record or
beneficially any outstanding shares of NHS Financial Common Stock.
Shares of NHS Financial Common Stock represented by properly executed
proxies will be voted in accordance with the instructions indicated on the
proxies or, if no instructions are indicated, will be voted FOR approval of the
Reorganization Agreement. Properly executed proxies will be voted in accordance
with the determination of the proxy holders as to any other matter which may
properly come before the Meeting
12
<PAGE>
or any adjournment or postponement thereof; however, proxies voting against
approval of the Reorganization Agreement will not be voted in favor of
adjournment of the Meeting. Shareholders who execute proxies retain the right to
revoke them at any time. Proxies may be revoked by written notice to the
Corporate Secretary of NHS Financial by the filing of a later dated proxy prior
to a vote being taken at the Meeting or by attending the Meeting and voting in
person. A proxy will not be voted if a shareholder attends the Meeting and votes
in person. James W. Barnett, JoAnne Fabian and Iris C. Pera have been appointed
by the Board of Directors as proxy holders.
The cost of solicitation of proxies will be borne by NHS Financial. In
addition to solicitations by mail, directors, officers and employees of NHS
Financial may solicit proxies personally or by telegraph or telephone without
additional compensation. NHS Financial will request persons, firms and
corporations holding shares in their names or in the names of their nominees,
which shares are beneficially owned by others, to send proxy materials to, and
to obtain proxies from, such beneficial owners and will reimburse such holders
for their reasonable expenses in doing so. NHS Financial has retained Skinner &
Co., Inc., San Francisco, California, to assist in soliciting proxies and to
send proxy materials to brokerage houses and other custodians, nominees and
fiduciaries for transmittal to their principals at a cost not to exceed $6,000,
plus out-of-pocket expenses.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT
Set forth below is certain information about shares of NHS Financial Common
Stock owned as of August 6, 1996, the most recent practicable date, by each
director and executive officer of NHS and by all directors and executive
officers as a group. The only person known by management of NHS Financial to be
the beneficial owner of more than five percent of NHS Financial's outstanding
Common Stock is Mr. James W. Barnett, Chairman, Chief Executive Officer and
President, as shown in the table below:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND POSITION OF BENEFICIAL PERCENT OF SHARES OF
OF BENEFICIAL OWNER OWNERSHIP COMMON STOCK OUTSTANDING
- --------------------------------------------------------------- ---------------------- ---------------------------
<S> <C> <C>
James W. Barnett, Director, Chairman
of the Board, President, Chief
Executive Officer (1)......................................... 131,788 5.11%
Steven N. Baloff, Director..................................... 0 0
Jody Anne Becker, Director..................................... 16,881 .67%
C. Paul Bettini, Director (2).................................. 37,269 1.48%
JoAnne Fabian, Director, Executive ............................
Vice President, Secretary (3) 36,171 1.42%
Pat Glasner, Director.......................................... 37,982 1.51%
Iris C. Pera, Director (4)..................................... 62,716 2.49%
George J. Silvestri, Jr., Director (4)......................... 38,905 1.54%
Judith A. Waller, Director (4)(5).............................. 22,775 .90%
Directors and Executive Officers as a Group (11 Persons)....... 385,587 14.83%
</TABLE>
- ------------------------
(1) Includes 57,580 shares subject to outstanding options exercisable within 60
days granted to Mr. Barnett in May 1987 pursuant to the 1987 Stock Option
Plan. Does not include 3,483 shares owned by Mr. Barnett's spouse, in which
he disclaims any beneficial interest.
(2) Represents shares held in a trust of which Mr. Bettini is co-trustee and in
which he has a beneficial interest and as to which shares Mr. Bettini has
voting and investment power with his spouse, co-trustee.
13
<PAGE>
(3) Includes 13,466 shares subject to outstanding options exercisable within 60
days granted to Ms. Fabian in March 1989 pursuant to the 1987 Stock Option
Plan and 6,047 exercisable subject to outstanding options exercisable within
60 days pursuant to 1992 Stock Option Plan. No options have been exercised.
(4) Includes shares held in Keogh, pension or Profit Sharing Plans and IRAs.
(5) Does not include 1,900 shares owned by Dean E. Showers, Ms. Waller's spouse,
in which she disclaims any beneficial interest.
THE MERGER
THE FOLLOWING INFORMATION CONCERNING THE MERGER, INSOFAR AS IT RELATES TO
MATTERS CONTAINED IN THE REORGANIZATION AGREEMENT AND THE STOCK OPTION
AGREEMENT, IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE REORGANIZATION
AGREEMENT AND STOCK OPTION AGREEMENT, WHICH ARE ATTACHED HERETO AS APPENDICES A
AND B, RESPECTIVELY. NHS FINANCIAL SHAREHOLDERS ARE URGED TO READ THE
REORGANIZATION AGREEMENT AND STOCK OPTION AGREEMENT CAREFULLY.
GENERAL
The Reorganization Agreement provides that LBC Interim will be merged with
and into NHS Financial, with NHS Financial being the surviving corporation;
immediately thereafter NHS Financial will merge with and into New Horizons, with
New Horizons as the surviving corporation; and immediately thereafter, New
Horizons will merge with and into Luther Burbank, with the result that Luther
Burbank will be the sole surviving savings and loan association, wholly-owned by
LBC. Each share of NHS Financial Common Stock outstanding at the Effective Time
(other than (i) shares for which any dissenters' rights are perfected and (ii)
shares, if any, which may be held directly or indirectly by LBC (which will be
canceled), other than shares held in a fiduciary capacity or in satisfaction of
a debt previously contracted, of which there were none, as of the date of this
Proxy Statement), will be automatically converted into the right to receive
$11.50 in cash, without interest (the "Merger Consideration"), and the holders
of such shares will thereafter cease to be shareholders of NHS Financial. Based
on the total number of shares of NHS Financial Common Stock outstanding as of
the Record Date and the consideration to be paid in respect of options and
related rights on NHS Financial Common Stock outstanding on that date, assuming
all such options and related rights are converted into the right to receive
cash. See "-- Interests of Certain Persons in the Merger -- Stock Options." The
total cash consideration to be paid to NHS Financial shareholders and option
holders in the Merger is approximately $29.7 million.
The Merger is subject to (i) approval by the holders of at least a majority
of the outstanding shares of NHS Financial Common Stock; (ii) the receipt of all
necessary regulatory approvals, consents and waivers; (iii) satisfaction of the
requirements of the First Bank National Association loan commitment letter dated
May 13, 1996; (iv) satisfaction of all necessary requirements prescribed by law;
(v) the absence of any order prohibiting NHS or LBC to consummate the Merger;
and (vi) the absence of any enacted statute, rule, regulation, order, injunction
or decree that prohibits consummation of the Merger. See "-- Regulatory
Approvals" and "-- Conditions to the Merger."
The Reorganization Agreement provides that LBC may elect to specify that,
before or after the mergers, NHS Financial, LBC and any subsidiary or affiliate
of NHS Financial or LBC shall enter into other transactions in order to effect
the Merger, provided, however, that LBC shall not have the right to require any
such transaction that may (i) alter or change the amount or kind of the Merger
Consideration or the treatment of the stock options of NHS Financial, (ii)
diminish the benefits to be received by the directors, officers or employees of
NHS Financial and New Horizons set forth in the Reorganization Agreement or
(iii) materially delay receipt of any regulatory approvals or the consummation
of the Merger or adversely affect the tax consequences or economic benefits to
the holders of NHS Financial Common Stock.
Within ten days after the Effective Time, a paying agent selected by LBC
will mail to holders of NHS Financial Common Stock a letter of transmittal and
instructions for surrendering certificates evidencing NHS Financial Common
Stock. Upon delivery to the paying agent of a properly executed letter of
transmittal and such certificates, a shareholder will receive a check for the
shares of NHS Financial Common Stock
14
<PAGE>
represented by the certificates and the certificates so surrendered will be
canceled. No interest will be paid or accrued on the cash amount to which the
shareholder became entitled at the Effective Time. DO NOT SEND STOCK
CERTIFICATES AT THIS TIME.
BACKGROUND OF THE MERGER
SALES NEGOTIATIONS WITH LBC IN 1994
In August, 1994, LBC submitted an unsolicited letter of intent to New
Horizons which provided, among other things, for the payment of $13.50 per share
for all issued and outstanding shares of New Horizons. Thereafter, LBC and New
Horizons agreed in principle to a $13.50 purchase proposal. After giving effect
to a 15% stock dividend declared in January 1995, this proposal would have an
approximate value on August 12, 1996 of $11.72. The LBC proposal was contingent
upon the completion of a due diligence examination, regulatory approval, and
financing from a third party institution. Between August and December 1994, LBC
and New Horizons negotiated a definitive purchase agreement and attempted to
resolve all other contingencies. This definitive agreement was not executed by
either party, and on December 12, 1994, LBC notified New Horizons that it was
not interested in proceeding at that time.
1995 - 1996 SALE NEGOTIATIONS
During 1994 and 1995, officers and the Board of Directors of NHS Financial
had discussions with at least five investment banking firms. In September 1995,
Chairman Barnett met with representatives of Hovde Financial ("Hovde") an
investment banking and financial services consulting firm to discuss strategic
options presently available to NHS Financial and New Horizons. Included among
the options reviewed was the possibility of selling NHS Financial. In that
regard, Hovde noted that several of California's major financial institutions
had expressed the desire to expand their respective operations in Northern
California through the acquisition of smaller institutions which could provide
in-place branch systems that had accumulated significant market shares.
Following the meeting with Chairman Barnett, Hovde was invited to speak with the
Board of Directors in late September 1995, at which time Hovde provided its
views regarding strategic options, including sale and discussed the approach
Hovde might take to market the institution. Thereafter, NHS Financial selected
Hovde as its financial advisor because of Hovde's reputation and substantial
experience in transactions such as the Merger. The Board of Directors also
considered the range of possible values to NHS Financial shareholders that could
potentially be achieved by remaining independent and realizing possible future
earnings. Factors considered by the Board of Directors which could affect those
values including the following: the increasing competitiveness for loan
originations and deposit funds within New Horizons' marketplace; the general
health and long term well-being of California's economy; the volatility of
interest rates and capital markets in general affecting NHS Financial's stock
price; the entrance into California of large financial institutions and
unregulated financial intermediaries with greater resources than New Horizons
that are able to price a wide range of financial products significantly below
existing competition; and the increasing consolidation of financial institutions
on a national, regional and local level.
Following completion of these discussions and deliberations and subsequent
meetings with Hovde in late September and early October 1995, New Horizons
entered into an Agreement with Hovde dated October 11, 1995 permitting Hovde to
conduct a discreet and targeted marketing effort (the "Engagement Letter").
Pursuant to the Engagement Letter, NHS Financial agreed to pay Hovde a fee (the
"Completion Fee") of one and one-half (1.5%) percent of the total Merger
Consideration. Twenty-five (25.0%) percent of such Completion Fee was to be paid
when a Definitive Agreement was executed, and the remainder was payable upon
consummation of the Merger. Because of prior dealings with LBC, any acquisition
by LBC was expressly excluded from the Engagement Letter. In addition, New
Horizons agreed to reimburse Hovde for all reasonable travel, legal and other
out-of-pocket expenses incurred in connection with its engagement. The
Engagement Letter also contains provisions relating to an indemnity of Hovde
against liabilities related to or arising out of Hovde's engagement or the
Merger, unless any claim, loss or expense arose from Hovde's negligence or
willful misconduct in performing its services.
During the period of October 1995 through early January 1996, Hovde
contacted 17 possible acquirors which Hovde believed would derive strategic
benefit from, or who had expressed an interest, in acquiring NHS Financial. Each
of these parties executed a confidentiality agreement and received a memorandum
15
<PAGE>
providing detailed information concerning New Horizons and its operations. In
early December 1995, the Board of Directors of NHS Financial met to review the
sales initiative and to continue its exploration of strategic options or
initiatives that would contribute to an improvement in earnings and long term
shareholder value. During this meeting, Hovde noted that numerous parties had
expressed an interest in an acquisition, with three parties conducting off-site
due diligence.
In December 1995, Hovde received written expressions of interest from two
financial institutions (Nor-Cal-1 and Nor-Cal-2), at levels that were below the
minimum pricing level set by the Board of Directors. In addition, Hovde received
an oral proposal from So-Cal-2 which also failed to meet such pricing
parameters. Five of the remaining entities expressed continuing interest in
pursuing acquisition.
In January 1996, Hovde advised the Board of Directors that So-Cal-1 had
expressed an interest in conducting due diligence and that, while it was unable
to provide an offer at this time, it believed it would be in a position to
submit an acceptable offer. Commencement of due diligence by So-Cal-1 was
conditioned upon a review of a special analysis respecting the asset portfolio
of New Horizons. Nor-Cal-3 expressed an interest in continuing dialogue, but
requested additional time to await the outcome of a pending transaction which,
if completed, would preclude Nor-Cal-3 from acquiring NHS Financial. During this
period Nor-Cal-4 stated that the transaction was too small to warrant immediate
attention, while acknowledging that it might have an interest in the future.
Following these discussions, Hovde was directed to advise Nor-Cal-1 and Nor-
Cal-2 of the rejection of their proposals, and to pursue the proposal from
So-Cal-1, while maintaining contact with those institutions which had expressed
difficulty in submitting an offer within the time period stated in Hovde's
offering memorandum.
In February 1996, Hovde received a preliminary bid of $11.75 to $12.00 per
share from So-Cal-1, subject to the completion of due diligence and review of
the special asset analysis. Also during this period, Hovde continued discussions
with Nor-Cal-3. Later in February 1996, Nor-Cal-3 successfully completed
negotiations with another target, and its interest in NHS Financial ceased.
On February 12, 1996, NHS Financial received an unsolicited proposal from
LBC, wherein LBC indicated interest at $11.25 per share, subject to a number of
conditions including: completion of due diligence; satisfaction of conditions in
a new financing arrangement with First Bank National Association, Minneapolis,
Minnesota ("First Bank"), as well as shareholder and regulatory approval. This
letter called for a response by February 14, 1996. On February 14, 1996, the
Board of Directors of NHS Financial responded to LBC stating that it had
considered the proposal, was not prepared to move forward under terms presented
but was willing to maintain dialogue.
In mid-February 1996, Hovde delivered the special asset study to So-Cal-1,
and renewed dialogue with Nor-Cal-4. So-Cal-1 performed additional off-site due
diligence and continued to maintain an interest in the range of $11.75 - $12.00
per share, subject only to the completion of the additional due diligence and
regulatory approval. Also at this time, Hovde provided updated financial
information, including the special asset study, to Nor-Cal-4, which had
expressed a new interest in the acquisition of NHS Financial. Neither So-Cal-1
or Nor-Cal-4 felt it necessary to impose a condition relating to financing, as
LBC had done.
In late February 1996, NHS Financial received an updated proposal, including
a confidentiality agreement from LBC, which again provided for the acquisition
of NHS Financial at a price of $11.25, subject to the satisfaction of a number
of contingencies. LBC's new proposal sought to resolve the due diligence and
financing contingencies by allowing LBC and First Bank (LBC's source of
financing for the transaction) to conduct due diligence prior to the Board of
Directors' consideration of any different proposal. Following consideration of
the LBC proposal, the Board of Directors notified LBC that while it would be
receptive to maintaining continued dialogue, the terms of LBC's proposal and
confidentiality agreement were unacceptable.
The Board of Directors of NHS Financial then expanded the scope of Hovde's
engagement to include representation of NHS Financial and New Horizons in its
ongoing negotiations with LBC. An amendment to the Engagement Letter with Hovde
was executed March 13, 1996, reducing the Completion Fee to three quarters of
one percent (0.75%) of the total Merger Consideration. During numerous meetings
and
16
<PAGE>
conversations in March 1996, representatives of Hovde, NHS Financial and LBC
negotiated a revised form of confidentiality agreement that was acceptable to
the Board of Directors of NHS Financial. This confidentiality agreement was
executed on March 29, 1996.
Concurrent with negotiations with LBC, Hovde maintained contact with
So-Cal-1 and Nor-Cal-4. As a result of these discussions, So-Cal-1 completed
reviews of all facilities of New Horizons and notified Hovde that it was
prepared to commence due diligence in early April 1996. However, based upon
continuing questions regarding classified assets and loan delinquencies,
So-Cal-1 informed Hovde that it could not commit to pricing at the $11.75 to
$12.00 level and stated that any offer would probably be at or below $11.50 per
share. As a result of these discussions, and other factors, So-Cal-1 elected not
to proceed with due diligence. In late March 1996, Hovde and Nor-Cal-4 continued
discussions and information sharing centered on the submission of a cash
proposal in the range of $11.75 per share. These discussions continued
concurrent with LBC's due diligence examination. Following completion of
off-site due diligence, Nor-Cal-4 provided Hovde with an indication of its
interest in proceeding with a transaction in the range of $11.00 - $11.75 per
share, subject to completion of additional due diligence.
In early May, representatives of Hovde held numerous discussions and
meetings with LBC to attempt to increase the consideration above $11.25 per
share. On May 10, 1996, representatives of Hovde and NHS Financial met with LBC
management to discuss the status of the transaction, including LBC's ability to
secure financing, and to continue price negotiations. During this period
Nor-Cal-4 maintained a continued interest, suggesting a pricing range of between
$11.00 and $11.75 per share, subject to the completion of due diligence.
On May 13, 1996, representatives of Hovde and NHS Financial met with LBC
management to receive a new proposal. At this meeting, LBC increased its offer
to $11.50 per share, and noted that it had formalized the commitment with First
Bank for financing of $21.0 million, with such commitment being contingent only
upon LBC's maintaining certain capital adequacy, loan loss provision,
non-performing and classified asset levels as a condition to completion of the
transaction. Following this meeting, Hovde contacted Nor-Cal-4, and was advised
that Nor-Cal-4 would not submit an offer above this level.
The Board of Directors considered the proposals from both LBC and Nor-Cal-4
during a meeting on May 14, 1996. Following its consideration of LBC's increased
offer and the fact that Nor-Cal-4's proposal was subject to due diligence,
discussion and presentation by Hovde, the Board of Directors directed Hovde to
contact LBC and advise it of the Board of Directors' willingness to proceed with
a transaction, provided that LBC increase its consideration to $11.75 per share.
On May 15, 1996, LBC advised Hovde and NHS Financial of LBC's unwillingness to
increase the cash consideration above $11.50 per share.
Concurrent with negotiation of pricing issues, and pursuant to the terms of
the confidentiality agreement and timing constraints imposed by First Bank's
commitment letter, Hovde, LBC and NHS Financial negotiated the Reorganization
Agreement (Appendix A hereto) and the Stock Option Agreement (Appendix B hereto)
that provided NHS Financial's shareholders the Merger Consideration of $11.50
per share on a fully diluted basis. In its consideration of pricing LBC took
into account the possible payment of a special assessment to the SAIF of up to
$1.3 million or up to $0.49 per fully diluted share. See "-- Conditions To The
Merger" and "The Stock Option Agreement."
On May 21, 1996, the Board of Directors of New Horizons and NHS Financial
reviewed the terms of the Reorganization Agreement with NHS counsel and
management and considered a presentation by Hovde. Thereafter the Board of
Directors reconvened on May 22, 1996, and after further deliberations approved
the Reorganization Agreement and the related Stock Option Agreement. The
Reorganization Agreement was executed shortly thereafter, and the transaction
was publicly announced the following morning prior to the opening of the NASDAQ
markets.
17
<PAGE>
REASONS FOR THE MERGER
Prior to having authorized Hovde to initiate negotiations with prospective
merger candidates, the issue of whether to remain independent was evaluated by
New Horizons and NHS Financial's Boards of Directors. The Boards reviewed NHS
Financial's and New Horizons' 1996 Business Plan projections and updates, actual
1995 operating results and prospective earnings forecasts for 1996-1998. That
review led to the conclusion that although improved earnings during the
three-year period were indicated, they would not, when compared to other
investment opportunities, reach the level sufficient to support enhanced
shareholder value. While New Horizons is categorized by OTS as a "well
capitalized" institution, longer term forces operating in New Horizons'
marketplace -- such as the expanding array of alternative investment
opportunities for depositors' funds and, as noted previously, the increasingly
competitive market for new loan originations -- have had and will continue to
have an impact on New Horizons' asset growth and profitability.
While NHS Financial currently has the capital resources to realistically
consider the acquisition of one or more suitably sized and profitable financial
institutions as a means to gain assets and improve earnings, such an acquisition
would require extensive restructuring of the institution's method of doing
business and would not assure any increase of shareholder value.
After review and evaluation of these and other factors (see "-- Factors
Considered by the Board of Directors of NHS Financial" below) and the opinion of
Hovde, it was the Board of Directors' conclusion that in the long term there is
reasonable doubt that NHS Financial could produce shareholder value in excess of
that represented by the Merger Consideration, and that the Merger Consideration
was fair, from a financial point of view, to the shareholders of NHS Financial.
Accordingly, the Board of Directors determined that the Merger was in the best
interests of NHS Financial's shareholders and unanimously approved the
Reorganization Agreement and the transactions contemplated thereby. THEREFORE,
THE BOARD OF DIRECTORS OF NHS FINANCIAL UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS OF NHS FINANCIAL VOTE FOR APPROVAL AND ADOPTION OF THE
REORGANIZATION AGREEMENT.
FACTORS CONSIDERED BY THE BOARD OF DIRECTORS OF NHS FINANCIAL
The terms of the proposed Merger are the result of arms-length negotiations.
In arriving at its decision to approve and recommend the Reorganization
Agreement, the Board of Directors of NHS Financial considered a number of
factors, including, but not limited to, the following:
(i) The general economic and competitive conditions of the market in
which New Horizons operates and trends in the consolidation of thrift and
banking institutions. These conditions relate largely to excess capacity in
the banking industry and active competition from non-banking entities for
deposits and loan products.
(ii) The volatility in levels of interest rates and the impact of such
changes on New Horizons' earnings performance and other prospects.
(iii) The costs of re-structuring New Horizons with no indication that a
major restructuring would significantly alter current profitability or
provide assurance of achieving higher stockholder value long-term.
(iv) The managerial and financial resources of LBC and the likelihood of
receiving the requisite regulatory approvals in a timely manner.
(v) The fact that the Merger would be a taxable transaction to the
shareholders of NHS Financial.
(vi) The opinion of Hovde that as of May 23, 1996, the Merger
Consideration of $11.50 in cash per share was fair, from a financial point
of view, to the holders of NHS Financial Common Stock, and considering
current market values, book values, earnings per share, and the prices and
premiums paid in certain other similar transactions involving financial
institutions. See "-- Opinion of Financial Advisor."
18
<PAGE>
(viii) The Directors' views that it was not likely that a better offer
could be obtained in the short-term and that there could be no assurance
that LBC would not withdraw its proposal if NHS Financial were to continue
soliciting other potential acquirors, or that any other offers would be
better than LBC's offer.
(ix) The interests of certain officers, which are considered in another
section of this Proxy Statement under "The Merger -- Interests of Certain
Persons in the Merger".
(x) The facts and circumstances set forth above in this section entitled
"Background of the Merger".
In reaching its determination to approve and recommend the Merger, the
Boards of Directors of NHS Financial and New Horizons did not assign any
relative or specific weights to the foregoing factors, and individual directors
may have given different weights to different factors.
OPINION OF FINANCIAL ADVISOR
Hovde has delivered its written opinion to the Board of Directors of NHS
Financial that, as of the date of this Proxy Statement, the consideration to be
received in the Merger by the holders of NHS Financial Common Stock is fair,
from a financial point of view, to such holders of Common Stock.
THE FULL TEXT OF THE OPINION OF HOVDE DATED AS OF THE DATE OF THIS PROXY
STATEMENT, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS
ON THE REVIEW UNDERTAKEN BY HOVDE, IS ATTACHED HERETO AS APPENDIX C.
SHAREHOLDERS ARE URGED TO READ THIS OPINION IN ITS ENTIRETY. HOVDE'S OPINION IS
DIRECTED ONLY TO THE CONSIDERATION TO BE RECEIVED IN THE MERGER BY THE HOLDERS
OF NHS FINANCIAL COMMON STOCK AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE
SUMMARY OF THE OPINION OF HOVDE SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In connection with its opinion, Hovde reviewed and analyzed, among other
things: (i) the Reorganization Agreement and Stock Option Agreement; (ii) this
Proxy Statement in substantially the form to be sent to NHS Financial
shareholders; (iii) the Annual Report on Form 10-K of the Company for each year
in the three year period ending December 31, 1995, (iv) the Quarterly Report on
Form 10-Q of NHS Financial for the three-month period ended March 31, 1996; (v)
certain other publicly available financial and other information concerning NHS
Financial and LBC and the trading markets for the publicly traded securities of
NHS Financial; (vi) certain other internal information, including a business
plan and projections, relating to NHS Financial, prepared by the management of
NHS Financial and furnished to Hovde for the purposes of its analysis; and (vii)
certain publicly available information concerning certain other depository
institutions and holding companies, the trading markets for their securities and
the nature and terms of certain other merger and acquisition transactions Hovde
deemed relevant to its inquiry. Hovde also met with certain officers and
representatives of NHS Financial and LBC to discuss the foregoing as well as
other relevant matters. Hovde's opinion was necessarily based upon conditions as
they existed and the information made available to Hovde through the date
thereof.
In connection with its opinion, Hovde relied upon and assumed the accuracy
and completeness of the financial and other information provided to it or
publicly available and did not independently attempt to verify the same. Hovde
relied upon the management of NHS Financial as to the reasonableness and
achievability of its business plan and projections (and the assumptions and
bases therefor) provided to Hovde, and assumed that such business plan and
projections reflected the best currently available estimates and judgments of
the management of its business plan and projections and that such business plan
and projections would be realized in the amount and in the time periods
estimated by the management of NHS Financial. Hovde also assumed, without
independent verification, that the allowances for loan losses for NHS Financial
are adequate to cover such losses. Hovde did not make or obtain any evaluations
or appraisals of the properties or assets of NHS Financial or LBC, nor did Hovde
examine any individual loan
19
<PAGE>
credit files. Hovde was retained by the Board of Directors of NHS Financial to
express an opinion as to the fairness, from a financial point of view, to the
holders of NHS Financial Common Stock of the consideration to be received by
such holders in the Merger, and its opinions were limited to such fairness.
Hovde did not make any recommendation to the Board of Directors of NHS Financial
or the shareholders of NHS Financial with respect to approval of the Merger.
In connection with its opinion, Hovde performed a variety of financial
analyses, which are summarized below. Hovde believes that its analyses must be
considered as a whole and that selecting portions of such analyses and the
factors considered therein, without considering all factors and analyses, could
create an incomplete view of the analyses and the processes underlying Hovde's
opinions. The preparation of a fairness opinion is a complex process involving
subjective judgments and is not necessarily susceptible to partial analyses or
summary description. In its analyses, Hovde made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of NHS Financial. Any estimates
contained in Hovde's analyses are not necessarily indicative of future results
or values, which may be significantly more or less favorable than such
estimates. Estimates of values of companies do not purport to be appraisals or
necessarily reflect the prices at which companies or their securities actually
maybe sold. None of the analyses performed by Hovde was assigned a greater
significance by Hovde than any other.
The projections reviewed by Hovde were prepared by the management of NHS
Financial. NHS Financial does not publicly disclose internal management
projections of the type provided to Hovde in connection with the review of the
Merger. Such projections were not prepared with a view toward public disclosure.
The projections were based on numerous variables and assumptions that are
inherently uncertain, including, without limitation, factors related to interest
rates and general economic and competitive conditions. Accordingly, actual
results could vary significantly from those set forth in such projections.
The following is a brief summary of the analyses performed by Hovde:
(a) TRANSACTION SUMMARY. Hovde analyzed the Merger Consideration of
$11.50 for each share of NHS Financial Common Stock and the implied total
transaction value of $29.7 million (based on 2,646,910 shares of fully
diluted NHS Financial Common Stock outstanding). Hovde noted that the Merger
Consideration represented a multiple of 60.5x earnings for the 12 months
ending March 31, 1996, a multiple of 1.18x fully diluted book value per
share and 1.18x fully diluted tangible book value per share, in each case at
March 31, 1996.
(b) COMPARABLE TRANSACTION ANALYSIS. Hovde analyzed (i) all thrift
merger and acquisition transactions throughout the United States as a whole
for the period from January 1, 1995 to May 31, 1996; (ii) all such
transactions in the Western Region (Alaska, Arizona, California, Idaho,
Montana, Nevada, Oregon, Washington, and Wyoming); and (iii) Western Region
transactions in which the acquired company had a return on average assets of
less than 0.80%. Hovde then compared the multiples implied by the Merger
Consideration of $11.50 per share with the high, low and median deal
multiples for the transactions analyzed. This analysis compared the
price/latest 12 months' earnings, price/fully diluted
20
<PAGE>
book value and price/fully diluted tangible book value multiples implied by
the Merger Consideration to the high, low and median multiples for the
transactions analyzed. Set forth below are the high, low and median deal
multiples presented to the Board of Directors of NHS Financial,
<TABLE>
<CAPTION>
ALL WESTERN REGION TRANSACTIONS
ALL U.S. TRANSACTIONS (A)
------------------------------- -------------------------------
LOW MEDIAN HIGH LOW MEDIAN HIGH
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Price/LTM Earnings........................................ 7.67 17.62 60.26 11.05 17.98 57.50
Price/FD Book Value....................................... 72.00 144.11 248.39 72.00 119.90 127.67
Price/FD Tangible to Value................................ 72.00 145.80 381.86 72.00 123.60 168.87
</TABLE>
<TABLE>
<CAPTION>
MERGER CONSIDERATION (B)(C)
---------------------------
<S> <C>
Merger Consideration Per Share....................................................... $ 11.50
Price/LTM Earnings................................................................... 60.5
Price/FD Book Value.................................................................. 117.59
Price/FD Tangible to Value........................................................... 117.83
</TABLE>
- ------------------------
(a) Includes transactions in Alaska, Arizona, California, Idaho, Montana,
Nevada, Oregon, Washington and Wyoming.
(b) Based upon reported fully diluted earnings per share of $0.19 for the 12
months ended March 31, 1996.
(c) Based upon 2,522,827 shares outstanding and 124,083 options outstanding with
an average exercise price of $6.03.
Hovde then compared the multiples implied by the Merger Consideration of
$11.50 per share with the foregoing multiples. The book value and tangible book
value ratio calculations in each category of comparable transactions included
the proceeds of the exercise of options. The multiples of the Merger
Consideration to NHS Financial's diluted book value per share and fully diluted
tangible book value per share would be 1.18x and 1.18x, respectively.
Hovde reviewed certain financial data relating to selected recently
completed (within the period from June 1, 1995 through May 31, 1996) and pending
thrift acquisition transactions involving institutions throughout the United
States and, in particular, acquisition transactions in the Western region of the
United States (includes Alaska, Arizona, California, Idaho, Montana, Nevada,
Oregon, Washington and Wyoming). In each transaction, Hovde reviewed the implied
per share valuation ranges of NHS Financial Common Stock by applying the high,
low and median deal multiples described above to each of NHS Financial's fully
diluted book value per share. Hovde's analysis of fully diluted book value
yielded valuations ranging from $7.04 to $24.29 with a median of $13.07; and the
high, low and median price/LTM earnings ranging from $1.53 to $12.05, thus
establishing a median value of $5.86. Hovde noted that the results produced in
this analysis did not purport to be indicative of actual values or expected
values of NHS Financial or shares of NHS Financial Common Stock.
(c) STOCK MARKET DATA. Hovde also considered the history of the
trading prices and volume for NHS Financial Common Stock from January 1,
1992 through May 15, 1996 and the comparative performance of NHS Financial
Common Stock over the same period to various thrift and peer group common
stock indexes including the Dow Jones Industrial average, Standard & Poors
Savings and Loan Index, and Standard & Poors Major Regional Banks Index.
This analysis indicates that although NHS Financial's Common Stock has
increased 137.83% since January 1, 1992 through May 15, 1996 (on a capital
appreciation basis), and outperformed various indices returns, including the
Dow Jones Industrial Average, 77.88%; Standard & Poors Savings and Loan
Index, 34.80%; while falling below the index for Standard & Poors Major
Regional Banks of 172.36%, the trading prices for NHS Financial Common Stock
underperformed these respective indices based on a 13.8% capital
appreciation in the current period dated June 1, 1995 to May 15, 1996.
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<PAGE>
(d) DISCOUNTED CASH FLOW ANALYSIS. Hovde performed a discounted cash
flow analysis using the business plan and projections for 1996 through 2001
provided by management of NHS Financial for purposes of Hovde's analysis,
with a discount rate of 15% and terminal value per share multiples ranging
from 12.0x to 14.5x to apply to 2001 forecasted net income and projecting
$0.16 per share payment of dividends per year. This analysis showed a range
of implied present values per share of NHS Financial Common Stock (on a
fully diluted basis) from $8.02 to $12.40. The results produced by this
analysis did not purport to be indicative of actual values or expected
values of the shares of NHS Financial Common Stock before or after the
Merger. Hovde noted that the discounted cash flow analysis was included
because it is a widely used valuation methodology, but noted that its
results are sensitive to its underlying assumptions, including earnings
growth rates, dividend payout rates, terminal values and discount rates.
(e) HISTORICAL AND PROJECTED PERFORMANCE. Hovde reviewed certain
operating statistics for NHS Financial over the period from 1992 through
1996. This review compared NHS Financial's earnings per share growth, net
interest margin, ratio of non-interest income to total revenue, overhead
ratio, ratio of loan loss provisions to average loans, return on average
assets, return on average common equity, total asset growth, total loan
growth, ratio of tangible common equity to tangible assets, ratio of non-
performing assets to loans and other real estate related assets and ratio of
reserves to non-performing assets, with comparable historical data for
thrift institutions located in the Western United States.
EFFECTIVE DATE; EFFECTIVE TIME
The closing of the transactions contemplated by the Reorganization Agreement
shall take place on such date ("Closing Date") and at such time as LBC and NHS
Financial mutually agree upon, which shall be within 30 days after the
expiration of all applicable waiting periods in connection with approvals of
governmental authorities and the receipt of all approvals of governmental
authorities and after all other conditions to the consummation of the
Reorganization Agreement are satisfied or waived, or on such other date as may
be agreed by the parties. The "Effective Date" of the Merger will be the date on
which the Agreements of Merger, in the form prescribed and executed in
accordance with all appropriate legal requirements, are filed as required by
law. The "Effective Time" of the Merger shall be the time of such filing or as
set forth in such Agreements of Merger. Assuming shareholder approval, it is
anticipated that the Merger shall take place on September 30, 1996.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The directors and executive officers of NHS Financial (eleven persons)
together with their affiliates, beneficially owned a total of 385,587 shares of
NHS Common Stock (representing 14.83% of all outstanding shares of NHS Financial
Common Stock) on August 6, 1996. The directors and executive officers will
receive the same consideration for their shares, including any shares which they
may acquire prior to the Effective Time pursuant to the exercise of stock
options, as the other shareholders of NHS Financial. See "-- Stock Options"
discussed below. Certain members of NHS Financial's management have certain
interests in the Merger that are in addition to their interests as shareholders
of NHS Financial generally. The Board of Directors was aware of these interests
and considered them, among other matters, in approving the Reorganization
Agreement and the transactions contemplated thereby.
EMPLOYMENT AGREEMENTS. New Horizons previously has entered into
Supplemental Retirement Agreements (SERP) with James W. Barnett, Chairman of the
Board of Directors, President and Chief Executive Officer of New Horizons and
JoAnne Fabian, Executive Vice President, Chief Administrative Officer and
Secretary of New Horizons. Mr. Barnett also serves as Chairman of the Board of
Directors, President and Chief Executive Officer of NHS Financial. Ms. Fabian
also serves as Executive Vice President and Secretary of NHS Financial.
The SERPs entitle Mr. Barnett and Ms. Fabian to certain payments following a
"change of control" (as defined in each SERP) of New Horizons or NHS Financial.
The Merger, if consummated, will constitute a change of control within the
meaning of each SERP. Under the terms of Mr. Barnett's SERP, the acquiring
entity, as a condition of the change of control, is required to agree to fulfill
the obligations of NHS Financial and New Horizons under the agreement.
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<PAGE>
Pursuant to Mr. Barnett's SERP, he, or his heirs in the event of his death,
will be entitled to receive the sum of $75,000 per year for a period of ten
years. Payments will begin on the latter of Mr. Barnett's sixty-sixth birthday
or his retirement or such other time as is mutually agreed between Mr. Barnett
and LBC and Luther Burbank. Ms. Fabian's SERP entitles her to receive two times
her current annual salary paid in a lump sum if she is terminated within three
years of the change of control. This amount would equal $295,000.
STOCK OPTIONS. Certain key employees of NHS Financial and New Horizons have
been granted options to purchase shares of NHS Financial Common Stock under the
NHS Financial 1987 and 1992 Stock Option Plans. The Reorganization Agreement
provides that, in consideration of the cancellation of such option, each holder
of an outstanding option (whether or not then exercisable and without regard to
whether such option expired prior to the Effective Time) will receive a lump sum
cash payment equal to the product of (i) the excess of $11.50 over the exercise
price of such option and (ii) the number of shares subject to such option.
The following table sets forth the number of shares subject to options held
by each executive officer and the aggregate value to be received by all
optionholders upon cancellation.
<TABLE>
<CAPTION>
NUMBER OF SHARES AGGREGATE
SUBJECT TO CANCELLATION
EXECUTIVE OFFICER OPTIONS AMOUNT
- -------------------------------------------- ----------------- -----------
<S> <C> <C>
James W. Barnett(1) 57,580 $ 405,939
JoAnne Fabian(1) 23,780 120,326
Albert J. Thomson 4,000 7,360
------- -----------
Executive Officers of NHS Financial as a
Group (3 persons) 85,360 $ 533,625
------- -----------
Other officers and employees of NHS
Financial and New Horizons as a Group (14
persons) 38,723 145,243
------- -----------
Totals (17 persons) 124,083 $ 678,858
------- -----------
------- -----------
</TABLE>
- ------------------------
(1) Also a Director of NHS Financial and New Horizons.
DIRECTORS AND OFFICERS INDEMNIFICATION. The Reorganization Agreement
provides that for a period of four years after the Effective Time, LBC shall
indemnify and hold harmless each present and former director and officer of NHS
Financial and New Horizons with respect to matters asserted or arising before or
after the Effective Time (including with respect to transactions contemplated by
the Reorganization Agreement) and advance expenses in connection therewith to
the full extent then permitted by applicable law. For a period of four years
following the Effective Time, LBC has agreed to use all commercially reasonable
efforts to cause to be maintained in effect the existing, or similar, liability
insurance policies with respect to directors and officers of NHS Financial and
New Horizons, provided that the premium cost to LBC of such policies shall not
exceed 100% of the annual premiums paid by NHS Financial as of the date of the
Reorganization Agreement.
INTERESTS OF CERTAIN OTHER EMPLOYEES. Following the Merger, any NHS
Financial Employee who continues as an employee of LBC or Luther Burbank will be
entitled to participate in LBC's or Luther Burbank's employee benefit plans on
the same basis as similarly situated LBC or Luther Burbank employees with credit
for prior service with NHS Financial and New Horizons. LBC has agreed in the
Reorganization Agreement that New Horizons' employees terminated within six
months of the Effective Time will receive severance benefits equal to two weeks
of his or her respective base salary plus one additional week for each year of
service or under any specific severance agreements. Following the initial six
month period, former New Horizons employees will be covered by LBC severance
plans in effect from time to time.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of material federal income tax consequences of the
Merger to certain holders of NHS Financial Common Stock is based on present law
and does not purport to be a complete analysis of
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<PAGE>
all tax consequences that may be relevant to any particular shareholder. The
state, local, foreign, estate and alternative minimum tax consequences to
shareholders of NHS Financial are not discussed. Certain holders (including, but
not limited to, insurance companies, tax-exempt organizations, financial
institutions, securities dealers, broker-dealers, employee shareholders, foreign
corporations, persons who are not citizens or residents of the United States and
persons who acquired shares of NHS Financial Common Stock as part of a straddle
or conversion transaction) may be subject to special rules not discussed below.
The discussion assumes that each shareholder holds shares of NHS Financial
Common Stock as a capital asset. However, certain shareholders who are employees
or directors may not be entitled to treat certain of the shares which they may
have acquired from NHS Financial as capital assets and may be required to report
any gain on the sale of the shares as taxable compensation from NHS Financial.
The discussion is based on laws, regulations, rulings, practice and judicial
decisions now in effect, all of which are subject to change (possibly with
retroactive effect) by legislation, administrative action or judicial decision.
The receipt of cash for NHS Financial Common Stock pursuant to the Merger
or, in the case of any dissenting shareholder, pursuant to any appraisal
proceedings, if five percent (5%) or more of the outstanding shares of Common
Stock of NHS Financial are voted against the merger and written demands for
payment of fair market value are made therefor before the Meeting by record
holders thereof (see "The Merger - Possible Dissenters' Rights"), will be
treated as a sale or exchange of those shares for federal income tax purposes. A
holder of NHS Financial Common Stock (and if dissenters' rights exist following
the meeting, including a dissenting shareholder) will recognize a gain or loss
for federal income tax purposes generally in an amount equal to the difference,
if any, between the amount of cash received and the adjusted tax basis of his,
her or its shares of NHS Financial Common Stock surrendered (except, in the case
of dissenting shareholders, if any, for any amount constituting interest, which
will be taxable as ordinary income). Except for gain attributable to certain
shares owned by employees or directors of NHS Financial, as described above,
gain or loss on the sale of the shares will be long-term capital gain or loss if
the shares of NHS Financial Common Stock have been held by the shareholder for
one year or more.
The cash payments due the holders of NHS Financial Common Stock upon the
exchange of such NHS Financial Common Stock pursuant to the Merger (other than
certain exempt persons or entities) will be subject to "backup withholding" for
federal income tax purposes unless certain requirements are met. Under federal
law, the third-party paying agent must withhold 31% of the cash payments to
holders of NHS Financial Common Stock to whom backup withholding applies, and
the federal income tax liability of such persons will be reduced by the amount
so withheld. To avoid backup withholding, a holder of NHS Financial Common Stock
must provide the third-party exchange agent with his or her taxpayer
identification number and complete a form in which he or she certifies that he
or she has not been notified by the Internal Revenue Service that he or she is
subject to backup withholding as a result of a failure to report interest and
dividends. The taxpayer identification number of an individual is his or her
Social Security number.
No ruling has been or will be requested from the Internal Revenue Service as
to any of the tax effects to NHS Financial's shareholders of the transactions
discussed in this Proxy Statement, and no opinion of counsel has been or will be
rendered to NHS Financial's shareholders with respect to any of the tax effects
of the Merger to shareholders.
THE TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE PARTICULAR
CIRCUMSTANCES OF EACH SHAREHOLDER; THEREFORE, EACH SHAREHOLDER IS URGED TO
CONSULT HIS OR HER TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES OF
THE MERGER TO SUCH HOLDER, INCLUDING THOSE RELATING TO STATE AND/OR LOCAL TAXES.
SURRENDER OF STOCK CERTIFICATES
Within ten business days after the Effective Time, a paying agent selected
by LBC will mail written transmittal materials concerning surrender of stock
certificates to each record holder of shares of NHS Financial Common Stock
outstanding at the Effective Time. The transmittal material will contain
instructions with respect to the proper method of surrender of certificates
formerly representing shares of NHS Financial Common Stock in exchange for the
Merger Consideration.
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Upon delivery to the paying agent of certificates formerly representing
shares of NHS Financial Common Stock for cancellation, together with properly
completed transmittal material, a NHS Financial shareholder will receive a check
in payment of the Merger Consideration for the shares of NHS Financial Common
Stock represented by such certificates. NHS Financial shareholders will not be
entitled to receive interest on any cash to be received in the Merger.
SHAREHOLDERS OF NHS FINANCIAL ARE REQUESTED NOT TO SURRENDER THEIR
CERTIFICATE(S) FOR EXCHANGE UNTIL THEY HAVE RECEIVED SUCH INSTRUCTIONS AND
LETTER OF TRANSMITTAL AND HAVE COMPLETED THE TRANSMITTAL MATERIALS ACCORDINGLY.
In the event of a transfer of ownership of any shares of NHS Financial
Common Stock that has not been registered in the transfer records of NHS
Financial, a check for the Merger Consideration may be issued to the transferee
if the certificate representing such NHS Financial Common Stock is presented to
the paying agent, accompanied by documents sufficient, in the reasonable
discretion of LBC and the paying agent, (i) to evidence and effect such transfer
and (ii) to evidence that all applicable stock transfer taxes have been paid.
From and after the Effective Time, there will be no transfers on the stock
transfer records of NHS Financial of shares of NHS Financial Common Stock that
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, a certificate representing such shares is presented to LBC, the
certificate shall be canceled and exchanged for the Merger Consideration
deliverable in respect thereof in accordance with the procedures set forth in
the Reorganization Agreement.
Any portion of the aggregate Merger Consideration or the proceeds of any
investments thereof that remain unclaimed by the shareholders of NHS Financial
for 12 months after the Effective Time shall be repaid by the paying agent to
LBC. Any shareholders of NHS Financial who have not theretofore complied with
the procedures regarding payment for shares in accordance with the
Reorganization Agreement shall thereafter look only to LBC for payment of the
Merger Consideration deliverable in respect of each share of NHS Financial
Common Stock such shareholder holds as determined pursuant to the Reorganization
Agreement without any interest thereon. If outstanding certificates are not
surrendered, or the payment for them not claimed prior to the date on which such
payments would otherwise escheat to, or become the property of any governmental
unit or agency, the unclaimed items shall, to the extent permitted by abandoned
property and any other applicable law, become the property of LBC, free and
clear of all claims or interest of any person previously entitled to such
claims.
Notwithstanding the foregoing, none of LBC, NHS Financial, the paying agent
or any other person shall be liable to any former holder of NHS Financial Common
Stock for any amount delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
In the event any certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such certificate
to be lost, stolen or destroyed and, if required by the paying agent, the
posting by such person of a bond in such amount as the paying agent may direct
as indemnity against any claim that may be made against it with respect to such
certificate, the paying agent will issue in exchange for such lost, stolen or
destroyed certificate, the Merger Consideration deliverable in respect thereof
pursuant to the Reorganization Agreement.
REGULATORY APPROVALS
The Merger requires the approval of the OTS. An application was filed with
the OTS for such approval on June 24, 1996 and approval was granted on August 5,
1996, subject to pre-merger-certification by the chief financial officers of
LBC, Luther Burbank and New Horizons that no material adverse events or changes
have occurred with respect to the financial conditions or operations of LBC,
Luther Burbank or New Horizons. An appropriate filing has also been made by LBC
and Luther Burbank with the California Department of Savings and Loan. The
Commissioner of Savings and Loan must give his written approval to the Merger
Agreement prior to its filing with the Secretary of State of the State of
California.
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The OTS is required to evaluate the applications by taking into
consideration, among other things, the financial and managerial resources and
future prospects of the institutions involved, the insurance risk to the SAIF of
the FDIC and the convenience and needs of the community to be served. In
addition, the OTS may not approve any proposed acquisition (i) that would result
in a monopoly or that would be in furtherance of any combination or conspiracy
to monopolize or to attempt to monopolize the savings and loan business in any
part of the United States or (ii) that in any section of the country may have
the effect of substantially lessening competition or tending to create a
monopoly or that in any other manner would be in restraint of trade, unless the
OTS finds that the anticompetitive effects of the proposed acquisition are
clearly outweighed in the public interest by the probable effect of the
acquisition in meeting the convenience and needs of the community to be served.
Under the CRA, the OTS must take into account the record of performance of the
existing institutions in meeting the credit needs of the entire community,
including low- and moderate-income neighborhoods. The OTS also considers, among
other things, the fairness and disclosure of the plan including compensation to
officers, directors and controlling persons of the disappearing association by
the surviving association, the justification, need for and compensation to be
paid to any advisory board, fees paid to each person or firm rendering legal or
other professional services in connection with a merger and the accounting
treatment of any goodwill in connection with a merger.
The Merger cannot proceed in the absence of obtaining the requisite
approvals. See "-- Conditions to the Merger." There can be no assurance that the
United States Department of Justice or other federal regulatory authority will
not challenge the Merger, or if such challenge is made, as to the result
thereof. Under federal law, the Merger may not be consummated until after the
15th day following the date of OTS approval -- August 5, 1996, during which time
the United States Department of Justice may challenge the transaction on
antitrust grounds. Should the Merger not be consummated, NHS and New Horizons
will continue as separate going concerns. Assuming shareholder approval, it is
anticipated that the Merger will be consummated on about September 30, 1996.
The Reorganization Agreement provides that either party may terminate the
Reorganization Agreement if the Merger has not been consummated by December 31,
1996. See "-- Termination of the Reorganization Agreement."
CONDITIONS TO THE MERGER
Consummation of the Merger is subject to various specific conditions in the
Reorganization Agreement. While it is anticipated that all such conditions will
be satisfied or (when permissible) be waived, there can be no such assurance.
CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of each
party to effect the Merger are subject to the satisfaction or waiver prior to
the Effective Time of the following conditions: (i) the Reorganization Agreement
and the transactions contemplated thereby shall have been approved by vote of
the holders of at least a majority of the outstanding shares of Common Stock of
NHS Financial in accordance with applicable law; (ii) all necessary regulatory
approvals, consents and waivers required to consummate the transactions
contemplated by the Reorganization Agreement shall have been obtained and all
statutory waiting periods in respect thereof shall have expired; the parties
shall have procured all other regulatory approvals, consents or waivers of
governmental authorities or other persons that, in the opinion of counsel for
LBC, are necessary or appropriate to the consummation of the transactions
contemplated by the Reorganization Agreement; provided, however, that no such
approval, consent or waiver shall be deemed to have been received if it shall
include any condition or requirement that, individually or in the aggregate,
would (a) result in a Material Adverse Effect (as defined below) on LBC or (b)
would reduce the benefits of the transactions contemplated by the Reorganization
Agreement to LBC in so significant a manner that LBC, in its reasonable, good
faith judgment, would not have entered into the Reorganization Agreement had
such condition or requirement been known at that time; (iii) all other
requirements prescribed by law that are necessary to the consummation of the
transactions contemplated by the Reorganization Agreement shall have been
satisfied; (iv) no party to the Reorganization Agreement shall be subject to any
order, decree or injunction of a court or agency of competent jurisdiction that
enjoins or prohibits the consummation of the Merger or any other transaction
contemplated by the Reorganization Agreement, and
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no litigation or proceeding shall be pending against LBC or NHS Financial or any
of their subsidiaries brought by any governmental agency seeking to prevent
consummation of the transactions contemplated thereby; and (v) no statute, rule,
regulation, order, injunction or decree shall have been enacted, entered,
promulgated, interpreted, applied or enforced by any governmental authority that
prohibits, restricts or makes illegal consummation of the Merger or any other
transaction contemplated by the Reorganization Agreement.
As used in the Reorganization Agreement, the term "Material Adverse Effect"
means (i) an effect that (A) is material and adverse to the business, financial
condition or results of operations of NHS Financial or LBC and their
subsidiaries taken as a whole, as the context may dictate, (B) significantly and
adversely affects the ability of NHS Financial or LBC, as the context may
dictate, to consummate the Merger by September 30, 1996 or to perform its
material obligations under the Reorganization Agreement or (C) enables any
person to prevent the consummation by September 30, 1996 of the Merger or (ii)
the failure of (x) a representation or warranty made by NHS Financial relating
to matters stated by it in the Recitals to the Reorganization Agreement and to
the unchanged financial condition, properties, business or results of operations
of NHS Financial and New Horizons to be true and correct or (y) a representation
or warranty by NHS Financial relating to its subsidiaries and ownership of
equity securities and a representation or warranty by LBC relating to matters
stated by it in the Recitals to the Reorganization Agreement and to the
corporate qualifications of LBC, LBC Interim and Luther Burbank to be true and
correct in all material respects; provided, however, that in determining whether
a Material Adverse Effect has occurred there shall be excluded any effect the
cause of which is or are (i) any change in banking, tax and similar laws of
general applicability to savings institutions or their holding companies or
interpretations thereof by courts or governmental authorities, (ii) any change
in generally accepted accounting principles or regulatory accounting
requirements applicable to savings associations or their holding companies
generally, (iii) any action or omission of NHS Financial or LBC in contemplation
of the Merger, (iv) the actions contemplated by Section 4.2 of the
Reorganization Agreement if requested by LBC, relating to changes in NHS
Financial's policies and practices to be consistent with those of LBC,
immediately prior to the Effective Time, (v) any changes in general economic
conditions affecting financial institutions generally, including but not limited
to changes in interest rates, (vi) a special assessment on SAIF members or other
action taken by the FDIC in connection with the funding of the SAIF and (vii)
any action not taken or omission made by NHS Financial because the consent
thereto reasonably requested by NHS Financial from LBC to conduct ordinary
business operations was denied or not acted upon in a timely manner by LBC.
Pursuant to the Reorganization Agreement, NHS Financial has agreed not to
declare or pay any dividends on its Common Stock, except for regular quarterly
cash dividends at a rate per share not in excess of $.04, provided, however that
NHS Financial may not declare any dividend after June 30, 1996, unless the
Effective Date is extended beyond October 31, 1996.
CONDITIONS TO THE OBLIGATIONS OF LBC. The obligations of LBC to effect the
Merger shall be subject to the satisfaction or waiver prior to the Effective
Time of the following conditions: (i) LBC shall have received from NHS
Financial's independent certified public accountants "comfort" letters,
reasonably satisfactory to LBC, dated (a) the date of the mailing of this Proxy
Statement to NHS Financial's shareholders and (b) shortly prior to the Effective
Date, with respect to certain financial information regarding NHS Financial, in
the form customarily issued by such accountants at such times in transactions of
this type; (ii) the representations and warranties of NHS Financial and New
Horizons contained in the Reorganization Agreement and the Stock Option
Agreement shall be true and correct (subject to an exception generally for any
condition, event, change or occurrence that would not have a Material Adverse
Effect) as of the date of the Reorganization Agreement and as of the Effective
Date (as though made at and as of the Effective Date, except as to any
representation or warranty that specifically relates to an earlier date); (iii)
each of the obligations of NHS Financial required to be performed by it at or
prior to the Effective Date pursuant to the terms of the Reorganization
Agreement and the Stock Option Agreement shall have been performed in all
material respects; (iv) LBC shall have received (a) agreements from NHS
Financial's and New Horizons' directors not to solicit deposit customers or
employees of NHS Financial or New Horizons for twelve months from the Effective
Date and (b) an opinion from counsel to NHS Financial; (v) NHS Financial shall
have
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obtained all necessary consents to terminate and pay all outstanding and
unexercised stock options granted under plans maintained by NHS Financial; and
(vi) the terms and conditions of the commitment letter dated May 13, 1996 to LBC
from First Bank National Association, Minneapolis, Minnesota, pursuant to which
a certain amount of the funds to pay the Merger Consideration shall be provided,
shall have been satisfied.
CONDITIONS TO THE OBLIGATIONS OF NHS FINANCIAL. The obligations of NHS
Financial to effect the Merger shall be subject to the satisfaction or waiver
prior to the Effective Time of the following additional conditions: (i) the
representations, warranties and covenants of LBC contained in the Reorganization
Agreement shall be true and correct (subject to an exception generally for any
condition, event, change or occurrence that would not have a Material Adverse
Effect on NHS Financial) as of the date of the Reorganization Agreement and as
of the Effective Date (as though made at and as of the Effective Date except as
to any representation or warranty which specifically relates to an earlier
date); (ii) each of the obligations of LBC required to be performed by it at or
prior to the Effective Date pursuant to the terms of the Reorganization
Agreement shall have been performed and complied with in all material respects;
and (iii) NHS Financial shall have received various certificates of LBC's
officers and the NHS Financial Board of Directors shall have received an opinion
of Hovde Financial that the Merger is fair, from a financial point of view, to
NHS Financial and its shareholders.
REPRESENTATIONS AND WARRANTIES. NHS Financial, on the one hand, and LBC, on
the other hand, have made certain representations and warranties to each other
in the Reorganization Agreement as to, among other things, the accuracy of
certain facts set forth in the Recitals to the Reorganization Agreement, the
authorization, validity, binding effect and enforceability of the Reorganization
Agreement, various corporate matters, capital structure, compliance with laws,
absence of material adverse changes and absence of certain legal proceedings and
regulatory actions. NHS Financial has also made certain representations and
warranties to LBC with respect to, among other things, taxes, labor matters, its
employee benefit plans and agreements, title to its assets, environmental
matters, its loans, its material contracts, its insurance, its investment
securities, its books and records, certain fees payable in connection with the
proposed transactions, the subsidiary of NHS Financial and NHS Financial's and
its respective significant investments, material interests of certain persons,
and certain other matters. LBC has also made representations and warranties to
NHS Financial with respect to, among other things, its employee benefit plans
and that, on the date of the Reorganization Agreement or on the Closing Date,
LBC will have access to all funds necessary to consummate the Merger and pay the
aggregate Merger Consideration. The representations and warranties of the
parties generally are subject to an exception for any condition, event, change
or occurrence that would not have a Material Adverse Effect on the party making
such representation or warranty. The representations and warranties of the
parties do not survive beyond the Effective Time if the Merger is consummated
unless otherwise stated, and, if the Reorganization Agreement is terminated
without consummation of the Merger, there will be no liability on the part of
any party or their respective officers or directors except that such termination
shall be without prejudice to the rights of any party arising out of the willful
breach by any other party of any covenant or willful misrepresentation contained
in the Reorganization Agreement.
BUSINESS PENDING CONSUMMATION
Pursuant to the Reorganization Agreement, NHS Financial has agreed that
during the period from the date of the Reorganization Agreement to the Effective
Time (except as expressly provided in the Reorganization Agreement or as
disclosed to LBC pursuant to the Reorganization Agreement or as agreed to by
LBC) NHS Financial shall and shall cause New Horizons to (i) conduct its
business and maintain its books and records in the usual, regular and ordinary
course consistent with past practice, (ii) use its commercially reasonable
efforts to maintain and preserve intact its business organization, properties,
leases, employees and advantageous business relationships and retain the
services of its officers and key employees, (iii) except as required by
applicable law, rule or regulation, take no action that would adversely affect
or delay the ability of any of the parties to the Reorganization Agreement to
obtain any necessary approvals, consents or waivers of any governmental
authority required for the transactions contemplated by the Reorganization
Agreement or to perform its covenants and agreements on a timely basis under the
Reorganization Agreement, and (iv) except as required by applicable law, rule or
regulation, take no action that could reasonably be expected to have a Material
Adverse Effect on NHS Financial.
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NHS Financial and New Horizons have also agreed to cooperate with LBC and
Luther Burbank in completing the transactions contemplated by the Reorganization
Agreement and not take, cause to be taken or agree or commit to take any action
(i) that is intended or may reasonably be expected to cause any of its
representations or warranties not to be true and correct in any material
respect, or (ii) that is inconsistent with or prohibited by the Reorganization
Agreement; except in any case as may be required by law, rule or regulation.
The Reorganization Agreement also provides that, at the request of LBC, NHS
Financial shall, to the extent consistent with generally accepted accounting
principles, modify and change its loan, litigation and real estate valuation
policies and practices (including loan classifications and levels of reserves)
after the date on which all required federal depository institution regulatory
approvals are received and prior to the Effective Time so as to be consistent on
a mutually, satisfactory basis with those of LBC; provided, however, that NHS
Financial shall not be required to take such action unless (i) LBC agrees in
writing that all conditions to LBC's obligation to consummate the Merger set
forth in the Reorganization Agreement (other than the expiration of the
statutory waiting period following approval of the Merger by the OTS) have been
satisfied or waived, (ii) NHS Financial shall have received a written waiver by
LBC of its rights to terminate the Reorganization Agreement, and (iii) all of
the conditions to NHS Financial's obligation to consummate the Merger (other
than the statutory waiting period described above) shall have been satisfied.
NHS Financial's representations, warranties and covenants contained in the
Reorganization Agreement shall not be deemed to be untrue or breached in any
respect for any purpose as a consequence of any modifications or changes
undertaken solely on account of such actions.
