<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 1997
REGISTRATION NO. 333-20497
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO THE FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
LIFE FINANCIAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CERTIFICATE OF INCORPORATION)
----------------
<TABLE>
<S> <C> <C>
DELAWARE 6035 APPLIED FOR
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
4115 TIGRIS WAY
RIVERSIDE, CALIFORNIA 92503
(800) 448-2265
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DANIEL L. PERL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
LIFE FINANCIAL CORP.
4115 TIGRIS WAY
RIVERSIDE, CALIFORNIA 92503
(800) 448-2265
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
JOSEPH G. PASSAIC, JR., ESQUIRE PAUL H. IRVING, ESQUIRE
MARY M. SJOQUIST, ESQUIRE ALLEN Z. SUSSMAN, ESQUIRE
MANATT, PHELPS & PHILLIPS, LLP
GEOFFREY W. RYAN, ESQUIRE
MULDOON, MURPHY & FAUCETTE 11355 WEST OLYMPIC BOULEVARD
5101 WISCONSIN AVENUE, N.W. LOS ANGELES, CALIFORNIA 90064
WASHINGTON, D.C. 20016 (310) 312-4000
(202) 362-0840
</TABLE>
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED (1) PER SHARE OFFERING PRICE FEE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $.01 par
value................. 6,086,716 Shares $12.00 $73,040,592 $22,134(2)
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 3,211,716 shares to be issued in exchange for the 1,070,572
outstanding shares of Common Stock of Life Savings Bank, Federal Savings
Bank ("Life Savings"). In accordance with Rule 457(f) of the Securities
Act of 1933, as amended, the registration fee has been calculated on the
basis of the estimated market value of the number of shares of common
stock of Life Savings to be exchanged for shares of Life Financial Corp.
(2) $16,601 of the registration fee was previously paid upon the initial filing
of the Form S-1.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION, DATED MARCH 27, 1997
5,711,716 SHARES
[LOGO of LIFE FINANCIAL CORP.]
COMMON STOCK
Life Financial Corp. (the "Company" or "Life Financial"), a Delaware
corporation, is hereby offering (the "Public Offering") 2,500,000 shares of its
common stock, par value $.01 per share (the "Common Stock"). In addition, the
Company is hereby offering (the "Exchange Share Offering") 3,211,716 shares of
its Common Stock in connection with the reorganization of Life Savings Bank,
Federal Savings Bank (the "Bank"), as a result of which (i) each outstanding
share of the Bank's common stock will be converted into the right to receive
three shares of the Common Stock of the Company and (ii) the Bank is expected
to become a wholly-owned subsidiary of Life Financial Corp. (the
"Reorganization"). The Public Offering and the Exchange Share Offering are
collectively referred to herein as the "Offerings." The Company has received
conditional approval to have its Common Stock quoted on the National Market
System of the Nasdaq Stock Market, subject to notice of issuance, under the
symbol "LFCO." It is currently estimated that the price of the Common Stock to
be sold in the Public Offering will be between $10.00 and $12.00 per share.
The sale of the Common Stock is subject to the approval of the Reorganization
by stockholders of the Bank and the Office of Thrift Supervision ("OTS").
-----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" AT PAGES 11 TO 17 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY EACH PROSPECTIVE INVESTOR.
-----------
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION"), THE OTS, OR ANY OTHER FEDERAL
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION, THE
OTSOR ANY OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO THE
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............... $ $ $
- --------------------------------------------------------------------------------
Total(3)................ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses of the Offering payable by the Company estimated
to be $660,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
375,000 additional shares of Common Stock solely to cover overallotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares of Common Stock at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$ , $ , and $ , respectively. See "Underwriting."
The Common Stock offered by the Underwriters in the Public Offering is
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to their right to withdraw, modify, correct and
reject orders in whole or in part. It is expected that delivery of the
certificates representing such shares of Common Stock will be made against
payment therefor at the offices of Friedman, Billings, Ramsey & Co., Inc.
("FBR"), Arlington, Virginia, in book entry form, or through the facilities of
the Depository Trust Company on or about April , 1997.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING BIDS AND PURCHASES, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE
"UNDERWRITING." THE INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO THE
REORGANIZATION OF THE BANK, PURSUANT TO WHICH (I) THE BANK'S STOCKHOLDERS WILL
BE ENTITLED TO RECEIVE THREE SHARES OF COMMON STOCK OF THE COMPANY IN EXCHANGE
FOR EACH SHARE OF COMMON STOCK OF THE BANK AND (II) THE BANK IS EXPECTED TO
BECOME A WHOLLY-OWNED SUBSIDIARY OF THE COMPANY. UNLESS OTHERWISE INDICATED,
ALL PER SHARE INFORMATION OF THE BANK HAS BEEN ADJUSTED TO REFLECT 3,211,716
SHARES OUTSTANDING, THE MAXIMUM NUMBER OF SHARES OF COMPANY COMMON STOCK
PROPOSED TO BE EXCHANGED FOR SHARES OF BANK COMMON STOCK IN THE EXCHANGE SHARE
OFFERING. UNLESS OTHERWISE INDICATED ALL REFERENCES TO THE COMPANY SHALL BE
DEEMED TO INCLUDE THE COMPANY AND ITS SUBSIDIARIES.
THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY.
PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE
CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT ACTUAL EVENTS OR
RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE
PURCHASERS OF THE SHARES OF COMMON STOCK SHOULD SPECIFICALLY CONSIDER THE
VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH
UNDER "RISK FACTORS," WHICH WOULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
The Bank originates, purchases, sells and services non-conventional mortgage
loans principally secured by first and second mortgages on one- to four-family
residences. The Bank focuses on loans for the purchasing or refinancing of
residential real property by borrowers who, because of prior credit problems or
the absence of a credit history, are considered "sub-prime borrowers." (Such
loans are called "Liberator Series" loans and may sometimes hereinafter be
referred to as such.) The Bank also originates debt consolidation loans for up
to 125% of the appraised value of such loans for borrowers whose credit history
qualifies for Federal National Mortgage Association ("FNMA") and Federal Home
Loan Mortgage Corporation ("FHLMC") loans ("Agency Qualified Borrowers"). (Such
loans are called "Portfolio Series" loans and may sometimes hereinafter be
referred to as such.) The Bank purchases and originates mortgage loans and
other real estate secured loans through a network of approved mortgage brokers
and correspondents on a nationwide basis, as well as through the Bank's Retail
Lending Division. No mortgage broker or correspondent accounted for more than
4.1% of 1996 volume. Since 1994, loans originated or purchased are generally
originated for sale in the secondary mortgage market or in asset
securitizations. The Bank generally retains the majority of the servicing
rights to the loans sold or securitized and may sell servicing rights at a
later date depending on market opportunities. In addition, the Bank purchases
and originates for resale in the secondary market smaller commercial real
estate and multi-family mortgage loans.
Management believes that the Bank's competitive strengths include an
extensive network of loan brokers with which the Bank has had prior experience
and repeat business, its efficient loan processing operations which provide
prompt, responsive service, its underwriting process, and a diversified network
of investors to which the Bank can sell loans in the secondary mortgage market.
Total loan production, including loans purchased and originated, increased from
$72.8 million for the year ended December 31, 1994, to $134.8 million for the
year ended December 31, 1995, and was $222.6 million for the year ended
December 31, 1996. The Bank plans to continue to increase its lending
operations through additional loan office expansion, greater penetration in its
existing markets and increased correspondent loan acquisitions. During the
fourth quarter of 1996, the Bank securitized $51.9 million of loans (the
"Securitization"). This was the first loan securitization completed by the
Bank, which recorded a gain on sale of approximately $4.3 million. The Company
currently contemplates that a significant component of its business strategy
will be to generate revenue and net income through future asset securitizations
and intends to conduct securitizations at a rate of one per quarter, although
there can be no assurance that it will be able to do so successfully.
Management believes that securitizations represent an efficient, timely and
profitable means of maximizing returns to the Company from its operations. See
"Recent Developments," "Risk Factors--Dependence on Asset Securitizations and
Impact on Quarterly Operating Results" and "Business--Lending Activities--Loan
Sales and Asset Securitizations."
3
<PAGE>
Historically, all operations have been conducted through the Bank. The
Company and the Bank, pending applicable licensing and regulatory approvals,
intend to conduct their operations through the following operating entities in
order to maximize their operating flexibility and efficiency.
LIFE FINANCIAL CORP.
<TABLE>
<S> <C> <C>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK LIFE WAREHOUSE
(RETAIL LENDING DIVISION AND BANKING INVESTMENT FINANCING
DEPOSITORY DIVISION) HOLDINGS, SUBSIDIARY
</TABLE>
LIFE
FINANCIAL
SERVICES,
INC.
LIFE
INCOME CAPITAL SERVICES,
INC.
LIFE ASSET
MANAGEMENT,INC.
. Life Financial Services, Inc. ("Life Financial Services") will continue
the nationwide sub-prime one- to four-family loan originations previously
conducted by the Bank. The Bank plans to transfer this subsidiary
directly to the Company in the future. See "Business--Lending
Activities--Underwriting."
. Life Income Capital Services, Inc. ("Life Income Capital") will continue
the nationwide origination of multi-family and commercial real estate
loans in the $50,000 to $750,000 range previously conducted by the Bank.
Although there can be no assurances in this regard, management intends to
expand the operations of this subsidiary and expects the operations of
this subsidiary to create an increased source of revenue for the Company,
because of the perceived demand for and higher yield on such loans.
. Life Asset Management, Inc. ("Life Asset Management") is being
established as a direct subsidiary of the Bank to continue to service
loans and real estate owned ("REO") for both the Bank and for purchasers
of loans. At December 31, 1996, the Bank's mortgage servicing portfolio
totalled $238.0 million, including $169.0 million of loans serviced for
others.
. The Bank will continue to operate the Retail Lending Division and the
Banking Depository Division. In addition, as part of its liquidity and
investment portfolios, the Bank will continue to hold investments in U.S.
government and agency securities.
. Life Investment Holdings, Inc. ("Life Investment") will hold residuals
and other related assets resulting from asset securitization activities.
Immediately upon the completion of the Offerings, Life Investment will
acquire residual assets of approximately $12.3 million and $6.6 million
in restricted cash (the "Reserve Account") resulting from the
Securitization completed in the fourth quarter of 1996 and a
securitization completed during the first quarter of 1997. See "Recent
Developments". It is intended that any future residuals and related
assets retained by the Company will be held by this subsidiary.
. Upon the completion of the Offerings, the Company intends to acquire or
establish a subsidiary to provide warehouse lines of credit to meet the
cash flow needs of smaller loan originators on a short-term basis, which
it expects will in turn create additional sources of loans for the
Company to purchase and securitize.
4
<PAGE>
The Company was incorporated in Delaware in 1996. The Company has applied to
the OTS, and expects to receive the approval of the OTS, to become a savings
and loan holding company and to acquire all of the issued and outstanding
common stock of the Bank in the Reorganization. Such approval is subject to the
affirmative vote of the holders of a majority of the outstanding shares of the
Bank's common stock eligible to be cast at the annual meeting of stockholders
scheduled to be held on April 18, 1997.
The Company's principal executive offices are located at 4110 Tigris Way,
Riverside, California 92503 and its telephone number at that location is (909)
280-5100. In addition to its executive offices, the Company conducts its
business from the Bank's home office in San Bernardino, California, a mortgage
financing office in Riverside, California, a loan center in Jacksonville,
Florida and a recently established loan center in the Denver, Colorado
metropolitan area.
THE OFFERING
Common Stock offered in the
Exchange Share Offering........ 3,211,716 shares
Common Stock offered in the
Public Offering(1)(2).......... 2,500,000 shares
Common Stock to be outstanding
after the Offerings(1)(2)...... 5,711,716 shares
Dividend Policy................. The Company intends to retain its earnings to
support its future growth strategy and does
not anticipate paying cash dividends on the
Common Stock in the foreseeable future. See
"Dividend Policy."
Use of Proceeds.................
Net proceeds will be used to (i) acquire
residual assets of approximately $12.3
million and $6.6 million in the Reserve
Account from the Bank (which, when netted
against the net subordinated debt of $9.6
million expected to be transferred to the
Company following the Reorganization, would
total $9.3 million), see "Recent
Developments"; (ii) acquire an interest in or
establish a subsidiary for the purpose of
providing short term warehouse lines of
credit; (iii) downstream proceeds to the Bank
if necessary to fund additional purchases of
loans; and (iv) fund general business
activities, including possible acquisitions
of related businesses as opportunities arise.
No determination has been made as to the
amount of proceeds that will be allocated to
each use, with the exception of the
acquisition of the residual assets and the
Reserve Account. See "Use of Proceeds."
Dilution........................
Upon completion of the Offerings, there will
be an immediate dilution of the net tangible
book value per share of Common Stock of $5.01
per share based on an assumed offering price
of $11.00 per share, the midpoint of the
range of the proposed Offerings. See
"Dilution."
Reserved Nasdaq National Market "LFCO"
Symbol.........................
- --------
(1) Assumes no exercise of the Underwriters' overallotment option of 375,000
shares. See "Underwriting."
(2) Does not include 571,172 shares reserved for issuance pursuant to the Bank
Option Plan and Company Option Plan. See "The Board of Directors and
Management of the Bank--Stock Option Plans."
5
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF THE BANK
The selected financial and other data of the Bank, the primary operating
subsidiary of the Company from and after the effective date of the
Reorganization, at or for the years ended December 31, 1996, 1995, 1994, 1993
and 1992, set forth below is derived in part from, and should be read in
conjunction with, the Financial Statements of the Bank and Notes thereto for
the years ended December 31, 1996, 1995 and 1994 presented elsewhere in this
Prospectus. The Bank did not pay any cash dividends in any of the periods set
forth.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets................ $ 104,010 $ 74,136 $ 71,402 $ 78,256 $ 78,788
Securities held-to-maturity
and FHLB stock............. 8,837 2,700 2,860 3,883 4,829
Loans held for sale......... 31,018 21,688 17,070 2,348 4,499
Loans held for investment,
net........................ 36,895 41,693 47,107 64,381 60,873
Deposit accounts............ 85,711 67,535 65,689 72,008 71,719
FHLB advances............... -- -- 1,250 1,200 2,000
Stockholders' equity........ 9,273 4,268 3,748 4,419 4,326
Book value per share (pro
forma)(1).................. $ 2.89 $ 2.29 $ 2.01 $ 2.37 $ 2.55
Shares outstanding (pro
forma)(1).................. 3,211,716 1,866,216 1,866,216 1,866,216 1,696,410
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income............. $ 6,929 $ 5,825 $ 4,824 $ 5,445 $ 6,143
Interest expense............ 3,766 3,448 2,721 3,045 3,687
--------- --------- --------- --------- ---------
Net interest income..... 3,163 2,377 2,103 2,400 2,456
Provision for estimated loan
losses..................... 963 1,194 1,306 404 129
--------- --------- --------- --------- ---------
Net interest income
after provision for
estimated loan losses.. 2,200 1,183 797 1,996 2,327
Non-interest income......... 9,112 4,020 1,688 1,397 1,732
Non-interest expense:
Compensation and
benefits................. 5,233 2,544 1,575 1,403 1,426
Net loss on foreclosed
real estate.............. 158 53 280 228 78
SAIF special assessment... 448 -- -- -- --
Other expense............. 2,842 1,792 1,601 1,562 2,045
--------- --------- --------- --------- ---------
Total non-interest
expense................ 8,681 4,389 3,456 3,193 3,549
--------- --------- --------- --------- ---------
Income (loss) before income
tax provision (benefit).... 2,631 814 (971) 200 510
Income tax provision
(benefit).................. 1,126 294 (300) 107 148
--------- --------- --------- --------- ---------
Net income (loss)........... $ 1,505 $ 520 $ (671) $ 93 $ 362
========= ========= ========= ========= =========
Earnings (loss) per share
(pro forma)(2)............. $ 0.63 $ 0.28 $ (0.36) $ 0.05 $ 0.22
========= ========= ========= ========= =========
Weighted average shares out-
standing
(pro forma)(2)............. 2,370,779 1,866,216 1,866,216 1,823,765 1,644,886
========= ========= ========= ========= =========
</TABLE>
(continued on following page)
6
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND
OTHER DATA(3):
PERFORMANCE RATIOS:
Return on average assets..... 1.74% 0.69% (0.89)% 0.12% 0.46%
Return on average equity..... 24.99 13.64 (17.01) 2.11 8.92
Average equity to average
assets...................... 6.98 5.04 5.22 5.51 5.17
Equity to total assets at end
of period................... 8.92 5.76 5.25 5.65 5.49
Average interest rate
spread(4)................... 3.76 3.09 2.79 3.02 3.04
Net interest margin(5)....... 3.94 3.25 2.88 3.14 4.29
Average interest-earning
assets to average interest-
bearing liabilities......... 103.90 103.50 102.27 103.08 103.64
Efficiency Ratio(6).......... 69.43 67.78 83.78 78.09 82.88
LOAN ORIGINATIONS AND
PURCHASES..................... $222,553 $134,772 $72,815 $82,015 $90,870
REGULATORY CAPITAL RATIOS(7):
Tangible capital............. 8.90% 5.68% 5.25% 5.65% 5.49%
Core capital................. 8.90 5.68 5.25 5.65 5.49
Risk-based capital........... 9.43 10.17 10.00 10.87 10.56
ASSET QUALITY RATIOS:
Non-performing assets as a
percent of total assets(8).. 2.86% 3.00% 3.42% 5.05% 4.15%
Allowance for estimated loan
losses as a percent of non-
performing loans............ 67.26 84.25 44.04 20.02 16.29
</TABLE>
- --------
(1) Book value per share (pro forma) is based upon the shares outstanding at
the end of each period, adjusted for a 100% stock dividend which occurred
during 1996, and then adjusted for the exchange of three shares of Company
Common Stock for one share of Bank common stock which is expected to take
place in connection with the Reorganization.
(2) Earnings per share (pro forma) is based upon the weighted average shares
outstanding during the period, adjusted for a 100% stock dividend which
occurred during 1996, and then adjusted for the exchange of three shares of
Company Common Stock for one share of Bank common stock which is expected
to take place in connection with the Reorganization.
(3) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average daily or average month-end balances during the indicated periods.
(4) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) The efficiency ratio represents noninterest expense less (gain) loss on
foreclosed real estate divided by noninterest income plus net interest
income before provision for estimated loan losses.
(7) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation--Federal Savings Institution
Regulation--Capital Requirements." See "Capitalization" for the Company's
pro forma capital levels as a result of the Offerings.
(8) Non-performing assets consist of non-performing loans and REO. See
"Business--Lending Activities--Non-Accrual and Past-Due Loans" and "--REO."
7
<PAGE>
QUARTERLY OPERATING AND OTHER DATA OF THE BANK
Financial information of the Bank at March 31, June 30, September 30, and
December 31, 1996 and for the quarters ended March 31, June 30, September 31
and December 31, 1996 is derived from unaudited financial data, but in the
opinion of management, reflects all adjustments (consisting of only normal
recurring adjustments) which are necessary to present fairly the results of
such interim periods.
<TABLE>
<CAPTION>
AT OR FOR THE QUARTER ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
--------- -------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income.................. $ 1,662 $ 1,691 $ 1,569 $ 2,007
Interest expense................. 929 926 844 1,067
------- ------- ------- -------
Net interest income.......... 733 765 725 940
Provision for estimated loan
losses.......................... 68 40 251 604
------- ------- ------- -------
Net interest income after
provision for estimated loan
losses...................... 665 725 474 336
Non-interest income.............. 1,040 1,432 1,791 4,849
Non-interest expense:
Compensation and benefits...... 814 1,337 1,056 2,026
Net loss (gain) on foreclosed
real estate................... 91 9 71 (13)
SAIF Special Assessment........ -- -- 448 --
Other expense.................. 616 704 671 851
------- ------- ------- -------
Total non-interest expense... 1,521 2,050 2,246 2,864
------- ------- ------- -------
Income before income tax
provision....................... 184 107 19 2,321
Income tax provision............. 79 46 17 984
------- ------- ------- -------
Net income....................... $ 105 $ 61 $ 2 $ 1,337
======= ======= ======= =======
Earnings per share (pro
forma)(1)....................... $ 0.06 $ 0.03 $ 0.00 $ 0.42
======= ======= ======= =======
SELECTED FINANCIAL RATIOS AND
OTHER DATA(2):
PERFORMANCE RATIOS:
Return on average assets....... 0.48% 0.30% 0.01% 5.56%
Return on average equity....... 9.73 5.44 0.12 61.35
Average equity to average
assets........................ 4.95 5.56 8.42 8.77
Equity to total assets at end
of period..................... 5.04 5.62 9.40 8.92
Average interest rate
spread(3)..................... 3.49 3.71 3.93 4.09
Net interest margin(4)......... 3.70 3.85 3.95 4.22
Average interest-earning assets
to average interest-bearing
liabilities................... 104.49 103.10 103.25 104.64
Efficiency Ratio(5)............ 80.65 92.90 86.45 49.70
LOAN ORIGINATIONS AND PURCHASES.. $50,928 $52,925 $44,536 $74,164
REGULATORY CAPITAL RATIOS(6):
Tangible capital............... 4.99% 5.62% 9.40% 8.90%
Core capital................... 4.99 5.62 9.40 8.90
Risk-based capital............. 8.91 9.82 16.06 9.43
ASSET QUALITY RATIOS:
Non-performing assets as a
percent of total assets(7).... 2.49% 3.59% 3.36% 2.86%
Allowance for estimated loan
losses as a percent of
non-performing loans.......... 98.99 66.06 55.66 67.26
</TABLE>
(footnotes on following page)
8
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- --------
(1) Earnings per share (pro forma) is based on the weighted average shares
outstanding during the period, adjusted for a 100% stock dividend which
occurred during 1996, and then adjusted for the exchange of three shares of
Company Common Stock for one share of Bank common stock which is expected
to take place in connection with the Reorganization.
(2) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average daily or average month end balances during the indicated periods
and are annualized where appropriate.
(3) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(4) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(5) The efficiency ratio represents noninterest expense less (gain) loss on
foreclosed real estate divided by noninterest income plus net interest
income before provision for estimated loan losses.
(6) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation--Federal Savings Institution
Regulation--Capital Requirements." See "Capitalization" for the Company's
pro forma capital levels as a result of the Offerings.
(7) Non-performing assets consist of non-performing loans and REO. See
"Business--Lending Activities--Non-Accrual and Past-Due Loans" and "--REO."
9
<PAGE>
RECENT DEVELOPMENTS
On March 14, 1997, the Bank issued subordinated debentures ("Debentures") in
the aggregate principal amount of $10.0 million through a private placement
and pursuant to a Debenture Purchase Agreement (the "Debenture Offering"). The
Debentures will mature on March 15, 2004 and bear interest at the rate of 13
1/2% per annum, payable semi-annually. The Debentures qualify as supplementary
capital under regulations of the OTS which capital may be used to satisfy the
risk-based capital requirements in an amount up to 100% of the Bank's core
capital. See "Regulation--Federal Savings Institution Regulation--Capital
Requirements." By enhancing the Bank's capital position the Debentures provide
support for the Bank's current operations. The Debentures are direct,
unconditional obligations of the Bank ranking with all other existing and
future unsecured and subordinated indebtedness of the Bank. They are
subordinated on liquidation, as to principal and interest, and premium, if
any, to all claims against the Bank having the same priority as savings
account holders or any higher priority.
The Debentures are redeemable at the option of the Bank, in whole or in
part, at any time after September 15, 1998, at the aggregate principal amount
thereof, plus accrued and unpaid interest, if any. Following the
Reorganization, the Bank may substitute the Company in its place as obligor on
the Debentures (the "Substitution"). If such Substitution occurs, holders of
the Debentures will have the option, at September 15, 1998 or at such later
time as the Substitution occurs, to require the Company to purchase all or
part of the holder's outstanding Debentures at a price equal to 100% of the
principal amount repurchased plus accrued interest through the repurchase
date. If the Substitution occurs, upon a change in control of the Company
holders of the Debentures will have the option to require the Company to
purchase all or part of the holder's outstanding Debenture at a price equal to
101% of the principal amount repurchased plus accrued interest through the
repurchase date. Any such repurchase would have a negative impact on the
Company's liquidity after September 15, 1997. See "Risk Factors--Risks Related
to Debentures".
During the quarter ended March 31, 1997, the Bank participated in a loan
securitization whereby mortgage-pass-through certificates in the Life
Financial Services Trusts 1997-1A and 1997-1B were issued. The 1997-1A Trust
was initially funded with $33.6 million of adjustable-rate Liberator Series
Loans sold by the Bank, and the 1997-1B Trust was initially funded with $46.7
million of fixed-rate Liberator Series and Portfolio Series Loans sold by the
Bank. An additional $19.7 million of loans will be sold by the Bank as part of
this securitization. The certificates issued were guaranteed as to certain
payments by insurance policies issued by MBIA Insurance Corporation and were
sold through Prudential Securities Incorporated. The certificates issued also
have the benefit of Reserve Accounts, initially funded by $3.9 million of the
proceeds from the sale of the loans. Such Reserve Accounts will be increased
by excess interest received on the loans until the required reserve level,
initially 6.0% of the original outstanding balance of the loans funding Trust
1997-1A and 10.1% of the original outstanding balance of the loans funding
Trust 1997-1B, is achieved and maintained. Residual amounts in excess of the
required reserve amount will be distributed to the Bank. As a result of this
securitization, the Bank recognized a gain of $4.0 million. Certain
assumptions relating to the value of the residual asset include a 17.0% home
equity payment (an estimation of prepayment speed) on the fixed rate loans and
a 25.0% constant prepayment rate on the adjustable-rate loans, a 13.5%
discount factor and loss factors of 0.5% on the Liberator Series loans and
1.5% on the Portfolio Series loans. The Bank also receives servicing fees of
1.00% as servicer of the fixed rate loans sold and 0.65% as servicer of the
adjustable rate loans sold for the first twelve months following the
securitization and 1.00% thereafter.
The Company intends to continue a program of asset securitization at an
approximate rate of one per quarter, either through private placements or
public offerings. There can be no assurance, however, that any asset
securitizations will be completed by the Company in the future. See "Risk
Factors--Dependence on Asset Securitizationsand Impact on Quarterly Operating
Results" and "Business--Lending Activities--Loan Sales and Asset
Securitizations."
The Bank has negotiated a line of credit with a national investment banking
firm in the amount of $35.0 million which is expected to close in the first
quarter of 1997. The line of credit will be used for the origination of
mortgage loans. Upon the completion of the Reorganization, and upon the
formation of the warehouse financing subsidiary of the Company, it is expected
that the line of credit will become a line of credit of the Company. See
"Business--Restructuring".
10
<PAGE>
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors in deciding whether to purchase
the Common Stock offered hereby.
ABILITY OF THE COMPANY TO IMPLEMENT ITS BUSINESS STRATEGY
The Company's business strategy is dependent upon its ability to increase
its loan origination volume through the nationwide growth of its network of
correspondents and brokers, while maintaining its existing levels of
origination costs, interest rate spreads and underwriting criteria.
Implementation of this strategy will depend in large part on the Company's
ability to: (i) expand its correspondent network in markets with a sufficient
concentration of borrowers meeting the Company's underwriting criteria; (ii)
obtain adequate financing on favorable terms to fund its growth strategy;
(iii) profitably sell its loans in the secondary market or through asset
securitizations on a regular basis; (iv) retain skilled employees; and (v)
continue to expand in the face of increasing competition from other mortgage
lenders. The Company's failure with respect to any of these factors could
impair its ability to successfully implement its business strategy, which
would have a material adverse effect on the Company's results of operations
and financial condition. See "Business--Lending Activities."
RISKS ASSOCIATED WITH MORTGAGE ORIGINATION, PURCHASE AND SALE ACTIVITIES
The Bank has been actively involved in the origination, purchase and sale to
institutional investors of real estate secured loans and, more recently, in
asset securitizations. Generally, the profitability of such mortgage financing
operations depends on maintaining a sufficient volume of loans for sale and
the availability of purchasers. Changes in the level of interest rates and
economic factors may affect the amount of loans originated or available for
purchase by the Company, and thus the availability of gains on sale of loans
and servicing fee income. Changes in the purchasing policies of institutional
investors or increases in defaults after funding could substantially reduce
the amount of loans sold to such investors or through asset securitizations.
Any such changes could have a material adverse effect on the Company's results
of operations and financial condition. While the Bank has recently adopted a
hedging policy, the Bank does not currently utilize any specific hedging
instruments to minimize exposure to fluctuations in the market price of loans
and interest rates with regard to loans held for sale in the secondary
mortgage market. Therefore, between the time the Company originates loans and
purchase commitments are issued or asset securitizations are completed, the
Company is exposed to downward movements in the market price of such loans due
to upward movements in interest rates. See "Business--Lending Activities--
Origination and Purchase of Loans" and "--Loan Sales and Asset
Securitizations" and "--Sources of Funds." In addition, documents governing
the Bank's securitizations and whole loan sales generally require the Bank to
commit to repurchase or substitute loans in the event of a breach of a
representation or warranty made by the Bank to the loan purchaser, any
misrepresentation during the mortgage loan origination process or, in some
cases, upon any fraud or first payment default on such mortgage loans. Any
claims asserted against the Bank in the future by one or more of its loan
purchasers may result in liabilities or legal expenses that could have a
material adverse effect on the Company's results of operations and financial
condition.
DEPENDENCE ON ASSET SECURITIZATIONS AND IMPACT ON QUARTERLY OPERATING RESULTS
During the fourth quarter of 1996, the Bank, through its Financial Services
Division, completed its first asset securitization, which involved $51.9
million of loans and which generated gains of approximately $4.3 million. A
significant component of the Company's business strategy is to generate
revenue and net income and provide funding for future originations and
purchases of loans through asset securitizations at the rate of one per
quarter. There can be no assurance, however, that the Company will be able to
successfully implement this approach. Several factors will affect the
Company's ability to complete asset securitizations, including conditions in
the securities markets generally and in the asset-backed securities markets
specifically, the credit quality of the Company's loan portfolio and the
Company's ability to obtain credit enhancements. Although the Bank obtained a
credit enhancement in its Securitization completed during the fourth quarter
of 1996 which facilitated a "AAA" rating for the Securitization interests,
there can be no assurance that the Company will be able to obtain
11
<PAGE>
future credit enhancements on acceptable terms or that future securitizations
will be similarly rated. Any substantial reduction in the ability of the
Company to complete asset securitizations could have a material adverse effect
on the Company's results of operations and financial condition.
The Company's future revenues and net income are expected to fluctuate in
large part as a result of the timing and size of its future asset
securitizations. A delay in closing a securitization during a particular
quarter would postpone recognition of gain on sale of loans. In addition,
unanticipated delays in closing a securitization could also increase the
Company's exposure to credit risks and interest rate fluctuations by
increasing the period during which the Company holds its loans. If the Company
were unable to profitably securitize a sufficient number of its loans in a
particular reporting period, the Company's revenues for such period would
decline and would result in lower net income and possibly a net loss for such
period, and could have a material adverse effect on the Company's results of
operations, financial condition and capital ratios. The Bank records gains on
sales of loans through securitizations based in part on the fair value of the
residuals received by the Bank related to such loans, which are classified as
trading securities. The fair values of such residuals are in turn based in
part on market interest rates and projected loan prepayment and credit loss
rates. Increases in interest rates or higher than anticipated rates of loan
prepayments or credit losses of these or similar securities may require the
Company to write down the value of such residuals and result in a material
adverse effect on the Company's results of operations and financial condition.
The Company is not aware of an active market for the residuals. No assurance
can be given that the residuals could in fact be sold at their carrying value,
if at all. See "Business--Lending Activities--Loan Sales and Asset
Securitizations."