In addition, pursuant to the Reorganization Agreement, during the period
from the date of the Reorganization Agreement to the Effective Time (except as
otherwise specifically provided in the Reorganization Agreement or the Stock
Option Agreement or as disclosed to LBC pursuant to the Reorganization
Agreement), NHS Financial has agreed that it shall not, and shall not permit New
Horizons to, without the prior written consent of LBC, take certain actions,
including the following:
(1) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money or assume, guarantee,
endorse or otherwise as an accommodation become responsible for the
obligations of any other person; provided, however, that neither NHS
Financial or New Horizons shall incur any indebtedness for borrowed money
(including reverse repurchase agreements) with final maturity date falling
on any date after September 30, 1996;
(2) adjust, split, combine or reclassify any capital stock; make,
declare or pay any dividend or make any other distribution on, or directly
or indirectly redeem, purchase or otherwise acquire, any shares of its
capital stock or any securities or obligations convertible into or
exchangeable for any shares of its capital stock, or grant any stock
appreciation rights or grant, sell or issue to any individual, corporation
or other person any right or option to acquire, or securities evidencing a
right to convert into or acquire, any shares of its capital stock, except
for regular quarterly cash dividends at a rate per share of NHS Financial
Common Stock not in excess of $0.04 per share; provided, however, that NHS
Financial may not declare any dividend after June 30, 1996, unless the
Effective Date is extended beyond October 31, 1996; or issue any additional
shares of capital stock or rights asserted therewith except pursuant to the
exercise of stock options outstanding as of the date of the Reorganization
Agreement or the Stock Option Agreement;
(3) other than in the ordinary course of business consistent with past
practice, sell, transfer, mortgage, encumber or otherwise dispose of any of
its properties, leases or assets to any person, or cancel, release or assign
any indebtedness of any such person, except pursuant to contracts or
agreements in force at the date of the Reorganization Agreement;
(4) hire a replacement employee above the level of Assistant Vice
President, enter into, renew or amend any employment agreement with any
employee or director, increase in any manner the compensation or fringe
benefits of any of its employees or directors, or create or institute, or
make any payments pursuant to, any severance plan or package, or pay any
pension or retirement allowance not required by any existing plan or
agreement to any such employees or directors, or become a party to,
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amend or commit itself to, or otherwise establish any trust or account
related to, any employee plan with or for the benefit of any employee, other
than general increases in compensation in the ordinary course of business
consistent with past practice but in any event not in excess of 3% in the
aggregate for all employees, 4% for any individual employee at the level of
Vice President or above, and 5% for any individual employee below the level
of Vice President, or any amendment to any employee plan required by
applicable law (provided that NHS Financial shall use its best efforts to
minimize the cost of any such amendment as permitted under such applicable
law), voluntarily accelerate the vesting of any stock options, or other
compensation or benefit, or declare or pay any bonus, provided, however,
that the provisions of an employee retention plan previously agreed to by
NHS Financial and LBC may be implemented; and NHS Financial may amend the
severance provisions of any employment contract in place on the date of the
Reorganization Agreement, so long as the purpose of such amendment is to
bring the contract into compliance with current laws relating to the payment
of severance and such amendment does not result in any increase in the
financial obligations of NHS Financial, New Horizons, LBC or Luther Burbank;
(5) other than in the ordinary course of business consistent with past
practice, and except as necessary to meet current liquidity requirements,
make any investment either by purchase of stock or securities, contributions
to capital, property transfers, or purchase of any property or assets of any
person; provided, however, that no investment or series of related
investments shall be made in an amount in excess of $50,000 except in (i)
securities which would be reported under the caption "cash and cash
equivalents" on NHS Financial's consolidated statements of financial
condition and (ii) federal government securities with a maturity of not more
than ninety (90) days, and in no event shall NHS Financial make any
acquisition of equity securities or business operations without LBC's prior
consent;
(6) enter into, renew or terminate any material contract or agreement
requiring payment by NHS Financial or New Horizons of more than six months
in duration, or that is not cancelable without penalty with 30 days notice,
except for any contract to sell real estate owned done in the ordinary
course of business, or make any change in any of its material leases or
contracts, other than as contemplated by the Reorganization Agreement;
(7) settle any claim, action or proceeding involving any liability of
NHS Financial or New Horizons for money damages that would have a material
adverse effect on NHS Financial or involving restrictions upon the
operations of NHS Financial or New Horizons;
(8) except in the ordinary course of business, waive or release any
material right or collateral or cancel or compromise any extension of credit
or other debt or claim;
(9) except in the ordinary course of business, make, renegotiate, renew,
increase, extend or purchase any loan, lease (credit equivalent), advance,
credit enhancement or other extension of credit, or make any commitment in
respect of any of the foregoing;
(10) except as contemplated by the Reorganization Agreement, change its
method of accounting as in effect at December 31, 1995, except as required
by changes in generally accepted accounting principles as concurred on by
NHS Financial's independent auditors, or as required by regulatory
accounting principles or regulatory requirements;
(11) enter into any new activities or lines of business, including news
savings programs, or cease to conduct any material activities or lines of
business that it conducts on the date of the Reorganization Agreement, alter
its pricing strategy with respect to deposits, take any action that would
alter its deposit pricing practices that would reasonably be expected to
result in a material change in its deposit pricing when compared to
financial institutions competing in the same market, or conduct any material
business activity not consistent with past practice;
(12) except as required by law or applicable regulation, amend its
restated certificate of incorporation or its bylaws;
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(13) make any capital expenditure for fixed assets in excess of $5,000
other than pursuant to commitments existing on the date of the
Reorganization Agreement and other than expenditures necessary to maintain
existing assets in good repair;
(14) incur general or administrative expenses other than such expenses
as are reasonably necessary in the ordinary course of business; or
(15) agree to, or make any commitment to, take any of the actions
prohibited in the Reorganization Agreement.
WAIVER AND AMENDMENT
Prior to the Effective Time, any condition of the Reorganization Agreement
(to the extent allowed by law) may be waived by the party benefitted by the
provision or may be amended or modified (including the structure of the
transaction) by an agreement in writing approved by the Boards of Directors of
LBC and NHS Financial; except that, after the vote by the shareholders of NHS
Financial, no amendment may be made that would change any of the principal terms
of the Reorganization Agreement without approval of the NHS Financial
shareholders.
NO SOLICITATION OF ALTERNATIVE TRANSACTIONS
NHS Financial has agreed that neither it nor New Horizons nor any of their
respective officers and directors shall, (and NHS Financial will direct and use
its best efforts to cause its employees, agents and representatives not to),
directly or indirectly, initiate, solicit, or encourage, subject to fiduciary
duties, any inquiries or the making of any proposal or offer (including, without
limitation, any proposal or offer to shareholders of NHS Financial) with respect
to a merger, consolidation or similar transaction involving, or any purchase of
all or any significant portion of the assets, deposits or any equity securities
of, NHS Financial or New Horizons (any such proposal or offer being an
"Acquisition Proposal"). However, NHS Financial may engage in any negotiations
concerning, or provide any confidential information or data to, or have
discussions with, any person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal,
if NHS Financial's Board of Directors, after consultation with its counsel with
respect to an unsolicited offer from a third party, determines in the exercise
of its fiduciary duties that such discussions, negotiations or actions are
legally required. NHS Financial has agreed to cease and terminate any existing
activities, discussions or negotiations with any parties (other than LBC)
previously conducted regarding an Acquisition Proposal, and has informed the
appropriate individuals or entities of its obligation to cease such activities.
NHS Financial has agreed to notify LBC immediately if any such inquiries,
proposals or offers are received by, any such information is requested from, or
any such negotiations or discussions are sought to be initiated or continued
with NHS Financial or New Horizons. As agreed, NHS Financial has requested that
any other person, other than LBC, that executed a confidentiality agreement in
connection with its consideration of acquiring NHS Financial or New Horizons
return any confidential information furnished to such person by or on behalf of
NHS Financial or New Horizons.
TERMINATION OF THE REORGANIZATION AGREEMENT
The Reorganization Agreement may be terminated, and the Merger abandoned,
prior to the Effective Date either before or after its approval by the
shareholders of NHS Financial and LBC: (i) by the mutual consent of NHS
Financial and LBC, if the board of directors of each so determines by a vote of
a majority of the members of its entire board; (ii) by LBC or NHS Financial, if
its board of directors so determines by a vote of a majority of the members of
its entire board, in the event of (a) the failure of the shareholders of NHS
Financial to approve the Reorganization Agreement at the Meeting or other
meeting called to consider such approval, or (b) a material breach by the other
party of any material representation, warranty, covenant or agreement contained
in the Reorganization Agreement (or, in the case of NHS Financial, in the Stock
Option Agreement) that is not cured or not curable within thirty days after
written notice of such breach is given to the party committing such breach by
the other party; provided, however, that neither party shall have the right to
so terminate the Reorganization Agreement unless such breach, together with all
other such breaches, would entitle the party receiving such representation or
warranty not to consummate the transactions otherwise contemplated by the
Reorganization Agreement; (iii) by LBC or NHS Financial by written notice to the
other party, if either (a) any approval, consent or waiver of a governmental
authority
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required to permit consummation of the transactions contemplated by the
Reorganization Agreement shall have been denied or imposes any material
condition (which in the case of LBC shall include requiring any shareholder of
LBC to guarantee any part of the transactions contemplated by the Reorganization
Agreement), provided, however, that standard conditions of approval related to
the Bank Merger Act waiting period, customer notices, officer and legal
certifications, shareholder approval, submission of post-closing financial data
and timing of closure shall not be a basis for termination; or (b) any
governmental authority of competent jurisdiction shall have issued a final,
unappealable order prohibiting consummation of the transactions contemplated by
the Reorganization Agreement; or (iv) by LBC or NHS Financial, if its board of
directors so determines by vote of a majority of the members of its entire
board, in the event that the Mergers are not consummated by December 31, 1996,
unless the failure to so consummate is due to the breach of any material
representation, warranty or covenant contained in the Reorganization Agreement
by the party seeking to terminate.
In the event of the termination of the Reorganization Agreement by either
LBC or NHS Financial, as provided above, the Reorganization Agreement shall
thereafter become void and there shall be no liability on the part of any party
to the Reorganization Agreement or their respective officers or directors,
except that (i) certain provisions regarding confidential information and
expenses shall survive and remain in full force and effect and (ii) such
termination shall be without prejudice to the rights of any party arising out of
the willful breach by any other party of any covenant or willful
misrepresentation contained in the Reorganization Agreement.
THE STOCK OPTION AGREEMENT
The following is a summary of the material provisions of the Stock Option
Agreement, entered into by and between NHS Financial and LBC, dated May 23,
1996. The following summary is qualified in its entirety by reference to the
Stock Option Agreement, a copy of which is appended hereto as Appendix B.
Execution of the Stock Option Agreement was a condition to LBC's willingness to
enter into the transactions contemplated by the Reorganization Agreement.
Pursuant to the Stock Option Agreement, NHS Financial granted to LBC an option
(the "Option") to purchase up to 19.9% of the outstanding shares of NHS
Financial Common Stock (represented by approximately 502,043 shares), at an
exercise price of $9.50 per share (the "Option Price"), subject to the terms and
conditions set forth therein.
The Option is exercisable, in whole or in part, at any time and from time to
time, only if (i) LBC is not in material breach of any agreements or covenants
contained in the Reorganization Agreement and the Stock Option Agreement, and
(ii) no preliminary or permanent injunction or other order against delivery of
NHS Financial Common Stock under the Option shall have been issued against NHS
Financial, and subject, further, to satisfaction of all conditions (including,
but not limited to, regulatory approvals) attendant to any agreement to engage
in an "Acquisition Transaction" (as defined below) relating to a "Purchase
Event" (as defined below).
An "Acquisition Transaction" is defined as one of the following events:
(a) a merger or consolidation, or any similar transaction, involving NHS
Financial, or any of its subsidiaries;
(b) a purchase, lease or other acquisition of all or substantially all
of the assets of NHS Financial or any subsidiary; or
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(c) a purchase or other acquisition (including by way of merger,
consolidation, share exchange or otherwise) of securities representing 10%
or more of the voting power of NHS Financial or any subsidiary; provided
that the term "Acquisition Transaction" does not include any internal merger
or consolidation involving only NHS Financial and any subsidiary.
A "Purchase Event" is defined as any one of the following events:
(a) any person (other than LBC or its subsidiaries) shall have acquired
beneficial ownership (the term "beneficial ownership" for purposes of the
Reorganization Agreement and the Stock Option Agreement having the meaning
assigned to such term in Section 13(d) of the Securities Exchange Act of
1934, as amended ("Exchange Act"), and the rules and regulations thereunder)
of securities representing 25% or more of the voting power of NHS;
(b) NHS Financial or any of its subsidiaries, without having received
LBC's prior written consent, shall have entered into an agreement to engage
in an Acquisition Transaction with any person (the term "person" for
purposes of the Reorganization Agreement and Stock Option Agreement having
the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the
Exchange Act and the rules and regulations thereunder) other than LBC or any
of its subsidiaries or the Board of Directors of NHS Financial shall have
recommended that the shareholders of NHS Financial approve or accept any
Acquisition Transaction with any person other than LBC or any of its
subsidiaries, except that the percentage referred to in (c) above in the
definition of "Acquisition Transaction" shall be 25%.
In the event that a Purchase Event occurs as set forth in (b) above, and all
conditions (including, but not limited to, regulatory approvals) attendant to
the agreement to engage in the Acquisition Transaction have been satisfied, but
the Acquisition Transaction is not consummated for any reason, then NHS
Financial shall immediately purchase the Option from LBC or any permitted
assignee of LBC at a cash price equal to $1.00 times the number of shares
represented by the Option.
For purposes of the Stock Option Agreement each of the following events is a
"Preliminary Purchase Event":
(a) NHS Financial or any of its subsidiaries, without having received
LBC's prior written consent, shall have entered into an agreement to engage
in an Acquisition Transaction with any person other than LBC or any of its
subsidiaries or the Board of Directors of NHS Financial shall have
recommended that the shareholders of NHS Financial approve or accept any
Acquisition Transaction with any person other than LBC or any of its
subsidiaries.
(b) any person (other than LBC or any of its subsidiaries) shall have
acquired beneficial ownership or the right to acquire beneficial ownership
of securities representing 10% or more of the voting power of NHS Financial;
(c) any person other than LBC or any of its subsidiaries shall have made
a bona fide proposal to NHS Financial or its shareholders, by public
announcement or written communication that is or becomes the subject of
public disclosure, to engage in an Acquisition Transaction (including,
without limitation, any situation in which any person other than LBC or any
subsidiary of LBC shall have commenced (as such term is defined in Rule
14d-2 under the Exchange Act) or shall have filed a registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to a tender offer or exchange offer to purchase any securities of
NHS Financial such that, upon consummation of such offer, such person would
own or control 10% or more of the voting power of NHS Financial (such an
offer being referred to as a "Tender Offer" or an "Exchange Offer",
respectively));
(d) after a proposal is made by a third party to NHS Financial or its
shareholders to engage in an Acquisition Transaction, NHS Financial shall
have breached any covenant or obligation contained in the Reorganization
Agreement and such breach would entitle LBC to terminate the Reorganization
Agreement or the holders of NHS Financial Common Stock shall not have
approved the Reorganization Agreement at the Meeting, such Meeting shall not
have been held or shall have been canceled prior
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to termination of the Reorganization Agreement or NHS Financial's Board of
Directors shall have withdrawn or modified in a manner adverse to LBC the
recommendation of NHS Financial's Board of Directors with respect to the
Reorganization Agreement; or
(e) any person other than LBC or any of its subsidiaries, other than in
connection with a transaction to which LBC has given its prior written
consent, shall have filed an application or notice with the OTS or other
governmental authority or regulatory or administrative agency or commission
for approval to engage in an Acquisition Transaction.
The Option expires upon the earliest to occur of (i) the time immediately
prior to the Effective Time, (ii) nine months after the first occurrence of a
Purchase Event, (iii) 15 months after the termination of the Reorganization
Agreement following the occurrence of a Preliminary Purchase Event (as defined
below), (iv) termination of the Reorganization Agreement in accordance with the
terms thereof prior to the occurrence of a Purchase Event or a Preliminary
Purchase Event (other than a termination resulting from a volitional breach by
NHS Financial of any representation, warranty, covenant or agreement under the
Reorganization Agreement), or (v) 15 months after the termination of the
Reorganization Agreement by LBC if such termination results from a volitional
breach by NHS Financial of any representation, warranty, covenant or agreement
under the Reorganization Agreement.
In the event of any change in NHS Financial's Common Stock by reason of
stock dividends, split-ups, mergers, recapitalizations, combinations,
subdivisions, conversions, exchanges of shares or the like, or the issuance or
grant of any rights or securities which entitle the holder(s) thereof to voting
powers superior to or dilutive of the Common Stock, the type and number of
shares of NHS Financial Common Stock subject to the Option shall be
appropriately adjusted and proper provision made so that in the event that any
additional rights or securities are to be issued or otherwise to become
outstanding as a result of any change, the number of shares that remain subject
to the Option and their rights and powers, shall be increased or modified, so
that after such issuance and together with shares previously issued pursuant
thereto, it equals 19.9% of the voting power of NHS Financial. Whenever the
number of shares subject to the Option is adjusted, the Option Price shall be
adjusted as well.
In the event NHS Financial, prior to the Option expiring, enters into any
agreement (i) to consolidate or merge with any person, other than LBC or any of
its subsidiaries, and is not the surviving corporation, (ii) to permit any
person, other than LBC or any of its subsidiaries, to merge into NHS Financial
and NHS Financial is the surviving corporation, but, in connection with such
merger, the outstanding shares of NHS Financial's Common Stock are changed into
or exchanged for stock or other securities of any other person or cash or any
other property or the then outstanding shares of NHS Financial's Common Stock
shall after such merger represent less then 50% of the outstanding shares and
share equivalents of the merged company, or (iii) to sell or otherwise transfer
all or substantially all of its or any material subsidiary's assets to any
person other than LBC or any of its subsidiaries, then, and in each such case,
the agreement governing such transaction must provide that, upon consummation of
the transaction, the Option will be converted into, or exchanged for, an option
of either the Acquiring Corporation (as defined below) or any person that
controls the Acquiring Corporation, in all cases at the option of LBC.
"Acquiring Corporation" means (a) the continuing or surviving corporation of a
consolidation or merger with NHS Financial (if other than NHS Financial), (b)
NHS Financial in a merger in which NHS Financial is the continuing or surviving
person, and (c) the transferee of all or any substantial part of NHS Financial's
assets (or the assets of any of NHS Financial's subsidiaries).
LBC has the right to require NHS Financial to repurchase the Option and any
shares acquired pursuant to the exercise of the Option in the following
circumstances:
(a) any person (other than LBC or any of its subsidiaries) shall have
acquired beneficial ownership of 50% or more of the then outstanding shares
of NHS Financial Common Stock; or
(b) the consummation of an Acquisition Transaction with any person other
than LBC or any of its subsidiaries.
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At the request (the date of such request being the "Option Repurchase
Request Date") of LBC, NHS Financial shall repurchase the Option from LBC at a
price (the "Option Repurchase Price") equal to the amount by which (A) the
market/offer price (as defined below) exceeds (B) the Option Price, multiplied
by the number of shares for which the Option may then be exercised and at the
request (the date of such request being the "Option Share Repurchase Request
Date") of the owner of Option shares from time to time (the "Owner"), NHS
Financial shall repurchase such number of the Option shares from the Owner as
the Owner shall designate at a price (the "Option Share Repurchase Price") equal
to the market/offer price multiplied by the number of Option shares so
designated.
The term "market/offer price" shall mean the highest of (i) the price per
share of NHS Financial Common Stock at which a Tender Offer or Exchange Offer
therefor has been made after the date of the Reorganization Agreement and on or
prior to the Option Repurchase Request Date or the Option Share Repurchase
Request Date, as the case may be, (ii) the price per share of NHS Financial
Common Stock paid or to be paid by any third party pursuant to an agreement with
NHS Financial (whether by way of a merger, consolidation or otherwise), (iii)
the highest last sale price for shares of NHS Financial Common Stock within the
360-day period ending on the Option Repurchase Request Date or the Option Share
Repurchase Request Date, as the case may be, which is reported by The Wall
Street Journal or, if not reported thereby, another authoritative source, or
(iv) in the event of a sale of all or substantially all of NHS Financial's
assets, the sum of the price paid in such sale for such assets and the current
market value of the remaining assets of NHS Financial as determined by a
nationally recognized independent investment banking firm selected by LBC or the
Owner, as the case may be, divided by the number of shares of NHS Financial
Common Stock outstanding at the time of such sale. In determining the
market/offer price, the value of consideration other than cash shall be the
value determined by a nationally recognized independent investment banking firm
selected by LBC or the Owner, as the case may be, whose determination shall be
conclusive and binding on all parties.
NHS Financial has granted LBC certain registration rights with respect to
the Option and shares of NHS Financial Common Stock that may be acquired by LBC
upon exercise of the Option. These rights include that NHS Financial will file
up to two registration statements under the Securities Act if requested by LBC
after the Option becomes exercisable to permit the sale or other disposition of
the shares issued pursuant to the Option. Such registration rights are subject
to an exception that allows NHS Financial, or person assisting NHS Financial in
a public offering of shares, in the exercise of its business judgment, to delay
such registration (but by no more than 45 days) or reduce the number of shares
purchasable by LBC (such reduction affecting only the then current exercise of
the Option, and not the total number of shares subject to the Option). In
connection with any registration described above, NHS Financial and LBC will
provide to each other and any underwriter of the offering customary
representations, warranties, indemnities and other agreements.
The Stock Option Agreement is intended to increase the likelihood that the
Merger will be consummated in accordance with the terms of the Reorganization
Agreement. Consequently, certain aspects of the Stock Option Agreement may have
the effect of discouraging persons who might now or prior to the Effective Time
be interested in acquiring all of, or a significant interest in, NHS Financial
from considering or proposing such an acquisition, even if such persons were
prepared to pay a higher price per share for NHS Financial Common Stock than the
then-current market price of such shares. The acquisition of, or an interest in,
NHS Financial, or an agreement to do either, could cause the Option to become
exercisable. The existence of the Stock Option Agreement could significantly
increase the cost to a potential acquiror of acquiring NHS Financial compared to
its cost had the Stock Option Agreement not been entered into. Such increased
cost might discourage a potential acquiror from considering or proposing an
acquisition or might result in a potential acquiror proposing to pay a lower per
share price to acquire NHS Financial than it might otherwise have proposed to
pay.
POSSIBLE DISSENTERS' APPRAISAL RIGHTS
Under the CGCL, rights are created under limited circumstances and subject
to specific conditions to allow a NHS Financial shareholder of record to vote
against the Merger and seek judicial appraisal of and/or
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purchase by NHS Financial of his or her shares at their fair market value,
determined as of the day before the first public announcement of the proposed
Merger (exclusive of any appreciation or depreciation in consequence of the
proposed Merger), rather than accept the Merger Consideration. Such rights are
known as "dissenters' appraisal rights." Dissenters' appraisal rights will not
exist with respect to the Merger unless the exception described in the following
paragraph exists.
Section 1300 of the CGCL provides that the definition therein of "dissenting
shares" will NOT include the outstanding shares of the Common Stock of NHS
Financial, except and only if proper demands for payment (described below) are
filed with NHS Financial or its transfer agent with respect to 5 percent (5%) or
more of the outstanding shares of Common Stock (the "Five Percent Exception"),
as long as (i) the outstanding Common Stock of NHS Financial immediately prior
to the Merger is listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System and (ii) Sections 1300, 1301, 1302, 1303
and 1304 of Chapter 13 of the CGCL are summarized in the notice to shareholders
of the meeting. This section of the Proxy Statement entitled "THE MERGER --
Possible Dissenters' Appraisal Rights" provides that summarization. The Common
Stock of NHS Financial is listed on the Federal Reserve's most recent list of
OTC margin stocks (as well as listed on the NASDAQ National Market System under
the symbol "NHSL"). Consequently, shareholders will not be entitled to
dissenters' rights unless the Five Percent Exception is applicable, which will
be known to NHS Financial not later than the date of the Meeting, when the
tabulation is completed of the number of shares voted by shareholders of record
against the meeting and for which the proper written demands for payment of fair
market value have been received (as described below).
If any shareholder seeks to perfect dissenters' rights and demand purchase
by NHS Financial or judicial appraisal of his or her shares, rather than accept
the Merger Consideration of $11.50 per share, the shareholder must first satisfy
each of the following conditions:
(i) the record shareholder must deliver and NHS Financial or its
transfer agent must have received not later than the date of the Meeting
(Section 1300 of the CGCL) a written demand which must state the number of
shares held of record by the shareholder which the shareholder demands that
NHS Financial purchase and contain a statement of what such shareholder
claims to be the fair market value of those shares as of the day before the
public announcement by NHS Financial of the proposed Merger. The statement
of fair market value constitutes an offer by the shareholder to sell the
shares to NHS Financial at such price (Section 1301(b) and (c)). The date of
the public announcement of the proposed Merger by NHS Financial was
Thursday, May 23, 1996.
(ii) the shareholder of record must vote AGAINST the Merger. An
abstention or failure to vote will NOT satisfy this requirement. The vote
against may be in person by the record holder or his or her proxy (Section
1300(b)(2)(B)).
If any shareholder of record fails to comply exactly with either of these
conditions and the Merger becomes effective, the shareholder will be entitled to
receive the Merger Consideration as provided for in the Reorganization Agreement
but will have no dissenters' appraisal rights with respect to NHS Financial
shares, even if dissenters' appraisal rights are otherwise applicable due to the
Five Percent Exception.
All written demands for payment of shareholders of record under Section 1301
of the CGCL should be addressed to the Corporate Secretary, NHS Financial, Inc.,
1050 Fourth Street, San Rafael, California 94901, and must be RECEIVED by NHS
Financial or its transfer agent not later than the date of the Meeting at which
the vote is taken on the Merger (Section 1301(b)), scheduled for September 18,
1996. If written demands are being delivered to the transfer agent, they should
be addressed to Wells Fargo Bank, 345 California Street, San Francisco,
California 94108.
TO BE EFFECTIVE, A DEMAND FOR PAYMENT FOR NHS FINANCIAL SHARES MUST BE MADE
BY THE RECORD HOLDER, FULLY AND CORRECTLY, AS THE SHAREHOLDER'S NAME APPEARS ON
HIS OR HER STOCK CERTIFICATE(S) AND CANNOT BE MADE BY THE BENEFICIAL OWNER IF HE
OR SHE DOES NOT ALSO HOLD THE SHARES OF RECORD. THE BENEFICIAL HOLDER MUST, IN
SUCH CASES, HAVE THE RECORD OWNER SUBMIT THE REQUIRED DEMAND IN RESPECT OF SUCH
SHARES. (SECTION 1300(C)).
If shares are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, execution of a demand for payment should be made in such
capacity; and if the shares are owned of record
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by more than one person, as in a joint tenancy or tenancy in common, the demand
should be executed by or for all joint owners. An authorized agent, including
one for two or more joint owners, may execute the demand for payment for a
shareholder of record; however, the agent must identify the record owner or
owners and expressly disclose the fact that, in executing the demand, he or she
is acting as agent for the record owner. A record owner, such as a broker, who
holds shares as a nominee for others, may file a demand for payment with respect
to all or a portion of the shares held for one or more beneficial owners, while
not demanding payment for other beneficial owners or other shares of a
beneficial owner on behalf of whom a demand for payment is made. In such case,
the written demand must state the number of shares held of record as to which
the demand is made and a statement of what such record holder claims to be the
fair market value of those shares as of the day before the public announcement
by NHS Financial of the proposed Merger.
Persons who hold their shares of NHS Financial Common Stock in brokerage
accounts or in other nominee forms and who wish to make the demand for payment
should consult with their brokers or such other nominees to determine the
appropriate procedures for the making of a demand by such nominee.
If the Five Percent Exception applies to the Merger (which will become known
on the date of the Meeting by a tabulation of the number and percentage of
shares of the outstanding NHS Financial Common Stock for which demands for
payment were timely received and votes properly cast against the Merger, in
accordance with Sections 1300 and 1301 of the CGCL), within ten (10) days after
the approval of the Reorganization Agreement by a majority of the outstanding
Common Stock of NHS Financial at the Meeting or any adjournment thereof, NHS
Financial must mail to each NHS Financial shareholder of record who has
perfected dissenter's appraisal rights a notice of the approval of the Merger,
accompanied by a copy of Sections 1300, 1301, 1302, 1303 and 1304 of Chapter 13
of the CGCL, a statement of the price determined by NHS Financial to represent
the fair market value of the dissenting shares, and a brief description of the
procedure to be followed if the shareholder desires to exercise the
shareholder's right under such sections. Such statement of price will constitute
an offer by NHS Financial to purchase at the prices stated any dissenting shares
as defined by Section 1300(b).
Within 30 days after the date on which notice by NHS Financial is mailed to
dissenting shareholders (if any) of the approval of the Reorganization Agreement
by at least a majority of the outstanding shares of Common Stock of NHS
Financial, each dissenting shareholder shall submit to NHS Financial at the
office of its transfer agent Wells Fargo Bank, 345 California Street, San
Francisco, California 94108, the shareholder's certificates representing the
shares which that shareholder demands that NHS Financial purchase, to be stamped
or endorsed with a statement that the shares are dissenting shares or to be
exchanged for certificates of appropriate denomination so stamped or endorsed
(Section 1302, CGCL).
If NHS Financial and the dissenting shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between NHS Financial and the holders
thereof shall be filed with the corporate secretary of NHS Financial.
If any such agreement is arrived at between NHS Financial and a shareholder,
payment of the fair market value of such dissenting shares shall be made within
the later of 30 days after the amount thereof has been agreed or 30 days after
all statutory and contractual conditions to the Reorganization Agreement are
satisfied, and subject to surrender of the certificates therefor unless provided
otherwise by agreement (Section 1303, CGCL).
If NHS Financial denies that shares are properly dissenting shares, or NHS
Financial and the shareholder do not agree upon the fair market value of shares,
then the shareholder who has demanded purchase of such shares as dissenting
shares or NHS Financial, within six months after the date of the mailing of
notice to dissenting shareholders of the approval of the Reorganization
Agreement by the requisite majority of the outstanding Common Stock of NHS
Financial, but not thereafter, may file a complaint in the superior court of the
proper county requesting the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
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NHS Financial does not presently intend to file such a complaint in the event
there are dissenting shareholders and has no obligation to do so. Accordingly,
the failure of a shareholder to file such a complaint within the period
specified could nullify such shareholder's previously written demands for
payment (Section 1304, CGCL).
The court shall determine the issues on the trial of the action, and if the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value is in issue, the court shall
determine, or shall appoint one or more impartial appraisers to determine the
fair market value of the shares.
If the court appoints an appraiser or appraisers, they will determine the
fair market value per share and make a report to the court. The court may
confirm the report if it finds it to be reasonable. Judgment shall then be
rendered against NHS Financial for payment of the fair market value in favor of
any dissenting shareholder who is a party in the suit, or who has intervened,
with interest thereon from the date of entry of the judgment. Payment of the
judgment is due upon endorsement and delivery of certificates for the shares.
Any party may appeal such a judgment (Section 1305, CGCL).
Shareholders considering seeking appraisal should be aware that the fair
market value of their shares as determined by the court could be more, the same
or less than the value of the Merger Consideration they are entitled to receive
pursuant to the Reorganization Agreement if they do not seek appraisal of their
shares.
The cost of the appraisal action, including reasonable compensation to the
appraisers, shall be assessed or apportioned as the court considers equitable,
but, if the appraisal exceeds the price offered by NHS Financial, it shall pay
the costs (including in the discretion of the court attorneys' fees, fees of
expert witnesses and interest from the date of compliance by a shareholder with
Sections 1300, 1301 and 1302 of the CGCL if the value awarded by the court for
the shares is more than 125 percent of the price offered by NHS Financial in its
notice that was mailed to dissenting shareholders not more than 10 days
following the approval of the Reorganization Agreement by the outstanding Common
Stock of NHS Financial) (Section 1305, CGCL).
Holders of dissenting shares continue to have all the rights and privileges
incident to their shares, until the fair market value of their shares is agreed
upon or determined. A dissenting shareholder may not withdraw a demand for
payment unless NHS Financial consents thereto. Cash dividends declared and paid
by NHS Financial upon any dissenting shares after the date of approval of the
Reorganization Agreement by the requisite majority of the outstanding Common
Stock of NHS Financial and prior to payment by NHS Financial for the shares are
credited against the total amount to be paid by NHS Financial therefor (Sections
1307 and 1308 of CGCL).
If no complaint for appraisal is filed in superior court within six months
of the date notice was mailed to dissenting shareholders of the approval of the
Reorganization Agreement, or if a dissenting shareholder, with the consent of
NHS Financial, withdraws the shareholder's demand for payment by NHS Financial,
or NHS Financial or LBC terminates the proposed Merger (in which event, NHS
Financial is required to pay on demand to any dissenting shareholder who has
initiated proceedings in good faith all necessary expenses incurred in such
proceedings and reasonable attorneys' fees), or the dissenting shares are
transferred prior to their submission for endorsement within 30 days after the
date of mailing of the notice to dissenting shareholders of approval of the
Reorganization Agreement, the dissenting shares lose their status as dissenting
shares and cease to be entitled to require their purchase by NHS Financial, and
such shareholder will be entitled to receive the Merger Consideration without
any interest thereon (Section 1309, CGCL).
The foregoing is intended as a brief summary of the material provisions of
the California statutory procedures required to be followed by a NHS Financial
shareholder in order to dissent from the Merger and obtain any dissenters'
appraisal rights. This summary, however, is not a complete statement of all
applicable requirements and is qualified in its entirety by reference to Chapter
13 of the CGCL, the full text of which is set forth in Appendix D hereto.
In view of the complexity of Chapter 13 of the CGCL, shareholders of NHS
Financial who may wish to dissent from the Merger and pursue possible appraisal
rights should consult their legal advisors.
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EXPENSES
The Reorganization Agreement provides that LBC and NHS Financial will each
pay their own expenses in connection with the Reorganization Agreement and the
transactions contemplated thereby.
ACCOUNTING TREATMENT
The Merger, if completed as proposed, will be treated as a purchase in
accordance with generally accepted accounting principles. Accordingly, the
consolidated assets and liabilities of NHS Financial will be recorded on the
books of LBC at their respective fair values at the time of consummation of the
Merger.
OPERATIONS AFTER THE MERGER
At the Effective Time, LBC Interim will merger with and into NHS Financial,
with NHS Financial being the surviving corporation; immediately thereafter NHS
Financial will merge with and into New Horizons, with New Horizons as the
surviving corporation; and immediately thereafter New Horizons will be merged
with and into Luther Burbank, with Luther Burbank being the surviving entity
(the "Resulting Association"), as the wholly-owned subsidiary of LBC. The
charter of the Resulting Association shall be the charter of Luther Burbank in
effect immediately prior to the Effective Time. All assets and property (real,
personal and mixed, tangible and intangible, chooses in actions, rights and
credits) then owned by NHS Financial and New Horizons shall immediately become
the property of the Resulting Association. The Resulting Association shall be
deemed to be a continuation of New Horizons, the rights and obligations of which
shall become the rights and obligations of the Resulting Association, including
the duties and liabilities connected therewith.
BUSINESS OF THE PARTIES TO THE MERGER
NHS FINANCIAL
NHS Financial, a California stock corporation, was organized in March 1995
for the purpose of becoming a holding company for New Horizons. At December 31,
1995, NHS Financial had total assets of $294 million, total deposits of $247
million, and stockholders equity of $24 million. NHS Financial's primary
business activity is its investment in the stock of New Horizons. NHS
Financial's executive offices are located at 1050 Fourth Street, San Rafael, CA
94901; its telephone number is (415) 257-3783.
New Horizons, a California stock association, was incorporated on February
28, 1978 and commenced operations on September 22, 1980. Effective November 1,
1995, New Horizons became the wholly owned subsidiary of NHS Financial. New
Horizons is regulated by the Office of Thrift Supervision, and its deposits are
insured to the applicable limits under the SAIF of the FDIC. New Horizons is
also a member of the FHLB system.
The principal business of New Horizons is to attract deposits from the
general public and invest those funds in residential, construction, and to a
lesser extent, commercial real estate loans. The principal sources of funds for
New Horizons' lending and investment activities are the repayment of loans, loan
sales, servicing fees, customer deposits, and to a lesser extent,
mortgage-backed securities and investments. Its principal expenses are interest
paid on customer deposits and borrowings and general and administrative
expenses. New Horizons operates branches in San Rafael, Mill Valley and Novato,
California.
LBC
LBC, a California stock corporation incorporated on May 14, 1991, was
established to act as a holding company for Luther Burbank. LBC acquired 100% of
the stock of Luther Burbank on January 1, 1992. Luther Burbank was incorporated
in California on June 17, 1982, and commenced operations on October 11, 1983.
Both LBC's and Luther Burbank's executive offices are located at 804 and 816
Fourth Street, Santa Rosa, CA 95404; the telephone number is (707) 578-9216.
LBC's primary business activity is investment in the stock of Luther Burbank.
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The principal business of Luther Burbank is the gathering of deposits from
the general public and investing in real estate loans for residential,
multifamily, construction, and commercial purposes. These operating activities
are financed through loan payoffs and customer deposits, and to a lesser extent,
loan sales and borrowings. Luther Burbank operates one branch in Santa Rosa,
California.
MARKET PRICES OF AND DIVIDENDS ON NHS FINANCIAL COMMON STOCK
NHS Financial Common Stock is listed on the NASDAQ National Market System
under the symbol "NHSL." The table below sets forth, for the quarters indicated,
the high and low sales prices of NHS Financial Common Stock as reported on the
NASDAQ National Market System and the dividends paid per share on NHS Financial
Common Stock in each such quarter.
<TABLE>
<CAPTION>
PRICES
-------------------- CASH DIVIDENDS
HIGH LOW PAID PER SHARE
--------- --------- -----------------
<S> <C> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1994
First Quarter............................................ $ 10.00 8.00 $ 0.04
Second Quarter........................................... 10.00 8.50 0.04
Third Quarter............................................ 12.75 8.50 0.04
Fourth Quarter........................................... 12.75 8.75 0.04
FISCAL YEAR ENDED DECEMBER 31, 1995
First Quarter............................................ 9.75 7.75 0.04
Second Quarter........................................... 10.00 8.00 0.04
Third Quarter............................................ 10.25 7.75 0.04
Fourth Quarter........................................... 10.00 8.38 0.04
FISCAL YEAR ENDED DECEMBER 31, 1996
First Quarter............................................ 9.88 8.00 0.04
Second Quarter........................................... 11/25 8.75 0.04
</TABLE>
The closing price per share for NHS Financial Common Stock as reported on
the NASDAQ National Market System on May 22, 1996, the last full trading day
prior to the public announcement of the execution of the Reorganization
Agreement, was $9.50. On August 8, 1996, which is most recent date for which it
was practicable to obtain market data prior to the printing of this Proxy
Statement, the closing price of NHS Financial Common Stock was $11.25. Holders
of NHS Financial Common Stock are urged to obtain current market quotations.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
A representative of KPMG Peat Marwick LLP, NHS Financial's independent
certified public accountants, is expected to be present at the Meeting, will
have an opportunity to make a statement if he or she desires to do so and will
be available to respond to questions raised at the Meeting.
CERTAIN INFORMATION REGARDING NHS FINANCIAL
NHS Financial is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the SEC. Copies of such reports, proxy statements and other
information can be obtained, upon payment of prescribed fees, from the SEC at
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In addition,
such reports, proxy statements and other information can be inspected at the
SEC's facilities referred to above and at the SEC's Regional Offices at 7 World
Trade Center (13th Floor), New York, New York 10048, the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 5670
Wilshire Boulevard, 11th Floor, Los Angeles, California 90036.
NHS Financial's Annual Report on Form 10-K for the year ended December 31,
1995, which incorporates and includes NHS Financial's 1995 Annual Report to
shareholders (together, Appendix E hereto), includes the audited consolidated
statements of financial condition of NHS Financial as of December 31,
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1995 and 1994 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 1995 and notes thereto, together with Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Appendix E hereto also includes NHS Financial's Quarterly Report on Form 10-Q at
and for the three months and six months ended June 30, 1996 and 1995. Such
Appendix E (excluding any documents incorporated by reference therein or
exhibits thereto) is a part of this Proxy Statement and should be carefully
reviewed for the information regarding NHS Financial contained therein. THE
DOCUMENTS INCORPORATED BY REFERENCE IN, OR INCLUDED AS EXHIBITS TO, SUCH
APPENDIX E, ARE NOT A PART OF THIS PROXY STATEMENT.
OTHER MATTERS
The NHS Financial Board of Directors is not aware of any business to come
before the Meeting other than those matters described in this Proxy Statement.
However, if any other matters should properly come before the Meeting, it is
intended that proxies in the accompanying form will be voted in respect thereof
in accordance with the judgment of the person or persons voting the proxies.
While there is no present intention or need to do so, the Board is empowered to
adjourn the Meeting from time to time.
BY ORDER OF THE BOARD OF DIRECTORS
JoAnne Fabian
CORPORATE SECRETARY
San Rafael, California
August 12, 1996
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APPENDIX A -- AGREEMENT AND PLAN OF REORGANIZATION
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Reorganization Agreement")
dated as of May 23, 1996, by and among LUTHER BURBANK CORPORATION ("LBC"), a
California corporation, which is registered as a savings and loan holding
company; LUTHER BURBANK SAVINGS AND LOAN ASSOCIATION ("LUTHER BURBANK"), a
California savings and loan association, which is a wholly-owned subsidiary of
LBC; LBC INTERIM ("LBC INTERIM"), a California corporation, which is a
wholly-owned subsidiary of LBC; NHS FINANCIAL INC. ("NHS FINANCIAL"), a
California corporation, which is registered as a savings and loan holding
company; and NEW HORIZONS SAVINGS AND LOAN ASSOCIATION ("NEW HORIZONS"), a
California savings and loan association, which is a wholly-owned subsidiary of
NHS FINANCIAL.
RECITALS:
A. NHS FINANCIAL desires to be acquired by LBC on the terms and subject to
the conditions set forth in this Reorganization Agreement and the accompanying
Agreements of Merger attached hereto as Exhibit A-1, A-2 and A-3 (the
"Agreements of Merger").
B. The Boards of Directors of LBC, LUTHER BURBANK, LBC INTERIM, NHS
FINANCIAL and NEW HORIZONS deem it advisable and in the best interests of LBC,
LUTHER BURBANK, LBC INTERIM, NHS FINANCIAL and NEW HORIZONS and their respective
shareholders to effect the mergers described herein and on the terms and subject
to the conditions set forth in this Reorganization Agreement and the Agreements
of Merger (the "Mergers").
C. The respective Boards of Directors of LBC, LUTHER BURBANK, LBC INTERIM,
NHS FINANCIAL and NEW HORIZONS have each adopted resolutions approving this
Reorganization Agreement and the Agreements of Merger, and have directed that
this Reorganization Agreement and the Agreements of Merger and all resolutions
related thereto be submitted with appropriate applications to such regulatory
agencies or authorities as may be necessary in order to obtain all governmental
authorizations required to consummate the proposed Mergers and the transactions
contemplated in this Reorganization Agreement in accordance therewith and
applicable law.
D. As a condition to the LBC's entering into this Reorganization Agreement,
NHS FINANCIAL is simultaneously entering into a Stock Option Agreement with the
LBC attached hereto as Exhibit B (the "Option Agreement"), pursuant to which NHS
FINANCIAL is granting to LBC an option to purchase authorized but unissued
shares of NHS FINANCIAL Common Stock equal to 19.9% of the outstanding shares of
NHS FINANCIAL Common Stock upon the terms and conditions contained therein.
In consideration of the foregoing and the mutual representations,
warranties, covenants and agreements contained herein and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and the parties agree as follows:
ARTICLE 1. THE MERGER
Section 1.1 STRUCTURE OF THE MERGER. On the Effective Date (as defined in
Section 7.1), LBC INTERIM will merge with and into NHS FINANCIAL, with NHS
FINANCIAL being the surviving corporation pursuant to the Agreement of Merger
attached hereto as Exhibit A-1. Immediately thereafter, NHS FINANCIAL will merge
with and into NEW HORIZONS, with NEW HORIZONS as the surviving corporation
pursuant to the Agreement of Merger attached hereto as Exhibit A-2. Immediately
thereafter, NEW HORIZONS will merge with and into LUTHER BURBANK, with LUTHER
BURBANK as the surviving association, pursuant to the Agreement of Merger
attached hereto as Exhibit A-3. LUTHER BURBANK, after completion of the three
mergers described above is referred to herein as the "Surviving Corporation" and
shall continue in its separate corporate existence with all of its rights,
privileges, immunities, powers and franchises unaffected by such Mergers.
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Section 1.2 EFFECT ON OUTSTANDING SHARES.
(a) By virtue of the Agreements of Merger, automatically and without any
action on the part of the holders of shares of NHS FINANCIAL common stock ("NHS
FINANCIAL Common Stock"), each share of NHS FINANCIAL Common Stock issued and
outstanding at the Effective Time (other than Excluded Shares (as defined
below)) shall become and be converted into the right to receive eleven and
50/100 dollars ($11.50) in cash without interest (the "Merger Consideration").
As of the Effective Time, each share of NHS FINANCIAL Common Stock held directly
or indirectly by LBC, other than shares held in a fiduciary capacity or in
satisfaction of a debt previously contracted shall be canceled and retired and
cease to exist, and no exchange or payment shall be made with respect thereto.
The aggregate consideration for the NHS FINANCIAL Common Stock other than
Excluded Shares shall be Twenty-Nine Million Twelve Thousand Five Hundred Eleven
Dollars ($29,012,511), and the aggregate consideration for the options described
in Section 1.5 below shall be Six Hundred Seventy-Eight Thousand Eight Hundred
Fifty-Eight Dollars ($678,858), for a total consideration of Twenty-Nine Million
Six Hundred Ninety-One Thousand Three Hundred Sixty-Nine Dollars ($29,691,369).
(b) "Excluded Shares" shall mean (i) shares of NHS FINANCIAL Common Stock
the holder of which dissents from the merger (the "Dissenting Shareholder"),
pursuant to Chapter 13 of the California General Corporation Law (the "GCL")
providing for dissenters' rights and becomes entitled to receive payment in
accordance with the GCL, such holder to have only the rights provided in the GCL
(the "Dissenters' Shares") and (ii) shares of NHS FINANCIAL Common Stock held
directly or indirectly by LBC, other than shares held in a fiduciary capacity or
in satisfaction of a debt previously contracted.
Section 1.3 EXCHANGE PROCEDURES.
(a) At and after the Effective Time, each certificate (a "Certificate")
previously representing shares of NHS FINANCIAL Common Stock shall represent
only the right to receive the Merger Consideration in cash without interest.
(b) As of the Effective Time, LBC shall deposit, or shall cause to be
deposited with such bank, savings and loan association or trust company as LBC
shall elect (the "Exchange Agent"), for the benefit of the holders of shares of
NHS FINANCIAL Common Stock, for exchange in accordance with this Section 1.3,
the amount of cash constituting the Merger Consideration to be paid pursuant to
Section 1.2. Any interest earned on such deposit while in the possession of the
Exchange Agent shall be the sole property of LBC.
(c) Within ten (10) business days after the Effective Time, LBC shall cause
the Exchange Agent to mail to each holder of record of a Certificate or
Certificates the following: (i) a letter of transmittal specifying that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent, which shall be in
a form and contain any other reasonable provisions as LBC may determine; and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration. LBC shall also make appropriate
provisions with the Exchange Agent to enable holders of record of a Certificate
or Certificates to deliver such Certificate or Certificates to the Exchange
Agent in person commencing on or not later than the second business day
following the Effective Time. Upon the proper surrender of a Certificate to the
Exchange Agent, together with a properly completed and duly executed letter of
transmittal, the holder of such Certificate shall be entitled to receive in
exchange therefor a check representing the Merger Consideration which such
holder has the right to receive in respect of the Certificate surrendered
pursuant to the provisions hereof, and the Certificate so surrendered shall
forthwith be canceled. No interest will be paid or accrued on the Merger
Consideration. In the event of a transfer of ownership of any shares of NHS
FINANCIAL Common Stock not registered in the transfer records of NHS FINANCIAL,
a check for the Merger Consideration may be issued to the transferee if the
Certificate representing such NHS FINANCIAL Common Stock is presented to the
Exchange Agent, accompanied by documents sufficient, in the reasonable
discretion of LBC and the Exchange Agent, (i) to evidence and effect such
transfer and (ii) to evidence that all applicable stock transfer taxes have been
paid.
(d) From and after the Effective Time, there shall be no transfers on the
stock transfer records of NHS FINANCIAL of any shares of NHS FINANCIAL Common
Stock that were outstanding immediately prior
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to the Effective Time. If, after the Effective Time, Certificates are presented
to LBC or the Surviving Corporation, they shall be canceled and exchanged for
the Merger Consideration deliverable in respect thereof pursuant to this
Reorganization Agreement in accordance with the procedures set forth in this
Section 1.3.
(e) Any portion of the aggregate Merger Consideration or the proceeds of any
investments thereof that remains unclaimed by the shareholders of NHS FINANCIAL
for twelve (12) months after the Effective Time shall be repaid by the Exchange
Agent to LBC. Any shareholders of NHS FINANCIAL who have not theretofore
complied with this Section 1.3 shall thereafter look only to LBC for payment of
their Merger Consideration deliverable in respect of each share of NHS FINANCIAL
Common Stock such stockholder holds as determined pursuant to this
Reorganization Agreement without any interest thereon. If outstanding
Certificates are not surrendered or the payment for them not claimed prior to
the date on which such payments would otherwise escheat to or become the
property of any governmental unit or agency, the unclaimed items shall, to the
extent permitted by abandoned property and any other applicable law, become the
property of LBC (and to the extent not in its possession shall be paid over to
it), free and clear of all claims or interest of any person previously entitled
to such claims. Notwithstanding the foregoing, none of LBC, the Surviving
Corporation, the Exchange Agent or any other person shall be liable to any
former holder of NHS FINANCIAL Common Stock for any amount delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
(f) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by the Exchange
Agent, the posting by such person of a bond in such amount as the Exchange Agent
may reasonably direct as indemnity against any claim that may be made against it
with respect to such Certificate, the Exchange Agent will issue in exchange for
such lost, stolen or destroyed Certificate the Merger Consideration deliverable
in respect thereof pursuant to this Reorganization Agreement.
Section 1.4 DISSENTERS' RIGHTS. Any Dissenting Shareholder who shall
become entitled to be paid the "fair value" of his or her Dissenters' Shares, as
provided in Chapter 13 of the GCL shall not be entitled to the Merger
Consideration, unless and until the holder thereof shall have failed to perfect
or shall have effectively withdrawn or lost such holder's right to dissent under
the GCL, and shall be entitled to receive only the payment to the extent
provided for by the GCL with respect to such Dissenters' Shares. If any
Dissenting Shareholder shall fail to perfect or shall have effectively withdrawn
or lost the right to dissent, the Dissenters' Shares held by such Dissenting
Shareholder shall thereupon be treated as though such Dissenters' Shares had
been converted into the right to receive the Merger Consideration pursuant to
Section 1.2.
Section 1.5 OPTIONS AND STOCK APPRECIATION RIGHTS. At the Effective Time,
each option granted by NHS FINANCIAL to purchase shares of NHS FINANCIAL Common
Stock or receive other consideration, which is outstanding and unexercised
immediately prior to the Effective Time, whether or not then vested and
exercisable, including any option that has expired during the time period from
the date of this Reorganization Agreement through the Effective Time, shall be
terminated and each grantee thereof shall be entitled to receive, in lieu of
each share of NHS FINANCIAL Common Stock or any other consideration that would
otherwise have been issuable upon exercise, an amount in cash computed by
multiplying (i) the difference between (x) the per share amount of the Merger
Consideration and (y) the per share exercise price applicable to such option by
(ii) the number of such shares of NHS FINANCIAL Common Stock subject to such
option. NHS FINANCIAL agrees to use its commercially reasonable efforts to take
or cause to be taken all action necessary under such options to provide for such
termination and payment, including obtaining any necessary consents from
grantees. NHS FINANCIAL will make the payments required to be made to grantees
of options under this Section 1.5 immediately prior to the Effective Time.
Section 1.6 ALTERNATIVE STRUCTURE. Notwithstanding anything in this
Reorganization Agreement to the contrary, LBC may specify that, before or after
the Mergers, NHS FINANCIAL, LBC and any other subsidiary or affiliate of LBC or
NHS FINANCIAL shall enter into transactions other than those described in
Article 1 hereof in order to effect the purposes of this Reorganization
Agreement, and NHS FINANCIAL and LBC shall take all action necessary and
appropriate to effect, or cause to be effected, such transactions;
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PROVIDED, HOWEVER, that no such transaction may (i) alter or change the amount
or kind of the Merger Consideration or the treatment of the stock options
contemplated by Section 1.5 hereof, (ii) diminish in any material amount or
respect the benefits to be received by the directors, officers or employees of
NHS FINANCIAL and NEW HORIZONS set forth in this Reorganization Agreement or in
any agreements between the parties made in connection with this Reorganization
Agreement, or (iii) materially and adversely affect the timing of the
consummation of the transactions contemplated herein or the tax effect or
economic benefits of the Mergers to the holders of NHS FINANCIAL Common Stock.
ARTICLE 2. CONDUCT PENDING THE MERGERS
Section 2.1 CONDUCT OF NHS FINANCIAL'S AND NEW HORIZONS' BUSINESS PRIOR TO
THE EFFECTIVE TIME. Except as expressly provided in this Reorganization
Agreement or as agreed to by LBC in writing during the period from the date of
this Reorganization Agreement to the Effective Time or as set forth in the
Disclosure Letter as defined in Section 3.1 below, NHS FINANCIAL shall, and
shall cause its subsidiaries to (i) conduct its business and maintain its books
and records in the usual, regular and ordinary course consistent with past
practice, (ii) use its commercially reasonable efforts to maintain and preserve
intact its business organization, properties, leases, employees and advantageous
business relationships, including but not limited to depositors and borrowers,
and retain the services of its officers and key employees, (iii) except as
required by applicable law, rule or regulation, take no action which would
adversely affect or delay the ability of any of the parties hereto to obtain any
necessary approvals, consents or waivers of any governmental authority required
for the transactions contemplated hereby or to perform its covenants and
agreements on a timely basis under this Reorganization Agreement and (iv) except
as required by applicable law, rule or regulation take no action that could
reasonably be expected to have a Material Adverse Effect (as defined in Section
3.2 hereof) on NHS FINANCIAL.
Section 2.2 FORBEARANCE BY NHS FINANCIAL. During the period from the date
of this Reorganization Agreement to the Effective Time, and except as
contemplated by this Reorganization Agreement or the Option Agreement or as set
forth in NHS FINANCIAL Disclosure Letter, NHS FINANCIAL shall not, and shall not
permit NEW HORIZONS, without the prior written consent of LBC, which consent
shall not be unreasonably withheld, to:
(a) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money or assume, guarantee,
endorse or otherwise as an accommodation become responsible for the
obligations of any other person; PROVIDED, HOWEVER, that neither NHS
FINANCIAL nor NEW HORIZONS shall incur any indebtedness for borrowed money
(including reverse repurchase agreements) with a final maturity date falling
on any date after September 30, 1996;
(b) adjust, split, combine or reclassify any capital stock, make,
declare or pay any dividend or make any other distribution on, or directly
or indirectly redeem, purchase or otherwise acquire, any share of its
capital stock or any securities or obligations convertible into or
exchangeable for any shares of its capital stock, or grant any stock
appreciation rights or grant, sell or issue to any individual, corporation
or other person any right or option to acquire, or securities evidencing a
right to convert into or acquire, any shares of its capital stock, except
for regular quarterly cash dividends at a rate per share of NHS FINANCIAL
Common Stock not in excess of $.04 (PROVIDED, HOWEVER, that NHS FINANCIAL
may not declare or pay any dividend after June 30, 1996, unless the
Effective Date is extended beyond October 31, 1996); or issue any additional
shares of capital stock or rights asserted therewith except pursuant to (i)
the exercise of stock options outstanding as of the date hereof on the terms
in effect on the date hereof or (ii) the Option Agreement;
(c) other than in the ordinary course of business consistent with past
practice, sell, transfer, mortgage, encumber or otherwise dispose of any of
its properties, leases or assets to any person, or cancel, release or assign
any indebtedness of any such person, except pursuant to contracts or
agreements in force at the date of this Reorganization Agreement;
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(d) notwithstanding the introduction to this Section 2.2, without prior
notice to LBC, hire a replacement employee above the level of Assistant Vice
President, enter into, renew or amend any employment agreement with any
employee or director, increase in any manner the compensation or fringe
benefits of any of its employees or directors, or create or institute, or
make any payments pursuant to, any severance plan or package, or pay any
pension or retirement allowance not required by any existing plan or
agreement to any such employees or directors, or become a party to, amend or
commit itself to, or otherwise establish any trust account related to, any
Employee Plan (as defined in Section 3.3(n)), with or for the benefit of any
employee, other than general increases in compensation in the ordinary
course of business consistent with past practice but in any event not in
excess of 3.0% (three percent) in the aggregate for all employees, 4.0%
(four percent) for any individual employee at the level of Vice President or
above, and 5.0% (five percent) for any individual employee below the level
of Vice President or any amendment to any Employee Plan required by
applicable law (provided that NHS FINANCIAL shall use its best efforts to
minimize the cost of any such amendment as permitted under such applicable
law), voluntarily accelerate the vesting of any stock options or other
compensation or benefit or declare or pay any bonus; PROVIDED, HOWEVER, that
the provisions of an employee retention plan previously agreed to by the
parties may be implemented; and NHS FINANCIAL may amend the severance
provisions of any employment contract in place on the date of this
Reorganization Agreement, so long as the purpose of such amendment is to
bring the contract into compliance with current laws relating to the payment
of severance and such amendment does not result in any increase in the
financial obligations of NHS FINANCIAL, NEW HORIZONS, LBC or LUTHER BURBANK;
(e) other than in the ordinary course of business consistent with past
practice, and except as necessary to meet current liquidity requirements,
make any investment either by purchase of stock or securities, contributions
to capital, property transfers, or purchase of any property or assets of any
person; provided that no investment or series of related investments shall
be made in excess of $50,000 except in (i) securities which would be
reported under the caption "Cash and Cash Equivalents" on NHS FINANCIAL's
consolidated statements of financial condition; and (ii) federal government
securities with a maturity of not more than ninety (90) days, and in no
event shall NHS FINANCIAL make any acquisition of equity securities or
business operations without LBC's prior written consent;
(f) enter into, renew or terminate any contract or agreement requiring
payment by NHS FINANCIAL or NEW HORIZONS of more than six months in
duration, or that is not cancelable without penalty with thirty (30) days
notice, except for any contract to sell real estate owned done in the
ordinary course of business, or make any change in any of its material
leases or contracts, other than as contemplated by Section 3.3(bb) hereof;
(g) settle any claim, action or proceeding involving any liability of
NHS FINANCIAL or NEW HORIZONS for money damages that would have a material
adverse effect on NHS FINANCIAL or NEW HORIZONS or would involve material
restrictions upon the operations of NHS FINANCIAL or NEW HORIZONS;
(h) except in the ordinary course of business, waive or release any
material right or collateral or cancel or compromise any extension of credit
or other debt or claim;
(i) except in the ordinary course of business, make, renegotiate, renew,
increase, extend, sell or purchase any loan, lease (credit equivalent),
advance, credit enhancement or other extension of credit or make any
commitment in respect of any of the foregoing;
(j) notwithstanding the introduction to this Section 2.2, without prior
notice to LBC, make, negotiate, renew, increase, extend or purchase any
loan, lease (credit equivalent), advance, credit enhancement or other
extension of credit or make any commitment in respect of any of the
foregoing (except for loans in progress as of the date hereof), whether or
not in the ordinary course of business:
A. on any property in excess of $1,000,000;
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B. on speculative construction property in excess of 65% LTV, or on
detached owner-occupied home construction property in excess of 75% LTV,
and in any such event, only if the loan is secured by a first priority
lien;
C. on any undeveloped property;
D. on undeveloped property with tentative or final development plans
in excess of 60% LTV; or
E. on property secured by subordinate liens in excess of $750,000,
including the value of loans secured by priority liens.
(k) except as contemplated by Section 4.2, change its method of
accounting as in effect at December 31, 1995, except as required by changes
in generally accepted accounting principles as concurred in by NHS
FINANCIAL's independent auditors, or as required by regulatory accounting
principles or regulatory requirements;
(l) enter into any new activities or lines of business, including but
not limited to new savings programs, or cease to conduct any material
activities or lines of business that it conducts on the date hereof, alter
its pricing strategy with respect to deposits, take any action that would
alter its deposit pricing practices that would reasonably be expected to
result in a material change in its deposit pricing when compared to
financial institutions competing in the same market or conduct any material
business activity not consistent with past practice;
(m) except as required by law or applicable regulation, amend its
restated certificate of incorporation or its bylaws;
(n) make any capital expenditures for fixed assets in excess of Five
Thousand Dollars ($5,000) other than pursuant to binding commitments
existing on the date hereof and other than expenditures necessary to
maintain existing assets in good repair;
(o) incur general or administrative expenses other than such expenses as
are reasonably necessary in the ordinary course of business; or
(p) agree to, or make any commitment to, take any of the actions
prohibited by this Section 2.2.