RISKS ASSOCIATED WITH SUB-PRIME LENDING
Through its Liberator Series program, the Bank has developed a lending niche
for the origination and purchase of mortgage loans to sub-prime borrowers,
defined as borrowers who do not qualify for credit under FHLMC, FNMA or
Government National Mortgage Association ("GNMA") guidelines. Loans to sub-
prime borrowers present a higher level of risk of default than conforming
loans because of the increased potential for default by borrowers who may have
had previous credit problems or who do not have any credit history. Loans to
sub-prime borrowers also involve additional liquidity risks, as these loans
generally have a more limited secondary market than conventional loans. The
actual rates of delinquencies, foreclosures and losses on loans to sub-prime
borrowers could be higher under adverse economic conditions than those
currently experienced in the mortgage lending industry in general. While the
Bank believes that the underwriting procedures and appraisal processes it
employs enable it to somewhat mitigate the higher risks inherent in loans made
to these borrowers, no assurance can be given that such procedures or
processes will afford adequate protection against such risks. See "Business--
Lending Activities--Origination and Purchase of Loans" and "--Underwriting."
HIGH LOAN TO VALUE RATIOS OF PORTFOLIO SERIES LOANS
Through its Portfolio Series program, the Bank originates debt consolidation
loans for Agency Qualified Borrowers. Portfolio Series loans are primarily
home equity lines of credit and second deeds of trust generally up to 125% of
the appraised value of the real estate underlying the loans. In the event of a
default on a Portfolio Series loan by a borrower, there generally would be
insufficient collateral to pay off the balance of such loan and the Bank, as
holder of a second position on the property, would likely lose a substantial
portion, if not all, of its investment. While the Bank believes that the
underwriting procedures it employs enable it to somewhat mitigate the higher
risks inherent in such loans, no assurance can be given that such procedures
will afford adequate protection against such risks. During the fourth quarter
of 1996, the Bank securitized $51.9 million in loans of which $33.7 million
consisted of Portfolio Series loans. Servicing was retained by the Bank on all
loans securitized. See "Business--Lending Activities--Origination and Purchase
of Loans" and "--Underwriting."
DEPENDENCE ON KEY PERSONNEL
The Company depends to a considerable degree on the contributions of a
limited number of key management personnel who have had, and will continue to
have, a significant role in the development and
12
<PAGE>
management of the Company's mortgage financing operations. The continued
development of the Company's business strategy depends to a large extent upon
the continued employment of Daniel L. Perl, President and Chief Executive
Officer of both the Company and the Bank. Most of the senior management
personnel in the mortgage lending area have had working relationships with Mr.
Perl prior to joining the Bank. The loss of such personnel or Mr. Perl could
materially adversely affect the Company's business. The Bank has entered into
an interim employment agreement with Mr. Perl and upon the completion of the
Offerings, the Company and the Bank will each enter into a three year
employment agreement with Mr. Perl. See "The Board of Directors and Management
of the Bank--Letter Agreement" and "--Employment Agreements."
RISKS RELATED TO DEBENTURES
In March 1997, the Bank issued $10.0 million of the Debentures. In the event
that the Company and the Bank elect to substitute the Company as obligor on
the Debentures following the Reorganization, the holders of the Debentures
will have the option, at September 15, 1998 or at such later time as the
Substitution occurs, to require the Company to purchase all or part of their
Debentures. See "Recent Developments." In the event that all of the holders of
the Debentures opt to require the Company to purchase their Debentures at
September 15, 1998, the Company would be required to fund $10.0 million plus
accrued interest from the last interest payment date in reimbursements to
holders of the Debentures. Such an event would have a material adverse effect
on the Company's liquidity. Furthermore, in the event that the Company has
insufficient funds available to repurchase the Debentures, the Company may be
required to borrow funds at more expensive rates than the interest rate on the
Debentures, which would have a material adverse effect on the Company's
results of operations.
RISKS RELATED TO MORTGAGE SERVICING RIGHTS
To determine the fair value of its mortgage servicing rights, the Bank
projects net cash flows expected to be received over the life of the
underlying loans. Such projections assume certain servicing costs, prepayment
rates and delinquencies. As of December 31, 1996, the carrying value of the
Bank's mortgage servicing rights totalled $2.6 million, up from $683,000 at
December 31, 1995. In addition, the pooling and servicing agreement relating
to the Bank's Securitization contains provisions with respect to the maximum
permitted loan delinquency rates and loan default rates, which, if exceeded,
would allow the termination of the Bank's right to service the related loans.
The mortgage servicing rights on the loans securitized during the fourth
quarter of 1996 totalled approximately $722,000.
There can be no assurance that the Bank's estimates used to determine the
fair value of mortgage servicing rights will remain appropriate for the life
of the loans sold or the Securitization. If actual loan prepayments or
delinquencies exceed the Bank's estimates, the carrying value of the Bank's
mortgage servicing rights may have to be written down through a charge against
earnings. The Bank cannot write up such assets to reflect slower than expected
prepayments, although slower prepayments may increase future earnings as the
Bank will receive cash flows in excess of those anticipated. Fluctuations in
interest rates may also result in a write-down of the Bank's mortgage
servicing rights in subsequent periods.
COMPETITION
As a purchaser and originator of mortgage loans, the Company faces intense
competition, primarily from mortgage banking companies, commercial banks,
credit unions, thrift institutions, credit card issuers and finance companies.
Many of these competitors in the financial services business are substantially
larger and have more capital and other resources than the Company.
Furthermore, certain large national finance companies and conforming mortgage
originators have announced their intention to adapt their conforming
origination programs and allocate resources to the origination of non-
conforming loans. In addition, certain of these larger mortgage companies and
commercial banks have begun to offer products similar to those offered by the
Company, targeting customers similar to those of the Company. The entrance of
these competitors into the Company's market could have a material adverse
effect on the Company's results of operations and financial condition. The
13
<PAGE>
Company depends largely on correspondents and brokers for its purchases and
originations of new loans with whom the Company's competitors also seek to
establish relationships. The Company's future results may become increasingly
sensitive to fluctuations in the volume and cost of its wholesale loans
resulting from competition from other purchasers for such loans. In addition,
as the Company expands into new geographic markets, it will face competition
from lenders with established positions in these locations. There can be no
assurance that the Company will be able to continue to compete successfully in
the markets it serves. See "Business-- Competition."
AVAILABILITY OF FUNDING SOURCES
The Bank funds substantially all of the loans which it originates or
purchases through deposits, internally generated funds or Federal Home Loan
Bank ("FHLB") advances. The Bank competes for deposits primarily on the basis
of rates, and as a consequence the Bank could experience difficulties in
attracting deposits to fund its operations if it does not continue to offer
deposit rates at levels that are competitive with other financial
institutions. The Bank also uses the proceeds generated by the Bank in selling
loans in the secondary market or pools of loans in asset securitizations to
fund subsequent originations or purchases. On an ongoing basis, the Bank
explores opportunities to access credit lines as an additional source of funds
and, in the future, expects to use the warehouse line of credit and/or the
repurchase financing facilities of a national investment banking firm to fund
loan originations. To the extent that the Bank is not able to maintain its
currently available funding sources or to access new funding sources, it would
have to curtail its loan production activities or sell loans earlier than is
optimal. Any such event would have a material adverse effect on the Company's
results of operations and financial condition. See "Recent Developments" and
"Business--Sources of Funds."
REAL ESTATE SECURED RISKS
As part of its lending strategy, the Bank has targeted borrowers seeking
loans secured by multi-family properties or properties used for commercial
business purposes such as small office buildings or light industrial or retail
facilities. Although such loans are generally originated for sale, the Bank
anticipates that its multi-family and commercial real estate portfolios will
increase as a percentage of total assets in future periods. Multi-family and
commercial real estate loans are generally considered to involve a higher
degree of credit risk, be more vulnerable to deteriorating economic conditions
and involve higher loan principal amounts than one- to four-family residential
mortgage loans. Income producing property values are also subject to greater
volatility than owner-occupied residential property values. Economic events
and government regulations, which are outside the control of the borrower or
lender, could impact the value of the security for such loans or the future
cash flows of the affected properties. Further, any material decline in real
estate values, such as the declines experienced in southern California in
recent years, generally reduces the ability of borrowers to use home equity to
support borrowings and increases the loan-to-value ratios of loans previously
made, thereby weakening collateral coverage and increasing the possibility of
a loss in the event of a borrower default. Because of the Bank's focus on
borrowers who are unable to obtain mortgage financing from conventional
mortgage sources, the actual rates of delinquencies, foreclosures and losses
on its loans could be higher under adverse economic conditions than those
currently experienced in the mortgage lending industry in general.
In addition to its lending activity in California, the Bank has originated
or purchased a significant number of one- to four-family residential mortgage
loans on a nationwide basis for sale through its correspondent and wholesale
lending activities. Management believes that originating and purchasing loans
secured by properties located across the country results in a geographically
diversified lending operation which reduces certain risks associated with loan
concentrations in a single area. However, there are certain other risks
involved in nationwide lending. Some of the properties may be located in
states which are experiencing adverse economic conditions, including a general
softening in real estate markets and the local economies, which may result in
increased loan delinquencies and loan losses. Additionally, regulations and
practices regarding the liquidation of properties (e.g., foreclosure) and the
rights of mortgagors in default vary greatly from state to state, and these
restrictions may limit the Bank's ability to foreclose on a property or seek
other recovery. See "Business--Lending Activities."
14
<PAGE>
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The Bank's profitability is dependent to a certain extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest
expense on interest-bearing liabilities, such as deposits and borrowings.
Interest rate caps on the Bank's adjustable-rate mortgage ("ARM") loans and
the tendency for changes in the Cost of Funds Index ("COFI"), the market index
to which many of the Bank's ARM loans are indexed, to lag changes in market
interest rates may reduce the Bank's net earnings in a period of rising
interest rates. The Bank's ability to originate, purchase and sell loans
through its mortgage financing operations is also significantly impacted by
changes in interest rates. Increases in interest rates may also reduce the
amount of loan and commitment fees received by the Bank. A significant decline
in interest rates could also decrease the size of the Bank's servicing
portfolio and the related servicing income by increasing the level of loan
prepayments. In an effort to control its interest rate risk the Bank has
recently been reducing the percentage of loans tied to COFI and been tying
more adjustable-rate mortgage loans to current market indices, such as the
six-month London Interbank Offered Rate ("LIBOR") or U.S. Treasury Security
indices, which reprice more frequently. Additionally, the interest rate
adjustments with respect to the Bank's investment securities lag rate
adjustments to the Bank's deposit accounts. Accordingly, the yield on the
Bank's investment securities may adjust more slowly than the cost of the
Bank's interest-bearing liabilities in a rising interest rate environment.
Although the Bank has recently adopted a hedging policy, the Bank does not
currently utilize any specific hedging instruments to minimize exposure to
fluctuations in the market price of loans and interest rates with regard to
loans held for sale in the secondary mortgage market or asset securitizations.
Therefore, between the time the Bank originates the loans and purchase
commitments are issued, the Bank is exposed to downward movements in the
market price of such loans due to upward movements in interest rates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Management of Interest Rate Risk."
ABSENCE OF MARKET FOR COMMON STOCK
The Company, as a newly organized company, has never issued common stock.
The Company has received conditional approval to have its Common Stock quoted
on the National Market System of the Nasdaq Stock Market under the symbol
"LFCO" upon completion of the Offerings. However, there can be no assurance
that an active and liquid trading market for the Common Stock will develop,
or, once developed, will continue, nor can there be any assurances that
holders of the Common Stock will be able to sell their shares at or above the
price per share in the Public Offering. The absence or discontinuance of a
market for the Common Stock may have an adverse effect on both the price and
liquidity of the Common Stock. In addition, the stock market has on occasion
experienced extreme price and volume fluctuations. These broad market
fluctuations may adversely affect the market price for the Company's Common
Stock. See "Market for the Common Stock of the Company."
CERTAIN ANTI-TAKEOVER PROVISIONS
Provisions in the Company's Governing Instruments. Certain provisions of the
Company's Certificate of Incorporation and Bylaws, particularly a provision
limiting voting rights, as well as certain federal regulations, assist the
Company in maintaining its status as an independent publicly owned
corporation. These provisions provide for, among other things, supermajority
voting on certain matters, staggered elections of the board of directors, non-
cumulative voting for directors, limits on the calling of special meetings,
limits on voting shares in excess of 10% of the outstanding shares, and
certain uniform price provisions for certain business combinations. These
provisions in the Company's governing instruments may discourage potential
proxy contests and other potential takeover attempts, particularly those which
have not been negotiated with the Board of Directors, and thus, generally may
serve to perpetuate current management. For a more detailed discussion of
these provisions, see "Restrictions on Acquisition of the Company."
Voting Control of Officers and Directors. Directors and executive officers
of the Company are expected to own approximately 14.2% of the shares of common
stock of the Company following the Reorganization,
15
<PAGE>
including shares of Company Common Stock exchanged for shares of Bank common
stock in the Reorganization and shares purchased by directors and executive
officers in the Public Offering. Options for an additional 434,840 shares of
Common Stock, or 7.1% of the shares of Common Stock to be issued and
outstanding after the Offerings and the exercise of such options, may be
attributable to directors and executive officers through the Option Plans.
Accordingly, management's potential voting control could, together with
additional stockholder support, defeat stockholder proposals requiring 80%
approval of stockholders and will continue to have a significant influence
over the affairs of the Company and the Bank. Such concentration of ownership
may have the effect of delaying, deferring or preventing takeover attempts
that certain stockholders deem to be in their best interest and may tend to
perpetuate existing management. See "Restrictions on Acquisition of the
Company--Restrictions in the Company's Certificate of Incorporation and
Bylaws" and "The Board of Directors and Management of the Bank--Stock Option
Plans."
Employment Agreement. Daniel L. Perl, the President and Chief Executive
Officer, is subject to a letter agreement with the Bank from January 1, 1997
until the consummation of the Offerings (the "Letter Agreement"). At such
time, the Bank and the Company intend to enter into written employment
agreements with Mr. Perl. Such employment agreements provide for benefits and
cash payments in the event of a change in control of the Company or the Bank.
These provisions may have the effect of increasing the cost of acquiring the
Company, thereby discouraging future attempts to take over the Company or the
Bank. See "The Board of Directors and Management of the Bank--Employment
Agreements." Based on current salary and cash bonus, payments to be paid in
the event of a change in control pursuant to the Employment Agreements would
be approximately $3.0 million. However, the actual amount to be paid in the
event of a change in control of the Company or the Bank cannot be estimated at
this time because the actual amount is based on the average salary of the
employee and other factors existing at the time of the change in control which
cannot be determined at this time.
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Company, as a savings and loan holding company, will be, and the Bank,
as a federal savings association, is subject to extensive federal law,
regulations and supervision. Such law and regulations, which affect operations
on a daily basis, may be changed at any time, and the interpretation of the
relevant law and regulations is also subject to change by the federal
regulatory authorities. Any change in the regulatory structure or the
applicable statutes or regulations, whether by the OTS, the Federal Deposit
Insurance Corporation ("FDIC") or the Congress, could have a material impact
on the Company, the Bank, their respective operations or the Reorganization.
See "Regulation."
Recently enacted legislation provides that the Bank Insurance Fund ("BIF")
and the Savings Association Insurance Fund ("SAIF") will merge on January 1,
1999 if there are no more savings associations as of that date. Such
legislation also requires that the Department of Treasury submit a report to
Congress that makes recommendations regarding a common financial institutions
charter, including whether the separate charters for thrifts and banks should
be abolished. Various proposals to eliminate the federal thrift charter,
create a uniform financial institutions charter and abolish the OTS were
introduced in the 104th Congress. Such legislative proposals would also
abolish the OTS and transfer its functions to three federal bank regulators
and to the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") with respect to the regulation of holding companies. All state
savings and loan associations would be regulated as state banks by the FDIC.
While such legislation was not acted upon by the past session of Congress, no
assurances can be made that similar legislation will not be introduced in the
current session of Congress. The Bank is unable to determine the extent to
which such legislation, if enacted, would affect its business.
Recent federal legislation known as the Riegle Community Development and
Regulatory Improvement Act (the "Riegle Act"), imposed additional regulatory
requirements on mortgage loans having relatively higher origination fees and
interest rates, such as those made by the Bank, and the Bank expects its
business to be the focus of additional federal and state legislation, and
regulation in the future.
16
<PAGE>
DILUTION
Upon completion of the Offerings, there will be an immediate dilution to
investors in the Public Offering of the net tangible book value per share of
Common Stock of $5.01 per share based on the mid-point of the range of
offering prices of $11.00 per share. On an as adjusted basis, the offering
price is substantially greater than the effective price at which the existing
stockholders purchased their shares and the effective exercise price of the
outstanding stock options. See "Dilution."
NO CASH DIVIDENDS
Following the Offerings, the Company intends to retain its earnings, if any,
for use in its business and does not anticipate declaring or paying any cash
dividends in the foreseeable future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Dividend Policy."
RISKS ASSOCIATED WITH DISSENTERS' RIGHTS
If the Reorganization is consummated, pursuant to regulations of the OTS,
any stockholder of record of Bank common stock who complies with the
requirements of the OTS regulations will be entitled to demand and receive
payment in an amount equal to the fair or appraised value of the holder's
shares of Bank common stock. The Amended Agreement and Plan of Reorganization,
dated January 16, 1997 (the "Plan of Reorganization"), states an intent that
the Reorganization be treated as a non-taxable transaction under the Internal
Revenue Code of 1986, as amended (the "Code"). There is a risk that the number
of dissenters who request and receive a cash payment for their Bank common
stock could exceed the amount of cash permitted to be received by stockholders
under the reorganization provisions of the Code. If that were to occur, it is
possible that the transaction would not qualify as a non-taxable transaction
under the Code. The Bank believes that the requisite percentage of
stockholders will vote in favor of the Reorganization. However, there can be
no assurance as to the number of stockholders who will exercise dissenters'
rights. In the event that the exercise of dissenters' rights may cause the
Reorganization to be a taxable transaction, the Bank may choose to take the
steps necessary to withdraw the Offerings. See "The Reorganization--Tax
Consequences of Reorganization."
ENVIRONMENTAL RISKS
In the course of its business, the Bank has acquired, and may acquire in the
future, properties securing loans that are in default. There is a risk that
hazardous substances or waste, contaminants, pollutants or sources thereof
could be discovered on such properties after acquisition by the Bank. In such
event, the Bank may be required by law to remove such substances from the
affected properties at its sole cost and expense. There can be no assurance
that (i) the cost of such removal would not substantially exceed the value of
the affected properties or the loans secured by the properties, (ii) the Bank
would have adequate remedies against the prior owner or other responsible
parties or (iii) the Bank would not find it difficult or impossible to sell
the affected properties either prior to or following such removal.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of 2,500,000
shares of Common Stock offered in the Public Offering based on an assumed
offering price of $11.00 per share (after deducting estimated expenses and
fees to FBR) are estimated to be $24.9 million ($28.8 million, if the
Underwriters' overallotment option is exercised in full). Such net proceeds
will be used to (i) acquire residual assets of approximately $12.3 million and
$6.6 million in the Reserve Account resulting from the Securitization and a
securitization completed during the first quarter of 1997 (which, when netted
against the net subordinated debt of $9.6 million expected to be transferred
to the Company following the Reorganization, would total $9.3 million), see
"Recent Developments"; (ii) acquire an interest in or establish a subsidiary
for the purpose of providing short term warehouse lines of credit; (iii)
downstream proceeds to the Bank if necessary to fund additional purchases of
loans; and (iv) fund general business activities, including possible
acquisitions of related businesses as opportunities arise. However, the
Company has not entered into any arrangement, agreement or understanding with
respect to future acquisitions and there can be no assurance that it will do
so in the future. No determination has been made as to the amount of proceeds
that will be allocated to each use, with the exception of the acquisition of
the residual asset and Reserve Account. The Company, upon the Reorganization,
will be a unitary savings and loan holding company, which under existing laws
would generally not be restricted as to the types of business activities in
which it may engage, provided that the Bank continues to be a qualified thrift
lender ("QTL"). See "Regulation--Holding Company Regulation" for a description
of certain regulations and proposed regulations applicable to the Company.
DIVIDEND POLICY
The Company presently intends to retain all future earnings, if any, for use
in its business and does not anticipate declaring or paying any cash dividends
on its Common Stock in the foreseeable future. In the event that the Board of
Directors does determine to pay dividends in the future, any such payment will
depend upon a number of factors, including investment opportunities available
to the Company or the Bank, capital requirements, regulatory limitations, the
Company's or the Bank's financial condition and results of operations, tax
considerations and general economic conditions. For information concerning
federal regulations regarding the Bank's ability to make capital distributions
to the Company, see "Regulation--Federal Savings Institution Regulation--
Limitation on Capital Distributions."
The Company is subject to the requirements of Delaware law, which generally
limit dividends to an amount equal to the excess of the net assets of the
Company (the amount by which total assets exceed total liabilities) over its
statutory capital, or if there is no such excess, to its net profits for the
current and/or immediately preceding fiscal year. For a discussion of certain
circumstances under which the Company may become subject to certain provisions
of the California Corporation Code, see "Restrictions on Acquisition of the
Company--General."
MARKET FOR THE COMMON STOCK OF THE COMPANY
The Company was recently formed and has never issued capital stock. The
Company has received conditional approval to have its Common Stock quoted on
the National Market System of the Nasdaq Stock Market under the symbol "LFCO"
subject to the completion of the Offerings and compliance with certain
conditions including the presence of at least two registered and active market
makers. FBR has indicated its intention to make a market in the Company's
Common Stock. FBR is not obligated, however, to make a market in the Common
Stock and any market making may be discontinued at any time. Upon completion
of the Offerings, the Company will have at least two market makers making a
market in its Common Stock. Making a market involves maintaining bid and ask
quotations and being able, as principal, to effect transactions in reasonable
quantities at those quoted prices, subject to various securities laws and
other regulatory requirements. There can be no assurance that the Common Stock
will be able to meet the applicable listing criteria in order to maintain its
quotation on the Nasdaq Stock Market or that an active and liquid trading
market will develop or, if developed, will be maintained. A public market
having the desirable characteristics of depth, liquidity and
18
<PAGE>
orderliness, however, depends upon the presence in the marketplace of both
willing buyers and sellers of Common Stock at any given time, which is not
within the control of the Company. No assurance can be given that an investor
will be able to resell the Common Stock at or above the price to the public of
the Common Stock after the Offerings. See "Risk Factors--Absence of Market for
Common Stock."
MARKET FOR THE COMMON STOCK OF THE BANK
There is no established market for the common stock of the Bank. As of
February 28, 1997, the Bank's common stock was held by approximately 407
holders of record. The Bank has not paid cash dividends on its common stock.
The Board of Directors declared a 100% stock dividend to stockholders of
record as of February 28, 1996, payable as of March 31, 1996. For a
description of regulatory restrictions on the payment of cash dividends and
other capital distributions by the Bank, see "Regulation--Federal Savings
Institution Regulation--Limitation on Capital Distributions."
DILUTION
The net tangible pro forma book value of the Common Stock of the Bank at
December 31, 1996, was $2.89 per share. Net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the number of shares of Common Stock outstanding. After giving effect to
the Offerings, assuming an initial public offering price of $11.00 per share,
the mid-point of the range of the proposed Offerings and the application of
the net proceeds therefrom, the pro forma net tangible book value of the
Company at December 31, 1996 would have been $34.2 million, or $5.99 per share
of Common Stock. This would represent an immediate increase in net tangible
book value per share of $3.10 to the existing stockholders of the Bank and an
immediate dilution in net tangible book value per share of $5.01 to new
investors at the assumed initial public offering price. The following
illustrates this dilution per share:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $11.00
Pro forma net tangible book value per share as of December
31, 1996, as adjusted for the Reorganization............. 2.89
Increase in net tangible book value per share attributable
to new investors......................................... 3.10
----
Pro forma net tangible book value after the Public
Offering................................................... 5.99
------
Dilution to new investors................................... $ 5.01
======
</TABLE>
The following table summarizes, on a pro forma basis, as of December 31,
1996, the relative investments of the existing stockholders of the Bank and
new investors in the Company, after giving effect to the Offerings at an
assumed price of $11.00 per share:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
--------------------- ------------------- AVERAGE PRICE
NUMBER PERCENT NUMBER PERCENT PER SHARE
------------ -------- ---------- -------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1)........ 3,211,716 56.2% $ 9,273 25.2% $ 2.89
New investors........... 2,500,000 43.8 27,500 74.8 11.00
------------ -------- ---------- --------
Total................... 5,711,716 100.0% $ 36,773 100.0%
============ ======== ========== ========
</TABLE>
- --------
(1) As adjusted for the three-for-one exchange offer in the Reorganization.
The foregoing tables exclude 571,172 shares reserved for issuance pursuant
to the Option Plans and assume no exercise of the Underwriters' over-allotment
option. If the Underwriters' over-allotment option were exercised in full, the
shares purchased from the Company would increase to 2,875,000 shares (47.2% of
the shares of Common Stock outstanding after the Offerings) and the total
consideration paid to the Company by new investors would increase to $31.6
million (77.3% of the total consideration paid to the Company by all
stockholders).
19
<PAGE>
CAPITALIZATION
The following table sets forth, at December 31, 1996, the actual
capitalization of the Bank, the pro forma capitalization of the Bank giving
effect to the Debenture Offering, the pro forma capitalization of the Company
giving effect to the Debenture Offering and the Reorganization, and the pro
forma capitalization of the Company as adjusted to give effect to the
Debenture Offering and the Reorganization and the sale by the Company of
2,500,000 shares of Common Stock at the assumed initial public offering price
of $11.00 per share (net of underwriting discount and estimated expenses and
excluding any exercise by the Underwriters of an over-allotment option)
offered hereby. The information below should be read in conjunction with the
Financial Statements and the Notes thereto which are included elsewhere
herein.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
---------------------------------------
PRO FORMA
BANK PRO FORMA PRO FORMA COMPANY AS
ACTUAL BANK COMPANY ADJUSTED
------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposits............................ $85,711 $85,711 $85,711 $85,711
FHLB advances and other borrowed
funds.............................. 3,278 3,278 3,278 3,278
Subordinated debt................... -- 10,000 10,000 10,000
------- ------- ------- -------
Total borrowed funds............ $88,989 $98,989 $98,989 $98,989
======= ======= ======= =======
Common Stock of the Bank, $8.00
stated value (10,000,000 shares
authorized, 1,070,572 shares issued
and outstanding)................... 8,565 8,565 -- --
Common stock of the Company, $0.01
par value (25,000,000 shares
authorized, 3,211,716 shares issued
and outstanding, as adjusted to
reflect the Reorganization, and
5,711,716 shares issued and
outstanding, as adjusted to reflect
the Reorganization and the Public
Offering).......................... -- -- 32 57
Additional paid-in capital.......... 825 825 9,358 34,248
Retained earnings (deficit)......... (117) (117) (117) (117)
------- ------- ------- -------
Total stockholders' equity...... $ 9,273 $ 9,273 $ 9,273 $34,188
======= ======= ======= =======
Bank Regulatory Capital Ratios:
Tangible Capital.................. 8.90% 8.12% 8.12% 8.12%(1)
Core (leverage) capital........... 8.90 8.12 8.12 8.12(1)
Total risk-based capital.......... 9.43 16.32 16.32 16.32(1)
Stockholders' equity to total
assets............................. 8.92 8.13 8.13 23.33
</TABLE>
- --------
(1) Assumes that no proceeds from the Offering are downstreamed to the Bank
and the residuals, Reserve Account and subordinated debt have not been
transferred to the Company.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The condensed operating data presented below is derived in part from, and
should be read in conjunction with, the Financial Statements and related notes
of Life Savings Bank, Federal Savings Bank, presented elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income:
Loans................................................ $ 6,542 $ 5,433 $ 4,530
Securities held to maturity.......................... 56 159 138
Other interest-earning assets........................ 331 233 156
------- ------- -------
Total interest income.............................. 6,929 5,825 4,824
------- ------- -------
Interest expense:
Deposit accounts..................................... 3,514 3,192 2,534
FHLB advances and other borrowings................... 252 256 187
------- ------- -------
Total interest expense............................. 3,766 3,448 2,721
------- ------- -------
Net interest income before provision for
estimated loan losses........................... 3,163 2,377 2,103
Provision for estimated loan losses.................... 963 1,194 1,306
------- ------- -------
Net interest income after provision for estimated
loan losses..................................... 2,200 1,183 797
------- ------- -------
Non-interest income:
Loan servicing and other fees........................ 496 231 164
Service charges on deposit accounts.................. 128 111 84
Net gains from mortgage financing operations......... 8,352 3,575 1,428
Other income......................................... 136 103 12
------- ------- -------
Total non-interest income.......................... 9,112 4,020 1,688
------- ------- -------
Non-interest expense:
Compensation and benefits............................ 5,233 2,544 1,575
Premises and occupancy............................... 746 471 418
Data processing...................................... 390 208 167
Net loss on foreclosed real estate................... 158 53 280
FDIC insurance premiums.............................. 174 184 186
SAIF special assessment.............................. 448 -- --
Marketing............................................ 189 65 55
Telephone............................................ 246 143 128
Professional services................................ 218 92 86
Other expense........................................ 879 629 561
------- ------- -------
Total non-interest expense......................... 8,681 4,389 3,456
------- ------- -------
Income (loss) before income tax provision (benefit).... 2,631 814 (971)
Income tax provision (benefit)......................... 1,126 294 (300)
------- ------- -------
Net income (loss).................................. $ 1,505 $ 520 $ (671)
======= ======= =======
Earnings (loss) per share (pro forma).................. $ 0.63 $ 0.28 $ (0.36)
======= ======= =======
</TABLE>
21
<PAGE>
AVERAGE BALANCE SHEETS
The following tables set forth certain information relating to the Bank at
December 31, 1996, and for the years ended December 31, 1996, 1995 and 1994.
The yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown. Unless
otherwise noted, average balances are measured on a daily basis. The yields
and costs include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
AT DECEMBER 31, ----------------------------------------------------------------------------
1996 1996 1995 1994
--------------- ------------------------ ------------------------ ------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- ------ ------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-earning
deposits and
short-term investments.. $ 10,972 4.51% $ 5,618 $ 257 4.57% $ 4,225 $ 203 4.80% $ 3,736 $ 124 3.32%
Investment
securities(1).......... 8,827 5.56 1,912 100 5.23 3,458 188 5.44 3,763 169 4.49
Loans receivable,
net(2)................. 67,913 8.87 72,556 6,542 9.02 65,521 5,433 8.29 65,566 4,530 6.91
Mortgage-backed
securities(1).......... 10 6.88 11 1 9.09 12 1 8.33 14 1 7.14
Residual asset.......... 5,700 13.50 199 29 14.57 -- -- -- -- -- --
-------- ------- ------ ------- ------ ------- ------
Total interest-earning
assets................. 93,422 8.33 80,296 6,929 8.63 73,216 5,825 7.96 73,079 4,824 6.60
-------- ------- ------ ------- ------ ------- ------
Non-interest-earning
assets(3)............... 10,588 6,035 2,465 2,517
-------- ------- ------- -------
Total assets(3)......... $104,010 $86,331 $75,681 $75,596
======== ======= ======= =======
LIABILITIES AND EQUITY:
Interest-bearing
liabilities:
Passbook accounts....... $ 4,117 2.10 $ 4,401 92 2.09 $ 5,090 127 2.50 $ 7,048 157 2.23
Money market accounts... 3,217 2.99 4,233 118 2.79 5,493 144 2.62 6,512 163 2.50
Checking accounts....... 8,947 2.22 7,048 112 1.59 6,434 92 1.43 6,180 95 1.54
Certificate accounts.... 69,430 5.65 57,333 3,192 5.57 50,608 2,829 5.59 49,851 2,119 4.25
-------- ------- ------ ------- ------ ------- ------
Total deposit
accounts............... 85,711 5.02 73,015 3,514 4.81 67,625 3,192 4.72 69,591 2,534 3.64
Borrowings(4)........... 3,278 8.43 4,268 252 5.90 3,112 256 8.23 1,863 187 10.04
-------- ------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities............ 88,989 5.15 77,283 3,766 4.87 70,737 3,448 4.87 71,454 2,721 3.81
------ ------ ------
Non-interest-bearing
liabilities(3).......... 5,748 3,026 1,131 197
-------- ------- ------- -------
Total liabilities(3).... 94,737 80,309 71,868 71,651
Equity(3)................ 9,273 6,022 3,813 3,945
-------- ------- ------- -------
Total liabilities and
equity(3).............. $104,010 $86,331 $75,681 $75,596
======== ======= ======= =======
Net interest income
before provision for
estimated loan losses... $3,163 $2,377 $2,103
====== ====== ======
Net interest rate
spread(5)............... 3.18 3.76 3.09 2.79
Net interest margin(6)... 3.94 3.25 2.88
Ratio of interest-earning
assets to
interest-bearing
liabilities............. 104.98 103.90 103.50 102.27
</TABLE>
- -------
(1)Includes unamortized discounts and premiums and certificates of deposit.