Section 2.3 COOPERATION. NHS FINANCIAL and NEW HORIZONS shall cooperate
with LBC and LUTHER BURBANK in completing the transactions contemplated hereby
and shall not take, cause to be taken or agree or make any commitment to take
any action: (i) that is intended or may reasonably be expected to cause any of
the representations or warranties of it that are set forth in Article 3 hereof
not to be true and correct in any material respect, or (ii) that is inconsistent
with or prohibited by this Reorganization Agreement, including but not limited
to Section 2.1 or Section 2.2, except in any case as may be required by law,
rule or regulation.
Section 2.4 CONDUCT OF LBC PRIOR TO THE EFFECTIVE TIME. Except as
expressly provided in this Reorganization Agreement, or as agreed to by NHS
FINANCIAL or as required by applicable law, rule or regulation, during the
period from the date of this plan to the Effective Time, LBC shall take no
action (i) that would materially affect or delay the ability of any of the
parties to obtain any necessary approval, consent or waiver of any governmental
authority required under this Reorganization Agreement or to perform its
covenants and agreements on a timely basis under the Reorganization Agreement,
and (ii) that could reasonably be expected to have a Material Adverse Effect on
LBC.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES
Section 3.1 DISCLOSURE LETTERS. On or prior to the date hereof, NHS
FINANCIAL has delivered to LBC, and LBC has delivered to NHS FINANCIAL, a letter
(as the case may be, its "DISCLOSURE LETTER") setting forth, among other things,
facts, circumstances and events the disclosure of which is required or
appropriate in relation to any or all of its representations and warranties (and
making specific reference to
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the section of this Reorganization Agreement to which they relate); PROVIDED,
HOWEVER, that (a) no such fact, circumstance or event is required to be set
forth in a Disclosure Letter as an exception to a representation or warranty (it
being understood that items to be set forth in response to Sections 3.3(b) and
3.3(d) are intended as informational disclosures and not to constitute
exceptions to the applicable representation or warranty) if its absence is not
reasonably likely to result in the related representation or warranty being
deemed untrue or incorrect under the standards established by Section 3.2, and
(b) the mere inclusion of a fact, circumstance or event in a Disclosure Letter
shall not be deemed an admission by a party that such item represents a material
exception or that such item is reasonably likely to result in a Material Adverse
Effect (as defined in Section 3.2).
Section 3.2 STANDARDS. (a) No representation or warranty of NHS FINANCIAL
or LBC contained in Section 3.3 or 3.4, respectively, shall be deemed untrue or
incorrect and no party hereto shall be deemed to have breached a representation
or warranty, on account of the existence of any fact, circumstance or event
unless, as a consequence of such fact, circumstance or event, individually or
taken together with all other facts, circumstances or events inconsistent with
any paragraph of Section 3.3 or 3.4, as applicable, there is reasonably likely
to occur a Material Adverse Effect.
(b) As used in this Reorganization Agreement, the term "Material Adverse
Effect" means (i) an effect which (A) is material and adverse to the business,
financial condition or results of operations of NHS FINANCIAL or LBC and its
subsidiaries taken as a whole, or to any shareholder of LBC, as the context may
dictate, (B) significantly and adversely affects the ability of NHS FINANCIAL or
LBC as the context may dictate, to consummate the Mergers by September 30, 1996,
or to perform its material obligations under this Reorganization Agreement or
(C) enables any person to prevent the consummation by September 30, 1996, of the
Mergers or (ii) the failure of (x) a representation or warranty contained in
Sections 3.3(a) or 3.3(h)(B) to be true and correct; or (y) a representation or
warranty contained in Sections 3.3(d), 3.4(a) or 3.4(b) to be true and correct
in all material respects; PROVIDED, HOWEVER, that in determining whether a
Material Adverse Effect has occurred there shall be excluded any effect the
cause of which is (i) any change in banking, tax and similar laws of general
applicability to savings associations or their holding companies or
interpretations thereof by courts or governmental authorities, (ii) any change
in generally accepted accounting principles or regulatory accounting
requirements applicable to savings associations or their holding companies
generally, (iii) any action or omission of NHS FINANCIAL or LBC, as applicable,
in contemplation of the Mergers, (iv) the actions contemplated by Section 4.2,
(v) any changes in general economic conditions affecting financial institutions
generally, including but not limited to changes in interest rates, (vi) a
special assessment on SAIF members or other action taken by the Federal Deposit
Insurance Corporation in connection with the funding of the SAIF, (vii) any
action not taken or omission made by NHS FINANCIAL because the consent thereto
reasonably requested by NHS FINANCIAL from LBC to conduct ordinary business
operations was denied or not acted upon in a timely manner by LBC.
Section 3.3 REPRESENTATIONS AND WARRANTIES OF NHS FINANCIAL. Subject to
Sections 3.1 and 3.2 and except as set forth in the Disclosure Letter relating
to NHS FINANCIAL referred to therein, NHS FINANCIAL represents and warrants to
LBC that:
(a) RECITALS. The facts set forth in the Recitals of this
Reorganization Agreement with respect to NHS FINANCIAL and NEW HORIZONS are
true and correct in all material respects.
(b) CAPITAL STOCK. All outstanding shares of common stock of NHS
FINANCIAL and of NEW HORIZONS are duly authorized, validly issued and
outstanding, fully paid and non-assessable, and subject to no preemptive or
other rights, a total of 2,522,827 shares of NHS FINANCIAL Common Stock are
outstanding. No shares of preferred stock of NHS FINANCIAL are outstanding.
(c) QUALIFICATION. Each of NHS FINANCIAL and NEW HORIZONS has the power
and authority, and is duly qualified in all jurisdictions where such
qualification is required, to carry on its business as it is now being
conducted and to own all its properties and assets, and it has all federal,
state, local, and foreign governmental authorizations necessary for it to
own or lease its properties and assets and to carry on its business as it is
now being conducted.
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(d) SUBSIDIARIES: SIGNIFICANT INVESTMENTS. The only subsidiary of NHS
FINANCIAL is NEW HORIZONS. All of the shares of common stock of NEW HORIZONS
are owned directly and of record by NHS FINANCIAL free and clear of all
liens, claims, encumbrances and restrictions on transfer; no other stock of
NEW HORIZONS is outstanding. Neither NHS FINANCIAL nor NEW HORIZONS owns any
equity securities, any security convertible or exchangeable into an equity
security or any rights to acquire any equity security, except for the shares
of capital stock, par value $100 per share, of the Federal Home Loan Bank of
San Francisco ("FHLBSF"), held by NHS FINANCIAL as of the date hereof.
(e) AUTHORITY AND SHAREHOLDER APPROVALS.
(i) Subject to the receipt of required shareholder approval of this
Reorganization Agreement by the holders of NHS FINANCIAL Common Stock,
this Reorganization Agreement and the Option Agreement have been
authorized by all necessary corporate action of NHS FINANCIAL. Subject to
receipt of (A) such shareholder approval and (B) the required approvals,
consents or waivers of governmental authorities referred to in Section
5.1 (b), this Reorganization Agreement is a valid and binding agreement
of NHS FINANCIAL enforceable against it in accordance with its terms,
subject as to enforcement to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles.
(ii) The affirmative vote of at least a majority of the outstanding
shares of NHS FINANCIAL Common Stock entitled to vote on this
Reorganization Agreement is the only shareholder vote
required for approval of the Reorganization Agreement and consummation of
the Mergers and the other transactions contemplated hereby.
(f) NO VIOLATIONS. The execution, delivery and performance of this
Reorganization Agreement by NHS FINANCIAL do not, and the consummation of
the transactions contemplated hereby by NHS FINANCIAL will not, constitute
(i) a breach or violation of, or a default under, any law, rule or
regulation or any judgment, decree, order, governmental permit or license,
or agreement, indenture or instrument of NHS FINANCIAL or NEW HORIZONS or to
which NHS FINANCIAL or NEW HORIZONS (or any of their respective properties)
is subject, or enable any person to enjoin the Mergers or the other
transactions contemplated hereby, (ii) a breach or violation of, or a
default under, the certificate of incorporation or bylaws or similar
organizational documents of NHS FINANCIAL or NEW HORIZONS or (iii) a breach
or violation of, or a default under (or an event which with due notice or
lapse of time or both would constitute a default under), or result in the
termination of, accelerate the performance required by, or result in the
creation of any lien, pledge, security interest, charge or other encumbrance
upon any of the properties or assets of NHS FINANCIAL or NEW HORIZONS under,
any of the terms, conditions or provisions of any note, bond, indenture,
deed of trust, loan agreement or other agreement, instrument or obligation
to which NHS FINANCIAL or NEW HORIZONS is a party, or to which any of their
respective properties or assets may be bound or affected; and the
consummation of the transactions contemplated hereby and by the Option
Agreement will not require NHS FINANCIAL to obtain any approval, consent or
waiver under any such law, rule, regulation, judgment, decree, order,
governmental permit or license or the approval, consent or waiver of any
other party to any such agreement, indenture or instrument, other than (i)
the required approvals, consents and waivers of governmental authorities
referred to in Section 5.1(b), (ii) the approval of the shareholders of NHS
FINANCIAL referred to in Section 3.3(e) and (iii) such approvals, consents
or waivers as may be required under the federal and state securities or
"Blue Sky" laws in connection with the transactions contemplated by this
Reorganization Agreement or the Option Agreement.
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(g) REPORTS.
(i) As of their respective dates, neither NHS FINANCIAL's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995, nor any other
document filed subsequent to December 31, 1995 (including, without
limitation, NHS FINANCIAL's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996, under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"),
each in the form (including exhibits) filed with the Securities and Exchange
Commission (the "SEC"), or any of the reports or other statements filed by
NHS FINANCIAL or NEW HORIZONS on or subsequent to December 31, 1995, with
the Office of Thrift Supervision ("OTS") or otherwise pursuant to 12 C.F.R.
563b, 563d or 563g (collectively with the above-referenced reports filed
under the Securities Exchange Act, the "Reports"), contained or will contain
any untrue statement of a material fact or omitted or will omit to state a
material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading. Each of the balance sheets contained or incorporated
by reference in the Reports (including in each case any related notes and
schedules) fairly presented or will fairly present, as the case may be, the
financial position of the entity or entities to which it relates as of its
date and each of the statements of operations, statements of cash flows and
statements of stockholders' equity, contained or incorporated by reference
in its reports (including in each case any related notes and schedules),
fairly presented or will fairly present, as the case may be, the results of
operations, stockholders' equity and cash flows, as the case may be, of the
entity or entities to which it relates for the periods set forth therein
(subject, in the case of unaudited interim statements, to normal year-end
audit adjustments that are not material in amount or effect), in each case
in accordance with generally accepted accounting principles consistently
applied during the periods involved, except as may be noted therein.
(ii) NHS FINANCIAL and NEW HORIZONS have each timely filed all material
reports, registrations and statements together with any amendments required
thereto, that they were required to file since December 31, 1990 with (i)
the SEC, (ii) the OTS, (iii) the Federal Deposit Insurance Corporation
("FDIC"), (iv) the Savings Association Insurance Fund ("SAIF"), (v) the
Federal Housing Finance Board ("FHFB"), (vi) the FHLBSF, (vii) any state
banking commission or other similar state regulatory authority ("State
Regulator") (collectively, the "Regulatory Agencies"), and (viii) the
National Association of Securities Dealers, Inc. and any other
self-regulatory organization ("SRO"), and all other material reports and
statements required to be filed by them since December 31, 1990, including,
without limitation, any report or statement required to be filed pursuant to
the laws, rules or regulations of the United States, the OTS, the FDIC,
SAIF, FHFB, FHLBSF, any State Regulator or any SRO, and have paid all fees
and assessments due and payable in connection therewith.
(h) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in NHS
FINANCIAL's reports filed prior to the date of this Reorganization Agreement,
true and complete copies of which have been provided by NHS FINANCIAL to LBC,
and except as contemplated by this Reorganization Agreement, Option Agreement or
disclosed in the Disclosure Letter, since December 31, 1995, (A)(1) NHS
FINANCIAL and NEW HORIZONS have not incurred any liability, except in the
ordinary course of their business consistent with past practice and (2) NHS
FINANCIAL and NEW HORIZONS have conducted their respective businesses only in
the ordinary and usual course of such businesses, and (B) without giving effect
to the proviso of Section 3.1 or to Section 3.2(a), there has not been any
change in the financial condition, properties, business, or results of
operations of NHS FINANCIAL and NEW HORIZONS which, individually or in the
aggregate, is reasonably likely to result in a Material Adverse Effect.
(i) TAXES. All federal, state, local, and foreign tax returns required to
be filed by or on behalf of NHS FINANCIAL and NHS FINANCIAL Subsidiaries have
been timely filed or requests for extensions have been timely filed and any such
extension shall have been granted and not have expired, and all such filed
returns are complete and accurate in all material respects. All taxes shown on
such returns have been paid in full or adequate provision has been made for any
such taxes in the financial statements of NHS FINANCIAL and NEW HORIZONS (in
accordance with generally accepted accounting principles). There is no audit
examination, deficiency assessment, or refund litigation currently pending with
respect to any taxes of NHS
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FINANCIAL or NEW HORIZONS. All taxes, interest, additions, and penalties due
with respect to completed and settled examinations or concluded litigation
relating to NHS FINANCIAL or NEW HORIZONS have been paid in full or adequate
provision has been made for any such taxes in the financial statements of NHS
FINANCIAL or NEW HORIZONS (in accordance with generally accepted accounting
principles). No extensions or waivers of statutes of limitations have been given
by or requested with respect to any taxes of NHS FINANCIAL or NEW HORIZONS.
(j) ABSENCE OF CLAIMS. Except as disclosed in NHS FINANCIAL's Disclosure
Letter, as of the date hereof, no litigation, proceeding or controversy before
any court or governmental agency is pending, and there is no pending claim,
action or proceeding against NHS FINANCIAL and NEW HORIZONS, and, to the
knowledge of NHS FINANCIAL and NEW HORIZONS, no such litigation, proceeding,
controversy, claim or action has been threatened. As of the Effective Time, no
litigation, proceeding or controversy before any court or governmental agency is
pending, and there is no pending claim, action or proceeding against NHS
FINANCIAL or NEW HORIZONS, and, to the knowledge of NHS FINANCIAL, no such
litigation, proceeding, controversy, claim or action has been threatened. As of
the date hereof, there are no claims (statutory or otherwise), demands,
proceedings or other actions pending or, to NHS FINANCIAL's actual knowledge,
threatened against NHS FINANCIAL or NEW HORIZONS by (i) any of their present or
former employees or (ii) any person who sought to become employed by NHS
FINANCIAL or NEW HORIZONS.
(k) ABSENCE OF REGULATORY ACTIONS. Neither NHS FINANCIAL nor NEW HORIZONS
is a party to any cease and desist order, written agreement or memorandum of
understanding with, or a party to any commitment letter or similar undertaking
to, or is subject to any order or directive by, or is a recipient of any
extraordinary supervisory letter from, or has adopted any board resolutions
relating to the foregoing at the request of, federal or state governmental
authorities charged with the supervision or regulation of depository
institutions or depository institution holding companies or engaged in the
insurance of bank and/or savings and loan deposits ("Government Regulators") nor
has it been advised by any Government Regulator that it is contemplating issuing
or requesting (or is considering the appropriateness of issuing or requesting)
any such order, directive, written agreement, memorandum of understanding,
extraordinary supervisory letter, commitment letter, board resolutions or
similar undertaking.
(l) AGREEMENTS.
(i) Except for the Option Agreement and arrangements made in the
ordinary course of business, NHS FINANCIAL and NEW HORIZONS are not bound by
any material contract (as defined in Item 601(b)(10) of Regulation S-K) to
be performed after the date hereof that has not been filed with, described,
or incorporated by reference in NHS FINANCIAL's Reports filed prior to the
date of this Reorganization Agreement. Except as disclosed in NHS
FINANCIAL's Reports filed prior to the date of this Reorganization
Agreement, neither NHS FINANCIAL nor any of its subsidiaries is a party to
an oral or written (A) consulting agreement (other than data processing,
software programming and licensing contracts entered into in the ordinary
course of business) involving the payment of more than $50,000 per annum, in
the case of any such agreement with an individual, or $100,000 per annum, in
the case of any other such agreement, (B) except as set forth on Exhibit C
hereto, agreement with any executive officer or other key employee of NHS
FINANCIAL or of NEW HORIZONS the benefits of which are contingent, or the
terms of which are materially altered or any payments or rights are
accelerated upon the occurrence of a transaction involving NHS FINANCIAL or
NEW HORIZONS of the nature contemplated by this Reorganization Agreement or
the Option Agreement and which provides for the payment of in excess of
$50,000, (C) agreement with respect to any executive officer of NHS
FINANCIAL or NEW HORIZONS providing any term of employment or compensation
guarantee extending for a period longer than one year and for the payment of
in excess of $100,000 per annum, (D) agreement or plan, including any stock
option plan, stock appreciation rights plan, restricted stock plan or stock
purchase plan, any of the benefits of which will be increased, or the
vesting of the benefits of which will be accelerated by the occurrence of
any of the transactions contemplated by this Reorganization Agreement or the
Option Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Reorganization Agreement or
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the Option Agreement or (E) agreement containing covenants that limit the
ability of NHS FINANCIAL or NEW HORIZONS to compete in any line of business
or with any person, or that involve any restriction on the geographic area
in which, or method by which, NHS FINANCIAL (including any subsidiary or
successor thereof) may carry on business (other than as may be required by
law or any regulatory agency).
(ii) Neither NHS FINANCIAL nor NEW HORIZONS is in default under or in
violation of any provision of any material note, bond, indenture, mortgage,
deed of trust, loan agreement, lease or other agreement to which it is a
party or by which it is bound or to which any of its respective properties
or assets is subject.
(m) LABOR MATTERS. Neither NHS FINANCIAL or NEW HORIZONS is a party to, or
is bound by, any collective-bargaining agreement, contract, or other agreement
or understanding with a labor union or labor organization, nor is NHS FINANCIAL
or NEW HORIZONS the subject of any proceeding asserting that it has committed an
unfair labor practice or seeking to compel it to bargain with any labor
organization as to wages and conditions of employment, nor is there any strike,
other labor dispute or organizational effort involving NHS FINANCIAL or NEW
HORIZONS pending or threatened, to the best of NHS FINANCIAL's knowledge.
(n) EMPLOYEE BENEFIT PLANS. Exhibit C contains a complete list of all
pension, retirement, stock option, stock purchase, stock ownership, savings,
stock appreciation right, profit sharing, deferred compensation, consulting,
bonus, group insurance, employment, termination, severance, medical, health and
other benefit plans, contracts, agreements, arrangements, including, but not
limited to, "employee benefit plans", as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") or Section 406 of
the Code, incentive and welfare policies, contracts, plans and arrangements and
all trust agreements related thereto in respect to any present or former
directors, officers, or other employees of NHS FINANCIAL or NEW HORIZONS
(hereinafter referred to collectively as the "Employee Plans"); (i) All of the
Employee Plans comply in all material respects with all applicable requirements
of ERISA; the Internal Revenue Code of 1996, as amended ("Code") and other
applicable laws; neither NHS FINANCIAL nor NEW HORIZONS has engaged in a
"prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of
the Code) with respect to any Employee Plan that, assuming the taxable period of
such transaction expired as of the date hereof, would subject NHS FINANCIAL to a
material tax or penalty imposed by either Section 4975 of the Code or Section
502 of ERISA; and all contributions required to be made under the terms of any
Employee Plan have been timely made or have been reflected on the balance sheets
contained or incorporated by reference in the Reports; (ii) no liability to the
Pension Benefit Guaranty Corporation (the "PBGC") has been or is expected by NHS
FINANCIAL or NEW HORIZONS to be incurred with respect to any Employee Plan which
is subject to Title IV of ERISA ("Pension Plan"), or with respect to any
"single-employer plan" (as defined in Section 4001(a)(15) of ERISA) currently or
formerly maintained by NHS FINANCIAL or any entity (an "ERISA Affiliate") which
is considered one employer with NHS FINANCIAL under Section 4001 of ERISA or
Section 414 of the Code (an "ERISA Affiliate Plan"); and no proceedings have
been instituted to terminate any Pension Plan or ERISA Affiliate Plan; (iii) no
Pension Plan or ERISA Affiliate Plan had an accumulated funding deficiency (as
defined in Section 302 of ERISA (whether or not waived)) as of the last day of
the end of the most recent plan year ending prior to the date hereof, the fair
market value of the assets of each Pension Plan and ERISA Affiliate Plan exceeds
the present value of the "benefit liabilities" (as defined in Section
4001(a)(16) of ERISA) under such Pension Plan or ERISA Affiliate Plan as of the
end of the most recent plan year with respect to the respective Pension Plan or
ERISA Affiliate Plan ending prior to the date hereof, calculated on the basis of
the actuarial assumptions used in the most recent actuarial valuation for such
Pension Plan or ERISA Affiliate Plan prior to the date hereof, which assumptions
are reasonable and comply with ERISA and the Code, and there has been no
material change in the financial condition of any such Pension Plan or ERISA
Affiliate Plan since the last day of the most recent plan year, which would
cause the present value of the "benefit liabilities" to exceed the fair market
value of the assets, and no notice of a "reportable event" (as defined in
Section 4043 of ERISA) for which the 30-day reporting requirement has not been
waived has been required to be filed for any Pension Plan or ERISA Affiliate
Plan within the 12-month period ending on the
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date hereof or will be required to be filed in connection with the transactions
contemplated in this Plan; (iv) neither NHS FINANCIAL nor NEW HORIZONS has
provided or is required to provide security to any Pension Plan or to any ERISA
Affiliate Plan pursuant to Section 401(a)(29) of the Code; (v) neither NHS
FINANCIAL, its subsidiaries, nor any ERISA Affiliate has contributed to any
"multiemployer plan", as defined in Section 3(37) of ERISA, on or after
September 26, 1980; (vi) each Employee Plan of NHS FINANCIAL or NEW HORIZONS
which is an "employee pension benefit plan" (as defined in Section 3(2) of
ERISA) has received a favorable determination letter from the Internal Revenue
Service ("IRS") deeming such plan (a "Qualified Plan") to be qualified under
Section 401 (a) of the Code; and neither NHS FINANCIAL nor NEW HORIZONS are
aware of any circumstances likely to result in revocation of any such favorable
determination letter or any operational compliance failures that would adversely
affect the qualified status of any Employee Plan under Section 401(a) of the
Code; (vii) all Employee Plans covering current or former non-U.S. employees
comply in all respects with applicable local law, and there are no unfunded
liabilities with respect to any Employee Plan which covers such employees;
(viii) there is no pending or threatened material litigation, administrative
action, investigation, audit or proceeding relating to any Employee Plan; (ix)
there has been no announcement or commitment by NHS FINANCIAL or NEW HORIZONS to
create an additional Employee Plan, or to amend or terminate an Employee Plan;
(x) NHS FINANCIAL and NHS FINANCIAL Subsidiaries do not have any obligations for
retiree health and life benefits under any Employee Plan except as set forth in
Exhibit C, and there are no such Employee Plans that cannot be amended or
terminated without incurring any liability thereunder; (xi) neither NHS
FINANCIAL nor NEW HORIZONS has the right to accelerate the time of payment or
vesting of any benefit or compensation payable under any Employee Plan except as
set forth on Exhibit C; (xii) with respect to NHS FINANCIAL or NEW HORIZONS
except as specifically identified on Exhibit C and subject to the conditions,
limitations and assumptions specified therein, the execution and delivery of
this Plan and the consummation of the transactions contemplated hereby will not
result in any payment or series of payments by NHS FINANCIAL or NEW HORIZONS to
any person which is an "excess parachute payment" (as defined in Section 28OG of
the Code) under any Employee Plan, increase or secure (by way of a trust or
other vehicle) any benefits or compensation payable under any Employee Plan, or
accelerate the time of payment or vesting of any such benefit or compensation,
and (xiii) with respect to each Employee Plan, NHS FINANCIAL has supplied to LBC
a true and correct copy, if applicable, of (A) the two most recent annual
reports on the applicable form of the Form 5500 series filed with the IRS, (B)
such Employee Plan, including all amendments thereto, (C) each trust agreement
and insurance contract relating to such Employee Plan, including all amendments
thereto, (D) the most recent summary plan description for such Employee Plan;
including all amendments thereto, if the Employee Plan is subject to Title I of
ERISA, (E) the most recent actuarial report or valuation if such Employee Plan
is a Pension Plan, (F) the most recent determination letter issued by the IRS if
such Employee Plan is a Qualified Plan and (G) the most recent financial
statements and auditor's report.
(o) TITLE TO ASSETS. NHS FINANCIAL and NEW HORIZONS each has good and
marketable title to its respective properties and assets (including any
intellectual property asset such as, without limitation, any trademark, service
mark, trade name or copyright) other than (i) as reflected in the Reports, (ii)
property as to which it is lessee and (iii) real estate owned as a result of
foreclosure, transfer in lieu of foreclosure or other transfer in satisfaction
of a debtor's obligation previously contracted.
(p) COMPLIANCE WITH LAWS. NHS FINANCIAL and NEW HORIZONS:
(i) has all permits, licenses, certificates of authority, orders and
approvals of, and has made all filings, applications and registrations with,
federal, state, local and foreign governmental or regulatory bodies that are
required in order to permit it to carry on its business as it is presently
conducted; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect, and, to the knowledge of NHS
FINANCIAL and NEW HORIZONS, no suspension or cancellation of any of them is
threatened; and
(ii) assuming the receipt of the requisite approvals set forth in
Section 5.1 of this Reorganization Agreement, is in material compliance, in
the conduct of its business, with all applicable federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders or
decrees applicable
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thereto or to the employees conducting such businesses, including, without
limitation, the Equal Credit Opportunity Act, the Fair Housing Act, the
Community Reinvestment Act, the Home Mortgage Disclosure Act, the Americans
with Disabilities Act, all other applicable fair lending laws or other laws
relating to discrimination and the Bank Secrecy Act.
(q) FEES. Other than financial advisory services performed for NHS
FINANCIAL by Hovde Financial, Inc. in an amount and pursuant to an agreement
both previously disclosed to LBC, neither NHS FINANCIAL nor NEW HORIZONS, nor
any of their respective officers, directors, employees or agents, has employed
any broker or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions, or finder's fees, and no broker or finder has acted
directly or indirectly for NHS FINANCIAL or NEW HORIZONS, in connection with the
Reorganization Agreement or the transactions contemplated hereby. NHS FINANCIAL
shall not be liable for any financial services advisory fees incurred by LBC.
(r) ENVIRONMENTAL MATTERS.
(i) With respect to NHS FINANCIAL and each NHS FINANCIAL Subsidiary,
including but not limited to, NEW HORIZONS:
(A) To the best knowledge of NHS FINANCIAL, the Loan Properties, the
Participation Facilities (each as defined below) and the properties
owned, operated or leased by NHS FINANCIAL or NEW HORIZONS are, and have
been, in substantial compliance with all Environmental Laws (as defined
below);
(B) There is no suit, claim, action, demand, executive or
administrative order, directive, investigation or proceeding pending or,
to the best knowledge of NHS FINANCIAL, threatened, before any court,
governmental agency or board or other forum against it or NEW HORIZONS
or, to the best knowledge of NHS FINANCIAL, any Participation Facility
relating to NHS FINANCIAL's or NEW HORIZONS' direct management of such
Participation Facility (x) for alleged noncompliance (including by any
predecessor) with, or liability under, any Environmental Law or (y)
relating to the presence of or release into the environment of any
Hazardous Materials (as defined below), whether or not occurring at or on
a site owned, leased or operated by NHS FINANCIAL or NEW HORIZONS or any
Participation Facility;
(C) To the best knowledge of NHS FINANCIAL, there is no suit, claim,
action, demand, executive or administrative order, directive,
investigation or proceeding pending or threatened, before any court,
governmental agency or board or other forum relating to NHS FINANCIAL or
NEW HORIZONS or against any Loan Property (or NHS FINANCIAL or NEW
HORIZONS in respect of such Loan Property) (x) relating to alleged
noncompliance (including by any predecessor) with, or liability under,
any Environmental Law or (y) relating to the presence of or release into
the environment of any Hazardous Materials whether or not occurring at or
on a site owned, leased or operated by a Loan Property;
(D) To the best knowledge of NHS FINANCIAL, there are no existing
facts or circumstances that could reasonably be expected to give rise to
any suit, claim, action, demand, executive or administrative order,
directive or proceeding of a type described in Section 3.3(r)(i)(B) or
(C);
(E) To the best knowledge of NHS FINANCIAL, the properties currently
or formerly owned, operated or leased by NHS FINANCIAL or NEW HORIZONS
(including, without limitation, soil, groundwater or surface water on,
under or adjacent to the properties, and buildings thereon) are not
contaminated with and do not otherwise contain any Hazardous Materials
(as defined below) that could reasonably be expected to give rise to
liability to NHS FINANCIAL or NEW HORIZONS.
(F) Neither NHS FINANCIAL nor NEW HORIZONS has received any notice,
demand letter, executive or administrative order, directive or request
for information from any federal, state, local or foreign governmental
entity or any third party indicating that it may be in violation of, or
liable under, any Environmental Law;
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(G) To the best knowledge of NHS FINANCIAL, there are no underground
storage tanks on, in or under any properties owned, operated or leased by
NHS FINANCIAL or NEW HORIZONS or any Participation Facility and no
underground storage tanks have been closed or removed from any properties
or Participation Facilities which are or have been in the ownership of
NHS FINANCIAL or NEW HORIZONS;
(H) To the best knowledge of NHS FINANCIAL and NEW HORIZONS during
the period of (1) NHS FINANCIAL's, or NEW HORIZONS' ownership, operation
or leasing of any of their respective current properties, (2) NHS
FINANCIAL's, or NEW HORIZONS' participation in any Participation
Facility, or (3) NHS FINANCIAL's or NEW HORIZONS' holding of a security
interest in a Loan Property, there has been no contamination by or
release of Hazardous Materials in, on, under or affecting such
properties. Prior to the period of (x) NHS FINANCIAL's or NEW HORIZONS'
ownership, operation or leasing of any of their respective current
properties, (y) NHS FINANCIAL's or NEW HORIZONS' participation in the
management of any Participation Facility, or (z) NHS FINANCIAL's or NEW
HORIZONS' holding of a security interest in a Loan Property, there was no
contamination by or release of Hazardous Materials in, on, under or
affecting any such property, Participation Facility or Loan Property;
(I) Neither NHS FINANCIAL nor NEW HORIZONS participates in the
management of a Loan Property or Participation Facility to an extent that
it would be deemed an "owner or operator" as defined in 42 U.S.C. Section
9601 or any similar Environmental Law;
(J) To the best knowledge of NHS FINANCIAL and NEW HORIZONS, NHS
FINANCIAL and NEW HORIZONS have all permits, licenses and approvals
required under applicable Environmental Laws for the ownership, operation
or leasehold of their respective properties;
(K) The properties currently owned, operated or leased by NHS
FINANCIAL or NEW HORIZONS are not the subject of any current
environmental investigation or remedial action of any kind;
(L) Neither NHS FINANCIAL nor NEW HORIZONS is a party or a successor
in interest to any contract or agreement including without limitation any
purchase agreement, lease, indemnity or guarantee pursuant to which NHS
FINANCIAL or NEW HORIZONS has assumed or agreed to be responsible for any
material liabilities with respect to Hazardous Materials or any matters
arising under applicable Environmental Laws.
(ii) The following definitions apply for purposes of this Section
3.3(r): (w) "Loan Property" means any property in which NHS FINANCIAL or NEW
HORIZONS holds a security interest, and, where required by the context,
includes the owner or operator of such property, but only with respect to
such property; (x) "Participation Facility", means any facility in which NHS
FINANCIAL or NEW HORIZONS participates in the management (including all
property held as trustee or in any other fiduciary capacity) and, where
required by the context, includes the owner or operator of such property;
(y) "Environmental Laws" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, directive, executive or administrative order, judgment,
decree, injunction, requirement or agreement with any governmental entity,
relating to the protection, preservation or restoration of health, safety or
the environment (which includes, without limitation, air, water vapors,
surface water, groundwater, drinking water supply, structures, soil, surface
land, subsurface land, plants and animals), in each case as amended and as
now or hereafter in effect, including all current Environmental Laws, all
future interpretations of current Environmental Laws and all future
Environmental Laws and subsequent interpretations thereof. The term
"Environmental Law" includes without limitation, the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the
Superfund Amendments and Reauthorization Act of 1986, the federal Water
Pollution Control Act of 1972, the federal Clean Air Act, the federal Clean
Water Act, the federal Resource Conservation and Recovery Act of 1976
(including the Hazardous and Solid Waste Amendments of 1984), the federal
Solid Waste Disposal Act and the federal Toxic Substances Control Act, the
Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational
Safety and
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Health Act of 1970, the Federal Hazardous Materials Transportation Act, or
any so-called "Superfund" or "Superlien" law, each as amended and as now or
hereafter in effect, and (ii) any common law or equitable doctrine
(including, without limitation, injunctive relief and tort doctrines such as
negligence, nuisance, trespass and strict liability) that may impose
liability or obligations for injuries or damages; and (z) "Hazardous
Materials" means any substance, chemical, mixture, compound or other
material in any concentration which is or could be detrimental to human
health or safety or to the environment, currently or hereafter listed,
defined, designated or classified as hazardous, toxic, radioactive or
dangerous, or otherwise regulated, under any Environmental Law, whether by
type or by quantity, including any substance containing any such substance
as a component. Hazardous Materials includes, without limitation, any toxic
waste, pollutant, contaminant, hazardous substance, toxic substance,
hazardous waste, special waste, industrial substance, oil or petroleum or
any derivative or by-product thereof, radon, radioactive material, asbestos,
asbestos-containing material, urea formaldehyde foam insulation, lead and
polychlorinated biphenyl.
(s) ALLOWANCE. The allowance for possible loan losses shown on NHS
FINANCIAL's unaudited balance sheet as of December 31, 1995 was, and the
allowance for possible loan losses shown on the balance sheets in its Reports
for periods ending after the date of this Reorganization Agreement will be, in
the opinion of NHS FINANCIAL's senior management based upon known facts and its
review of applicable laws and regulations, adequate, as of the date thereof,
under generally accepted accounting principles applicable to savings and loan
associations and savings and loan holding companies. NHS FINANCIAL has disclosed
to LBC in writing prior to the date hereof the amounts of all loans, leases,
advances, credit enhancements, other extensions of credit, commitments and
interest-bearing assets of NHS FINANCIAL and NEW HORIZONS with an original
principal amount in excess of $250,000 that, as of March 31, 1996, have been
criticized or classified by it as "Other Loans Specially Mentioned", "Special
Mention", "Substandard", "Doubtful", "Loss", "Classified", "Criticized", "Credit
Risk Assets", "Concerned Loans" or words of similar import. NHS FINANCIAL and
its subsidiaries shall promptly after the end of any month inform LBC of any
such criticism or classification arrived at any time after the date hereof.
(t) MATERIAL INTERESTS OF CERTAIN PERSONS. Except as disclosed in NHS
FINANCIAL's Proxy Statement for its 1995 Special Meeting of Shareholders, no
officer or director of NHS FINANCIAL, or any "associate" (as such term is
defined in Rule 12b-2 under the Securities Exchange Act) of any such officer or
director, has any material interest in any material contract or property (real
or personal), tangible or intangible, used in or pertaining to the business of
NHS FINANCIAL or NEW HORIZONS.
(u) INSURANCE. NHS FINANCIAL and NEW HORIZONS are presently insured, and
since December 31, 1991, have been insured, for reasonable amounts with
financially sound and reputable insurance companies, against such risks as
companies engaged in a similar business would, in accordance with good business
practice, customarily be insured. All of the insurance policies and bonds
maintained by NHS FINANCIAL and NEW HORIZONS are in full force and effect, NHS
FINANCIAL and NEW HORIZONS are not in default thereunder and all material claims
thereunder have been filed in due and timely fashion. No claim by NHS FINANCIAL
or NEW HORIZONS on or in respect of an insurance policy or bond has been
declined or refused by the relevant insurer or insurers. Between the date hereof
and the Effective Time, NHS FINANCIAL and NEW HORIZONS will use commercially
reasonable efforts to maintain the levels of insurance coverage in effect on the
date hereof.
(v) REGISTRATION OBLIGATION. Neither NHS FINANCIAL or NEW HORIZONS is
under any obligation, contingent or otherwise, to register any of its securities
under the Securities Act of 1933, as amended.
(w) BOOKS AND RECORDS. The books and records of NHS FINANCIAL and NEW
HORIZONS have been, and are being, maintained in accordance with applicable
legal and accounting requirements and reflect in all material aspects the
substance of events and actions that should be included therein.
(x) CORPORATE DOCUMENTS. NHS FINANCIAL has delivered to LBC true and
complete copies of (i) its articles of incorporation and by-laws and (ii) the
charter and by-laws of NEW HORIZONS, as each of them is in effect on the date
hereof.
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(y) NHS FINANCIAL ACTION. The Board of Directors of NHS FINANCIAL and NEW
HORIZONS have (i) determined that the transactions contemplated by this
Reorganization Agreement are advisable and in the best interests of such
corporations and their respective shareholders, (ii) approved this
Reorganization Agreement, the Agreements of Merger and the Option Agreement and
the transactions contemplated hereby and thereby, and (iii) directed that,
subject to the provisions of applicable law, this Reorganization Agreement and
the agreements and transactions contemplated thereby be submitted for approval
by NHS FINANCIAL's shareholders.
(z) INDEMNIFICATION. Other than pursuant to the provisions of its
certificate of incorporation and bylaws, neither NHS FINANCIAL nor NEW HORIZONS
is a party to any indemnification agreement with or has an indemnification
obligation to any of its present or former directors, officers, employees,
agents or other persons who serve or served in any other capacity with any other
enterprise at the request of NHS FINANCIAL (a "Covered Person"), and to the best
knowledge of NHS FINANCIAL, there are no claims for which any Covered Person
would be entitled to indemnification.
(aa) LOANS. Each loan, other than loans the aggregate amount of which to
any one borrower and its related interests does not exceed $50,000, reflected as
an asset on NHS FINANCIAL's balance sheet as of December 31, 1995 and each
balance sheet date subsequent thereto (i) is evidenced by notes, agreements or
other evidences of indebtedness which are true, genuine and what they purport to
be, and (ii) is the legal, valid and binding obligation of the obligor named
therein, enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent conveyance and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles. All
such loans and extensions of credit that have been made by NEW HORIZONS and that
are subject to Section 11 of HOLA comply therewith. NHS FINANCIAL has included
in the Disclosure Letter a listing of all loans from banks at March 31, 1996 the
principal of which is past due or will become due within a period of time up to
six months after the date hereof.
(bb) DERIVATIVES CONTRACTS; STRUCTURED NOTES; ETC. Neither NHS FINANCIAL
nor NEW HORIZONS is a party to or has agreed to enter into an exchange or other
swap, forward, future, option, cap, floor or collar or any other contract, that
is not included on the balance sheet and is a derivative contract (including
various combinations thereof) (each a "Derivatives Contract") or owns securities
that (i) are referred to generically as "structured notes," "high risk mortgage
derivatives," "capped floating rate notes," or "capped floating rate mortgage
derivatives" or (ii) are likely to have changes in value as a result of interest
or interest or exchange rate changes that significantly exceed normal changes in
value attributable to interest or exchange rate changes, except for those
Derivatives Contracts and other instruments legally purchased or entered into in
the ordinary course of business, consistent with safe and sound banking
practices and regulatory guidance, and listed (as of the date hereof) in
paragraph 3.3(bb) of its Disclosure Letter or disclosed in its Reports filed on
or prior to the date hereof.
Section 3.4 REPRESENTATIONS AND WARRANTIES OF LBC. Subject to Sections 3.1
and 3.2 and except as set forth in the Disclosure Letter relating to LBC
referred to therein, LBC represents and warrants to NHS FINANCIAL that:
(a) RECITALS. The facts set forth in the Recitals to this Reorganization
Agreement with respect to LBC, LBC INTERIM and LUTHER BURBANK are true and
correct in all respects.
(b) CORPORATE QUALIFICATION. Each of LBC, LBC INTERIM and LUTHER BURBANK
is in good standing in its jurisdiction of organization and as a foreign
corporation in each jurisdiction where the properties owned, leased or operated,
or the business conducted, by it requires such qualification. Each of LBC, LBC
INTERIM and LUTHER BURBANK has the requisite corporate and other power and
authority (including all federal, state, local and foreign government
authorizations) to carry on their respective businesses as they are now being
conducted.
(c) CORPORATE AUTHORITY. Each of LBC, LBC INTERIM and LUTHER BURBANK has
the requisite corporate or other power and authority and has taken all corporate
or other action necessary in order to execute and deliver this Reorganization
Agreement and to consummate the transactions contemplated
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hereby. This Reorganization Agreement is a valid and binding agreement of LBC,
LBC INTERIM and LUTHER BURBANK enforceable against LBC, LBC INTERIM and LUTHER
BURBANK in accordance with its terms.
(d) NO VIOLATIONS. The execution, delivery and performance of this
Reorganization Agreement by LBC, LBC INTERIM and LUTHER BURBANK do not, and the
consummation of the transactions contemplated hereby by LBC, LBC INTERIM and
LUTHER BURBANK will not constitute (i) a breach or violation of, or a default
under, any law, rule or regulation or any judgment, decree, order, governmental
permit or license, or agreement, indenture or instrument of LBC, LBC INTERIM or
LUTHER BURBANK or to which LBC, LBC INTERIM or LUTHER BURBANK is subject, which
breach, violation or default would have a Material Adverse Effect on LBC, or
enable any person to enjoin the Merger, (ii) a breach or violation of, or a
default under, the articles of incorporation or bylaws of LBC, LBC INTERIM and
LUTHER BURBANK, or (iii) a breach or violation of, or a default under (or an
event which with due notice or lapse of time or both would constitute a default
under), or result in the termination of, accelerate the performance required by,
or result in the creation of any lien, pledge, security interest, charge or
other encumbrance upon any of the properties or assets of LBC, LBC INTERIM and
LUTHER BURBANK under, any of the terms, conditions or provisions of any note,
bond, indenture, deed of trust, loan agreement or other agreement, instrument or
obligation to which LBC, LBC INTERIM or LUTHER BURBANK is a party, or to which
any of their respective properties or assets may be bound or affected, except
for any of the foregoing that individually or in the aggregate, would not have a
Material Adverse Effect on LBC, LBC INTERIM and LUTHER BURBANK, and the
consummation of the transactions contemplated hereby will not require any
approval, consent or waiver under any such law, rule, regulation, judgment,
decree, order, governmental permit or license or the approval, consent or waiver
of any other party to any such agreement indenture or instrument, other than (i)
the required approvals, consents and waivers of governmental authorities
referred to in Section 5.1(b), (ii) any such approval, consent or waiver that
already has been obtained, and (iii) any other approvals, consents or waivers
the absence of which, individually or in the aggregate, would not result in a
Material Adverse Effect on LBC, LBC INTERIM and LUTHER BURBANK or enable any
person to enjoin the Mergers.
(e) ACCESS TO FUNDS. Subject to the terms and conditions of a commitment
letter dated May 13, 1996, delivered to LBC by First Bank, Minneapolis,
Minnesota, a copy of which is attached hereto as Exhibit D (the "Commitment
Letter"), LBC has, or on the Closing Date will have, all funds necessary to
consummate the Merger and pay the aggregate Merger Consideration.
(f) ABSENCE OF REGULATORY ACTIONS. Neither LBC nor any of its subsidiaries
is a party to any cease and desist order, written agreement or memorandum of
understanding with, or a party to any commitment letter or similar undertaking
to, or is subject to any order or directive by, or is a recipient of any
extraordinary supervisory letter from, or has adopted any board resolutions
related thereto at the request of any Government Regulator nor has it been
advised by any Government Regulator that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such order, directive, written agreement, memorandum of understanding,
extraordinary supervisory letter, commitment letter, board resolutions or
similar undertaking.
(g) KNOWLEDGE AS TO CONDITIONS. LBC knows of no reason why the approvals,
consents and waivers of governmental authorities referred to in Section 5.1(b)
should not be obtained without the imposition of any condition of the type
referred to in the proviso thereto.
(h) CORPORATE AUTHORITY. The Boards of Directors of LBC, LBC INTERIM and
LUTHER BURBANK have by the requisite vote of all directors present approved this
Reorganization Agreement and have taken all necessary corporate actions to
approve the Agreements of Merger and the Option Agreement and the transactions
contemplated thereby and hereby.
(i) NO VIOLATIONS. LBC, LBC INTERIM and LUTHER BURBANK are not in breach
or violation or default under (and no event has occurred which with due notice
or lapse of time or both would constitute a default under) any agreement,
indenture or instrument which breach, violation or default would materially
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and adversely affect or delay the ability of any of them to obtain any necessary
approvals, consents or waivers of any governmental authority required for the
transactions contemplated hereby or to perform its covenants and agreements on a
timely basis under this Reorganization Agreement.
(j) EFFECT OF LIMITED DUE DILIGENCE. LBC has conducted limited due
diligence of NHS FINANCIAL and NEW HORIZONS and, based on such limited due
diligence, has no knowledge of any facts which, independently or in connection
with any other facts known to LBC, (i) would render any of the representations
or warranties of NHS FINANCIAL herein to be untrue, inaccurate or incomplete in
any material respect as of the date hereof, (ii) would render any of the
covenants of NHS FINANCIAL herein to be incapable of performance as of the date
hereof, or (iii) would render any conditions to the performance of any
obligations of LBC hereunder incapable of fulfillment prior to the Effective
Date.
ARTICLE 4. COVENANTS
Section 4.1 ACQUISITIONS PROPOSALS. NHS FINANCIAL agrees that neither it
nor NEW HORIZONS nor any of the respective officers and directors of NHS
FINANCIAL or NEW HORIZONS shall, and NHS FINANCIAL shall direct and use its best
efforts to cause its employees, agents and representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or NEW
HORIZONS) not to, directly or indirectly, initiate, solicit, or encourage,
subject to fiduciary duties, any inquiries or the making of any proposal or
offer (including, without limitation, any proposal or offer to shareholders of
NHS FINANCIAL) with respect to a merger, consolidation or similar transaction
involving, or any purchase of all or any significant portion of the assets,
deposits or any equity securities of, NHS FINANCIAL or NEW HORIZONS (any such
proposal or offer being hereinafter referred to as an "Acquisition Proposal")
or, except to the extent legally required for the discharge by NHS FINANCIAL's
board of directors of its fiduciary duties as advised by such counsel with
respect to an unsolicited offer from a third party, engage in any negotiations
concerning or provide any confidential information or data to, or have any
discussions with, any person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal.
NHS FINANCIAL will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties (other than LBC)
conducted heretofore with respect to any of the foregoing. NHS FINANCIAL will
take the necessary steps to inform promptly the appropriate individuals or
entities referred to in the first sentence hereof of the obligations undertaken
in this Section 4.1. NHS FINANCIAL agrees that it will notify LBC immediately if
any such inquiries, proposals or offers are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with NHS FINANCIAL or NEW HORIZONS. NHS FINANCIAL also
agrees that it promptly shall request each person other than LBC that has
heretofore executed a confidentiality agreement in connection with its
consideration of acquiring NHS FINANCIAL or NEW HORIZONS to return or certify as
destroyed all confidential information heretofore furnished to such person by or
on behalf of NHS FINANCIAL or NEW HORIZONS and enforce any such confidentiality
agreements.
Section 4.2 CERTAIN POLICIES OF NHS FINANCIAL. At the request of LBC, NHS
FINANCIAL shall to the extent consistent with generally accepted accounting
principles, modify and change its loan, litigation and real estate valuation
policies and practices (including loan classifications and levels of reserves)
after the date on which any required federal depository institution regulatory
approvals are received and prior to the Effective Time so as to be consistent on
a mutually satisfactory basis with those of LBC; PROVIDED, HOWEVER, that NHS
FINANCIAL shall not be required to take such action unless (A) LBC agrees in
writing that all conditions to LBC's obligation to consummate the Mergers set
forth in Article V hereof (other than the expiration of the statutory waiting
period following approval by the OTS) have been satisfied or waived, (B) NHS
FINANCIAL shall have received a written waiver by LBC of its rights to terminate
this Agreement, and (C) all of the conditions to NHS FINANCIAL's obligation to
consummate the Mergers (other than the statutory waiting period described above)
shall have been satisfied. NHS FINANCIAL's representations, warranties and
covenants contained in this Reorganization Agreement shall not be deemed to be
untrue or breached in any respect for any purpose as a consequence of any
modifications or changes undertaken solely
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on account of this Section 4. Three (3) days before the Effective Time, NHS
FINANCIAL and NEW HORIZONS shall make such additions to the loan loss reserves
of NEW HORIZONS as specified by LBS in its sole discretion.
Section 4.3 EMPLOYEES. (a) Except for those individuals with written
contracts or agreements with NHS FINANCIAL or NEW HORIZONS, as of the Effective
Time, LBC shall, in consultation with NHS FINANCIAL and NEW HORIZONS, consider
offering employment to the employees of NHS FINANCIAL and NEW HORIZONS who are
continued employees ("Continued Employees"). Continued Employees are defined as:
(a) regular full-time employees who are benefits eligible and are scheduled to
work forty (40) hours per week; (b) regular part-time employees scheduled to
work an average of twenty (20) or more hours per week and are eligible for all
benefits except long-term disability (except those scheduled for more than
thirty (30) hours per week are eligible for long-term disability); or (c)
regular part-time employees scheduled to work an average of fewer than twenty
(20) hours per week and who receive a paycheck, subject to withholding, from NHS
FINANCIAL or NEW HORIZONS. All such Continued Employees will be deemed to be
employees at will. Except as otherwise provided in applicable written contracts
or agreements, all employees of NHS FINANCIAL and NEW HORIZONS who are not
Continued Employees after the Effective Time shall be paid retention payments
equal to two weeks of their respective base salary plus one additional week for
each year of service, provided such employees do not voluntarily leave or are
not terminated for cause prior to the Effective Time. Continued Employees who
are terminated within six (6) months after the Effective Time, other than for
cause, shall be paid two weeks of their respective base salary plus one week for
each additional year of service.
(b) As of the Effective Time, any retirement plan of NHS FINANCIAL or NEW
HORIZONS shall be capped as to participants. The NEW HORIZONS' Profit Sharing
Plan shall be fully funded and no additional contributions shall be made from
the date of this Reorganization Agreement through the Effective Date. The NEW
HORIZONS' Cash Incentive Plan has been suspended and will remain suspended
through the Effective Date.
(c) Except as set forth in this Section 4.3, from and after the Effective
Time each Continued Employee shall be entitled to participate in LBC's or LUTHER
BURBANK's employee benefits plans that may be in effect generally for such
employees from time to time ("LBC's Plans") if such Continued Employee shall be
eligible for participation therein on the same basis as similarly situated
employees of LBC or LUTHER BURBANK. All such participation shall be subject to
such terms of LBC's Plans as may be in effect from time to time. For purposes of
any seniority or length of service requirement, waiting periods or vesting
periods based on length of service in any of LBC's Plans, the service of the
Continued Employee with NHS FINANCIAL or NEW HORIZONS (or predecessor thereof)
shall be deemed to be in service with LBC or LUTHER BURBANK.
(d) Each Continued Employee shall be entitled to carryover all accrued but
unused vacation.
(e) Each Continued Employee shall be entitled to carryover accrued but
unused sick leave in an amount to be determined by NEW HORIZONS in consultation
with LBC and LUTHER BURBANK.
(f) For a reasonable period of time, not to exceed sixty (60) days after the
Effective Time, LBC or LUTHER BURBANK may continue NHS FINANCIAL's and NEW
HORIZONS' health plans, in order for LBC or LUTHER BURBANK to facilitate the
transfer of the Continued Employees to its health plan or a comparable health
plan of NHS FINANCIAL or NEW HORIZONS selected by LBC in its sole discretion.
Following the transfer of the Continued Employees to LBC's or LUTHER BURBANK's
health plan, there shall be no exclusion from coverage for any pre-existing
medical condition of any Continued Employee to the extent such condition was
covered under a health plan of NHS FINANCIAL or NEW HORIZONS.
(g) NHS FINANCIAL shall not provide any written communication to its
employees regarding employment, compensation or benefits under this
Reorganization Agreement or any transaction contemplated therein without the
prior written approval of LBC, which approval shall not unreasonably be
withheld.
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(h) Within thirty (30) days of the date of this Reorganization Agreement,
NHS FINANCIAL shall deliver to LBC descriptions of all benefits plans listed on
Exhibit C and offered by NHS FINANCIAL as of the date of this Reorganization
Agreement.
(i) All current written contracts or agreements with employees of NHS
FINANCIAL or NEW HORIZONS shall be terminated on the Effective Date, PROVIDED,
HOWEVER, that the severance benefits provided for under any such agreement shall
be honored by LBC or LUTHER BURBANK.
Section 4.4 ACCESS AND INFORMATION. (a) Upon reasonable notice and subject
to applicable laws relating to the exchange of information, NHS FINANCIAL shall,
and shall cause NEW HORIZONS to afford to the officers, employees, accountants,
counsel and other representatives of LBC access, during normal business hours
during the period prior to the Effective Time, to all its properties, books,
contracts, commitments, records, officers, employees, accountants, counsel and
other representatives and, during such period, NHS FINANCIAL shall, and shall
cause NEW HORIZONS to make available to LBC (i) a copy of each report, schedule,
registration statement and other document filed or received by it during such
period pursuant to the requirements of federal securities laws or federal or
state banking laws (other than reports or documents which NHS FINANCIAL is not
permitted to disclose under applicable law) and (ii) all other information
concerning its business, properties and personnel as LBC may reasonably request.
Neither NHS FINANCIAL nor NEW HORIZONS shall be required to provide access to or
to disclose information where such access or disclosure would violate or
prejudice the rights of NHS FINANCIAL's customers, jeopardize any
attorney-client privilege or contravene any law, rule, regulations, order,
judgment, decree, fiduciary duty or binding agreement entered into prior to the
date of this Reorganization Agreement. The parties hereto will use their
respective best efforts to make appropriate substitute disclosure arrangements
under circumstances in which the restrictions of the preceding sentence apply.
LBC will hold all such information in confidence in accordance with the
provisions of the confidentiality agreement, dated March 29, 1996, between LBC
and NHS FINANCIAL (the "Confidentiality Agreement").
Upon reasonable notice and subject to applicable laws relating to the
exchange of information, LBC and LUTHER BURBANK shall afford to the officers,
employees, accountants, counsel and other representatives of NHS FINANCIAL,
access, during normal business hours during the period prior to the Effective
Time, to such information regarding LBC and its subsidiaries as shall be
reasonably necessary for NHS FINANCIAL to fulfill its obligations pursuant to
this Reorganization Agreement to prepare the Proxy Statement or which may be
reasonably necessary for NHS FINANCIAL to confirm that the representations and
warranties of LBC and LUTHER BURBANK contained herein are true and correct and
that the covenants of LBC and LUTHER BURBANK contained herein have been
performed in all material respects. Neither LBC nor LUTHER BURBANK shall be
required to provide access to or to disclose information where such access or
disclosure would violate or prejudice the rights of customers, jeopardize any
attorney-client privilege or contravene any law, rule, regulation, order,
judgment, decree, fiduciary duty or binding agreement entered into prior to the
date of this Reorganization Agreement. The parties hereto will make appropriate
substitute disclosure arrangements under circumstances in which the restrictions
of the preceding sentence apply.
(c) All information furnished by LBC or LUTHER BURBANK to NHS FINANCIAL or
its representatives pursuant hereto shall be treated as the sole property of LBC
and, if the Merger shall not occur, NHS FINANCIAL and its representatives shall
return to LBC or certify as to the destruction of all of such written
information and all documents, notes, summaries or other materials containing,
reflecting or referring to, or derived from, such information. NHS FINANCIAL
shall, and shall use its best efforts to cause its representatives to keep
confidential all such information, and shall not directly or indirectly use such
information for any competitive or other commercial purpose. The obligation to
keep such information confidential shall continue for three (3) years from the
date the transactions contemplated by this Reorganization Agreement are
abandoned and shall not apply to (i) any information which (x) was already in
NHS FINANCIAL's possession prior to the disclosure thereof by LBC, (y) was then
generally known to the public, or (z) was disclosed to NHS FINANCIAL by a third
party not bound by an obligation of confidentiality or (ii) disclosures made as
required by law, rule or regulation. It is further agreed that if in the absence
of a protective order or the receipt of a waiver hereunder NHS FINANCIAL is
nonetheless, in the opinion of its
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counsel, compelled to disclose information concerning LBC or LUTHER BURBANK to
any tribunal or governmental authority or else stand liable for contempt or
suffer other censure or penalty, NHS FINANCIAL may disclose such information to
such tribunal or governmental authority without liability hereunder, but NHS
FINANCIAL shall make reasonable efforts to inform LBC in advance of such
disclosure.
(d) All information furnished by NHS FINANCIAL or NEW HORIZONS to LBC or its
representatives pursuant hereto shall be treated as the sole property of NHS
FINANCIAL and, if the Merger shall not occur, LBC and its representatives shall
return to NHS FINANCIAL or certify as to the destruction of all of such written
information and all documents, notes, summaries or other materials containing,
reflecting or referring to, or derived from, such information. LBC shall, and
shall use its best efforts to cause its representatives to, keep confidential
all such information, and shall not directly or indirectly use such information
for any competitive or other commercial purpose. The obligation to keep such
information confidential shall continue for three (3) years from the date the
transactions contemplated by this Reorganization Agreement are abandoned and
shall not apply to (i) any information which (x) was already in LBC's possession
prior to the disclosure thereof by NHS FINANCIAL, (y) was then generally known
to the public, or (z) was disclosed to LBC by a third party not bound by an
obligation of confidentiality or (ii) disclosures made as required by law, rule
or regulation. It is further agreed that if in the absence of a protective order
or the receipt of a waiver hereunder LBC is nonetheless, in the opinion of its
counsel, compelled to disclose information concerning NHS FINANCIAL or NEW
HORIZONS to any tribunal or governmental authority or else stand liable for
contempt or suffer other censure or penalty, LBC may disclose such information
to such tribunal or governmental authority without liability hereunder, but LBC
shall make reasonable efforts to inform NHS FINANCIAL in advance of such
disclosure.
(e) No investigation by either of the parties or their respective
representatives shall affect the representations, warranties, covenants or
agreements of the other set forth herein.
Section 4.5 REGULATORY MATTERS. (a) The parties hereto shall cooperate
with each other and use their reasonable best efforts to promptly prepare and
file within thirty (30) days of the date of the Reorganization Agreement all
necessary documentation, to effect all applications, notices, petition and
filings, and to obtain as promptly as practicable all permits, consents,
approvals and authorizations of all third parties and governmental authorities
which are necessary or advisable to consummate the transactions contemplated by
this Reorganization Agreement. NHS FINANCIAL and LBC shall have the right to
review in advance, and to the extent practicable each will consult the other on,
in each case subject to applicable laws relating to the exchange of information,
all the information relating to NHS FINANCIAL or LBC, as the case may be, and
any of their respective subsidiaries, which appear in any filing made with, of
written materials submitted to, any third party or any governmental authority in
connection with the transactions contemplated by this Reorganization Agreement.
LBC will coordinate with NHS FINANCIAL on the preparation of the Application to
the OTS for approval of the transactions contemplated by this Reorganization
Agreement, shall provide copies of all nonconfidential filings made with the
OTS, and shall periodically update NHS FINANCIAL on the status of such
application. In exercising the foregoing right, each of the parties hereto shall
act reasonably and as promptly as practicable. The parties hereto agree that
they will consult with each other with respect to the obtaining of all permits,
consents. approvals and authorizations of all third parties and governmental
authorities necessary or advisable to consummate the transactions contemplated
by this Reorganization Agreement and each party will keep the other apprised of
the status of matters relating to completion of the transactions contemplated
herein.
(b) LBC and NHS FINANCIAL shall, upon request, furnish each other with all
information concerning themselves, their subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with the Proxy Statement (as defined below) or any other
statements filing, notice or application made by or on behalf of LBC, NHS
FINANCIAL or any of their respective subsidiaries to any governmental authority
in connection with the other transactions contemplated by this Reorganization
Agreement.
(c) LBC and NHS FINANCIAL shall promptly furnish each other with copies of
written communications received by LBC or NHS FINANCIAL, as the case may be, or
any of their respective subsidiaries,
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affiliates or associates (as such terms are defined in Rule 12b-2 under the
Securities Exchange Act as in effect on the date of this Agreement) from, or
delivered by any of the foregoing to, any governmental authority in respect of
the transactions contemplated hereby.
Section 4.6 INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE. (a) In
the event of any threatened or actual claim, action, suit, proceeding or
investigation, whether civil, criminal administrative or investigative,
including, without limitation, any such claim, action, suit, proceeding or
investigation in which any person who is now, or has been at any time prior to
the date of this Agreement, or who becomes prior to the Effective Time, a
director or officer of NHS FINANCIAL or NEW HORIZONS (the "Indemnified Parties")
is, or is threatened to be, made a party based in whole or in part on, or
arising in whole or in part out of, or pertaining to (i) the fact that he is or
was a director, officer or employee of NHS FINANCIAL or NEW HORIZONS, or any of
their respective predecessors or (ii) this Reorganization Agreement, the Option
Agreement or any of the transactions contemplated hereby or thereby, whether in
any case asserted or arising before or after the Effective Time, the parties
hereto agree to cooperate and use their best efforts to defend against and
respond thereto. From and after the Effective Time through the fourth
anniversary of the Effective Date, LBC agrees to indemnify and hold harmless
each Indemnified Party, against any costs or expenses (including reasonable
attorneys' fees and expenses in advance of the final disposition of any claim,
action, suit, proceeding or investigation to each Indemnified Party to the
fullest extent permitted by law upon receipt of any undertaking required by
applicable law), judgments, fines, losses, claims, damages or liabilities and
amounts paid in settlement (collectively, "Costs") incurred in connection with
any threatened or actual claim, action suit, proceeding or investigation,
whether civil, criminal, administrative or investigative, arising out of matters
existing or occurring at or prior to the Effective Time (collectively "Claims"),
whether asserted or claimed prior to, at or after the Effective Time, to the
fullest extent permitted by applicable law. Notwithstanding anything to the
contrary contained herein, all rights to indemnification in respect of any Claim
asserted or made within such four (4) year period shall continue until the final
disposition of such Claim.
(b) Any Indemnified Party wishing to claim under Section 4.6(a), upon
learning of any such claim, action, suit, proceeding or investigation, shall
promptly notify LBC thereof, but the failure to so notify shall not relieve LBC
of any liability it may have to such Indemnified Party except to the extent such
failure to notify materially prejudices the indemnifying party. In the event of
any such claim, action, suit, proceeding or investigation (whether arising
before or after the Effective Time), the Indemnified Parties may retain counsel
reasonably satisfactory to them after consultation with LBC, provided, however,
that (i) LBC shall have the right to assume the defense thereof and upon such
assumption LBC shall not be liable to such Indemnified Parties for any legal
expenses of other counsel subsequently incurred by such Indemnified Parties in
connection with the defense thereof, except that if LBC elects not to assume
such defense or counsel for the Indemnified Parties advises that there are
issues which raise conflicts of interest between LBC and the Indemnified
Parties, the Indemnified Parties may retain counsel satisfactory to them, and
LBC shall pay the reasonable fees and expenses of such counsel for the
Indemnified Parties in any jurisdiction unless the use of one counsel for such
Indemnified Parties would present such counsel with a conflict of interest, in
which case the Indemnified Parties may use more than one counsel, as
appropriate, and LBC will pay for more than one counsel, (ii) the Indemnified
Parties will cooperate in the defense of any such matter and (iii) LBC shall not
be liable for any settlement effected without its prior written consent, which
consent shall not be unreasonably withheld; and PROVIDED, FURTHER, that LBC
shall not have any obligation hereunder to any Indemnified Party when and if a
court of competent jurisdiction shall ultimately determine, and such
determination shall have become final and nonappealable, that the
indemnification of such Indemnified Party in the manner contemplated hereby is
prohibited by applicable law.
(c) For a period of four (4) years after the Effective Time, LBC shall use
all commercially reasonable efforts to cause to be maintained in effect the
current policies of directors' and officers' liability insurance maintained by
NHS FINANCIAL or NEW HORIZONS (provided that LBC may substitute therefor
policies of at least the same coverage and amounts containing terms and
conditions which are not less advantageous than such policy; PROVIDED, HOWEVER,
that in no event shall LBC be obligated to expend, in order to maintain or
provide insurance coverage pursuant to this SubSection 4.6(c), any amount per
annum in
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excess of 100% of the amount of the annual premiums paid as of the date hereof
by NHS FINANCIAL or NEW HORIZONS for such insurance (the "Maximum Amount"). If
the amount of the annual premiums necessary to maintain or procure such
insurance coverage exceeds the Maximum Amount, LBC shall use all commercially
reasonable efforts to maintain the most advantageous policies of directors' and
officers' insurance obtainable for an annual premium equal to the Maximum
Amount. Notwithstanding the foregoing, prior to the Effective Time, LBC may
request NHS FINANCIAL or NEW HORIZONS to, and NHS FINANCIAL or NEW HORIZONS
shall purchase insurance coverage, on such terms and conditions as shall be
acceptable to LBC, extending for a period of four (4) years NHS FINANCIAL's or
NEW HORIZONS' then-existing directors' and officers' liability insurance
coverage (covering past claims or future claims with respect to periods before
the Effective Time) and such coverage shall satisfy LBC's obligations under this
Subsection (c).
(d) In the event LBC or any of its successors or assigns (i) consolidates
with or merges into any other person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger, or (ii)
transfers or conveys all or substantially all of its properties and assets to
any person, then and in each such case, to the extent necessary, proper
provision shall be made so that the successors and assigns of LBC assume the
obligations set forth in this Section 4.6.
(e) The provisions of this Section 4.6 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs and
representatives.
Section 4.7 ACTIONS. Subject to the terms and conditions herein provided,
each of the parties hereto agrees to use its reasonable best efforts to take
promptly, or cause to be taken promptly, all actions and to do promptly, or
cause to be done promptly, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Reorganization Agreement as soon as
practicable, including using efforts to obtain all necessary actions or
non-actions, extensions, waivers, consents and approvals from all applicable
governmental entities, effecting all necessary registrations, applications and
filings (including, without limitation, filings under any applicable state
securities laws) and obtaining any required contractual consents and regulatory
approvals.
Section 4.8 PUBLICITY. The initial press release announcing this
Reorganization Agreement shall be mutually agreed to and, thereafter, subject to
the provisions of applicable law and the rules of the Nasdaq/ National Market,
NHS FINANCIAL and LBC shall mutually agree with each other prior to issuing any
press releases or otherwise making any statements, public or otherwise, with
respect to the transactions contemplated hereby and in making any filings with
any governmental entity or with any securities exchange with respect thereto.
Nothing in this Reorganization Agreement shall be construed to prohibit NHS
FINANCIAL or NEW HORIZONS or their respective board of directors from making any
disclosure to stockholders which in the judgment of such directors (as advised
by counsel), may be required in connection with this Reorganization Agreement.
Section 4.9 PROXY STATEMENT. Within forty-five (45) days of the date of
the Reorganization Agreement NHS FINANCIAL shall prepare a proxy statement to
take shareholder action on the Merger and this Reorganization Agreement (the
"Proxy Statement") and file the Proxy Statement with the SEC, and thereafter
will use best efforts to (i) timely respond to comments of the staff of the SEC
and (ii) promptly mail the Proxy Statement to all holders of record (as of the
applicable record date) of shares of NHS FINANCIAL Common Stock. NHS FINANCIAL
represents and covenants that the Proxy Statement and any amendment or
supplement thereto, at the date of mailing to shareholders of NHS FINANCIAL and
the date of the meeting of NHS FINANCIAL's shareholders to be held in connection
with the Mergers, will be in compliance with all relevant rules and regulations
of the SEC and will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. LBC and NHS FINANCIAL shall cooperate with each other in
the preparation of the Proxy Statement. If requested by LBC, NHS FINANCIAL shall
employ professional proxy solicitors to assist it in contacting stockholders in
connection with the vote on the transactions contemplated by this Reorganization
Agreement.
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Section 4.10 SHAREHOLDERS' MEETING. NHS FINANCIAL shall take all action
necessary, in accordance with applicable law and its certificate of
incorporation and by-laws, to convene a meeting of the holders of NHS FINANCIAL
Common Stock (the "NHS FINANCIAL Meeting") as promptly as practicable for the
purpose of considering and taking action required by this Reorganization
Agreement. Except to the extent legally required for the discharge by the board
of directors of its fiduciary duties as advised in writing by such counsel, the
board of directors of NHS FINANCIAL shall recommend at NHS FINANCIAL's meeting
that the holders of NHS FINANCIAL Common Stock vote in favor of and approve this
Reorganization Agreement and the transactions contemplated thereby.
Section 4.11 NOTIFICATION OF CERTAIN MATTERS. NHS FINANCIAL shall give
prompt notice to LBC of: (a) any notice of, or other communication relating to,
a default or event that, with notice or lapse of time or both, would become a
default, received by it or any of its subsidiaries subsequent to the date of
this Reorganization Agreement and prior to the Effective Time, under any
contract material to the financial condition, properties, businesses or results
of operations of NHS FINANCIAL and NEW HORIZONS taken as a whole to which NHS
FINANCIAL or NEW HORIZONS is a party or is subject and (b) any material adverse
change in the financial condition, properties, business or results of operations
of NHS FINANCIAL and NEW HORIZONS taken as a whole or the occurrence of any
event which, so far as reasonably can be foreseen at the time of its occurrence,
is reasonably likely to result in any such change. Each of NHS FINANCIAL and LBC
shall give prompt notice to the other party of any notice or other communication
from any third party alleging that the consent of such third party is or may be
required in connection with the transactions contemplated by this Reorganization
Agreement.
Section 4.12 TAX MATTERS. NHS FINANCIAL shall keep LBC fully apprised of
its progress in the preparation of its tax returns and shall provide to LBC
copies of draft returns prior to filing. In addition, NHS FINANCIAL agrees that
it shall consult with LBC prior to making any significant decisions with respect
to any tax reporting or other tax matters, in order to ensure to the extent
possible that such decisions are consistent with the consummation of the
transactions contemplated hereby.
Section 4.13 RETAIL DEPOSITS. NHS FINANCIAL and NEW HORIZONS shall use
their best efforts to maintain retail deposits at a level of $225,000,000.
ARTICLE 5. CONDITIONS TO CONSUMMATION
Section 5.1 CONDITIONS TO ALL PARTIES' OBLIGATIONS. The respective
obligations of the parties hereto shall be subject to the satisfaction or waiver
prior to the Effective Time of the following conditions:
(a) The Reorganization Agreement and the transactions contemplated hereby
shall have been approved by the requisite vote of the shareholders of NHS
FINANCIAL in accordance with applicable law.
(b) All necessary regulatory approvals, consents and waivers with respect to
the Reorganization Agreement and the transactions contemplated hereby shall have
been received and all applicable statutory waiting periods shall have expired
and the parties shall have procured all other regulatory approvals, consents or
waivers of governmental authorities or other persons that, in the opinion of
counsel for LBC, are necessary or appropriate to the consummation of the
transactions contemplated by the Reorganization Agreement; PROVIDED, HOWEVER,
that no approval, consent or waiver referred to this Section 5.1(b) shall be
deemed to have been received if it shall include any condition or requirement
that, individually or in the aggregate, would (i) result in a Material Adverse
Effect on LBC or its shareholders or (ii) would reduce the benefits of the
transactions contemplated by the Reorganization Agreement to LBC in so
significant a manner that LBC, in its reasonable, good faith judgment, would not
have entered into this Reorganization Agreement had such condition or
requirement been known at the time hereof; PROVIDED, FURTHER, that the
imposition of any of the Standard Conditions as defined in Section 6.1(c) of
this Reorganization Agreement shall not trigger the provisions of this Section
5.1(b).
(c) All other requirements prescribed by law which are necessary to the
consummation of the transactions contemplated by this Reorganization Agreement
shall have been satisfied.
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(d) No party hereto shall be subject to any order, decree or injunction of a
court or agency of competent jurisdiction which enjoins or prohibits the
consummation of any transaction contemplated by this Reorganization Agreement,
and no litigation or proceeding shall be pending against LBC or NHS FINANCIAL or
any of their subsidiaries brought by any governmental agency seeking to prevent
consummation of the transactions contemplated hereby.
(e) No statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, promulgated, interpreted, applied or enforced by any
government authority which prohibits, restricts or makes illegal consummation of
any transaction contemplated by this Reorganization Agreement.
Section 5.2 CONDITIONS TO THE OBLIGATIONS OF LBC. The obligations of LBC
shall be subject to the satisfaction or waiver prior to the Effective Time of
the following additional conditions:
(a) LBC shall have received from NHS FINANCIAL's independent certified
public accountants "comfort" letters, reasonably satisfactory to LBC, dated (i)
the date of the mailing of the Proxy Statement to NHS FINANCIAL's shareholders
and (ii) within seventy-two (72) hours prior to the Effective Date, with respect
to certain financial information regarding NHS FINANCIAL in the form customarily
issued by such accountants at such time in transactions of this type.
(b) Each of the representations and warranties of NHS FINANCIAL and NEW
HORIZONS contained in this Reorganization Agreement and the Option Agreement
shall have been true and correct (subject to Section 3.1 and 3.2) on the date
hereof and shall be true and correct (subject to Section 3.1 and 3.2) on the
Effective Date as if made on such date (or on the date when made in the case of
any representation or warranty, which specifically relates to an earlier date);
NHS FINANCIAL shall have performed, in all material respects, each of its
covenants and agreements contained in this Reorganization Agreement and the
Option Agreement; and LBC shall have received a certificate signed by the Chief
Executive Officer and the Chief Financial Officer of NHS FINANCIAL, dated the
Effective Due, to the foregoing effect.
(c) LBC shall have received an opinion, dated the Effective Date, from
counsel to NHS FINANCIAL, in the form attached hereto as Exhibit E.
(d) NHS FINANCIAL shall have obtained any necessary consents referred to in
Section 1.5.
(e) LBC shall have received from each person who, as of the date hereof, is
a member of NHS FINANCIAL's and NEW HORIZONS' Board of Directors, an agreement
not to solicit deposit customers or employees of NHS FINANCIAL or NEW HORIZONS
for a period of twelve (12) months from the Effective Date, in the form attached
hereto as Exhibit F.
(f) No shareholder of LBC shall have been required to provide any guarantee,
indemnity, bond or other financial accommodation in connection with the
transactions contemplated by this Reorganization Agreement or any activities of
the Surviving Corporation contemplated or required by this Reorganization
Agreement.
(g) The terms and conditions of the Commitment Letter shall have been
satisfied.
Section 5.3 CONDITIONS TO THE OBLIGATION OF NHS FINANCIAL. The obligation
of NHS FINANCIAL to effect the Merger shall be subject to the satisfaction or
waiver prior to the Effective Time of the following additional conditions:
(a) Each of the representations, warranties and covenants of LBC contained
in this Reorganization Agreement shall have been true and correct (subject to
Sections 3.1 and 3.2) on the date hereof and shall be true and correct (subject
to Sections 3.1 and 3.2) on the Effective Date as if made on such date (or on
the date when made in the of any representation or warranty which specifically
relates to an earlier date); LBC shall have performed in all material respects,
each of its covenants and agreements contained in this Reorganization Agreement,
and NHS FINANCIAL shall have received certificates signed by the Chief Executive
Officer and the Chief Financial Officer of LBC, dated the Effective Date, to the
foregoing effect.
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(b) The Board of Directors of NHS FINANCIAL shall have received an opinion
of Hovde Financial dated at least three business days prior to the Effective
Date to the effect that the transactions contemplated by the Reorganization
Agreement are fair, from a financial point of view, to NHS FINANCIAL and its
shareholders.
ARTICLE 6. TERMINATION
Section 6.1 TERMINATION. This Reorganization Agreement may be terminated,
and the Merger abandoned, prior to the Effective Date, either before or after
its approval by the shareholders of NHS FINANCIAL and LBC:
(a) by the mutual consent of LBC and NHS FINANCIAL, if the board of
directors of each so determines by vote of a majority of the members of its
entire board;
(b) by LBC or NHS FINANCIAL, if its board of directors so determines by vote
of a majority of the members of its entire board, in the event of (i) the
failure of the shareholders of NHS FINANCIAL to approve the Reorganization
Agreement or (ii) a material breach by the other party hereto of any material
representation, warranty, covenant or agreement contained herein (or, in the
case of NHS FINANCIAL, in the Option Agreement) which is not cured or not
curable within thirty (30) days after written notice of such breach is given to
the party committing such breach by the other party; PROVIDED, HOWEVER, that
neither party shall have the right to terminate this Agreement pursuant to this
Section 6.1(b) unless the breach of representation or warranty, together with
all other such breaches, would entitle the party receiving such representation
or warranty not to consummate the transactions contemplated hereby under Section
5.2(b) (in the case of a breach of representation or warranty by NHS FINANCIAL)
or Section 5.3 (in the case of a breach of representation or warranty by LBC);
(c) by LBC or NHS FINANCIAL by written notice to the other party if either
(i) any approval, consent or waiver of a governmental authority required to
permit consummation of the transactions contemplated hereby shall have been
denied or imposes any material condition (which in the case of LBC shall include
requiring any shareholder of LBC to guarantee any part of the transactions
contemplated by this Reorganization Agreement), PROVIDED, HOWEVER, that standard
conditions of approval related to the Bank Merger Act waiting period, customer
notices, officer and legal certifications, shareholder approval, submission of
post-closing financial data and timing of closure shall not be a basis for
termination under this provision ("Standard Conditions"); or (ii) any
governmental authority of competent jurisdiction shall have issued a final,
unappealable order enjoining or otherwise prohibiting consummation of the
transactions contemplated by this Reorganization Agreement; or
(d) by LBC or NHS FINANCIAL, if its board of directors so determines by vote
of a majority of the members of its entire board, in the event that the Mergers
are not consummated by December 31, 1996, unless the failure to so consummate by
such time is due to the breach of any material representation, warranty or
covenant contained in this Reorganization Agreement by the party seeking to
terminate.
Section 6.2 EFFECT OF TERMINATION. In the event of the termination of this
Reorganization Agreement by either LBC or NHS FINANCIAL, as provided above, this
Reorganization Agreement shall thereafter become void and, subject to the
provisions of the last sentence of Section 8.2, there shall be no liability on
the part of any party hereto or their respective officers or directors, except
that any such termination shall be without prejudice to the rights of any party
hereto arising out of the willful breach by any other party of any covenant or
willful misrepresentation contained in this Reorganization Agreement including,
without limitation, any out-of-pocket or transaction-related expenses arising
from the transactions contemplated by this Reorganization Agreement.
ARTICLE 7. EFFECTIVE DATE AND EFFECTIVE TIME
Section 7.1 EFFECTIVE DATE AND EFFECTIVE TIME. On such date as is mutually
agreed upon by LBC and NHS FINANCIAL which shall be within thirty (30) days
after the last to occur of the expiration of all
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applicable waiting periods in connection with approvals of governmental
authorities occur and the receipt of all approvals of governmental authorities
and all conditions to the consummation of this Reorganization Agreement are
satisfied or waived (other than those conditions relating to the receipt of
officer's certificates or attorneys' opinions), or on such earlier or later date
as may be agreed in writing by the parties, the Agreements of Merger and
accompanying officers' certificates shall be executed in accordance with all
appropriate legal requirements and shall be filed as required by law, and the
Mergers provided for herein shall become effective upon such filings or on such
date as may be specified in such Agreements of Merger. The date of such filing
or such later effective date is herein called the "Effective Date." The
"Effective Time" of the Mergers shall be the time of such filings or as set
forth in such Agreements of Merger.
ARTICLE 8. OTHER MATTERS
Section 8.1 CERTAIN DEFINITIONS, INTERPRETATION. As used in this
Reorganization Agreement, the following terms shall have the meanings indicated:
"material" means material to LBC or NHS FINANCIAL (as the case may be)
and its respective subsidiaries, taken as a whole.
"person" includes an individual, corporation, partnership, association,
trust or unincorporated organization.
"subsidiary," with respect to a person, means any other person
controlled by such person.
Section 8.2 SURVIVAL. Only those agreements and covenants of the parties
that are by their terms applicable in whole or in part after the Effective Time
shall survive the Effective Time. All other representations, warranties,
agreements and covenants shall be deemed to be conditions of the Reorganization
Agreement and shall not survive the Effective Time. If the Reorganization
Agreement shall be terminated, the agreements of the parties in the
Confidentiality Agreement, in Section 4.4(c) and in Section 4.4(d) shall survive
such termination.
Section 8.3 LIMITATION ON REMEDIES. The sole right and remedy of either
party for an uncured material breach of a representation, warranty or covenant
hereunder (after timely opportunity to cure), unless willful, shall be
termination of this Reorganization Agreement by the aggrieved party.
Section 8.4 WAIVER. Prior to the Effective Time, any provision of this
Reorganization Agreement may be: (i) waived by the party benefited by the
provision; or (ii) amended or modified at any time (including the structure of
the transaction) by an agreement in writing between the parties hereto approved
by their respective boards of directors, except that, after the vote by the
shareholders of NHS FINANCIAL, no amendment may be made that would contravene
any provision of applicable law.
Section 8.5 COUNTERPARTS. This Reorganization Agreement may be executed in
counterparts each of which shall be deemed to constitute an original, but all of
which together shall constitute one and the same instrument.
Section 8.6 GOVERNING LAW. This Reorganization Agreement and the Option
Agreement shall be governed by, and interpreted in accordance with, the laws of
the State of California without regard to the conflict of law principles thereof
and in respect of the transactions contemplated herein and therein, and hereby
waive, and agree not to assert, as a defense in any action, suit or proceeding
for the interpretation or enforcement hereof or of any such document, that it is
not subject thereto or that such action, suit or proceeding may not be brought
or is not maintainable in said courts or that the venue thereof may not be
appropriate or that this Reorganization Agreement and the Option Agreement or
any such document may not be enforced in or by such courts, and the parties
hereto irrevocably agree that all claims with respect to such action or
proceeding shall be heard and determined in such a California State or federal
court. The parties hereby consent to and grant any such court jurisdiction over
the person of such parties and over the subject matter of such dispute and agree
that mailing of process or other papers in connection with any such action or
proceeding in the manner provided in Section 8.8 or in such other manner as may
be permitted by law, shall be valid and sufficient service thereof.
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Section 8.7 EXPENSES. Each party hereto will bear all expenses incurred by
it in connection with this Reorganization Agreement and the transactions
contemplated hereby.
Section 8.8 NOTICES. All notices, requests, acknowledgments and other
communications hereunder to a party shall be in writing and shall be deemed to
have been duly given when delivered by hand, telecopy, telegram or telex
(confirmed in writing) to such party at its address set forth below or such
other address as such party may specify by notice to the other party hereto.
If to NHS FINANCIAL, to:
James W. Barnett
Chairman, President and Chief Executive Officer
NHS FINANCIAL, INC.
1050 Fourth Street
San Rafael, CA 94901
(415) 257-3783
With copies to:
Barry D. Hovis, Esq.
Hovis Smith Larson et al.
100 Pine Street, 21st Floor
San Francisco, CA 94111
(415) 421-9696
(415) 421-0320 (Fax)
Gregory A. Mitchell
Senior Vice President
Hovde Financial, Inc.
1801 Oakland Boulevard, Suite 330
Walnut Creek, CA 94596
(510) 256-4008
(510) 256-4017 (Fax)
If to LUTHER BURBANK CORPORATION, to:
George Mancini, President
816 Fourth Street
Santa Rosa, CA 95404
(707) 578-9216
(707) 526-7844 (Fax)
With a copy to:
James E. Topinka, Esq.
Graham & James LLP
One Maritime Plaza, Suite 300
San Francisco, CA 94111
(415) 393-9866
(415) 391-2493 (Fax)
Section 8.9 ENTIRE AGREEMENT, ETC. This Reorganization Agreement, together
with the Option Agreement and all agreements referred to herein, represents the
entire understanding of the parties hereto with reference to the transactions
contemplated hereby and supersedes any and all other oral or written agreements
heretofore made. All terms and provisions of the Reorganization Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns. Except as to Sections 1.5, 4.3 and 4.7,
nothing in this Reorganization Agreement is intended to confer upon any other
person any rights or remedies of any nature whatsoever under or by reason of
this Reorganization Agreement.
A-28
<PAGE>
Section 8.10 ASSIGNMENT. This Reorganization Agreement may not be assigned
by any party hereto without the written consent of the other parties.
Section 8.11 SEVERABILITY. The provisions of this Reorganization Agreement
shall be deemed severable and the invalidity or unenforceability of any
provision shall not affect the validity or enforceability or the other
provisions hereof. If any provision of this Reorganization Agreement, or the
application thereof to any person or any circumstance, is invalid or
unenforceable, (a) a suitable and equitable provision shall be substituted
therefor in order to carry out, so far as may be valid and enforceable, the
intent and purpose of such invalid or unenforceable provision and (b) the
remainder of this Reorganization Agreement and the application of such provision
to other persons or circumstances shall not be affected by such invalidity or
unenforceability, nor shall such invalidity or unenforceability affect the
validity or enforceability of such provisions at the application thereof, in any
other jurisdiction.
Section 8.12 CAPTIONS. The Article, Section and paragraph captions herein
are for convenience of reference only, do not constitute part of this
Reorganization Agreement and shall not be deemed to limit or otherwise affect
any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Reorganization
Agreement to be executed by their duly authorized officers as of the day and
year first above written.
NHS FINANCIAL, INC.
By: /s/ JAMES W. BARNETT
-----------------------------------
James W. Barnett
Its: Chairman, President and Chief
Executive Officer
NEW HORIZONS SAVINGS AND LOAN
ASSOCIATION
By: /s/ JAMES W. BARNETT
-----------------------------------
James W. Barnett
Its: Chairman, President and Chief
Executive Officer
LUTHER BURBANK CORPORATION
By: /s/ VICTOR S. TRIONE
-----------------------------------
Victor S. Trione
Its: Chairman and Chief Executive
Officer
By: /s/ GEORGE MANCINI
-----------------------------------
George Mancini
Its: President and Chief Operating
Officer
A-29
<PAGE>
LUTHER BURBANK SAVINGS AND LOAN
ASSOCIATION
By: /s/ VICTOR S. TRIONE
-----------------------------------
Victor S. Trione
Its: Chairman
By: /s/ GEORGE MANCINI
-----------------------------------
George Mancini
Its: President and Chief Executive
Officer
LBC INTERIM
By: /s/ VICTOR S. TRIONE
-----------------------------------
Victor S. Trione
Its: Chairman and Chief Executive
Officer
By: /s/ GEORGE MANCINI
-----------------------------------
George Mancini
Its: President and Chief Operating
Officer
A-30
<PAGE>
EXHIBIT A-1
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER is entered into by and between LBC INTERIM, a
California corporation ("Merging Corporation") and NHS FINANCIAL INC., a
California corporation ("Surviving Corporation").
1. Merging Corporation shall be merged into Surviving Corporation.
2. Each outstanding share of Surviving Corporation shall be converted into
the right to receive eleven dollars and fifty cents ($11.50) in cash without
interest.
3. The outstanding shares of Surviving Corporation shall remain outstanding
and are not affected by the merger.
4. Merging Corporation shall from time to time, as and when requested by
Surviving Corporation, execute and deliver all such documents and instruments
and take all such action necessary or desirable to evidence or carry out the
merger.
5. The effect of the merger and the effective date of the merger are as
prescribed by law.
IN WITNESS WHEREOF, the parties have executed this Agreement.
NHS FINANCIAL INC.
By: __________________________________
, President
By: __________________________________
, Secretary
LBC INTERIM
By: __________________________________
, President
By: __________________________________
, Secretary
A-31
<PAGE>
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
________________________ and ________________________ certify that:
1. They are the president and secretary, respectively, of NHS FINANCIAL
INC., a California corporation.
2. The Agreement of Merger in the form attached was duly approved by the
board of directors and shareholders of the corporation.
3. The shareholder approval was by the holders of __% of the outstanding
shares of the corporation.
4. There is only one class of shares and the number of shares outstanding
is ______.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
<TABLE>
<S> <C>
Date: , President
, Secretary
</TABLE>
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
________________________ and ________________________ certify that:
1. They are the president and secretary, respectively, of LBC INTERIM, a
California corporation.
2. The Agreement of Merger in the form attached was duly approved by the
board of directors of the corporation.
3. Pursuant to Section 1201(b) of the California Corporations Code, no
approval of the Agreement of Merger by the outstanding shares of the corporation
was required or obtained.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
<TABLE>
<S> <C>
Date: , President
, Secretary
</TABLE>
A-32
<PAGE>
EXHIBIT A-2
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER is entered into between NHS FINANCIAL INC., a
California corporation ("Parent Corporation"), and NEW HORIZONS SAVINGS AND LOAN
ASSOCIATION, a California state-chartered savings and loan association and
wholly-owned subsidiary of Parent Corporation ("Subsidiary Corporation").
1. Parent Corporation shall be merged into Subsidiary Corporation, with
Subsidiary Corporation being the survivor, and Subsidiary Corporation shall
assume all of the liabilities of Parent Corporation.
2. All outstanding shares of Parent Corporation shall be converted, on a
pro rata basis, into shares of surviving Subsidiary Corporation.
3. Parent Corporation shall, from time to time, as and when requested by
Subsidiary Corporation, execute and deliver all such documents and instruments
and take all such action necessary or desirable to evidence or carry out the
merger.
4. The effect of the merger and the effective date of the merger are as
prescribed by law.
IN WITNESS WHEREOF, the parties have executed this Agreement of Merger.
NHS FINANCIAL INC.
By: __________________________________
, President
By: __________________________________
, Secretary
NEW HORIZONS SAVINGS AND LOAN
ASSOCIATION
By: __________________________________
, President
By: __________________________________
, Secretary
A-33
<PAGE>
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
________________________ and ________________________ certify that:
1. They are the President and Secretary, respectively, of NHS FINANCIAL
INC., a California corporation.
2. The Agreement of Merger in the form attached hereto was duly approved by
the boards of directors by the board of directors and shareholders of the
corporation.
3. The shareholder approval was by the holders of 100% of the outstanding
shares of the corporation.
4. There is only one class of shares and the number of shares outstanding
is ______.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge.
<TABLE>
<S> <C>
Date:, 1996 NHS FINANCIAL INC.
By:
, President
By:
, Secretary
</TABLE>
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
________________________ and ________________________ certify that:
1. They are the President and Secretary, respectively, of NEW HORIZONS
SAVINGS AND LOAN ASSOCIATION, a state-chartered savings and loan association.
2. The Agreement of Merger in the form attached hereto was duly approved by
the boards of directors by the board of directors and shareholder of the
association.
3. The shareholder approval was by the holders of 100% of the outstanding
shares of the corporation.
4. There is only one class of shares and the number of shares outstanding
is ______.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge.
<TABLE>
<S> <C>
NEW HORIZONS SAVINGS AND LOAN
Date:, 1996 ASSOCIATION
By:
, President
By:
, Secretary
</TABLE>
A-34
<PAGE>
EXHIBIT A-3
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER is entered into between LUTHER BURBANK SAVINGS AND
LOAN ASSOCIATION, a California state-chartered savings and loan association
("Surviving Corporation") and NEW HORIZONS SAVINGS AND LOAN ASSOCIATION, a
California state-chartered savings and loan association ("Merging Corporation").
1. Merging Corporation shall be merged into Surviving Corporation.
2. The outstanding shares of Merging Corporation shall be cancelled and no
shares of Surviving Corporation shall be issued in exchange therefor.
3. The outstanding shares of Surviving Corporation shall remain outstanding
and are not affected by the merger.
4. Merging Corporation shall from time to time, as and when requested by
Surviving Corporation, execute and deliver all such documents and instruments
and take all such action necessary or desirable to evidence or carry out the
merger.
5. The effect of the merger and the effective date of the merger are as
prescribed by law.
IN WITNESS WHEREOF, the parties have executed this Agreement.
LUTHER BURBANK SAVINGS AND LOAN
ASSOCIATION
By: __________________________________
, President
By: __________________________________
, Secretary
NEW HORIZONS SAVINGS AND LOAN
ASSOCIATION
By: __________________________________
, President
By: __________________________________
, Secretary
A-35
<PAGE>
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
________________________ and ________________________ certify that:
1. They are the president and secretary, respectively, of LUTHER BURBANK
SAVINGS AND LOAN ASSOCIATION, a California state-chartered savings and loan
association.
2. The Agreement of Merger in the form attached was duly approved by the
board of directors of the corporation.
3. Pursuant to Section 1201(b) of the California Corporations Code, no
approval of the Agreement of Merger by the outstanding shares of the corporation
was required or obtained.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
<TABLE>
<S> <C>
Date: , President
, Secretary
</TABLE>
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
________________________ and ________________________ certify that:
1. They are the president and secretary, respectively, of NEW HORIZONS
SAVINGS AND LOAN ASSOCIATION, a California state-chartered savings and loan
association.
2. The Agreement of Merger in the form attached was duly approved by the
board of directors and shareholder of the association.
3. The shareholder approval was by the holders of 100% of the outstanding
shares of the association.
4. There is only one class of shares and the number of shares outstanding
is .
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
<TABLE>
<S> <C>
Date: By:
, President
By:
, Secretary
</TABLE>
A-36
<PAGE>
EXHIBIT B
STOCK OPTION AGREEMENT
ATTACHED TO THIS PROXY STATEMENT AS APPENDIX B
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
LBC/LUTHER BURBANK/LBC INTERIM AND NHS FINANCIAL
MAY 23, 1996
EXHIBIT C
EMPLOYEE BENEFIT PLANS
A. Employee Pension Benefit Plans (EPBP)
1. The Principal Financial Group Prototype for Profit Sharing Plans --
Adoption Agreement Plan No. 003 approved October 26, 1992
The Principal Financial Group Prototype Basic Defined Contribution Plan
-- Basic Plan No. 01 approved October 20, 1992
2. No operational deviations from written provisions of the plan -- now
amended to permit withdrawal on termination
B. Employee Welfare Benefit Plans (EWBP)
1. HIPIC - HMO, POS, PPO, EPO as set forth in HIPIC Employee Brochure,
effective July 1, 1996 to June 30, 1997 individual benefits allowance per
month
2. Group Vision Care (Vision Service Plan)
3. Prudential Dental Maintenance Organization
4. Kaiser Foundation (with vision)
5. Group American Life Accidental Death and Dismemberment
6. Northwestern Mutual Life Insurance (Long Term Disability)
C. Benefit Arrangements (BA)
1. 1987 Stock Option Plan and Last Amended Agreements for Barnett, Fabian
and Kress; plus options for persons listed in the minutes of the meeting
of the Stock Option Committee of New Horizons Savings and Loan
Association of September 19, 1995
2. 1992 Stock Option Plan and Agreements for Fabian, Kress and Hamza
D. EPBP, EWBP, BA, Change in Control Arrangements
1. SERP - JWB
2. SERP - JAF
3. 1987 Stock Option Agreements (acceleration of vesting)
4. 1992 Stock Option Agreements (acceleration of vesting)
5. Letter Agreement with Jared L. Book
E. Termination in 30 days without penalty except:
1. SERP - JWB
2. SERP - JAF
F. Additional benefits listed below:
1. Paid parking -- San Rafael
2. Educational Reimbursement Policy
3. Health club initiation fee reimbursement
4. Free checking
<PAGE>
EXHIBIT D
[FIRST BANK LOGO]
First Bank Place
601 Second Avenue South
Minneapolis, MN 55402-4302
May 13, 1996
Luther Burbank Savings
804 Fourth Street
Santa Rosa, California 95404
Attention: Mr. George Mancini
Chief Executive Officer
Dear George:
First Bank National Association (the "Bank") is pleased to advise Luther
Burbank Corporation (the "Company") that the Bank shall extend credit to the
Company in the amount of up to $21,000,000 as set forth in a letter dated
January 17, 1996 and as amended in letters dated April 30, 1996 and May 9, 1996,
as previously accepted by the Company. The bank's commitment is subject to the
terms and conditions set forth below, which the Company acknowledges shall
supersede any and all previous terms and conditions.
The Bank hereby acknowledges that satisfactory due diligence has been
performed and that any contingency related to the performance of such due
diligence is removed. The Bank's commitment remains subject to the negotiation
and execution of definitive Credit, Security and related loan documents (the
"Credit Documents") satisfactory to the Bank. The Credit Documents will embody
the structure, pricing and other terms described in the attached Summary of
Terms and Conditions. They will also include provisions viewed by the Bank and
its counsel as appropriate for this transaction and for transactions of this
type. Accordingly, it should be recognized that this letter and the Summary of
Terms and Conditions are indicative but not exhaustive as to the terms and
conditions which shall govern this facility.
By acknowledging and agreeing to the terms of this letter, the Company
agrees to be responsible for all reasonable costs and expenses incurred by the
Bank (including fees and expenses of counsel) in connection with the negotiation
and preparation of the Credit Documents and the transaction contemplated hereby,
whether or not the Credit Documents are executed and whether or not loans are
made available under the Credit Documents.
The Bank's commitment hereunder shall be accepted by the Company on or
before May 14, 1996, whereupon the Bank's commitment will become effective until
May 21, 1996. The Company may extend the Bank's commitment termination date to
June 30, 1996 by delivering to the Bank an executed definitive merger and
acquisition agreement between the Company and NHS Financial, Inc. ("New
Horizons") and remitting the Fourth Installment of the Upfront Fee on or before
May 21, 1996, or the Bank's commitment will be deemed to have been terminated.
The Credit Documents shall be entered into not later than June 30, 1996,
after which date the commitment of the Bank hereunder shall expire.
Additionally, the Bank's commitment shall be funded not later than September 30,
1996, after which date the commitment of the Bank hereunder shall expire. If the
foregoing is acceptable, please indicate your agreement and acceptance by
signing and returning the enclosed copy of this letter.
<PAGE>
The Bank looks forward to this opportunity to work with Luther Burbank
Corporation on this transaction.
Very truly yours,
FIRST BANK NATIONAL ASSOCIATION
By: _______/s/_MICHAEL S. HARTER______
Michael S. Harter
COMMERCIAL BANKING OFFICER
Accepted and agreed as of this 14th
day of May, 1996
Luther Burbank Corporation
By: __________/s/_JOHN BIGGS__________
Title: ______________CFO______________
<PAGE>
SUMMARY OF TERMS AND CONDITIONS
<TABLE>
<S> <C>
BORROWER: Luther Burbank Corporation ("Luther Burbank")
LENDER: First Bank National Association (the "Bank").
COMMITTED AMOUNT: Up to $21,000,000. Final amount to be determined by the transaction
price as part of a definitive acquisition and merger agreement
between Luther Burbank and NHS Financial, Inc., the holding company
parent of New Horizons Savings and Loan Association (collectively,
"New Horizons"), a California savings and loan.
FACILITY: Term Loan
MATURITY: Five years from funding (tentatively September 30, 2001)
PURPOSE: The proceeds of the Term Loan shall be used to purchase the
outstanding common stock of New Horizons as part of an acquisition
and merger transaction.
SCHEDULED The Term Loan will amortize as shown below (payable in arrears in
AMORTIZATION: equal quarterly installments commencing the first calendar quarter
after funding). The full unpaid balance shall be due and payable five
years from funding (tentatively September 30, 2001).
</TABLE>
<TABLE>
<CAPTION>
YEAR AMORTIZATION
--------------------------------------------------- -------------
<S> <C> <C>
1.................................................. $ 2,000,000
2.................................................. 2,000,000
3.................................................. 2,000,000
4.................................................. 2,000,000
5.................................................. 2,000,000
Balloon............................................ 11,000,000
-------------
TOTAL.............................................. $ 21,000,000
</TABLE>
<TABLE>
<S> <C>
SECURITY: Pledge of the capital stock of Luther Burbank Savings, a savings and
loan chartered in the State of California ("Luther Burbank Savings").
UPFRONT FEE: 2% of the Term Loan amount payable in accordance with the provisions
of Appendix A attached hereto.
COMMITMENT FEE: .25% on unfunded portion of the Term Loan commitment commencing upon
closing (and terminating upon funding) of the Term Loan.
INTEREST RATE: First Bank Reference Rate +2.0%.
CLOSING: On or before June 30, 1996
PREPAYMENTS: Allowed without penalty.
REPRESENTATIONS AND Usual and customary for transactions of this nature with respect to
WARRANTIES: the Borrower and its subsidiaries, including but not limited to: (i)
corporate status; (ii) corporate power and authority/enforceability;
(iii) no violation of law or contracts or organizational documents;
(iv) no material litigation; (v) correctness of specified financial
statements and no material adverse change (vi) no required
governmental or third party approvals; (vii) use of proceeds; (viii)
ERISA; (ix) perfected security interest and liens; and (x) payment of
taxes.
CONDITIONS PRECEDENT The funding of the Term Loan will be subject to satisfaction of
TO FUNDING: certain conditions precedent, including but not limited to the
following:
(1) Approval of the acquisition and merger transaction by all
applicable regulatory agencies.
(2) Execution of an interest rate hedge structured to fix the maximum
rate of interest at 12% on $10,000,000 for a period of three years
from the funding date.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(3) The loan loss reserve (the General Valuation Allowance portion
only) must be equal to or greater than 1.2% of the total gross loan
on a combined proforma basis (after giving effect to all
accounting adjustments related to the merger transaction) of
Luther Burbank.
(4) Core (Tier 1) Capital, calculated on a combined, proforma basis
in accordance with regulatory definitions, must be equal to at least
6.5% at Luther Burbank Savings and 3.5% at Luther Burbank
Corporation.
(5) Aggregate commercial real estate mortgages and loans for raw land
cannot exceed 25% of gross loans calculated on a combined,
proforma basis.
(6) Nonperforming assets (defined as the sum of 90+ day past dues
still accruing, nonaccrual, OREO, and repossessed assets, minus the
amount offset by any Specific Valuation Reserve) cannot exceed
25% of primary capital (defined as Core Capital plus the loan
loss reserve as defined) calculated on a combined, proforma
basis.
(7) Classified assets (defined as the sum of all assets classified
internally by management or externally by regulators as Substandard,
Doubtful, or Loss, minus the amount offset by any Specific
Valuation Reserve) do not exceed 60% of primary capital (defined
as Core Capital plus the loan loss reserve as defined) calculated
on a combined, proforma basis.
(8) Only in the event the one-time fee to be assessed as part of the
combination of the SAIF/BIF deposit insurance funds (the
"SAIF/BIF Charge", contemplated as part of pending Congressional
legislation) has not been expensed at both Luther Burbank and New
Horizons prior to closing of the Term Loan, Luther Burbank
Savings must maintain "Excess Risk Based Capital" (as defined by
regulators) in an amount to provide dividend capacity sufficient
to cover the Term Loan's first year debt service requirements
(estimated at a maximum of approximately $4.4MM)
COVENANTS: Usual and customary in transactions of this nature, to include,
without limitation, (i) delivery of financial statements and other
reports; (ii) compliance certificates; (iii) notices of default,
material litigation and material governmental and environmental
proceedings; (iv) compliance with laws; (v) payment of taxes; (vi)
maintenance of insurance; (vii) prohibition of liens; and (viii)
ERISA.
Financial covenants will include:
(1) MINIMUM LLR/GROSS LOANS RATIO. Maintain the ratio of the Loan
Loss Reserve to Gross Loans at 1.05% minimum at all times for the
first three years the subsequent to closing; 1.10% thereafter.
(2) CORE CAPITAL RATIO. Maintain Core (Tier 1) Capital, calculated in
accordance with regulatory definitions, of 6.5% at Luther Burbank
Savings and 3.5% at Luther Burbank Corporation at all times.
(3) MAXIMUM COMMERCIAL REAL ESTATE AND LAND LOANS/GROSS LOANS.
Aggregate commercial real estate mortgages and loans for raw land
cannot exceed 25% of gross loans at any time.
(4) MAXIMUM NONPERFORMING ASSETS/PRIMARY CAPITAL: Maintain loan
portfolio quality such that nonperforming assets (defined as the
sum of 90+ day past dues still accruing, nonaccrual, OREO, and
repossessed assets, minus the amount offset by any Specific
Valuation Reserve) do not exceed 25% of primary capital (defined
as tangible capital plus the loan loss reserve as defined) at any
time.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(5) MAXIMUM CLASSIFIED ASSETS/PRIMARY CAPITAL: Maintain loan
portfolio quality such that classified assets (defined as the sum of
all assets classified internally by management or externally by
regulators as Substandard, Doubtful, or Loss, minus the amount
offset by any Specific Valuation Reserve) do not exceed 60% of
primary capital (defined as tangible capital plus the loan loss
reserve as defined) at any time.
A default cure period will be incorporated for "Nonperforming Assets/
Primary Capital" and the "Classified Assets/Primary Capital"
covenants only. Luther Burbank Savings must notify the Bank
immediately upon the occurrence of an event of default. Within 30
days of the date the default event occurs, a plan to rectify the
default event must be submitted to and approved by the Bank. The
Bank maintains its discretion to approve or veto the rectification
plan based upon a good faith assessment of the merits of the plan
and the protection afforded the Bank. If the rectification plan is
not accepted by the Bank, the default event continues from the date
of occurrence. If the rectification plan is accepted by the Bank,
Luther Burbank Savings will have a maximum of 180 days to cure the
default. If the default is not cured within that time, a default
event will again occur at 180 days. The 180 day cure period will
remain in effect so long as the accepted rectification plan is
implemented and continues to be executed; otherwise, the default
event is reconstituted.
(6) MINIMUM ROA: Luther Burbank Savings must achieve a return or
average assets, calculated on a rolling four-quarter basis
(starting with the calendar quarter in which the merger occurs),
of .75% at all times, to exclude the effects of the SAIF/BIF
Charge.
EVENTS OF DEFAULT: Usual and customary in transactions of this nature, and to include,
without limitation, (i) nonpayment of principal, interest, fees and
other amounts, (ii) violation of covenants, (iii) inaccuracy of
representations and warranties, (iv) bankruptcy, (v) material
judgments, (vi) ERISA, (vii) actual or asserted invalidity of any
loan documents or security interests, and (vii) change in control (to
be defined).
INDEMNIFICATION: The Bank will be indemnified against all losses, liabilities, claims,
damages or expenses (including but not limited to reasonable attorney
fees and settlement costs) relating to its loan, the Borrower's use
of the loan proceed or the commitment, including but not limited to
reasonable attorney's fees and settlement costs. This indemnification
shall survive and continue for the benefit of the Bank at all times
after the Borrower's acceptance of the Bank's commitment for the Term
Loan, notwithstanding any failure of the Term Loan to close.
GOVERNING LAW: State of Minnesota.
EXPENSES: Borrower will pay all reasonable costs and expenses associated with
the preparation, due diligence, administration, and enforcement of
all documents executed in connection with the Term Loan, including
without limitation, the reasonable legal fees of the Bank's counsel
(which may include the Bank's internal counsel) regardless of whether
or not the Term Loan is closed.
OTHER: This term sheet is intended as an outline only and does not purport
to detail all the conditions, covenants, representations, warranties,
and other provisions which would be contained in definitive legal
documentation for the Term Loan contemplated herein.
</TABLE>
<PAGE>
APPENDIX A
UPFRONT FEE
The schedule below sets forth the payment schedule for the Upfront Fee to be
paid in six installments, the sum of which shall total 2.0% of the Term Loan
amount. All installments of the Upfront Fee paid previously or to be paid by
Luther Burbank are nonrefundable by the Bank.
(i) $35,000 (.167% of maximum commitment amount) previously received by the
Bank on 1/24/96 subsequent to delivery of the Bank's commitment to Luther
Burbank ("First Installment").
(ii) $35,000 (.167% of maximum commitment amount) previously received on 2/2/96
to extend the Bank's commitment to Luther Burbank ("Second Installment").
(iii) $35,000 (.167% of maximum commitment amount) previously received on
2/16/96 to extend the Bank's commitment to Luther Burbank ("Third
Installment").
(iv) $70,000 (.33% of maximum commitment amount) payable on or before 5/21/96
("Fourth Installment").
(v) .50% of actual commitment amount under loan agreement payable upon closing,
tentatively 6/30/96 ("Fifth Installment").
(vi) Remainder payable at funding (tentative outside date of 9/30/96) in an
amount such that the sum of all Upfront Fee installment payments equal 2% of
the actual commitment amount under the loan agreement ("Sixth Installment").
<PAGE>
[FIRST BANK LOGO]
First Bank Place
601 Second Avenue South
Minneapolis, MN 55402-4302
May 20, 1996
Luther Burbank Savings
804 Fourth Street
Santa Rosa, California 95404
Attention: Mr. George Mancini
Chief Executive Officer
Dear George:
First Bank National Association (the "Bank") is pleased to advise Luther
Burbank Corporation (the "Company") that the Bank has extended its commitment,
subject to the summary terms and conditions as set forth in a letter dated May
13, 1996, as previously accepted by the Company. The terms and conditions of
such letter shall be deemed to apply to such extended commitment (provided that
the date of MAY 21, 1996 only shall now be deemed to be replaced by MAY 28,
1996).
The Bank looks forward to this opportunity to work with Luther Burbank
Corporation on this transaction.
Very truly yours,
FIRST BANK NATIONAL ASSOCIATION
By: _______/s/_MICHAEL S. HARTER______
Michael S. Harter
COMMERCIAL BANKING OFFICER
<PAGE>
EXHIBIT E
FORM OF LEGAL OPINION OF COUNSEL TO NHS FINANCIAL, INC.
AND NEW HORIZONS SAVINGS AND LOAN ASSOCIATION
(a) NHS Financial, Inc. ("NHS Financial") is a corporation duly organized,
validly existing and in good standing under the laws of the State of California
and is a savings and loan holding company registered under the Home Owners' Loan
Act of 1933, as amended. New Horizons Savings and Loan Association ("New
Horizons") is a state-chartered savings and loan association and wholly-owned
subsidiary of NHS Financial, duly organized and in good standing under the laws
of the State of California.
(b) NHS Financial and New Horizons have all requisite corporate power and
authority to own, lease and operate their respective properties and to carry on
their businesses as now being conducted and are duly qualified to do business
and in good standing in each jurisdiction in which the nature of their business
or the ownership or leasing of their properties makes such qualification
necessary, other than such jurisdictions where the failure to so qualify would
not have a material adverse effect with respect to either NHS Financial or New
Horizons.
(c) The authorized, issued and outstanding capital stock of NHS Financial
conforms to the description thereof contained in Section 3.3(b) of the
Agreement. All outstanding shares of NHS Financial and New Horizons capital
stock are validly issued, fully paid and nonassessable and not subject to any
preemptive rights. Except as disclosed in the Agreement, there are no options,
warrants, calls, rights, commitments or agreements obligating NHS Financial or
New Horizons to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock or any voting debt securities of NHS
Financial or New Horizons or obligating NHS Financial or New Horizons to grant,
extend or enter into any such option, call, warrant, right or agreement. There
are no outstanding contractual obligations of NHS Financial or New Horizons to
repurchase, redeem, or otherwise acquire any shares of capital stock of NHS
Financial or New Horizons, other than the Option Plan.
(d) NHS Financial and New Horizons have all requisite corporate power and
authority to enter into the Reorganization Agreement and the Option Agreement
and to consummate the transactions contemplated thereby. The execution and
delivery of the Reorganization Agreement and the Option Agreement and the
consummation of the transactions contemplated thereby have been duly authorized
by all necessary corporate action on the part of NHS Financial and New Horizons
(including without limitation the approval of the Reorganization Agreement and
the Option Agreement by the requisite vote of NHS Financial's Board of
Directors, which approval includes a resolution recommending that the Agreement
and the transactions contemplated thereby be approved by the shareholders of NHS
Financial). The Reorganization Agreement and the Option Agreement have been duly
executed and delivered by NHS Financial and New Horizons and constitute valid
and binding obligations on NHS Financial and New Horizons, enforceable against
either in accordance with its terms, subject only to the effect of bankruptcy,
insolvency, reorganization, receivership, conservatorship, arrangement,
moratorium or other laws affecting or relating to the rights of creditors
generally, or the rights of savings and loan associations, the accounts of which
are insured by the FDIC and which are subject to regulation by the FDIC or by
general equity principles, regardless of whether such enforceability is
considered in a proceeding in equity or at law.
(e) All consents, approvals, orders or authorizations of, or registrations,
declarations or filings with, any governmental entity required to be obtained by
NHS Financial or New Horizons, for the execution and delivery of the
Reorganization Agreement and the Option Agreement or the consummation by NHS
Financial and New Horizons of the transactions contemplated thereby, have, as
appropriate, been made, obtained or given, except for those consents, approvals,
orders or authorizations of, or registrations, declarations or filings with any
governmental entity, the failure to obtain which would not be likely to have a
material adverse effect.
(f) To our knowledge, there is no suit, action or proceeding pending or
threatened against or affecting NHS Financial or New Horizons which is required
to be disclosed in any document filed by NHS Financial or New Horizons with the
Securities and Exchange Commission (the "SEC") pursuant to Item 103 of
Regulation S-K of the Securities Act of 1933, as amended, which has not been so
disclosed, and to our knowledge,
<PAGE>
there is no judgment, decree, injunction, order, writ or rule of any
governmental entity or arbitrator outstanding against NHS Financial or New
Horizons having, or which might reasonably be expected to have, individually or
in the aggregate, a Material Adverse Effect.
(g) All filings made by NHS Financial under the Securities Exchange Act of
1934, as amended, that are incorporated by reference in the Proxy Statement,
complied as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations of the SEC thereunder.
(h) To our knowledge, the business of NHS Financial and New Horizons is not
being conducted in violation of any law, ordinance or regulation of any
governmental entity where such violation has had or is reasonably likely to
have, a material adverse effect. Except for routine examinations by bank
regulators, to our knowledge, no investigation by any governmental entity with
respect to NHS Financial or New Horizons is pending or threatened which is
reasonably likely to have a Material Adverse Effect.
<PAGE>
EXHIBIT F
[AGREEMENT NOT TO SOLICIT.]
[NHS FINANCIAL/NEW HORIZONS LETTERHEAD]
Luther Burbank Corporation
George Mancini
President
816 Fourth Street
Santa Rosa, California 95404
Re: Agreement Not to Solicit
Dear Mr. Mancini:
Pursuant to Section 5.2(e) of the Agreement and Plan of Reorganization (the
"Reorganization Agreement") dated as of May 23, 1996, by and among Luther
Burbank Corporation ("LBC"), a California corporation, which is registered as a
savings and loan holding company, Luther Burbank Savings and Loan Association, a
California savings and loan association, which is a wholly-owned subsidiary of
LBC, LBC Interim, a California corporation, which is a wholly-owned subsidiary
of LBC, NHS Financial Inc., a California corporation ("NHS Financial"), which is
registered as a savings and loan holding company and New Horizons Savings and
Loan Association, a California savings and loan association ("New Horizons"),
which is a wholly-owned subsidiary of NHS Financial, I hereby agree not to
solicit deposit customers or employees of NHS Financial or New Horizons for a
period of twelve (12) months from the Effective Date as defined in the
Reorganization Agreement.
Sincerely,
[Name]
Director
<PAGE>
APPENDIX B -- STOCK OPTION AGREEMENT
<PAGE>
EXHIBIT B
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of the 23rd day of May, 1996 (this
"Agreement"), between LUTHER BURBANK CORPORATION, a California corporation which
is registered as a savings and loan holding company ("Grantee"), and NHS
FINANCIAL INC., a California corporation, which is registered as a savings and
loan holding company, ("Issuer").
WITNESSETH:
WHEREAS, Grantee and Issuer are entering into an Agreement and Plan of
Reorganization, dated as of the 23rd day of May, 1996 (the "Plan"), which is
being executed by the parties hereto simultaneously with the execution of this
Agreement; and
WHEREAS, as a condition and inducement to Grantee's entering into the Plan
and in consideration therefore, Issuer has agreed to grant Grantee the Option
(as defined below);
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Plan, the parties hereto agree as
follows:
Section 1. Issuer hereby grants to Grantee an irrevocable option (the
"Option") to Purchase, subject to the terms hereof, 19.9% of the outstanding
shares of common stock, no par value, fully paid and nonassessable ("Common
Stock"), of Issuer at a price per share equal to $9.50 per share (the "Initial
Price"); PROVIDED, HOWEVER, that in the event Issuer issues or agrees to issue
(other than pursuant to options to issue Common Stock in effect as of the date
hereof) any shares of Common Stock at a price less than the Initial Price (as
adjusted pursuant to Section 5(b)), such price shall be equal to such lesser
price (such price, as adjusted as hereinafter provided, the "Option Price"). The
number of shares of Common Stock that may be received upon the exercise of the
Option and the Option Price are subject to adjustment as herein set forth.
Section 2. (a) Provided that: (i) Grantee shall not be in material breach
of the agreements or covenants contained in this Agreement or the Plan, and (ii)
no preliminary or permanent injunction or other order against delivery of the
shares covered by the Option shall have been issued against Issuer by any court
of competent jurisdiction in the United States shall be in effect, Grantee may
exercise the Option, in whole or part, at any time and from time to time
following the occurrence of a Purchase Event (as defined below) and satisfaction
of all conditions (including, but not limited to, regulatory approvals)
attendant to any agreement to engage in an Acquisition Transaction (as defined
below) relating to a Purchase Event pursuant to Section 2(c)(ii) below; PROVIDED
that the Option shall terminate and be of no further force and effect upon the
earliest to occur of (i) the time immediately prior to the Effective Time, as
defined in the Plan, (ii) nine (9) months after the first occurrence of a
Purchase Event, (iii) fifteen (15) months after the termination of the Plan
following the occurrence of a Preliminary Purchase Event (as defined below),
(iv) termination of the Plan in accordance with the terms thereof prior to the
occurrence of a Purchase Event or a Preliminary Purchase Event (other than a
termination of the Plan by Grantee as a result of any volitional breach by the
Issuer of any representation, warranty, covenant or agreement), or (v) fifteen
(15) months after the termination of the Plan by Grantee as a result of any
volitional breach by the Issuer of any representation, warranty, covenant or
agreement. The events described in clauses (i) - (v) in the preceding sentence
are hereinafter collectively referred to as an "Exercise Termination Event." In
the event that a Purchase Event occurs pursuant to Section 2(c)(ii) below and
that all conditions (including, but not limited to, regulatory approvals)
attendant to the agreement to engage in the Acquisition Transaction (as defined
below) have been satisfied, but the Acquisition Transaction is not consummated
for any reason, than in such event Issuer shall immediately purchase the Option
from Grantee or the permitted assignee of Grantee at a cash price equal to One
Dollar ($1.00) times the number of shares represented by the Option.
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(b) The term "Preliminary Purchase Event" shall mean any of the following
events or transactions occurring after the date hereof:
(i) Issuer or any of its subsidiaries (each an "Issuer Subsidiary")
without having received Grantee's prior written consent, shall have entered
into an agreement to engage in an Acquisition Transaction (as defined below)
with any person (the term "person" for purposes of this Agreement having the
meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the Securities
Exchange Act of 1934, as amended (the "Securities Exchange Act"), and the
rules and regulations thereunder) other than Grantee or any of its
subsidiaries (each a "Grantee Subsidiary") or the Board of Directors of
Issuer shall have recommended that the shareholders of Issuer approve or
accept any Acquisition Transaction with any person other than Grantee or any
Grantee Subsidiary. For purposes of this Agreement, "Acquisition
Transaction" shall mean (x) a merger or consolidation, or any similar
transaction, involving Issuer or any Issuer Subsidiary, (y) a purchase,
lease or other acquisition of all or substantially all of the assets of
Issuer or any Issuer Subsidiary or (z) a purchase or other acquisition
(including by way of merger, consolidation, share exchange or otherwise) of
securities representing 10% or more of the voting power of Issuer or any
Issuer Subsidiary; provided that the term "Acquisition Transaction" does not
include any internal merger or consolidation involving only Issuer and/or
Issuer Subsidiaries;
(ii) Any person (other than Grantee or any Grantee Subsidiary) shall
have acquired beneficial ownership or the right to acquire beneficial
ownership of securities representing 10% or more of the voting power of
Issuer (the term "beneficial ownership" for purposes of this Agreement
having the meaning assigned thereto in Section 13(d) of the Securities
Exchange Act, and the rules and regulations thereunder);
(iii) Any person other than Grantee or any Grantee Subsidiary shall have
made a BONA FIDE proposal to Issuer or its shareholders, by public
announcement or written communication that is or becomes the subject of
public disclosure, to engage in an Acquisition Transaction (including,
without limitation, any situation in which any person other than Grantee or
any Grantee Subsidiary shall have commenced (as such term is defined in Rule
14d-2 under the Securities Exchange Act) or shall have filed a registration
statement under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to, a tender offer or exchange offer to purchase any
securities of Issuer such that, upon consummation of such offer, such person
would own or control 10% or more of the voting power of Issuer (such an
offer being referred to herein as a "Tender Offer" or an "Exchange Offer",
respectively));
(iv) After a proposal is made by a third party to Issuer or its
shareholders to engage in an Acquisition Transaction, Issuer shall have
breached any covenant or obligation contained in the Plan and such breach
would entitle Grantee to terminate the Plan or the holders of Common Stock
shall not have approved the Plan at the meeting of such stockholders held
for the purpose of voting on the Plan, such meeting shall not have been held
or shall have been canceled prior to termination of the Plan or Issuer's
Board of Directors shall have withdrawn or modified in a manner adverse to
Grantee the recommendation of Issuer's Board of Directors with respect to
the Plan; or
(v) Any person other than Grantee or any Grantee Subsidiary, other than
in connection with a transaction to which Grantee has given its prior
written consent, shall have filed an application or notice with the Office
of Thrift Supervision ("OTS") or other governmental authority or regulatory
or administrative agency or commission (each, a "Governmental Authority")
for approval to engage in an Acquisition Transaction.