(2) Amount is net of deferred loan origination fees, unamortized discounts,
premiums and allowance for estimated loan losses and includes loans held
for sale and non-performing loans. See "Business--Lending Activities."
(3) Average balances are measured on a month-end basis.
(4) The average yield on borrowings for the years ending December 31, 1995 and
1994 included the effects of $52,000 and $96,000, respectively, in
interest expense on swap transactions with a notional principal balance of
$2.0 million in 1995 and 1994. Without this added expense, the average
yield on borrowings for the years ending December 31, 1995 and 1994 would
have been 6.56% and 4.88%, respectively. The yield on total interest-
bearing liabilities for the years ending December 31, 1995 and 1994 would
have been 4.80% and 3.67%, respectively. The $2.0 million in swap
contracts matured on November 7, 1995.
(5) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by average
interest-earning assets.
22
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the
net change. The changes attributable to the combined impact of volume and rate
have been allocated proportionately to the changes due to volume and the
changes due to rate.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------- -------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
----------- -----------
VOLUME RATE NET VOLUME RATE NET
------ ---- ------ ------ ---- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits and
short-term investments............ $ 64 $(10) $ 54 $ 18 $ 60 $ 78
Investment securities.............. (81) (7) (88) (14) 34 20
Loans receivable, net(1)........... 609 500 1,109 (2) 905 903
Residual asset .................... 29 -- 29 -- -- --
Mortgage-backed securities......... -- -- -- -- -- --
---- ---- ------ ---- ---- ------
Total interest-earning assets.... 621 483 1,104 2 999 1,001
INTEREST-BEARING LIABILITIES:
Money market accounts.............. (35) 9 (26) (27) 8 (19)
Passbook accounts.................. (16) (19) (35) (47) 17 (30)
Checking accounts.................. 9 11 20 4 (7) (3)
Certificate accounts............... 374 (11) 363 33 677 710
Borrowings......................... 80 (84) (4) 108 (39) 69
---- ---- ------ ---- ---- ------
Total interest-bearing
liabilities..................... 412 (94) 318 71 656 727
---- ---- ------ ---- ---- ------
Change in net interest income........ $209 $577 $ 786 $(69) $343 $ 274
==== ==== ====== ==== ==== ======
</TABLE>
- --------
(1) Includes interest on loans held for sale.
SUMMARY
The Bank is involved in the origination, purchase, sale and servicing of
non-conventional mortgage loans principally secured by first and second
mortgage loans on one- to four-family residences. The Bank has focused on
Liberator Series loans which are for the purchase or refinance of residential
real property by borrowers who, because of prior credit problems or the
absence of a credit history, are considered "sub-prime borrowers," or loans
which have other non-conforming features. In addition, the Bank has originated
a substantial number of Portfolio Series loans which are debt consolidation
loans for Agency Qualified Borrowers. The Bank purchases and originates
mortgage loans and other real estate secured loans through a network of
approved correspondents and mortgage brokers throughout the country. The Bank
funds substantially all of the loans which it originates or purchases through
deposits, internally generated funds and FHLB advances. In the immediate and
foreseeable future, the Bank will also fund loans from proceeds, if any,
derived from asset securitizations. Deposit flows and cost of funds are
influenced by prevailing market rates of interest primarily on competing
investments, account maturities and the levels of savings in the Bank's market
area. The Bank's ability to purchase or sell loans is influenced by the
general level of product available from its correspondent relationships and
the willingness of investors to purchase the loans at an acceptable price to
the Bank. Due to substantial activity in the purchase and sale of loans in
recent years, the gain on sale of loans has been significant. The Company
anticipates utilizing a
23
<PAGE>
portion of the net proceeds from the Public Offering to continue to expand its
mortgage financing operations. See "Business" and "Use of Proceeds." The
Bank's results of operations are also affected by the Bank's provision for
loan losses and the level of operating expenses. The Bank's operating expenses
primarily consist of employee compensation and benefits, premises and
occupancy expenses, and other general expenses. The Bank's results of
operations are also affected by prevailing economic conditions, competition,
government policies and actions of regulatory agencies. See "Regulation."
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
GENERAL
Net income increased by $985,000 from $520,000 for the year ended December
31, 1995 to $1.5 million for the year ended December 31, 1996. Net income for
the year ended December 31, 1996 was adversely impacted by a non-recurring
expense for compensation and benefits of $354,000 which was incurred during
the quarter ended June 30, 1996, and a non-recurring SAIF special assessment
of $448,000 which was incurred during the quarter ended September 30, 1996.
The non-recurring expense for compensation and benefits is an accrual of the
present value of a portion of the future payments due pursuant to a consulting
agreement entered into with a former officer of the Bank. See "The Board of
Directors and Management of the Bank--Consultation Agreement." Net income for
the year ended December 31, 1996 would have been $2.0 million if these charges
had not been incurred.
Gains from mortgage financing operations for the year ended December 31,
1995 totaled $3.6 million compared to $8.4 million for the year ended December
31, 1996 due to the expansion of the mortgage financing operations and
increased marketing effort therefrom, along with the issuance of the Bank's
Securitization. The expansion of the mortgage financing operations resulted in
an increase in loan originations and purchases from $134.8 million for the
year ended December 31, 1995 to $222.6 million for the year ended December 31,
1996. The related sales of loans increased from $126.9 million for the year
ended December 31, 1995 to $206.6 million (including $51.9 million sold
through the Securitization) for the year ended December 31, 1996.
During the quarter ended December 31, 1996, the Bank participated in the
Securitization whereby Mortgage-Pass-Through Certificates (the "Certificates")
in the Life Financial Services Trust 1996-1 (the "Trust") were issued. The
Series 1996-1 Trust was initially funded with $51.9 million of fixed-rate
Liberator Series and Portfolio Series Loans sold by the Bank. For a discussion
of Liberator Series and Portfolio Series loans, see "Risk Factors--Risks
Associated with Sub-Prime Lending," " --High Loan to Value Ratios of Portfolio
Series Loans" and "Business--Lending Activities." The Certificates were
guaranteed as to certain payments by insurance policies issued by MBIA
Insurance Corporation and were sold through Prudential Securities
Incorporated. The Certificates also have the benefit of the Reserve Account,
initially funded by $1.6 million of the proceeds from the sale of the loans.
Such Reserve Account will be increased by excess interest received on the
loans until the required reserve level, initially 9.0% of the original
outstanding balance of the loans funding the Trust, is achieved and
maintained. Residual amounts in excess of the required reserve amount will be
distributed to the Bank. As a result of this Securitization, the Bank
recognized a gain on sale of $4.3 million. Certain assumptions relating to the
value of the residual asset include a 17.0% home equity payment (an estimation
of prepayment speed), a 13.5% discount factor and a loss factor of 1.5%.
Servicing fees retained as part of the transaction will be 0.50% for the
initial six months, after which they will be 1.00%
The Company currently intends to conduct asset securitizations at a rate of
one per quarter either through private placements or public offerings. There
can be no assurance, however, that the Company will be able to successfully
implement this strategy. See "Risk Factors--Dependence on Asset
Securitizations and Impact on Quarterly Operating Results."
In addition, during the quarter ended December 31, 1996, the Bank entered
into a lease on a property in the Denver, Colorado metropolitan area out of
which it intends to operate a loan center. The Bank also acquired the
Riverside, California property it had been leasing by exercising its lease
option at a price of $375,000.
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The expansion in mortgage financing operations included the addition of the
Riverside, California mortgage financing center and a corresponding increase
in personnel from an average of 50 for the year ended December 31, 1995 to an
average of 97 for the year ended December 31, 1996. The additional staff
allowed for increased marketing, processing and underwriting efforts and the
ability to increase the number of broker and correspondent relationships, but
also added to non-interest expense for the period.
INTEREST INCOME
Interest income increased from $5.8 million for the year ended December 31,
1995 to $6.9 million for the year ended December 31, 1996, due to an increase
in the yield on interest-earning assets as well as in the average balances of
those assets. The Bank's yield on average interest-earning assets increased
from 7.96% for the year ended December 31, 1995 to 8.63% for the year ended
December 31, 1996. Total average interest-earning assets increased from $73.2
million for the year ended December 31, 1995 to $80.3 million for the year
ended December 31, 1996. The largest single component of interest-earning
assets was loans receivable, net, which increased from an average of $65.5
million for the year ended December 31, 1995 to $72.6 million for the year
ended December 31, 1996. The increase in average loans receivable, net was due
to an increase in loans held for sale from the expansion of the mortgage
financing operations. Loans held for sale increased from $21.7 million at
December 31, 1995 to $31.0 million at December 31, 1996, while loans held for
investment, net decreased from $41.7 million at December 31, 1995 compared to
$36.9 million at December 31, 1996. Generally, all loans are originated or
purchased for sale in the secondary market or through securitizations. See
"Business--Lending Activities." The yield on loans receivable increased from
8.29% for the year ended December 31, 1995 to 9.02% for the year ended
December 31, 1996.
INTEREST EXPENSE
Interest expense increased from $3.4 million for the year ended December 31,
1995 to $3.8 million for the year ended December 31, 1996 due to an increase
in average interest-bearing liabilities. Average interest-bearing liabilities
increased from $70.7 million for the year ended December 31, 1995 to $77.3
million for the year ended December 31, 1996. Interest expense for the year
ended December 31, 1995 was adversely impacted by the effects of an interest
rate swap which matured on November 7, 1995 which resulted in an increase in
interest expense on borrowings of $52,000 for the year ended December 31,
1995. Without this expense, average yield on borrowings for the year ended
December 31, 1995 would have been 6.56%, and the average yield on total
interest-bearing liabilities would have been 4.80%. The increase in interest
expense also reflects a change in the composition of interest-bearing
liabilities. Average certificate accounts increased from $50.6 million for the
year ended December 31, 1995 to $57.3 million for the year ended December 31,
1996. Average borrowings increased from $3.1 million for the year ended
December 31, 1995 to $4.3 million for the year ended December 31, 1996.
NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN LOSSES
Net interest income before provision for estimated loan losses for the year
ended December 31, 1995 was $2.4 million compared to $3.2 million for the year
ended December 31, 1996. This increase was primarily due to the increase in
the net interest margin from 3.25% for the year ended December 31, 1995 to
3.94% for the year ended December 31, 1996, and an increase in the ratio of
average interest-earning assets to average interest-bearing liabilities from
103.50% for the year ended December 31, 1995 to 103.90% for the year ended
December 31, 1996.
PROVISION FOR ESTIMATED LOAN LOSSES
The provision for estimated loan losses was $963,000 for the year ended
December 31, 1996 compared to $1.2 million for the year ended December 31,
1995. The decrease in the provision resulted from the Bank's quarterly
analysis of its loan portfolio, the decrease in charge-offs of loans and the
increase in recoveries and management's belief that property values in the
southern California market had stopped deteriorating.
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Charge-offs for the year ended December 31, 1995 were $914,000 compared to
$734,000 for the year ended December 31, 1996. For the year ended December 31,
1995, the ratio of net charge-offs to average loans outstanding was 1.30%
compared to 0.71% for the year ended December 31, 1996. Recoveries increased
from $65,000 for the year ended December 31, 1995 to $219,000 for the year
ended December 31, 1996. Non-performing assets as a percent of total assets
decreased from 3.0% at December 31, 1995 to 2.86% at December 31, 1996. At
December 31, 1995 the allowance for estimated loan losses was $1.2 million
compared to $1.6 million at December 31, 1996. The allowance for estimated
loan losses as a percent of non-performing loans was 84.25% at December 31,
1995 compared to 67.26% at December 31, 1996. While management believes it has
adequately provided for losses and does not expect any material loss on its
loans in excess of allowances already recorded, no assurance can be given that
additional loans will not become delinquent or that the collateral for such
loans will be sufficient to prevent losses in the event of foreclosure.
Management believes that the allowance for loan losses at December 31, 1996
was adequate to absorb known and inherent risks in the Bank's loan portfolio.
No assurance can be given, however, that economic conditions which may
adversely affect the Company's or the Bank's service areas or other
circumstances will not be reflected in increased losses in the loan portfolio.
In addition, regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance or to
take charge-offs (reductions in the allowance) in anticipation of losses. See
"Business--Lending Activities--Delinquencies and Classified Assets" and "--
Lending Activities--Allowance for Loan Losses."
NON-INTEREST INCOME
Gains from mortgage financing operations for the year ended December 31,
1995 were $3.6 million compared to $8.4 million for the year ended December
31, 1996. This increase was attributable to the increase in the level of
mortgage financing operations, with loans sold totaling $126.9 million for the
year ended December 31, 1995 compared to $206.6 million (including $51.9
million sold through the Securitization) for the year ended December 31, 1996.
Loans originated and purchased totalled $134.8 million for the year ended
December 31, 1995 compared to $222.6 million for the year ended December 31,
1996, which also resulted in an increase in loan servicing and other fees from
$231,000 for the year ended December 31, 1995 to $496,000 for the year ended
December 31, 1996.
Gains from mortgage financing operations as a percent of loans sold and
securitized increased from 2.82% for the year ended December 31, 1995 to 4.04%
for the year ended December 31, 1996. This increase is a direct result of the
Bank's Securitization during the quarter ended December 31, 1996. As a result
of the Securitization, the Bank generated a gain on sale of $4.3 million.
Consistent with management's business strategy, it is anticipated that
mortgage financing operations will constitute an even greater portion of the
Company's business in future periods. The inability of the Company to
implement its business strategy would have a material adverse effect on the
Company's financial condition and results of operations. See "Risk Factors--
Ability of the Company to Implement its Business Strategy" and "Business--
Background" and "--Restructuring."
NON-INTEREST EXPENSE
Non-interest expense was $4.4 million for the year ended December 31, 1995
compared to $8.7 million for the year ended December 31, 1996. The increase
was due primarily to the expansion of the mortgage financing operations, a
non-recurring increase in compensation and benefits and the non-recurring SAIF
special assessment. New loans originated and purchased increased from $134.8
million for the year ended December 31, 1995 to $222.6 million for the year
ended December 31, 1996, which resulted in increased employee commissions and
bonuses.
Compensation and benefits increased from $2.5 million for the year ended
December 31, 1995 to $5.2 million for the year ended December 31, 1996. These
costs are directly related to the expansion of the mortgage financing
operations and the corresponding increase in personnel, from an average of 50
for the year ended December 31, 1995 to 97 for the year ended December 31,
1996, combined with a non-recurring expense for compensation and benefits of
$354,000 during the quarter ended June 30, 1996. The non-recurring expense for
26
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compensation and benefits is an accrual of the present value of a portion of
the future payments due pursuant to a consulting agreement entered into with a
former officer of the Bank. See "The Board of Directors and Management of the
Bank--Consultation Agreement."
Premises and occupancy increased from $471,000 for the year ended December
31, 1995 to $746,000 for the year ended December 31, 1996 due to the addition
of the Riverside, California mortgage financing office. The financing office
is approximately 7,500 square feet, with additional space being utilized for
the increase in personnel and the expansion of the mortgage financing
operations. With the increase in loans originated and purchased, combined with
the increase in personnel, data processing expense increased from $208,000 for
the year ended December 31, 1995 to $390,000 for the year ended December 31,
1996.
As a result of the expansion of the mortgage financing operations, marketing
expense increased from $65,000 for the year ended December 31, 1995 to
$189,000 for the year ended December 31, 1996. In addition, telephone expense
increased from $143,000 for the year ended December 31, 1995 to $246,000 for
the year ended December 31, 1996, and professional services increased from
$92,000 for the year ended December 31, 1995 to $218,000 for the year ended
December 31, 1996.
The Bank incurred a charge of $448,000 due to the non-recurring SAIF special
assessment during the year ended December 31, 1996. No similar charge was
assessed for the year ended December 31, 1995. In addition, other expenses
also increased due to the expansion of the mortgage financing operations,
although no single item exceeded 1.0% of gross income.
INCOME TAXES
The provision for income taxes increased from $294,000 for the year ended
December 31, 1995 to $1.1 million for the year ended December 31, 1996. The
increase in income taxes is the result of the increase in income before tax,
which increased from $814,000 for the year ended December 31, 1995 to $2.6
million for the year ended December 31, 1996. The effective tax rate increased
from 36.1% for the year ended December 31, 1995 to 42.8% for the year ended
December 31, 1996. The change in effective tax rate is due to a reduction in
the deferred tax valuation allowance for state tax purposes in 1995.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995
Total assets increased from $74.1 million as of December 31, 1995 to $104.0
million as of December 31, 1996, which was attributable to an increase in
loans held for sale, an increase in cash and cash equivalents, an increase in
securities held-to-maturity and FHLB stock and an investment in residuals and
restricted cash created as a result of the Securitization. Loans held for
sale, net, increased from $21.7 million as of December 31, 1995 to $31.0
million as of December 31, 1996, which was partially offset by a decrease in
loans held for investment from $41.7 million as of December 31, 1995 to $36.9
million as of December 31, 1996. During the year ended December 31, 1996, the
Bank originated and purchased $222.6 million in loans, which were offset by
prepayments, sales and securitizations totaling $206.6 million. Cash and cash
equivalents were $3.9 million at December 31, 1995, compared to $13.3 million
at December 31, 1996 due to an increase in deposits from $67.5 million at
December 31, 1995 to $85.7 million at December 31, 1996. Securities held-to-
maturity and FHLB stock increased from $2.7 million at December 31, 1995 to
$8.8 million at December 31, 1996. Securities held-to-maturity consist of U.S.
Treasury bills and U.S. Treasury notes with staggered maturities ranging from
three months to 24 months. During the quarter ended December 31, 1996, the
Bank securitized $51.9 million in loans. This was the first loan
securitization completed by the Bank, which recorded a gain on sale of $4.3
million.
Deposit accounts increased from $67.5 million as of December 31, 1995 to
$85.7 million as of December 31, 1996 due to an increased use of wholesale
deposits to fund lending activity. While core deposits remained fairly stable,
certificates of deposits increased from $51.8 million at December 31, 1995 to
$69.4 million at December 31, 1996.
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<PAGE>
Stockholders' equity increased from $4.3 million at December 31, 1995 to
$9.3 million at December 31, 1996 due to net income of $1.5 million for the
year ended December 31, 1996 and due to proceeds from the issuance of common
stock in a private placement offering (the "Private Placement") during the
third quarter of 1996 totaling $3.5 million.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994
GENERAL
The Bank reported net income of $520,000 for the year ended December 31,
1995, which represented a $1.2 million increase from the net loss of $671,000
for the year ended December 31, 1994. The increase in net income for the year
ended December 31, 1995 compared to the year ended December 31, 1994 was
attributable to the increase in mortgage financing operations and an increase
in net interest income. Loans originated and purchased totalled $134.8 million
for the year ended December 31, 1995 compared to $72.8 million for the year
ended December 31, 1994. The increase in loans originated and purchased is due
to the restructuring and expansion of the mortgage financing operations during
1994 and 1995.
During 1994, the Bank hired new management to restructure the mortgage
financing operations, changing the lending strategy from traditional mortgage
banking and portfolio lending to focusing on sub-prime mortgage financing.
During the period of restructuring in the first half of 1994, loan
originations and purchases declined as new lending products were being
developed and new personnel skilled in originating, processing underwriting
and servicing the new products were being hired. Loan originations and
purchases increased during the latter half of 1994 and 1995 as a result of the
restructuring.
Gains from mortgage financing operations were $3.6 million for the year
ended December 31, 1995 compared to $1.4 million for the year ended December
31, 1994 due to the expansion of the mortgage financing operations and the
increase in sales of loans which were generated as a result of this expansion.
Loan sales were $126.9 million for the year ended December 31, 1995 compared
to $65.7 million for the year ended December 31, 1994. In addition, based on
the change in the loans generated and therefore the change in the market
demand for these loans, gains on sale as a percentage of loans sold increased
from 2.17% for the year ended December 31, 1994 to 2.82% for the year ended
December 31, 1995.
In addition, interest income increased due to the types of loans being
generated. Net interest income before provision for estimated loan losses for
the year ended December 31, 1995 was $2.4 million compared to $2.1 million for
the year ended December 31, 1994. The Bank's net interest margin increased to
3.25% for the year ended December 31, 1995 compared to 2.88% for the year
ended December 31, 1994. The Bank's yield on loans receivable, the single
largest component of interest-earning assets, increased from 6.91% for the
year ending December 31, 1994 to 8.29% for the year ending December 31, 1995.
As a result of these events, the Bank's return on average assets and return
on average equity increased to 0.69% and 13.64%, respectively, for the year
ended December 31, 1995, compared to (0.89%) and (17.01%), respectively, for
the year ended December 31, 1994.
INTEREST INCOME
Interest income increased from $4.8 million for the year ended December 31,
1994 to $5.8 million for the year ended December 31, 1995 due to an increase
in the yield on interest earning assets as well as the average balances of
those assets. The Bank's yield on average interest earning assets increased to
7.96% for the year ended December 31, 1995 compared to 6.60% for the year
ended December 31, 1994 due to the increase in loans held for sale from $17.1
million at December 31, 1994 to $21.7 million at December 31, 1995 as compared
to loans held for investment which decreased from $47.1 million at December
31, 1994 to $41.7 million at December 31, 1995. The total average interest
earning assets increased from $73.1 million for the year ended December 31,
1994 to $73.2 million for the year ended December 31, 1995. The largest single
component of
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<PAGE>
interest-earning assets was loans receivable, net. The yield on loans
receivable increased from 6.91% for the year ended December 31, 1994 to 8.29%
for the year ended December 31, 1995. Except for loans specifically originated
to be held for investment, all loans are originated or purchased for sale in
the secondary market or through securitizations.
INTEREST EXPENSE
Interest expense increased from $2.7 million for the year ended December 31,
1994 to $3.4 million for the year ended December 31, 1995. Total average
interest-bearing liabilities decreased from $71.5 million with an average
yield of 3.81% for the year ended December 31, 1994 to $70.7 million with an
average yield of 4.87% for the year ended December 31, 1995. The yield on
certificate accounts increased from 4.25% for the year ended December 31, 1994
to 5.59% for the year ended December 31, 1995. The level of certificate
accounts averaged $50.6 million for the year ended December 31, 1995 compared
to $49.9 million for the year ended December 31, 1994. The interest expense
increase also reflects the rise in average borrowings, which were $3.1 million
for the year ended December 31, 1995, compared to $1.9 million for the year
ended December 31, 1994. The yield on borrowings was adversely affected by
interest rate swaps which matured on November 7, 1995. During the years ended
December 31, 1995 and December 31, 1994, the interest on swaps totalled
$52,000 and $96,000, respectively, which increased the yield on borrowings for
the years ended December 31, 1995 and December 31, 1994 to 8.23% and 10.04%,
respectively. Without the interest on the swaps, the yield on borrowings would
have been 6.56% for the year ended December 31, 1995 and 4.88% for the year
ended December 31, 1994. Furthermore, the yield on total interest-bearing
liabilities for the years ended December 31, 1995 and December 31, 1994 would
have been 4.80% and 3.67% without the interest on the swaps.
NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN LOSSES
Net interest income before provision for estimated loan losses for the year
ended December 31, 1995 was $2.4 million compared to $2.1 million for the year
ended December 31, 1994. The Bank's net interest margin increased to 3.25% for
the year ended December 31, 1995 compared to 2.88% for the year ended December
31, 1994. Average interest-earning assets to interest-bearing liabilities
increased from 102.27% at December 31, 1994 to 103.50% at December 31, 1995.
PROVISION FOR ESTIMATED LOAN LOSSES
The provision for estimated loan losses was $1.2 million for the year ended
December 31, 1995 compared to $1.3 million for the year ended December 31,
1994. The decrease in the provision resulted from the Bank's analysis of its
loan portfolio and an increase in the recoveries of the loans previously
charged off. Recoveries for the year ended December 31, 1995 were $65,000
compared to $3,000 for the year ended December 31, 1994.
Charge-offs for the 1995 and 1994 periods remained relatively constant as
management continued to charge-off problem assets and improve its collection
procedures pursuant to its strategy which was revised during the year ended
December 31, 1994. See "Business--Background--Strategy." Charge-offs net of
recoveries, however, totalled $849,000 for the year ended December 31, 1995
exceeding the Bank's allowance for estimated loan losses of $832,000
established at December 31, 1994, which reflected management's loss
expectation for the year ended December 31, 1995.
Non-performing assets as a percent of total assets declined from 3.42% at
December 31, 1994 to 3.00% at December 31, 1995. The Bank's allowance for
estimated loan losses increased from $832,000 at December 31, 1994 to $1.2
million at December 31, 1995. The allowance for estimated loan losses as a
percent of non-performing loans increased to 84.25% at December 31, 1995
compared to 44.04% at December 31, 1994.
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<PAGE>
NON-INTEREST INCOME
Gains from mortgage financing operations for the year ended December 31,
1995 were $3.6 million compared to $1.4 million for the year ended December
31, 1994. This increase was attributable to the increase in the level of
mortgage financing operations, with loans sold totaling $126.9 million for the
year ended December 31, 1995 compared to $65.7 million for the year ended
December 31, 1994. Loans originated and purchased totaled $134.8 million for
the year ended December 31, 1995 compared to $72.8 million for the year ended
December 31, 1994. During 1994, the Bank hired new management to restructure
the mortgage financing operations, changing the lending strategy from a
traditional mortgage banking and portfolio lending operation to a strategy of
a sub-prime mortgage financing operations. During the period of restructuring
in the first six months of 1994, loan originations and purchases declined as
new lending products were being developed and new personnel skilled in
originating, processing, underwriting and servicing the new products were
being hired. Loan originations and purchases increased during the latter half
of 1994 and 1995 as a result of the restructuring.
Loan servicing and other fees were $231,000 for the year ended December 31,
1995 compared to $164,000 for the year ended December 31, 1994 due to the
expansion of the mortgage financing operations and the increase in the loan
servicing portfolio. With the adoption of SFAS No. 122 in July of 1995, the
Bank retained a greater portion of its servicing, which resulted in an
increase in servicing for other investors from $48.2 million as of December
31, 1994 to $189.5 million as of December 31, 1995. See "- Impact of New
Accounting Standards."
NON-INTEREST EXPENSE
Total non-interest expense totalled $4.4 million for the year ended December
31, 1995 compared to $3.5 million for the year ended December 31, 1994. This
increase is primarily attributable to the expenses related to compensation and
benefits increasing from $1.6 million for the year ended December 31, 1994 to
$2.5 million for the year ended December 31, 1995. These costs are directly
related to the expansion of the mortgage financing operations and the
corresponding increase in personnel. Loans originated and purchased increased
from $72.8 million for the year ended December 31, 1994 to $134.8 million for
the year ended December 31, 1995, which resulted in increased employee
commissions.
Premises and occupancy, data processing and other expense increased as a
result of the addition of the Riverside loan center in November 1995 and the
increased loan activity during the year ended December 31, 1995 compared to
the year ended December 31, 1994.
INCOME TAXES
The provision for income taxes increased from a benefit of $300,000 for the
year ended December 31, 1994 to an expense of $294,000 for the year ended
December 31, 1995. This increase is a result of income before income taxes of
$814,000 for the year ended December 31, 1995 compared to a loss before income
taxes of $971,000 for the year ended December 31, 1994 and the resulting
increase in the Bank's effective rate from 30.9% to 36.1% for the year ended
December 31, 1995.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1995 AND DECEMBER 31, 1994
Total assets increased from $71.4 million as of December 31, 1994 to $74.1
million as of December 31, 1995, which was directly attributable to loans held
for sale. Loans held for sale increased to $21.7 million at December 31, 1995
compared to $17.1 million at December 31, 1994, which was offset by a decrease
in loans held for investment from $47.1 million at December 31, 1994 to $41.7
million at December 31, 1995. During the year ended December 31, 1995 the Bank
originated and purchased $134.8 million in loans, which were offset by sales
totalling $126.9 million. Cash and cash equivalents also increased during the
year ended December 31, 1995 to $3.9 million from $1.5 million at December 31,
1994 due to the increase in deposits from $65.7 million at December 31, 1994
to $67.5 million at December 31, 1995.
The increase in assets were funded by an increase in deposits and other
liabilities. Borrowings totalled $1.3 million as of December 31, 1994 compared
to zero at December 31, 1995. Deposits slightly increased from $65.7
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million at December 31, 1994 to $67.5 million at December 31, 1995. Other
liabilities increased as a result of an increase in loans serviced for others
and the corresponding impounds thereon. With earnings of $520,000 for the year
ended December 31, 1995, total stockholders' equity increased from $3.7
million for the year ended December 31, 1994 to $4.3 million for the year
ended December 31, 1995.
Tangible, core and risk based capital ratios increased from 5.25%, 5.25% and
10.00% as of December 31, 1994, to 5.68%, 5.68% and 10.17% as of December 31,
1995, respectively. During the same period, non-performing loans as a percent
of gross loans decreased from 2.90% as of December 31, 1994 to 2.17% as of
December 31, 1995. Non-performing assets as a percent of total assets
decreased from 3.42% to 3.00% as of December 31, 1994 and December 31, 1995,
respectively. See "Business--Lending Activities--Delinquencies and Classified
Assets."
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Bank's interest rate risk management function
is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of appropriate risk given the Bank's business
focus, operating environment, capital and liquidity requirements and
performance objectives and manage the risk consistent with Board approved
guidelines through the establishment of prudent asset concentration
guidelines. Through such management, management of the Bank seeks to reduce
the vulnerability of the Bank's operations to changes in interest rates.
Management of the Bank monitors its interest rate risk as such risk relates to
its operational strategies. The Bank's Board of Directors reviews on a
quarterly basis the Bank's asset/liability position, including simulations of
the effect on the Bank's capital of various interest rate scenarios. The
extent of the movement of interest rates, higher or lower, is an uncertainty
that could have a negative impact on the earnings of the Bank.
Net Portfolio Value. The Bank's interest rate sensitivity is monitored by
management through the use of a model which estimates the change in net
portfolio value ("NPV") over a range of interest rate scenarios. NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. An NPV Ratio, in any interest rate scenario, is defined as
the NPV in that scenario divided by the market value of assets in the same
scenario. The sensitivity measure is the decline in the NPV Ratio, in basis
points, caused by a 2% increase or decrease in rates, whichever produces a
larger decline (the "Sensitivity Measure"). The higher an institution's
Sensitivity Measure is, the greater its exposure to interest rate risk is
considered to be. The Bank utilizes a market value model prepared by the OTS
(the "OTS NPV model"), which is prepared quarterly, based on the Bank's
quarterly Thrift Financial Reports filed with the OTS. The OTS NPV model
measures the Bank's interest rate risk by approximating the Bank's NPV, which
is the net present value of expected cash flows from assets, liabilities and
any off-balance sheet contracts, under various market interest rate scenarios
which range from a 400 basis point increase to a 400 basis point decrease in
market interest rates. The interest rate risk policy of the Bank provides that
the maximum permissible change at a 400 basis point increase or decrease in
market interest rates is a 45% change in the net portfolio value. The OTS has
incorporated an interest rate risk component into its regulatory capital rule.
Under the rule, an institution whose sensitivity measure exceeds 2% would be
required to deduct an interest rate risk component in calculating its total
capital for purpose of the risk-based capital requirement. See "Regulation--
Federal Savings Institution Regulation." As of December 31, 1996, the most
recent date for which the relevant data is available, the Bank's sensitivity
measure, as measured by the OTS, resulting from a 200 basis point decrease in
interest rates was 96 basis points and would result in a $1.0 million
reduction in the NPV of the Bank. The NPV Ratio sensitivity measure is below
the threshold at which the Bank could be required to hold additional risk-
based capital under OTS regulations. The OTS has postponed the date the
component will first be deducted from an institution's total capital to
provide the OTS with an opportunity to review the interest rate risk
approaches taken by the other federal banking agencies. See "Regulation--
Federal Savings Institution Regulation."