(c) The term "Purchase Event" shall mean either of the following events or
transactions occurring after the date hereof:
(i) The acquisition by any person other than Grantee or any Grantee
Subsidiary of beneficial ownership of securities representing 25% or more of
the voting power of issuer; or
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(ii) The occurrence of a Preliminary Purchase Event described in Section
2(b)(i) except that the percentage referred to in clause (z) shall be 25%.
(d) The term "Put Purchase Event" shall mean either of the following events
or transactions occurring after the date hereof:
(i) The acquisition by any person other than Grantee or any Grantee
Subsidiary of beneficial ownership of securities representing 50% or more of
the voting power of Issuer; or
(ii) The consummation of an Acquisition Transaction with any person
other than the Grantee or any Grantee Subsidiary.
(e) Issuer shall notify Grantee promptly in writing of the occurrence of any
Preliminary Purchase Event or Purchase Event; PROVIDED, HOWEVER, that the giving
of such notice by Issuer shall not be a condition to the right of Grantee to
exercise the Option.
(f) In the event that Grantee is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the "Option Notice" and the
date of which being hereinafter referred to as the "Notice Date") specifying (i)
the total number of shares of Common Stock it will purchase pursuant to such
exercise and (ii) a period of time (that shall not be less than three business
days nor more than thirty business days) running from the Notice Date (the
"Closing Date") and a place at which the closing of such purchase shall take
place, PROVIDED, THAT, if prior notification to or approval of the OTS or any
other Governmental Authority is required in connection with such purchase (each,
a "Notification" or an "Approval," as the case may be), (a) Grantee shall
promptly file the required notice or application for approval
("Notice/Application"), (b) Grantee shall expeditiously process the
Notice/Application and (c) for the purpose of determining the Closing Date
pursuant to clause (ii) of this sentence, the period of time that otherwise
would run from the Notice Date shall instead run from the later of (x) in
connection with any Notification, the date on which any required notification
periods have expired or been terminated and (y) in connection with any Approval,
the date on which such approval has been obtained and any requisite waiting
period or periods shall have expired. For purposes of Section 2(a), any exercise
of the Option shall be deemed to occur on the Notice Date relating thereto. On
or prior to the Closing Date, Grantee shall have the right to revoke its
exercise of the Option in the event that the transaction constituting a Purchase
Event that gives rise to such right to exercise shall not have been consummated.
(g) At the closing referred to in Section 2(f), Grantee shall pay to Issuer
the aggregate purchase price for the shares of Common Stock determined in
accordance with Section 1, in immediately available funds by wire transfer to a
bank account designated by Issuer; PROVIDED, HOWEVER, that failure or refusal of
Issuer to designate such a bank account shall not preclude Grantee from
exercising the Option.
(h) At such closing, simultaneously with the delivery of immediately
available funds as provided in Section 2(g), Issuer shall deliver to Grantee a
certificate or certificates representing the number of shares of Common Stock
specified in the Option Notice and, if the Option should be exercised in part
only, a new Option evidencing the rights of Grantee thereof to purchase the
balance of the shares of Common Stock purchasable hereunder.
(i) Certificates for Common Stock delivered at a closing hereunder shall be
endorsed with a restrictive legend substantially as follows:
The transfer of the shares represented by this certificate is subject to
resale restrictions arising under the Securities Act of 1933, as
amended, and to certain provisions of an agreement between Luther
Burbank Corporation, a California corporation which is registered as a
savings and loan holding company and NHS Financial Inc., a California
corporation, which is registered as a savings and loan holding company
("Issuer"), dated as of the day of May, 1996. A copy of such
agreement is on file at the principal office of Issuer and will be
provided to the holder hereof without charge upon receipt by Issuer of a
written request therefor.
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act in the above legend shall be removed by delivery of
substitute certificate(s) without such reference if Grantee shall have
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<PAGE>
delivered to Issuer a copy of a letter from the staff of the Securities and
Exchange Commission (the "SEC"), or an opinion of counsel, in form and substance
satisfactory to Issuer, to the effect that such legend is not required for
purposes of the Securities Act; (ii) the reference to the provisions of this
Agreement in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if the shares have been sold or
transferred in compliance with the provisions of this Agreement and under
circumstances that do not require the retention of such reference; and (iii) the
legend shall be removed in its entirety if the conditions in the preceding
clauses (i) and (ii) are both satisfied. In addition, such certificates shall
bear any other legend as may be required by law.
(j) Upon the giving by Grantee to Issuer of an Option Notice and the tender
of the applicable purchase price in immediately available funds on the Closing
Date, Grantee shall be deemed to be the holder of record of the number of shares
of Common Stock specified in the Option Notice, notwithstanding that the stock
transfer books of Issuer shall then be closed or that certificates representing
such shares of Common Stock shall not then actually be delivered to Grantee.
Issuer shall pay all expenses and any and all United States federal, state and
local taxes and other charges that may be payable in connection with the
preparation, issue and delivery of stock certificates under this Section 2 in
the name of Grantee.
Section 3. Issuer agrees: (i) that it shall at all times until the
termination of this Agreement have reserved for issuance upon the exercise of
the Option that number of authorized and reserved shares of Common Stock equal
to the maximum number of shares of Common Stock at any time and from time to
time issuable hereunder, all of which shares will, upon issuance pursuant
hereto, be duly authorized, validly issued, fully paid, nonassessable, and
delivered free and clear of all claims, liens, encumbrances and security
interest, and not subject to any preemptive rights; (ii) that it will not, by
amendment of its articles of incorporation or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observance or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
Issuer, (iii) promptly to take all action as may from time to time be required
(including (x) complying with all pre-merger notification, reporting and waiting
period requirements specified in 15 U.S.C. Section 18a and regulations
promulgated thereunder and (y) in the event, under the Home Owners' Loan Act of
1933, as amended ("HOLA"), or any state banking law, prior approval of or notice
to the OTS or to any other Governmental Authority is necessary before the Option
may be exercised, cooperating with Grantee in preparing such applications or
notices and providing such information to each such Governmental Authority as it
may require) in order to permit Grantee to exercise the Option and Issuer duly
and effectively to issue shares of Common Stock pursuant hereto; and (iv) to
take all action provided herein to protect the rights of Grantee against
dilution.
Section 4. This Agreement and the Option granted hereby are exchangeable,
without expense, at the option of Grantee, upon presentation and surrender of
this Agreement at the principal office of Issuer, for other agreements providing
for Options of different denominations entitling the holder thereof to purchase,
on the same terms and subject to the same conditions as are set forth herein, in
the aggregate the same number of shares of Common Stock purchasable hereunder.
The terms "Agreement" and "Option" as used herein include any agreements and
related options for which this Agreement and the Option granted hereby may be
exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Agreement, and (in the case
of loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Agreement, if mutilated, Issuer will
execute and deliver a new Agreement of like tenor and date. Any such new
Agreement executed and delivered shall constitute an additional contractual
obligation on the part of Issuer, whether or not the Agreement so lost, stolen,
destroyed or mutilated shall at any time be enforceable by anyone.
Section 5. The number of shares of Common Stock purchasable upon the
exercise of the Option shall be subject to adjustment from time to time as
follows:
(a) In the event of any change in the Common Stock by reason of stock
dividends, split-ups, mergers, recapitalizations, combinations,
subdivisions, conversions, exchanges of shares or the like, or the issuance
or grant of any rights or securities which entitle the holder(s) thereof to
voting powers superior to or dilutive of the Common Stock, the type and
number of shares of Common Stock
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purchasable upon exercise hereof shall be appropriately adjusted and proper
provision shall be made so that, in the event that any additional rights or
securities are to be issued or otherwise to become outstanding as a result
of any such change (other than pursuant to an exercise of the Option), the
number of shares of Common Stock that remain subject to the Option and the
rights and powers of such Common Stock shall be increased or modified so
that, after such issuance and together with shares of Common Stock
previously issued pursuant to the exercise of the Option (as adjusted on
account of any of the foregoing changes in the Common Stock), it equals
19.9% of the voting power of Issuer.
(b) Whenever the number of shares of Common Stock purchasable upon
exercise hereof is adjusted as provided in this Section 5, the Option Price
shall be adjusted by multiplying the Option Price by a fraction, the
numerator of which shall be equal to the number of shares of Common Stock
purchasable prior to the adjustment and the denominator of which shall be
equal to the number of shares of Common Stock purchasable after the
adjustment.
Section 6. (a) Upon the occurrence of a Purchase Event that occurs prior
to an Exercise Termination Event, Issuer shall, at the request of Grantee
(whether on its own behalf or on behalf of any subsequent holder of the Option
(or part thereof) or any of the shares of Common Stock issued pursuant hereto),
promptly prepare, file and keep current a registration statement under the
Securities Act covering any shares issued and issuable pursuant to the Option
and shall use its best efforts to cause such registration statement to become
effective, and to remain current and effective for a period not in excess of 180
days from the day such registration statement first becomes effective, in order
to permit the sale or other disposition of any shares of Common Stock issued
upon total or partial exercise of the Option ("Option Shares") in accordance
with any plan of disposition requested by Grantee; PROVIDED, HOWEVER, that
Issuer may postpone filing a registration statement relating to a registration
request by Grantee under this Section 6 for a period of time (not in excess of
45 days) if in its judgment such filing would require the disclosure of material
information that Issuer has a bona fide business purpose for preserving as
confidential. Grantee shall have the right to demand two such registrations. The
foregoing notwithstanding, if, at the time of any request by Grantee for
registration of Option Shares as provided above, Issuer is in the process of
registration with respect to an underwritten public offering of shares of Common
Stock, and if in the good faith judgment of the managing underwriter or managing
underwriters, or, if none, the sole underwriter or underwriters of such offering
the offering or inclusion of the Option Shares would interfere materially with
the successful marketing of the shares of Common Stock offered by Issuer, the
number of Option Shares otherwise to be covered in the registration statement
contemplated hereby may be reduced, provided, however, that after any such
required reduction the number of Option Shares to be included in such offering
for the account of Grantee shall constitute at least 33 1/3% of the total number
of shares of Grantee and Issuer covered in such registration statement; PROVIDED
FURTHER, HOWEVER, that if such reduction occurs, then Issuer shall file a
registration statement for the balance as promptly as practicable thereafter as
to which no reduction pursuant to this Section 6(a) shall be permitted or occur
and the Grantee shall thereafter be entitled to one additional registration
statement. Grantee shall provide all information reasonably requested by Issuer
for inclusion in any registration statement to be filed hereunder. In connection
with any such registration, Issuer and Grantee shall provide each other with
representations, warranties, indemnities and other agreements customarily given
in connection with such registrations. If requested by Grantee in connection
with such registration, Issuer and Grantee shall become a party to any
underwriting agreement relating to the sale of such shares but only to the
extent of obligating themselves in respect of representation, warranties,
indemnities and other agreements customarily included in such underwriting
agreements. Notwithstanding the foregoing, if Grantee revokes any Option Notice
or fails to exercise any Option with respect to any Option Notice pursuant to
Section 2(f), Issuer shall not be obligated to continue any registration process
with respect to the sale of Option Shares issuable upon the exercise of such
Option and Grantee shall not be deemed to have demanded registration of Option
Shares.
(b) In the event that Grantee requests Issuer to file a registration
statement following the failure to obtain any approval required to exercise the
Option as described in Section 9, the closing of the sale or other disposition
of the Common Stock or other securities pursuant to such registration statement
shall occur substantially simultaneously with the exercise of the Option.
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Section 7. (a) Upon the occurrence of a Put Purchase Event that occurs
prior to an Exercise Termination Event, (i) at the request (the date of such
request being the "Option Repurchase Request Date") of Grantee, Issuer shall
repurchase the Option from Grantee at a price (the "Option Repurchase Price")
equal to the amount by which (A) the market/offer price (as defined below)
exceeds (B) the Option Price, multiplied by the number of shares for which the
Option may then be exercised and (ii) at the request (the date of such request
being the "Option Share Repurchase Request Date") of the owner of Option Shares
from time to time (the "Owner"), Issuer shall repurchase such number of the
Option Shares from the Owner as the Owner shall designate at a price (the
"Option Share Repurchase Price") equal to the market/ offer price multiplied by
the number of Option Shares so designated. The term "market/offer price" shall
mean the highest of (i) the price per share of Common Stock at which a tender
offer or exchange offer therefor has been made after the date hereof and on or
prior to the Option Repurchase Request Date or the Option Share Repurchase
Request Date, as the case may be, (ii) the price per share of Common Stock paid
or to be paid by any third party pursuant to an agreement with Issuer (whether
by way of a merger, consolidation or otherwise), (iii) the highest last sale
price for shares of Common Stock within the 360-day period ending on the Option
Repurchase Request Date or the Option Share Repurchase Request Date, as the case
may be, which is reported by THE WALL STREET JOURNAL or, if not reported
thereby, another authoritative source, (iv) in the event of a sale of all or
substantially all of Issuer's assets, the sum of the price paid in such sale for
such assets and the current market value of the remaining assets of Issuer as
determined by a nationally recognized independent investment banking firm
selected by Grantee or the Owner, as the case may be, divided by the number of
shares of Common Stock of Issuer outstanding at the time of such sale. In
determining the market/offer price, the value of consideration other than cash
shall be the value determined by a nationally recognized independent investment
banking firm selected by Grantee or the Owner, as the case may be, whose
determination shall be conclusive and binding on all parties.
(b) Grantee or the Owner, as the case may be, may exercise its right to
require Issuer to repurchase the Option and/or any Option Shares pursuant to
this Section 7 by surrendering for such purpose to Issuer, at its principal
office, a copy of this Agreement or certificates for Option Shares, as
applicable, accompanied by a written notice or notices stating that Grantee or
the Owner, as the case may be, elects to require Issuer to repurchase the Option
and/or the Option Shares in accordance with the provisions of this Section 7. As
promptly as practicable, and in any event within five business days after the
surrender of the Option and/or certificates representing Option Shares and the
receipt of such notice or notices relating thereto, Issuer shall deliver or
cause to be delivered to Grantee the Option Repurchase Price or to the Owner the
Option Share Repurchase Price or the portion thereof that Issuer is not then
prohibited from so delivering under applicable law and regulation or as a
consequence of administrative policy.
(c) Issuer hereby undertakes to use its best efforts to obtain all required
regulatory and legal approvals and to file any required notices as promptly as
practicable in order to accomplish any repurchase contemplated by this Section
7. Nonetheless, to the extent that Issuer is prohibited under applicable law or
regulation, or as a consequence of administrative policy, from repurchasing any
Option and/or any Option Shares in full, Issuer shall promptly so notify Grantee
and/or the Owner and thereafter deliver or cause to be delivered, from time to
time, to Grantee and/or the Owner, as appropriate, the portion of the Option
Repurchase Price and the Option Share Repurchase Price, respectively, that it is
no longer prohibited from delivering, within five business days after the date
on which Issuer is no longer so prohibited; provided, however, that if Issuer at
any time after delivery of a notice of repurchase pursuant to Section 7(b) is
prohibited under applicable law or regulation, or as a consequence of
administrative policy, from delivering to Grantee and/or the Owner, as
appropriate, the Option Repurchase Price or the Option Share Repurchase Price,
respectively, in full, Grantee or the Owner, as appropriate, may revoke its
notice of repurchase of the Option or the Option Shares either in whole or in
part whereupon, in the case of a revocation in part, Issuer shall promptly (i)
deliver to Grantee and/or the Owner, as appropriate, that portion of the Option
Purchase Price or the Option Share Repurchase Price that Issuer is not
prohibited from delivering after taking into account any such revocation and
(ii) deliver, as appropriate, either (A) to Grantee, a new Agreement evidencing
the right of Grantee to purchase that number of shares of Common Stock equal to
the number of
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shares of Common Stock purchasable immediately prior to the delivery of the
notice of repurchase less the number of shares of Common Stock covered by the
portion of the Option repurchased or (B) to the Owner, a certificate for the
number of Option Shares covered by the revocation.
(d) Issuer shall not enter into any agreement with any party (other than
Grantee or a Grantee Subsidiary) for an Acquisition Transaction unless the other
party thereto assumes all the obligations of Issuer pursuant to this Section 7
in the event that Grantee or the Owner elects, in its sole discretion, to
require such other party to perform such obligations.
Section 8. (a) In the event that prior to an Exercise Termination Event,
Issuer shall enter into an agreement (i) to consolidate or merge with any
person, other than Grantee or a Grantee Subsidiary, and shall not be the
continuing or surviving corporation of such consolidation or merger, (ii) to
permit any person, other than Grantee or a Grantee Subsidiary, to merge into
Issuer and Issuer shall be the continuing or surviving corporation, but, in
connection with such merger, the then outstanding shares of Common Stock shall
be changed into or exchanged for stock or other securities of any other person
or cash or any other property or the then outstanding shares of Common Stock
shall after such merger represent less than 50% of the outstanding shares and
share equivalents of the merged company, or (iii) to sell or otherwise transfer
all or substantially all of its or any Issuer Subsidiary's assets to any person,
other than Grantee or a Grantee Subsidiary, then, and in each such case, the
agreement governing such transaction shall make proper provision so that the
Option shall, upon the consummation of such transaction and upon the terms and
conditions set forth herein, be converted into, or exchanged for, an option (the
"Substitute Option"), at the election of Grantee, of either (x) the Acquiring
Corporation (as defined below) or (y) any person that controls the Acquiring
Corporation (the Acquiring Corporation and any such controlling person being
hereinafter referred to as the Substitute Option Issuer).
(b) The Substitute Option shall be exercisable for such number of shares of
the Substitute Common Stock (as is hereinafter defined) as is equal to the
market/offer price (as defined in Section 7) multiplied by the number of shares
of the Issuer Common Stock for which the Option was theretofore exercisable,
divided by the Average Price (as is hereinafter defined). The exercise price of
the Substitute Option per share of the Substitute Common Stock (the "Substitute
Purchase Price") shall then be equal to the Option Price multiplied by a
fraction in which the numerator is the number of shares of the Issuer Common
Stock for which the Option was theretofore exercisable and the denominator is
the number of shares for which the Substitute Option is exercisable.
(c) The Substitute Option shall otherwise have the same terms as the Option,
PROVIDED that if the terms of the Substitute Option cannot, for legal reasons,
be the same as the Option, such terms shall be as similar as possible and in no
event less advantageous to Grantee, provided further that the terms of the
Substitute Option shall include (by way of example and not limitation)
provisions for the repurchase of the Substitute Option and Substitute Common
Stock by the Substitute Option Issuer on the same terms and conditions as
provided in Section 7.
(d) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (i) the continuing or surviving
corporation of a consolidation or merger with Issuer (if other than Issuer),
(ii) Issuer in a merger in which Issuer is the continuing or surviving
person, and (iii) the transferee of all or any substantial part of the
Issuer's assets (or the assets of any Issuer Subsidiary);
(ii) "Substitute Common Stock" shall mean the common stock issued by the
Substitute Option Issuer upon exercise of the Substitute Option; and
(iii) "Average Price" shall mean the average closing price of a share of
the Substitute Common Stock for the 360-day period immediately preceding the
consolidation, merger or sale in question, but in no event higher than the
closing price of the shares of the Substitute Common Stock on the day
preceding such consolidation, merger or sale; provided that if Issuer is the
issuer of the Substitute
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Option, the Average Price shall be computed with respect to a share of
common stock issued by Issuer, the person merging into Issuer or by any
company which controls or is controlled by such merging person, as Grantee
may elect.
(e) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 19.9% of the aggregate of the
shares of the Substitute Common Stock outstanding immediately prior to the
issuance of the Substitute Option. In the event that the Substitute Option would
be exercisable for more than 19.9% of the aggregate of the shares of Substitute
Common Stock but for this clause (e), the Substitute Option Issuer shall make a
cash payment to Grantee equal to the excess of (i) the value of the Substitute
Option without giving effect to the limitation in this clause (e) over (ii) the
value of the Substitute Option after giving effect to the limitation in the
clause (e). This difference in value shall be determined by a nationally
recognized investment banking firm selected by Grantee and the Substitute Option
Issuer.
Section 9. Notwithstanding Sections 2, 6 and 7, if Grantee has given the
notice referred to in one or more of such Sections, the exercise of the rights
specified in any such Section shall be extended (a) if the exercise of such
rights requires obtaining regulatory approvals (including any required waiting
periods) to the extent necessary to obtain all regulatory approvals for the
exercise of such rights, and (b) to the extent necessary to avoid liability
under Section 16(b) of the Securities Exchange Act by reason of such exercise;
PROVIDED that in no event shall any closing date occur more than 18 months after
the related Notice Date, and, if the closing date shall not have occurred within
such period due to the failure to obtain any required approval by the OTS or any
other Governmental Authority despite the best efforts to Issuer or the
Substitute Option Issuer, as the case may be, to obtain such approvals, the
exercise of the Option shall be deemed to have been rescinded as of the related
Notice Date. In the event (a) Grantee receives official notice that an approval
of the OTS or any other Governmental Authority required for the purchase and
sale of the Option Shares will not be issued or granted or (b) a closing date
has not occurred within 18 months after the related Notice Date due to the
failure to obtain any such required approval, Grantee shall be entitled to
exercise the Option in connection with the resale of the Option Shares pursuant
to a registration statement as provided in Section 6. Nothing contained in this
Agreement shall restrict Grantee from specifying alternative means of exercising
rights pursuant to Sections 2, 6 or 7 hereof in the event that the exercising of
any such rights shall not have occurred due to the failure to obtain any
required approval referred to in this Section 9.
Section 10. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has the requisite corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and consummation of the
transactions contemplated hereby have been duly approved by the Board of
Directors of Issuer and no other corporate proceedings on the part of Issuer
are necessary to authorize this Agreement or to consummate the transactions
so contemplated. This Agreement has been duly executed and delivered by, and
constitutes a valid and binding obligation of, Issuer, enforceable against
Issuer in accordance with its terms, except as enforceability thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws affecting the enforcement of creditors' rights generally
and except that the availability of the equitable remedy of specific
performance or injunctive relief is subject to the discretion of the court
before which any proceeding may be brought; and
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof
through the termination of this Agreement in accordance with its terms will
have reserved for issuance upon the exercise of the Option, that number of
shares of Common Stock equal to the maximum number of shares of Common Stock
at any time and from time to time issuable hereunder, and all such shares,
upon issuance pursuant hereto, will be duly authorized, validly issued,
fully paid, non-assessable, and will be delivered free and clear of all
claims, liens, encumbrances and security interests and not subject to any
preemptive rights.
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Section 11. (a) Neither of the parties hereto may assign any of its rights
or delegate any of its obligations hereunder to any other person without the
express written consent of the other party, except that Grantee may assign this
Agreement to a wholly owned subsidiary of Grantee and Grantee may assign its
rights hereunder in whole or in part after the occurrence of a Preliminary
Purchase Event; PROVIDED, HOWEVER, that until the date at which the OTS has
approved an application by Grantee under HOLA to acquire the shares of Common
Stock subject to the Option, Grantee may not assign its rights under the Option
except in (i) a widely dispersed public distribution, (ii) a private placement
in which no one party acquires the right to purchase in excess of 2% of the
voting shares of Issuer, (iii) an assignment to a single party (E.G., a broker
or investment banker) for the purpose of conducting a widely dispersed public
distribution on Grantee's behalf, or (iv) any other manner approved by the
Federal Reserve Board. The term "Grantee" as used in this Agreement shall also
be deemed to refer to Grantee's permitted assigns.
(b) Any assignment of rights of Grantee to any permitted assignee of Grantee
hereunder shall bear the restrictive legend at the beginning thereof
substantially as follows:
The transfer of the option represented by this assignment and the
related option agreement is subject to resale restrictions arising under
the Securities Act of 1933, as amended, and to certain provisions of an
agreement between Luther Burbank Corporation, a California corporation
which is registered as a savings and loan holding company and NHS
Financial Inc., a California corporation, which is registered as a
savings and loan holding company ("Issuer"), dated as of the day of
May, 1996. A copy of such agreement is on file at the principal office
of Issuer and will be provided to any permitted assignee of the Option
without change upon receipt by Issuer of a written request therefore.
It is understood and agreed that (i) the reference to the resale restrictions of
the Securities Act in the above legend shall be removed by delivery of
Substitute assignments without such reference if Grantee shall have delivered to
Issuer a copy of a letter from the staff of the SEC, or an opinion of counsel,
in form and substance satisfactory to Issuer, to the effect that such legend is
not required for purposes of the Securities Act; (ii) the reference to the
provisions of this Agreement in the above legend shall be removed by delivery of
substitute assignments without such reference if the Option has been sold or
transferred in compliance with the provisions of this Agreement and under
circumstances that do not require the retention of such reference, and (iii) the
legend shall be removed in its entirety if the conditions in the preceding
clauses (i) and (ii) are both satisfied. In addition, such assignments shall
bear any other legend as may be required by law.
Section 12. Each of Grantee and Issuer will use its reasonable efforts to
make all filings with, and to obtain consents of, all third parties and
Governmental Authorities necessary to the consummation of the transactions
contemplated by this Agreement, including, without limitation, if necessary,
applying to the OTS under HOLA and to state banking authorities for approval to
acquire the shares issuable hereunder.
Section 13. The parties hereto acknowledge that damages would be an
inadequate remedy for a breach of this Agreement by either party hereto and that
the obligations of the parties shall hereto be enforceable by either party
hereto through injunctive or other equitable relief. Both parties further agree
to waive any requirement for the securing or posting of any bond in connection
with the obtaining of any such equitable relief and that this provision is
without prejudice to any other rights that the parties hereto may have for any
failure to perform this Agreement.
Section 14. If any term, provision, covenant or restriction contained in
this Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that Grantee is not permitted to acquire, or Issuer is not permitted to
repurchase pursuant to Section 7, the full number of shares of Common Stock
provided in Section 1 (as adjusted pursuant hereto), it is the express intention
of Issuer to allow Grantee to acquire or to require Issuer to repurchase such
lesser number of shares as may be permissible, without any amendment or
modification hereof.
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Section 15. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
cable, telegram, telecopy or telex, or by registered or certified mail (postage
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Plan.
Section 16. This Agreement shall be governed by and construed in accordance
with the laws of the State of California.
Section 17. This Agreement may be executed in two or more counterparts,
each of which shall be deemed to be an original but all of which shall
constitute one and the same agreement and shall be effective at the time of
execution.
Section 18. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
Section 19. Except as otherwise expressly provided herein or in the Plan,
this Agreement contains the entire agreement between the parties with respect to
the transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereof, written or oral. The terms and conditions
of this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors and permitted assigns. Nothing in this
Agreement, expressed or implied, is intended to confer upon any party, other
than the parties hereto, and their respective successors and permitted assigns,
any rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided herein.
Section 20. Capitalized terms used in this Agreement and not defined herein
but defined in the Plan shall have the meanings assigned thereto in the Plan.
Section 21. Nothing contained in this Agreement shall be deemed to
authorize Issuer or Grantee to breach any provision of the Plan.
Section 22. In the event that any selection or determination is to be made
by Grantee or the Owner hereunder and at the time of such selection or
determination there is more than one Grantee or Owner, such selection shall be
made by a majority in interest of such Grantees or Owners.
Section 23. In the event of any exercise of the option by Grantee, Issuer
and such Grantee shall execute and deliver all other documents and instruments
and take all other action that may be reasonably necessary in order to
consummate the transactions provided for by such exercise.
Section 24. Except to the extent Grantee exercises the Option, Grantee
shall have no rights to vote or receive dividends or have any other rights as a
shareholder with respect to shares of Common Stock covered hereby.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Stock Option
Agreement to be executed on its behalf by their officers thereunto duly
authorized, all as of the date first above written.
LUTHER BURBANK CORPORATION
By: /s/ VICTOR S. TRIONE
--------------------------------------
Name: Victor S. Trione
Title: Chairman and Chief Executive
Officer
By: /s/ GEORGE MANCINI
--------------------------------------
Name: George Mancini
Title: President and Chief Operating
Officer
NHS FINANCIAL INC.
By: /s/ JAMES W. BARNETT
--------------------------------------
Name: James W. Barnett
Title: Chairman, President and Chief
Executive Officer
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<PAGE>
APPENDIX C -- OPINION LETTER
<PAGE>
Hovde Financial, Inc.
I N V E S T M E N T B A N K E R S & F I N A N C I A L A D V I S O R S
August 12, 1996
Board of Directors
NHS Financial, Inc.
New Horizons Savings
and Loan Association
1050 Fourth Street
San Rafael, CA 94901
Dear Directors:
NHS Financial, Inc. ("NHS Financial") and New Horizons Savings and Loan
Association ("New Horizons") have entered into an Agreement and Plan of
Reorganization ("Agreement") with Luther Burbank Corporation ("LBC") and Luther
Burbank Savings and Loan Association ("Luther Burbank") in the form attached
hereto. As set forth in the Agreement, each share of NHS Financial will be
converted into the right to receive $11.50 in cash from LBC, subject to certain
conditions contained in the Agreement ("Merger Consideration"). Pursuant to the
Agreement, NHS Financial has entered into a separate Stock Option Agreement
("Stock Option Agreement") under which NHS Financial has agreed to grant to LBC
an option to purchase up to 19.9 percent of the outstanding shares of NHS
Financial common stock at the time of exercise at a option price of $9.50 per
share. Other terms of the merger are more fully set forth in the Agreement.
Hovde Financial, Inc. ("Hovde") specializes in providing investment banking
and financial advisory services to commercial banks and thrift institutions. Our
principals are experienced in the independent valuation of securities in
connection with negotiated underwritings, subscription and community offerings,
private placements, mergers and acquisition transactions and recapitalizations.
Pursuant to the terms of a Consulting Agreement dated October 11, 1995, between
New Horizons and Hovde, Hovde was engaged to assist the Board of Directors in
exploring various strategic options, including a potential sale of New Horizons
to a larger financial institution. Therefore, we are familiar with the
operations of New Horizons and NHS Financial, having acted as their financial
advisor in connection with the proposed transaction, and having participated in
the negotiation leading to the Agreement.
During the course of our engagement, we reviewed and analyzed material
having a bearing upon the operating and financial condition of NHS Financial,
New Horizons and Luther Burbank as well as material prepared in connection with
the proposed transaction, including: the Agreement and Stock Option Agreement;
certain confidential and publicly available information concerning NHS Financial
and New Horizons, including the consolidated financial statements of New
Horizons for each of the three years ending December 31, 1995, as well as recent
internal reports and regulatory filings for the quarter ending June 30, 1996;
the nature and terms of recent merger transactions involving thrifts and thrift
holding companies that we consider relevant; and financial and other information
provided to us by the management of NHS Financial, New Horizons and Luther
Burbank. In addition, we have conducted meetings with members of the senior
management of NHS Financial and New Horizons for the purpose of reviewing the
future prospects of New Horizons. We also performed a discounted cash flow
analysis to determine a range of present values per share of the NHS Financial's
common stock, assuming New Horizons continued to operate as a stand-alone
entity. In addition, we have taken into account our assessment of general
economic, regulatory, market and financial conditions and our experience in
similar transactions as well as our overall knowledge of the thrift industry and
our general experience in securities valuations. Finally, as part of our
engagement, we solicited and reviewed competitive bids and other information
from parties which we believed to be likely acquirers for New Horizons.
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In rendering this opinion, we have assumed, without independent
verification, the accuracy and completeness of the financial and other
information and representations contained in the materials provided by NHS
Financial, New Horizons and Luther Burbank, and in discussions with NHS
Financial's and New Horizons' management.
Based upon the foregoing and our experience as investment bankers, we are of
the opinion that, as of the date hereof, the Merger Consideration to be received
by the shareholders of NHS Financial is fair from a financial point of view.
Sincerely,
[SIGNATURE]
HOVDE FINANCIAL, INC.
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APPENDIX D - CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW
<PAGE>
CHAPTER 13
DISSENTERS' RIGHTS
SECTION1300. SHAREHOLDER IN SHORT-FORM MERGER; PURCHASE AT FAIR MARKET VALUE;
"DISSENTING SHARES"; "DISSENTING SHAREHOLDER"
(a) If the approval of the outstanding shares (Section 152) of a corporation is
required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in
a short form merger may, by complying with this chapter, require the
corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are
dissenting shares as defined in subdivision (b). The fair market value shall
be determined as of the day before the first announcement of the terms of
the proposed reorganization or short-form merger, excluding any appreciation
or depreciation in consequence of the proposed action, but adjusted for any
stock split, reverse stock split, or share dividend which becomes effective
thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come within
all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100
or (B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this
provision does not apply to any shares with respect to which there exists
any restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of shareholders
entitled to vote on the reorganization and (A) were not voted in favor of
the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were
voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that
subparagraph (A) rather than subparagraph (B) of this paragraph applies
in any case where the approval required by Section 1201 is sought by
written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder of
dissenting shares and includes a transferee of record.
SECTION1301. NOTICE TO HOLDER OF DISSENTING SHARES OF REORGANIZATION APPROVAL;
DEMAND FOR PURCHASE OF SHARES; CONTENTS OF DEMAND
(a) If, in the case of a reorganization, any shareholders of a corporation have
a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a
notice of the approval of the reorganization by its outstanding shares
(Section 152) within 10 days after the date of such approval, accompanied by
a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value
of the dissenting shares, and
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a brief description of the procedure to be followed if the shareholder
desires to exercise the shareholder's right under such sections. The
statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of
Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase the
shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder
in cash of their fair market value. The demand is not effective for any
purpose unless it is received by the corporation or any transfer agent
thereof (1) in the case of shares described in clause (i) or (ii) of
paragraph (1) of subdivision (b) of Section 1300 (without regard to the
provisos in that paragraph), not later than the date of the shareholders'
meeting to vote upon the reorganization, or (2) in any other case within 30
days after the date on which the notice of the approval by the outstanding
shares pursuant to subdivision (a) or the notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record by
the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such
price.
SECTION1302. STAMPING OR ENDORSING DISSENTING SHARES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION1303. DISSENTING SHAREHOLDER ENTITLED TO AGREED PRICE WITH INTEREST
THEREON; WHEN PRICE TO BE PAID
(a) If the corporation and the shareholder agree that the shares are dissenting
shares and agree upon the price of the shares, the dissenting shareholder is
entitled to the agreed price with interest thereon at the legal rate on
judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market value
of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in
the case of certificated securities, subject to surrender of the
certificates therefor, unless provided otherwise by agreement.
SECTION1304. ACTION BY DISSENTERS TO DETERMINE WHETHER SHARES ARE DISSENTING
SHARES OR FAIR MARKET VALUE OF DISSENTING SHARES OR BOTH; JOINDER OF
SHAREHOLDERS; CONSOLIDATION OF ACTIONS; DETERMINATION OF ISSUES; APPOINTMENT OF
APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152)
or notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior
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<PAGE>
court of the proper county praying the court to determine whether the shares
are dissenting shares or the fair market value of the dissenting shares or
both or may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined as
defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is
in issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION1305. DUTY AND REPORT OF APPRAISERS; COURT'S, CONFIRMATION OF REPORT;
DETERMINATION OF FAIR MARKET VALUE BY COURT; JUDGMENT, AND PAYMENT; APPEAL;
COSTS OF ACTION
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time
fixed by the court, the appraisers, or a majority of them, shall make and
file a report in the office of the clerk of the court. Thereupon, on the
motion of any party, the report shall be submitted to the court and
considered on such evidence as the court considers relevant. If the court
finds the report reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the
court, the court shall determine the fair market value of the dissenting
shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market
value of each dissenting share multiplied by the number of dissenting share
which any dissenting shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest thereon at
the legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to uncertificated
securities and, with respect to certificated securities, only upon the
endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the appraisers
to be fixed by the court, shall be assessed or apportioned as the court
considers equitable, but, if the appraisal exceeds the price offered by the
corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and
interest at the legal rate on judgments from the date of compliance with
Sections 1300, 1301 and 1302 if the value awarded by the court for the
shares is more than 125 percent of the price offered by the corporation
under subdivision (a) of Section 1301).
SECTION1306. PREVENTION OF PAYMENT TO HOLDERS OF DISSENTING SHARES OF FAIR
MARKET VALUE: EFFECT
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceedings, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION1307. DISPOSITION OF DIVIDENDS UPON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by corporation therefor.
SECTION1308. RIGHTS AND PRIVILEGES OF DISSENTING SHARES: WITHDRAWAL OF DEMAND
FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
D-3
<PAGE>
SECTION1309. WHEN DISSENTING SHARES LOSE THEIR STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) the corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this
chapter all necessary expenses incurred in such proceedings and
reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into
shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending
action as provided in Section 1304, within six months after the date on
which notice of the approval by the outstanding shares or notice pursuant
to subdivision (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION1310. SUSPENSION OF PROCEEDINGS FOR COMPENSATION OR VALUATION PENDING
LITIGATION
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SECTION1311. SHARES TO WHICH CHAPTER INAPPLICABLE
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
SECTION1312. ATTACK ON VALIDITY OF REORGANIZATION OR SHORT-FORM MERGER; RIGHTS
OF SHAREHOLDERS; BURDEN OF PROOF
(a) No shareholder of a corporation who has a right under this chapter to demand
payment of cash for the shares held by the shareholder shall have any right
at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted
in favor thereof; but any holder of shares of a class whose terms and
provisions specifically set forth the amount to be paid in respect to them
in the event of a reorganization or short-form merger is entitled to payment
in accordance with those terms and provisions or, if the principal terms of
the reorganization are approved pursuant to subdivision (b) of Section 1202,
is entitled to payment in accordance with the terms and provisions of the
approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is directly
or indirectly controlled by, or under common control with, another party to
the reorganization or short-form merger, subdivision (a) shall not apply to
any shareholder of such party who has not demanded payment of cash for such
shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or
short-form merger or to have the reorganization or short-form merger set
aside or rescinded, the shareholder shall not thereafter have any right to
demand payment of cash for the shareholder's shares pursuant to this
chapter. The court in any action attacking the validity of the
reorganization or short-form merger or to have the reorganization or
short-form merger set aside or rescinded shall not restrain or enjoin the
consummation of the transaction except upon 10 days' prior
D-4
<PAGE>
notice to the corporation and upon a determination by the court that clearly
no other remedy will adequately protect the complaining shareholder or the
class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is directly
or indirectly controlled by, or under common control with, another party to
the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that
the transaction is just and reasonable as to the shareholders of the
controlled party, and (2) a person who controls two or more parties to a
reorganization shall have the burden of proving that the transaction is just
and reasonable as to the shareholders of any party so controlled.
D-5
<PAGE>
APPENDIX E --
NHS FINANCIAL, INC. --
FORM 10-K, FINANCIAL STATEMENTS AND FORM 10-Q
<PAGE>
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
<TABLE>
<S> <C>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
</TABLE>
COMMISSION FILE NUMBER: 0-27124
------------------------
NHS FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 68-0359326
(State of (I.R.S. Employer
incorporation) Identification
Number)
1050 FOURTH STREET
SAN RAFAEL, 94901
CALIFORNIA
(Address of principal (Zip Code)
executive office)
</TABLE>
Registrant's telephone number: (415) 257-3783
------------------------
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par
value.
------------------------
Indicate by check mark whether 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 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 (Section229.405 of this chapter) 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]
Aggregate market value of voting stock held by non-affiliates on March 15,
1996 approximates $19,366,147. (See: "Item 5"):
Number of Shares of Common Stock Outstanding as of March 15, 1996: 2,522,827
DOCUMENTS INCORPORATED BY REFERENCE
Part II incorporates by reference from Registrant's Audited Financial
Statements and Independent Auditors' Report dated February 15, 1996 for fiscal
year ended December 31, 1995. Part III incorporates by reference from portions
of the definitive Proxy Statement to be filed not later than one hundred twenty
(120) days after the end of the fiscal year covered by this report. Part IV
incorporates by reference from Registrant's Form 10 Registration Statement.
The index to Exhibits appears on page 30.
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
<PAGE>
NHS FINANCIAL, INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NUMBER DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
PART I.
1. Business
General........................................................................................... E-3
Lending Activities................................................................................ E-4
Securities........................................................................................ E-14
Deposit Activities................................................................................ E-15
Borrowings........................................................................................ E-16
Competition....................................................................................... E-18
Employees......................................................................................... E-18
Regulation........................................................................................ E-20
2. Properties........................................................................................ E-29
3. Legal Proceedings................................................................................. E-29
4. Submission of Matters to a Vote of Security Holders............................................... E-29
PART II.
5. Market for Registrant's Common Equity and Related Stockholder Matters............................. E-30
6. Selected Financial Data........................................................................... E-30
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. E-30
8. Financial Statements and Supplementary Data....................................................... E-30
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. E-30
PART III.
10. Directors and Executive Officers of the Registrant................................................ E-31
11. Executive Compensation............................................................................ E-31
12. Security Ownership of Certain Beneficial Owners and Management.................................... E-31
13. Certain Relationships and Related Transactions.................................................... E-31
PART IV.
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................. E-32
SIGNATURES........................................................................................ E-33
</TABLE>
E-2
<PAGE>
PART I
ITEM 1. BUSINESS OF REGISTRANT
GENERAL
On November 1, 1995, NHS Financial, Inc. (the "Company"), a California
Corporation, became the holding company for New Horizons Savings and Loan
Association (Association) as a result of a reorganization of the Association
into a holding company structure. Shareholders of the Association exchanged
their shares for shares of the Company on a share-for-share basis. As used
hereafter, the "Company" means the Company and its consolidated subsidiary,
unless the context indicates otherwise.
The Association is a state-chartered capital stock savings and loan
association, which was incorporated under the laws of the State of California on
February 28, 1978. The Association received its license to do business as a
savings and loan association on September 22, 1980.
The principal business of the Company is to attract deposits from the
general public and invest those funds in residential, construction and, to a
lesser extent, commercial real estate loans. The Company's geographical area for
attracting deposits and making real estate loans is the San Francisco Bay Area,
concentrating in Marin and Sonoma counties, and the City and County of San
Francisco During 1995, the Company, conducted its business in three facilities;
one located in San Rafael, California, another in Mill Valley, California and
the third in Novato, California.
The Company's operations are significantly influenced by general economic
conditions, the regional real estate market and by related monetary, fiscal and
regulatory policies of the federal government. Deposit flows and cost of funds
are influenced by interest rates on competing investments and general market
rates of interest. Lending activities are affected by the demand for mortgage
financing and the types of loans the Company offers, which in turn are affected
by the interest rates at which such financing may be offered and other factors
affecting the supply of housing and availability of funds.
The Company engages primarily in real estate lending for its own portfolio,
specializing in short-term fixed rate and longer term adjustable rate real
estate loans. The Company attracts and maintains deposit funds by offering
competitive interest rates and providing excellent customer service. The Company
also uses Federal Home Loan Bank of San Francisco (FHLBSF) advances and other
short term borrowings, such as reverse repurchase agreements (reverse repos) as
a supplementary source of funds.
[This space intentionally left blank]
E-3
<PAGE>
LENDING ACTIVITIES
The Company's principal investment activity has been and continues to be the
origination of real estate loans. The Company's lending activities consist
primarily of making loans secured by first or second liens on residential and
other real estate. These loans are made in connection with purchases,
refinancing, construction or improvement of property located primarily in the
San Francisco Bay Area, concentrating in Marin, Sonoma and San Francisco
Counties. Historically, the Company has relied heavily upon its ability to
provide customized loans for homes and for home construction. The economy of the
Bay Area counties is varied and includes industries that are industrial,
professional and agricultural, providing a balanced deposit and mortgage lending
market. The Company's loans are primarily obtained through a selected group of
independent loan brokers. Loan applications are also obtained from existing
customers and other individuals. The Company has no foreign or out of state
loans in its portfolio.
The regulations of the Office of Thrift Supervision (OTS), and the
California Department of Savings and Loan (CDSL) prescribe the nature, amount,
terms and security for loans made by the Company, including the provisions for
interest rate caps on adjustable rate mortgages (ARMs). The Financial
Institutions Reform, Recovery and Enforcement Act (FIRREA) further regulates
lending activity by setting new lending limits on commercial real estate loans
and on loans made to one borrower. (See: "Regulation")
It is the Company's practice to have all loans in excess of a stated amount
approved by a loan committee consisting of members of the Board of Directors of
the Company or, in the case of larger loans, approved by the entire Board of
Directors. It is the Company's policy to require an ALTA lender's policy of
title insurance, fire and casualty insurance and, when applicable, flood
insurance on the properties which are pledged as security for its loans.
The Company makes loans on the basis of the borrower's credit worthiness,
ability to repay the debt and the security of the encumbered real property. Upon
receipt of the loan application, a credit report is ordered to verify specific
information relating to the loan applicant's employment, income and credit
standing. An appraisal of the real estate intended to secure the proposed loan
is undertaken by an independent appraiser approved by the Company, either
employed by the Company or through an independent agent. In addition, financial
statements are requested of the borrower to determine the borrower's current
financial status.
With certain exceptions, it is the Company's policy, as established by its
Board of Directors to make loans based upon loan-to-value ratios of up to 75-80%
on real estate purchases, 70-75% on refinance and construction loans, and 50% on
land loans. If a loan becomes delinquent and the delinquency is not cured
through the Company's normal collection procedures, which include telephone
calls and "breach" letters, foreclosure may be initiated. The Company may obtain
title to the property securing the loan at the foreclosure sale or take a
deed-in-lieu of foreclosure. Such property is then treated as "real estate
owned" and is held for sale. Upon sale of the real estate owned, the Company
may, on occasion, provide financing either by a loan conforming to normal loan
requirements or with a "loan to facilitate" on terms more favorable to the
borrower than normally offered. It is the Company's policy to dispose promptly
of properties so acquired in order to avoid or mitigate loss.
The Company principally originates loans with adjustable rates. Fixed rate
real estate loans are generally made with terms of 5 years or less. Shorter term
fixed rate loans include construction, swing, and land loans and generally carry
terms of 12 to 18 months. In addition, the Company's construction loans are
primarily made on single or in-fill lots as opposed to tract developments or
subdivisions. The Company uses the FHLB Eleventh District Cost of Funds Index
(COFI) for its ARMs as an index upon which the interest rate adjusts
semi-annually. The Federal Reserve Board's Regulation Z (Truth in Lending)
requires ARM lenders to establish a lifetime limitation on the maximum interest
rate applicable during the term of an ARM loan for any ARM made on or after
December 9, 1987. The maximum rate which may be charged is within the lender's
discretion. The Company's ARMs normally provide for a maximum interest rate of
5% over the initial annual interest rate as well as a minimum rate of 5% below
the initial rate.
E-4
<PAGE>
The following Table One is a summary of the Company's gross loan portfolio
by property category (before deductions for construction loans in process,
deferred loan fees, and allowance for loan losses) at December 31:
TABLE ONE
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family....................... $ 157,301 145,002 146,666 138,019 117,646
Multi-family............................. 43,184 39,186 37,859 38,153 27,414
Construction............................. 29,722 27,643 29,585 43,303 28,048
Commercial............................... 39,586 40,034 38,328 34,338 30,968
Land..................................... 4,812 4,866 7,240 6,278 5,105
---------- ---------- ---------- ---------- ----------
274,605 256,731 259,678 260,091 209,181
Loans secured by savings accounts.......... 337 292 408 483 272
---------- ---------- ---------- ---------- ----------
$ 274,942 257,023 260,086 260,574 209,453
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
For additional information on the composition of the Company's loan
portfolio, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition -- Loans Receivable."
[This space intentionally left blank]
E-5
<PAGE>
MATURITY AND RATE SENSITIVITY
The Company is and has been sensitive to the problems of the savings and
loan industry caused by lending long term at a fixed rate when the savings
interest rates paid are susceptible to rapid change. Therefore, the Board of
Directors has established a policy of making long term loans with adjustable
rates. As of December 31, 1995, approximately 87% of the Company's loan
portfolio consisted of ARMs.
On residential loans, the Company will, with an adjustable rate, lend for a
term of up to 30 years. However, because many borrowers refinance or pay off
their loans, loans normally remain outstanding for a shorter period than the
contractual time. At December 31, 1995, 88% of the loans originated in 1995 were
outstanding, 80% of the loans originated in 1994 were outstanding and 51% of the
loans originated in 1993 were outstanding.
The following Table Two sets forth certain information at December 31, 1995,
regarding the dollar amount of loans maturing in the Company's portfolio based
on their contractual terms to maturity, unadjusted for prepayments. Adjustable
rate loans are included in the period in which the loan is scheduled to mature.
TABLE TWO
<TABLE>
<CAPTION>
DUE IN ONE
DUE WITHIN TO FIVE DUE AFTER
ONE YEAR YEARS FIVE YEARS TOTAL
----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
One-to-four family........................................... $ 2,384 1,066 153,851 157,301
Multi-family................................................. 958 647 41,579 43,184
Construction................................................. 29,722 -- -- 29,722
Commercial................................................... 4,675 9,127 25,784 39,586
Land......................................................... 2,825 1,691 296 4,812
Loans secured by Savings accounts.............................. 337 -- -- 337
----------- ----------- ---------- ----------
$ 40,901 12,531 221,510 274,942
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Total amount of all loans due after December 31, 1996 with:
Fixed interest rates..................................... $ 1,542
Adjustable interest rates................................ 232,499
-----------
$ 234,041
-----------
-----------
</TABLE>
Generally, owner-occupied one-to-four family construction loans have a
provision to roll to a 30 year adjustable rate mortgage upon completion of
construction. Construction loans other than owner occupied one-to-four family,
generally contain no such provision.
[This space intentionally left blank]
E-6
<PAGE>
YIELD AND PERFORMANCE ANALYSIS
The following Table Three sets forth the average interest-earning assets and
interest-bearing liabilities, interest income and expense and average interest
rates during the years ended December 31, 1995, 1994 and 1993.
TABLE THREE
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------- ------------------------------- -------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE (3) INTEREST RATE BALANCE (3) INTEREST RATE BALANCE (3) INTEREST RATE
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1)(2)........... $252,141 20,589 8.17% 239,247 18,355 7.67% 243,185 20,843 8.57%
Mortgage-backed
securities............ 14,365 889 6.19% 16,796 953 5.67% 27,765 1,314 4.73%
Other interest-earning
assets................ 12,600 780 6.19% 7,190 321 4.46% 5,737 194 3.38%
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
Total interest-earning
assets.................. 279,106 22,258 7.96% 263,233 19,629 7.46% 276,687 22,351 8.08%
-------- ------ -------- ------ -------- ------
Non-earning assets..... 7,862 4,650 6,461
----------- ----------- -----------
Total average
assets.............. $286,968 267,883 283,148
----------- ----------- -----------
----------- ----------- -----------
Interest-bearing
liabilities:
Customer deposits...... $242,615 13,701 5.65% 217,685 9,033 4.15% 220,751 9,527 4.32%
FHLBSF Advances........ 16,965 913 5.38% 22,200 1,071 4.82% 24,021 951 3.96%
Other borrowings....... -- -- --% 2,534 100 3.96% 15,136 526 3.47%
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
Total interest-bearing
liabilities............. 259,580 14,614 5.63% 242,419 10,204 4.21% 259,908 11,004 4.23%
-------- ------ -------- ------ -------- ------
Non-interest bearing
liabilities........... 2,961 2,213 2,581
Stockholders' equity... 24,427 23,251 20,659
----------- ----------- -----------
Average liabilities
and equity.......... $286,968 267,883 283,148
----------- ----------- -----------
----------- ----------- -----------
Net interest income and
spread (4).............. 7,644 2.33% 9,425 3.25% 11,347 3.85%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
Net margin on
interest-earning assets
(5)..................... 2.73% 3.58% 4.10%
------ ------ ------
------ ------ ------
</TABLE>
- ------------------------------
(1) Average loans exclude non-accrual loans and are net of allowances for loan
losses, loans in process and deferred loan origination fees.
(2) Loan interest income includes the amortization of deferred loan origination
fees (in thousands) of $823, $914 and $1,317 in 1995, 1994 and 1993,
respectively.
(3) Average balances for 1995 are daily average balances; for 1994 and 1993,
average balances are computed from month-end balances.
(4) Net interest spread is computed as the difference between yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin is computed as net interest income divided by
interest-earning assets.
The table above depicting the historical yield-cost spread may not be
indicative of future trends in the interest rate spread and margin. For further
discussion on net interest income and spread, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Net Interest Income".
LOAN ORIGINATIONS, PURCHASES AND SALES
The Company originates loans primarily for its own portfolio, but has in the
past occasionally engaged in the sale of loan participations in the secondary
market. Loans sold are adjustable rate loans, and the Company's decision to sell
loans is based upon market opportunities that permit loan sales on terms
favorable to the Company. Loan sales are private sales to other financial
institutions and are made without recourse. The Company does not use loan sales
as a source of liquidity.
E-7
<PAGE>
The Company has purchased real estate loans from other financial
institutions and during 1995 and 1994, $7.3 million, and $3.8 million in
participations and loan pools were purchased. At December 31, 1995, 1994, and
1993, the Company held $16.0 million, $9.3 million, and $6.0 million of
purchased loans in its portfolio.
No loans were sold in 1995, 1994 or 1993. The Company generally retains the
servicing on loans sold, for which it receives a servicing fee. The Company was
servicing interests in loans for others aggregating $2.9 million, $4.9 million,
and $5.7 million, at December 31, 1994, 1993 and 1992, respectively.
Table Four below profiles mortgage loan origination, purchase and repayment
activity for the years ended December 31, 1995, 1994 and 1993.
TABLE FOUR
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loan originations:
One-to-four family......................................... $ 15,352 27,408 29,945
Multi-family............................................... 6,044 4,512 2,986
Construction............................................... 27,838 24,939 28,002
Commercial................................................. 1,995 4,126 4,127
Land....................................................... 961 666 2,099
--------- --------- ---------
Total mortgage loans originated.......................... 52,190 61,651 67,159
Loans and participations purchased........................... 7,257 3,802 40
Loans and participations sold................................ -- -- --
Principal repayments, including prepayments on mortgage
loans....................................................... (38,582) (67,882) (61,102)
Transfer to foreclosed real estate........................... (1,684) (1,030) (1,237)
Other increases (decreases).................................. (1,160) 938 1,932
--------- --------- ---------
Net loan activity............................................ $ 18,021 (2,521) 6,792
--------- --------- ---------
--------- --------- ---------
</TABLE>
For additional information on the Company's loan portfolio, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Loans Receivable."
[This space intentionally left blank]
E-8
<PAGE>
DELINQUENT, NONPERFORMING LOANS, AND REAL ESTATE OWNED
DELINQUENT LOANS. When a borrower fails to make required payments on a loan
within 30 days of the due date, the loan is considered contractually delinquent.
Table Five below shows the amount of loan delinquencies by loan type at December
31.
TABLE FIVE
<TABLE>
<CAPTION>
NUMBER OF DAYS DELINQUENT
--------------------------------------------
30-59 60-89 90 OR MORE TOTAL
--------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1995
One-to-four family.................................................. $ 6,761 1,747 2,385 10,893
Multi-family........................................................ 262 867 -- 1,129
Construction and land............................................... 728 204 1,624 2,556
Commercial real estate.............................................. 1,722 609 -- 2,331
--------- --------- ----------- ---------
Total............................................................. $ 9,473 3,427 4,009 16,909
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Delinquencies to Gross Loans...................................... 3.45% 1.25% 1.46% 6.15%
1994
One-to-four family.................................................. $ 6,668 1,185 2,162 10,015
Multi-family........................................................ -- -- -- --
Construction and land............................................... 374 -- -- 374
Commercial real estate.............................................. 1,188 619 -- 1,807
--------- --------- ----------- ---------
Total............................................................. $ 8,230 1,804 2,162 12,196
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Delinquencies to Gross Loans...................................... 3.20% 0.70% 0.84% 4.75%
1993
One-to-four family.................................................. $ 3,587 2,614 2,857 9,058
Multi-family........................................................ -- -- -- --
Construction and land............................................... -- 159 114 273
Commercial real estate.............................................. 1,511 -- 1,004 2,515
Total............................................................. $ 5,098 2,773 3,975 11,846
--------- --------- ----------- ---------
Delinquencies to Gross Loans...................................... 1.96% 1.07% 1.53% 4.55%
--------- --------- ----------- ---------
--------- --------- ----------- ---------
1992
One-to-four family.................................................. $ 5,452 2,739 2,035 10,226
Multi-family........................................................ -- -- 697 697
Construction and land............................................... 607 -- 44 651
Commercial real estate.............................................. 436 -- 1,179 1,615
--------- --------- ----------- ---------
Total............................................................. $ 6,495 2,739 3,955 13,189
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Delinquencies to Gross Loans...................................... 2.49% 1.05% 1.52% 5.06%
1991
One-to-four family.................................................. $ 7,568 2,774 3,076 13,418
Multi-family........................................................ -- -- 484 484
Construction and land............................................... 2,433 -- 880 3,313
Commercial real estate.............................................. -- -- 3,178 3,178
--------- --------- ----------- ---------
Total............................................................. $ 10,001 2,774 7,618 20,393
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Delinquencies to Gross Loans...................................... 4.77% 1.32% 3.64% 9.74%
</TABLE>
For additional information on the Company's delinquent loans, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Delinquent Loans".
E-9
<PAGE>
NONACCRUAL LOANS. It is the Company's policy to put loans that are
contractually delinquent 90 days or more on non-accrual status. Management
reviews other loans less than 90 days contractually delinquent. When the
collection of interest and principal payments on a loan appears unlikely the
loan is placed on non-accrual status. Interest income deemed uncollectible is
reversed. Income is subsequently recognized only to the extent cash payments are
received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is in accordance with the loan terms,
at which time the loan is returned to accrual status.
IMPAIRED LOANS. The Company considers a loan to be impaired when, based
upon the evaluation of the credit worthiness, cash flows and financial condition
of the borrower, and the condition and appraised value of the collateral, it is
unlikely that the Company will be able to collect all the principal and interest
due under the contractual terms of the loan. The Company provides, through a
charge to income, for estimated losses on impaired loans when fair value,
including consideration of potential holding and disposition costs, exceeds the
carrying value of the loan. For additional information on nonperforming assets
and the ratios of nonperforming assets to total assets see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Financial Condition -- Nonperforming Assets" and Note 4 of the Notes to
Consolidated Financial Statements.
REAL ESTATE OWNED. Real estate acquired through foreclosure is recorded at
estimated fair value (including consideration of costs of holding and
disposition) at the time of foreclosure. Valuations are periodically performed
and related adjustments, if any, are made as a charge to income when the
carrying value exceeds fair value. At December 31, 1995, the Company's real
estate owned portfolio had an aggregate fair market value of $1.7 million and
consisted of four residential properties, two parcels of land, and one
multi-family and commercial mixed use property. At December 31, 1994, the
Company's real estate owned portfolio had an aggregate fair market value of $1.3
million and consisted of four residential properties, four parcels of land, and
two commercial properties. At December 31, 1993, the Association's real estate
owned portfolio had an aggregate fair market value of $.8 million and consisted
of one residential property, five parcels of land, and two commercial
properties. For additional information regarding real estate owned, see Note 5
of the Notes to Consolidated Financial Statements.
The following Table Six sets forth information with respect to the Company's
nonperforming assets at December 31, for the years indicated.
TABLE SIX
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
BALANCE BALANCE BALANCE BALANCE BALANCE
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis............. $ 4,009 2,162 3,975 3,955 7,618
Accruing loans contractually past due 90 days or
more.................................................. -- -- -- -- --
Real estate owned, net................................. 1,653 1,271 779 2,671 1,133
--------- --------- --------- --------- ---------
Totals................................................. $ 5,662 3,433 4,754 6,626 8,751
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Percentage of non-performing assets to total assets.... 1.92% 1.30% 1.73% 2.42% 4.04%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Foregone interest...................................... $ 433 312 380 662 582
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Foregone interest is the gross interest income that would have been recorded
if the loans had been current in accordance with their original terms (i.e.,
total interest that was not accrued since the loans became nonperforming).
Restructured loans were $3.9 million, $4.2 million and $1.7 million at
December 31, 1995, 1994 and 1993, respectively. There were no restructured loans
outstanding as of December 31, 1992 or 1991. Interest income that would have
been recognized on the restructured loans had the loans performed in accordance
E-10
<PAGE>
with their original terms was $323,706 in 1995, $322,549 in 1994 and $226,932 in
1993. Interest income recognized on restructured loans was $317,116 in 1995,
$268,352 in 1994 and $102,000 in 1993. Restructured loans are not included in
the above nonperforming assets table as the borrowers are making their payments
in accordance with the restructured loan terms.