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV requires the making
of certain assumptions that may tend to oversimplify the manner in which
actual yields and costs respond to changes in market interest rates. First,
the models assume that the
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composition of the Bank's interest sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured.
Second, the models assume that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration to
maturity or repricing of specific assets and liabilities. Third, the model
does not take into account the impact of the Bank's business or strategic
plans on the structure of interest-earning assets and interest-bearing
liabilities. Accordingly, although the NPV measurement provides an indication
of the Bank's interest rate risk exposure at a particular point in time, such
measurement is not intended to and does not provide a precise forecast of the
effect of changes in market interest rates on the Bank's net interest income
and will differ from actual results. The results of this modeling are
monitored by management and presented to the Board of Directors, quarterly.
The following table shows the NPV and projected change in the NPV of the
Bank at December 31, 1996 assuming an instantaneous and sustained change in
market interest rates of 100, 200, 300 and 400 basis points ("bp").
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
<TABLE>
<CAPTION>
NPV AS % OF PORTFOLIO
NET PORTFOLIO VALUE VALUE OF ASSETS
-------------------------- ------------------------
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO %CHANGE
--------------- -------- -------- -------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+400 bp $12,688 (1,393) (10)% 11.99% -97 bp
+300 bp 13,629 (451) (3) 12.73 -23 bp
+200 bp 14,282 201 1 13.22 +26 bp
+100 bp 14,185 104 1 13.10 +14 bp
Static 14,080 12.96
-100 bp 13,613 (468) (3) 12.52 -44 bp
-200 bp 13,038 (1,042) (7) 12.00 -96 bp
-300 bp 12,282 (1,799) (13) 11.33 -163 bp
-400 bp 11,748 (2,332) (17) 10.83 -213 bp
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, FHLB advances,
principal and interest payments on loans and mortgage-backed securities,
proceeds from the sale of loans, and to a lesser extent, interest payments on
investment securities and proceeds from the maturation of investment
securities. In the immediate and foreseeable future, the Company also plans to
fund loans from the proceeds derived from asset securitizations. See "Risk
Factors--Availability of Funding Sources" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." While maturities
and scheduled amortization of loans and mortgage-backed securities are a
predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition. However, the Company has continued to maintain the required
minimum levels of liquid assets as defined by OTS regulations. This
requirement, which may be varied at the direction of the OTS depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. The required ratio is currently 5%. The Bank's
average liquidity ratios were 8.5%, 9.4% and 8.9% for the years ended December
31, 1996, 1995 and 1994, respectively. Management currently attempts to
maintain a liquidity ratio between 5.0 and 8.0 percent.
The Company's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows used in operating activities were $18.7 million, $5.3
million and $6.9 million, for the years ended December 31, 1996, 1995 and
1994, respectively. Such cash flows primarily consisted of loans originated
and purchased for sale (net of loan fees) of $227.2 million, $135.6 million
and $72.6 million, net of proceeds from the sale and securitization of loans
held for sale of $212.2 million, $130.1 million and $66.4 million for the
years ended December 31, 1996, 1995 and 1994, respectively. Net cash provided
by investing activities consisted primarily of investment purchases offset by
principal collections on loans and proceeds from maturation of investment
purchases. Proceeds from the maturation of
32
<PAGE>
investment securities were $2.0 million, $9.2 million and $2.0 million for the
years ended December 31, 1996, 1995 and 1994, respectively. Net cash provided
by (used in) financing activities consisted primarily of net activity in
deposit accounts and FHLB advances. The net increase (decrease) in deposits
and advances was $18.2 million, $596,000 and $(6.3) million for the years
ended December 31, 1996, 1995 and 1994, respectively. The Bank also received
proceeds from the issuance of common stock in the Private Placement of $3.5
million in August 1996.
At December 31, 1996, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $9.3 million, or 8.9% of total
adjusted assets, which is above the required level of $1.6 million, or 1.50%;
core capital of $9.3 million, or 8.9% of total adjusted assets, which is above
the required level of $3.1 million, or 3.0%, and risk-based capital of $10.4
million, or 9.4% of risk-weighted assets, which is above the required level of
$8.9 million, or 8.0%. See "Capitalization" and "Regulation--Federal Savings
Institution Regulation--Capital Requirements."
The Company's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At December 31,
1996, cash and short-term investments totalled $13.3 million. The Company has
other sources of liquidity if a need for additional funds arises, including
the utilization of FHLB advances. At December 31, 1996, the Bank had no
advances outstanding from the FHLB. Other sources of liquidity include
investment securities maturing within one year. On an on-going basis, the
Company explores opportunities to access credit lines as an additional source
of funds for its mortgage financing operations and expects to use the
warehouse line of credit and/or the repurchase financing facilities of a
national investment banking firm to fund loan originations in the near future.
See "Risk Factors--Availability of Funding Sources."
The Company currently has no material contractual obligations or commitments
for capital expenditures. At December 31, 1996 the Bank had outstanding
commitments to originate mortgage loans and to purchase mortgage loans of $5.0
million, and $4.2 million, respectively compared to $1.8 million and $8.1
million, respectively at December 31, 1995. The Company anticipates that it
will have sufficient funds available to meet its current loan origination
commitments. See "Business--Background--General." Certificates of deposit
which are scheduled to mature one year or less from December 31, 1996,
totalled $59.4 million. The Company expects that a substantial portion of the
maturing certificates of deposit will be retained by the Company at maturity.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with Generally Accepted Accounting Principles ("GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollar amounts without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations.
Unlike industrial companies, nearly all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed
Of" ("SFAS No. 121"). SFAS No. 121 requires that long lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. However, SFAS No. 121 does not apply to financial instruments,
core deposit intangibles, mortgage and other servicing rights or deferred tax
assets. The adoption of SFAS No. 121 in 1996 did not have a material effect on
the Bank's income from operations or financial condition.
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<PAGE>
Effective July 1, 1995, the Bank adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS No. 122"), which amended SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities." SFAS No. 122 requires an
institution that purchases or originates mortgage loans and sells or
securitizes those loans with servicing rights retained to allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values.
The impact of adopting SFAS No. 122 was an increase in pretax earnings of
$594,000, net income of $438,000 and earnings per share of $0.23, as adjusted
for the Reorganization, for the year ended December 31, 1995.
In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which encourages companies to account for
stock compensation awards based on their fair value at the date the awards are
granted. SFAS No. 123 does not require the application of the fair value
method and allows for the continuance of current accounting methods, which
require accounting for stock compensation awards based on their intrinsic
value as of the grant date. However, SFAS No. 123 requires proforma disclosure
of net income and, if presented, earnings per share, as if the fair value
based method of accounting defined in this Statement had been applied. The
accounting and disclosure requirements of this Statement are effective for
financial statements for fiscal years beginning after December 15, 1995. The
Bank did not adopt the recognition provisions of SFAS No. 123 with respect to
the Stock Option Plan.
In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"), which was amended by SFAS No. 127. This Statement provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial-
components approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
Under the financial-components approach, after a transfer of financial assets,
an entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished. The financial-components
approach focuses on the assets and liabilities that exist after the transfer.
Many of these assets and liabilities are components of financial assets that
existed prior to the transfer. If a transfer does not meet the criteria for a
sale, the transfer is accounted for as a secured borrowing with pledge of
collateral. The Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996. Retroactive application of this Statement is not permitted. The
Company does not anticipate that the implementation of SFAS No. 125 will have
a material impact on its results of operations or financial condition.
LIFE FINANCIAL CORP.
Life Financial Corp. is a Delaware corporation recently organized by the
Bank as a financial services holding company. The Company will own all of the
capital stock of the Bank upon completion of the Reorganization. Immediately
following the Reorganization, the only significant assets of the Company will
be the capital stock of the Bank and the net proceeds of the Offering. Net
proceeds received by the Company will be used to (i) acquire approximately
$12.3 million of residuals and $6.6 million in the Reserve Account resulting
from the Securitization and a securitization completed during the first
quarter of 1997 (which, when netted against the net subordinated debt of
$9.6 million expected to be transferred to the Company following the
Reorganization, would total $9.3 million), see "Recent Developments";
(ii) acquire an interest in or establish a subsidiary for the purpose of
providing short term warehouse lines of credit; (iii) downstream proceeds to
the Bank if necessary to fund additional purchases and sales of loans; and
(iv) fund general business activities including possible acquisitions of
related businesses as opportunities arise. However, the Company has not
entered into any arrangement, agreement or understanding with respect to
future acquisitions and there can be no assurance that it will do so in the
future. No determination has been made as to the amount of proceeds that will
be allocated to each use, with the exception of the acquisition of the
residuals and restricted cash. On an interim basis, the net proceeds are
expected to be invested in short to intermediate-term investment securities
and mortgage-backed securities. See "Use of Proceeds" and "Business."
The Company's principal executive offices are located at 4110 Tigris Way,
Riverside, California 92503 and its telephone number at that location is (909)
280-5100.
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<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
The Bank originally was chartered as a stock savings and loan association
under the laws of the State of California in 1983 and became a federally
chartered stock savings bank in 1991. The Bank conducts its business from its
home office in San Bernardino, California, a mortgage financing office in
Riverside, California, a loan center in Jacksonville, Florida and a recently
established loan center in the Denver, Colorado metropolitan area. At December
31, 1996, the Bank had total assets of $104.0 million, total deposits of $85.7
million and total equity of $9.3 million. The Bank's deposits are insured up
to the maximum allowable amount by the SAIF of the FDIC.
The Bank's corporate offices are located at 1598 East Highland Avenue, San
Bernardino, California 92404 and its telephone number is (909) 886-9751.
BUSINESS
BACKGROUND
General. The Bank originates, purchases, sells and services primarily non-
conventional mortgage loans principally secured by first and second mortgages
on one- to four-family residences. The Bank has focused on Liberator Series
loans which are for the purchase or refinance of residential real property by
borrowers who, because of prior credit problems or the absence of a credit
history, are considered "sub-prime borrowers." In addition, the Bank has
originated a substantial number of Portfolio Series loans which are debt
consolidation loans for Agency Qualified Borrowers. The Bank purchases and
originates mortgage loans and other real estate secured loans through a
network of approved correspondents and mortgage brokers on a nationwide basis.
Except for a limited number of loans specifically originated for retention in
the Bank's portfolio as loans held for investment, since 1994, loans
originated or purchased through the loan operation are generally originated
for sale in the secondary mortgage market and, more recently, in asset
securitizations. During the fourth quarter of 1996, the Bank securitized $51.9
million of loans in a "AAA" rated securitization. The Bank generally retains
the servicing rights on the majority of loans sold and securitized and may
sell servicing rights at a later date depending on market opportunities. In
addition, the Bank engages in retail lending activities in its primary market
area on a limited basis. The Bank funds substantially all of the loans which
it purchases or originates through deposits from customers concentrated in the
communities surrounding its home office in San Bernardino, internally
generated funds, and FHLB advances. In the immediate and foreseeable future,
the Company also plans to fund loans from the proceeds derived from asset
securitizations. On an on-going basis, the Bank explores opportunities to
access credit lines as an additional source of funds and expects to use the
warehouse line of credit and/or the repurchase financing facilities of a
national investment banking firm to fund loan originations in the future.
There can be no assurances, however, that the Company will be able to complete
future asset securitizations as planned or that the Company will be able to
access lines of credit. See "Recent Developments," "Risk Factors--Dependence
on Asset Securitizations and Impact on Quarterly Operating Results" and "--
Availability of Funding Sources."
Strategy. During the early 1990s, Southern California experienced reduced
employment levels as a result of the downsizing of the defense industry,
corporate relocations and the general weakness of the national economy.
Additionally, the area experienced a general weakening of real estate values
and a reduction in home sales and construction. At the same time, the Bank
experienced increased competition both in originating and selling conforming
loans, which resulted in nominal growth in the Bank's lending operations
during this time. Consequently, the Bank's results of operations were
adversely impacted and the Bank began to experience increases in total non-
performing loans held for investment.
In 1994, the Bank retained new management experienced in the sub-prime
business to reorganize its lending operations and revise underwriting policies
and procedures. A strategic plan was developed for the Bank pursuant to which
(1) the Bank reorganized its lending strategies, changing strategies from a
strategy which emphasized traditional mortgage banking operations and
traditional portfolio lending to a financial services operation strategy
35
<PAGE>
focusing on the origination for sale, while retaining servicing, of (i)
Liberator Series loans; (ii) Portfolio Series loans; (iii) commercial real
estate loans; and (iv) multi-family real estate loans; (2) the Bank adopted
revised underwriting procedures and instituted more aggressive procedures for
resolving problem loans and for reducing the level of non-performing assets;
and (3) the Bank improved its profitability.
As part of the Bank's strategic plan, the Bank developed an internal
structure of operating divisions, each with distinct objectives and management
focus including (i) the Financial Services Division, with emphasis on
wholesale origination of residential mortgage loans; (ii) the Income Capital
Services Division which originates and sells commercial and multi-family
loans; (iii) the Retail Loan Division which concentrates on offering the
Bank's loan products to the public primarily in the Bank's primary market
area; (iv) the Asset Management Division which services loans and REO for both
the Bank and for purchasers of loans (the "Investors"); and (v) the Banking
Division which offers depository services to the public. Within this
structure, the Bank began to implement its strategic plan and as a result of
this strategy:
. The Bank has experienced considerable growth in loan production, as total
purchases and originations increased from $72.8 million for the year
ended December 31, 1994 to $134.8 million for the year ended December 31,
1995 and were $222.6 million for the year ended December 31, 1996.
Similarly, the Bank's loan sales and securitizations increased from $65.7
million for the year ended December 31, 1994 to $126.9 million for the
year ended December 31, 1995 and were $206.6 million for the year ended
December 31, 1996. Gains from mortgage financing operations increased
from $1.4 million for the year ended December 31, 1994 to $3.6 million
for the year ended December 31, 1995 and were $8.4 million for the year
ended December 31, 1996. Loan servicing and other fees have increased
from $164,000 for the year ended December 31, 1994 to $231,000 for the
year ended December 31, 1995 and were $496,000 for the year ended
December 31, 1996. At December 31, 1996 the Company was servicing $169.0
million of loans for others.
. Non-performing assets as a percent of total assets have decreased from
5.05% at December 31, 1993 to 2.86% at December 31, 1996. REO, net
decreased from $1.8 million, or 2.26% of total assets, at December 31,
1993 to $561,000, or 0.54% of total assets, at December 31, 1996. Non-
performing loans as a percent of gross loans receivable has increased
from 3.24% at December 31, 1993 to 3.50% at December 31, 1996 while the
allowance for estimated loan losses as a percent of gross loans
receivable has increased from 0.65% at December 31, 1993 to 2.36% at
December 31, 1996.
. Primarily due to the success of the Bank's mortgage financing operations,
the Bank's net income increased to $520,000 for the year ended December
31, 1995 and to $1.5 million for the year ended December 31, 1996 despite
the costs of resolving problem loans originated in prior periods. The
Company had net income of $93,000 for the year ended December 31, 1993
and experienced a net loss of $671,000 for the year ended December 31,
1994. Non-interest income increased from $1.4 million for the year ended
December 31, 1993 to $1.7 million for the year ended December 31, 1994 to
$4.0 million for the year ended December 31, 1995 and was $9.1 million
for the year ended December 31, 1996. Non-interest expense increased from
$4.4 million for the year ended December 31, 1995 to $8.7 million for the
year ended December 31, 1996. This increase was primarily due to the
Bank's $448,000 share of an industry-wide special assessment levied
against the March 31, 1995 deposit bases of all savings institutions in
the country with deposits insured by the SAIF in order to recapitalize
the SAIF and a non-recurring expense for compensation and benefits of
$354,000 which was incurred in the year ended December 31, 1996. Net
income for the year ended December 31, 1996, would have been $2.0 million
if these charges had not been incurred. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RESTRUCTURING
General. In 1996, management of the Bank determined that in order to become
a full service financial services company it would be necessary (i) to
reorganize into the holding company form of organization, (ii) to form
separate holding company subsidiaries, (iii) to restructure the Bank by
forming separate operating subsidiaries, and (iv) to raise additional capital
to fund operations and expansion.
36
<PAGE>
The Reorganization. The Boards of Directors of the Company and the Bank
unanimously approved and entered into the Plan of Reorganization pursuant to
which the Bank will be reorganized into a holding company structure and become
a wholly-owned subsidiary of the Company, subject to the approval of the
Bank's stockholders. See "The Reorganization." Management believes that the
holding company form of organization will provide the Company with more
flexibility and a greater ability to compete with other financial services
companies in the market place.
Formation of Company Subsidiary. At the time of the Reorganization the
Company will establish Life Investment Holdings, a bankruptcy remote entity,
for the purpose of holding residuals created by its asset securitizations.
Immediately upon the completion of the Offerings, the Company will acquire
$12.3 million of residuals and $6.6 million in the Reserve Account resulting
from the Securitization and a securitization completed during the first
quarter of 1997. See "Recent Developments." Due to regulatory restrictions,
the Bank is limited in the amount of investment in residuals and related
assets that it can retain. It is intended that any future residuals and
related assets will be purchased by this subsidiary, as a result of such
regulatory limitations. See "--Investment Activities."
In addition to the foregoing, upon the completion of the Offerings, the
Company may acquire or establish a subsidiary to provide warehouse lines of
credit to meet the cash flow needs of smaller loan originators on a short-term
basis, which it is expected will in turn create additional sources of loans
for the Company to purchase and securitize. See "Use of Proceeds."
Formation of Operating Subsidiaries. Applications and notices are in the
process of being prepared for filing with the appropriate regulatory agencies
to form several operating subsidiaries.
. Life Financial Services, which primarily operates out of an owned
facility in Riverside, California, will assume the functions of the Life
Financial Services Division of the Bank. This subsidiary will continue to
focus on Liberator Series loans, which are loans for the purchasing or
refinancing of residential real property by borrowers who, because of
prior credit problems or the absence of a credit history, are considered
"sub-prime borrowers." In addition, this subsidiary will continue to
originate Portfolio Series loans, which are debt consolidation loans for
Agency Qualified Borrowers. During the fourth quarter of 1996, the Bank
securitized $51.9 million of loans through a public offering of "AAA
rated," credit enhanced, asset-backed securities. See "--Lending
Activities--Loan Sales and Asset Securitizations." Through this
subsidiary, the Company intends to conduct asset securitizations at a
rate of one per quarter and, in the future, plans to transfer this
subsidiary directly to the Company. There can be no assurance, however,
that any asset securitizations will be completed in the future. The Bank
raised $3.5 million net in the Private Placement during the third quarter
of 1996 which provided it with the capital to undertake its first asset
securitization. Although there can be no assurances in this regard,
management intends to expand the operations of this subsidiary and
expects its operations to create a major source of revenue for the
Company.
. Life Income Capital is being established for the purpose of originating
and selling multi-family and commercial real estate loans in the $50,000
to $750,000 range. Prior to the third quarter of 1996, the Bank was
substantially limited in its ability to originate such loans by its level
of available capital. Although the Bank had the ability to raise the
funds to finance such loans prior to the third quarter of 1996, with the
level of leveraging needed to do so, it would have been unable to
maintain its required capital ratios during the period of origination to
sale. Although there can be no assurances in this regard, management
intends to expand the operations of this subsidiary and expects the
operations of this subsidiary to create an increased source of revenue
for the Company because of the perceived demand for and higher yields on
such loans. See "Risk Factors--Real Estate Secured Risks" for a
discussion of the risks associated with multi-family and commercial real
estate lending.
. Life Asset Management is being established as a direct subsidiary of the
Bank to service loans and REO for both the Bank and for purchasers of
loans.
The Retail Lending Division and the Banking Depository Division will remain
within the Bank. In addition, as part of its liquidity and investment
portfolios, the Bank will continue to hold investments in U.S. government
37
<PAGE>
and agency securities. As part of its ongoing commitment to the Southern
California area and more specifically to the Inland Empire region, which
consists of the counties of San Bernardino and Riverside, the Bank will lend
to and invest in community development programs. As of January 1997, the Bank
had committed to lend or invest $2.5 million in such projects. See "--Lending
Activities--One- to Four-Family Mortgage Lending."
Capital Raising. In order to fund the acquisition of the residuals and the
Reserve Account currently in the Bank's portfolio, to acquire or form a
subsidiary to provide warehouse lines of credit and for general corporate
purposes, including the origination and purchase of loans to be securitized or
sold in the secondary market and to grow and expand operations through the
establishment of retail lending and mortgage banking offices, the Company is
conducting the Public Offering to raise approximately $24.9 million in Net
Proceeds in connection with the Reorganization.
COMPETITION
As a purchaser and originator of mortgage loans, the Bank faces intense
competition, primarily from mortgage banking companies, commercial banks,
credit unions, thrift institutions, credit card issuers and finance companies.
Many of these competitors in the financial services business are substantially
larger and have more capital and other resources than the Bank. Furthermore,
certain large national finance companies and conforming mortgage originators
have announced their intention to adapt their conforming origination programs
and allocate resources to the origination of non-conforming loans. In
addition, certain of these larger mortgage companies and commercial banks have
begun to offer products similar to those offered by the Bank targeting
customers similar to those of the Bank. The entrance of these competitors into
the Bank's market could have a material adverse effect on the Bank's results
of operations and financial condition.
Competition can take many forms, including convenience in obtaining a loan,
service, marketing and distribution channels and interest rates. Furthermore,
the current level of gains realized by the Bank and its competitors on the
sale of the type of loans purchased and originated is attracting additional
competitors, including at least one quasi-governmental agency, into this
market with the effect of lowering the gains that may be realized by the Bank
on future loan sales. Competition may be affected by fluctuations in interest
rates and general economic conditions. During periods of rising rates,
competitors which have "locked in" low borrowing costs may have a competitive
advantage. During periods of declining rates, competitors may solicit the
Bank's borrowers to refinance their loans. During economic slowdowns or
recessions, the Bank's borrowers may have new financial difficulties and may
be receptive to offers by the Bank's competitors.
The Bank depends largely on correspondents and brokers for its purchases and
originations of new loans. The Bank's competitors also seek to establish
relationships with the Bank's correspondents and brokers. The Bank's future
results may become more exposed to fluctuations in the volume and cost of its
wholesale loans resulting from competition from other purchasers of such
loans, market conditions and other factors.
In addition, the Bank faces increasing competition for deposits and other
financial products from non-bank institutions such as brokerage firms and
insurance companies in such areas as short-term money market funds, corporate
and government securities funds, mutual funds and annuities. In order to
compete with these other institutions with respect to deposits and fee
services, the Bank relies principally upon local promotional activities,
personal relationships established by officers, directors and employees of the
Bank and specialized services tailored to meet the individual needs of the
Bank's customers.
COMPETITIVE STRENGTHS
Management believes that its competitive strengths include prompt,
responsive service, its underwriting process, an extensive correspondent
network with which the Bank has had previous experience and repeat business
and a diversified network of investors to which the Bank sells loans in the
secondary mortgage market. As a result of its Securitization of $51.9 million
of loans in the fourth quarter of 1996, the Bank has established a
relationship with a nationally recognized investment banking firm with whom or
through whom it intends to
38
<PAGE>
offer future asset securitizations. There can be no assurances, however, that
any future asset securitizations will be undertaken or completed. See "Risk
Factors--Dependence on Asset Securitizations and Impact on Quarterly Operating
Results" and "--Lending Activities--Loan Sales and Asset Securitizations."
Management believes that it has the capacity to process more loans than it
currently is processing and that it can process such loans at a lower cost
than some of its competitors. In most cases, the Bank conditionally approves
loans within 48 hours from receipt of an application and funds loans
immediately upon receipt of all conditions for approval of the loan. Life
Financial Services' ability to process and fund loans is further enhanced by
the support and complementary operations of the Bank. Management believes that
the Bank's underwriting process is also enhanced by its experienced staff and
their utilization of a software program designed to evaluate the borrower's
credit history based upon geographic location, demographic information and
other credit scoring techniques.
LENDING ACTIVITIES
Loan Portfolio Composition. At December 31, 1996, the Bank had gross loans
outstanding of $69.0 million, of which $30.5 million were held for sale. The
Bank's gross loan portfolio consists of $54.3 million or 78.7% of mortgage
loans secured by one- to four-family residences. The remainder of the
portfolio consists of $9.7 million of commercial real estate and land loans,
or 14.0% of total gross loans; $4.8 million of multi-family mortgage loans, or
6.9% of total gross loans; and $309,000 of consumer and other loans, or 0.4%
of total gross loans. At December 31, 1996, 85.4% of the Bank's mortgage loans
had adjustable interest rates. In recent periods, the Bank has sought to
decrease the percentage of adjustable-rate mortgage loans held for investment
which are tied to COFI, an index that lags changes in general market rates of
interest and increase the percentage tied to LIBOR or U.S. Treasury security
indices as these tend to reprice more frequently. It is the current practice
of the Company to only invest in loans which are tied to COFI on a case by
case basis. Of the Bank adjustable-rate mortgage loans at December 31, 1996,
46.0% were indexed to COFI, 4.8% were indexed to the prime rate and 49.2% were
indexed to either the LIBOR or U.S. Treasury security indices.
The types of loans that the Company may originate are subject to federal and
state law and regulations. Interest rates charged by the Company on loans are
affected by the demand for such loans and the supply of money available for
lending purposes and the rates offered by competitors. These factors are, in
turn, affected by, among other things, economic conditions, monetary policies
of the federal government, including the Federal Reserve Board, and
legislative tax policies.
39
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- --------------- --------------- ---------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate(1):
Residential:
One- to four-family.... $54,275 78.67% $54,007 84.04% $53,755 82.62% $55,841 83.01% $53,816 81.68%
Multi-family........... 4,752 6.89 2,412 3.75 2,685 4.12 2,296 3.41 2,338 3.55
Commercial and land.... 9,659 14.00 7,522 11.71 8,131 12.50 8,389 12.47 8,930 13.55
Other loans:
Loans secured by
deposit accounts...... 177 0.25 186 0.29 213 0.33 396 0.59 381 0.58
Unsecured commercial
loans................. 67 0.10 70 0.11 197 0.30 190 0.28 224 0.34
Unsecured consumer
loans................. 65 0.09 63 0.10 84 0.13 162 0.24 200 0.30
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total gross loans..... 68,995 100.00% 64,260 100.00% 65,065 100.00% 67,274 100.00% 65,889 100.00%
====== ====== ====== ====== ======
Less (plus):
Deferred loan
origination (costs)
fees and (premiums)
discounts............. (543) (298) 56 109 209
Allowance for estimated
loan losses........... 1,625 1,177 832 436 308
------- ------- ------- ------- -------
Loans receivable,
net.................. $67,913 $63,381 $64,177 $66,729 $65,372
======= ======= ======= ======= =======
</TABLE>
- --------
(1) Includes second trust deeds.
Loan Maturity. The following table shows the contractual maturity of the
Bank's gross loans at December 31, 1996. There were $31.0 million of loans
held for sale at December 31, 1996. The table does not reflect prepayment
assumptions.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
----------------------------------------------
TOTAL
ONE- TO MULTI- COMMERCIAL OTHER LOANS
FOUR-FAMILY FAMILY AND LAND LOANS RECEIVABLE
----------- ------ ---------- ----- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amounts due:
One year or less.............. $ 1,077 $ -- $ -- $249 $ 1,326
After one year:
More than one year to three
years...................... 1,130 -- -- 53 1,183
More than three years to
five years................. 581 124 3,077 7 3,789
More than five years to 10
years...................... 838 -- 1,792 -- 2,630
More than 10 years to 20
years...................... 7,406 553 1,103 -- 9,062
More than 20 years.......... 43,243 4,075 3,687 -- 51,005
------- ------ ------ ---- -------
Total amount due.......... 54,275 4,752 9,659 309 68,995
Less (plus):
Unamortized discounts
(premiums), net............ (601) -- -- -- (601)
Deferred loan origination
fees (costs)............... (15) 40 33 -- 58
Allowance for estimated loan
losses..................... 1,462 20 124 19 1,625
------- ------ ------ ---- -------
Total loans, net.......... 53,429 4,692 9,502 290 67,913
Loans held for sale......... 26,051 2,588 2,379 -- 31,018
------- ------ ------ ---- -------
Loans receivable, net....... $27,378 $2,104 $7,123 $290 $36,895
======= ====== ====== ==== =======
</TABLE>
40
<PAGE>
The following table sets forth at December 31, 1996, the dollar amount of
gross loans receivable contractually due after December 31, 1997, and whether
such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1997
------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
Residential:
One- to four-family......................... $ 8,862 $ 44,336 $ 53,198
Multi-family................................ 98 4,654 4,752
Commercial and land........................... 528 9,131 9,659
Other loans................................... 60 -- 60
-------- --------- ---------
Total gross loans receivable.............. $ 9,548 $ 58,121 $ 67,669
======== ========= =========
</TABLE>
Origination and Purchase of Loans. The Bank has concentrated its efforts on
developing market niches for the origination and purchase of real estate
secured loans. In recent years through Life Financial Services, the Bank has
focused on Liberator Series loans which are loans for the purchase or
refinance of one- to four-family residential real property by borrowers who,
because of prior credit problems or the absence of a credit history are
considered "sub-prime borrowers," and loans which otherwise do not conform to
FHLMC or FNMA guidelines ("conforming loans"). Loans to sub-prime borrowers
are perceived by the Company's management as being advantageous to the Company
because they generally have higher interest rates and origination and
servicing fees and generally lower loan-to-value ratios than conforming loans.
In addition, management believes the Company has the resources to adequately
resolve loans acquired pursuant to this program which become non-performing
after acquisition. The Bank has established specific underwriting policies and
procedures, invested in facilities and systems and developed correspondent
relationships with various entities and brokers throughout the country which
has enabled the Bank to develop its niche as an originator and purchaser of
one- to four-family residential loans to sub-prime borrowers. The Bank also
engages in the origination of loans in its primary market area. See "Risk
Factors--Risks Associated with Sub-Prime Lending."
The Bank originates both adjustable-rate and fixed-rate mortgage loans.
Although most fixed-rate loans are underwritten to the Bank's published
guidelines and to qualify for sale to non-quasi governmental agencies, the
Company may originate loans which conform to FHLMC or FNMA guidelines. The
Bank's ability to originate loans is dependent upon the relative customer
demand for fixed-rate or adjustable-rate mortgage loans, which is affected by
the current and expected future level of interest rates. At December 31, 1996,
86.0% of the Bank's mortgage loans held for investment had adjustable rates.
The Bank's adjustable-rate mortgage loans require that any payment adjustment
resulting from a change in the interest rate be made to both the interest and
payment in order to result in full amortization of the loan by the end of the
loan term, and thus, do not permit negative amortization.
In continuing with its tradition as a niche market lender and as part of its
revised lending strategy, the Bank, through Life Income Capital, has recently
begun to focus its efforts on the origination and purchase of multi-family and
commercial real estate loans. Specifically, the Bank has begun to target the
market for borrowers seeking loans in the range of $50,000 to $750,000 which
are secured by multi-family properties or properties used for commercial
business purposes such as small office buildings, light industrial or retail
facilities. To date, the Bank has been limited in its ability to originate
such loans by its level of available capital. Although there can be no
assurances in this regard, management intends to expand the operations of this
subsidiary, thereby adding a source of revenue for the Company as well as
providing loans for future securitizations. There can be no assurances,
however, that any such securitization will be completed in the future.
The Bank has originated a substantial number of Portfolio Series loans,
which are debt consolidation loans for Agency Qualified Borrowers, both on a
wholesale basis and through its Retail Lending Division. These loans
41
<PAGE>
are consumer-oriented loans secured by real estate, primarily home equity
lines of credit and second deeds of trust, for up to 125% of the appraised
value of the real estate underlying the aggregate loans on the property. It is
the Company's intent to open retail store-front operations to expand the
operations of the Retail Lending division. See "Risk Factors--High Loan to
Value Ratios of Portfolio Series Loans."