ASSET CLASSIFICATION AND VALUATION ALLOWANCES
Under federal regulations, each insured institution is required to classify
its assets on a regular basis. In addition, in connection with examinations of
insured institutions, OTS examiners have authority to identify problem assets
and, if appropriate, direct the Company to classify them. Under the regulations,
assets are subject to evaluation under a classification system with three
categories: substandard, doubtful and loss. The regulations have also created a
special mention category. This category includes assets which do not currently
expose an insured institution to a sufficient degree of risk to warrant
classification, but do possess credit deficiencies or potential weaknesses
deserving management's close attention.
At December 31, 1995, the percentage of classified assets to total assets
increased to 6.38% from 3.87% at December 31, 1994. At December 31, 1995, $18.8
million was classified as substandard compared to $9.5 million at December 31,
1994. There were no assets classified as doubtful or loss at December 31, 1995
or 1994. The increase in classified assets from year-end 1994 to year-end 1995
by almost 50% reflected the related increase in delinquencies during 1995 and
the Company's adoption in 1995 of more stringent technical criteria for
identifying non-delinquent classified assets.
In addition to providing general valuation allowances for unclassified
assets, the Company provides general valuation allowances based on estimates of
inherent losses associated with it loan portfolio. Additionally, general
valuation allowances are provided for assets classified as substandard or
doubtful. If an asset or portion thereof is classified as loss the Company must
either establish a specific allowance for loss in the amount of 100% of the
portion of the asset classified as a loss or, in the alternative, charge off
such amount. The Company's policy is to use the charge off method when the
amount of loss is estimable. General valuation allowances established to cover
possible losses related to substandard or doubtful classification may be
included in determining an institution's risk-based regulatory capital (subject
to limitations), while specific valuation allowances for loan losses do not
qualify as regulatory capital.
The Company establishes general valuation allowances for potential loan and
real estate losses based upon management's review and analysis of the portfolio.
The adequacy of such allowances is periodically reviewed by management, with
adjustments charged to current earnings. The factors used by management in
determining the adequacy of the allowance include review of existing risks in
the loan portfolio, prevailing economic conditions, regular examinations and
evaluations of the quality of loans by management and by regulatory authorities,
historical loss experience and the Company's underwriting practices.
For additional discussion on the Company's level of loss allowances compared
to nonperforming assets, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition -- Allowance for
Losses."
[This space intentionally left blank]
E-11
<PAGE>
The following Table Seven sets forth an analysis of the Company's allowance for
loan and real estate losses and the related loss experience for the periods
indicated.
TABLE SEVEN
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for Loan Losses:
Balance at beginning of year.................... $ 3,412 $ 3,993 $ 4,692 $ 1,656 $ 1,317
Provision for losses.......................... 2,003 -- 231 3,135 588
Charge-offs: (1)
One-to-four family.......................... (478) (215) (239) (99) (74)
Multi-family................................ (673) -- -- -- --
Construction................................ (267) -- (26) -- --
Commercial.................................. (489) (112) (665) -- (100)
Land........................................ -- (280) -- -- (75)
------------ ------ ------ ------ ------
Total charge-offs......................... (1,907) (607) (930) (99) (249)
------------ ------ ------ ------ ------
Recoveries: (2)
One-to-four family.......................... -- 26 -- -- --
------------ ------ ------ ------ ------
Total recoveries.......................... -- 26 -- -- --
------------ ------ ------ ------ ------
Balance at end of year.......................... $ 3,508 3,412 3,993 4,692 1,656
------------ ------ ------ ------ ------
------------ ------ ------ ------ ------
Components of allowance for loan losses:
General valuation allowance................... $ 3,508 2,676 3,177 3,269 1,614
Specific loss allowances...................... -- 736 816 1,423 42
Ratio of net charge-offs to average loans
outstanding during the year.................... 0.76% 0.24% 0.38% 0.05% 0.12%
------------ ------ ------ ------ ------
------------ ------ ------ ------ ------
Allowance for Real Estate Losses:
Balance at beginning of year.................... $ 40 $ 157 $ 294 $ 35 $ --
Provision for losses.......................... 100 -- 316 571 48
Charge-offs:
One-to-four family.......................... (94) -- (245) (35) (13)
Commercial.................................. -- (23) (208) (277) --
Land........................................ (46) (94) -- -- --
------------ ------ ------ ------ ------
Total charge-offs......................... (140) (117) (453) (312) (13)
------------ ------ ------ ------ ------
Recoveries (2)................................ -- -- -- -- --
------------ ------ ------ ------ ------
Balance at end of year.......................... $ -- $ 40 $ 157 $ 294 $ 35
------------ ------ ------ ------ ------
------------ ------ ------ ------ ------
</TABLE>
- ------------------------
(1) During 1995, the Company adopted the direct charge-off method of accounting
for nonperforming loans, as well as for performing loans considered by
management as impaired. Charge-offs in 1995 include $736,000 of specific
loan loss allowances provided for in prior periods. Charge-offs during 1995
included $741,000 which under the Company's former method would have been
treated as specific loss allowances at December 31, 1995. This change in
procedure has not affected current loss provisions and will not alter
provisions for loan losses in future periods.
(2) Recoveries of loan and real estate losses are recognized when realized,
i.e., the underlying property has been sold, and are accounted for as gain
on sale of real estate in the Statement of Operations.
E-12
<PAGE>
The following Table Eight sets forth the Company's allowance for loan losses
allocated to loan categories at December 31 for the years indicated.
TABLE EIGHT
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
One-to-four family............................................... $ 1,058 $ 977 $ 810 $ 798 $ 476
Multi-family..................................................... 646 967 506 340 284
Commercial....................................................... 1,165 647 1,833 2,854 431
Construction..................................................... 424 622 478 442 368
Land............................................................. 215 199 367 258 97
--------- --------- --------- --------- ---------
Total Loan Loss Allowance...................................... $ 3,508 $ 3,412 $ 3,993 $ 4,692 $ 1,656
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Management believes that the allowance can be allocated by category only on
an approximate basis. In general, the allocation is based on several factors,
including the outstanding principal balance of loans by category, the amount of
classified loans in each category, risk factors assigned to each loan category
and asset classification and any specific valuation allowances allocated to
loans in a particular category. The allocation of the allowance to each category
is not necessarily indicative of future losses and does not restrict the use of
the allowance to absorb losses in any category. At December 31, 1995, the
general valuation allowance (GVA) was $3.5 million. The increase in the
allowance for loan losses assigned to commercial real estate loans, in 1995
versus 1994, reflects an increase in classified loans in that category .
[This space intentionally left blank]
E-13
<PAGE>
SECURITIES
Income from investments provides the second largest source of income for the
Company, after interest income on loans. The Company is required by federal
regulation to maintain a specified minimum amount of liquid assets which may be
invested in specific short term securities (see: "Regulation"). It has generally
been the Company's policy to maintain a liquidity portfolio that exceeds
regulatory minimum requirements.
Authorized investments include obligations insured or fully guaranteed by
the United States government, certain agency securities, certificates of deposit
issued by financial institutions and other investment securities. The Company's
current investment portfolio consists of mortgage-backed securities, callable
U.S. Government Agency notes and overnight investments with the FHLBSF. In
making investments, the Company considers current liquidity levels, market rates
of return, the duration of the investment, and the level of potential interest
rate and credit risk associated with the investment.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115) as of January 1, 1994. Under SFAS 115, the Company
classifies its securities in one of three categories: trading, available for
sale, or held to maturity. Securities held to maturity are stated at amortized
cost, as the Company has the intent and ability to hold these securities to
maturity. Premiums and discounts are amortized over the estimated life of the
security, adjusted for actual prepayments, by a method approximating the
interest method. Available for sale securities are recorded at fair value.
Unrealized gains and losses, net of tax, on available for sale securities are
excluded from earnings and are reported as a separate component of stockholders'
equity. Realized gains and losses for all securities are included in earnings.
The Company does not have a trading portfolio. For additional information on the
securities portfolio, see Notes 2 and 3 of the Notes to Consolidated Financial
Statements.
The following Table Nine is a summary of the Company's investments,
including mortgage-backed securities, at December 31:
TABLE NINE
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Investment securities:
Federal agency securities (1).................................................. $ 11,000 $ -- $ --
--------- --------- ---------
Total........................................................................ 11,000 -- --
--------- --------- ---------
Mortgage-backed securities:
FHLMC pass-through securities.................................................. 12,884 15,264 14,898
FNMA pass-through securities................................................... -- -- 5,855
--------- --------- ---------
Total........................................................................ 12,884 15,264 20,753
--------- --------- ---------
Total Securities................................................................. $ 23,884 $ 15,264 $ 20,753
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) All investment securities mature in the year 2000. The securities are
subject to call dates commencing in 1996 at the option of the issuer.
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E-14
<PAGE>
DEPOSIT ACTIVITIES
Deposits are the major source of the Company's funds for lending and other
investment purposes. The Company obtains deposits primarily through its retail
branches and offers a broad selection of deposit instruments including NOW
accounts, money market accounts, regular savings accounts, checking accounts,
certificates of deposit and retirement savings plans. While the deregulation of
insured deposits has allowed the Company to be more competitive in obtaining
funds and given it more flexibility to meet the threat of net deposit outflows,
it has also resulted in a more volatile cost of funds. The Company's interest
rates paid on deposits are not determined by regulatory authorities but rather
by prevailing market conditions. In the event of liquidation (which is not
currently foreseen), savings account holders will be entitled to full payment of
their accounts prior to any moneys paid to shareholders.
In an effort to increase its deposit base and market share in Marin County,
the Company opened a third branch in Novato, California, north of its
headquarters in San Rafael. The branch opened in August, 1994 and has grown to
$22.3 million in deposits at December 31, 1995 compared to $8.1 million at
December 31, 1994.
The Company regularly evaluates its internal cost of funds, surveys rates
offered by competing institutions, reviews liquidity and executes rate changes
when deemed appropriate. The Company's primary strategy for attracting and
retaining deposits is to emphasize superior customer service and personal
attention, and to pay competitive interest rates on deposits.
The following Table Ten sets forth the composition and weighted average
interest rate of the Company's deposits as of December 31, for the years
indicated.
TABLE TEN
<TABLE>
<CAPTION>
BALANCE BALANCE BALANCE
1995 WAIR 1995 1994 WAIR 1994 1993 WAIR 1993
---------- ----------- ---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts............................... $ 1,571 2.62% $ 1,824 2.81% $ 2,085 2.81%
Money market savings and checking accounts
(MMDA)......................................... 23,705 3.80% 32,288 3.21% 45,669 2.50%
Interest checking accounts...................... 5,930 1.72% 7,499 1.76% 8,854 2.01%
Non interest checking accounts.................. 1,027 -- 886 -- 927 --
---------- ---------- ----------
32,233 42,497 57,535
---------- ---------- ----------
Certificates of deposit
3 months........................................ 5,098 4.90% 6,508 4.45% 7,401 2.92%
6 months........................................ 13,624 5.27% 19,583 4.83% 22,024 3.19%
9 months........................................ 23,477 5.57% 12,671 5.61% 21,462 3.94%
11 months....................................... 54,186 7.07% -- -- -- --
1 year.......................................... 40,711 6.11% 51,945 4.99% 37,661 4.00%
2 year.......................................... 14,776 5.63% 16,833 5.04% 8,551 4.63%
3 to 5 year..................................... 11,955 6.28% 13,945 5.69% 17,711 7.07%
IRA............................................. 23,677 6.16% 21,694 5.48% 20,227 5.28%
Jumbos ($90 minimum)............................ 27,215 6.35% 28,720 5.44% 28,840 4.68%
---------- ---------- ----------
Total certificate accounts.................... $ 214,719 $ 171,899 $ 163,877
---------- ---------- ----------
Total savings accounts.......................... $ 246,952 $ 214,396 $ 221,412
---------- ---------- ----------
---------- ---------- ----------
Weighted average interest rate.................. 5.84% 4.73% 3.94%
--- --- ---
--- --- ---
</TABLE>
E-15
<PAGE>
The following Table Eleven indicates the amount of the Company's
certificates of deposit of $100,000 or more by time remaining until maturity as
of December 31, 1995.
TABLE ELEVEN
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN
THOUSANDS)
<S> <C>
Remaining Maturity:
Three months or less............................................... $ 37,010
Over three through six months...................................... 10,779
Over six through twelve months..................................... 11,188
Over twelve months................................................. 8,643
-------------
Total............................................................ $ 67,620
-------------
-------------
</TABLE>
For additional information on deposit activity, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Financial
Condition -- Customer Deposits", and Note 7 of the Notes to Consolidated
Financial Statements.
BORROWINGS
The Company may rely upon advances from the FHLBSF to supplement its supply
of funds for lending and investment purposes. Advances may also be used to meet
large deposit withdrawal requirements. Advances from the FHLBSF are typically
secured by the Company's stock in the FHLBSF and by pledges of certain real
estate loans and securities (see: "Regulation" for additional discussion on the
Federal Home Loan Bank (FHLB) System). The Company had pledged loans and
securities with outstanding principal balances of approximately $93.1 million at
December 31, 1995.
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E-16
<PAGE>
The following Table Twelve summarizes short-term borrowings for the last
three years:
TABLE TWELVE
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-Term Advances:
Short-term FHLB advances at year-end............................................ $ 7,000 $ 11,000 $ 11,500
Average balance during the year................................................. 5,088 7,763 14,542
Maximum month-end balance during the year....................................... 7,800 11,000 34,500
Weighted average interest rate at year-end...................................... 4.99% 5.39% 3.65%
Average interest rate during the year........................................... 5.11% 3.88% 3.61%
Reverse Repurchase Agreements:
Reverse repurchase agreements at year-end....................................... $ -- $ -- $ 4,817
Average balance during the year................................................. -- 2,534 15,136
Maximum month-end balance during the year....................................... -- 4,000 19,719
Weighted average interest rate at year-end...................................... -- -- 3.50%
Average interest rate during the year........................................... -- 3.96% 3.47%
</TABLE>
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E-17
<PAGE>
COMPETITION
The Company faces strong competition both in the attraction of deposits and
in the making of real estate loans. Its most direct competition for deposits has
historically come from savings institutions, commercial banks and credit unions.
During recent periods substantial competition for deposits has come from money
market and other types of mutual funds as well as non-bank organizations. In
addition, corporate and governmental securities also compete for the public's
funds. The Company competes for deposits by offering a variety of deposit
accounts at competitive interest rates, providing quick, efficient and
personalized service to customers and utilizing direct customer solicitation for
major accounts.
The Company's competition for real estate loans comes primarily from savings
institutions, commercial banks, mortgage companies and, to a lesser degree,
insurance companies and governmental agencies. The Company competes for loans
principally through the quality and efficiency of service it provides to
borrowers, loan and real estate brokers. In addition, it competes for loans
through the interest rates and loan fees it charges. Factors which affect
competition include general and local economic conditions, current interest rate
levels and volatility of the mortgage markets. No material changes are
anticipated in the Company's competitive standing, except it is expected that
the high number of competitors will continue, together with aggressive pricing
by those competitors, to gain or maintain market share. The Company is able to
compete in this market because of its community focus and knowledge of its
construction lending market niche.
EMPLOYEES
At December 31, 1995, the Company employed forty-two (42) persons full time.
The employees are not covered by a collective bargaining agreement. The Company
has enjoyed good relations with its personnel in the past and expects that those
good relations will continue. The Company provides its full-time employees with
a comprehensive benefit program which includes medical, dental and vision
insurance, long-term disability and life insurance coverage and sick leave. The
benefits are considered by management to be generally competitive with employee
benefits provided by other institutions of the Company's size. For a further
discussion of Employee Benefit Plans, See Note 11 of the Notes to Consolidated
Financial Statements.
[This space intentionally left blank]
E-18
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME, AGE AND POSITION BUSINESS EXPERIENCE
- --------------------------------------------- ------------------------------------------------------------------
<S> <C>
James W. Barnett, 64......................... Mr. Barnett is and has been President and Chief Executive Officer
of the Association since August 1980 and
Chairman of the Board Chairman since 1981 and of the Company since 1995. From April
Chief Executive Officer and 1975 to July 1980, he was employed and by Coast Federal Savings
President of the Company and Loan Association as Executive Vice President. Before joining
the Association Coast, Mr. Barnett was Executive Vice President, Managing Officer
and Director of Fidelity Savings and Loan Association in Oakland.
From 1967 until Northwestern merged with Fidelity in 1968, he was
President, Managing Officer and Director of Northwestern Savings
and Loan Association. Prior to 1967, he served as Secretary,
Manager and Director of Tamalpais Savings and Loan Association.
JoAnne Fabian, 61............................ Ms. Fabian is and has been Secretary to the Association since 1978
and to the Company since 1995. She joined the
Director, Executive Vice President Association in December 1987 as a Vice President and General
and Secretary of the Company Counsel. In January 1993, she was appointed a Senior Vice
and the Association and President, and Executive Vice President in August 1994. She has
Chief Administrative been an attorney since 1974. Prior to joining the Associaion in
Officer of the Association 1987, she was a member of the San Rafael law firm of McNeil,
Silveira & Fabian, with a practice emphasis on real property
transactions, business organizations and tax, and held a
California Real Estate Brokers' license.
Albert J. Thomson, 56........................ Mr. Thomson joined the Association in August 1995 as Senior Vice
and Chief President and Chief Financial
Senior Vice President Officer. He is also Senior Vice President and Chief Financial
Financial Officer of the Company Officer of the Company since 1995. Prior to joining the
and the Association Association, Mr. Thomson served as a financial advisor to Plaza
Home Mortgage Bank and was an independent consultant since July
of 1993. From February 1982 to May 1993, he was Executive Vice
President and Chief Financial Officer at Bay View Federal Bank.
From July 1979 to January 1982, he was Chief Financial Officer
for Alameda Federal Savings. Mr. Thomson is a Certified Public
Accountant.
Michael M. Kress, 51......................... Mr. Kress was appointed Senior Vice President of the Association
in January 1993. He joined the Association as
Senior Vice President and Chief a Loan Officer in June 1986 and was appointed Vice President in
Lending Officer of the Association December 1986. Mr. Kress was employed by The Applied Research
Group from October 1984 where he analyzed lending department
needs and drafted computer software for savings and loan
associations. From January 1984 through August 1984, he was Vice
President and Senior Loan Officer for Centennial Savings and Loan
Association. From January 1983 through December 1983, Mr. Kress
was Vice President for Alta Mortgage Company where he managed the
company's branch expansion program.
</TABLE>
E-19
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND POSITION BUSINESS EXPERIENCE
- --------------------------------------------- ------------------------------------------------------------------
<S> <C>
Jared L. Book, 39............................ Mr. Book joined the Association in December 1994 as Vice
President, Controller and Chief Accounting Officer. He is
Vice President, Controller and also Vice President, Controller and Chief Accounting Officer for
Chief Accounting Officer of the the Company since 1995. Prior to joining the Association, Mr.
Company and the Association Book served as Controller at Novato National Bank from October
1993. Prior to that he was employed by the Federal Deposit
Insurance Corporation and assigned as a Managing Agent for the
Resolution Trust Corporation from December 1990.
</TABLE>
REGULATION
GENERAL
The Company, as a savings and loan holding company, and the Association, as
a state chartered capital stock savings and loan association, are subject to
examination and comprehensive regulation by the OTS, a bureau within the
Department of the Treasury, and the CDSL. Its deposits are insured by the
Savings Association Insurance Fund (SAIF) governed by the Federal Deposit
Insurance Corporation (FDIC). The Association is a member of and owns capital
stock in the FHLBSF, which is one of twelve regional banks in the FHLB System.
The Association is further subject to the regulations of the Board of Governors
of the Federal Reserve System (FRB) with respect to reserves to be maintained
against deposits and certain other matters. Supervision, regulation, and
reporting requirements are mandated by federal regulators primarily for the
protection of depositors and the SAIF. Regulation and reporting requirements
which affect the Company are summarized in the following sections.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
Since the passage of the Financial Institutions Reform, Recovery and
Enforcement Act (FIRREA), the OTS issues and enforces regulations affecting
federally insured savings institutions and regularly examines these
institutions. The enactment of FIRREA changed the regulatory responsibilities of
the FDIC. The FDIC was established originally to insure the deposits, up to
specified statutory limits, of federally insured banks and to preserve the
safety and soundness of the banking industry. Now the FDIC is charged with also
insuring, up to the prescribed limits, the deposit accounts held at federally
insured savings institutions. To this end, two separate funds are maintained and
administered by the FDIC: the Bank Insurance Fund (BIF) and the SAIF. As such,
the FDIC has examination, supervisory and enforcement authority over all savings
institutions.
REGULATORY CAPITAL REQUIREMENTS
Effective December 7, 1989, FIRREA mandated three new capital standards for
savings institutions, no less stringent than those for national banks: (1) core
capital to adjusted total assets of 3%, (2) tangible capital to adjusted total
assets of 1.5%, and (3) risk-based capital (which gears an institution's capital
requirements individually to the riskiness of its assets) to risk weighted
assets of 8%. The Association has met all three required capital standards since
enactment of FIRREA. Also, see under The Federal Deposit Insurance Corporation
Improvement Act (FDICIA) which follows. For the schedule of capital requirements
prescribed by FIRREA and FDICIA, see Note 10 of Notes to Consolidated Financial
Statements.
LOANS TO ONE BORROWER LIMITATION
Prior to the enactment of FIRREA, savings institutions could generally lend
the lesser of 10% of withdrawable deposits or 100% of regulatory capital to one
borrower. The new loans to one borrower limitation, which became effective upon
enactment of FIRREA, is substantially more restrictive than the limitations
previously imposed on savings institutions. With certain limited exceptions, the
maximum amount that a savings association may lend to one borrower (including
certain related entities of such borrower) is an amount equal to 15% of the
savings institutions unimpaired capital and unimpaired surplus, plus an
additional 10% for loans fully secured by readily marketable collateral. Real
estate is not included within the definition of "readily marketable collateral."
E-20
<PAGE>
As of December 31, 1995 and 1994, the maximum amount that the Company could
have loaned to one borrower (and related entities) was $4.2 million. At December
31, 1995, the Company had no loans outstanding to one borrower that totaled
greater than the $4.2 million limit. Management has limited lending activity to
comply with the loans-to-one-borrower limitation, and will continue to monitor
limits to see that they are not exceeded.
RESTRICTIONS ON COMMERCIAL REAL ESTATE LOANS
Prior to the enactment of FIRREA, federally-chartered savings institutions
could invest up to 40% of their assets in non-residential real estate loans.
FIRREA limits such loans to 400% of capital. As of December 31, 1995 and 1994,
400% of the Company's capital under generally accepted accounting principals
(GAAP), was $96.9 and $95.9 million, respectively. At such dates, the Company
had approximately $40.0 million in nonresidential real estate loans, well within
the limits imposed by FIRREA.
THE FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT (FDICIA)
In December of 1991, Congress passed legislation and the President signed
into law a banking bill designated the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA). The goal of FDICIA is to reduce the overall
risks within the thrift and banking system and financial markets. The law
provides for re-capitalization of the SAIF and also increases the FDIC's access
to Treasury funds. The legislation also instituted reforms in the deposit
insurance system and provided for numerous supervisory reforms and changes
applicable to the Company.
Overall, complying with the comprehensive provisions of FDICIA subjected the
Company to significantly increased operating expenses such as compliance,
examination, and insurance costs. In addition, if the Company is placed in any
risk category other than the category having the lowest assessment rate, the
SAIF insurance rates will increase, with a resultant increase in operating
expenses. Conversely, if the FDIC lowers the assessment rate for all SAIF-member
institutions, this could have a positive impact on the Company's overhead
expenses and earnings.
With the passage of the FDICIA, Congress set out the framework for an
increasingly capital-based supervisory system. The law distinguishes financial
institutions by five categories based on their capital levels. The highest
category for an institution is "well capitalized," meaning it significantly
exceeds the required minimum for each relevant capital level. The required
minimum capital levels for this category are a total risk-based capital ratio
(total capital to risk-weighted assets) of 10% or greater, a Tier 1 risk-based
capital ratio (tier 1 capital to risk-weighted assets) of 6% or greater, and a
Tier 1 leverage capital ratio (tier 1 capital to adjusted total assets) of 5% or
greater. The next level for an institution is "adequately capitalized," meaning
it has a total risk-based capital ratio of 4% or greater, and a Tier 1 leverage
capital ratio of 4% or greater, and the institution does not meet the definition
of a "well capitalized" institution. "Undercapitalized" institutions are those
which fail to meet the required minimum for any relevant capital measure, and
"significantly undercapitalized" institutions fall significantly below required
capital levels. The fifth category is for "critically undercapitalized"
institutions or those institutions that have a ratio of tangible equity (as
defined in the regulations) to total assets that is equal to or less than 2%. At
each successive category level, FDICIA mandates increasingly strict regulatory
restrictions and supervisory actions. At December 31, 1995 and 1994, the
Association met the capital requirements for a "well capitalized" institution.
For the schedule of capital standards prescribed by FDICIA, see Note 10 of Notes
to Consolidated Financial Statements.
FDICIA also required the FDIC to designate a reserve ratio for the SAIF and
to develop a system of risk-based insurance assessments. The FDIC is required to
establish a schedule to increase the reserve ratio of the SAIF to 1.25% of
insured deposits within a "reasonable period of time" (which the FDIC has
estimated to be the year 2002), and must impose higher deposit insurance
premiums on SAIF members, if necessary, to achieve that ratio.
On September 14, 1992, the FDIC adopted regulations to implement a
transitional risk-based insurance assessment system, starting January 1, 1993,
charged higher rates to those banks and thrifts deemed to have posed greater
risk to the deposit insurance funds. Under that system, the FDIC placed each
insured depository in one of nine risk categories based on its level of capital
and other relevant information (such as
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<PAGE>
supervisory evaluations). Each institution's insurance assessment rate was then
determined by the risk category in which it had been classified by the FDIC.
Under this transitional system, the average insurance assessment rate for
SAIF-insured institutions was $0.259 per hundred dollars of domestic deposits.
However, there was an eight basis point spread between the highest and lowest
assessment rates so that institutions classified as strongest by the FDIC were
subject to a rate of $0.23, and institutions classified as weakest by the FDIC
were subject to a rate of $0.31 (with intermediate rates of $0.26, $0.29, and
$0.30). The FDIC had indicated that it expected that the majority of
SAIF-insured institutions would be subject to an assessment rate of $0.23 (the
same rate as under the prior flat-rate assessment system).
On June 17, 1993, the FDIC Board of Directors amended Part 327 of the FDIC's
Rules and Regulations on assessments to establish a new risk-related premium
system (RRPS). The new system, which became effective October 1, 1993, replaces
the interim risk-related premium system in effect for assessments due in 1993
and will be implemented beginning with the assessment period commencing January
1, 1994. Under the new RRPS each insured institution is assigned to one of three
capital groups and to one of three supervisory subgroups for purposes of
determining an assessment rate.
Effective January 1, 1994, the FDIC adopted a permanent system of risk-based
deposit insurance premium assessments to implement the risk-based assessment
system which was required by FDICIA. This system classifies institutions on the
basis of capital ratios, supervisory evaluation by the institutions' primary
federal regulatory agency and other information determined by the FDIC to be
relevant. Each of nine resulting risk category subgroups of institutions is
assigned a deposit insurance premium assessment rate, which currently ranges
from 0.23% to 0.31%, as compared with the uniform 0.23% rate that had been in
effect since January 1, 1991. The FDIC stated in connection with adopting its
current premium rate schedule that it had considered whether it should widen the
spread of premium assessment rates and that it may do so in the future. During
1995, 1994 and 1993, the Association's deposit insurance expense was $.5
million, $.5 million, and $.6 million respectively.
A number of proposals have recently been introduced in Congress to address
the disparity in the bank and thrift deposit insurance premium. On September 19,
1995, legislation was introduced and referred to the House Banking Committee
that would, among other things: (I) impose a requirement on all SAIF member
institutions to fully recapitalized the SAIF by paying a one-time assessment of
85 basis points on all assessable deposits as of March 31, 1995, which
assessment would be due as of January 1, 1996; (ii) spread the responsibility
for the Financing Corporation (FICO) interest payments across all FDIC-insured
institutions on a pro-rata basis, subject to certain exceptions; (iii) require
that deposit insurance premium assessment rates applicable to SAIF member
institutions be no less than deposit insurance premium assessment rates
applicable to BIF member institutions; (iv) provide for a merger of the BIF and
the SAIF as of January 1, 1998; (v) require savings associations to convert to
state or national bank charters by January 1, 1998; (vi) require savings
associations to divest any activities not permissible for commercial banks
within five years; (vii) eliminate the bad-debt reserve deduction for savings
associations, although savings associations would not be required to recapture
into income their accumulated bad-debt reserves; (viii) provide for the
conversion of savings and loan holding companies into bank holding companies as
of January 1, 1998, although unitary savings and loan holding companies
authorized to engage in activities as of September 13, 1995 would have such
authority grandfathered (subject to certain limitations); and (ix) abolish the
OTS and transfer the OTS' regulatory authority to the other federal banking
agencies. The legislation would also provide that the institution would continue
to be subject to the payment of semiannual assessments under the current rate
schedule following the recapitalization of the SAIF. The legislation was
considered and passed by the House Banking Committee's Subcommittee on Financial
Institutions on September 27, 1995, and has not yet been acted on by the full
House Banking Committee.
On September 20, 1995, similar legislation was introduced in the Senate,
although the Senate bill does not include a comprehensive approach to merging
the savings association and commercial bank charters. (The Senate bill remains
pending before the Senate Banking Committee.)
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<PAGE>
The future of both of these bills is linked with that of pending budget
reconciliation legislation since some of the major features of the bills are
included in the Seven-Year Balanced Budget Reconciliation Act (the
"Reconciliation Act"). The Reconciliation Act was passed by both the House and
Senate on November 17, 1995 and vetoed by the President on December 6, 1995.
While the outcome of pending legislation cannot be predicted with certainty,
it is likely that some kind of legislation or regulatory action will be taken
that will impact the SAIF and therefore the Association. Subsequent versions of
the bill described above have resulted in a proposal of a one-time special
assessment of between 0.77% to 0.90% of total insured deposits which would, if
enacted, have a $1.1 million to $1.3 million after tax impact on the Company's
earnings and capital.
In light of ongoing debate over the content and fate of the Reconciliation
Act, the different proposals currently under consideration and the uncertainty
of the Congressional budget and legislative processes in general, management
cannot predict whether any or all of the proposed legislation will be passed, or
in what form. Accordingly, the effect of any such legislation on the Company or
the Association cannot be determined.
In addition, FDICIA: (1) imposes annual on-site examinations (beginning
November 1992) on all depository institutions except those well-capitalized
institutions with assets less than $100 million; (2) requires annual audits by
independent public accountants for all insured institutions with assets in
excess of $150 million; (3) requires the formation of independent audit
committees of the boards of directors of insured depository institutions (with
respect to fiscal years beginning after December 31, 1992); (4) imposes annual
reporting obligations on management of depository institutions that concern the
preparation of financial reports and the establishment of internal compliance
procedures; (5) sets forth accounting objectives, standards and requirements to
be implemented through regulations; (6) requires the FDIC to establish a
risk-related deposit insurance system which would charge higher rates to those
institutions which pose the greatest risk to the insurance funds; and (7)
restricts the receipt of "brokered deposits" and the rates of interest which may
be paid on any deposits by institutions which are not "well capitalized" (even
if they meet minimum regulatory capital requirements).
FDICIA includes a number of specific directives to the OTS, FDIC and other
banking agencies to promulgate regulations carrying out the stipulations of the
new law. Additionally, some provisions of FDICIA are subject to certain phase-in
periods. These regulations are referred to below or appear elsewhere herein.
BROKERED DEPOSITS; INTEREST RATE LIMITATIONS
The FDIC has adopted regulations, mandated by FDICIA, that restrict the
acceptance of brokered deposits. In general, a "well capitalized" institution,
such as the Association, may accept, renew or roll over any brokered deposits
without restriction. "Adequately capitalized" institutions may request a waiver
from the FDIC to use brokered deposits, while "undercapitalized" institutions
may not accept, renew or roll over such deposits. Institutions that are not
"well capitalized" (even if meeting minimum capital requirements) are subject to
limits on rates of interest they may pay on brokered and other deposits. Broker
deposits held by the Association at December 31, 1995 were $2.0 million.
INTEREST RATE RISK
On August 31, 1993, the OTS issued final regulations to implement section
305 of FDICIA which requires an Interest Rate Risk (IRR) component be included
in the computation of risk-based capital.
The federal regulators maintain that in order to adequately protect the
insurance fund and create the necessary incentives to prudently manage interest
rate risk, thrifts' capital requirements must explicitly take account of
interest rate risk exposure. Therefore, the principal objectives of the IRR
component are: (1) to make regulatory capital requirements sensitive to
differences in interest rate risk; (2) to discourage savings associations from
taking excessive interest rate risk; and (3) to ensure that savings associations
maintain adequate capital which reduces the exposure of the deposit insurance
fund.
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<PAGE>
The regulators have determined a "normal" level of interest rate risk and
have designed a "stress test" to determine if institutions are adversely exposed
to high levels of interest rate risk. Each institution must measure their
interest rate risk to determine if they pass or fail the "stress test". The
amount by which an institution passes or fails the test is the IRR component
which must be subtracted from risk-based capital. Specifically, the test
mandates that interest rate exposure will be measured as the decline in Net
Portfolio Value-NPV (referred to in past IRR policy as the Market Value of
Portfolio Equity-MVPE) due to a 200 basis point shock in market interest rates.
The IRR component to be deducted from total capital is equal to one half the
difference between the institution's measured exposure and the "normal" level of
exposure which is defined as 2.0% of the estimated economic value of its assets.
The new OTS regulation became effective January 1, 1994. The Company has
performed this "stress test" each quarter in order to monitor and maintain a
strong IRR measuring system, and if necessary, adjust capital for the required
IRR component. The adjustment requirement took effect beginning July 1, 1994. As
of December 31, 1994, the Company's interest rate risk level is considered
within the normal exposure level as defined by the OTS. Therefore, no adjustment
to capital is required.
SAFETY AND SOUNDNESS STANDARDS
The FDICIA requires the federal banking regulatory agencies to prescribe, by
regulation, standards for all insured depository institution holding companies
relating to: (I) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) audit underwriting; (iv) interest rate
risk exposure; (v) asset growth; and (vi) compensation, fees and benefits. The
compensation standards would prohibit employment contracts, compensation or
benefit arrangements, stock option plans, fee arrangements or other compensatory
arrangements that would provide excessive compensation, fees or benefits or
could lead to material financial loss. In addition, the federal banking
regulatory agencies would be required to prescribe by regulation standards
specifying: (I) maximum classified assets to capital ratios; (ii) minimum
earnings sufficient to absorb losses without impairing capital; and (iii) to the
extent feasible, a minimum ratio of market value to book value for publicly
traded shares of depository institutions and depository institution holding
companies.
OTS AND FDIC ASSESSMENTS
In August 1990, the OTS issued final regulations which, among other things,
provide for the funding of the expenses of the OTS, costs of examinations of
institutions under OTS jurisdiction, and the costs of processing various
applications and filings. The regulation provides for a sliding scale
asset-based assessment differentiating between troubled and non-troubled savings
associations. For the purposes of the regulation, "troubled savings
associations" are defined generally as those operating under the jurisdiction of
the RTC or with a MACRO rating of 4 or 5. The assessments are based on total
assets as reported on its most recent consolidated Thrift Financial Report.
During 1995, the Company paid approximately $78,000 in OTS assessments.
BRANCHING BY FEDERALLY CHARTERED ASSOCIATIONS
On April 2, 1992, the OTS amended its rules on branching by federally
chartered savings associations to permit nationwide branching to the extent
allowed by federal statute. This action, which became effective May 2, 1992,
permits associations with interstate networks to diversify their loan portfolios
and lines of business. OTS authority preempts any state law purporting to
regulate branching by federal savings associations.
To obtain supervisory clearance for branching, an applicant's regulatory
capital must meet or exceed the minimum requirements established by law and by
OTS regulations. Section 38(e)(4) of FDICIA prohibits any "undercapitalized"
insured association from acquiring or establishing additional branches, unless
the OTS has accepted the institution's capital restoration plan required by the
law, the association is implementing the plan, and the OTS determines that the
proposed action is consistent with such plan, or the FDIC Board of Directors
determines that the proposed action will further the purposes of the law. In
addition, the institution must have a satisfactory record under the Community
Reinvestment Act.
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<PAGE>
QUALIFIED THRIFT LENDER TEST
As amended by FIRREA the Qualified Thrift Lender (QTL) test requires that
65% of certain of a savings institution's assets must be invested in a limited
list of "qualified thrift investments" on a monthly average basis in nine out of
every 12 months. At December 31, 1995 and 1994, 86% and 90% of the Association's
assets constituted qualified thrift investments. It is management's current
intention to continue to meet the qualified thrift lender test.
For purposes of the test, portfolio assets are defined as the total assets
of the savings association minus: goodwill and other intangible assets; the
value of property used by the association to conduct its business; and liquid
assets not to exceed 20% of the association's total assets.
Under the QTL statutory and regulatory provisions, all forms of home
mortgages, home improvement loans, home equity loans and loans on the security
of other residential real estate and mobile homes as well as a designated
percentage of consumer loans are "qualified thrift investments," as are shares
of stock of a FHLB, investments or deposits in other insured institutions,
securities issued by the FNMA, FHLMC, GNMA or the FSLIC Financing Corporation
and other mortgage-related securities. Investments in non-subsidiary
corporations or partnerships whose activities include servicing mortgages or
real estate development are also considered qualified thrift investments in
proportion to the amount of primary revenue such entities derive from
housing-related activities. Also included in qualified thrift investments are
mortgage servicing rights, whether such rights are purchased by the insured
institution or created when the institution sells loans and retains the right to
service such loans.
A savings institution that fails to become or remain a qualified thrift
lender shall either become a national bank or be subject to restrictions
specified in FIRREA. If an institution does not requalify and converts to a
national bank charter, it must remain SAIF-insured until the FDIC permits it to
transfer to the BIF. If an institution that fails the test has not yet
requalified and has not converted to a national bank, its new investments and
activities are limited to those permissible for both a saving association and a
national bank, and it is limited to national bank branching rights in it home
state. In addition, the institution is immediately ineligible to receive any
FHLB borrowings and is subject to national bank limits for payment of dividends.
If such institution has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any institution that fails the QTL test is controlled by a holding
company, then within one year after the failure, the holding company must
register as a bank holding company and become subject to all restrictions on
bank holding companies.
FEDERAL HOME LOAN BANK SYSTEM
The FHLB System, which consists of twelve member banks, is now under the
jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated
duties of the FHFB are to: (1) supervise the FHLBs, (2) ensure that the FHLBs
carry out their housing finance mission, (3) ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital market, and (4)
ensure that the FHLBs operate in a safe and sound manner.
The Association, which is a member of the FHLBSF, is required to acquire and
hold shares of capital stock in the FHLBSF in an amount equal to the greater of
(1) 1% of the aggregate outstanding principal amount of residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year, or (2) 5% of its advances from the FHLBSF. The Association is in
compliance with this requirement with an investment in FHLBSF stock of
$2,212,500 at December 31, 1995. The amount of the investment in FHLBSF stock is
adjusted annually by the FHLBSF as of the close of the calendar year. FHLBSF
stock in excess of the above requirements may be redeemed for cash at par value.
A stock dividend on the FHLBSF stock has traditionally been paid on a
quarterly basis to member stockholders, and is based upon the outstanding stock
held at the time the dividend is declared. FIRREA has reduced the dividends
received by the Association on its FHLBSF stock. Each FHLB has been required to
transfer a significant amount of its reserves and undivided profits to the RFC,
the government entity
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<PAGE>
established to raise funds to resolve troubled thrift cases and fund obligations
on the RFC bonds. As a result of FIRREA requirements, it is anticipated that the
FHLB's earnings available for dividends will continue to remain substantially
below pre-FIRREA levels and the Association will continue to receive reduced
dividends on its FHLBSF stock. FHLBSF stock dividends earned during 1995, 1994
and 1993 totaled $110,583, $108,787 and $79,748, respectively.
The FHLBSF also provides a central credit facility primarily for member
institutions. It is funded from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes advances to members in accordance with
policies and procedures established by the FHLB and the Board of Directors of
the FHLBSF. At December 31, 1995, the Association had $21 million in advances
from the FHLBSF. For additional information on Borrowed Funds, see Notes 8 of
the Notes to Consolidated Financial Statements.
LIQUIDITY REQUIREMENTS
Under OTS regulations, a member thrift institution is required to maintain
an average daily balance of liquid assets (cash, certain time deposits and
savings accounts, bankers' acceptances, and specified government, state or
federal agency obligations and certain other investments) equal to a monthly
average of not less than a specified percentage of its net withdrawable accounts
plus short-term borrowings. This liquidity requirement, which is currently 5%,
may be changed from time to time by the OTS to any amount within the range of 4%
to 10% depending upon economic conditions and the deposit flows of member
associations. The Association had a liquidity ratio of 8.38% at December 31,
1995. Existing OTS regulations also require each member institution to maintain
an average daily balance of short-term liquid assets at a specified percentage
(currently 1%) of the total of its net withdrawable savings accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet liquidity requirements.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires savings institutions to maintain
non-interest-earning reserves against certain of their transactional accounts
(primarily deposit accounts that may be accessed by writing checks) and
non-personal time deposits. For the calculation period including December 31,
1995, the Association maintained $30,000 in non-interest-earning reserves and
was in compliance with this requirement. The balance maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be included to
satisfy the Association's liquidity requirements discussed above.
As a creditor and a financial institution, the Association is subject to
certain regulations promulgated by the Federal Reserve Board, including, without
limitation, Regulation B (Equal Credit Opportunity Act), Regulation D
(Reserves), Regulation E (Electronic Funds Transfer Act), Regulation F (Limits
on Exposure to Other Banks), Regulation Z (Truth in Lending Act) and Regulation
CC (Expedited Funds Availability Act). Effective in June 1993, the Association
became subject to the Truth in Savings Act and the implementing Regulation DD
regarding required disclosures to holders of deposits accounts of the interest
rates and fees applicable to their accounts. As creditors of loans secured by
real property and as owners of real property, financial institutions, including
the Association, may be subject to potential liability under various statutes
and regulations applicable to property owners generally, including statutes and
regulations relating to the environmental condition of the property.
HOLDING COMPANY REGULATION
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. As a subsidiary of a savings and loan holding company, the Association
is subject to certain restrictions in its dealings with the Company and
affiliates thereof.
There are generally no restrictions on the activities of a unitary savings
and loan holding company. However, if the Director of the OTS determines that
there is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a significant risk to the financial
safety, soundness or stability of its subsidiary savings association, the
Director of the OTS may impose such restrictions as deemed necessary to address
such risk including limiting: (i) payment of dividends by the savings
association; (ii) transactions between the savings association and its
affiliates; and (iii) any activities
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<PAGE>
of the savings association that might create a significant risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet the QTL test,
then such unitary holding company shall also presently become subject to the
activities restrictions applicable to multiple holding companies and, unless the
savings association requalifies as a QTL within one year thereafter, register
as, and become subject to, the restrictions applicable to a bank holding
company. The Company believes that it is in compliance with all holding company
regulations.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
The Company's only significant assets is its investment in all of the stock
of the Association. The Company's principal source of income is dividends paid
by the Association. The Association's retained earnings are substantially
restricted as to payments of dividends based on certain regulations relating to
dividend distributions. OTS regulations impose various restrictions or
requirements on institutions with respect to their ability to pay dividends or
make other distributions of capital. The OTS utilizes a three-tiered approach to
permit institutions, based on their capital level and supervisory condition, to
make capital distributions which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account.
Tier one institutions are institutions that continue to meet or exceed their
fully phased-in capital requirements. Such institutions may make capital
distributions during any calendar year equal to the greater of (i) 100% of net
income on a year-to-date basis plus 50% of the amount by which the institution's
capital exceeds its fully phased-in capital requirement, as measured at the
beginning of the calendar year, or (ii) 75% of the net income for the prior four
quarters. The Association meets, and expects to continue to meet, the
requirements for a tier one institution. The Association expects to be able to
continue to pay dividends to the Company for the foreseeable future.
FEDERAL AND STATE TAXATION
The Company and the Association file a consolidated income tax return. Under
applicable provisions of the amended Internal Revenue Code of 1986 (the "Code"),
a savings institution that meets specific definitive tests relating to the
composition of its assets and income (a "qualifying savings institution") is
permitted to establish reserves for bad debts. A qualifying savings institution
may make annual additions to its bad debt reserve on qualifying real estate
loans based on the experience method or the percentage of taxable income method.
The Association used the experience method in 1994 and 1993, and anticipates
using the same method in 1995.
A savings institution with a stock structure whose accumulated reserves for
qualified bad debts exceed the reserves as calculated under the experience
method may be subject to recapture taxes on these reserves. Earnings
appropriated to the bad debt reserve and claimed as a tax deduction will not be
available for the payment of cash dividends or for distribution to stockholders
(in the event of dissolution or liquidation) without payment of federal income
taxes on such distributions or dividends at the then current tax rate.
In addition to the regular corporate income tax, corporations including
qualifying thrifts are subject to an alternative minimum tax. The alternative
minimum tax is generally equal to 20% of alternative minimum taxable income
(taxable income, increased by tax preference items and adjusted for certain
regular tax items). The tax will apply if it exceeds the Association's regular
tax liability. The tax preference items common to thrifts such as the
Association, include: 1) the excess, if any, of the tax bad debt deduction over
the deduction that would have been available if the experience method was used
and 2) an amount equal to 75% of the excess amount of adjusted current earnings
over alternative minimum taxable income. Adjusted current earnings is an income
tax concept that attempts to measure economic income by inclusion of items
excluded from taxable income such as tax exempt income. Because the
Association's regular tax liability exceeds the alternative minimum tax, this
tax did not apply in 1993 or 1994 and is not expected to apply in 1995.
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<PAGE>
The California franchise tax applicable to the Company is a variable rate
tax, computed under a formula which results in a rate higher than the rate
applicable to non-financial corporations as it reflects an amount "in lieu" of
local personal property and business license taxes generally not paid by banks
or financial corporations such as the Company. For the taxable year 1995, the
most recent year for which the rate has been computed, the rate was 11.30%.
Under the California code, bad debt deductions are available in computing
California franchise taxes only to the extent of the greater of: 1) an amount
based upon the debts actually experienced over the preceding three or six years,
or 2) subject to certain limitations, the amount necessary to absorb anticipated
losses. California franchise taxes are deductible for federal income tax
purposes.
Commencing in 1981, savings and loan associations were no longer subject to
personal property taxes and city license taxes, but they continue to be subject
to real property taxes, local utility user taxes, sales and use tax and motor
vehicle registration fees.
The Association has been audited by the Internal Revenue Service (IRS) and
the California Franchise Tax Board (FTB) for the tax years 1989 and 1990. No
adjustments to taxable income had been made by the IRS nor the FTB upon
conclusion of these examinations.
For additional information on Federal and State Taxation, see Notes 9 and 13
of the Notes to Consolidated Financial Statements.
[This space intentionally left blank]
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<PAGE>
ITEM 2. PROPERTIES
The Company owns no real property other than certain real estate obtained by
foreclosure (REO). It currently leases its headquarters office at 1050 Fourth
Street, San Rafael, California which includes the main savings office, lending,
accounting and administrative functions, and two savings branches at 767 E.
Blithedale, Mill Valley, California and 1711 Grant Avenue, Novato California.
For additional information regarding the Company's offices and equipment and
minimum future lease payments, see Notes 6 and 12 of Notes to Consolidated
Financial Statements.
The Company considers its leased facilities to be suitable and adequate for
its present needs. At December 31, 1995 and 1994 the net book value of the
Association's leasehold improvements and equipment was $842,338 and $873,214
respectively.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1995, there were no material pending legal proceedings to
which the Company was a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1995 to a vote of
security holders through the solicitation of proxies or otherwise.
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<PAGE>
PART II
ITEM 5. MARKET FOR COMPANY'S CAPITAL STOCK AND RELATED SECURITY HOLDER MATTERS
The Company is listed on the NASDAQ National Market System under the trading
symbol of NHSL. At December 31, 1995, the Company had approximately 494
stockholders of record (not including the number of persons or entities holding
stock in nominee or street name through various brokerage firms) and 2,522,827
outstanding shares of common stock. There is a limited market for shares of the
Company's stock through various brokerage firms in the area. To the best of the
Company's knowledge, based on the NASDAQ reports information, shares of the
Company's stock traded at approximately $8.75 per share on March 15, 1996. The
Company shares are thinly traded.
The following Table Twelve sets forth for the quarters indicated the range
of high and low sale prices per share of the common stock of the Company and
adjusted for a 15% stock dividend paid in February 1995.
TABLE TWELVE
<TABLE>
<CAPTION>
LOW HIGH
--------- ---------
<S> <C> <C>
Quarter ended:
March 31, 1995 $ 7 3/4 $ 9 3/4
June 30, 1995 8 10
September 30, 1995 7 3/4 10 1/4
December 31, 1995 8 3/8 10
March 31, 1994 $ 8 $ 10
June 30, 1994 8 1/2 10
September 30, 1994 8 1/2 12 3/4
December 31, 1994 8 3/4 12 1/2
</TABLE>
During both 1995 and 1994, the Company paid quarterly cash dividends
totaling $0.04 per share. On February 12, 1995, the Company paid a 15% stock
dividend. The Board of Directors' policy is to consider the declaration of
dividends on a quarterly basis.
ITEM 6. SELECTED FINANCIAL DATA
In addition to the information presented in Item 1, BUSINESS OF REGISTRANT,
of this Form 10-K, the information called for by this item is captioned as
"Selected Five Year Financial Information" contained on page 4 of the Company's
Annual Report incorporated by reference and furnished pursuant to Rule 12b-23
and filed herewith.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information called for by this item is captioned as "Management's
Discussion and Analysis of financial Condition and Results of Operations"
contained on pages 5 through 11 of the Company's Annual Report incorporated by
reference and furnished pursuant to Rule 12b-23 and filed herewith.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is incorporated by reference from
the Company's Annual Report pursuant to Rule 12b-23 and filed herewith.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
E-30
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors of the Registrant is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on May 29, 1996, a copy of which will be
filed not later than 120 days after the close of the fiscal year. The
compensation report and performance graph included in the Proxy Statement
pursuant to Items 402(k) and 402(l) of Regulation S-K are specifically not
incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on May 29, 1996, a copy of which will be
filed not later than 120 days after the close of the fiscal year. The
compensation report and performance graph included in the Proxy Statement
pursuant to Items 402(k) and 402(l) of Regulation S-K are specifically not
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on
May 29, 1996, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders scheduled to be held on May 29, 1996, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
[This space intentionally left blank]
E-31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed with this Report and incorporated by
reference from the Company's Annual Report, pursuant to Rule 12b-23.
Financial Statements
Independent Auditors' Report dated February 15, 1996
Consolidated Statements of Financial Condition at December 31, 1995, 1994
Consolidated Statements of Operations, years ended December 31, 1995, 1994, 1993
Consolidated Statements of Stockholders' Equity, years ended December 31, 1995,
1994, 1993
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1994 and 1993
Notes to Consolidated Financial Statements
Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------------- ---------------------------------------------------------------------------------------
<S> <C>
2.1* Prospectus and Proxy Statement of the Association
3.1* Articles of Incorporation of NHS Financial, Inc.
3.2* Bylaws of NHS Financial, Inc.
5.1** Opinion and Consent of Hovis, Smith, Larson, Stewart, Lipscomb & Cross, A Professional
Corporation
10.1* New Horizons Savings and Loan Association Profit Sharing Plan
10.2* New Horizons Savings and Loan Association 1987 Stock Option Plan
10.3** New Horizons Savings and Loan Association 1987 Stock Option Plan, as amended
10.4* New Horizons Savings and Loan Association 1992 Stock Option Plan
10.5** New Horizons Savings and Loan Association 1992 Stock Option Plan, as amended
10.6* Supplemental Retirement Agreement of James W. Barnett, dated December 17, 1991
10.7* New Horizons 1991 Executive Cash Compensation Program
10.8* Supplemental Retirement Agreement of JoAnne Fabian, dated December 22, 1993
13.1 Annual Report to Shareholders for the Year-Ended December 31, 1995
21.1* Subsidiaries
23.1* Consent of Independent Public Accountants-KPMG Peat Marwick LLP
</TABLE>
- ------------------------
* Filed as part of the Company's report on Form 8-B filed October 31, 1995.
** Filed as part of the Company's report on Form S-8 filed March 21, 1996.
Schedules
All schedules are omitted as the required information is inapplicable or the
information is presented in the financial statements or related notes.
Form 8-K
The Company filed Form 8-K dated November 1, 1995 reporting a change of
control of the Association. Effective November 1, 1995, the Company acquired
control of the Association as a result of a reorganization.
E-32
<PAGE>
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.
NHS FINANCIAL, INC.
Date: March 19, 1996 By: /s/ JAMES W. BARNETT
-----------------------------------
James W. Barnett,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
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.
<TABLE>
<C> <S> <C>
NAME TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
/s/ JAMES W. BARNETT
------------------------------------------- Director, Chief Executive March 19, 1996
James W. Barnett, Officer, Chairman of the Board
/s/ STEVEN N. BALOFF
------------------------------------------- Director March 19, 1996
Steven N. Baloff
/S/ JODY ANNE BECKER
------------------------------------------- Director March 19, 1996
Jody Anne Becker
/s/ C. PAUL BETTINI
------------------------------------------- Director March 19, 1996
C. Paul Bettini
/s/ JOANNE FABIAN
------------------------------------------- Director Executive Vice March 19, 1996
JoAnne Fabian President, Corporate Secretary
/s/ PAT GLASNER
------------------------------------------- Director March 19, 1996
Pat Glasner
/s/ IRIS C. PERA
------------------------------------------- Director March 19, 1996
Iris C. Pera
/s/ GEORGE J. SILVESTRI, JR.
------------------------------------------- Director March 19, 1996
George J. Silvestri, Jr.
/s/ JUDITH A. WALLER
------------------------------------------- Director March 19, 1996
Judith A. Waller
/s/ ALBERT J. THOMSON
------------------------------------------- Sr. Vice President, Chief March 19, 1996
Albert J. Thomson Financial Officer
/s/ JARED L. BOOK
------------------------------------------- Vice President Controller March 19, 1996
Jared L. Book
</TABLE>
E-33
<PAGE>
EXHIBITS
E-34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ORGANIZATION
On November 1, 1995, NHS Financial, Inc. (the "Company"), a California
Corporation, became the holding company for New Horizons Savings and Loan
Association (the "Association") as a result of a reorganization of the
Association into a holding company structure. Shareholders of the Association
exchanged their shares for shares of the Company on a share-for-share basis. As
used hereafter, the "Company" means the Company and its consolidated subsidiary,
unless the context indicates otherwise.
The Association is a California chartered Savings and Loan Association whose
principal business is to attract deposits from the general public and invest
those funds in residential, construction and, to a lesser extent, commercial
real estate loans. The Company operates three savings branches in Marin County,
California and makes real estate loans in the San Francisco Bay Area,
concentrating in Marin, Sonoma and San Francisco counties.
OVERVIEW
The Company's earnings for 1995, 1994 and 1993 were $321,000, $2.5 million
and $3.3 million, respectively. The decline in earnings for 1995 compared with
1994 was principally due to a large provision for losses on loans and real
estate owned (REO) in 1995 and reduced net interest income and margins for 1995
versus 1994. Earnings for 1994 compared with 1993 were also adversely affected
by reduced net interest income and margins.
The provisions for loan and REO losses were $2.1 million, none, and $547,000
for 1995, 1994 and 1993, respectively. The increased loss provisions for 1995
include general provisions reflecting the Company's view of the California
economy and the flat Bay Area real estate market. The 1995 loss provisions also
include specific additions for certain performing loans identified as a result
of the Company's ongoing review of the loan portfolio as well as an increase in
nonperforming assets. The California economy has experienced recessionary
conditions in the last few years which have resulted in a weakened, though
slowly recovering, real estate market. Nonperforming assets as of year ends
1995, 1994 and 1993 were $5.7 million, $3.4 million and $4.8 million,
respectively.
Net interest income for 1995, 1994 and 1993 was $7.6 million, $9.4 million
and $11.3 million, respectively. Lower net interest income was recorded in 1995
compared with 1994 even though average earning assets for 1995 increased
approximately 6% from the average for 1994. For most of 1994 and for the first
quarter of 1995, market interest rates rose rapidly. The Company's net interest
margin in 1995 was adversely affected by rising interest rates since the major
portion of the loan portfolio is indexed to the Federal Home Loan Bank Eleventh
District Cost of Funds Index, or COFI, an adjustable rate mortgage (ARM) index
that typically lags behind current market interest rate movements. As a result,
the Company's cost of funds increased more rapidly than the yields on its ARM
loans. With the drop in interest rates in the second half of 1995 and the
repricing at maturity of substantial amounts of higher cost deposits in the
first quarter of 1996, the Company expects that its net interest margin will
improve from year end 1995 levels. Net interest income for 1994 decreased 17%
from 1993 due to the unfavorable relative effect of rising interest rates on the
upward repricing of deposits rates compared with adjustments to loan yields from
the ARM portfolio.
General and administrative expenses were $5.1 million, $5.2 million and $5.4
million for 1995, 1994 and 1993, respectively. This favorable decline in
operating expenses primarily reflects management efforts to control overhead,
while growing the Company's asset base.
Customer deposits increased from $214 million at December 31, 1994 to $247
million at December 31, 1995, a 15% growth. Loans receivable increased from $239
million at December 31, 1994 to $257 million at year end 1995, an 8% growth. The
increase in deposits resulted from specific marketing programs for deposit
growth and was assisted by deposit inflows at the Novato branch which opened in
August of 1994. Loan growth primarily resulted from the excess of loan
originations and purchases in 1995 over loan payoffs and other principal
repayments as higher market interest rates during much of 1995 significantly
reduced loan refinancings, compared with levels in 1994 and 1993.
E-35
<PAGE>
The Company met and exceeded all regulatory capital tests at December 31,
1995, and is deemed to be "well-capitalized".
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Company's net interest income is determined by both its interest rate
spread and net interest margin. Interest rate spread is the difference between
the yields earned on interest-earning assets and the rates paid on deposits and
borrowings. Margin is interest rate spread adjusted for the excess of interest-
earning assets over interest-costing liabilities and is a major determinant of
net interest income. The Company's interest rate spread and margin are
influenced by changes in market interest rates as, for the reasons discussed
below, the Company's liabilities tend to respond to interest rate movements more
rapidly than its assets.
At December 31, 1995, 87% of the Company's gross loan portfolio consists of
ARM loans which are tied to COFI with rates that adjust semi-annually. Because
of this semi-annual repricing factor and the lag between the monthly change in
COFI and the related change in the Company's ARM loans indexed to COFI, the time
between a change in COFI and an adjustment to the rate on ARM loans can range
from three to six months. In addition, the Company's ARM loans have restrictions
on the maximum amounts of semi-annual changes in interest rates and payments.
Thus, in times of rapidly rising interest rates, the repricing of the ARM loans
will adversely lag upward movements in the Company's cost of funds. Conversely,
in a significant falling rate environment, ARM loan repricing and interest
income will favorably lag the decrease in the Company's cost of funds.
Volatile changes in market interest rates exacerbate the lag in the
adjustment speed of COFI. The Company is considering the origination of ARM
loans repricing from indexes that more rapidly reflect changes in market
interest rates and/or modifying the rate adjustment speed of future COFI loan
originations.
Net interest income was $7.6 million in 1995 compared with $9.4 million in
1994 and $11.3 million in 1993. The Company's net interest margin was 2.73%,
3.58% and 4.10% in 1995, 1994 and 1993, respectively.
Market interest rates reached historical low levels in 1993. The COFI lag
discussed above favorably increased the Company's net interest income and margin
in 1993. In 1994, rapidly rising interest rates reduced both measurements as the
Company's cost of funds began to increase faster than its yield on loans. Market
interest rates peaked during the first quarter of 1995 and moderately declined
throughout the rest of 1995. As a result, the Company's cost of funds increased
rapidly for much of 1995 compared with slower increases in the yield on the loan
portfolio. In addition, the Company introduced a marketing program for
certificate of deposits which increased certificates of deposit by $35 million
during the first quarter of 1995.
During January 1996, $82.6 million of relatively higher cost term deposits
matured. At January 31, 1996, the Company's cost of funds dropped to 5.38% from
5.81% at year end 1995 and its margin increased to 3.33% from 2.90%,
respectively.
INTEREST INCOME
Interest income on loans for 1995, compared with 1994, increased $2.2
million to $20.6 million from $18.4 million in 1994. Approximately $1 million of
this increase resulted from a 5% increase in average loans receivable in 1995
versus 1994. The remaining portion of the increase in interest income resulted
from an increase in average 1995 loan portfolio yield (including amortization of
deferred loan origination fees) to 8.17% from 7.67% for 1994. As previously
discussed above, the Company's ARM loans tied to COFI began to reprice upward
during the fourth quarter of 1994 and throughout most of 1995 due to rising
market interest rates in 1994 and the first quarter of 1995.