The Company's mortgage financing and servicing operations are conducted
primarily through its mortgage financing office in Riverside, California, a
loan center in Jacksonville, Florida and a recently established loan center in
the Denver, Colorado metropolitan area. The primary focus of the operations of
the Riverside office is mortgage banking. The Company may open additional loan
centers in other parts of the country if market opportunities warrant. From
its present locations, the Company is able to originate or purchase loans in
47 states. For the year ended December 31, 1996, 34.0% of the property
securing the loans funded by the Bank were located in California, 11.9% were
located in Utah, 7.6% were located in Colorado, 6.8% were located in Florida
and the remainder were dispersed throughout the country. The Bank's mortgage
lending originations and purchases through its mortgage financing operation
for the year ended December 31, 1996 totalled $222.6 million compared to
$134.8 million and $72.8 million for the years ended December 31, 1995 and
1994, respectively. Except for loans specifically originated by the Bank to be
held for investment, loans originated or purchased through the mortgage
financing operation are originated for sale in the secondary mortgage market
or for sale in asset securitizations. With the exception of customary
provisions relating to breaches of representations and warranties, loans sold
or securitized by the Bank generally are without recourse to the Bank and
generally are sold with servicing retained. See "Risk Factors--Risks
Associated with Mortgage Origination, Purchase and Sale Activities". All loans
originated by the Bank, either through internal sources or through
correspondent relationships are underwritten by the Bank pursuant to the
Company's policies and procedures. Such correspondent institutions originate
loans based on guidelines provided by the Bank and promptly sell the loans to
the Bank on a servicing-released basis.
Loan Sales and Asset Securitizations. Except for loans specifically
originated by the Bank to be held for investment, loans originated or
purchased through the mortgage financing operation are originated or purchased
for sale in the secondary mortgage market and, more recently, through asset
securitizations. Loans are sold pursuant to purchase, sale and servicing
agreements negotiated with institutional investors to purchase loans meeting
the Bank's underwriting criteria. The agreements do not require the Bank to
deliver any specific amount of mortgage loans. The Bank expects to enter into
new commitments with these entities and other investors in the ordinary course
of business. The Bank retains the servicing rights on the majority of mortgage
loans sold. However, the Bank also sells loans on a servicing released basis
in which the Bank will temporarily continue to subservice the loans for a
period of up to nine months. For the years ended December 31, 1996, 1995 and
1994, the Bank sold and securitized $206.6 million, $126.9 million and $65.7
million in loans, respectively.
The Bank completed its first asset securitization of $51.9 million of
Portfolio Series and Liberator Series Loans during the fourth quarter of 1996
and generated $4.3 million of gains on sales from the Securitization. Upon
completion of the Reorganization and the Offering, the residual assets and the
Reserve Account will be purchased by Life Investment Holdings, a bankruptcy
remote entity which is currently being organized by the Company, for purposes
of holding the residuals and related assets created by the Securitization and
any future asset securitizations. Securitizations are expected to allow the
Company to increase its loan acquisition and origination volume, reduce the
risks associated with interest rate fluctuations and provide access to longer
term funding sources. The Company currently intends to conduct asset
securitizations at a rate of one per quarter either through private placements
or in public offerings. For a discussion of the Bank's first quarter asset
securitization, see "Recent Developments." There can be no assurance that the
Company will be able to successfully implement this strategy in the future.
In a securitization, the Company will generally transfer a pool of loans to
a separate entity (a "Special Purpose Entity") with the Company retaining the
excess cash flows, known as residuals, from the asset securitization which are
the difference between the note rate of the mortgages and the coupon rate of
the securities after adjustment for servicing and other costs such as trustee
fees and credit enhancement fees, which constitutes the proceeds of the
securities issued by the Special Purpose Entity. The cash generally will be
used to repay borrowings used to finance the pool of loans that were acquired
by the Company. Generally, the holders of the securities from the asset
securitization are entitled to receive scheduled principal collected on the
pool of
42
<PAGE>
securitized loans and interest at the pass-through interest rate on the
certificate balance. The residual asset represents the subordinated right to
receive cash flows from the pool of securitized loans after payment of the
required amounts to the holders of the securities and the costs associated
with the securitization.
The Company may arrange for credit enhancement for a transaction to achieve
an improved credit rating on the securities issued if this improves the level
of profitability for such transaction. This credit enhancement may take the
form of an insurance and indemnity policy, insuring the holders of the
securities of timely payment of the scheduled pass- through interest and
principal. In addition, the pooling and servicing agreements that govern the
distribution of cash flows from the loan pool included in a transaction
typically require over-collateralization as an additional means of credit
enhancement. Over-collateralization may in some cases also require an initial
deposit, the sale of loans at less than par or retention in the Special
Purpose Entity of collections from the pool until a specified over-
collateralization amount has been attained. In the case of the Securitization,
the over-collateralization was in the form of a cash deposit. The purpose of
the over-collateralization is to provide a source of payment in the event of
higher than anticipated credit losses. Losses resulting from defaults by
borrowers on the payment of principal or interest on the loans in a
securitized loan pool will reduce the over-collateralization to the extent
that funds are available and may result in a reduction in the value of the
residual asset and related assets. See "Risk Factors--Dependence on Asset
Securitizations and Impact on Quarterly Operating Results."
The Company classifies the residual assets as trading securities which are
recorded at fair value with any unrealized gains or losses recorded in the
results of operations in the period of the change in fair value. Valuations at
origination and at each reporting period will be based on discounted cash flow
analyses. The cash flows will be estimated as the excess of the weighted
average coupon on a pool of loans sold over the sum of the pass-through
interest rate, a servicing fee, a trustee fee, an insurance fee and an
estimate of annual future credit losses related to the loans securitized, over
the life of the loans. These cash flows are projected over the life of the
loans using prepayment, default, loss, and interest rate assumptions that
market participants would use for similar financial instruments subject to
prepayment, credit and interest rate risk and are discounted using an interest
rate that a purchaser unrelated to the seller of such a financial instrument
would demand. At origination, the Company utilized a prepayment assumption of
17.0%, an estimated loss factor assumption of 1.5% and a weighted average
discount rate of 13.5% for the loans securitized during the fourth quarter of
1996, to value the residual asset. The valuation includes consideration of
characteristics of the loans including loan type and size, interest rate,
origination date, term and geographic location. The Company also uses other
available information such as externally prepared reports on prepayments
rates, collateral value, economic forecasts and historical default and
prepayment rates of the portfolio under review. To the Company's knowledge,
there is no active market for the sale of these residuals and related assets.
The range of values attributable to the factors used in determining fair value
is broad. Accordingly, the Company's estimate of fair value is subjective.
The Company intends to retain the servicing rights to the loans it
securitizes. The pooling and servicing agreements related to the fourth
quarter Securitization contain provisions with respect to the maximum
permitted loan delinquency rates and loan default rates which, if exceeded,
would allow the termination of the Bank's right to service the related loans.
See "Risk Factors--Risks Related to Mortgage Servicing Rights." Servicing
rights with an allocated fair value of $722,000 were retained in the
Securitization completed during the fourth quarter of 1996.
Use and Qualifications of Originators. The Bank purchases loans from
originators throughout the country. Such originators must be approved by the
Bank prior to submitting loans to the Bank. Pursuant to the Bank's approval
process, each originator is generally required to have a specified minimum
level of experience in originating non-conforming loans, and provide
representations, warranties, and buy-back provisions to the Bank. The Bank
generally classifies the originators with which it does business into four
classes with descending priority with regard to the terms and the pricing of
the loans the Bank purchases from such originators. Correspondents are those
originators that have a minimum net worth of $250,000 and (1) have been in
business for at least two years; (2) have demonstrated a capacity to do a
substantial business; (3) have a warehouse credit facility available to
finance their operations; and (4) have errors and omissions insurance in the
amount of $1.0 million. Third party originators and junior correspondents have
unaudited net worth of $50,000 and $100,000,
43
<PAGE>
respectively, and (1) have been in business for at least two years and (2) in
the case of junior correspondents, have a warehouse line of credit and have
errors and omissions insurance in the amount of $300,000. Mortgage brokers are
those persons who do not meet the specific foregoing criteria but have
demonstrated to the Bank, or have a reputation for, the ability to originate
real estate secured loans and have acceptable credit and finance industry
references. Substantially all loans purchased are purchased on an individual
basis from correspondents or brokers with whom the Bank has developed
relationships. As of December 31, 1996, the Bank did business with
approximately 608 mortgage brokers and third party originators and
approximately 104 correspondents and junior correspondents throughout the
country.
Loan Servicing. The Bank's loan servicing activities include (i) the
collection and remittance of mortgage loan payments, (ii) accounting for
principal and interest and other collections and expenses, (iii) holding and
disbursing escrow or impounding funds for real estate taxes and insurance
premiums, (iv) inspecting properties when appropriate, (v) contacting
delinquent borrowers, and (vi) acting as fiduciary in foreclosing and
disposing of collateral properties. The Bank receives a servicing fee for
performing these services for others. For the year ended December 31, 1996,
the Bank earned $496,000 in servicing and other fees. At December 31, 1996
there were $31.0 million of mortgage loans categorized as held for sale. The
Bank sells loans to a number of different investors with which it does
business. As such, Management believes that no one investor relationship
constitutes the predominant source of sales for the Bank and the Bank does not
rely on any specific entities for sales of its loans. In addition, with the
commencement of its asset securitization program, the Bank established an
additional outlet for the sale of its loans. However, there can be no
assurances that future asset securitizations will be commenced or completed
successfully. See "Risk Factors--Dependence on Asset Securitizations and
Impact on Quarterly Operating Results."
While most of the Bank's servicing portfolio is generated through the Bank's
origination and purchase activities, when economically attractive, the Bank
has, from time to time, made bulk purchases of mortgage servicing rights from
financial institutions. The Bank does not intend to make significant bulk
purchases of servicing rights in the near future but may do so depending on
market opportunities. The mortgage loans underlying the servicing rights
retained by the Bank have been underwritten by the Bank. These servicing
rights were either originated by mortgage brokers or purchased through various
programs from correspondents or junior correspondents. The costs to acquire
servicing are based on the present value of the estimated future servicing
revenues, net of the expected servicing expenses, for each acquisition. Major
factors impacting the value of servicing rights include contractual service
fee rates, projected mortgage prepayment speed, projected delinquencies and
foreclosures, projected escrow, agency and fiduciary funds to be held in
connection with such servicing and the projected benefit to be realized from
such funds. See "Risk Factors--Risks Related to Mortgage Servicing Rights." At
December 31, 1996, the Bank serviced $169.0 million of loans for others. Any
future growth of the mortgage servicing portfolio will be generated primarily
through the retention of servicing rights on mortgage loans originated or
purchased by the Bank.
44
<PAGE>
The following tables set forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gross loans(1):
Beginning balance........................... $ 64,260 $ 65,065 $ 67,274
Loans originated:
One- to four-family(2).................. 100,745 38,259 34,740
Multi-family............................ 2,976 -- 85
Commercial and land..................... 7,172 -- 266
Other loans............................. 126 358 452
---------- ---------- ----------
Total loans originated................ 111,019 38,617 35,543
Loans purchased........................... 111,534 96,155 37,272
---------- ---------- ----------
Total................................. 286,813 199,837 140,089
Less:
Principal repayments........................ 9,184 6,719 7,440
Sales of loans.............................. 154,620 126,875 65,713
Securitizations of loans.................... 51,944 -- --
Transfer to REO............................. 2,070 1,983 1,871
---------- ---------- ----------
Total loans........................... 68,995 64,260 65,065
Loans held for sale......................... 30,454 21,397 17,146
---------- ---------- ----------
Ending balance loans held for investment...... $ 38,541 $ 42,863 $ 47,919
========== ========== ==========
</TABLE>
- --------
(1) Gross loans includes loans held for investment and loans held for sale.
(2) Includes second trust deeds.
One- to Four-Family Mortgage Lending. The Bank originates and purchases both
fixed-rate and adjustable-rate mortgage loans with maturities up to 30 years,
secured primarily by first trust deeds on one- to four-family residences. The
Bank also originates second trust deeds. During the year ended December 31,
1996, the Bank originated or purchased $65.0 million of second trust deed
loans. Except for loans specifically originated to be held for investment, all
loans originated or purchased through the mortgage financing operation are
originated or purchased for sale in the secondary mortgage market and/or
through securitizations. See "--Loan Sales and Asset Securitizations." As part
of its strategy, the Company intends to continue to expand the volume of
Liberator Series loans which it originates and purchases to market areas
throughout the country to sub-prime borrowers who meet its niche lending
criteria. Loan originations are obtained from the Bank's loan representatives
and their contacts with the local real estate industry, existing or past
customers, members of the local communities and wholesale correspondents and
brokers on a nationwide basis. The Company intends to continue to originate
loans to be held for investment and may originate loans which conform to FNMA
or FHLMC guidelines in order to meet this objective. At December 31, 1996,
$38.5 million, or 55.9%, of the Bank's gross loan portfolio was held for
investment, substantially all of which was secured by properties located in
California.
As part of the Bank's ongoing commitment to the Southern California area,
and more specifically the Inland Empire region, the Bank has committed to lend
and invest $2.5 million, designated as investments in Community Development.
This investment in the local community may be used for (i) lending for home
improvement in low to moderate income areas on one- to four-family residential
properties, (ii) providing redevelopment loans to facilitate the
rehabilitation of residential properties in the low to moderate income areas,
(iii) investing in government bonds which are designated for the purpose of
redeveloping low to moderate income areas, or (iv) participating in programs
that provide housing in low to moderate income areas, including Savings
Association Mortgage Company, Inc. ("SAMCO") type loans.
45
<PAGE>
At December 31, 1996, the Bank's gross loans outstanding were $69.0 million,
of which $54.3 million or 78.7% were one- to four-family residential mortgage
loans. Of this amount, $42.7 million or 78.7% of the one- to four-family
mortgage loans at that date were secured by owner-occupied properties. Of the
one- to four-family residential mortgage loans outstanding at that date, 82.5%
were adjustable-rate loans. Of the Bank's one- to four-family adjustable-rate
mortgage loans, 42.8% are indexed to COFI, 4.5% were indexed to the prime rate
and 52.7% are indexed to LIBOR or U.S. Treasury indices. The Bank has recently
been attempting to reduce the percentage of loans tied to COFI and tie more
adjustable-rate mortgage loans to current market indices, such as LIBOR and
the U.S. Treasury index, which reprice more frequently. Consequently, the Bank
may purchase adjustable-rate mortgage loans indexed to COFI only on a case by
case basis. The Bank offers a number of adjustable-rate mortgage loan programs
with interest rates which adjust semi-annually or annually. A portion of the
Bank's adjustable-rate mortgage loans have introductory rates which are below
the fully indexed rate. At the end of the introductory period, which is
usually between six and 13 months depending on the original agreement, the
interest rate adjusts upward in accordance with the original agreement. The
Bank's adjustable-rate mortgage loans generally provide for periodic and
overall caps on the increase or decrease in interest rate at any adjustment
date and over the life of the loan. The Bank's adjustable-rate mortgage loans
require that any payment resulting from a change in the interest rate be made
simultaneously to both the interest and principal payment in order to result
in full amortization of the loan by the end of the loan term, and thus do not
permit any negative amortization.
Depending on the credit history of the borrower and the Bank's assessment of
the borrower's ability to repay the loan, the Bank's policy is to originate
one- to four-family residential mortgage loans secured by first trust deeds in
amounts up to 90% of the lower of the appraised value or the selling price of
the property securing the loan. The Bank originates consumer-oriented loans
secured primarily by home equity lines of credit and by second trust deeds up
to 125% of the appraised value of the property securing the loan as part of
its Portfolio Series of loans. See "Risk Factors--High Loan to Value Ratios of
Portfolio Series Loans." Mortgage loans originated by the Bank generally
include due-on-sale clauses which provide the Bank with the contractual right
to deem the loan immediately due and payable in the event the borrower
transfers ownership of the property without the Bank's consent. Due-on-sale
clauses are an important means of adjusting the rates on the Bank's fixed-rate
mortgage loan portfolio and the Bank has generally exercised its rights under
these clauses.
Commercial Real Estate and Multi-Family Real Estate Lending. The Bank has,
in the past, originated commercial real estate and multi-family loans
generally secured by properties located in southern California. As part of its
revised lending strategy, the Bank began, in February 1996, to emphasize the
origination of such loans both in its primary market area and nationwide
through its correspondent network on a wholesale basis.
The Bank's current policy is to emphasize the origination of commercial real
estate loans secured by properties used for business purposes such as small
office buildings and light industrial or retail facilities in the $50,000 to
$750,000 range subject to the Bank's loans-to-one borrower limit. The Bank
makes commercial real estate loans to borrowers seeking this type of loan
except for those borrowers who are in bankruptcy, foreclosure, have loans more
than 30 days delinquent or other combinations of weaknesses unacceptable to
the Bank. The Bank's underwriting procedures provide that commercial real
estate loans may be made in amounts up to 70% of the appraised value of the
property depending on the borrower's ability to repay the loan. These loans
are generally adjustable-rate loans, generally will be indexed to LIBOR and
may be made with terms of up to 30 years. The adjustable-rate loans include
prepayment penalties if repaid within the first three to five years. When
evaluating a commercial real estate loan, the Bank considers the net operating
income of the property and the borrower's expertise, credit history and
profitability. The Bank has generally required that the properties securing
commercial real estate loans have debt service coverage ratios (the ratio of
net operating income to debt service) of at least 120%. The largest commercial
real estate loan in the Bank's held for sale portfolio at December 31, 1996
was $559,000 and is secured by a nine unit strip shopping center located in
southern California. The largest commercial real estate loan in the Bank's
held for investment portfolio at December 31, 1996 was $593,000 secured by a
hotel located in San Bernardino, California. At December 31, 1996 the Bank's
commercial real estate and land loan portfolio was $9.7 million, or 14.0% of
total gross loans, $2.4 million of which were held for sale.
46
<PAGE>
In reaching its decision on whether to make a multi-family loan, the Bank
considers a number of factors including: the credit history of the borrower;
the net operating income of the mortgaged premises before debt service and
depreciation; the debt service ratio; and the ratio of loan amount to
appraised value. Pursuant to the Bank's current underwriting policies, a
multi-family adjustable-rate mortgage loan may only be made in an amount up to
75% of the appraised value of the underlying property. In addition, the Bank
generally requires a debt service ratio of 120%. Properties securing a loan
are appraised by an appraiser and title insurance is required on all loans.
Similar to the origination of commercial real estate loans, the Company
intends to target the market for multi-family borrowers seeking loans in the
range of $50,000 to $750,000.
When evaluating a multi-family loan borrower, the Bank considers the
borrower's financial resources and income level and the borrower's experience
in owning or managing similar property. The Bank's underwriting policies
require that the borrower be able to demonstrate the ability to repay the
mortgage and the ability to maintain the property from current rental income.
In making its assessment of the creditworthiness of the borrower, the Bank
generally reviews the financial statements, employment and credit history of
the borrower, as well as other related documentation.
The Bank's multi-family loan portfolio at December 31, 1996 totalled $4.8
million or 6.9% of total gross loans. At December 31, 1996, 41.7% of the
Bank's adjustable-rate multi-family loans were indexed to COFI and 58.3% were
indexed to LIBOR. At December 31, 1996, 2.1% of the Bank's multi-family loan
portfolio was comprised of fixed-rate loans. The Bank's largest multi-family
loan at December 31, 1996, had an outstanding balance of $397,000.
Substantially all commercial real estate and multi-family loans originated
by the Bank since 1994 are held for sale. To date, the Bank has been
substantially restricted in its ability to originate such loans by its level
of available capital. Although the Bank has had the ability to raise the funds
to finance such loans prior to the third quarter of 1996, with the level of
leveraging needed to do so, it would have been unable to maintain its required
capital ratios during the period of origination to sale.
Repayment of multi-family and commercial real estate loans generally is
dependent, in large part, on sufficient income from the property to cover
operating expenses and debt service. The Bank attempts to offset the risks
associated with multi-family and commercial real estate lending by primarily
lending to individuals who will be actively involved in the management of the
property and generally to individuals who have proven management experience,
and by making such loans with lower loan-to-value ratios than one- to four-
family loans. See "Risk Factors--Real Estate Secured Risks."
Consumer and Other Lending. The Bank's consumer and other loans generally
consist of overdraft lines of credit, commercial business loans and unsecured
personal loans. At December 31, 1996, the Bank's consumer and other loan
portfolio was $309,000 or 0.4% of total gross loans.
Underwriting. The main underwriting and quality control functions are
managed through the Bank's loan center in Riverside, California. The Bank
believes that its underwriting process begins with the experience of its
staff, its correspondent relationships and its loan approval procedures. As an
integral part of its lending operation, the Bank ensures that its underwriters
assess each loan application and subject property against the Bank's
underwriting guidelines. All appraisers are required to assess the valuation
of the property pursuant to U.S. Government Property Analysis guidelines and
conduct an economic analysis of the geographic region in which the property is
located.
Personnel in the Bank's loan centers review in the entirety each loan
application submitted for approval. The Bank conducts its own underwriting
review of each loan, including those loans originated for or purchased by it
from its correspondents, other third party originators and brokers. Loan files
are reviewed for completeness, accuracy and compliance with the Bank's
underwriting criteria and applicable governmental regulations. This
underwriting process is intended to assess both the prospective borrower's
ability to repay the loan and the adequacy of the real property security as
collateral for the loan granted, tailored to the general nature of the
47
<PAGE>
Portfolio Series and the Liberator Series loans, respectively. In certain
cases deemed appropriate by the Seller, loans may be made outside of the
Bank's general guidelines with the prior approval of pre-designated senior
officers. Based on the initial review, the personnel in the loan center will
inform the correspondents or brokers of additional requirements that must be
fulfilled to complete the loan file. The Bank strives to process each loan
application received from its network of originators and correspondents as
quickly as possible in accordance with the Bank's loan application approval
procedures. Accordingly, most loan applications receive decisions within 48
hours of receipt and are funded immediately upon receipt of all conditions for
approval of the loan.
Each prospective borrower is required to complete a mortgage loan
application that may include (depending on the program requirement)
information detailing the applicant's liabilities, income, credit history,
employment history and personal information. Since most of the loan
applications are presented through the Bank's network of correspondents, other
third party originators and brokers, the Bank completes an additional credit
report on all applications received. Such report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcies, repossessions or judgments. This credit report is obtained
through a sophisticated computer program that accesses the most appropriate
credit bureau in a particular zip code and combines that information with a
credit risk score.
This application and review procedure is used by the Bank to analyze the
applicant's creditworthiness (i.e., a determination of the applicant's ability
to repay the loan). Creditworthiness is assessed by examination of a number of
factors, including calculating a debt-to-income ratio obtained by dividing a
borrower's fixed monthly debt by the borrower's gross monthly income. Fixed
monthly debt generally includes (i) the monthly payment under any related
prior mortgages (which generally includes an escrow for real estate taxes),
(ii) the monthly payment on the loan applied for and (iii) other installment
debt, including, for revolving debt, the required monthly payment thereon, or,
if no such payment is specified, 5% of the balance as of the date of
calculation. Fixed monthly debt does not include any debt (other than
revolving credit debt) described above that matures within less than 10 months
of the date of calculation.
Several procedures are used to verify information obtained from an
applicant. The applicant's outstanding balance and payment history on any
senior mortgage may be verified by calling the senior mortgage lender. If the
senior mortgage lender cannot be reached by telephone to verify this
information, the Bank or other originator may rely upon information provided
by the applicant, such as a recent statement from the senior lender and
verification of payment, such as cancelled checks, or upon information
provided by national credit bureaus. In order to verify an applicant's
employment status, the Bank or other originator may obtain from the applicant
recent tax returns or other tax forms (e.g., W-2 forms) or current pay stubs
or may telephone the applicant's employer or obtain written verification from
the employer. As in the case of the senior mortgage lender verification
procedures, if the employer will not verify employment history over the
telephone, the Bank or other originator may rely solely on the other
information provided by the applicant. However, the Bank does offer certain
Liberator Series loans at reduced loan-to-value ratios in lieu of documenting
cash flow of the borrower.
Debt to income ratios for Portfolio Series mortgage loans generally do not
exceed 45%, but in certain instances where deemed appropriate by the Bank, the
ratio may go as high as 50%. For Liberator Series mortgage loans, debt to
income ratios may vary depending upon a number of other factors used to
ascertain the creditworthiness of the related borrower.
The Bank has adopted policies that set forth the specific lending
requirements of the Bank as they relate to the processing, underwriting,
property appraisal, closing, and funding of loans. These policies include an
analysis based on five classes of non-conforming loans, designated Ax, A-, B,
C and Cx. Class Ax denominated loans generally relate to borrowers who have no
or limited adverse incidents in their credit histories (typically conforming
loans), whereas Class B, C and Cx loans relate to descending degrees of sub-
prime borrowers. Factors which are considered in evaluating a borrower in this
regard are the presence or absence of a credit history, prior delinquencies in
the payment of mortgage and consumer credit and personal bankruptcies. Class
A-denominated loans generally relate to borrowers with overall good credit who
have had minimal adverse credit issues with less than 25% of their outstanding
credit exhibiting some form of 30-day delinquency in the past 24
48
<PAGE>
months. Class B denominated loans generally relate to borrowers who have
credit delinquencies in their credit histories, are currently past due on
consumer debt payments, have 30-60 day delinquencies related to mortgage
payment or have been at their current employment for less than one year or
have a history of late payments on consumer debt payments and mortgage
payments. Class C borrowers have shown a willingness to pay their obligations
in a timely manner with no more than 70% of their previous obligations
reporting a derogatory credit history and currently no obligation is more than
60 days past due at application. Class Cx denominated loans generally relate
to borrowers who have many adverse incidents in their credit histories and are
generally considered to have a bad credit history. Although in limited
circumstances the Bank will originate Class Cx loans, the vast majority of
loans originated or purchased by the Bank are Class Ax through Class C loans.
Appraisal. All mortgaged properties relating to mortgage loans where
collateral assessment is an integral part of the evaluation process are
appraised by licensed or certified appraisers. All of the appraisals are
either performed or reviewed by the Bank's approved appraisers. Once a loan
application file is complete, the file will be reviewed to determine whether
the property securing the loan should undergo a desk or field review. This
determination will be made based on the loan-to-value ratio to the underlying
property and the type of loan or loan program. If after the initial desk
review, the underwriter requires additional information with regard to the
appraised value of the property, a field review may also be conducted. The
Bank requires the appraiser to address neighborhood conditions, site and
zoning status and the condition and valuation of improvements. Following each
appraisal, the appraiser prepares a report which (when appropriate) includes a
reproduction cost analysis based on the current cost of constructing a similar
building and a market value analysis based on recent sales of comparable homes
in the area. Title insurance policies are required on all first mortgage
liens, with a limited judgment lien report required on all second lien loans
under $100,000.
For Liberator Series loans, because of the sub-prime quality of the
creditworthiness of the borrowers, the evaluation of the value of the property
securing the loans and the ratio of loans secured by such property to its
value become of greater importance in the underwriting process. The specific
procedures and criteria utilized in the appraisal process range from a desk
review, a field review, to a second appraisal, depending on the size of the
loan and its loan-to- value ratio.
The value of the mortgaged property has lesser importance with respect to
the Portfolio Series loans in light of their high mortgaged loan-to-value
ratios. As a result, Portfolio Series loans generally have little or no equity
in the mortgaged property available to repay the loan if it is in default. For
Portfolio Series loans, the Bank accepts the homeowner/mortgagee's "as stated"
value on loans to $35,000. On loans in excess of $35,000 to a maximum of
$50,000, the Bank requires a current tax assessment, a broker price opinion, a
statistical appraisal or a HUD-1 conformed closing statement where purchase of
the subject property has occurred within the previous 12 months. For loans in
excess of $50,000, a drive-by appraisal including comparable analysis on a
FHLMC Form 704 is required.
Qualified property inspection firms are also utilized for annual property
inspections on all properties 45 days or more delinquent. Property inspections
are intended to provide updated information concerning occupancy, maintenance,
current rent levels, and changes in market conditions.
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies of the Bank and delegates authority and responsibility
for loan approvals to the Loan Committee and specified officers of the Bank.
All real estate loans must be approved by a quorum of the designated committee
or by the designated individual or individuals. The following committees,
groups of officers and individual officers are granted the authority to
approve and commit the Bank to the funding of the following categories of
loans: mortgage loans to be held for investment in the amount up to $250,000,
or adjusted FNMA and FHLMC limits, may be approved by two of the Bank's staff
underwriters; mortgage loans to be held for investment in excess of $250,000
and up to $550,000 require loan committee approval; mortgage loans held for
investment in excess of $550,000 require loan committee approval and approval
of the Board of Directors. Mortgage loans held for sale in the amount up to
$550,000, or adjusted FNMA and FHLMC limits, may be approved by two of the
Bank's staff underwriters; mortgage loans held for sale in excess of $550,000
require loan committee and board
49
<PAGE>
approval. Unsecured loans, loans secured by other than real estate, consumer
or commercial, other than savings loans in the amount up to $25,000, may be
approved by two of the Bank's staff underwriters; loans in excess of $25,000
and up to $50,000, require loan committee approval; loans in excess of
$50,000, require loan committee and approval of the Board of Directors.
Savings loans secured by deposits at the Bank may be approved by a staff
underwriter of the Bank. The Bank will not make loans-to-one borrower that are
in excess of regulatory limits. Pursuant to OTS regulations, loans-to-one
borrower cannot exceed 15% of the Bank's unimpaired capital and surplus. At
December 31, 1996, the Bank's loans to one borrower limit equalled $1.6
million. See "Regulation--Federal Savings Institution Regulation--Loans-to-One
Borrower."
Delinquencies and Classified Assets. The Board of Directors generally
performs a monthly review of all delinquent loans 90 days or more past due. In
addition, Management reviews on an ongoing basis all delinquent loans. The
procedures taken by the Bank with respect to delinquencies vary depending on
the nature of the loan and period of delinquency. When a borrower fails to
make a required payment on a loan, the Bank takes a number of steps to have
the borrower cure the delinquency and restore the loan to current status. The
Bank generally sends the borrower a written notice of non-payment within ten
days after the loan is first past due. In the event payment is not then
received, additional letters and phone calls generally are made. If the loan
is still not brought current, the Bank generally sends a notice of the intent
to foreclose 25 days after the loan is first past due. If the borrower does
not cure the delinquency and it becomes necessary for the Bank to take legal
action, which typically occurs after a loan is delinquent at least 30 days or
more, the Bank will commence foreclosure proceedings against any real property
that secures the loan. If a loan remains delinquent on the 45th day, a
property inspection will be made to verify occupancy, determine the condition
of the property and as an attempt to contact the borrower. If a foreclosure
action is instituted and the loan is not brought current, paid in full, or
refinanced before the foreclosure sale, the real property securing the loan
generally is sold at foreclosure. The Bank's procedures for repossession and
sale of consumer collateral are subject to various requirements under state
consumer protection laws.
Regulation and practices in the United States regarding the liquidation of
properties (e.g., foreclosure) and the rights of the mortgagor in default vary
greatly from state to state. Loans originated or purchased by the Bank are
secured by mortgages, deeds of trust, trust deeds, security deeds or deeds to
secure debt, depending upon the prevailing practice in the state in which the
property securing the loan is located. Depending on local law, foreclosure is
effected by judicial action and/or non-judicial sale, and is subject to
various notice and filing requirements. If foreclosure is effected by judicial
action, the foreclosure proceedings may take several months.
In general, the borrower, or any person having a junior encumbrance on the
real estate, may cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation during a statutorily prescribed reinstatement period. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorneys' fees, which may be recovered by a lender.
There are a number of restrictions that may limit the Bank's ability to
foreclose on a property. A lender may not foreclose on the property securing a
junior mortgage loan unless it forecloses subject to each senior mortgage, in
which case the junior lender or purchaser at such a foreclosure sale will take
title to the property subject to the lien securing the amount due on the
senior mortgage. Moreover, if a borrower has filed for bankruptcy protection,
a lender may be stayed from exercising its foreclosure rights. Also, certain
states provide a homestead exemption that may restrict the ability of a lender
to foreclose on residential property.
Federal regulations and the Bank's Classification of Assets Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Bank currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered
"Substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified "Substandard" with the added
50
<PAGE>
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values,
"highly questionable and improbable." Assets classified as "Loss" are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss allowance is not
warranted. Assets which do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "Special
Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, under current OTS policy the Bank is
required to consider establishing a general valuation allowance in an amount
deemed prudent by management. The general valuation allowance, which is a
regulatory term, represents a loss allowance which has been established to
recognize the inherent credit risk associated with lending and investing
activities, but which, unlike specific allowances, has not been allocated to
particular problem assets. When an insured institution classifies one or more
assets, or portions thereof, as "Loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount.
A savings institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS
which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment
of adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation allowances. Generally, the
policy statement recommends that institutions have effective systems and
controls to identify, monitor and address asset quality problems; that
management has analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner; and that management has established
acceptable allowance evaluation processes that meet the objectives set forth
in the policy statement. As a result of the declines in local and regional
real estate market values and the significant losses experienced by many
financial institutions, there has been a greater level of scrutiny by
regulatory authorities of the loan portfolios of financial institutions
undertaken as part of the examination of institutions by the OTS and the FDIC.
While the Bank believes that it has established an adequate allowance for
estimated loan losses, there can be no assurance that regulators, in reviewing
the Bank's loan portfolio, will not request the Bank to materially increase at
that time its allowance for estimated loan losses, thereby negatively
affecting the Bank's financial condition and earnings at that time. Although
management believes that an adequate allowance for estimated loan losses has
been established, actual losses are dependent upon future events and, as such,
further additions to the level of allowances for estimated loan losses may
become necessary.
51
<PAGE>
The Bank's Internal Asset Review Committee reviews and classifies the Bank's
assets quarterly and reports the results of its review to the Board of
Directors. The Bank classifies assets in accordance with the management
guidelines described above. REO is classified as Substandard. The following
table sets forth information concerning loans, REO and total assets classified
as substandard at December 31, 1996. At December 31, 1996, the Bank had
$870,000 of assets classified as Special Mention, $4.4 million of assets
classified as Substandard, no assets classified as Doubtful and $487,000 of
assets classified as Loss. As of December 31, 1996, assets classified as
Special Mention include 6 loans totalling $221,000 secured by one- to four-
family residential properties. At December 31, 1996, the largest loan
classified as Special Mention had a loan balance of $303,000 and is secured by
commercial real estate. As set forth below, as of December 31, 1996, assets
classified as Substandard, Doubtful and Loss include 44 loans totalling $4.2
million.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------------------------------------------------------------------------
TOTAL SUBSTANDARD, DOUBTFUL
LOANS REO AND LOSS ASSETS
--------------------------- ----------------------------- ----------------------------
GROSS NET NUMBER GROSS NET NUMBER OF GROSS NET NUMBER
BALANCE BALANCE(1) OF LOANS BALANCE BALANCE(1) PROPERTIES BALANCE BALANCE(1) OF ASSETS
------- ---------- -------- ------- ---------- ---------- ------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential:
One- to four-family.... $4,073 $3,642 42 $626 $561 6 $4,699 $4,203 48
Commercial and land..... 120 109 1 -- -- -- 120 109 1
Other loans............. 10 -- 1 -- -- -- 10 -- 1
------ ------ --- ---- ---- --- ------ ------ ---
Total loans............ $4,203 $3,751 44 $626 $561 6 $4,829 $4,312 50
====== ====== === ==== ==== === ====== ====== ===
</TABLE>
- --------
(1) Net balances are reduced for specific loss allowances established against
substandard loans and real estate.
52
<PAGE>
Non-Accrual and Past-Due Loans. The following table sets forth information
regarding non-accrual loans, troubled-debt restructurings and REO. There was
one troubled-debt restructured loan within the meaning of SFAS 15, and six REO
properties at December 31, 1996. Until March 31, 1996 it was the policy of the
Bank to cease accruing interest on loans at the time of foreclosure, which
typically occurs when a loan is 45 days past due or possibly longer depending
on the circumstances, which period will not exceed 90 days past due.
Subsequent to March 31, 1996, the Bank adopted a policy to cease accruing
interest on loans 90 days or more past due. For the years ended December 31,
1996, 1995, 1994, 1993 and 1992, respectively, the amount of interest income
that would have been recognized on nonaccrual loans if such loans had
continued to perform in accordance with their contractual terms was $150,000,
$66,000, $106,000, $117,000 and $84,000, none of which was recognized. For the
same periods, the amount of interest income recognized on troubled debt
restructurings was $12,000, $11,000, $10,000, $1,000, and $0.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential real estate:
One- to four-family............... $2,361 $1,305 $1,766 $1,919 $1,606
Multi-family...................... 45 -- -- -- --
Commercial and land................. -- 82 78 197 283
Other loans........................... 10 10 45 62 2
------ ------ ------ ------ ------
Total........................... 2,416 1,397 1,889 2,178 1,891
REO, net(1)........................... 561 827 555 1,772 1,377
------ ------ ------ ------ ------
Total non-performing assets..... $2,977 $2,224 $2,444 $3,950 $3,268
====== ====== ====== ====== ======
Restructured loans.................... $ 131 $ 131 $ -- $ 15 $ --
Classified assets, gross.............. 4,829 3,929 3,951 4,165 4,827
Allowance for estimated loan losses as
a percent of gross loans
receivable(2)........................ 2.36% 1.83% 1.28% 0.65% 0.47%
Allowance for estimated loan losses as
a percent of total non-performing
loans(3)............................. 67.26 84.25 44.04 20.02 16.29
Non-performing loans as a percent of
gross loans receivable(2)(3)......... 3.50 2.17 2.90 3.24 2.87
Non-performing assets as a percent of
total assets(3)...................... 2.86 3.00 3.42 5.05 4.15
</TABLE>
- --------
(1) REO balances are shown net of related loss allowances.
(2) Gross loans includes loans receivable held for investment and loans
receivable held for sale.
(3) Non-performing assets consist of non-performing loans and REO. Prior to
April 1, 1996, non-performing loans consisted of all loans 45 days or more
past due and all other non-accrual loans. Commencing on April 1, 1996,
non-performing loans consisted of all loans 90 days or more past due and
all other non-accrual loans.
53
<PAGE>
The following table sets forth delinquencies in the Bank's loan portfolio as
of the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
------------------------------------- -------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family..... 3 $354 21 $2,361 8 $446 13 $1,286
Multi-family............ -- -- 1 45 -- -- -- --
Commercial and land..... -- -- -- -- -- -- -- --
Other loans............. -- -- 1 10 -- -- 1 10
--- ---- --- ------ --- ---- --- ------
Total................. 3 $354 23 $2,416 8 $446 14 $1,296
=== ==== === ====== === ==== === ======
Delinquent loans to
total gross loans...... 0.51% 3.50% 0.69% 2.01%
==== ====== ==== ======
<CAPTION>
AT DECEMBER 31, 1994
-------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------ ------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family..... 5 $375 8 $1,728
Multi-family............ -- -- -- --
Commercial and land..... -- -- 1 77
Other loans............. -- -- -- --
--- ---- --- ------
Total................. 5 $375 9 $1,805
=== ==== === ======
Delinquent loans to
total gross loans...... 0.58% 2.78%
==== ======
</TABLE>
54
<PAGE>
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance
for loan losses is maintained at an amount management considers adequate to
cover estimated losses in loans receivable which are deemed probable and
estimable. The allowance is based upon a number of factors, including current
economic conditions, actual loss experience and industry trends. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to make additional provisions for loan losses based upon
information available at the time of the review. As of December 31, 1996, the
Bank's allowance for loan losses was 2.36% of gross loans compared to 1.83% as
of December 31, 1995. The Bank had non-accrual loans of $2.4 million and $1.4
million at December 31, 1996 and December 31, 1995, respectively. The Bank
will continue to monitor and modify its allowances for loan losses as
conditions dictate.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods set forth in the table.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period... $ 1,177 $ 832 $ 436 $ 308 $ 299
Provision for loan losses........ 963 1,194 1,306 404 129
Charge-offs:
Real Estate:
One- to four-family.......... 668 736 771 301 60
Multi-family................. 45 -- -- -- --
Commercial and land.......... 11 111 47 -- --
Other loans.................... 10 67 95 -- 60
------- ------- ------- ------- -------
Total...................... 734 914 913 301 120
Recoveries....................... 219 65 3 25 --
------- ------- ------- ------- -------
Balance at end of period......... $ 1,625 $ 1,177 $ 832 $ 436 $ 308
======= ======= ======= ======= =======
Average net loans outstanding.... $72,556 $65,521 $65,566 $68,511 $62,522
Net charge-offs to average net
loans outstanding............... 0.71% 1.30% 1.39% 0.40% 0.19%
</TABLE>
55
<PAGE>
The following table set forth the amount of the Bank's allowance for loan
losses, the percent of allowance for loan losses to total allowance and the
percent of gross loans to total gross loans in each of the categories listed
at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ----------------------------- -----------------------------
PERCENT OF PERCENT OF PERCENT OF
GROSS LOANS GROSS LOANS GROSS LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS
------ ---------- ----------- ------ ---------- ----------- ------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to
four-
family..... $1,462 89.97% 78.67% $1,001 85.05% 84.04% $604 72.60% 82.62%
Multi-
family..... 20 1.23 6.89 14 1.19 3.75 10 1.20 4.12
Commercial
and land... 124 7.63 14.00 143 12.15 11.71 164 19.71 12.50
Other...... 19 1.17 0.44 19 1.61 0.50 54 6.49 0.76
------ ------ ------ ------ ------ ------ ---- ------ ------
Total
allowance
for loan
losses..... $1,625 100.00% 100.00% $1,177 100.00% 100.00% $832 100.00% 100.00%
====== ====== ====== ====== ====== ====== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------
1993 1992
----------------------------- -----------------------------
PERCENT OF PERCENT OF
GROSS LOANS GROSS LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS
------ ---------- ----------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
One- to
four-
family.... $287 65.83% 83.01% $225 73.05% 81.68%
Multi-
family.... 10 2.29 3.41 6 1.95 3.55
Commercial
and land.. 98 22.48 12.47 57 18.51 13.55
Other..... 41 9.40 1.11 20 6.49 1.22
---- ------ ------ ---- ------ ------
Total
allowance
for loan
losses.... $436 100.00% 100.00% $308 100.00% 100.00%
==== ====== ====== ==== ====== ======
</TABLE>
56
<PAGE>
REO
At December 31, 1996, the Bank had $561,000 of REO, net of allowances. Real
estate properties acquired through or in lieu of loan foreclosure are
initially recorded at the lower of fair value or the balance of the loan at
the date of foreclosure through a charge to the allowance for estimated loan
losses. After foreclosure, valuations are periodically performed by management
and an allowance for losses is established by a charge to operations if the
carrying value of a property exceeds its fair value less estimated cost to
sell. It is the policy of the Bank to obtain an appraisal on all REO at the
time of possession and every six months thereafter.
INVESTMENT ACTIVITIES
Federally chartered savings institutions, such as the Bank, have the
authority to invest in various types of liquid assets, including United States
Treasury obligations, securities of various federal agencies, certificates of
deposit of insured banks and savings institutions, bankers' acceptances, and
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment-
grade corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly. Additionally, the Bank must maintain minimum
levels of investments that qualify as liquid assets under OTS regulations. See
"Regulation--Federal Savings Institution Regulation--Liquidity." Historically,
the Bank has maintained liquid assets above the minimum OTS requirements and
at a level considered to be adequate to meet its normal daily activities.
The investment policy of the Bank as established by the Board of Directors
attempts to provide and maintain liquidity, generate a favorable return on
investments without incurring undue interest rate and credit risk, and
complement the Bank's lending activities. Specifically, the Bank's policies
generally limit investments to government and federal agency-backed securities
and non-government guaranteed securities, including corporate debt
obligations, that are investment grade. The Bank's policies provide the
authority to invest in marketable equity securities meeting the Bank's
guidelines and in mortgage-backed securities guaranteed by the U.S. government
and agencies thereof and other financial institutions.
At December 31, 1996, the Bank had $10,000 in its mortgage-backed securities
portfolio, all of which were insured or guaranteed by the FHLMC and are being
held-to-maturity. The Company may increase its investment in mortgage-backed
securities in the future depending on its liquidity needs and market
opportunities. Investments in mortgage-backed securities involve a risk that
actual prepayments will be greater than estimated prepayments over the life of
the security which may require adjustments to the amortization of any premium
or accretion of any discount relating to such instruments thereby reducing the
net yield on such securities. There is also reinvestment risk associated with
the cash flows from such securities. In addition, the market value of such
securities may be adversely affected by changes in interest rates.
During the fourth quarter of 1996, the Bank completed the Securitization
which generated a residual asset in the amount of $5.7 million and $1.6
million of the Reserve Account. At December 31, 1996, the residual asset of
$5.7 million was classified as a trading security. For regulatory reasons, the
residual asset and the Reserve Account will be sold to Life Investment
Holdings immediately following the Reorganization and the Offering. Future
residuals and related assets generated by asset securitizations will be held
by the Bank only until they can be sold to Life Investment Holdings. The
residual asset and any future residuals generated by future asset
securitizations and held by the Company will be marked to market on a
quarterly basis with unrealized gains and losses recorded in operations. See
"Risk Factors--Dependence on Asset Securitizations and Impact on Quarterly
Operating Results" and "--Lending Activities--Loan Sales and Asset
Securitizations."
57
<PAGE>
The following table sets forth certain information regarding the carrying
and fair values of the Bank's securities at the dates indicated. There were no
securities available-for-sale at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Securities:
Held-to-maturity:
U.S. Treasury and other
agency securities......... $8,827 $8,785 $2,689 $2,689 $2,846 $2,838
FHLMC...................... 10 10 11 11 13 13
------ ------ ------ ------ ------ ------
Total securities held-to-
maturity................ $8,837 $8,795 $2,700 $2,700 $2,859 $2,851
====== ====== ====== ====== ====== ======
</TABLE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Bank's securities as
of December 31, 1996. There were no securities available for sale at December
31, 1996.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-------------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE MORE THAN
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS TEN YEARS TOTAL
----------------- --------------------- ---------------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- ---------- --------- ---------- --------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities:
Held-to-maturity:
U.S. Treasury and
other agency
securities........... $5,000 5.33% $ 3,013 5.71% $ -- -- % $ -- -- % $8,013 5.47%
FHLMC................. -- -- -- -- -- -- 10 6.88 10 6.88
------ ---------- ---------- ----- ------
Total held-to-
maturity............ 5,000 5.33 3,013 5.71 -- -- 10 6.88 8,023 5.47
FHLB stock............ 814 -- -- -- -- -- -- -- 814 --
------ ---------- ---------- ----- ------
Total securities
held-to-maturity.... $5,814 $ 3,013 $ -- $ 10 $8,837
====== ========== ========== ===== ======
</TABLE>
SOURCES OF FUNDS
General. Deposits, loan repayments and prepayments, proceeds from sales of
loans, cash flows generated from operations and borrowings are the primary
sources of the Company's funds for use in lending, investing and for other
general purposes. On an on-going basis, the Company explores opportunities to
access credit lines as a source of funds to enable the Company to further
expand its lending activities.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of passbook savings,
checking accounts, money market savings accounts and certificates of deposit.
For the year ended December 31, 1996, certificates of deposit constituted
78.5% of total average deposits. The term of the fixed-rate certificates of
deposit offered by the Bank vary from 90 days to eighteen years and the
offering rates are established by the Bank on a weekly basis. Specific terms
of an individual account vary according to the type of account, the minimum
balance required, the time period funds must remain on deposit and the
interest rate, among other factors. The flow of deposits is influenced
significantly by general economic conditions, changes in money market rates,
prevailing interest rates and competition. At December 31, 1996, the Bank had
$59.4 million of certificate accounts maturing in one year or less. While the
Bank does accept out of area deposits, the Bank's deposits are obtained
predominantly from the areas surrounding its home office. The Bank relies
primarily on customer service and long-standing relationships with customers
to attract and retain these deposits; however, market interest rates and rates
offered by competing financial institutions
58
<PAGE>
significantly affect the Bank's ability to attract and retain deposits. In
order to meet its liquidity needs for the purchase of loans, from time to time
the Bank offers above market interest rates on short term certificate accounts
and may utilize brokered deposits during periods the Bank maintains a well-
capitalized status. The Bank is currently "adequately capitalized" and,
without the prior approval of the regulators, may not accept brokered
deposits. This is not expected to materially impact the Bank as the Bank has
other available sources of funds. At December 31, 1996, the Bank had $2.2
million in brokered deposits. Although the Bank has a significant portion of
its deposits in shorter term certificates of deposit, management monitors
activity on the Bank's certificate of deposit accounts and, based on
historical experience, and the Bank's current pricing strategy, believes that
it will retain a large portion of such accounts upon maturity. Further
increases in short-term certificate of deposit accounts, which tend to be more
sensitive to movements in market interest rates than core deposits, may result
in the Bank's deposit base being less stable than if it had a large amount of
core deposits which, in turn, may result in further increases in the Bank's
cost of deposits.
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net deposits (withdrawals)................... $ 15,700 $ (1,329) $ (8,880)
Interest credited on deposit accounts........ 2,476 3,175 2,561
---------- ---------- ----------
Total increase (decrease) in
deposit accounts.......................... $ 18,176 $ 1,846 $ (6,319)
========== ========== ==========
</TABLE>
At December 31, 1996, the Bank had $20 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
--------------- ------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less................................ $ 8,182 5.47%
Over three through 12 months........................ 10,110 5.75
Over 12 months...................................... 1,701 5.72
------------
Total............................................. $ 19,993 5.63
============
</TABLE>
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------- -------------------------
PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
------- -------- -------- ------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts....... $ 4,401 6.03% 2.09% $ 5,090 7.53% 2.50% $ 7,048 10.13% 2.23%
Money market accounts... 4,233 5.80 2.79 5,493 8.12 2.62 6,512 9.36 2.50
Checking accounts....... 7,048 9.65 1.59 6,434 9.51 1.43 6,180 8.88 1.54
------- ------ ------- ------ ------- ------
Total.................. 15,682 21.48 2.05 17,017 25.16 2.13 19,740 28.37 2.10
Certificate accounts:
Three months or less... 3,994 5.47 5.66 11,570 17.11 5.09 16,952 24.36 3.60
Four through 12
months................ 36,519 50.01 5.23 20,762 30.71 5.44 21,768 31.28 4.19
13 through 36 months... 10,204 13.98 6.25 11,188 16.54 5.93 7,218 10.37 5.11
37 months or greater... 6,616 9.06 6.36 7,088 10.48 6.32 3,913 5.62 5.86
------- ------ ------- ------ ------- ------
Total certificate
accounts.............. 57,333 78.52 5.57 50,608 74.84 5.59 49,851 71.63 4.25
------- ------ ------- ------ ------- ------
Total average deposits.. $73,015 100.00% 4.81% $67,625 100.00% 4.72% $69,591 100.00% 3.64%
======= ====== ======= ====== ======= ======
</TABLE>
59
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1996.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM DECEMBER 31, 1996 AT DECEMBER 31,
----------------------------------------------------------- -----------------------
TWO TO
LESS THAN ONE TO THREE THREE TO FOUR TO MORE THAN
ONE YEAR TWO YEARS YEARS FOUR YEARS FIVE YEARS FIVE YEARS 1996 1995 1994
--------- --------- ------ ---------- ---------- ---------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%............. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 477 $ 9,674
4.01 to 5.00%.......... 2,977 258 200 5 4 60 3,504 5,710 16,098
5.01 to 6.00%.......... 53,983 4,911 495 162 442 152 60,145 32,298 15,282
6.01 to 7.00%.......... 2,020 824 526 416 23 82 3,891 10,676 5,481
7.01 to 8.00%.......... 458 204 479 342 144 263 1,890 2,641 1,487
8.01 to 9.00%.......... -- -- -- -- -- -- -- -- 22
Over 9.01%............. -- -- -- -- -- -- -- -- --
------- ------ ------ ----- ----- ----- ------- ------- -------
Total.................. $59,438 $6,197 $1,700 $ 925 $ 613 $ 557 $69,430 $51,802 $48,044
======= ====== ====== ===== ===== ===== ======= ======= =======
</TABLE>
Borrowings. From time to time the Bank has obtained advances from the FHLB
as an alternative to retail deposit funds and internally generated funds and
may do so in the future as part of its operating strategy. FHLB advances may
also be used to acquire certain other assets as may be deemed appropriate for
investment purposes. These advances are collateralized primarily by certain of
the Bank's mortgage loans and mortgage-backed securities and secondarily by
the Bank's investment in capital stock of the FHLB. See "Regulation--Federal
Home Loan Bank System." Such advances are made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time-to-time in accordance
with the policies of the OTS and the FHLB. At December 31, 1996, the Company
had no outstanding advances from the FHLB. On an on-going basis the Company
explores opportunities to access credit lines to provide additional funds to
expand its lending activities and expects to use a warehouse line of credit
and/or the repurchase finance facilities of a national investment banking firm
to fund loan originations in the future.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding........................ $ 4,259 $ 3,112 $ 1,863
Maximum amount outstanding at any month-end during
the period....................................... 13,900 7,600 7,000
Balance outstanding at end of period.............. -- -- 1,250
Weighted average interest rate during the period.. 5.93% 6.55% 4.87%
</TABLE>
60
<PAGE>
PROPERTIES
As of December 31, 1996, the Bank conducted its business through three
offices. In December 1996, a lease in the amount of $3,500 per month starting
on March 1, 1997 with a term of 36 months was entered into on a property in
the Denver, Colorado metropolitan area, out of which the Company intends to
operate a loan center commencing in the first quarter of 1997. The Bank
entered into a lease, in the amount of $14,000 per year for the first two
years, on a property in Riverside, California in March 1997, which is expected
to house the Company's executive offices following the Reorganization. The
Company expects to open de novo branches or acquire existing branch offices in
the Inland Empire of California and other locations in southern California
during 1997 and, as it expands its loan origination operations throughout the
United States, will open loan origination centers on an as-needed basis. The
opening of additional offices is dependent upon the Company's loan
originations. There can be no assurance that the Company will be able to
expand its loan originations and/or open additional offices.
<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE
YEAR OF PROPERTY OR
LEASED LEASED DATE OF LEASEHOLD
OR OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1996
-------- ------ -------- ---------- -----------------
<S> <C> <C> <C> <C>
1598 E. Highland Avenue Leased 1986 2001 $261,000
San Bernardino, CA
4110 Tigris Way Owned 1996 -- $547,000
Riverside, CA
7751 Belfort Parkway Leased 1996 1997 --
Suite 150
Jacksonville, FL
161 McKinley Street Leased 1996 -- (1) --
Corona, CA
Parker Place Leased 1997 2000 --
Aurora, CO(2)
</TABLE>
- --------
(1) The property in Corona is rented on a month-to-month basis.
(2) Leaseheld improvements are to be made on the Colorado office.
SUBSIDIARIES
As of December 31, 1996, the Bank had no subsidiaries. For a discussion of
the Company's restructuring plan and establishment of subsidiaries, see
"Prospectus Summary" and "--Restructuring."
LEGAL PROCEEDINGS
The Company and the Bank are not involved in any pending legal proceedings
other than legal proceedings occurring in the ordinary course of business.
Management believes that none of these legal proceedings, individually or in
the aggregate, will have a material adverse impact on the results of
operations or financial condition of the Company and the Bank.
PERSONNEL
As of December 31, 1996, the Bank had 137 full-time employees and 7 part-
time employees. The employees are not represented by a collective bargaining
unit and the Bank considers its relationship with its employees to be good.
See "Board of Directors and Management of the Bank--Benefits" for a
description of certain compensation and benefit programs offered to the
Company's employees.
61
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank will report their income on a calendar
year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company. The statute of limitations has closed
for federal tax purposes through the 1992 tax year and for California
Franchise Tax Board purposes through the 1991 tax year.
Bad Debt Reserve. Historically, savings institutions such as the Bank which
met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrifts") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income. The Bank's deduction with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on
the Bank's actual loss experience, or a percentage equal to 8% of the Bank's
taxable income, computed with certain modifications and reduced by the amount
of any permitted addition to the non-qualifying reserve.
In August, 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base
year (last taxable year beginning before January 1, 1988). The Bank has
previously recorded a deferred tax liability equal to the bad debt recapture
and as such, the new rules will have no effect on net income or federal income
tax expense.
For tax years beginning after December 31, 1995, the Bank is permitted to
maintain a tax reserve equal to the greater of the base year reserve of the
reserve calculated using the experience method available to small (average
assets less than $500 million) commercial banks as of the year of the change.
Any excess of the reserve as of the year of the change over the allowable
reserves must be recaptured into taxable income evenly over a period of six
years beginning in the 1996 taxable year subject to the suspension rule
described below. As of December 31, 1996, the Bank has an excess amount
subject to recapture equal to $330,000.
The experience method allows an institution to maintain a bad debt reserve
equal to the ratio of the net charge-offs for the last six years divided by
total loans for those years multiplied by the total loans outstanding at the
end of the current year. However, this method permits the institution to
maintain a minimum reserve balance equal to its reserve balance at the end of
its base year, adjusted for declines in the loan portfolio for the base year.
Although deductions are allowed for the calculated addition to the bad debt
reserve, net recoveries are not taken into taxable income. The Bank is
currently using the "6-year moving average" method to calculate its bad debt
reserve. The Bank anticipates that it will continue this practice.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for
such losses exceeds the amount that would have been allowed under the
experience method, or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will
be included in the Bank's taxable income. Non-dividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock, and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve. Thus, any dividends to the Company that would reduce amounts
appropriated to the Bank's bad debt reserve and deducted for federal income
tax purposes would create a tax liability for the Bank. The amount of
additional taxable income created from an Excess Distribution is an amount
that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the
62
<PAGE>
Bank makes a "non-dividend distribution," then approximately one and one-half
times the amount so used would be includable in gross income for federal
income tax purposes, assuming a 34% corporate income tax rate (exclusive of
state and local taxes). See "Regulation" and "Dividend Policy" for limits on
the payment of dividends of the Bank. The Bank does not intend to pay
dividends that would result in a recapture of any portion of its bad debt
reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be
offset by net operating loss carryovers of which the Bank currently has none.
AMTI is increased by an amount equal to 75% of the amount by which the Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). In addition, for
taxable years beginning after December 31, 1986 and before January 1, 1996, an
environmental tax of .12% of the excess of AMTI (with certain modifications)
over $2.0 million is imposed on corporations, including the Bank, whether or
not an Alternative Minimum Tax ("AMT") is paid. The Bank does not expect to be
subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction
is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company or the Bank own more than 20% of the
stock of a corporation distributing a dividend then 80% of any dividends
received may be deducted.
STATE AND LOCAL TAXATION
State of California. The California franchise tax rate applicable to the
Bank equals the franchise tax rate applicable to corporations generally, plus
an "in lieu" rate approximately equal to personal property taxes and business
license taxes paid by such corporations (but not generally paid by banks or
financial corporations such as the Bank); however, the total tax rate cannot
exceed 11.3%. Under California regulations, bad debt deductions are available
in computing California franchise taxes using a three or six year weighted
average loss experience method. The Company, as a savings and loan holding
company commercially domiciled in California, will generally be treated as a
financial corporation and subject to the general corporate tax rate plus the
"in lieu" rate as discussed previously for the Bank.
State of Delaware Taxation. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
63
<PAGE>
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The
Bank is a member of the FHLB System. The Bank's deposit accounts are insured
up to applicable limits by the SAIF managed by the FDIC. The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to test
the Bank's compliance with various regulatory requirements. This regulation
and supervision establishes a comprehensive framework of activities in which
an institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank or their operations. The Company, as a
savings and loan holding company, will also be required to file certain
reports with, and otherwise comply with the rules and regulations of the OTS
and the SEC under the federal securities laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a
material impact on the Company, the Bank, their operations, or the
Reorganization. Congress is expected to consider in 1997 the elimination of
the federal thrift charter and the abolishment of the OTS. The results of such
consideration, including possible enactment of legislation, is uncertain.
Therefore, the Bank is unable to determine the extent to which the results of
such consideration or possible legislation, if enacted, would affect its
business. See "Risk Factors--Financial Institution Regulation and Possible
Legislation."
Certain of the regulatory requirements applicable to the Bank and to the
Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings associations set
forth in this Prospectus do not purport to be complete descriptions of such
statutes and regulations and their effects on the Bank and the Company and is
qualified in its entirety by reference to such statutes and regulations.
FEDERAL SAVINGS INSTITUTION REGULATION
Business Activities. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal
associations may engage. In particular, many types of lending authority for
federal associations, e.g., commercial, non-residential real property loans
and consumer loans, are limited to a specified percentage of the
institutions's capital or assets.
Loans-to-One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial
instruments and bullion. At December 31, 1996, the Bank's general limit on
loans-to-one borrower was $1.6 million. At December 31, 1996, the Bank's
largest aggregate amount of loans-to-one borrower consisted of $710,000.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings association is required to maintain at least 65% of
its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift
investments" (primarily residential mortgages and related investments,
including certain mortgage-backed and related securities) in at least 9 months
out of each 12 month
64
<PAGE>
period. A savings association that fails the QTL test must either convert to a
bank charter or operate under certain restrictions. As of December 31, 1996,
the Bank maintained 97.3% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business
loans may be considered as "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations upon
all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
institutions, which are based primarily on an institution's capital level. An
institution that exceeds all fully phased-in regulatory capital requirements
before and after a proposed capital distribution ("Tier 1 Bank") and has not
been advised by the OTS that it is in need of more than normal supervision,
could, after prior notice to, but without the approval of the OTS, make
capital distributions during a calendar year equal to the greater of: (i) 100%
of its net earnings to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar
year; or (ii) 75% of its net earnings for the previous four quarters. Any
additional capital distributions would require prior OTS approval. In the
event the Bank's capital fell below its capital requirements or the OTS
notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the
OTS could prohibit a proposed capital distribution by any institution, which
would otherwise be permitted by the regulation, if the OTS determines that
such distribution would constitute an unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a
specified percentage (currently 5%) of its net withdrawable deposit accounts
plus short-term borrowings. OTS regulations also require each savings
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
deposit accounts and borrowings payable in one year or less. Monetary
penalties may be imposed for failure to meet these liquidity requirements. The
Bank's average liquidity ratio for the year ended December 31, 1996 was 8.5%,
which exceeded the applicable requirements. The Bank has never been subject to
monetary penalties for failure to meet its liquidity requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Assessments. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general
assessment, paid on a semi-annual basis, is based upon the savings
institution's total assets, including consolidated subsidiaries, as reported
in the Bank's latest quarterly Thrift Financial Report. The assessments paid
by the Bank for the year ended December 31, 1996 totalled $27,000.
Branching. OTS regulations permit federally chartered savings associations
to branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations.
For a discussion of the impact of proposed legislation, see "Risk Factors--
Financial Institution Regulation and Possible Legislation."
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish)
is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section
23A restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and
also limits the aggregate amount of transactions with all affiliates to 20% of
the savings institution's capital and surplus. Certain transactions with
affiliates are required to be secured by collateral in an amount and of a type
described in Section 23A and the purchase of low quality assets from
affiliates is generally prohibited. Section 23B generally requires that
certain transactions with affiliates, including loans and asset purchases,
must be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies.
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Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate
in wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive
or cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions before
capital becomes impaired. The Guidelines address internal controls and
information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; asset quality;
earnings; and compensation, fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital
standard, a 3% leverage (core capital) ratio and an 8% risk based capital
standard. Core capital is defined as common stockholder's equity (including
retained earnings), certain non-cumulative perpetual preferred stock and
related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights and
credit card relationships. The OTS regulations require that, in meeting the
leverage ratio, tangible and risk-based capital standards institutions
generally must deduct investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. In addition, the OTS prompt
corrective action regulation provides that a savings institution that has a
leverage capital ratio of less than 4% (3% for institutions receiving the
highest CAMEL examination rating) will be deemed to be "undercapitalized" and
may be subject to certain restrictions. See "--Prompt Corrective Regulatory
Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, including certain off-balance
sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by
the OTS capital regulation based on the risks the OTS believes are inherent in
the type of asset. The components of core capital are equivalent to those
discussed earlier under the 3% leverage standard. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and, within specified limits, the allowance
for loan and lease losses. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its regulatory
capital rule. The final interest rate risk rule also adjusts the risk-
weighting for certain mortgage derivative securities. Under the rule, savings
associations with "above normal" interest rate risk exposure would be subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. A savings association's interest rate risk is
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measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct
an interest rate component in calculating its total capital under the risk-
based capital rule. The interest rate risk component is an amount equal to
one-half of the difference between the institution's measured interest rate
risk and 2%, multiplied by the estimated economic value of the association's
assets. That dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement. Under the
rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings association with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise. The
rule also provides that the Director of the OTS may waive or defer an
association's interest rate risk component on a case-by-case basis. The OTS
has postponed the date that the component will first be deducted from an
institution's total capital to provide it with an opportunity to review the
interest rate risk approaches taken by the other federal banking agencies.