Interest income on loans for 1994, compared with 1993, decreased $2.4
million to $18.4 million from $20.8 million. Most of this decrease resulted from
the effect of the downward repricing of the ARM loan portfolio during the second
half of 1993 and the first half of 1994 as a result of low interest rates during
1993 and early 1994.
E-36
<PAGE>
Interest and dividend income on mortgage-backed securities and investment
securities, including stock of the Federal Home Loan Bank of San Francisco
(FHLBSF), increased $395,000, or 31%, in 1995 from 1994. This increase primarily
arose from greater levels of investments in callable U.S. Government Agency
notes in 1995 as excess cash inflows resulting from the Company's 1995 deposit
growth over loan funding needs were invested. Interest and dividend income from
the mortgage-backed and investment securities portfolio decreased by $234,000 to
$1.3 million in 1994 from $1.5 million in 1993. This 1994 net decrease primarily
resulted from lower average securities balances in 1994 over 1993 because of the
sale of mortgage-backed securities in 1994.
The following table represents yields and rates paid on various assets and
liabilities for the years indicated.
<TABLE>
<CAPTION>
1995 1994 1993
END OF YEAR FOR YEAR END OF YEAR FOR YEAR END OF YEAR FOR YEAR
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Average Yield:
Loan portfolio (1)....................... 8.56% 8.17% 7.69% 7.67% 8.13% 8.57%
Mortgage-backed securities............... 6.14% 6.19% 6.07% 5.67% 5.02% 4.73%
Other interest earning assets (2)........ 5.35% 6.19% 3.65% 4.46% 2.12% 3.38%
----------- ----------- ----------- ----------- ----------- -----------
Total average yield:....................... 8.31% 7.96% 7.56% 7.46% 7.78% 8.08%
----------- ----------- ----------- ----------- ----------- -----------
Average Cost:
Deposits................................. 5.84% 5.65% 4.73% 4.15% 3.94% 4.32%
FHLB advances............................ 5.46% 5.38% 5.34% 4.82% 4.15% 3.96%
Other borrowings......................... -- -- -- 3.96% 3.50% 3.47%
----------- ----------- ----------- ----------- ----------- -----------
Total average cost:........................ 5.81% 5.63% 4.79% 4.21% 3.95% 4.23%
----------- ----------- ----------- ----------- ----------- -----------
Interest rate spread....................... 2.50% 2.33% 2.77% 3.25% 3.83% 3.85%
Net interest margin........................ 2.90% 2.73% 3.15% 3.58% 4.11% 4.10%
</TABLE>
- ------------------------
(1) The yield on the loan portfolio includes the effect of amortization of
deferred loan fees and discounts.
(2) Included in other interest earning assets are investment securities, stock
of the FHLBSF and overnight deposits.
INTEREST EXPENSE
Interest expense on customer deposits increased $4.7 million to $13.7
million in 1995 from $9.0 million in 1994. Approximately $3.5 million of this
increase in 1995 interest expense resulted from the effect of the rapid rise in
market interest rates during most of 1994 and the first quarter of 1995 on the
interest cost of the Company's certificates of deposit. The remaining portion of
the increase in deposit interest expense reflected a 15% growth in deposits
during 1995. Much of this deposit growth occurred in the first quarter of 1995
as a result of a marketing program for certificates of deposit offering
attractive rates and terms including deposit add-to features. Interest expense
on FHLBSF advances decreased primarily due to reduced levels of advances in 1995
versus 1994.
Interest expense on customer deposits decreased $495,000 to $9.0 million in
1994 from $9.5 million in 1993. This decrease reflects both a decrease in
average cost and a decrease in average deposits. The cost of FHLBSF advances and
other borrowings in 1994 decreased $305,000 primarily reflecting reduced average
balances of these liabilities in 1994 compared with 1993.
E-37
<PAGE>
The following table sets forth the changes in net interest income due to
changes in the rate and volume of the Company's interest-earning assets and
interest-bearing liabilities and the net effect of both.
<TABLE>
<CAPTION>
1995 COMPARED WITH 1994 1994 COMPARED WITH 1993
INCREASE/(DECREASE) (1) INCREASE/(DECREASE) (1)
------------------------------- ---------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- --------- --------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans.................................................. $ 1,018 1,216 2,234 (333) (2,155) (2,488)
Mortgage-backed securities............................. (145) 82 (63) (588) 227 (361)
Other interest-earning assets.......................... 303 156 459 56 71 127
--------- --------- --------- --- --------- ---------
Total Interest Income................................ 1,176 1,454 2,630 (865) (1,857) (2,722)
--------- --------- --------- --- --------- ---------
Interest Expense:
Deposits............................................... 1,124 3,543 4,667 (131) (364) (495)
FHLBSF advances........................................ (272) 115 (157) (76) 196 120
Other borrowings....................................... (100) -- (100) (490) 65 (425)
--------- --------- --------- --- --------- ---------
Total Interest Expense............................... 752 3,658 4,410 (697) (103) (800)
--------- --------- --------- --- --------- ---------
Net Interest Income...................................... $ 424 (2,204) (1,780) (168) (1,754) (1,922)
--------- --------- --------- --- --------- ---------
--------- --------- --------- --- --------- ---------
</TABLE>
- ------------------------
(1) The changes have been computed as follows: average balance changes -- change
in volume holding initial rate constant; average rate changes -- change in
average rate holding the initial balance constant; changes attributable to
both volume and rate have been allocated proportionately.
PROVISION FOR LOSSES ON LOANS AND REO
See ASSET QUALITY, below.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Non-interest income and non-interest expense by major categories are shown
in the Consolidated Statements of Operations for the three years ended December
31, 1995, as part of the Company's consolidated financial statements included in
this 1995 Annual Report.
Non-interest income was $371,000, $313,000 and $369,000 for 1995, 1994 and
1993, respectively. Non-interest income for 1994 includes a reduction of $77,000
for losses on sales of securities available for sale. Without such loss, the
1994 total would be in line with non-interest income for 1995 and 1993. The
largest category of non-interest income is miscellaneous loan and deposit fees
including loan late charges and penalty fees on customer early deposit
withdrawals.
General and administrative expenses were $5.1 million, $5.2 million and $5.4
million in 1995, 1994 and 1993, respectively. The ratio of overhead expenses to
average assets was 1.79%, 1.95% and 1.90%, respectively. This overall favorable
trend in overhead expenses primarily reflects management efforts to control
overhead.
Compensation expense includes a profit sharing plan accrual of $116,000 for
1994, which was reversed in 1995. Occupancy expenses increased 17% from $479,000
in 1994 to $559,000 in 1995 mainly because of the opening of the Novato branch
in August of 1994. Professional fees expenses were $401,000, $500,000 and
$554,000 for 1995, 1994 and 1993, respectively. In 1994 professional fees
included $125,000 relating to a terminated merger proposal with another
financial institution while 1995 fees included $140,000 of non-recurring cost
related to the reorganization of the Association into a holding company
structure. The increase in depreciation and amortization expense from 1994 to
1995 reflects depreciation on new computer equipment purchased in 1995 and a
full year in 1995 of operations of the Novato branch.
E-38
<PAGE>
FINANCIAL CONDITION
SECURITIES
From time to time the Company purchases mortgage-backed securities and other
investment securities, primarily callable U.S. Government Agency notes. The
Company utilizes its securities portfolio to effectively invest periodic excess
cash flows in interest earning assets, to enhance net interest income and margin
and to meet regulatory liquidity requirements (see under LIQUIDITY, below).
At December 31, 1995, the securities portfolio was $23.9 million compared
with $15.3 million at year-end 1994. Mortgage-backed securities decreased from
year-end 1994 to year-end 1995 by $2.4 million while other investment securities
grew by $11 million, from none in 1994. The Company used the cash flows from the
mortgage-backed securities to reduce borrowings and purchased investment
securities to absorb excess cash flows and enhance net interest income.
LOANS RECEIVABLE
The Company primarily originates ARM loans which reprice semi-annually based
on the COFI index. At December 31, 1995, 87% of the gross loan portfolio
consisted of ARM loans. By concentrating on ARMs, as well as 12 to 18 month
construction loans and in some cases 3 to 7 year fixed rate/ARM loans, the
Company is better able to deal with interest rate risks than it would if the
portfolio primarily consisted of fixed rate loans. See MANAGEMENT OF INTEREST
RATE RISK AND SENSITIVITY, below.
The following is a summary of the Company's gross loan portfolio by property
category (before deductions for construction loans in process, deferred loan
fees, and allowance for loan losses) at December 31:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1995 1994
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
One-to-four family............................................. $ 157,301 57.21% $ 145,002 56.42%
Multi-family................................................... 43,184 15.71% 39,186 15.25%
Construction................................................... 29,722 10.81% 27,643 10.76%
Commercial..................................................... 39,586 14.40% 40,034 15.58%
Land........................................................... 4,812 1.75% 4,866 1.89%
---------- ---------- ---------- ----------
274,605 99.88% 256,731 99.90%
Loans secured by savings accounts................................ 337 0.12% 292 0.10%
---------- ---------- ---------- ----------
$ 274,942 100.00% $ 257,023 100.00%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The Company's primary lending niche is to originate loans for home purchase,
refinance or construction of one-to-four family properties located in Marin,
Sonoma and San Francisco counties. To a lesser extent the Company originates
multi-family loans, and to a much lesser extent, commercial property and land
loans in the same counties. Home loan originations generally are for greater
amounts than the maximum $207,000 limit for conforming home loans. The average
loan size for home loans, and for all loans, in the Company's loan portfolio at
December 31, 1995 was $220,000 and $258,000, respectively. Construction lending,
primarily for homes, is an important part of the Company's loan business. In
1995 and 1994, the Company was one of the top three residential construction
lenders in Marin and San Francisco counties.
The Company believes that construction lending and income property lending
affords it an opportunity to receive interest income at higher yields than those
obtainable from home loan lending. Nevertheless, loans on income properties and
for residential construction generally present a higher risk than do one-to-four
family lending due to the sensitivity of the underlying properties to changes in
economic conditions. Management takes such risks into account when it
establishes the Company's loan rates, underwriting standards and loss
allowances.
E-39
<PAGE>
Total loan originations for 1995, 1994 and 1993 were $52.2 million, $61.7
million and $67.2 million, respectively. Construction loans originated in 1995,
1994 and 1993 were $27.8 million, $24.9 million and $28.0 million, respectively.
Loan purchases for the same periods were $7.3 million, $3.8 million and $40,000.
Occasional purchases of loans and loan participations from local lenders are
utilized to assist the Company in meeting its asset/liability objectives. There
were no loan sales for the three years ended December 31, 1995. Originations for
1995 were below levels for 1994 and 1993 due to increased competition in the
Company's geographical lending market and a general slowdown in real estate
activity in Marin County.
The 1995 increase in gross loans outstanding by $18 million to $275 million
at December 31, 1995, resulted from originations combined with significantly
reduced loan payoffs in 1995 compared with levels for 1994 and 1993. Principal
repayments for loans were $39 million in 1995, $68 million in 1994 and $61
million in 1993. The year 1993 and the first half of 1994 were periods of very
high levels of refinancing activity as market interest rates for loans reached
recent historical lows. Loan payoffs in 1995 declined as higher interest rates
made it less beneficial for borrowers to refinance their loans.
The Company's future levels of loan originations and portfolio growth will
depend on the pace of recovery of the Northern California real estate market,
the extent of competition for loans in the Company's geographical market,
borrower preference for fixed or ARM loans and the relationship of loan payoffs
to borrower refinancing opportunities.
CUSTOMER DEPOSITS
Customer deposits increased by $33 million to $247 million at December 31,
1995 compared with $214 million at year-end 1994. Certificates of deposit
increased $43 million and transaction account balances, including money market
savings accounts, dropped by $10 million at year-end 1995 from year-end 1994.
The increase in certificates of deposit reflected a marketing program of the
Company, in effect during the first quarter of 1995, which promoted certificates
of deposit by offering attractive rates and other terms including deposit add-to
features. As a result, certificates of deposit increased $35 million in the
first quarter of 1995. This 1995 deposit growth was also assisted by the Novato
branch which opened in August of 1994.
The decline in transaction account balances, including money market savings,
of $10 million in 1995 was a continuation of the trend the Company has
experienced since 1992. Rates paid to customers of such accounts have generally
been declining over the past few years. In response, depositors have been
partially or fully transferring their funds to higher rate certificates, to
money market funds offered by non-bank financial organizations and to other
savings and investments. During the fourth quarter of 1995, the Company raised
its rates on money market savings accounts to a market level. The Company has
set a goal to double its percentage of transaction and money market accounts to
total deposits over the next several years from the current level of 13% as of
December 31, 1995.
BORROWINGS
Advances from the FHLBSF were $21 million at December 31, 1995, compared
with $25 million at year-end 1994. Borrowings are used to provide funds for the
origination of loans, the purchase of securities and to supplement cash flows
for other purposes when necessary.
ASSET QUALITY
Provisions for loan and REO losses were $2.1 million, none and $547,000 for
1995, 1994 and 1993, respectively. The increased loss provisions for 1995
include general provisions reflecting the Company's view of the California
economy and the flat Bay Area real estate market. The 1995 loss provisions also
include specific additions for certain performing loans identified as a result
of the Company's ongoing review of the loan portfolio as well as an increase in
nonperforming assets. The California economy has experienced recessionary
conditions in the last few years which has resulted in a weakened, though slowly
recovering, real estate market. However, the Bay Area real estate market, where
the Company lends, is considered to be stronger than that of Southern
California.
E-40
<PAGE>
DELINQUENT LOANS
Delinquent loans by property type at December 31, 1995 and 1994, were as
follows:
<TABLE>
<CAPTION>
NUMBER OF DAYS DELINQUENT
--------------------------------------------------------------------------------------
30-59 60-89 90 OR MORE TOTAL
-------------------- -------------------- -------------------- --------------------
1995 1994 1995 1994 1995 1994 1995 1994
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family.................. $ 6,761 6,668 1,747 1,185 2,385 2,162 10,893 10,015
Multi-family........................ 262 -- 867 -- -- -- 1,129 --
Construction and land............... 728 374 204 -- 1,624 -- 2,556 374
Commercial real estate.............. 1,722 1,188 609 619 -- -- 2,331 1,807
--------- --------- --------- --------- --------- --------- --------- ---------
Total............................. $ 9,473 8,230 3,427 1,804 4,009 2,162 16,909 12,196
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Delinquencies to gross loans........ 3.45% 3.20% 1.25% 0.70% 1.46% 0.84% 6.15% 4.75%
</TABLE>
Delinquent loans in the 60-89 day and 90 or more days categories
significantly increased from year-end 1994 to year-end 1995. The 60-89 category
at year-end 1995 included two larger loans with balances of $1.0 million and
$609,000. The first loan is collateralized by an apartment house that is
experiencing cash flow problems and a potential decline in property value. The
Company has provided $160,000 to cover any potential loss on the loan. The
second loan is on a commercial property in San Francisco where, as part of a
bankruptcy court settlement, the borrower continues to make current payments but
remains 60 days delinquent. Individual loans in the 90 or more category are
discussed under NONPERFORMING ASSETS, below.
A significant portion of the Company's loan portfolio consists of loans with
balances of $500,000 or more. The dollar amount of delinquent loans at any month
end can be influenced by just a few loans that become delinquent. Therefore,
delinquencies, particularly in the 30-59 day category, will fluctuate due to
large loans becoming occasionally delinquent.
NONPERFORMING ASSETS
Nonperforming assets by property type at December 31, 1995 and 1994, were as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans:
One-to-four family....................................................... $ 2,436 2,424 2,912
Construction and land.................................................... 2,206 315 315
Commercial real estate................................................... -- -- 1,004
--------- --------- ---------
4,642 2,739 4,231
Real estate acquired by foreclosure:
One-to-four family....................................................... 984 1,028 323
Multi-family............................................................. 607 -- --
Land..................................................................... 62 153 471
Commercial............................................................... -- 130 143
--------- --------- ---------
1,653 1,311 937
Charge-offs of nonaccrual loans............................................ (633) (354) (75)
--------- --------- ---------
Gross nonperforming assets................................................. 5,662 3,696 5,093
Specific allowances for losses............................................. -- (263) (339)
--------- --------- ---------
Net nonperforming assets................................................... $ 5,662 3,433 4,754
--------- --------- ---------
--------- --------- ---------
Percent of total assets.................................................... 1.92% 1.30% 1.73%
</TABLE>
Nonaccrual loans at December 31, 1995, include three larger loans. The first
of these is a construction loan of $1.3 million used to fund the development of
12 townhouse units in Sonoma County. All units were completed and, at December
31, 1995, seven units remain unsold due to a slow real estate market for such
E-41
<PAGE>
properties. Subsequent to year end, four of the units were sold. The Company has
provided for potential losses of $267,000. The second loan of $730,000, which is
collateralized by a single-family property, paid off in full in early 1996. The
last loan is a $611,000 land loan for which the Company is in process of
foreclosing.
Real estate acquired by foreclosure (REO) at December 31, 1995, consists of
seven properties, the largest being an apartment condo building in San Francisco
carried at $607,000. All of the properties are carried on the Company's books at
estimated fair value reduced by estimated costs of holding and disposition. Fair
value is based upon appraisals and other information available from the real
estate community. Management actively seeks to dispose of REO at its fair value.
During 1995 and 1994, sales of REO aggregated $1.2 million and $818,000,
respectively.
Management periodically reviews specific loans and REO on an individual
basis. Such evaluation includes an analysis of creditworthiness, cash flows,
financial status of the borrower and the estimated fair value of the underlying
property. The Company provides for losses on individual assets when its
investment in the asset is not expected to be fully collectible or realizable.
TROUBLED DEBT RESTRUCTURINGS
Troubled debt restructurings are loans whose terms have been modified, due
to borrower financial difficulties, to allow a stated interest rate and/or
monthly payment rate lower than prevailing in the market. At December 31, 1995
and 1994, the Company had three such loans totaling $3.9 million and $4.2
million, respectively. All such loans were current according to their modified
terms.
ALLOWANCE FOR LOSSES
The Company maintains an overall loan loss reserve to cover estimated
potential losses in the portfolio. This general valuation allowance (GVA) is
provided through periodic charges to income and is determined based upon
management's analysis. This analysis incorporates a number of factors including
current economic considerations and the level of classified and nonperforming
loans, management's assessment of credit risk inherent in its portfolio, past
loss experience, and the Company's underwriting practices.
The following is a summary of changes in the allowance for loan losses:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loan loss allowance at beginning of year................................... $ 3,412 3,993 4,692
Provision for loan losses.................................................. 2,003 -- 231
Charge-offs, net of recoveries............................................. (1,907) (581) (930)
--------- --------- ---------
Loan loss allowance at end of year......................................... $ 3,508 3,412 3,993
--------- --------- ---------
--------- --------- ---------
Loan loss allowance at the end of each year:
General valuation allowance.............................................. $ 3,508 $ 2,676 $ 3,177
Specific loss allowances................................................. -- 736 816
Ratios of:
GVA/nonperforming assets................................................. 61.96% 77.94% 66.83%
GVA/gross loans.......................................................... 1.28% 1.04% 1.22%
GVA/nonperforming loans.................................................. 87.50% 123.75% 79.92%
</TABLE>
During 1995, the Company adopted the direct charge-off method of accounting
for nonperforming loans, as well as for performing loans considered by
management as impaired. Charge-offs in 1995 include $736,000 of specific loan
loss allowances provided for in prior periods. Charge-offs during 1995 included
$741,000 which under the Company's former method would have been treated as
specific loss allowances at December 31, 1995. This change in procedure has not
affected current loss provisions and will not alter provisions for loan losses
in future periods.
Management considers its allowance for losses to be adequate to cover losses
from loan and REO assets. However, future adjustments may be necessary and
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making such determinations. In addition,
E-42
<PAGE>
various regulatory agencies review the Company's allowance for losses as an
integral part of their examination process. Such agencies may require the
Company to recognize additions to this allowance based on their judgment
relating to information available to them at the time of their examination.
MANAGEMENT OF INTEREST RATE RISK AND SENSITIVITY
Savings institutions are subject to interest rate risks to the degree that
interest-bearing liabilities reprice or mature more rapidly or on a different
basis than interest-earning assets. The Company's strategy for managing interest
rate risk has been to reduce the sensitivity of its earnings to interest rate
variations by more closely matching the effective maturities or repricing
characteristics of its interest rate sensitive assets and liabilities. However,
there are certain characteristics of the Company's asset and liability products,
as well as those of other savings institutions, which under certain
circumstances may unfavorably mitigate the effectiveness of this strategy.
Certain assets and liabilities may react in varying degrees to changes in market
interest rates. Interest rates on certain asset and liability products may
respond in varying degrees to changes in market interest rates. Additionally,
the Company's ARM loans lag behind changes in the COFI index (see NET INTEREST
INCOME, above) and have rate caps which may limit changes in their interest
rates.
To manage the rate sensitivity and maturity balance of such assets and
liabilities, the Company emphasizes origination of loans with adjustable
interest rates, the funding of short-term construction loans and, at times,
production of three to seven year fixed rate loans which convert to ARM loans at
the end of their fixed periods. The Company's interest rate risk policies are
established and monitored by its Asset/Liability Committee. The Committee
reviews the sensitivity of the Company's capital and net interest income to
interest rate changes -- both up and down -- through simulation/duration
modeling.
During 1994, market interest rates were highly volatile. An increase of
approximately 350 basis points in the yield on one year Treasury Bills adversely
affected the Company's net interest income and margin in 1994 and into 1995.
During 1995, market interest rates on one year Treasury Bills declined by
approximately 200 basis points, which management expects will improve the
Company's results of operations in 1996.
The following table sets forth the repricing frequency of the Company's
major asset and liability categories as of December 31, 1995, as well as certain
information regarding the difference (referred to as "the gap") between
interest-earning assets and interest-bearing liabilities in future periods.
Generally, the lower the amount of this gap, the less sensitive are the
Company's earnings to interest rate changes up or down. This table is a common
financial reporting disclosure for savings institutions. However, the usefulness
of the gap method of measuring interest rate sensitivity is limited because it
does not take into account the differing repricing characteristics of various
types of assets and liabilities. In addition, the interest rate sensitivity of
the Company's assets and liabilities illustrated in the following table could
vary significantly if different assumptions were used or if actual experience
differed from the assumptions set forth.
E-43
<PAGE>
<TABLE>
<CAPTION>
GREATER
ASSETS/LIABILITIES BY REPRICING DATES WITHIN ONE THAN 5
AT DECEMBER 31, 1995 YEAR 1-3 YEARS 3-5 YEARS YEARS TOTAL
- ------------------------------------------------------------ ---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Cash and investments (1).................................... $ 7,693 -- 11,000 -- 18,693
Mortgage-backed securities (2).............................. 1,545 6,315 3,506 1,518 12,884
Loans receivable
Adjustable rate........................................... 221,661 9,986 5,038 3,425 240,110
Construction (3).......................................... 16,879 -- -- -- 16,879
Fixed rate (2)............................................ 3,227 1,013 202 65 4,507
Consumer.................................................. 337 -- -- -- 337
---------- --------- --------- --------- ---------
Total Interest-earning Assets............................... 251,342 17,314 19,746 5,008 293,410
---------- --------- --------- --------- ---------
INTEREST-BEARING LIABILITIES
Deposits
Certificates of deposit................................... 181,977 20,327 12,283 133 214,720
Money market accounts..................................... 23,778 -- -- -- 23,778
Checking accounts (4)..................................... 2,319 2,319 2,319 -- 6,957
Passbook accounts (4)..................................... 499 499 499 -- 1,497
FHLBSF advances............................................. 7,000 10,000 4,000 -- 21,000
---------- --------- --------- --------- ---------
Total interest-bearing liabilities.......................... 215,573 33,145 19,101 133 267,952
---------- --------- --------- --------- ---------
Repricing gap-positive (negative)........................... $ 35,769 (15,831) 645 4,875 25,458
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Cumulative repricing gap.................................... $ 35,769 19,938 20,583 25,458
---------- --------- --------- ---------
---------- --------- --------- ---------
Cumulative repricing gap as a percentage of total
interest-earning assets.................................... 12.19% 6.80% 7.02% 8.68%
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Callable government agency securities are classified as repricing in their
contractual maturity time period although management expects them to be
called by their issuers in 1996.
(2) Based on assumed annual prepayment rates which approximate the Company's
historical experience.
(3) Construction loans are shown net of loans in process.
(4) Checking and passbook accounts are assumed to represent a core deposit base
with an extended reduction rate.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's primary sources of funds include loan and securities
repayments, net deposit inflows, advances from the FHLBSF, collateralized
short-term borrowings and cash flows generated from operations. The Company uses
its liquidity resources principally to fund real estate loans, repay maturing
borrowings, fund maturing deposit certificates and deposit withdrawals and
provide for its foreseeable short and long-term needs. The Company expects to be
able to fund or refinance, on a timely basis, its commitments and liabilities.
Office of Thrift Supervision regulations require a savings institution to
maintain a specified ratio of liquidity, such that its liquid assets are not
less than 5% of the average balance of its total deposits and its borrowings due
in one year or less. At December 31, 1995 and 1994, the Bank had liquidity
ratios of 8.38% and 6.52%, respectively.
CAPITAL
The Company met and exceeded all regulatory capital tests at December 31,
1995, and is deemed to be "well-capitalized." See Note 10 of Notes to
Consolidated Financial Statements for further information.
E-44
<PAGE>
OTHER ISSUES
IMPACT OF INFLATION AND CHANGING PRICES
The Company's consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial condition and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time, due to the fact that almost all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than general levels of inflation. Interest rates do not necessarily
move in the same direction or magnitude as the prices of goods and services.
ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board has issued Financial Accounting
Standard (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" and No. 123, "Accounting for
Stock-Based Compensation."
The Company will adopt FAS No. 121 effective January 1, 1996, and believes
that adoption will not have a material impact on 1996 operating results. The
Company will adopt the disclosure requirements of FAS No. 123 in 1996 but
continue to account for its stock option plan under Accounting Principles Board
Opinion No. 25 as permitted under FAS 123.
E-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NHS Financial, Inc.:
We have audited the accompanying consolidated statements of financial
condition of NHS Financial, Inc. and subsidiary (the "Company") (formerly New
Horizons Savings and Loan Association) as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 principles 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NHS
Financial, Inc. and subsidiary as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
San Francisco, California
February 15, 1996
E-46
<PAGE>
NHS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Cash............................................................................. $ 169,202 $ 240,737
Interest-bearing deposits........................................................ 5,310,416 2,970,597
-------------- --------------
Cash and cash equivalents.................................................... 5,479,618 3,211,334
Mortgage-backed securities available for sale, at fair value..................... 4,053,873 9,268,226
Investment securities held to maturity (fair value: 1995, $11,025,888)........... 11,000,000 --
Mortgage-backed securities held to maturity (fair value: 1995, $8,835,578; 1994,
$5,709,121)..................................................................... 8,829,881 5,996,172
Loans receivable, net............................................................ 257,040,178 239,018,980
Real estate owned, net........................................................... 1,652,666 1,270,860
Accrued interest receivable:
Loans.......................................................................... 1,740,432 1,411,585
Securities..................................................................... 223,926 104,617
Investment in Federal Home Loan Bank of San Francisco stock, at cost............. 2,212,500 2,247,400
Leasehold improvements and equipment, net........................................ 842,338 873,214
Other assets..................................................................... 1,170,944 1,617,496
-------------- --------------
Total assets................................................................. $ 294,246,356 $ 265,019,884
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer Deposits................................................................ 246,952,323 214,396,398
Advances from the Federal Home Loan Bank of San Francisco........................ 21,000,000 25,000,000
Other liabilities................................................................ 2,063,389 1,642,292
-------------- --------------
Total liabilities............................................................ 270,015,712 241,038,690
-------------- --------------
Stockholders' equity
Capital stock, no par value. Authorized 5,000,000 shares; issued and
outstanding, 2,522,827 shares at December 31, 1995 and 1994................... 11,772,003 11,772,003
Unrealized loss on securities available for sale, net of tax................... (27,220) (359,277)
Retained earnings (substantially restricted)................................... 12,485,861 12,568,468
-------------- --------------
Total stockholders' equity................................................... 24,230,644 23,981,194
-------------- --------------
Commitments and contingencies....................................................
Total liabilities and stockholders' equity................................... $ 294,246,356 $ 265,019,884
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
E-47
<PAGE>
NHS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Loans receivable.................................................. $ 20,589,006 18,354,811 20,843,072
Mortgage-backed securities........................................ 888,952 953,029 1,313,870
Other investments................................................. 780,437 320,944 193,937
------------- ------------- -------------
22,258,395 19,628,784 22,350,879
------------- ------------- -------------
Interest expense:
Customer deposits................................................. 13,700,621 9,032,816 9,527,456
Advances from the Federal Home Loan Bank of San Francisco......... 913,351 1,070,537 950,974
Other borrowings.................................................. -- 100,415 525,515
------------- ------------- -------------
14,613,972 10,203,768 11,003,945
------------- ------------- -------------
Net interest income before provision for loan losses............ 7,644,423 9,425,016 11,346,934
Provision for loan losses........................................... 2,002,600 -- 230,750
------------- ------------- -------------
Net interest income after provision for loan losses............... 5,641,823 9,425,016 11,116,184
------------- ------------- -------------
Non-interest income:
Net gain (loss) on sale of real estate owned...................... 21,598 132,678 (65,454)
Income from real estate owned..................................... 40,078 -- 88,279
Loss on sale of securities........................................ -- (77,458) --
Loan and deposit fees............................................. 258,930 216,734 223,557
Other............................................................. 50,770 40,874 122,795
------------- ------------- -------------
371,376 312,828 369,177
------------- ------------- -------------
Non-interest expense:
General and administrative expense:
Compensation and benefits....................................... 2,337,752 2,427,382 2,394,620
Deposit insurance premium and regulatory assessments............ 605,771 589,753 644,025
Rent and other occupancy........................................ 559,078 478,769 449,749
Professional fees............................................... 400,796 499,580 554,116
Depreciation and amortization................................... 344,823 295,203 318,065
Information systems............................................. 192,806 194,251 189,912
Other........................................................... 706,578 744,975 819,539
------------- ------------- -------------
5,147,604 5,229,913 5,370,026
Expenses of real estate owned..................................... 216,800 179,859 221,606
Provision for losses on real estate owned......................... 100,000 -- 316,358
------------- ------------- -------------
5,464,404 5,409,772 5,907,990
------------- ------------- -------------
Income before income taxes.......................................... 548,795 4,328,072 5,577,371
Income taxes........................................................ 227,750 1,802,634 2,295,823
------------- ------------- -------------
Net income.......................................................... $ 321,045 2,525,438 3,281,548
------------- ------------- -------------
------------- ------------- -------------
Earnings per share $0.13 1.00 1.30
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
E-48
<PAGE>
NHS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
UNREALIZED
RETAINED LOSS ON
EARNINGS SECURITIES
(SUBSTANTIALLY AVAILABLE
SHARES CAPITAL STOCK RESTRICTED) FOR SALE TOTAL
------------ ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992............... 2,192,946 8,661,513 10,397,546 -- 19,059,059
Cash dividends, $0.08 per share.......... -- -- (175,436) -- (175,436)
Net income............................... -- -- 3,281,548 -- 3,281,548
------------ ------------- ------------- ----------- -------------
Balance, December 31, 1993............... 2,192,946 8,661,513 13,503,658 -- 22,165,171
Adoption of SFAS No. 115................. -- -- -- -- --
Exercise of stock options................ 817 831 -- -- 831
Cash dividends, $0.16 per share.......... -- -- (350,969) -- (350,969)
Net income............................... -- -- 2,525,438 -- 2,525,438
Unrealized loss on securities available
for sale, net of tax.................... -- -- -- (359,277) (359,277)
Retroactive effect of 15% stock dividend
announced January 20, 1995 at a market
value of $9.45 per share................ 329,064 3,109,659 (3,109,659) -- --
------------ ------------- ------------- ----------- -------------
Balance, December 31, 1994............... 2,522,827 11,772,003 12,568,468 (359,277) 23,981,194
Cash dividends, $0.16 per share.......... -- -- (403,652) -- (403,652)
Net income............................... -- -- 321,045 -- 321,045
Unrealized gain on securities available
for sale, net of tax.................... -- -- -- 332,057 332,057
------------ ------------- ------------- ----------- -------------
Balance, December 31, 1995............... 2,522,827 $ 11,772,003 12,485,861 (27,220) 24,230,644
------------ ------------- ------------- ----------- -------------
------------ ------------- ------------- ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
E-49
<PAGE>
NHS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 321,045 $ 2,525,438 $ 3,281,548
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization of net deferred loan origination fees................. (823,060) (914,245) (1,317,325)
Amortization of net premiums on mortgage-backed securities......... 73,045 197,553 746,071
Accretion of discounts on loans.................................... (19,937) (23,960) (41,655)
Provision for loan and real estate losses.......................... 2,102,600 -- 547,108
(Gain) loss on sale of real estate owned........................... (21,598) (132,678) 65,454
Loss on retirement of fixed assets................................. 16,892 6,400 --
Loss on sale of securities......................................... -- 77,458 --
Depreciation and amortization of fixed assets...................... 344,823 295,203 318,065
FHLBSF stock dividends............................................. (110,400) (102,900) (58,200)
(Increase) decrease in accrued interest receivable................. (448,156) 68,603 243,695
Decrease (increase) in other assets................................ 374,772 (168,866) (6,253)
(Increase) decrease in income tax receivable, net.................. (181,352) (150,853) 866,034
Increase (decrease) in other liabilities........................... 421,097 31,706 (444,119)
------------- ------------- -------------
Net cash provided by operating activities........................ 2,049,771 1,708,859 4,200,423
------------- ------------- -------------
Cash flows from investing activities:
Net (increase) decrease in loans resulting from originations, net of
principal collections............................................... (13,608,025) 6,325,578 (6,056,463)
Loans purchased...................................................... (7,257,245) (3,801,967) (40,000)
Maturities of investments in certificates of deposit................. -- -- 595,000
Purchases of leasehold improvements and equipment.................... (300,839) (257,918) (167,666)
Redemption (purchase) of FHLBSF stock................................ 145,300 128,000 (568,000)
Maturities or calls of securities held to maturity................... 3,000,000 -- 2,000,000
Purchase of securities held to maturity.............................. (14,000,000) -- (5,057,700)
Purchase of securities available for sale............................ -- (5,486,250) (4,835,966)
Principal repayments on securities held to maturity.................. 1,152,136 1,829,321 2,469,999
Principal repayments on securities available for sale................ 1,710,652 2,907,320 11,148,003
Proceeds from sale of securities available for sale.................. -- 5,354,608 --
Capital investments in real estate owned............................. -- (242,002) --
Proceeds from sale of real estate owned.............................. 1,224,261 817,779 1,943,098
------------- ------------- -------------
Net cash (used in) provided by investing activities.............. (27,933,760) 7,574,469 1,430,305
------------- ------------- -------------
Cash flows from financing activities:
Net increase (decrease) in customer deposits......................... 32,555,925 (7,015,946) 13,935,527
Proceeds from FHLBSF advances........................................ 10,700,000 27,400,000 69,250,000
Repayments of FHLBSF advances........................................ (14,700,000) (26,400,000) (74,250,000)
Proceeds from other borrowings....................................... -- 4,000,000 15,006,000
Repayments of other borrowings....................................... -- (8,817,000) (27,128,000)
Cash dividends....................................................... (403,652) (350,937) (87,718)
Exercise of stock options............................................ -- 831 --
------------- ------------- -------------
Net cash provided by (used in) financing activities.............. 28,152,273 (11,183,052) (3,274,191)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents................... 2,268,284 (1,899,724) 2,356,537
Cash and cash equivalents at beginning of year......................... 3,211,334 5,111,058 2,754,521
------------- ------------- -------------
Cash and cash equivalents at end of year............................... $ 5,479,618 $ 3,211,334 $ 5,111,058
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................................... $ 14,357,993 $ 10,209,782 $ 11,081,331
------------- ------------- -------------
------------- ------------- -------------
Income taxes....................................................... $ 480,000 $ 1,860,000 $ 990,000
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosure of non-cash investing and financing activities:
Transfer of loans to real estate owned............................... $ 1,684,469 $ 1,030,228 $ 1,237,146
------------- ------------- -------------
------------- ------------- -------------
Mortgage-backed securities transferred from available-for-sale
portfolio to held-to-maturity portfolio............................. $ 4,031,769 $ -- $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
E-50
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
On November 1, 1995, NHS Financial, Inc. (the "Company"), a California
Corporation, became the holding company for New Horizons Savings and Loan
Association (the "Association") as a result of a reorganization of the
Association into a holding company structure. Shareholders of the Association
exchanged their shares for shares of the Company on a share-for-share basis.
The Association is a California chartered Savings and Loan Association whose
principal business is to attract deposits from the general public and invest
those funds in residential, construction and, to a lesser extent, commercial
real estate loans. The Association's geographical area for attracting deposits
and making real estate loans is the San Francisco Bay Area, concentrating in
Marin and Sonoma counties and the City and County of San Francisco. Although the
Company has a diversified loan portfolio, the geographic concentration of its
borrowers implies a dependence on the regional economy and local real estate
markets.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its sole subsidiary, the Association. All significant
intercompany accounts and transactions have been eliminated. As used hereafter,
the "Company" means the Company and its consolidated subsidiary, unless the
context indicates otherwise.
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
dates of the financial statements and income and expenses during the reporting
period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior years' amounts to conform
to the current year presentation.
CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, due from banks and
certificates of deposit with an original maturity of 90 days or less.
SECURITIES
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115) as of January 1, 1994. Under SFAS 115, the Company
classifies its securities in one of three categories: trading, available for
sale, or held to maturity. Securities held to maturity are stated at amortized
cost, as the Company has the intent and ability to hold these securities to
maturity. Premiums and discounts are amortized over the estimated life of the
security, adjusted for actual prepayments, by a method approximating the
interest method. Available for sale securities are recorded at fair value.
Unrealized gains and losses, net of tax, on available for sale securities are
excluded from earnings and are reported as separate component of stockholders'
equity. Realized gains and losses for all securities are included in earnings.
The Company does not have a trading portfolio.
LOANS RECEIVABLE
Loans receivable are recorded at cost, and presented net of discounts,
unearned net loan origination fees and allowance for losses. Loans receivable
are not adjusted to the lower of cost or market because it is management's
intention, and the Company has the ability, to hold these loans to maturity or
payoff.
Interest on loans is accrued as income only to the extent considered
collectible. Generally, the Company ceases to accrue interest on loans that are
delinquent 90 days or more. Interest income deemed uncollectible
E-51
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
is reversed. Income is subsequently recognized only to the extent cash payments
are received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is in accordance with the loan terms,
at which time the loan is returned to accrual status.
The Company charges fees for originating loans. Loan origination fees and
certain direct origination costs are deferred and amortized generally over the
contractual life of the related loans. The fee amortization is accounted for as
an adjustment to the yield of the loan using the interest method. When a loan is
paid-off, the remaining unamortized balance is recognized as income.
ALLOWANCES FOR LOAN LOSSES
The Company adheres to an internal asset review system and loan loss reserve
methodology designed to provide for adequate valuation allowances to cover
estimated potential losses in the loan portfolio.
The Company considers a loan to be impaired when, based upon evaluation of
the credit worthiness, cash flows and financial condition of the borrower, and
the condition and appraised value of the collateral, it is likely that the
Company will not be able to collect all the principal and interest due under the
contractual terms of the loan. The Company provides, through a charge to income,
for estimated losses on impaired loans when fair value, including consideration
of holding and potential disposition costs, exceeds the carrying value of the
loan.
The Company maintains an overall loan loss reserve to cover estimated
potential losses in the portfolio. This general valuation allowance is provided
through periodic charges to income and is determined based upon management's
analysis. This analysis incorporates a number of factors including current
economic considerations and the level of classified and nonperforming loans,
management's assessment of credit risk inherent in its asset portfolio, past
loss experience, and the Company's underwriting practices.
Management believes that the allowance for loan losses is adequate to cover
estimated losses in its loan portfolio. However, future adjustments may be
necessary and earnings could be significantly affected if future circumstances
differ substantially from the assumptions used in making such determinations. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowances for loan losses. Such
agencies may require the Company to recognize additions to the allowances based
on their judgments of information available to them at the time of their
examination.
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS 114), issued in May 1993, applies to
all loans that are impaired and also addresses loans restructured in a troubled
debt restructuring involving a modification of terms. Under SFAS 114, impaired
loans are required to be valued based on the present value of expected future
cash flows discounted at the loan's effective interest rate or at the fair value
of the collateral.
In October 1994, the FASB issued Statement of Financial Accounting Standards
No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures". SFAS 118 amends SFAS 114 to allow a creditor to use existing
methods for recognizing interest income on an impaired loan. The Company adopted
SFAS 114 and 118 on January 1, 1995.
REAL ESTATE OWNED
Real estate acquired through foreclosure is recorded at estimated fair value
(including consideration of costs of holding and disposition) at the time of
foreclosure. Valuations are periodically performed and related adjustments, if
any, are made as a charge to income when the carrying value exceeds fair value.
E-52
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment are stated at cost, less accumulated
depreciation. Leasehold improvements, furniture and equipment are depreciated on
the straight-line basis over the estimated useful lives of the various assets.
INCOME TAXES
Effective January 1, 1992, the Association adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109
requires that income taxes be accounted for on the asset and liability method.
The objective of the asset and liability method is to establish deferred tax
assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled.
EARNINGS PER SHARE
Earnings per share are computed on the basis of the weighted average number
of shares outstanding for the year. All share and earnings per share data at and
for the years ended December 31, 1994 and 1993 have been adjusted to give effect
to a 15% stock dividend announced on January 20, 1995. Weighted average shares
used for the calculations of earnings per share were 2,522,827, 2,522,585 and
2,521,888 in 1995, 1994 and 1993, respectively. The Company has not separately
reported fully diluted earnings per share as it is not materially different from
primary earnings per share.
(2) CASH AND INVESTMENTS
The following is a summary of cash and cash equivalents at December 31:
<TABLE>
<CAPTION>
1995 1994
------------ ----------
<S> <C> <C>
Non-interest-earning deposits due from depository institutions..... $ 34,500 74,500
Cash in office..................................................... 134,702 166,237
Interest-earning deposits due from depository institutions......... 5,310,416 2,970,597
------------ ----------
$ 5,479,618 3,211,334
------------ ----------
------------ ----------
</TABLE>
Cash balances required to be held at the Federal Reserve Bank totaled
$30,000 and $70,000 at December 31, 1995 and 1994, respectively. The Company
does not maintain compensating balances or lines of credit with banks.
The following is a summary of the cost, gross unrealized holding gains and
losses and fair value of investment securities at December 31, 1995. All
investment securities were classified as held to maturity. At December 31, 1994,
the Company held no investment securities.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Held to maturity:
Federal Agency Securities $ 11,000,000 25,888 -- 11,025,888
------------- ----------- ----------- ------------
Weighted average interest rate 6.90%
-------------
</TABLE>
E-53
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(2) CASH AND INVESTMENTS (CONTINUED)
All the investment securities mature in 2000. The securities are subject to
call dates commencing in 1996 at the option of the issuer. At December 31, 1995,
$1,000,000 of investment securities were pledged as collateral for advances from
the Federal Home Loan Bank of San Francisco (FHLBSF).
In accordance with the Office of Thrift Supervision (OTS) regulations, the
Association maintains an amount greater than 5.0% of the sum of net withdrawable
savings accounts and short-term borrowings in cash, U.S. government and other
approved securities that are readily convertible to cash.
(3) MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains and losses and fair value of
mortgage-backed securities held to maturity or available for sale at December
31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Held to maturity:
FHLMC certificates..................... $ 8,829,881 14,574 (8,877) 8,835,578
------------- ----------- ---------- ------------
Available for sale:
FHLMC certificate...................... 4,118,586 -- (64,713) 4,053,873
------------- ----------- ---------- ------------
$ 12,948,467 14,574 (73,590) 12,889,451
------------- ----------- ---------- ------------
------------- ----------- ---------- ------------
Weighted average yield...................
6.14%
-------------
-------------
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Held to maturity:
FHLMC certificates..................... $ 5,996,172 -- (287,051) 5,709,121
------------- ----------- ---------- ------------
Available for sale:
FHLMC certificates..................... 9,877,170 -- (608,944) 9,268,226
------------- ----------- ---------- ------------
$ 15,873,342 -- (895,995) 14,977,347
------------- ----------- ---------- ------------
------------- ----------- ---------- ------------
Weighted average yield................... 6.07%
-------------
-------------
</TABLE>
At September 30, 1995, the Company transferred $4,031,769 of its
mortgage-backed securities from the available-for-sale portfolio to the
held-to-maturity portfolio. The net unrealized holding gain at the date of
transfer in the amount of $11,905 is being amortized as a yield adjustment over
the remaining life of the securities.
Proceeds from sale of securities classified as available for sale were
$5,354,608 in 1994. A gross loss of $77,458 was realized on securities sold in
1994. No securities were sold in 1993 or 1995. At December 31, 1995, $7,745,000
of mortgage-backed securities were pledged as collateral for advances from the
Federal Home Loan Bank of San Francisco. No securities were pledged in 1994.
E-54
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(3) MORTGAGE-BACKED SECURITIES (CONTINUED)
Maturities for mortgage-backed securities are scheduled below:
<TABLE>
<CAPTION>
CARRYING
AT DECEMBER 31, 1995: VALUE FAIR VALUES
- ---------------------------------------------------------------- ------------- ------------
<S> <C> <C>
Maturing in one year or less.................................... $ -- --
Maturing after one year through five years...................... 9,091,003 9,089,980
Maturing after five years through ten years..................... -- --
Maturing after ten years........................................ 3,792,751 3,799,471
------------- ------------
$12,883,754 12,889,451
------------- ------------
------------- ------------
</TABLE>
The schedule above is based on contractual maturities and does not consider
prepayments.
(4) LOANS RECEIVABLE
Loans receivable at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- -------------
<S> <C> <C>
Mortgage loans:
One-to-four family.......................................... $ 157,301,339 145,001,956
Multi-family.................................................. 43,183,646 39,186,186
Construction................................................ 29,722,192 27,643,150
Commercial.................................................. 39,586,517 40,033,336
Land........................................................ 4,811,654 4,866,285
-------------- -------------
274,605,348 256,730,913
Loans secured by savings accounts............................. 336,714 292,460
-------------- -------------
274,942,062 257,023,373
Less:
Loans in process............................................ 13,110,229 13,254,343
Discount on mortgage loans.................................. 104,435 110,693
Unearned loan fees.......................................... 1,179,321 1,226,823
Allowance for loan losses................................... 3,507,899 3,412,534
-------------- -------------
$ 257,040,178 239,018,980
-------------- -------------
-------------- -------------
Weighted average interest rate.............................. 8.23% 7.36%
-------------- -------------
-------------- -------------
</TABLE>
The above weighted average interest rates for loans receivable represent the
contractual interest rates on the underlying mortgage loans. If amortization of
deferred loan origination fees and loan discounts is factored in to the average
interest rate calculation, the resulting loan yields would be 8.56% and 7.69% at
December 31, 1995 and 1994, respectively.
The Company serviced participation interests in loans sold aggregating
$2,624,932, $2,934,484 and $4,879,681 at December 31, 1995, 1994 and 1993,
respectively. At December 31, 1995 and 1994, $84,331,000 and $82,054,000 of
mortgage loans were pledged as collateral for advances from the Federal Home
Loan Bank of San Francisco.
E-55
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(4) LOANS RECEIVABLE (CONTINUED)
Following is a summary of changes in the allowance for loan losses:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year......................... $ 3,412,534 3,993,020 4,692,020
Provision for losses................................. 2,002,600 -- 230,750
Charge-offs, net of recoveries....................... (1,907,235) (580,486) (929,750)
------------- ---------- ----------
Balance at end of year............................... $ 3,507,899 3,412,534 3,993,020
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
The Company implemented SFAS 114 and SFAS 118 effective January 1, 1995. At
December 31, 1995 the carrying value of loans that are considered to be impaired
under SFAS 114 totaled $4,322,459.
The following table sets forth information with respect to the Association's
nonperforming assets at December 31:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------- --------------------- ---------------------
FOREGONE FOREGONE FOREGONE
BALANCE INTEREST BALANCE INTEREST BALANCE INTEREST
------------ --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Loans accounted for on a
nonaccrual basis, net........ $ 4,009,184 432,797 2,162,357 311,894 3,975,269 380,207
Real estate owned, net........ 1,652,666 -- 1,270,860 -- 778,857 --
------------ --------- ---------- --------- ---------- ---------
Totals...................... $ 5,661,850 432,797 3,433,217 311,894 4,754,126 380,207
------------ --------- ---------- --------- ---------- ---------
------------ --------- ---------- --------- ---------- ---------
Percentage of non-performing
assets to total assets....... 1.92% 1.30% 1.73%
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
Foregone interest reflects total interest that would have accrued from the
time the loan became nonperforming. Restructured loans were $3,903,289 and
$4,225,938 at December 31, 1995 and 1994, respectively. The following is a
summary of interest foregone on restructured loans for the years ended December
31:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Interest income that would have been recognized had the loans performed
in accordance with their original terms............................... $ 323,706 322,549
Less: interest income recognized on restructured loans................. 317,116 268,352
---------- ---------
Interest foregone on restructured loans................................ $ 6,590 54,197
---------- ---------
---------- ---------
</TABLE>
(5) REAL ESTATE OWNED
Real estate owned at December 31, is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ----------
<S> <C> <C>
One-to-four residential............................................ $ 983,932 1,028,490
Multi-family residential........................................... 607,037 --
Commercial property................................................ -- 129,799
Land............................................................... 61,697 152,571
------------ ----------
1,652,666 1,310,860
Allowance for real estate losses................................... -- (40,000)
------------ ----------
$ 1,652,666 1,270,860
------------ ----------
------------ ----------
</TABLE>
E-56
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(5) REAL ESTATE OWNED (CONTINUED)
Following is a summary of changes in the allowance for real estate losses:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year............................. $ 40,000 157,589 294,000
Provision for losses..................................... 100,000 -- 316,358
Charge-offs, net of recoveries........................... (140,000) (117,589) (452,769)
----------- ---------- ----------
Balance at end of year................................... $ -- 40,000 157,589
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
(6) LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment at December 31, are summarized as
follows:
<TABLE>
<CAPTION>
ESTIMATED
1995 1994 USEFUL LIVES
------------- ----------- --------------
<S> <C> <C> <C>
Automobile........................................................... $ 25,500 25,500 3 years
Computer equipment................................................... 761,515 738,189 3-5 years
Furniture and equipment.............................................. 830,892 798,096 5-10 years
Leasehold improvements............................................... 749,501 681,741 Life of lease
------------- -----------
Total cost......................................................... 2,367,408 2,243,526
Accumulated depreciation and amortization............................ (1,525,070) (1,370,312)
------------- -----------
$ 842,338 873,214
------------- -----------
------------- -----------
</TABLE>
(7) CUSTOMER DEPOSITS
Customer deposits, their original maturity terms, and their weighted average
interest rates at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1995 1994
----------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Passbook accounts.............................................. 2.62% 2.81% $ 1,570,757 1,824,443
NOW and money market deposit accounts (MMDA)................... 3.80% 3.21% 23,704,515 32,287,738
Interest bearing checking accounts............................. 1.72% 1.76% 5,930,076 7,499,186
Non-interest checking accounts................................. -- -- 1,027,247 886,295
-------------- -------------
32,232,595 42,497,662
-------------- -------------
Certificate accounts:
3 months..................................................... 4.90% 4.45% 5,098,299 6,507,981
6 months..................................................... 5.27% 4.83% 13,623,778 19,582,779
9 months..................................................... 5.57% 5.61% 23,476,899 12,670,659
11 months.................................................... 7.07% -- 54,185,728 --
1 year....................................................... 6.11% 4.99% 40,711,626 51,944,529
2 years...................................................... 5.63% 5.04% 14,776,048 16,833,064
3 to 5 years................................................. 6.28% 5.69% 11,954,769 13,945,376
IRA.......................................................... 6.16% 5.48% 23,676,896 21,694,248
Jumbos ($90,000 minimum)..................................... 6.35% 5.44% 27,215,685 28,720,100
-------------- -------------
Total certificate accounts................................. 214,719,728 171,898,736
-------------- -------------
$ 246,952,323 214,396,398
-------------- -------------
-------------- -------------
Weighted average interest rate................................. 5.84% 4.73%
-------------- -------------
-------------- -------------
</TABLE>
E-57
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(7) CUSTOMER DEPOSITS (CONTINUED)
During January 1996, $82,594,000 of certificates of deposits matured with a
weighted average interest rate of 6.76%. At January 31, 1996, the Company's cost
of deposits was 5.38%, a 46 basis point decline from the 5.84% rate at December
31, 1995.
The Association maintains insurance on customer deposits with the Savings
Association Insurance Fund, which is administered by the Federal Deposit
Insurance Corporation.
Certificate accounts by interest rate ranges and maturities at December 31,
1995, are summarized as follows:
<TABLE>
<CAPTION>
1999
INTEREST RATE 1996 1997 1998 AND BEYOND TOTALS
- --------------------- -------------- ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
4.01 - 6.00%......... $ 81,331,166 11,376,061 3,412,531 1,515,810 97,635,568
6.01 - 8.00%......... 100,645,336 5,050,285 488,517 10,900,022 117,084,160
-------------- ------------ ---------- ------------ -------------
Totals............... $ 181,976,502 16,426,346 3,901,048 12,415,832 214,719,728
-------------- ------------ ---------- ------------ -------------
-------------- ------------ ---------- ------------ -------------
</TABLE>
Included in the balances above are certain accounts with balances in excess
of $100,000. At December 31, such accounts are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------------- ------------
<S> <C> <C>
Amount........................................................... $ 54,387,822 55,061,682
Number of accounts............................................... 395 454
Interest paid during the year.................................... $ 2,560,795 2,235,728
</TABLE>
Interest expense for the years ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ---------- ----------
<S> <C> <C> <C>
Passbook accounts.................................... $ 34,385 59,215 67,395
Checking accounts and MMDA deposits.................. 851,463 1,335,564 1,685,116
Certificate accounts................................. 12,814,773 7,638,037 7,774,945
------------- ---------- ----------
$ 13,700,621 9,032,816 9,527,456
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
(8) BORROWED FUNDS
Advances from the Federal Home Loan Bank of San Francisco at December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1994
--------------- ---------------
<S> <C> <C>
Short-term FHLBSF advances................................. $ 7,000,000 11,000,000
Weighted average interest rate........................... 4.99% 5.39%
Long-term FHLBSF advances.................................. $ 14,000,000 14,000,000
Weighted average interest rate........................... 5.69% 5.28%
</TABLE>
Long-term advance maturities are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ---------------------------------------------------------------------
<S> <C>
1997................................................................ $ 7,000,000
1998............................................................... 3,000,000
1999............................................................... 4,000,000
-------------
$ 14,000,000
-------------
-------------
</TABLE>
E-58
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(8) BORROWED FUNDS (CONTINUED)
Pursuant to collateral agreements with the FHLBSF, advances are secured by
all stock in the FHLBSF, by pledges of certain real estate loans and securities
of the Company with outstanding principal balances of approximately $93,076,000
and $82,054,000 at December 31, 1995 and 1994, respectively.
The Association, as a member of the Federal Home Loan Bank System, is
required to maintain a minimum investment in capital stock of the Federal Home
Loan Bank of San Francisco equal to the greater of 5% of advances outstanding or
1% of residential mortgage loans. Dividends earned on FHLBSF stock is included
in interest income.
The Association did not enter into borrowings under fixed-coupon dollar
reverse repurchase agreements at or for the year ended December 31, 1995.
Information concerning borrowings under fixed-coupon dollar reverse repurchase
agreements for 1994 (none were outstanding at year-end 1994), is summarized as
follows:
<TABLE>
<CAPTION>
1994
------------
<S> <C>
Average balance during the year................................................. $ 2,534,042
Average interest rate during the year........................................... 3.96%
Maximum month-end balance during the year....................................... $ 4,000,000
</TABLE>
(9) INCOME TAXES
The Company files income tax returns on a calendar-year basis. If certain
conditions are met in determining taxable income, the Association is allowed a
special bad debt deduction based on a percentage of taxable income (presently
8%) or on specified experience formulas. The Association used the experience
method in 1993 and 1994 and anticipates using the experience method in 1995.
Current and deferred income tax expense (benefit) for the years ended
December 31, 1995, 1994 and 1993, consist of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------------ ---------- ----------
<S> <C> <C> <C>
1995
Federal.............................................. $ 396,973 (232,957) 164,016
State................................................ 125,297 (61,563) 63,734
------------ ---------- ----------
$ 522,270 (294,520) 227,750
------------ ---------- ----------
------------ ---------- ----------
1994
Federal.............................................. $ 1,238,059 66,790 1,304,849
State................................................ 475,654 22,131 497,785
------------ ---------- ----------
$ 1,713,713 88,921 1,802,634
1993
Federal.............................................. $ 1,407,913 273,464 1,681,377
State................................................ 458,995 155,451 614,446
------------ ---------- ----------
$ 1,866,908 428,915 2,295,823
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
E-59
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(9) INCOME TAXES (CONTINUED)
Under SFAS 109, temporary differences between the financial statement
carrying amounts and tax bases of assets and liabilities that give rise to
significant components of the deferred tax asset and liability amounts as of
December 31, 1995 and 1994, relate to the following:
<TABLE>
<CAPTION>
1995 1994
------------ ----------
<S> <C> <C>
Deferred tax assets:
Reserve for loan losses.................................................... $ 1,535,926 1,341,460
State income taxes......................................................... 42,601 157,648
Unrealized losses on securities............................................ 26,532 249,667
Deferred compensation...................................................... 181,222 49,610
Other...................................................................... 18,309 --
------------ ----------
Gross deferred tax assets.............................................. 1,804,590 1,798,385
------------ ----------
Deferred tax liabilities:
Loan fees.................................................................. 1,130,640 1,208,405
Depreciation............................................................... 37,610 111,924
FHLBSF dividends........................................................... 313,575 225,103
Other...................................................................... 11,028 12,601
------------ ----------
Gross deferred tax liabilities......................................... 1,492,853 1,558,033
------------ ----------
Net deferred tax asset................................................. $ 311,737 240,352
------------ ----------
------------ ----------
</TABLE>
The net deferred tax asset is included in other assets at December 31, 1995
and 1994.
Management believes a valuation allowance is not needed to reduce the
deferred tax asset because there is no material portion of the deferred tax
asset that will not be realized through sufficient taxable income within the
carryback and carryforward periods.
The effective income tax rate, as a percentage of income before income
taxes, differs from the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Federal income taxes at statutory rate............................................ 34.0% 34.0% 34.0%
State franchise tax, net of federal income tax benefit............................ 7.7 7.6 7.3
Other............................................................................. (.2) -- (.1)
--- --- ---
Total effective tax rate.................................................... 41.5% 41.6% 41.2%
--- --- ---
--- --- ---
</TABLE>
E-60
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995, 1994 and 1993
(10) STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
Stockholders' equity includes approximately $1,376,000 at December 31, 1995
and 1994, of untaxed earnings related to bad debt reserves for federal income
tax purposes and, therefore, may be subject to tax if removed from such status
at the then-current tax rates. Management does not contemplate that this portion
of stockholders' equity will be used in a manner that will create any income tax
liability.
The Association is required to satisfy three capital standards established
by the OTS pursuant to the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA). The requirements include a leverage ratio of
core capital to adjusted total assets of 3%, a tangible capital standard
expressed as 1.5% of total adjusted assets and a risk-based capital standard of
8.0% of risk-weighted assets. The risk-based capital standard requires the
Association to classify its assets into one of five levels of perceived risk.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
required each federal banking agency to implement prompt corrective actions for
institutions it regulates. In response to this requirement, the OTS adopted
final rules, effective December 19, 1992, based on FDICIA's five capital tiers:
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. The rules provide that a
savings association is "well capitalized" if its total risk-based capital ratio
is 10% or greater, its tier one risk-based capital ratio (core capital to
risk-weighted assets) is 6% or greater, its leverage ratio is 5% or greater, and
the institution is not subject to a capital directive by the OTS.