At December 31, 1996, the Bank met each of its capital requirements, in each
case on a fully phased-in basis. Due to the fluctuations in the Bank's total
assets as a result of its mortgage banking operations, the Bank has been
required by the OTS since the Bank's examination completed August 9, 1996 to
compute its regulatory capital ratios based upon the higher of (1) the average
of total assets based on month-end results; or (2) total assets of the quarter
end. Total assets at the end of the quarter ended December 31, 1996 were
higher than the month end averages, and therefore the OTS capital averaging
requirement did not have an effect on the Bank's regulatory capital ratios.
See "Capitalization" for a table which sets forth in terms of dollars and
percentages the OTS tangible, leverage and risk-based capital requirements,
the Bank's historical amounts and percentages at December 31, 1996 and pro
forma capitalization of the Company based upon the issuance of the shares
within the Estimated Price Range.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital of less
than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has a total
risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of less
than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of
a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
INSURANCE OF DEPOSIT ACCOUNTS
Deposits of the Bank are presently insured by the SAIF. Both the SAIF and
the BIF (the deposit insurance fund that covers most commercial bank deposits)
are statutorily required to be recapitalized to a 1.25% of insured reserve
deposits ratio. Until recently, members of the SAIF and BIF were paying
average deposit insurance
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premiums of between 24 and 25 basis points. The BIF met the required reserve
in 1995, whereas the SAIF was not expected to meet or exceed the required
level until 2002 at the earliest. This situation was primarily due to the
statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the
predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a
special one-time assessment on SAIF member institutions, including the Bank,
to recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a
special assessment of 65.7 basis points on SAIF assessable deposits held as of
March 31, 1995, payable November 27, 1996 (the "SAIF Special Assessment"). The
SAIF Special Assessment was recognized by the Bank as an expense in the
quarter ended September 30, 1996 and is generally tax deductible. The SAIF
Special Assessment recorded by the Bank amounted to $448,000 on a pre-tax
basis and $256,000 on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits
will be assessed for FICO payment of 1.3 basis points, while SAIF deposits
will pay 6.48 basis points. Full pro rata sharing of the FICO payments between
BIF and SAIF members will occur on the earlier of January 1, 2000 or the date
the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF
will be merged on January 1, 1999, provided no savings associations remain as
of that time.
As a result of the Funds Act, the FDIC recently voted to effectively lower
SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range
comparable to that of BIF members. However, SAIF members will continue to make
the FICO payments described above. The FDIC also lowered the SAIF assessment
schedule for the fourth quarter of 1996 to 18 to 27 basis points. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated or whether the BIF
and SAIF will eventually be merged.
The Bank's assessment rate for the year ended December 31, 1996 was 26 basis
points and the premium paid for this period was $622,000, including the SAIF
Special Assessment. A significant increase in SAIF insurance premiums would
likely have an adverse effect on the operating expenses and results of
operations of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or
the OTS. The management of the Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
THRIFT RECHARTERING LEGISLATION
The Funds Act provides that the BIF and SAIF will merge on January 1, 1999
if there are no more savings associations as of that date. That legislation
also requires that the Department of Treasury to submit a report to Congress
by March 31, 1999 that makes recommendations regarding a common financial
institutions charter, including whether the separate charters for thrifts and
banks should be abolished. Various proposals to eliminate
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the federal thrift charter, create a uniform financial institutions charter
and abolish the OTS were introduced in the 104th Congress. It is likely that
legislation will be introduced in the new Congress addressing the elimination
of the savings association charter. However, the Bank is unable to predict
whether such legislation would be enacted and, if so, the extent to which the
legislation would restrict or disrupt its operations.
TRUTH IN LENDING
The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder
requires lenders, such as the Bank, to provide a disclosure statement to
borrowers which explains the terms and cost of credit, including, but not
limited to, the amount financed, finance charges, other charges and prepayment
terms. Regulation Z applies to a wide variety of lending transactions,
including mortgage loans and credit cards. The TILA provides borrowers with a
three day right to cancel certain credit transactions, including residential
mortgage loans and other loans where a customer pledges his or her principal
dwelling as security for the loan. Failure to comply with the provisions of
the TILA could subject a lender to criminal and civil sanctions.
The TILA was amended effective October 1, 1995 to impose new disclosure
requirements and substantive limitations on closed-end home equity mortgage
loans bearing rates or fees above a certain percentage or amount ("TILA
Amendments"). Specifically, the TILA Amendments applies to loans secured by a
customer's principal dwelling (other than a residential mortgage loan to
acquire or construct a borrower's principal dwelling, a reverse mortgage
transaction or home equity lines of credit) with (i) an annual percentage rate
which exceeds by more than ten percentage points the yield on U.S. Treasury
securities having comparable periods of maturity; or (ii) total loan
origination fees and other fees payable by the customer will exceed the
greater of 8% of the loan amount or $400 ("Covered Loans"). Additional
disclosures are required to be provided to the customer under the TILA
Amendments for all Covered Loans not less than three business days prior to
the consummation of the transaction.
OTHER LENDING LAWS
The Bank is also required to comply with the Equal Credit Opportunity Act of
1974, as amended ("ECOA"), which prohibits creditors from discriminating
against applicants on certain prohibited bases, including race, color,
religion, national origin, sex, age or marital status. Regulation B
promulgated under ECOA restricts creditors from obtaining certain types of
information from loan applicants. Among other things, it also requires certain
disclosures by the lender regarding consumer rights and requires lenders to
advise applicants of the reasons for any credit denial. In instances where the
applicant is denied credit or the rate or charge for loans increases as a
result of information obtained from a consumer credit agency, another statute,
the Fair Credit Reporting Act of 1970, as amended, requires lenders to supply
the applicant with the name and address of the reporting agency. In addition,
the Bank is subject to the Fair Housing Act and regulations thereunder, which
broadly prohibit certain discriminatory practices in connection with the
Bank's business. The Bank is also subject to the Real Estate Settlement
Procedures Act of 1974, as amended, and the Home Mortgage Disclosure Act.
In addition, the Bank is subject to various other Federal and state laws,
rules and regulations governing, among things, the licensing of, and
procedures which must be followed by, mortgage lenders and services, and
disclosures which must be made to consumer borrowers. Failure to comply with
such laws, as well as with the laws described above, may result in civil and
criminal liability.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and
hold shares of capital stock in the FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Bank was in compliance
with this
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requirement with an investment in FHLB stock at December 31, 1996, of
$814,000. FHLB advances must be secured by specified types of collateral and
all long-term advances may only be obtained for the purpose of providing funds
for residential housing finance. At December 31, 1996, the Bank had no
outstanding FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest
on advances to their members. For the years ended December 31, 1996, 1995 and
1994, dividends from the FHLB to the Bank amounted to $34,000, $30,000 and
$20,000, respectively. If dividends were reduced, the Bank's net interest
income would likely also be reduced. Further, there can be no assurance that
the impact of recent or future legislation on the FHLBs will not also cause a
decrease in the value of the FHLB stock held by the Bank.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be
maintained against aggregate transaction accounts as follows: for accounts
aggregating $52.0 million or less (subject to adjustment by the Federal
Reserve Board) the reserve requirement is 3%; and for accounts greater than
$52.0 million, the reserve requirement is $1.6 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that
portion of total transaction accounts in excess of $52.0 million. The first
$4.3 million of otherwise reservable balances (subject to adjustment by the
Federal Reserve Board) are exempted from the reserve requirements. The Bank is
in compliance with the foregoing requirements. Because required reserves must
be maintained in the form of either vault cash, a non-interest-bearing account
at a Federal Reserve Bank or a pass-through account as defined by the Federal
Reserve Board, the effect of this reserve requirement is to reduce the Bank's
interest-earning assets. FHLB System members are also authorized to borrow
from the Federal Reserve "discount window," but Federal Reserve Board
regulations require institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
HOLDING COMPANY REGULATION
The Company will be a non-diversified unitary savings and loan holding
company within the meaning of the HOLA. As such, the Company will be required
to register with the OTS and will be subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution. The Bank must notify the OTS 30 days before declaring any
dividend to the Company.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities
in which it may engage, provided that the Bank continues to be a QTL. See "--
Federal Savings Institution Regulation--QTL Test" for a discussion of the QTL
requirements. Upon any non-supervisory acquisition by the Company of another
savings association, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company ("BHC") Act, subject to the
prior approval of the OTS, and to other activities authorized by OTS
regulation. Previously proposed legislation would have treated all savings and
loan holding companies as bank holding companies and limit the activities of
such companies to those permissible for bank holding companies. See "Risk
Factors--Financial Institution Regulation and Possible Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5%
of the voting stock of another savings institution, or holding company
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thereof, without prior written approval of the OTS; and from acquiring or
retaining, with certain exceptions, more than 5% of a non-subsidiary holding
company or savings association. The HOLA also prohibits a savings and loan
holding company from acquiring more than 5% of a company engaged in activities
other than those authorized for savings and loan holding companies by the
HOLA; or acquiring or retaining control of a depository institution that is
not insured by the FDIC. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and
managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the insurance funds,
the convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition
of a savings institution in another state if the laws of the state of the
target savings institution specifically permit such acquisitions. The states
vary in the extent to which they permit interstate savings and loan holding
company acquisitions.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement on Form S-1
under the Securities Act for the registration of the Common Stock to be issued
in the Offerings. Upon the effectiveness of the registration statement the
Company's Common Stock will be registered with the SEC under the Exchange Act.
The Company will then be subject to the information, proxy solicitation,
insider trading restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Offerings does not cover the resale of such shares. Shares of
the Common Stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the
Company who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i)
1% of the outstanding shares of the Company or (ii) the average weekly volume
of trading in such shares during the preceding four calendar weeks. Provision
may be made in the future by the Company to permit affiliates to have their
shares registered for sale under the Securities Act under certain
circumstances.
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THE BOARD OF DIRECTORS AND MANAGEMENT OF THE COMPANY
The following table sets forth certain information regarding executive
officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD WITH COMPANY
---- ------ -----------------------------
<S> <C> <C>
Daniel L. Perl 47 Director, President and Chief
Executive Officer
L. Bruce Mills, Jr. 39 Executive Vice President, Chief
Financial Officer, Treasurer and
Corporate Secretary
Ronald G. Skipper 56 Chairman of the Board
Richard C. Caldwell 56 Director
John D. Goddard 57 Director
Milton E. Johnson 59 Director
</TABLE>
- --------
(1) As of December 31, 1996.
BIOGRAPHICAL INFORMATION
Daniel L. Perl joined the Bank in 1994 as the Senior Vice President and
Chief Loan Officer. Mr. Perl was recently promoted to the position of
President and Chief Executive Officer of the Bank. Mr. Perl has over twenty-
two years of continuous experience in real estate finance. Prior to joining
the Bank, Mr. Perl served in management positions with various mortgage
finance companies and banking institutions. From 1991 to 1993, Mr. Perl was a
Senior Vice President with WCP Trading Corporation.
L. Bruce Mills, Jr. joined the Bank in 1986. Mr. Mills currently serves as
the Executive Vice President and Chief Financial Officer of the Bank. Prior to
joining the Bank, Mr. Mills served as an examiner with the Federal Home Loan
Bank of San Francisco.
Ronald G. Skipper is the Chairman of the Board of the Company and has served
as a Director of the Bank since 1983. Mr. Skipper is a self-employed attorney
and has been practicing law for 32 years.
Richard C. Caldwell is the Chairman of the Board of the Bank. Mr. Caldwell
was elected to the Board of Directors of the Bank in 1983 and has served as
Chairman of the Board since 1983. Mr. Caldwell has been a partner of Caldwell
& Moreland Insurance brokers since January 1995. Since February 1982, Mr.
Caldwell has been President and sole owner of Caldwell & Hunt Insurance
Brokers.
John D. Goddard has served as a Director of the Bank since 1988. Mr. Goddard
is a Certified Public Accountant. Mr. Goddard has been President of Goddard
Accountancy Corporation since 1962.
Milton E. Johnson has served as a Director of the Bank since 1983. Mr.
Johnson has been the President of Home Lumber Company, a building materials
supplier, since 1960. In addition, Mr. Johnson has been a partner in Control
Nevada Hay Company since 1987.
In addition to the foregoing, Robert K. Riley has been nominated to become a
member of the Board following the Reorganization. Mr. Riley is the co-founder
and Chief Executive Officer of Millenium Asset Management, L.L.C., an SEC-
registered investment advisory firm, and also serves on the Board of Directors
of MBIC, an American subsidiary of a large Belgian bank. From 1992 to 1996,
Mr. Riley worked for the Millenium Group, a consulting firm focused on
designing asset securitization systems and developing risk management programs
for European banks.
The Board of Directors of the Company is divided into three classes, each of
which contains approximately one-third of the Board. The directors shall be
elected by the stockholders of the Company for staggered three year terms, or
until their successors are elected and qualified. One class of directors,
consisting of Messrs. Richard C. Caldwell and Milton E. Johnson, has a term of
office expiring at the first annual meeting of stockholders; a second class,
consisting of Messrs. Ronald G. Skipper and Daniel L. Perl, has a term of
office expiring at the second annual meeting of stockholders; and a third
class, consisting of Mr. John D. Goddard, has a term of office expiring at the
third annual meeting of stockholders.
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The officers of the Company are elected annually and hold office until their
respective successors have been elected and qualified or until death,
resignation or removal by the Board of Directors. Since the formation of the
Company, none of the executive officers or other personnel has received
remuneration from the Company.
COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMPANY
The Company has established an Audit Committee consisting of Messrs.
Skipper, Caldwell and Goddard and a Personnel/Compensation Committee
consisting of Messrs. Skipper, Goddard, Johnson and Perl.
DIRECTORS' COMPENSATION
The directors of the Company who are not also employees of the Company will
receive a monthly retainer for acting in such capacity following the
Reorganization. The monthly retainer for the Chairman of the Board shall be
$2,000 while the fee for other non-employee directors will be $1,500. In
addition, upon the Reorganization each non-employee director will receive fees
for each month preceding the Reorganization starting with February 1997 for
services performed on behalf of the Company.
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THE BOARD OF DIRECTORS AND MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) POSITION(S) HELD WITH THE BANK SINCE EXPIRES
---- ------ ------------------------------ -------- -------
<S> <C> <C> <C> <C>
Richard C. Caldwell 56 Chairman of the Board 1983 1997
John D. Goddard 57 Director 1988 1999
Milton E. Johnson 59 Director 1983 1997
Edgar C. Keller 75 Director 1983 1999
Daniel L. Perl(2) 47 Director, President and 1996 1997
Chief Executive Officer
Ronald G. Skipper 56 Director 1983 1998
Louis E. Yeager 76 Director 1983 1998
</TABLE>
- --------
(1) As of December 31, 1996
(2) Mr. Perl was elected by the Board of Directors to fill the vacancy created
by the resignation of a director in June 1996.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officers of the Bank who are not also directors.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD WITH THE BANK
---- ------ ------------------------------
<S> <C> <C>
L. Bruce Mills, Jr. 39 Executive Vice President, Secretary and Treasurer
Joseph R.L. Passerino 42 Senior Vice President
Mary E. Darter 36 Senior Vice President
</TABLE>
- --------
(1) As of December 31, 1996.
BIOGRAPHICAL INFORMATION
DIRECTORS AND EXECUTIVE OFFICERS OF THE BANK WHO ARE NOT DIRECTORS AND
EXECUTIVE OFFICERS OF THE COMPANY
Edgar C. Keller has been a Director of the Bank since 1983. Mr. Keller was a
partner with the law firm of Keller & Holt from 1963 until 1994. After such
time, Mr. Keller was a partner with the law firm of Keller & Keller until his
retirement in 1996.
Louis E. Yeager has served as a Director of the Bank since 1983. Mr. Yeager
was the District Manager for Shell Oil Company prior to his retirement in
March 1974. Mr. Yeager currently serves on the Board of the San Bernardino
United School District.
Joseph R. L. Passerino joined the Bank in February 1994. He was named senior
vice president in August 1996 and is responsible for all loans originated by
the Bank nationally. Prior to that, from 1988 to 1994, Mr. Passerino was in
charge of loan production for St. Thomas Capital Corp.
Mary E. Darter joined the Bank in March 1994. She was named senior vice
president in August 1996. Ms. Darter is primarily responsible for mortgage
financing operations. Prior to joining the Bank, Ms. Darter was employed by
Imperial Credit Industries/Southern Pacific Thrift and Loan from 1991 to 1994
in charge of the warehouse line of credit division and bulk acquisitions.
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<PAGE>
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK
The Board of Directors meets on a monthly basis and may have additional
special meetings upon the request of the Chairman of the Board. During the
year ended December 31, 1996, the Board of Directors had 12 regular meetings
and 6 special meetings. No director attended fewer than 75% of the total
number of Board meetings held during this period.
The Board of Directors of the Bank has established the following Board and
management committees:
The Audit Committee consists of Messrs. Keller, Goddard and Yeager. The
Bank's Internal Auditors report to this committee. The purpose of this
committee is to review the audit function and management actions regarding the
implementation of audit findings. The committee also maintains a liaison with
the outside auditors and reviews the adequacy of internal controls. The
committee meets quarterly or as necessary.
The Loan Committee consists of Messrs. Skipper, Caldwell, Johnson and Perl.
This Committee exercises the authority of the Board pertaining to loan matters
and approves or rejects all loans presented by management. This Committee also
reviews the workout solutions of problem loans, and approves the
classification of assets and the establishment of adequate valuation
allowances. The Committee meets monthly.
The Executive Committee consists of Messrs. Caldwell, Goddard and Skipper.
This committee exercises the authority of the Board of Directors with respect
to matters requiring action between meetings of the Board of Directors. Any
actions by this committee require subsequent ratification by the Board of
Directors at the next regular meeting. The Executive Committee meets as
needed.
The Investment Committee consists of Messrs. Goddard, Caldwell, Johnson and
Mills. The purpose of this committee is to adopt and maintain policies
regarding the investment portfolio and to monitor the interest rate and the
credit risks of liquidity portfolio investments. This committee meets semi-
annually or as needed.
The Personnel/Compensation Committee consists of Messrs. Yeager, Keller,
Johnson, Caldwell, Goddard and Perl. This Committee is responsible for all
matters regarding compensation and benefits, hiring, termination and
affirmative action issues. The committee meets semi-annually or as needed.
The Asset Classification Committee consists of Messrs. Mills and Perl. The
purpose of this committee is to review the Bank's loan portfolio and monitor
the classification of assets. This committee meets quarterly.
The Bank also maintains a Budget Committee consisting of Messrs. Caldwell,
Goddard, Yeager and Mills.
DIRECTORS' COMPENSATION
Directors' Fees. Directors of the Bank who are not also employees of the
Bank receive a retainer of $950 per month for serving on the Bank's Board of
Directors except the Chairman of the Board who receives $1200 per month.
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table shows, for the year ended
December 31, 1996, the cash compensation paid by the Bank, as well as certain
other compensation paid or accrued for that year, to the chief executive
officer and the most highly compensated executive officer of the Bank other
than the chief executive officer in fiscal year 1996 ("Named Executive
Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
COMPENSATION AWARDS PAYOUTS
------------------------------------ --------------------- -------
RESTRICTED SECURITIES
OTHER STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
POSITIONS(1) YEAR SALARY($) BONUS($) ($)(2) ($) (#) ($) ($)
------------------ ---- --------- ---------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Daniel L. Perl.......... 1996 $75,000 $1,464,374(3) $ -- $ -- 64,320(4) $ -- $ 2,370(5)
President and Chief
Executive Officer
Nora Vineyard........... 1996 76,083 -- -- -- -- -- 88,300(6)
President and Chief
Executive Officer
Joseph R.L. Passerino... 1996 29,000 217,199 -- -- 4,180(7) -- 2,300(5)
Senior Vice President
</TABLE>
- -------
(1) Ms. Vineyard retired from the position of President and Chief Executive
Officer in July 1996 at which time Mr. Perl was elected to fill these
positions.
(2) For the fiscal year ending in 1996, there were no (a) perquisites over the
lesser of $50,000 or 10% of the individual's total salary and bonus for
the year; (b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term incentive
plans prior to settlement or maturation; (d) tax payment reimbursements;
or (e) preferential discounts on stock.
(3) Includes $1,079,185 earned by Mr. Perl during 1996 which was paid in 1997.
See "--Previous Employment Agreement."
(4) 192,960 shares as adjusted for the Reorganization. See "--Stock Option
Plan."
(5) Represents amount contributed by the Bank pursuant to the Bank's 401(k)
Plan.
(6) Includes $500 contributed by the Bank pursuant to the Bank's 401(k) Plan.
Also includes a cash payment of $60,000 plus title to a 1996 automobile
with a market value of $27,800 pursuant to an agreement reached between
Mrs. Vineyard and the Bank upon her retirement from her position with the
Bank. See "--Consultation Agreement."
(7) 12,540 shares as adjusted for the Reorganization. See "--Stock Option
Plan."
PREVIOUS EMPLOYMENT AGREEMENT
The Bank entered into an employment agreement with Mr. Perl (the
"Executive") on December 31, 1993. This employment agreement was intended to
ensure that the Bank would be able to maintain a stable and competent loan
operation. The continued success of the Bank depends to a significant degree
on the skills and competence of Mr. Perl. The employment agreement provided
for a one year term and could be extended for an additional three year period.
The employment agreement provided that the Executive's base salary was
$75,000. In addition to the base salary, the employment agreement provided for
Mr. Perl to receive certain incentive compensation. The incentive compensation
was determined by a specific formula tied to the performance of the Bank's
mortgage financing operations. Mr. Perl earned approximately $1.5 million in
incentive compensation and $75,000 in base salary during the year ended
December 31, 1996.
LETTER AGREEMENT
In order to ensure continuity of management during the period prior to the
Reorganization, the Company and the Bank and Mr. Perl have entered into the
Letter Agreement to replace the previous employment agreement, effective
January 1, 1997, through the later of the date of the completion of the Public
Offering and the Reorganization. The Letter Agreement also sets forth the
basic terms of the employment agreements between Mr. Perl and each of the Bank
and the Company upon the completion of the Reorganization and the Public
Offering. The terms of the proposed agreements are set forth in "--Employment
Agreements."
The Letter Agreement provides that during the period of its effectiveness,
Mr. Perl will serve as President and Chief Executive Officer of the Company
and the Bank, and will receive a base salary of $400,000 per year ("Base
Salary"), plus a bonus equal to 8.0% of the average after tax net income in
excess of 10.0% return on average equity, as defined in the letter agreement
("Bonus"). Such Bonus shall be payable no later than March 15, 1998. Payment
of the Base Salary and Bonus are dependent upon the Bank maintaining minimum
regulatory capital requirements and there being no OTS supervisory directive
in place regarding the Bank and its operations or the services performed by
Mr. Perl.
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<PAGE>
The Letter Agreement provides for termination of Mr. Perl's employment by
the Bank or the Company for cause as defined in the Letter Agreement at any
time. In the event the Bank or the Company chooses to terminate Mr. Perl's
employment for reasons other than for cause during the effective period of the
Letter Agreement, Mr. Perl, or in the event of death, his beneficiary, would
be entitled to receive two times Base Salary plus a Bonus equal to $2.2
million. In the event the Bank is not in compliance with its minimum capital
requirements or if such payment would cause the Bank's capital to be reduced
below minimum regulatory capital requirements, such payments shall be deferred
until such time as the Bank or successor thereto is in capital compliance.
Under the Letter Agreement, in the event Mr. Perl voluntarily terminates his
employment with the Company or the Bank without the written approval of the
Boards of Directors of the Company and the Bank, as the case may be, Mr. Perl
has agreed not to compete with the Company or the Bank for a period of one
year following termination within the continental United States. Mr. Perl has
further agreed, in the event of a breach of the non-compete provision, to pay
as liquidated damages an aggregate sum of $500,000 in which event the non-
compete provision will expire.
EMPLOYMENT AGREEMENTS
Upon the consummation of the Reorganization and the Public Offering, the
Bank and the Company will enter into employment agreements (collectively, the
"Employment Agreements") with Mr. Perl. The Employment Agreements are intended
to ensure that the Bank and the Company will be able to maintain a stable and
competent management base after the Offerings. The continued success of the
Bank and the Company depends to a significant degree on the skills and
competence of Mr. Perl.
The Employment Agreements provide for three-year terms for Mr. Perl. The
Bank Employment Agreement, provides that, commencing on the first anniversary
date and continuing each anniversary date thereafter, the Board of Directors
may extend the agreement for an additional year so that the remaining term
shall be three years, unless written notice of non-renewal is given by the
Board of Directors after conducting a performance evaluation of Mr. Perl. The
term of the Company Employment Agreement shall be extended on a daily basis
unless written notice of non-renewal is given by the Board of the Company. The
Bank and Company Employment Agreements provide that Mr. Perl's salary will be
reviewed annually. The Bank Employment Agreement provides that Mr. Perl will
receive a Base Salary of $150,000 per year while the Company Employment
Agreement provides that he will receive a Base Salary of $250,000 per year
(together, the "Base Salary"), plus a bonus equal to 8.0% of the average of
the after tax net income of the Company in excess of 10% return on average
equity, as defined in the Employment Agreements ("Bonus"). Such Base Salary is
pro rated between the Bank and the Company depending upon the duties performed
for and the obligations to each of the Bank and the Company, respectively,
while the Bonus shall be paid by the Company. The Bonus for each year shall be
payable by the Company no later than March 15 of the following year. In
addition to the Base Salary and Bonus, the Employment Agreements provide for,
among other things, participation in stock benefits plans and other fringe
benefits substantially equivalent to those in which Mr. Perl was participating
or otherwise deriving benefit from immediately prior to the beginning of the
terms of the Employment Agreements. The Employment Agreements provide for
termination by the Bank or the Company for cause as defined in the Employment
Agreements at any time. In the event the Bank or the Company chooses to
terminate Mr. Perl's employment for reasons other than for cause, or in the
event of Mr. Perl's resignation from the Bank or the Company upon: (i) failure
to re-elect Mr. Perl to his current offices; (ii) a material change in Mr.
Perl's functions, duties or responsibilities; (iii) a relocation of Mr. Perl's
principal place of employment by more than 30 miles; (iv) a material reduction
in the benefits or perquisites to Mr. Perl from those being provided at the
effective date of the Employment Agreement, unless consented to by Mr. Perl or
such reduction is part of a nondiscriminatory reduction applicable to all
employees; (v) liquidation or dissolution of the Bank or the Company; or (vi)
a breach of the Employment Agreement by the Bank or the Company, Mr. Perl or,
in the event of death, his beneficiary would be entitled to receive, pursuant
to the Bank Employment Agreement, those payments due to Executive for the
remaining term of the Employment Agreement or, pursuant to the Company
Employment Agreement, an amount equal to three times his Base Salary under
that Employment Agreement for the preceding year plus two
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<PAGE>
times his Bonus for the preceding year; provided, however, that in the event
that the Boards of Directors determine that such payment would have a material
adverse affect on the Company's financial condition or results of operations,
then the Company and the Bank shall pay the Executive two times the previous
year's Base Salary under that Employment Agreement, Common Stock of the Company
having a fair market value equal to one times the previous year's Base Salary
under that Employment Agreement and two times the previous year's Bonus. In the
event that Executive is terminated without cause during 1997, the Executive
will be entitled to two times Base Salary and a Bonus equal to $2.2 million.
The Bank and the Company would also continue and pay for Mr. Perl's life,
health, dental and disability coverage for the remaining term of the Employment
Agreement. Under certain circumstances, upon any termination of the Executive,
the Executive is subject to a non-compete and liquidated damages provision and
a confidentiality provision relating to information in his possession regarding
the Company or the Bank. In the event that the Executive thereafter breaches
the non-compete provision, the Employment Agreements provide that the Executive
shall pay the Bank and the Company, in the aggregate, $500,000, as liquidated
damages, in which event the non-compete provision will expire.
Under the Employment Agreements, if voluntary or involuntary termination
follows a change in control of the Bank or the Company, Mr. Perl or, in the
event of his death, his beneficiary, would be entitled to a severance payment
equal to the greater of: (i) the payments due for the remaining terms of the
agreement; or (ii) three times the average of the five preceding taxable years'
annual compensation. The Bank and the Company would also continue Mr. Perl's
life, health, and disability coverage for thirty-six months.
Payments to Mr. Perl under the Bank's Employment Agreement will be guaranteed
by the Company in the event that payments or benefits are not paid by the Bank.
In the event the Bank is not in compliance with its minimum capital
requirements or if any payment under the Bank Employment Agreement would cause
the Bank's capital to be reduced below minimum regulatory capital requirements,
such payments shall be deferred until such time as the Bank or Successor
thereto is in capital compliance. Payment under the Company's Employment
Agreement would be made by the Company. All reasonable costs and legal fees
paid or incurred by Mr. Perl pursuant to any dispute or question of
interpretation relating to the Employment Agreements shall be paid by the Bank
or Company, respectively, if Mr. Perl is successful on the merits pursuant to a
legal judgment, arbitration or settlement. The Employment Agreements also
provide that the Bank and Company shall indemnify Mr. Perl to the fullest
extent allowable under federal and Delaware law, respectively. In the event of
a change in control of the Bank or the Company during 1997, the total amount of
payments due under the Agreements, based on Base Salary to be paid to Mr. Perl
and Bonus would be $3.0 million.
CONSULTATION AGREEMENT
The Bank has entered into a five year consulting agreement with Mrs. Nora L.
Vineyard commencing on July 15, 1996 (the "Agreement"). Mrs. Vineyard will
receive compensation in the amount of $120,000 for a period of three years and
$90,000 for the remaining two years of the Agreement. The Agreement provides
Mrs. Vineyard with medical insurance during the term of the Agreement. Pursuant
to the terms of the Agreement, Mrs. Vineyard will be available to provide
advisory and consulting services and will give the Company and the Bank the
benefit of her special knowledge, skills, contacts and business experience. A
portion of the future payments due pursuant to this Agreement were accrued and
expensed during the year ended December 31, 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Comparison of
Operating Results for the Year Ended December 31, 1996 and December 31, 1995."
BENEFITS
Insurance Plans. All full-time employees are covered as a group for
comprehensive hospitalization, including major medical, long-term disability,
accidental death and dismemberment insurance and group term life insurance.
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<PAGE>
Cash Bonus Plan. The Bank adopted a cash bonus plan (the "Bonus Plan")
effective February 1996. All employees except for commissioned employees and
employees with employment contracts are eligible to participate. The Bonus Plan
paid an aggregate of approximately $100,000 in 1996. For 1997, the Bonus Plan
will pay bonuses in the aggregate of 15% of the after tax profits of the Bank
in excess of a 15% return on average equity, as defined in the Bonus Plan.
401(k) Plan. The Bank maintains the Life Savings Bank Employee's Savings Plan
("401(k) Plan"), a tax- qualified cash or deferred arrangement (i.e., 401(k)
feature), under Section 401(a) of the Code. The 401(k) Plan provides
participants with benefits upon retirement, death, disability or termination of
employment with the Bank. Employees are eligible to participate in the plan
following the completion of 6 months of service with the Bank and the
attainment of age 21.
Participants may authorize the Bank to contribute to the 401(k) Plan, on
their behalf, from 1% to 15% of their compensation, not to exceed certain
legally permissible limits, including an overall dollar limit of $9,500 for
1997. The Bank currently matches 25% of the first 8% of the deferral by a
Participant under the 401(k) Plan each year. Each plan year, the Bank may also
make an additional contribution to the 401(k) Plan (a "profit sharing
contribution"). The profit sharing contribution, if made by the Bank, is
allocated to each Participant's account based on the Participant's compensation
for the year relative to the compensation of all participants for the year.