At December 31, 1995, the Association's regulatory capital exceeds the
requirements of each regulatory capital standard in effect on such date as
indicated below (unaudited):
<TABLE>
<CAPTION>
ACTUAL AT 12-31-95 MINIMUM REQUIREMENT
-------------------------- -------------------------- EXCESS OVER
CAPITAL RATIO CAPITAL RATIO REQUIREMENT
------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
FIRREA Capital Standards:
Tangible.................................... $ 23,961,875 8.15% $ 4,412,639 1.50% $ 19,549,236
Core (leverage)............................. 23,961,875 8.15% 8,825,278 3.00% 15,136,597
Risk-based.................................. 26,295,369 14.18% 14,840,412 8.00% 11,454,957
FDICIA Capital Standards (Well Capitalized):
Core (leverage)............................. 23,961,875 8.15% 14,708,796 5.00% 9,253,079
Tier 1 risk-based........................... 23,961,875 12.92% 11,130,309 6.00% 12,831,566
Total risk-based............................ 26,295,369 14.18% 18,550,515 10.00% 7,744,854
</TABLE>
The Association is deemed "well capitalized' at December 31, 1995.
In addition, the Association is subject to the net worth requirements of the
state regulatory authorities. The Association was in compliance with regulatory
capital requirements for both federal and state purposes at December 31, 1995.
E-61
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(10) STOCKHOLDERS' EQUITY AND REGULATORY MATTERS (CONTINUED)
The following is a reconciliation of the Association's capital under
Generally Accepted Accounting Principles (GAAP) with its regulatory capital at
December 31, 1995 (unaudited):
<TABLE>
<CAPTION>
TANGIBLE,
CORE, TIER 1 TOTAL RISK-
RISK- BASED BASED
CAPITAL CAPITAL
-------------- ------------
<S> <C> <C>
Capital per Association financial statements..................................... $ 23,995,588 23,995,588
Adjustments for regulatory capital purposes:
Core deposit premium intangible................................................ (60,933) (60,933)
Unrealized loss on securities available for sale, net of tax................... 27,220 27,220
Qualifying general valuation allowances........................................ -- 2,333,494
-------------- ------------
Regulatory capital............................................................... $ 23,961,875 26,295,369
-------------- ------------
-------------- ------------
</TABLE>
(11) EMPLOYEE BENEFIT PLANS
In 1987 and 1992, the stockholders approved stock option plans covering
full-time salaried employees of the Company. After adjustment for all stock
splits and dividends since inception of the plan, including the 15% stock
dividend announced on January 20, 1995, the Company has reserved a total of
340,871 shares for issuance under the plans. A committee, made up of members of
the Board of Directors, has the authority to grant options to participants at an
exercise price not less than the current market value per share at the time of
the grant. As of December 31, 1995, there are 124,083 nonqualified options
outstanding at exercise prices ranging from $4.45 to $9.66 per share (with
85,629 options exercisable). All options expire ten years from the grant date
and expiration dates on outstanding options as of December 31, 1995, range from
the year 1997 to 2005.
Option activity under the plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE PER
OUTSTANDING PRICE RANGE SHARE
----------- ------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1992.............................................. 84,482 $5.12 - 7.51 $ 5.57
Canceled................................................................ (2,080) 6.00
-----------
Balance at December 31, 1993.............................................. 82,402 5.12 - 7.51 5.55
Exercised............................................................... (2,925) 5.12
Canceled................................................................ (1,114) 6.00
Granted................................................................. 5,070 7.83
Retroactive effect of 15% stock dividend announced January 20, 1995..... 12,510
-----------
Balance at December 31, 1994.............................................. 95,943 4.45 - 7.83 5.02
Granted................................................................. 28,140 8.00 - 9.66
-----------
Balance at December 31, 1995.............................................. 124,083 4.45 - 9.66 6.03
-----------
-----------
</TABLE>
In December 1985, the Board of Directors approved a profit sharing plan
covering substantially all employees with one full calendar year of service and
21 years of age. Participants vest 20% after two years of service increasing up
to 100% after six years of service. The nonvested portions of terminated
participants are reallocated to remaining participants. No discretionary
contributions, as determined by the Board of Directors, were made for 1995 or
1994. The contribution for 1993 was $89,486.
E-62
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(11) EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company will adopt the disclosure requirements of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS
123) in 1996.
(12) COMMITMENTS AND CONTINGENCIES
Certain branch and office locations are leased by the Company under
operating leases expiring at various dates through the year 2004. Lease rental
expense for 1995, 1994 and 1993 amounted to $487,107, $439,886 and $407,934,
respectively.
Future minimum lease payments (excluding common area maintenance charges) on
office premises are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ----------------------------------------------------------------------
<S> <C>
1996................................................................ $ 352,852
1997................................................................ 278,252
1998................................................................ 106,932
1999................................................................ 103,971
2000................................................................ 60,500
Thereafter.......................................................... 224,700
------------
$ 1,127,207
------------
------------
</TABLE>
The Company is obligated under a master property lease expiring in 2011 for
an annual payment of $100,000 and, commencing in 1996, an annual adjustment for
increases in the Consumer Price Index. Operating expenses currently approximate
$85,000 annually. Sublease income approximates $140,000 a year on subleases
expiring from 1996 to 1998. The Company has recorded a liability for the present
value of the estimated differential over the term of the lease between projected
lease related expenditures and sublease income.
The Company had commitments to fund variable rate loans of $7,717,630 and
fixed rate loans of $235,000 at December 31, 1995.
Federal legislation to recapitalize the Savings Association Insurance Fund
is under consideration in Congress. If previously proposed legislation had been
enacted as proposed, all savings institutions, including the Association, would
have been assessed a one-time special charge. The previously proposed
legislation produced an estimated assessment of 0.77% to 0.90% of total insured
deposits ($1,100,000 to $1,300,000 after tax for the Company). Such legislation
also proposed to significantly reduce the future annual premiums paid by savings
institutions.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position.
(13) PARENT COMPANY FINANCIAL INFORMATION
The Company is a legal entity separate and distinct from the Association.
The Company's principal source of funds on an unconsolidated basis is dividends
from the Association. The Company and its subsidiary file a consolidated federal
income tax return in which the taxable income or loss of the Company is combined
with that of its subsidiary, the Association. The Company's share of income tax
expense is based on the amount which would be payable if separate returns were
filed. Accordingly, the Company's equity in the net income or loss of its
subsidiary (distributed or undistributed) is excluded from the computation of
the provision for income taxes for financial statement purposes.
E-63
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(13) PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
The Company began operation on November 1, 1995. The Company's statements of
financial condition and related statements of operations and cash flows on an
unconsolidated basis are as follows:
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
ASSETS
Cash in subsidiary........................................................................... $ 151,569
Investment in subsidiary..................................................................... 23,995,588
Income tax receivable........................................................................ 63,259
Dividend receivable from subsidiary.......................................................... 126,141
-----------------
$ 24,336,557
-----------------
-----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Accrued expenses............................................................................. $ 5,000
Dividend payable to stockholders............................................................. 100,913
Stockholder's equity (See Consolidated Statements of Financial Condition).................... 24,230,644
-----------------
$ 24,336,557
-----------------
-----------------
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
INCOME
Dividend from subsidiary..................................................................... $ 126,141
Interest on investments...................................................................... 2,234
-----------------
$ 128,375
EXPENSES
General and administrative................................................................... $ 154,665
Income tax benefit........................................................................... (63,259)
-----------------
91,406
Income before undistributed net income of subsidiary........................................... 36,969
Undistributed net loss of subsidiary from November 1, 1995..................................... (208,506)
-----------------
Net loss....................................................................................... $ (171,537)
-----------------
-----------------
</TABLE>
E-64
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(13) PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Cash flows from operating activities:
Net loss..................................................................................... $ (171,537)
Adjustment to reconcile net loss to net cash used in operating activities:
Undistributed net loss of subsidiary....................................................... 208,506
Dividend receivable from subsidiary........................................................ (126,141)
Income tax benefit......................................................................... (63,259)
Increase in other liabilities.............................................................. 5,000
-----------------
Net cash used in operating activities.......................................................... (147,431)
Cash flows from financing activities:
Proceeds from capital contributions by parent................................................ 299,000
-----------------
Net cash provided by financing activities...................................................... 299,000
-----------------
Net increase in cash and cash equivalents...................................................... 151,569
Cash and cash equivalents at beginning of period............................................. --
-----------------
Cash and cash equivalents at end of year....................................................... $ 151,569
-----------------
-----------------
</TABLE>
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," issued in December 1991, requires fair value
disclosures for financial instruments. The estimated fair values of the
Company's financial instruments at December 31, are as follows:
<TABLE>
<CAPTION>
1995 1994
----------------------------- -----------------------------
FAIR VALUE FAIR VALUE
CARRYING VALUE ESTIMATE CARRYING VALUE ESTIMATE
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents............. $ 5,479,618 5,479,618 3,211,334 3,211,334
Investment securities................. 11,000,000 11,025,888 -- --
Mortgage-backed securities............ 12,883,754 12,889,451 15,264,398 14,977,347
Loans receivable...................... 257,040,178 258,999,000 239,018,980 236,833,000
FHLBSF stock.......................... 2,212,500 2,212,500 2,247,400 2,247,400
Interest receivable................... 1,964,358 1,964,358 1,516,202 1,516,202
Liabilities:
Certificates of deposit............... 214,719,728 216,055,000 171,898,736 171,775,000
Transaction accounts.................. 32,232,595 32,232,595 42,497,662 42,497,662
FHLBSF advances....................... 21,000,000 20,872,000 25,000,000 24,051,000
Interest payable...................... 376,248 376,248 120,269 120,269
</TABLE>
These fair values do not represent actual amounts that may be realized upon
any sale or liquidation of the related assets or liabilities. Because no ready
market exists for a significant portion of the Company's financial instruments,
fair value estimates are based on judgments regarding future expected loss
experience,
E-65
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
CASH AND CASH EQUIVALENTS AND FHLBSF STOCK
The carrying amount of these financial instruments approximates fair value.
SECURITIES
The fair value of securities is based on quoted market prices.
LOANS RECEIVABLE
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as residential, multi-family,
commercial real estate, construction and other. Each loan category is further
segmented into either fixed or adjustable interest terms and performing or
nonperforming categories.
The fair value of performing loans is calculated by discounting the
contractual cash flows, adjusted for prepayment estimates, using a market
discount rate that reflects current interest rates being offered for loans with
similar terms to borrowers of similar credit quality. Fair value for
nonperforming loans is based on current available market values of
collateralized property and/or external appraisals.
CERTIFICATES OF DEPOSIT AND TRANSACTION ACCOUNTS
The fair value of deposits with no stated maturity, such as passbook
accounts, checking accounts and money market accounts, is equal to the amount
payable on demand as of December 31, 1995, and December 31, 1994. The fair value
of certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
FHLBSF ADVANCES
The fair value of advances from the Federal Home Loan Bank of San Francisco
is based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered by the FHLBSF for advances of
similar remaining maturities.
E-66
<PAGE>
NHS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(15) SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income................................ $ 5,073,897 $ 5,440,913 $ 5,819,775 $ 5,923,810
Interest expense............................... 3,198,248 3,670,175 3,834,780 3,910,769
------------ ------------ ------------ ------------
Net interest income............................ 1,875,649 1,770,738 1,984,995 2,013,041
Provision for loan losses...................... -- 1,361,600 150,000 491,000
Non-interest income............................ 134,211 70,734 75,594 90,837
Non-interest expense........................... 1,297,515 1,104,804 1,307,634 1,754,451
------------ ------------ ------------ ------------
Net income before income taxes................. 712,345 (624,932) 602,955 (141,573)
Provision for income taxes (benefit)........... 295,623 (259,346) 250,225 (58,752)
------------ ------------ ------------ ------------
Net income (loss).............................. $ 416,722 $ (365,586) $ 352,730 $ (82,821)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings (loss) per share:*.................... $0.16 $(0.14) $0.14 $(0.03)
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income................................ $ 5,064,910 $ 4,926,963 $ 4,756,197 $ 4,880,714
Interest expense............................... 2,423,738 2,478,089 2,573,620 2,728,321
------------ ------------ ------------ ------------
Net interest income............................ 2,641,172 2,448,874 2,182,577 2,152,393
Provision for loan losses...................... -- -- -- --
Non-interest income............................ 33,275 63,699 62,245 153,609
Non-interest expense........................... 1,309,662 1,235,462 1,427,544 1,437,104
------------ ------------ ------------ ------------
Net income before income taxes................. 1,364,785 1,277,111 817,278 868,898
Provision for income taxes..................... 562,133 529,992 349,918 360,591
------------ ------------ ------------ ------------
Net income..................................... $ 802,652 $ 747,119 $ 467,360 $ 508,307
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per share:*........................... $0.32 $0.29 $0.19 $0.20
</TABLE>
- ------------------------
*All per share figures have been adjusted to reflect a 15% stock dividend
declared on January 20, 1995.
E-67
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-27124
NHS FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 68-0359326
(State of incorporation) (I.R.S. Employer Identification
Number)
1050 Fourth Street 94901
San Rafael, California (Zip Code)
(Address of principal executive
office)
</TABLE>
Registrant's telephone number: (415) 257-3761
Indicate by check mark whether 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 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Number of Shares of Common Stock Outstanding as of August 5, 1996: 2,522,827
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NHS FINANCIAL, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NUMBER DESCRIPTION PAGE
- ------------- ------------------------------------------------------------------------------------------------ ---------
<C> <S> <C>
PART I.
1. Financial Information
Consolidated Statements of Condition June 30, 1996 and December 31, 1995........................ E-70
Consolidated Statements of Operations Three and six months ended June 30, 1996
and 1995..................................................................................... E-71
Consolidated Statements of Cashflows Six months ended June 30, 1996 and 1995.................... E-72
Notes to the Consolidated Financial Statements.................................................. E-73
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................................... E-75
PART II.
Other Information............................................................................... E-85
SIGNATURES...................................................................................... E-86
</TABLE>
E-69
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NHS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
ASSETS
Cash, including non-interest bearing deposits................................. $ 164,762 $ 169,202
Interest-bearing deposits..................................................... 6,233,266 5,310,416
Mortgage-backed securities available for sale, at fair value.................. 3,282,315 4,053,873
Investment securities held to maturity
(Fair value: 1996, $13,772,502; 1995, $11,025,888)........................... 13,998,793 11,000,000
Mortgage-backed securities held to maturity
(Fair value: 1996, $7,804,791; 1995, $8,835,578)............................. 7,868,320 8,829,881
Loans receivable, net of allowance for losses:
(1996, $3,603,899; 1995, $3,507,899)......................................... 245,186,644 257,040,178
Investment in Federal Home Loan Bank of San Francisco, at cost................ 2,330,000 2,212,500
Real estate owned............................................................. 1,409,398 1,652,666
Accrued interest receivable:
Loans....................................................................... 1,664,746 1,740,432
Securities.................................................................. 337,258 223,926
Leasehold improvements and equipment, net..................................... 698,535 842,338
Other assets.................................................................. 1,017,350 1,170,944
-------------- -----------------
Total assets.............................................................. $ 284,191,387 $ 294,246,356
-------------- -----------------
-------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposits............................................................. $ 225,817,677 $ 246,952,323
Advances from Federal Home Loan Bank of San Francisco
(FHLBSF)..................................................................... 31,000,000 21,000,000
Other liabilities............................................................. 2,340,735 2,063,389
-------------- -----------------
Total liabilities......................................................... 259,158,412 270,015,712
-------------- -----------------
Capital stock, no par value; authorized 5,000,000 shares; issued and
outstanding, 1996 and 1995: 2,522,827 shares................................. 11,772,003 11,772,003
Unrealized loss on securities available for sale, net of tax.................. (62,519) (27,220)
Retained earnings, substantially restricted................................... 13,323,491 12,485,861
-------------- -----------------
Total stockholders' equity................................................ 25,032,975 24,230,644
-------------- -----------------
Total liabilities and stockholders' equity................................ $ 284,191,387 $ 294,246,356
-------------- -----------------
-------------- -----------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
E-70
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NHS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Interest Income:
Loans receivable..................................... $ 5,389,150 $ 5,072,265 $ 10,916,947 $ 9,728,153
Mortgage-backed securities........................... 176,173 227,555 366,715 463,697
Other investments.................................... 329,767 141,093 599,615 322,960
------------ ------------ ------------- -------------
5,895,090 5,440,913 11,883,277 10,514,810
------------ ------------ ------------- -------------
Interest Expense:
Customer deposits.................................... 2,980,551 3,485,782 6,110,238 6,403,188
Advances from the FHLBSF............................. 441,968 184,393 892,622 465,235
------------ ------------ ------------- -------------
3,422,519 3,670,175 7,002,860 6,868,423
------------ ------------ ------------- -------------
Net interest income before provision for loan
losses............................................ 2,472,571 1,770,738 4,880,417 3,646,387
Provision for loan losses............................ 150,000 1,361,600 290,000 1,361,600
------------ ------------ ------------- -------------
Net interest income after provision for loan
losses............................................ 2,322,571 409,138 4,590,417 2,284,787
------------ ------------ ------------- -------------
Non-interest income:
Gain on sale of real estate owned.................... 85,900 -- 232,322 1,068
Income from real estate owned........................ 7,077 11,200 17,982 11,200
Loan and deposit fees................................ 69,350 47,256 119,597 157,847
Other................................................ 8,233 12,278 11,902 34,830
------------ ------------ ------------- -------------
Total non-interest income.......................... 170,560 70,734 381,803 204,945
------------ ------------ ------------- -------------
Non-interest expense:
General and administrative expense:
Compensation and benefits.......................... 699,407 417,301 1,413,439 1,072,589
Deposit insurance and regulatory assessments....... 178,306 142,192 357,167 284,380
Rent and occupancy................................. 139,033 133,656 280,074 263,293
Professional fees.................................. 208,004 58,820 330,737 104,614
Depreciation and amortization...................... 95,432 76,434 171,837 149,525
Information systems................................ 37,431 65,222 79,789 118,925
Other.............................................. 210,130 181,713 390,233 362,125
------------ ------------ ------------- -------------
Total general and administrative expense........... 1,567,743 1,075,338 3,023,276 2,355,451
Expenses of real estate owned.......................... 46,934 29,466 99,796 46,868
------------ ------------ ------------- -------------
Total non-interest expense......................... 1,614,677 1,104,804 3,123,072 2,402,319
------------ ------------ ------------- -------------
Income (loss) before income taxes...................... 878,454 (624,932) 1,849,148 87,413
Income taxes expense (benefit)......................... 406,854 (259,346) 809,692 36,277
------------ ------------ ------------- -------------
Net income (loss)...................................... $ 471,600 $ (365,586) $ 1,039,456 $ 51,136
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Earnings (loss) per share.............................. $ 0.19 $ (0.14) $ 0.41 $ 0.02
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
E-71
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NHS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................................... $ 1,039,456 $ 51,136
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Amortization of net deferred loan origination fees............................. (416,547) (355,977)
Amortization of premiums and discounts on mortgage-backed securities, net...... 34,238 41,458
Accretion of discounts on loans................................................ (43,303) (3,141)
Provision for loan losses...................................................... 290,000 1,361,600
Net gain on sale of real estate owned.......................................... (232,322) (1,068)
Loss on retirement of fixed assets............................................. -- 16,892
Depreciation and amortization of fixed assets.................................. 171,837 149,525
FHLBSF stock dividends......................................................... (59,700) (56,000)
Increase in accrued interest receivable........................................ (37,646) (270,483)
(Increase)/decrease in other assets............................................ (87,396) 66,367
Decrease/(increase) in income tax receivable, net.............................. 260,220 (368,723)
Increase in other liabilities.................................................. 277,346 891,744
------------- -------------
Net cash provided by operating activities.................................... 1,196,183 1,523,330
------------- -------------
Cash flows from investing activities:
Net decrease/(increase) in loans resulting from originations, net of principal
collections..................................................................... 10,621,648 (12,730,824)
Loans purchased.................................................................. -- (7,257,245)
Purchases of leasehold improvements and equipment................................ (23,155) (283,768)
(Purchases)/redemption of FHLBSF stock........................................... (57,800) 145,300
Maturity or calls of securities held to maturity................................. 10,000,000 --
Purchase of securities held to maturity.......................................... (12,998,750) --
Principal repayments on securities held to maturity.............................. 923,548 535,902
Principal repayments on securities available for sale............................ 715,882 528,226
Proceeds from sale of real estate owned.......................................... 1,877,326 1,029,558
------------- -------------
Net cash provided by (used in) investing activities............................ 11,058,699 (18,032,851)
------------- -------------
Cash flows from financing activities:
Net (decrease)/increase in customer deposits..................................... (21,134,646) 35,334,455
Proceeds from FHLBSF advances.................................................... 15,000,000 3,700,000
Repayments of FHLBSF advances.................................................... (5,000,000) (14,700,000)
Cash dividends................................................................... (201,826) (201,826)
------------- -------------
Net cash (used in) provided by financing activities............................ (11,336,472) 24,132,629
------------- -------------
Net increase in cash and cash equivalents.......................................... 918,410 7,623,108
Cash and cash equivalents at the beginning of period............................... 5,479,618 3,211,334
------------- -------------
Cash and cash equivalents at the end of period..................................... $ 6,398,028 $ 10,834,442
------------- -------------
------------- -------------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest....................................................................... $ 7,199,166 $ 6,831,917
------------- -------------
------------- -------------
Income taxes, net of refunds................................................... $ 770,000 $ 405,000
------------- -------------
------------- -------------
Supplemental disclosure of noncash investment and financing activities:
Transfer of loans to real estate owned........................................... $ 1,401,736 $ 492,248
------------- -------------
------------- -------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
E-72
<PAGE>
NHS FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The financial statements of the Company presented above reflect all
adjustments consisting of normal recurring accruals which are, in the opinion of
management, necessary to present a fair statement of the financial condition and
results of operations for the interim periods presented. The accompanying
unaudited financial statements have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include all information and
footnotes necessary for a fair presentation of financial condition, results of
operations and cash flows in accordance with generally accepted accounting
principles. Therefore, these financial statements should be read in conjunction
with the Company's 1995 Annual Report on Form 10-K which contains the latest
audited financial statements and notes thereto.
Certain of the 1995 financial statement amounts have been reclassified to
conform to the 1996 presentation.
(2) EARNINGS PER SHARE
Weighted average shares used for calculation of earnings per share for the
three months and six months ended June 30, 1996 and 1995 were 2,522,827 shares.
Earnings per share for the first half of 1995 has been adjusted to give
retroactive effect to a 15% stock dividend paid on February 10, 1995.
The Company has not separately reported its fully diluted earnings per share
(which includes outstanding stock options as common stock equivalents) as it is
not materially different than primary earnings per share.
(3) DIVIDEND DECLARATION
The Company declared a quarterly dividend on June 18, 1996 of $0.04 per
share payable July 15, 1996. The dividend totaling $100,913 was reflected as a
reduction of retained earnings in the accompanying Statement of Financial
Condition.
This dividend represents the tenth consecutive quarterly cash dividend
declared since its first such dividend in the third quarter of 1993 and reflects
the Company's commitment to enhancing shareholder value.
(4) CAPITAL
In 1989, the Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA) stipulated the requirement that insured savings institutions meet three
separate capital requirements. Those requirements are to have tangible capital
of 1.5% of adjusted total assets, core capital of 3% of adjusted total assets
and risk-based capital equal to 8.0% of risk-weighted assets.
In response to the Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA), the Office of Thrift Supervision (OTS) adopted final rules,
effective December 19, 1992, based upon FDICIA's five capital tiers: well
capitalized, adequately capitalized, under capitalized, significantly
undercapitalized, and critically undercapitalized. The rules provide that a
savings institution is "well capitalized" if its total risk-based capital ratio
is 10% or greater, its tier 1 risk-based capital ratio is 6% or greater and its
leverage ratio is 5% or greater.
At June 30, 1996, the Association's regulatory capital substantially exceeds
the requirements of each regulatory capital standard and the Association is
considered "well capitalized" at that date. Table One provides a comparison of
the Association's regulatory capital to its minimum requirement at June 30,
1996.
E-73
<PAGE>
NHS FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) CAPITAL (CONTINUED)
TABLE ONE
<TABLE>
<CAPTION>
ACTUAL AT JUNE 30, MINIMUM REQUIREMENT EXCESS OVER
1996 REQUIREMENT
-------------------- -------------------- --------------------
CAPITAL RATIO CAPITAL RATIO CAPITAL RATIO
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FIRREA Capital Standards:
Tangible...................................... $ 24,409 8.59% $ 4,263 1.50% $ 20,146 7.09%
Core (leverage)............................... 24,409 8.59% 8,527 3.00% 15,882 5.59%
Risk-based.................................... 26,652 14.97% 14,244 8.00% 12,408 6.97%
FDICIA Capital Standards (Well Capitalized):
Core (leverage)............................... 24,409 8.59% 14,212 5.00% 10,197 3.59%
Tier 1 risk-based............................. 24,409 13.71% 10,683 6.00% 13,726 7.71%
Total risk-based.............................. 26,652 14.97% 17,805 10.00% 8,847 4.97%
</TABLE>
(5) PROPOSED MERGER WITH LUTHER BURBANK CORPORATION
As previously announced, NHS Financial, Inc. has agreed to be acquired by
Luther Burbank Corporation, the holding company for Luther Burbank Savings.
Luther Burbank, which is headquartered in Santa Rosa, California, is a privately
held company. Both corporations have signed a definitive agreement to merge,
through which the acquisition will be completed. Under the terms of the
agreement, Luther Burbank will pay a total cash consideration of approximately
$29.7 million, or $11.50 per share to the shareholders of NHS Financial.
The proposed merger, which is subject to approval by the shareholders of
both corporations as well as the Office of Thrift Supervision and the California
Department of Savings and Loan, is estimated to close at the end of the third
quarter of 1996. In connection with the merger, NHS Financial has granted Luther
Burbank an option to purchase newly issued shares, giving Luther Burbank 19.9%
ownership of NHS Financial. This option would be triggered should NHS Financial
accept an offer to be acquired at a higher price.
E-74
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
NHS Financial, Inc. (the "Company"), a California Corporation, is the
holding company for New Horizons Savings and Loan Association (Association). The
principal business of the Company is to attract deposits from the general public
and invest those funds in residential, construction and, to a lesser extent,
commercial real estate loans. The Company's geographical area for attracting
deposits and making real estate loans is the San Francisco Bay Area,
concentrating in Marin and Sonoma counties, and the City and County of San
Francisco. The Company conducts its business in three facilities in Marin
County; one located in San Rafael, California, another in Mill Valley,
California and the third in Novato, California.
The Company's operations are significantly influenced by general economic
conditions, the regional real estate market and by related monetary, fiscal and
regulatory policies of the federal government. Deposit flows and cost of funds
are influenced by interest rates on competing investments and general market
rates of interest. Lending activities are affected by the demand for mortgage
financing and the types of loans the Company offers, which in turn are affected
by the interest rates at which such financing may be offered and other factors
affecting the supply of housing and availability of funds.
The Company engages primarily in real estate lending for its own portfolio,
specializing in short-term fixed rate and longer term adjustable rate real
estate loans. The Company attracts and maintains deposit funds by offering
competitive interest rates and emphasizing customer service. The Company also
uses Federal Home Loan Bank of San Francisco (FHLBSF) advances and occasionally
other short term borrowings, such as reverse repurchase agreements (reverse
repos), as a supplementary source of funds.
Table Two provides a summary of key operating statistics at or for the three
months and six months ending June 30, 1996 and June 30, 1995.
TABLE TWO
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
THE THREE MONTHS ENDED THE SIX MONTHS ENDED
---------------------------- ----------------------------
SUMMARY OF KEY STATISTICS JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995
- ------------------------------------------------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net interest margin on earning assets:
For period.......................................... 3.48% 2.53% 3.41% 2.65%
At period end....................................... 3.43% 2.69% 3.43% 2.69%
Ratio of G & A expenses to average assets............. 2.18% 1.50% 2.09% 1.68%
Return on average assets.............................. 0.66% (0.51)% 0.72% 0.04%
Return on average equity.............................. 7.59% (5.93)% 8.42% 0.42%
Average equity to average assets...................... 8.65% 8.59% 8.51% 8.71%
Dividend payout ratio................................. 21.40% N.M. 19.42% N.M.
Stockholders' equity per share........................ $ 9.92 $ 9.55
Regulatory Capital (the Association):
Tangible............................................ 8.59% 8.30%
Core (leverage)..................................... 8.59% 8.30%
Risk-based.......................................... 14.97% 12.56%
Ratio of nonperforming assets to total assets......... 1.44% 1.14%
General Valuation Allowances to:
Gross loans......................................... 1.38% 1.15%
Nonperforming loans................................. 134.49% 124.77%
</TABLE>
N.M. = Not meaningful
The discussion that follows focuses on the components of the Company's
financial condition, results of operations, liquidity and regulatory matters for
the three and six months ended June 30, 1996.
E-75
<PAGE>
FINANCIAL CONDITION
CASH AND INVESTMENTS
Income from investments provides the second largest source of income for the
Company, after interest income on loans. The Company is required by federal
regulation to maintain a specified minimum amount of liquid assets which may be
invested in specific short term securities. It is the Company's policy to
maintain a liquidity portfolio which exceeds regulatory minimum requirements.
The Company's cash and investment portfolio consists, from time to time, of
mortgage-backed securities, callable U.S. government agency notes, certificates
of deposit and overnight investments with the FHLBSF. Cash and investments at
June 30, 1996 amounted to $31.5 million compared with $29.4 million at December
31, 1995. The Company utilizes its investment portfolio to effectively invest
periodic excess cash flows in interest earning assets, to enhance net interest
income and margin and to meet regulatory liquidity requirements.
LOAN PORTFOLIO
The Company's principal investment activity has been and continues to be the
origination of real estate loans. The Company's lending activities consist
primarily of making loans secured by first or second liens on residential and
other real estate. These loans are made in connection with purchases,
refinancing, construction or improvement of property located principally in the
San Francisco Bay Area, concentrating in Marin, Sonoma and San Francisco
Counties. Historically, the Company has relied upon its ability to provide
customized loans for homes and for home construction. The economy of the Bay
Area counties is varied and includes manufacturing, technology, services and
agricultural industries, providing a balanced deposit and mortgage lending
market. The Company's loans are primarily obtained through a selected group of
independent loan brokers. Loan applications are also obtained from existing
customers and other individuals. The Company has no foreign or out of state
loans in its portfolio.
The Company principally originates adjustable rate mortgages (ARMs) which
re-price at six month intervals in accordance with the FHLBSF's 11th District
Cost of Funds Index (COFI). Fixed rate real estate loans are generally made with
terms of 5 years or less. Shorter fixed rate loans include construction, swing,
and land loans and generally carry terms of 12 to 18 months. As of June 30, 1996
and December 31, 1995, approximately 86% of the Company's portfolio consisted of
ARMs. By concentrating on ARMs, as well as short-term construction and fixed
rate loans with average maturities of twelve months, the Company believes that
it can better manage the sensitivity of its earnings to market interest rate
fluctuations.
New loan originations and loan participations purchased for the first half
of 1996 were $21.9 million, a decrease of $8.8 million from $30.7 million for
the same period in 1995. In the first quarter of 1995, the Company also
purchased $7.3 million of loans from local lenders. Occasional purchases of
loans and loan participations from local lenders are utilized to assist the
Company in meeting its asset/liability objectives.
Loan originations for the first half 1996 were below those for the 1995
period reflecting the slow real estate market, increased competition and
borrower preference during much of the 1996 period for fixed rate loans. The
Company's future levels of loan originations and portfolio growth will depend on
the pace of recovery of the Northern California real estate market, the extent
of competition for loans in the Company's geographical market, borrower
preference for fixed or ARM loans and the relationship of loan payoffs to
borrower refinancing opportunities.
E-76
<PAGE>
Table Three below is a summary of the Company's gross loan portfolio (before
deductions for construction loans in process, deferred loan fees and allowance
for loan losses) at June 30, 1996 and December 31, 1995:
TABLE THREE
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Mortgage loans:
One-to-four family............................................. $ 144,613 55.21% $ 157,301 57.21%
Multi-family................................................... 43,456 16.59% 43,184 15.71%
Construction................................................... 32,895 12.56% 29,722 10.81%
Commercial..................................................... 36,995 14.12% 39,586 14.40%
Land........................................................... 3,661 1.40% 4,812 1.75%
---------- ---------- ---------- ----------
261,620 99.88% 274,605 99.88%
Loans secured by savings accounts................................ 309 0.12% 337 0.12%
---------- ---------- ---------- ----------
$ 261,929 100.00% $ 274,942 100.00%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average interest rate................................... 8.23% 8.23%
---------- ----------
---------- ----------
</TABLE>
The above weighted average interest rates for loans receivable represent the
contractual interest rates on the underlying mortgage loans. If amortization of
deferred loan origination fees and loan discounts is factored into the average
interest rate calculation, the resulting loan yields would be 8.56% at both June
30, 1996 and December 31, 1995.
ASSET QUALITY
DELINQUENT LOANS. When a borrower fails to make required payments on a loan
within 30 days of the due date, the loan is considered contractually delinquent.
Table Four below shows the amount of loan delinquencies by loan type at June 30,
1996 and December 31, 1995.
TABLE FOUR
<TABLE>
<CAPTION>
NUMBER OF DAYS DELINQUENT
-----------------------------------------------------------------------------------------
30-59 60-89 90 OR MORE TOTAL
------------------------ ------------------------ ------------------------ -----------
6/30/96 12/31/95 6/30/96 12/31/95 6/30/96 12/31/95 6/30/96
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
One-to-four family................ $ 3,194 6,761 553 1,747 1,810 2,385 5,557
Multi-family...................... 260 262 866 867 -- -- 1,126
Construction and land............. 62 728 -- 204 870 1,624 932
Commercial real estate............ 876 1,722 604 609 -- -- 1,480
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total............................. $ 4,392 9,473 2,023 3,427 2,680 4,009 9,095
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Delinquencies to Gross Loans...... 1.68 % 3.45 % 0.77 % 1.25 % 1.02 % 1.46 % 3.47%
<CAPTION>
12/31/95
-----------
<S> <C>
One-to-four family................ 10,893
Multi-family...................... 1,129
Construction and land............. 2,556
Commercial real estate............ 2,331
-----------
Total............................. 16,909
-----------
-----------
Delinquencies to Gross Loans...... 6.15 %
</TABLE>
The 46% decline in delinquent loans at June 30, 1996 from year-end 1995
resulted from focused efforts by the Company to increase the rate of collection
on delinquent loans, resolve problem loans and to speed-up foreclosure of
nonperforming loans.
NONACCRUAL LOANS. It is the Company's policy to put loans that are
contractually delinquent 90 days or more on non-accrual status. Management
reviews other loans less than 90 days contractually delinquent. When the
collection of interest and principal payments on a loan appears unlikely the
loan is placed on non-accrual status. Accrued interest income deemed
uncollectible is reversed. Income is subsequently recognized only to the extent
cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments is in accordance with
the loan terms, at which time the loan is returned to accrual status.
E-77
<PAGE>
IMPAIRED LOANS. Management periodically reviews specific loans on an
individual basis. The Company considers a loan to be impaired when, based upon
the evaluation of the credit worthiness, cash flows and financial condition of
the borrower, and the condition and appraised value of the collateral, it is
unlikely that the Company will be able to collect all the principal and interest
due under the contractual terms of the loan. The Company provides, through a
charge to income, for estimated losses on impaired loans when fair value,
including consideration of potential holding and disposition costs, exceeds the
carrying value of the loan.
REAL ESTATE OWNED. Real estate acquired through foreclosure is recorded at
estimated fair value (including consideration of costs of holding and
disposition) at the time of foreclosure. Valuations are periodically performed
and related adjustments, if any, are made as a charge to income when the
carrying value exceeds fair value. At June 30, 1996, the Company's real estate
owned (REO) portfolio had an aggregate fair value of $1.4 million and consisted
of three residential properties, two parcels of land, and one commercial
property. At December 31, 1995, the Company's real estate owned portfolio had an
aggregate fair value of $1.7 million and consisted of four residential
properties, two parcels of land, and one multi-family and commercial mixed use
property. During the first half of 1996, the Company foreclosed on and
transferred to REO $1.4 million of loans and sold REO properties with a carrying
value of $1.6 million. A gain on sale of REO of $232,000 was recorded.
The following Table Five sets forth information with respect to the
Company's nonperforming assets at June 30, 1996 and December 31, 1995.
TABLE FIVE
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------------------ ------------------------
BOOK PERCENTAGE OF BOOK PERCENTAGE OF
VALUE TOTAL ASSETS VALUE TOTAL ASSETS
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Nonaccrual loans:
One-to-four family........................................... $ 1,920 0.68% $ 2,436 0.83%
Construction and land........................................ 1,452 0.51% 2,206 0.75%
--------- ------------- --------- -------------
3,372 1.19% 4,642 1.58%
Real estate acquired by foreclosure:
One-to-four family........................................... 1,150 0.40% 984 0.33%
Multi-family................................................. -- -- 607 0.21%
Commercial................................................... 197 0.07% -- --
Land......................................................... 62 0.02% 62 0.02%
--------- ------------- --------- -------------
1,409 0.49% 1,653 0.56%
Charge-offs of nonaccrual loans................................ (692) (0.24%) (633) (0.22%)
--------- ------------- --------- -------------
Net nonperforming assets....................................... $ 4,089 1.44% $ 5,662 1.92%
--------- ------------- --------- -------------
--------- ------------- --------- -------------
</TABLE>
Table Six below sets forth the relationship of the Company's General
Valuation Allowances (GVA) to gross loans and nonperforming loans and assets at
June 30, 1996 and December 31, 1995.
TABLE SIX
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
Ratios of:
GVA / nonperforming assets.................................................... 88.13% 61.96%
GVA / gross loans............................................................. 1.38% 1.28%
GVA / nonperforming loans..................................................... 134.49% 87.50%
</TABLE>
TROUBLE DEBT RESTRUCTURINGS. As of June 30, 1996, the Company had three
mortgage loans for which certain concessions were granted to the borrowers in
light of their financial difficulties. Such concessions include the extension of
maturity dates and the lowering of interest rates or payments. No reductions in
the principal amount of the loans have been granted. The objective of these
modifications in terms (i.e., troubled
E-78
<PAGE>
debt restructurings) is to maximize the recovery of the Company's investment.
The principal balance of the three loans falling under the definition of
troubled debt restructurings amounted to $2.4 million at June 30, 1996, and $3.9
million at December 31, 1995. All such loans were current according to their
modified terms.
ASSET CLASSIFICATION SYSTEM
Under federal regulations, each insured institution is required to classify
its assets on a regular basis. In addition, in connection with examinations of
insured institutions, OTS examiners have authority to identify problem assets
and, if appropriate, direct the Company to classify them. Under the regulations,
assets are subject to evaluation under a classification system with three
categories: substandard, doubtful and loss. The regulations have also created a
special mention category. This category includes assets which do not currently
expose an insured institution to a sufficient degree of risk to warrant
classification, but do possess credit deficiencies or potential weaknesses
deserving management's close attention. At June 30, 1996, the percentage of
classified assets to total assets was 6.62% ($18.8 million) compared with 6.38%
($18.8 million) at December 31, 1995. At June 30, 1996 and December 31, 1995,
there were no assets classified as doubtful or loss.
VALUATION ALLOWANCES
The Company maintains an overall loan loss reserve to cover estimated
potential losses in the portfolio. This GVA is provided through periodic charges
to income and is determined based upon management's analysis. This analysis
incorporates a number of factors including current economic considerations and
the level of classified and nonperforming loans, management's assessment of
credit risk inherent in its portfolio, past loss experience, and the Company's
underwriting practices.
The provision for loan losses for the six months ended June 30, 1996 was
$290,000. The provision for loan loss during the second quarter and first half
of 1995 was $1.4 million. This provision was recorded as a result of a
re-evaluation of the Company's general and specific loan loss allowances in
relation to the portfolio as a whole and the identification of specific loans
that were performing but with certain credit weaknesses.
The following Table Seven sets forth an analysis of the Company's allowance
for loan and real estate losses for the six months ending June 30, 1996 and
1995.
TABLE SEVEN
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Loan loss allowance at beginning of year....................................................... $ 3,508 3,412
Provision for loan losses...................................................................... 290 1,362
Charge offs, net of recoveries................................................................. (194) 148
--------- ---------
Loan loss allowance at June 30................................................................. $ 3,604 4,922
--------- ---------
--------- ---------
Loan loss allowance at June 30:
General valuation allowance (GVA)............................................................ $ 3,604 3,200
Specific valuation allowances................................................................ $ -- 1,722
--------- ---------
$ 3,604 4,922
--------- ---------
--------- ---------
</TABLE>
During the third quarter of 1995, the Company adopted the direct charge-off
method of accounting for non-performing loans, as well as for performing loans
considered by management to be impaired, and accordingly, specific valuation
allowances at June 30, 1995 of $1.7 million were charged-off by the Company. At
December 31, 1995 and June 30, 1996, no specific valuation allowances were
outstanding. This change in procedure did not effect current loss provisions and
will not alter provisions for general loan losses in future periods.
Management considers its allowance for losses to be adequate to cover losses
from loan and REO assets. However, future adjustments may be necessary and
earnings could be significantly affected, if
E-79
<PAGE>
circumstances differ substantially from the assumptions used in making such
determinations. In addition, various regulatory agencies review the Company's
allowances for losses as a part of their examination process. Such agencies may
require the Company to recognize additions to this allowance based on their
judgment relating to information available to them at the time of their
examination.
CUSTOMER DEPOSITS, FHLBSF ADVANCES AND OTHER BORROWINGS
Deposits are the major source of the Company's funds for lending and other
investment purposes. The Company obtains deposits primarily through its retail
branches and offers a broad selection of deposit instruments including NOW
accounts, money market accounts, regular savings accounts, checking accounts,
certificates of deposit and retirement savings plans. While the deregulation of
insured deposits has allowed the Company to be more competitive in obtaining
funds and given it more flexibility to meet the threat of net deposit outflows,
it has also resulted in a more volatile cost of funds. The Company's interest
rates paid on deposits are not determined by regulatory authorities but rather
by prevailing market conditions.
The Company regularly evaluates its internal cost of funds, measures its
cost of deposits against the costs of alternative sources of funds, surveys
deposit rates offered by competing institutions, reviews liquidity and executes
rate changes when deemed appropriate. The Company's primary strategy for
attracting and retaining deposits is to emphasize customer service and personal
attention, and to pay competitive interest rates on deposits.
During the first half of 1996, customer deposits decreased $21.1 million
from balances at December 31, 1995. The decrease was primarily the result of a
reduction in deposit rates the Company offered combined with the maturity and
repricing of approximately $107 million of relatively high cost certificates of
deposit during the first quarter of 1996. Approximately $53 million of these
maturing deposits represented deposits obtained during the first quarter of 1995
as a result of a one-time marketing program which promoted certificates of
deposit by offering attractive rates and other terms.
The following Table Eight summarizes customer deposits at June 30, 1996 and
December 31, 1995:
TABLE EIGHT
<TABLE>
<CAPTION>
6/30/96 12/31/95
---------- ----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Customer Deposits:
Transaction and Money Market Accounts................................................... $ 36,679 $ 32,232
Certificates of Deposit:
$100,000 and over..................................................................... 55,230 67,620
Under $100,000........................................................................ 133,909 147,100
---------- ----------
$ 225,818 $ 246,952
---------- ----------
---------- ----------
Weighted Average Interest Rate............................................................ 5.23% 5.84%
---------- ----------
---------- ----------
</TABLE>
The Company may rely upon advances from the FHLBSF to supplement its supply
of funds for lending and investment purposes. Advances may also be used to fund
large deposit withdrawals. Advances from the FHLBSF are typically secured by the
Company's stock in the FHLBSF and by pledges of certain real estate loans and
securities. The Company had pledged loans and securities with outstanding
principal balances of $92.0 million at June 30, 1996.
At June 30, 1996, FHLBSF advances and other borrowings amounted to $31.0
million compared to $21.0 million at December 31, 1995. The Company had no other
borrowings at June 30, 1996 and December 31, 1995. The increases in FHLBSF
advances were used to replace maturing higher costing deposits and to obtain
specific maturities of liabilities as determined by the Company's
asset/liability analysis, and to assist in reducing the Company's overall cost
of funds. The weighted average interest rate on borrowings at June 30, 1996 and
December 31, 1995 were 5.51% and 5.46%, respectively.
E-80
<PAGE>
RESULTS OF OPERATIONS
GENERAL
The Company earned $471,600 or $.19 per share for the second quarter ended
June 30, 1996 compared with a loss of $365,586 or $.14 per share for the like
quarter a year ago. First half 1996 earnings were $1.0 million or $.41 per share
compared with $51,000 or $.02 per share for the same period in 1995. The
increase in operating results for both periods in 1996 over 1995 resulted from
greatly improved interest margins and a substantial reduction in loan loss
provisions as discussed below.
INTEREST RATE SPREAD AND MARGIN
The following Table Nine sets forth the average interest-earning assets and
interest-bearing liabilities, interest income and expense and the average annual
interest rates during the six months ended June 30, 1996 and 1995.
TABLE NINE
<TABLE>
<CAPTION>
SIX MONTHS ENDED 6/30/96 SIX MONTHS ENDED 6/30/95
--------------------------------- ---------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE (3) INTEREST RATE BALANCE (3) INTEREST RATE
----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans (1)(2)................................. $ 252,300 $ 10,917 8.64% $ 249,415 $ 9,728 7.80%
Mortgage-backed securities................... 12,035 367 6.09% 14,987 464 6.19%
Other interest-earning assets................ 21,500 599 5.57% 11,000 323 5.87%
----------- --------- --------- ----------- --------- ---------
Total interest-earning assets.................. 285,835 11,883 8.31% 275,402 10,515 7.64%
--------- --------- --------- ---------
Non-earning assets............................. 4,167 5,705
----------- -----------
Total average assets......................... $ 290,002 $ 281,107
----------- -----------
----------- -----------
Interest-bearing liabilities:
Customer deposits............................ 229,220 6,110 5.33% 236,387 6,403 5.42%
FHLBSF advances.............................. 32,852 893 5.43% 17,467 465 5.33%
Other borrowings............................. -- -- -- -- -- --
----------- --------- --------- ----------- --------- ---------
Total interest-bearing liabilities............. 262,072 7,003 5.35% 253,854 6,868 5.41%
--------- --------- --------- ---------
Non-interest bearing liabilities............. 3,243 2,763
Stockholders' equity......................... 24,687 24,490
----------- -----------
Average liabilities and equity............... $ 290,002 $ 281,107
----------- -----------
----------- -----------
Net interest income and spread................. $ 4,880 2.96% $ 3,647 2.23%
--------- --------- --------- ---------
--------- --------- --------- ---------
Net margin on interest-earning assets (4)...... 3.41% 2.65%
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) Average loans exclude nonaccrual loans and are before allowances for loan
losses, loans in process and deferred loan origination fees.
(2) Loan interest income includes the amortization of deferred loan origination
fees (in thousands) of $460 and $359 in 1996 and 1995, respectively.
(3) Average balances for 1996 are daily average balances; for 1995, average
balances are computed from month-end balances.
(4) Net interest margin is computed as net interest income divided by
interest-earning assets.
NET INTEREST INCOME
The Company's net interest income is determined by both its interest rate
spread and net interest margin. Interest rate spread is the difference between
the yields earned on interest-earning assets and the rates paid on deposits and
borrowings. Margin is interest rate spread adjusted for the excess of interest-
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<PAGE>
earning assets over interest-costing liabilities. The Company's interest rate
spread and margin are influenced by changes in market interest rates as, for the
reasons discussed below, the Company's liabilities tend to respond to interest
rate movements more rapidly than its assets.
At June 30, 1996, 86% of the Company's gross loan portfolio consists of ARM
loans which are tied to the Cost of Funds Index (COFI) with rates that adjust
semi-annually. Because of this semi-annual repricing factor and the lag between
the monthly change in COFI and the related change in the Company's ARM loans
indexed to COFI, the time between a change in COFI and an adjustment to the rate
on ARM loans can range from three to six months. Thus, in times of rapidly
rising interest rates, the repricing of the ARM loans will adversely lag upward
movements in the Company's cost of funds. Conversely, in a significant falling
rate environment, ARM loan repricing and interest income will favorably lag the
decrease in the Company's cost of funds.
Net interest income for the second quarter of 1996 was $2.5 million compared
with $1.8 million for the 1995 second quarter. Net interest income for the first
half of 1996 was $4.9 million compared with $3.6 million for the same period in
1995. Most of the increase in net interest income for 1996 over 1995 for each
period resulted from favorable changes primarily in the yields on
interest-earning assets and, secondarily in the interest rate cost of deposits
and borrowings. The effect on net interest income of the net change in balances
of average interest earning assets and average interest costing liabilities was
minor.
Market interest rates rose rapidly during the second half of 1994 and peaked
during the first quarter of 1995 and moderately declined throughout the rest of
1995. Through the process discussed above, the Company's cost of funds markedly
increased during the first half of 1995 compared with much slower increases in
the yields on its loan portfolio. In addition, the Company introduced a
marketing program for certificates of deposit which increased certificates of
deposit by $35 million during the first quarter of 1995. Accordingly, the
Company's net interest margin dropped to 2.53% and 2.65% for the second quarter
and first half, respectively, of 1995 from the margin at year end 1994 of 3.15%,
thereby lowering net interest income for the 1995 periods.
During the second quarter and first half of 1996, the yields on the
Company's loan portfolio were higher than those for the 1995 periods, reflecting
the lagging increases in the COFI index that occurred during 1995. This factor
was principally responsible for increasing net interest income for the 1996
periods compared with the 1995 periods. The decline in market interest rates
during much of 1995 and the first quarter of 1996, lowered the Company's cost of
funds for 1996. In addition, during January 1996, $82.6 million of relatively
higher cost term deposits matured. At January 31, 1996, the Company's cost of
funds dropped to 5.39% from 5.81% at year end 1995 and its net interest margin
increased to 3.33% from 2.90%.
INTEREST INCOME
Interest income on loans for the second quarter and first half of 1996,
compared with the same periods in 1995, increased $317,000 and $1.2 million,
respectively. Most of these increases in loan interest income arose from upward
repricing adjustments to the Company's ARM loans subsequent to June 30, 1995, as
discussed above. Interest income from securities investments for the 1996
periods increased $137,000 and $180,000, respectively, from the comparable 1995
periods. These increases resulted from higher levels of securities investments
in 1996 over 1995.
INTEREST EXPENSE
Interest expense on deposits for the second quarter and first half of 1996,
compared with the same periods in 1995, decreased $505,000 and $293,000,
respectively. These declines resulted from lower amounts of deposits during the
1996 periods combined with the decrease in interest rates on the Company's
deposit portfolio that occurred during the first half of 1996, as discussed
above. The lower amounts of deposits during the 1996 periods were replaced with
greater borrowings from the FHLBSF thereby increasing interest expense on
borrowings in 1996 over 1995.
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<PAGE>
Table Ten below shows the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Company's net interest income for the three months ended June
30, 1996 compared with the same period in 1995, and the six months ended June
30, 1996 compared with the same period in 1995.
TABLE TEN
<TABLE>
<CAPTION>
SECOND QUARTER 1996 AND 1995 FIRST HALF 1996 AND 1995 VARIANCE
VARIANCE (1) (1)
--------------------------------- ---------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
----------- --------- --------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable........................................... $ (106) 423 317 $ 125 1,064 1,189
Mortgage-backed securities................................. (49) (3) (52) (90) (7) (97)
Other interest-earning assets.............................. 164 25 189 279 (2) 277
----- --- --------- ----- --------- ---------
Total Interest Income.................................... 9 445 454 314 1,055 1,369
----- --- --------- ----- --------- ---------
Interest Expense:
Customer deposits.......................................... (253) (252) (505) (192) (101) (293)
FHLBSF advances............................................ 249 8 257 418 10 428
----- --- --------- ----- --------- ---------
Total Interest Expense................................... (4) (244) (248) 226 (91) 135
----- --- --------- ----- --------- ---------
Net Interest Income.......................................... $ 13 689 702 $ 88 1,146 1,234
----- --- --------- ----- --------- ---------
----- --- --------- ----- --------- ---------
</TABLE>
- ------------------------
(1) The changes have been computed as follows: average balance changes -- change
in volume holding initial rate constant; average rate changes -- change in
average rate holding the initial balance constant; changes attributable to
both volume and rate have been allocated proportionately.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months and six months ended June
30, 1996 was $150,000 and $290,000, respectively, compared with $1.4 million for
the same periods in 1995. See discussion under VALUATION ALLOWANCES above.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Non-interest income and non-interest expense by major categories are shown
in the Consolidated Statements of Operations for the three months and six months
ended June 30, 1996 and 1995.
Non-interest income was $171,000 and $71,000 for the three months ended June
30, 1996 and 1995, respectively, and $382,000 and $205,000 for the six months
ended June 30, 1996, respectively. The greater amounts of non-interest income in
the 1996 periods resulted from gains on sale of REO of $86,000 and $232,000,
respectively, in 1996 compared with minimal gains in the 1995 periods. See
discussion under ASSET QUALITY above. Loans and deposit fees for the first half
of 1995 included deposit withdrawal penalties of $90,000 compared with $16,000
for the same 1996 period. Relatively higher market interest rates and a one-time
certificate of deposit program in effect during the first quarter of 1995
resulted in certain depositors withdrawing their certificates prior to maturity.
Non-interest expense includes general and administrative expenses (G&A) and
expenses of real estate owned. G&A expenses for the three and six months ended
June 30, 1996 were $1.6 million and $3.0 million, respectively, compared with
$1.1 million and $2.4 million, respectively, for the same periods in 1995. The
Company's G&A ratio to average assets for the three months and six months ended
June 30, 1996 were 2.18% and 2.09%, respectively, compared with 1.50% and 1.68%,
respectively, for the same periods in 1995. The increases in 1996 expenses over
1995 expenses primarily resulted from the following:
- Compensation and benefits increased $282,000 (68%) for the second quarter
of 1996 and $341,000 (32%) for the first half of 1996 compared with
compensation and benefits expenses for the same periods in 1995. During
the second quarter of 1995, benefits expense was reduced $116,000 by the
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<PAGE>
reversal of a prior year profit sharing plan accrual. The remaining
portion of the 1996 over 1995 increases in compensation and benefits,
$166,000 and $225,000, respectively, mainly reflected the cost of
additions to staff relating to the planning, loan service, loan credit
review and asset evaluation processes.
- Deposit insurance and regulatory assessments increased $36,000 (25%) and
$73,000 (26%) for the second quarter and first half of 1996 over
assessments for the same periods in 1995. These increases resulted from
higher deposit balances during the third and fourth quarters of 1995 and a
13% increase in the Company's deposit insurance assessment rate, effective
January 1, 1996. Deposit assessments for any quarter are based on average
deposit balances for the prior two quarters.
- Professional fees increased to $208,000 and $331,000 for the second
quarter and first half 1996 periods, respectively, compared with $50,000
and $105,000 for the second quarter and first half of 1995. Professional
fees for the second quarter of 1996 includes $102,000 of legal and other
costs relating to the proposed merger with Luther Burbank Corporation (see
Note 5 of Notes to Consolidated Financial Statements). In addition, during
the 1996 periods the Company expended greater amounts for professional
services to assist in enhancing the loan credit review process and in
resolving or disposing of problem loans and real estate owned.
INCOME TAX EXPENSE
The ratio of income tax expense to pre-tax income is 46.3% and 43.8% for the
second quarter and first half of 1996, compared with the Company's normal ratio
of 41.5%. The higher 1996 ratios reflect the nondeductibility for tax purposes
of the $102,000 of merger-related costs which are discussed above.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's primary sources of funds include loan and securities
repayment, deposit generation, advances from the Federal Home Loan Bank of San
Francisco, and cash flows generated from operations. The Company uses its
liquidity resources principally to fund mortgage loans, repay maturing
borrowings, fund maturing time deposit and savings withdrawals and provide for
its foreseeable short and long-term needs. The Company expects to be able to
fund or refinance, on a timely basis, its commitments and long-term liabilities.
Office of Thrift Supervision regulations require savings institutions to
maintain a specified liquidity ratio (presently 5%) of cash and specified
securities to customer deposits and borrowings due in one year or less. The
Company continues to be in compliance with the liquidity regulation. Liquidity
ratios at June 30, 1996 and December 31, 1995 were 8.52% and 8.38%,
respectively.
CAPITAL
The Company continues to meet and exceed all regulatory capital tests at
June 30, 1996 and is deemed well-capitalized. See Note 4 of Notes to
Consolidated Financial Statements for further information.
E-84
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was not involved in any claims or lawsuits which, in the opinion
of management after conferring with legal counsel, would have a material effect
on the financial position of the Company.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF COMMON STOCKHOLDERS
At the annual meeting of shareholders held on May 29, 1996, the shareholders
reelected Jody Anne Becker, Pat Glasner and Judith A. Waller to the Board of
Directors of NHS Financial, Inc. to serve three year terms to 1999. The election
of directors was the only business to be presented at the annual meeting. Of the
2,522,827 shares of common stock outstanding as of the record date, April 2,
1996, the following indicates the number of votes cast for each of the three
directors:
<TABLE>
<CAPTION>
YES VOTES VOTES WITHHELD
---------- --------------
<S> <C> <C>
Jody Anne Becker 2,050,231 31,788
Pat Glasner 2,049,343 32,676
Judith A. Waller 2,049,678 31,341
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On June 10, 1996, the Company filed a report on Form 8-K which consisted of
a copy of the press release, dated May 23, 1996, announcing that NHS Financial,
Inc. agreed to be acquired by Luther Burbank Corporation and that both
corporations have signed a definitive agreement to merge. Under the terms of the
agreement, Luther Burbank will pay a total cash consideration of approximately
$29.7 million or $11.50 per share to the shareholders of NHS Financial, Inc.
E-85
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
<TABLE>
<S> <C>
NHS FINANCIAL, INC.
(Registrant)
Date: August 5, 1996 /s/ JAMES W. BARNETT
--------------------------------------------------
JAMES W. BARNETT
President and Chief Executive Officer
Date: August 5, 1996 /s/ ALBERT J. THOMSON
--------------------------------------------------
ALBERT J. THOMSON
Senior Vice President and Chief Financial Officer
Date: August 5, 1996 /s/ JARED L. BOOK
--------------------------------------------------
JARED L. BOOK
Vice President and Chief Accounting Officer
</TABLE>
E-86
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
NHS Financial, Inc.:
We consent to incorporation in the proxy statement of NHS Financial, Inc. dated
August 12, 1996 of our report dated February 15, 1996, relating to the
consolidated statements of financial condition of NHS Financial, Inc. and
subsidiary as of December 31, 1995 and 1994 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended Decemeber 31, 1995, which report appears in
the December 31, 1995 annual report of Form 10-K of NHS Financial, Inc.
KPMG PEAT MARWICK LLP
San Francisco, California
August 13, 1996
<PAGE>
NHS FINANCIAL, INC.
THIS PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON SEPTEMBER 18, 1996
The undersigned hereby appoints James W. Barnett, JoAnne Fabian and Iris C.
Pera, and each of them with full power to act alone, the true and lawful
attorneys in fact and proxies of the undersigned to vote all shares of Common
Stock of NHS Financial, Inc., a California corporation (the "Company"), held
by the undersigned, with full power of substitution, with the same force and
effect as the undersigned would be entitled to vote if personally present, at
the Special Meeting of Shareholders of the Company to be held at the Embassy
Suites, 101 McInnis Parkway, San Rafael, California, on September 18, 1996,
at 2:00 p.m. (local time), and at any and all adjournments or postponements
thereof, as follows:
<PAGE>
Please mark your
votes as indicated /X/
in this example
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL AND
ADOPTION OF THE REORGANIZATION AGREEMENT.
1. Approval and adoption of the Agreement and Plan of Reorganization dated
as of May 23, 1996 (the "Reorganization Agreement"), by and among
Luther Burbank Corporation, Luther Burbank Savings and Loan Association,
Luther Burbank Interim, New Horizons Savings and Loan Association and the
Company.
FOR / / AGAINST / / ABSTAIN / /
2. OTHER MATTERS: Discretionary authority is hereby granted with respect to
such other business as may properly come before the meeting or any
adjournment or postponement thereof.
FOR / / AGAINST / / ABSTAIN / /
Please mark, sign, date and return this proxy card promptly, using the
enclosed envelope.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN. IF THIS PROXY IS SUBMITTED, BUT NO DIRECTIONS ARE MADE, THIS PROXY
WILL BE VOTED "FOR" THE APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT.
The undersigned hereby acknowledges receipt of the Notice of Special Meeting
of Shareholders and the Proxy Statement, each dated August 12, 1996,
furnished herewith.
Signature(s): ____________ Title or Authority: __________ Dated: ________,1996
Signature(s): ____________ Title or Authority: __________ Dated: ________,1996
IMPORTANT: Please sign your name exactly as it appears hereon. When signing
as attorney, agent, executor, administrator, trustee, guardian or corporate
officer, please give your full title as such. Each joint owner should sign
the proxy. If executed by a partnership, this proxy should be signed by an
authorized partner.