Participants are always 100% vested in their deferral contributions.
Participants become 20% vested in the Bank's matching contributions and profit
sharing contributions after the completion of two year of service with the
Bank. Their vested interest in the matching contributions and profit sharing
contributions increases by 20% for each year of service completed, so that
after the completion of 6 years of service, the Participant is 100% vested in
the Bank's matching contributions and profit sharing contributions.
A Participant's vested portion of his or her 401(k) Plan account is
distributable from the 401(k) Plan upon termination of the participant's
employment, death, disability or retirement. Participants may also receive
hardship distributions and loans from the 401(k) Plan. Any distribution made to
a Participant prior to the Participant's attainment of age 59 1/2 is subject to
a 10% tax penalty. The Board of Directors may at any time discontinue the
Bank's contributions to employee accounts. For the years ended December 31,
1996, 1995 and 1994, the Bank's matching contributions to the 401(k) Plan were
$21,000, zero and $7,000, respectively.
The 401(k) Plan permits Participants to direct the investment of their 401(k)
plan account into various investment alternatives. The investment accounts are
valued daily and participants are provided with information regarding the
market value of the participant's investments and all contributions made on his
or her behalf on at least an annual basis. In connection with the
Reorganization of the Bank and the Offering, the Bank will amend the 401(k)
Plan to permit Participants to invest in an Employer Stock Fund as one of the
investment alternatives. The Employer Stock Fund will be invested primarily in
shares of Common Stock.
Employee Stock Purchase Plan. The Company has adopted, as of January 1997,
the Life Financial Employee Stock Purchase Plan ("ESPP"), pursuant to which the
Company may make available for sale to employees shares of its Common Stock at
a price equal to no less than 85% of the fair market value of the Common Stock
on the date of purchase. The ESPP is designed to give eligible employees the
opportunity to purchase shares of Company Common Stock through payroll
deductions of up to a specified percentage of their total compensation. The
ESPP will become effective upon the completion of the Offerings.
ESOP. In connection with the Reorganization and Offering, the Company intends
to implement an employee stock ownership plan ("ESOP"). The ESOP is a tax-
qualified retirement plan under Section 401(a) of the Code designed to invest
primarily in the Common Stock. The ESOP will provide eligible employees with
the opportunity to receive a Company-funded retirement benefit based on the
value of the Common Stock and any other investment held by the plan. Employees
of the Company who have completed certain eligibility and minimum service
requirements will be eligible to participate in the ESOP. The Company's
contributions to the ESOP will be allocated to participants accounts based on
the ratio each participant's compensation bears to all
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<PAGE>
participants' compensation. It is expected that a Participant's account under
the ESOP will vest at the same rate as employer contributions to the 401(k)
Plan vest (i.e. 20% after two years of service with full vesting after six
years). It is anticipated that the shares purchased by the ESOP will be funded
through contributions from the general funds of the Company on an annual basis
and will equal up to two percent (2.0%) of the issued and outstanding shares of
the Company at the time of purchase. Any such contributions shall be at the
discretion of the Board of Directors of the Company. Borrowed funds will not be
used to acquire such shares.
STOCK OPTION PLANS
The Board of Directors of the Bank adopted the Life Savings Bank, Federal
Savings Bank 1996 Stock Option Plan (the "Bank Option Plan"), a stock-based
benefit plan which provides for the granting of stock options to eligible
officers, employees and directors of the Bank, on November 21, 1996. The Board
of Directors of the Bank has reserved 107,200 (321,600 post-Reorganization)
shares for issuance under the Bank Option Plan. The Bank Option Plan will be
presented to stockholders of the Bank for ratification at an annual meeting to
be held on April 18, 1997. Upon completion of the Reorganization and the Public
Offering, the Bank Option Plan will, by operation of law and pursuant to the
Bank Option Plan, become an option plan of the Company.
The Board of Directors of the Company has adopted the Life Financial Corp.
1997 Stock Option Plan (the "Company Option Plan") which will become effective
upon the completion of the Reorganization and the Public Offering (The Bank
Option Plan and the Company Option Plan will sometimes hereinafter be referred
to as the "Option Plans"). The Board of Directors of the Company has reserved
shares equal to 10% of the issued and outstanding shares of the Company giving
effect to the Reorganization and the Public Offering, including Company options
to be exchanged for Bank options pursuant to the Bank Option Plan for issuance
under the Option Plans. Stock options with respect to shares of the Bank's
Common Stock granted under the Bank Option Plan and outstanding prior to
completion of the Reorganization will automatically become options to purchase
three shares of the Company's Common Stock upon identical terms and conditions.
The Company will assume all of the Bank's obligations with respect to the Bank
Option Plan. Following the completion of the Reorganization, the Option Plans
will be available to directors, officers and employees of the Company and to
directors, officers and employees of its direct or indirect subsidiaries,
including the Bank, as selected pursuant to the Option Plans and all references
to the Bank's Common Stock under the Bank Option Plan will be deemed references
to the Company's Common Stock. The following description of the Option Plans
reflects the Option Plans as they will exist upon consummation of the
Reorganization.
The stock option benefits provided under the Option Plans are designed to
attract and retain qualified directors and personnel in key positions, provide
directors, officers and key employees with a proprietary interest in the
Company, and as an incentive to contribute to the success of the Bank and the
Company and reward key employees for outstanding performance. The Option Plans
provides for the grant of: (i) options to purchase the Company's Common Stock
intended to qualify as incentive stock options under Section 422 of the Code
("Incentive Stock Options"); (ii) options that do not so qualify ("Non-
Statutory Stock Options"); and (iii) Limited Rights. Limited Rights are
exercisable only upon a change in control of the Bank or the Company. Upon
exercise of "Limited Rights" in the event of a change in control, the employee
will be entitled to receive a lump sum cash payment equal to the difference
between the exercise price of the related option and the fair market value of
the shares of common stock subject to the option on the date of exercise of the
right in lieu of purchasing the stock underlying the option. Except for options
granted to directors, all options granted contemporaneously with adoption of
the Option Plans are intended to be Incentive Stock Options to the extent
permitted under Section 422 of the Code. The Option Plans will be in effect for
a period of ten years from the dates of adoption by the Boards of Directors of
the Bank and the Company, respectively.
Under the Option Plans, the Personnel/Compensation Committee determines which
officers and employees will be granted options and Limited Rights, whether such
options are to be incentive or non-statutory stock options, the number of
shares subject to each option, the exercise price of each stock option, whether
such options may be exercised by delivering other shares of Common Stock and
when such options become exercisable. The per share exercise price of a stock
option is required to be at least equal to the fair market value of a share of
Common Stock on the date the option is granted under the Option Plan. The Bank
Committee has granted options to purchase 64,320 (192,960 post-Reorganization),
and 4,180 (12,540 post-Reorganization)
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shares respectively to Messrs. Perl and Passerino and has granted options to
purchase an aggregate of 8,360 (25,080 post-Reorganization) shares to two other
executive officers as a group at an exercise price of $3.33, on a pro forma
basis as of December 31, 1996. An additional 25,000, 15,000 and 30,000 options
have been granted to Messrs. Perl and Passerino and two other executive
officers as a group, respectively, under the Company Option Plan at the
Offering Price effective as of the Reorganization.
An optionee will not be deemed to have received taxable income upon grant or
exercise of any Incentive Stock Option, provided that such shares received
through the exercise of such option are not disposed of by the employee for at
least one year after the date the stock is received in connection with the
option exercise and two years after the date of grant of the option. No
compensation deduction would be able to be taken by the Company as a result of
the grant or exercise of Incentive Stock Options, provided such shares are not
disposed of before the expiration of the period described above (a
"disqualifying disposition"). In the case of a Non-Statutory Stock Option and
in the case of a disqualifying disposition of an Incentive Stock Option, an
optionee will be deemed to receive ordinary income upon exercise of the stock
option in an amount equal to the amount by which the exercise price is exceeded
by the fair market value of the Common Stock purchased by exercising the option
on the date of exercise. The amount of any ordinary income deemed to be
received by an optionee upon the exercise of a Non-Statutory Stock Option or
due to a disqualifying disposition of an Incentive Stock Option would be a
deductible expense for tax purposes for the Company. In the case of Limited
Rights, upon exercise, the option holder would have to include the amount paid
to him or her upon exercise in his gross income for federal income tax purposes
in the year in which the payment is made and the Company would be entitled to a
deduction for federal income tax purposes of the amount paid.
Stock options will become vested and exercisable in the manner specified by
the Company. The options granted by the Bank in connection with the adoption of
the Bank Option Plan will vest at a rate of 33.3% per year, beginning on
November 21, 1999. It is anticipated that options granted by the Company in
connection with the Reorganization and the Public Offering under the Company
Option Plan will vest at a rate of 33.3% per year beginning on the third
anniversary of the date of the Reorganization and Public Offering. Incentive
Stock Options granted in connection with the Option Plans could be exercisable
for three months following the date on which the employee ceases to perform
services for the Bank or the Company, except that in the event of death,
disability, retirement or termination of an employee's service following change
in control of the Bank or the Company, options accelerate and become fully
vested and could be exercisable for up to one year thereafter or such longer
period as determined by the Company. However, any Incentive Stock Options
exercised more than three months following the date the employee ceases to
perform services as an employee would be treated as a Non-Statutory Stock
Option as described above. In the event of retirement, if the optionee
continues to perform services as a director on behalf of the Bank, the Company
or an affiliate, unvested options would continue to vest in accordance with
their original vesting schedule until the optionee ceases to serve as a
director. Non-Statutory Stock Options granted in connection with the Option
Plans could be exercisable for one year following the date on which the
employee ceases to perform services for the Bank or the Company, except that in
the case of death, disability, retirement or termination of the optionee's
service following a change in control, options accelerate and become fully
vested and could be exercisable for up to one year thereafter or such longer
period as determined by the Committee .
All Options granted by the Bank to outside directors under the Bank Option
Plan would be Non-Statutory Stock Options and will vest and become exercisable
commencing three years after the date of adoption of the Bank Option Plan at
the rate of 33.3% per year, and would expire upon the earlier of ten years
following the date of grant or one year following the date the optionee ceases
to be a director or consulting director. The Committee has granted options to
purchase 3,060 (9,180 post-Reorganization) shares to each of the outside
directors of the Bank at an exercise price of $3.33, on a pro forma basis as of
December 31, 1996. It is anticipated that options granted by the Company in
connection with the Reorganization and the Public Offering will vest at
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a rate of 33.3% per year beginning on the third anniversary date of the
Reorganization and the Public Offering. The Compensation Committee of the
Company has granted options to purchase 17,500 shares to each of the outside
directors under the Company Option Plan at an exercise price equal to the
Offering Price effective upon the Reorganization. In the event of the death or
disability of a participant or termination of a participant's service following
a change in control of the Company or the Bank, all previously granted options
would immediately vest and become fully exercisable.
A change in control is be defined in the Option Plans generally to occur when
a person or group of persons acting in concert acquires beneficial ownership of
20% or more of any class of equity security of the Company or the Bank or in
the event of a tender or exchange offer, merger or other form of business
combination, sale of all or substantially all of the assets of the Company or
the Bank or contested election of directors which resulted in the replacement
of a majority of the Board of Directors by persons not nominated by the
directors in office prior to the contested election.
The following table lists all grants of options and stock appreciation rights
("SARs") granted by the Bank Committee under the Bank Option Plan to the Named
Executive Officers for fiscal 1996 and contains certain information about the
potential value of those options based upon certain assumptions as to the
appreciation of the Company's stock over the life of the option.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE
UNDERLYING OPTION/SARS EXERCISE OR APPRECIATION FOR
OPTIONS/ GRANTED TO BASE PRICE OPTIONS(1)
SARS GRANTED EMPLOYEES IN PER EXPIRATION ---------------------
NAME (#)(2)(3)(4)(5) FISCAL YEAR SHARE DATE(6) 5% 10%
---- --------------- ------------ ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Daniel L. Perl.......... 192,960(7) 60.00% $3.33(7) 11/21/06 $ 404,811 $ 1,021,665
Joseph R.L. Passerino... 12,540(7) 3.90 3.33(7) 11/21/06 26,157 66,014
</TABLE>
- --------
(1) The amounts represent certain assumed rates of appreciation. Actual gains,
if any, on stock option exercises and Common Stock holdings are dependent
on the future performance of the Common Stock and overall stock market
conditions. There can be no assurance that the amounts reflected in this
table will be realized.
(2) Options granted pursuant to the Bank Option Plan become exercisable in
equal installments at an annual rate of 33.3% beginning November 21, 1999,
unless otherwise accelerated.
(3) The purchase price may be paid in cash or in Common Stock.
(4) Under limited circumstances, such as death or disability of an employee,
the employee (or his beneficiary) may request that the Company, in exchange
for the employee's surrender of an option, pay to the employee (or
beneficiary), the amount by which the fair market value of the Common Stock
exceeds the exercise price of the option on the date of the employee's
termination of employment. It is within the Company's discretion to accept
or reject such a request.
(5) To the extent possible, options will be treated as incentive options.
(6) The option term is ten years.
(7) As adjusted to reflect the Reorganization.
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The following table provides certain information with respect to the number
of shares of Common Stock represented by outstanding options held by the Named
Executive Officers as of December 31, 1996. Also reported are the values for
"in-the-money" options which represent the positive spread between the
exercise price of any such existing stock options and the year end price of
the Common Stock.
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTION/SARS AT
FISCAL YEAR END(#) FISCAL YEAR END($)
---------------------------- ----------------------------
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2)
---- ---------------------------- ----------------------------
<S> <C> <C>
Daniel L. Perl.......... 0/192,960 $0/0
Joseph R.L. Passerino... 0/12,540 0/0
</TABLE>
- --------
(1) The options in this table have an exercise price of $3.33, as adjusted to
reflect the Reorganization, and become exercisable at an annual rate of
33.3% beginning November 21, 1997. The options will expire ten (10) years
from the date of grant.
(2) Based on market value of the underlying stock at January 21, 1997, minus
the exercise price. The bid and ask prices for the Bank's common stock on
January 21, 1997 was $3.00 and $3.67 per share, respectively, as adjusted
to reflect the Reorganization. Therefore, using the average of the bid and
ask prices, there is no positive spread between the exercise price of the
options and the price of the common stock of the Bank.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") requires that all loans or extensions of credit to executive
officers and directors must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans
made to a director or executive officer in excess of the greater of $25,000 or
5% of the Bank's capital and surplus (up to a maximum of $500,000) must be
approved in advance by a majority of the disinterested members of the Board of
Directors.
The Bank's current policy provides that all loans made by the Bank to its
directors and officers are made in the ordinary course of business, are made
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons
and do not involve more than the normal risk of collectibility or present
other unfavorable features. During 1996, the law firm of Keller and Keller
provided legal representation to the Bank for which it was paid approximately
$2,300 for legal fees and related services. Until his retirement in 1996, Mr.
Edgar C. Keller, a director of the Bank was a partner with Keller and Keller.
In addition, the Bank purchased four policies of insurance from Caldwell &
Moreland Insurance Brokers, Inc. for approximately $45,000 which yielded
commissions of approximately $5,600. Richard C. Caldwell is a director of the
Bank and the Company and a partner of Caldwell & Moreland Insurance Brokers,
Inc.
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SECURITY OWNERSHIP OF MANAGEMENT AND OTHER BENEFICIAL OWNERS
At December 31, 1996, the Bank had 1,070,572 shares of common stock
outstanding. In connection with the Reorganization each share of common stock
will be exchanged for three shares of the Common Stock of the Company.
The following table sets forth, as of December 31, 1996, on an historical
and on a pro forma basis, giving effect to the Reorganization and the sale of
2,500,000 shares in the Public Offering, certain information as to those
persons who were known by management to be beneficial owners of more than 5%
of the Company's outstanding shares of Common Stock, each director, each Named
Executive Officer and the shares of Common Stock beneficially owned by all
directors and executive officers of the Company as a group. This table
includes proposed purchases by the below-listed persons in the Public Offering
at an assumed price of $11.00 per share.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE OFFERINGS AFTER OFFERINGS
NAME AND ADDRESS POSITION(S) WITH THE ------------------------- ----------------------
OF BENEFICIAL OWNER BANK SHARES PERCENT SHARES PERCENT
------------------- -------------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Richard C. Caldwell Chairman of the Board 60,226(1) 5.6% 185,223 3.2%
Ronald G. Skipper Director 52,000(2) 4.9 165,090 2.9
John D. Goddard Director 56,642(3) 5.3 172,199 3.0
Milton E. Johnson Director 37,842(4) 3.5 113,526 2.0
Daniel L. Perl Director, President and 24,974(5) 2.3 88,922 1.6
Chief Executive Officer
Edgar C. Keller Director 17,174(6) 1.6 55,158 1.0
Louis E. Yeager Director 8,160(7) 0.8 24,480 0.4
Joseph R.L. Passerino Senior Vice President 1,456 * 5,278 *
All Executive Officers
and Directors as a
Group
(10 persons) 258,840(8) 24.2 811,884 14.2
</TABLE>
- --------
(1) All shares are held through Mr. Caldwell's employee benefit plan.
(2) These shares are held in the Ronald Skipper Pension Sharing Plan.
(3) Of these shares, 25,376 are held by Mr. Goddard and his wife as joint
tenants and 31,266 are held in the John D. Goddard Corporation Profit
Sharing Plan and Trust.
(4) Of these shares, 4,668 are held by Mr. Johnson and his wife as joint
tenants, 27,882 are held in an IRA account for Mr. Johnson and his wife,
3,138 are held in custodial accounts for minors, 1,538 are held in joint
tenancy with other family members and 616 are owned of record by two other
family members.
(5) Of these shares, 7,502 are held in joint tenancy with Mr. Perl's wife and
17,472 are held in the Navieve Financial Corp. Profit Sharing Trust.
(6) Of these shares, 15,374 are held as tenants in common with another party.
(7) These shares are held in the Louis E. Yeager & Frances K. Yeager Revocable
Living Trust.
(8) Does not include 15,374 shares of Common Stock held by Mrs. Nora L.
Vineyard who is currently serving as a consultant to the Bank.
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<PAGE>
THE REORGANIZATION
GENERAL
The Boards of Directors of the Bank and the Company unanimously approved and
entered into the Plan of Reorganization pursuant to which the Bank will be
reorganized into a holding company structure and become the wholly owned
subsidiary of the Company and each share of common stock of the Bank
outstanding immediately prior to the Reorganization would be converted into
three shares of Company Common Stock. The Plan of Reorganization contemplates
that the Reorganization will be a tax-free transaction under the Code.
The Plan of Reorganization has been submitted to the OTS for approval. Upon
approval, the Plan of Reorganization is then subject to, among other things,
the approval of the Reorganization by the affirmative vote of the holders of a
majority of the outstanding shares of the Bank's common stock eligible to be
cast at the annual meeting of stockholders scheduled to be held on April 18,
1997. As soon as is practicable following approval by the OTS and the
stockholders of the Bank, the Reorganization and the Public Offering will be
consummated.
Until stockholder approval and all regulatory approvals have been obtained,
no sales of the Common Stock may be completed. The amount of cash paid to
those stockholders who exercise dissenters' rights, which are offered as
required by OTS regulations, could impact on whether or not the transaction
qualifies as a tax-free transaction. See "Risk Factors--Risks Associated with
Dissenters' Rights."
TAX CONSEQUENCES OF REORGANIZATION
The following discussion of the material federal income tax consequences of
the Reorganization is based on the Code, Treasury regulations, Internal
Revenue Service rulings, and judicial and administrative decisions in effect
as of the date hereof, all of which are subject to change at any time,
possibly with retroactive effect. The following discussion does not address
all of the federal income tax consequences that may be relevant to Bank
stockholders in light of such holders' particular circumstances or to holders
subject to special rules, such as foreign persons, financial institutions,
tax-exempt organizations or insurance companies.
The Bank has received an opinion of Muldoon, Murphy & Faucette, with regard
to federal income tax matters, and from Deloitte & Touche LLP, with regard to
California state income tax matters to the effect that, assuming the
Reorganization is consummated under the Plan of Reorganization, a statutory
merger under applicable federal law, and provided that in the transaction the
shareholders of the Bank will exchange stock possessing control (defined to be
at least 80% of the total vote and value) of all classes of the Bank stock,
then, in a manner that results in among other things: (1) no gain or loss will
be recognized by the Bank upon the receipt of assets of Interim in exchange
for Bank common stock; (2) no gain or loss will be recognized by the
stockholders of the Bank upon the transfer of their common stock in the Bank
to the Company solely for the Company's Common Stock; (3) the total basis of
the Company's Common Stock to be received by the stockholders of the Bank in
the Reorganization will, in each instance, be the same as the total basis of
such common stock of the Bank, exchanged therefor; (4) the holding period of
Company Common Stock received by the stockholders of the Bank in the
Reorganization will, in each instance, include the period during which the
stockholders held the Bank common stock exchanged therefor, provided, that the
Bank's common stock is held as a capital asset on the date of the
Reorganization; (5) no gain or loss will be recognized by the Bank as a result
of the transaction; and (6) no gain or loss will be recognized by the Company
upon its receipt of the Bank's common stock solely in exchange for the
issuance of Company Common Stock to Bank stockholders. Accordingly, if the
Reorganization transaction satisfies the conditions noted above, the
Reorganization will have no adverse federal or state income tax effects on the
Company, the Bank, or the stockholders of the Bank.
There is some risk that the exercise of dissenters' rights could result in
cash payments to shareholders which would interfere with satisfaction of the
control requirements noted above. While the Bank anticipates that the control
requirements for a tax free reorganization will be met, if the exercise of
dissenters' rights prevents the satisfaction of the control requirements, the
Bank may take the necessary steps to withdraw the offering.
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<PAGE>
RESTRICTIONS ON ACQUISITION OF THE COMPANY
GENERAL
Certain provisions in the Company's Certificate of Incorporation and Bylaws
and in its management remuneration together with provisions of Delaware
corporate law, may have anti-takeover effects. In addition, regulatory
restrictions may make it difficult for persons or companies to acquire control
of the Company. Notwithstanding the foregoing, under certain circumstances,
the Company may be subject to section 2115 of the California Corporation Code
(as a foreign corporation) which may have the effect of superseding certain
provisions of the Company's Certificate of Incorporation and Bylaws as
interpreted by Delaware law, particularly those provisions providing for a
staggered board of directors and eliminating cumulative voting. However, if
its securities remain listed on the National Market System of the Nasdaq Stock
Market and there are at least 800 stockholders, the Company will be exempt
from the provisions of Section 2115.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of the provisions
of the Company's Certificate of Incorporation and Bylaws which might be deemed
to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Company stockholders may deem to be in
their best interests or in which stockholders may receive a substantial
premium for their shares over then current market prices. As a result,
stockholders who might desire to participate in such a transaction may not
have an opportunity to do so. Such provisions will also render the removal of
the current Board of Directors or management of the Company more difficult.
The following description of certain of the provisions of the Certificate of
Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each case to such Certificate of Incorporation and Bylaws,
which are incorporated herein by reference. See "Additional Information" as to
how to obtain a copy of these documents.
Limitation on Voting Rights. The Certificate of Incorporation of the Company
provides that in no event shall any record owner of any outstanding Common
Stock which is beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined
pursuant to Rule 13d-3 of the General Rules and Regulations promulgated
pursuant to the Exchange Act, and includes shares beneficially owned by such
person or any of his affiliates (as defined in the Certificate of
Incorporation), shares which such person or his affiliates have the right to
acquire upon the exercise of conversion rights or options and shares as to
which such person and his affiliates have or share investment or voting power,
but shall not include shares beneficially owned by employee benefit plans or
directors, officers and employees of the Bank or Company or shares that are
subject to a revocable proxy and that are not otherwise beneficially owned, or
deemed by the Company to be beneficially owned, by such person and his
affiliates. The Certificate of Incorporation also contains provisions
authorizing the Board of Directors to construe and apply the Limit and to
demand that any person reasonably believed to beneficially own Common Stock in
excess of the Limit (or hold of record Common Stock beneficially owned in
excess of the Limit) to provide the Company with certain information. No
assurance can be given that a court applying Delaware law would enforce such
provisions of the Certificate of Incorporation. The Certificate of
Incorporation of the Company further provides that this provision limiting
voting rights may only be amended upon the vote of 80% of the outstanding
shares of voting stock (after giving effect to the limitation on voting
rights).
Board of Directors. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the
whole number of members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of directors being elected
each year. The Company's Certificate of Incorporation and Bylaws provide that
the size of the Board shall be determined by a majority of the directors. The
Certificate of Incorporation and the Bylaws provide that any vacancy occurring
in
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<PAGE>
the Board, including a vacancy created by an increase in the number of
directors or resulting from death, resignation, retirement, disqualification,
removal from office or other cause, may be filled for the remainder of the
unexpired term exclusively by a majority vote of the directors then in office.
The classified Board is intended to provide for continuity of the Board of
Directors and to make it more difficult and time consuming for a stockholder
group to fully use its voting power to gain control of the Board of Directors
without the consent of the incumbent Board of Directors of the Company. The
Certificate of Incorporation of the Company provides that a director may be
removed from the Board of Directors prior to the expiration of his term only
for cause, upon the vote of 80% of the outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a majority of
the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be
called only by the Board of Directors of the Company. The Certificate of
Incorporation also provides that any action required or permitted to be taken
by the stockholders of the Company may be taken only at an annual or special
meeting and prohibits stockholder action by written consent in lieu of a
meeting.
Authorized Shares. The Certificate of Incorporation authorizes the issuance
of 25,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock.
The shares of Common Stock and Preferred Stock were authorized in an amount
greater than that to be issued in the Reorganization and the Public Offering
to provide the Company's Board of Directors with as much flexibility as
possible to effect, among other transactions, financings, acquisitions, stock
dividends, stock splits and employee stock options. However, these additional
authorized shares may also be used by the Board of Directors consistent with
its fiduciary duty to deter future attempts to gain control of the Company.
The Board of Directors also has sole authority to determine the terms of any
one or more series of Preferred Stock, including voting rights, conversion
rates, and liquidation preferences. As a result of the ability to fix voting
rights for a series of Preferred Stock, the Board has the power, to the extent
consistent with its fiduciary duty, to issue a series of Preferred Stock to
persons friendly to management in order to attempt to block a post-tender
offer merger or other transaction by which a third party seeks control, and
thereby assist management to retain its position. The Company's Board of
Directors currently has no plans for the issuance of additional shares, other
than the issuance of additional shares and upon exercise of stock options to
be issued pursuant to the terms of the Incentive Plan.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Certificate of Incorporation requires the approval of the
holders of 80% of the Company's outstanding shares of voting stock to approve
certain "Business Combinations," as defined therein, and related transactions.
Under Delaware law, absent this provision, Business Combinations, including
mergers, consolidations and sales of all or substantially all of the assets of
a corporation must, subject to certain exceptions, be approved by the vote of
the holders of only a majority of the outstanding shares of Common Stock of
the Company and any other affected class of stock. Under the Certificate of
Incorporation, 80% approval of stockholders is required in connection with any
transaction involving an Interested Stockholder (as defined below) except (i)
in cases where the proposed transaction has been approved in advance by a
majority of those members of the Company's Board of Directors who are
unaffiliated with the Interested Stockholder and were directors prior to the
time when the Interested Stockholder became an Interested Stockholder or (ii)
if the proposed transaction meets certain conditions set forth therein which
are designed to afford the stockholders a fair price in consideration for
their shares in which case, if a stockholder vote is required, approval of
only a majority of the outstanding shares of voting stock would be sufficient.
The term "Interested Stockholder" is defined to include any individual,
corporation, partnership or other entity (other than the Company or its
subsidiary) which owns beneficially or controls, directly or indirectly, 10%
or more of the outstanding shares of voting stock of the Company. This
provision of the Certificate of Incorporation applies to any "Business
Combination," which is defined to include: (i) any merger or consolidation of
the Company or any of its subsidiaries with or into any Interested Stockholder
or Affiliate (as defined in the Certificate of Incorporation) of an Interested
Stockholder; (ii) any sale, lease, exchange, mortgage, transfer, or other
disposition to or with any Interested Stockholder or Affiliate of 25% or more
of the assets of the Company or combined assets of the Company and its
subsidiary; (iii) the issuance or
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transfer to any Interested Stockholder or its Affiliate by the Company (or any
subsidiary) of any securities of the Company in exchange for any assets, cash
or securities the value of which equals or exceeds 25% of the fair market
value of the Common Stock of the Company; (iv) the adoption of any plan for
the liquidation or dissolution of the Company proposed by or on behalf of any
Interested Stockholder or Affiliate thereof; and (v) any reclassification of
securities, recapitalization, merger or consolidation of the Company which has
the effect of increasing the proportionate share of Common Stock or any class
of equity or convertible securities of the Company owned directly or
indirectly by an Interested Stockholder or Affiliate thereof.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating
any offer of another "Person" (as defined therein) to: (i) make a tender or
exchange offer for any equity security of the Company; (ii) merge or
consolidate the Company with another corporation or entity; or (iii) purchase
or otherwise acquire all or substantially all of the properties and assets of
the Company, may, in connection with the exercise of its judgment in
determining what is in the best interest of the Company, the Bank and the
stockholders of the Company, give due consideration to all relevant factors,
including, without limitation, the social and economic effects of acceptance
of such offer on the Company's customers and the Bank's present and future
account holders, borrowers and employees; on the communities in which the
Company and the Bank operate or are located; and on the ability of the Company
to fulfill its corporate objectives as a savings and loan holding company and
on the ability of the Bank to fulfill the objectives of a federally chartered
stock savings association under applicable statutes and regulations. No
assurance can be given that a court applying Delaware law would enforce the
foregoing provision of the Certificate of Incorporation. By having these
standards in the Certificate of Incorporation of the Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then
market price of any equity security of the Company.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 80% of
the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision
limiting voting rights, the provisions relating to approval of certain
business combinations, calling special meetings, the number and classification
of directors, director and officer indemnification by the Company and
amendment of the Company's Bylaws and Certificate of Incorporation. The
Company's Bylaws may be amended by its Board of Directors, or by a vote of 80%
of the total votes eligible to be voted at a duly constituted meeting of
stockholders.
Certain Bylaw Provisions. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least
90 days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly,
a stockholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have
not been negotiated with and approved by members of its Board of Directors.
The provisions of the employment agreement with Mr. Perl and the Stock Option
Plans may also discourage takeover attempts by increasing the costs to be
incurred by the Bank and the Company in the event of a takeover. See "The
Board of Directors and Management of the Bank--Employment Agreements" and "--
Stock Option Plans."
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its
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<PAGE>
stockholders. An unsolicited non-negotiated proposal can seriously disrupt the
business and management of a corporation and cause it great expense.
Accordingly, the Board of Directors believes it is in the best interests of
the Company and its stockholders to encourage potential acquirors to negotiate
directly with management and that these provisions will encourage such
negotiations and discourage non-negotiated takeover attempts. It is also the
Board of Directors' view that these provisions should not discourage persons
from proposing a merger or other transaction at a price that reflects the true
value of the Company and that otherwise is in the best interest of all
stockholders.
DELAWARE CORPORATE LAW
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The
takeover statute, which is codified in Section 203 of the Delaware General
Corporate Law ("Section 203"), is intended to discourage certain takeover
practices by impeding the ability of a hostile acquiror to engage in certain
transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-
year period following the date such "Person" became an Interested Stockholder.
The term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person
became an Interested Stockholder, the Board of Directors approved either the
business combination or the transaction which resulted in the stockholder
becoming an Interested Stockholder; (ii) any business combination involving a
person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became an Interested Stockholder, with the number of
shares outstanding calculated without regard to those shares owned by the
corporation's directors who are also officers and by certain employee stock
plans; (iii) any business combination with an Interested Stockholder that is
approved by the Board of Directors and by a two-thirds vote of the outstanding
voting stock not owned by the Interested Stockholder; and (iv) certain
business combinations that are proposed after the corporation had received
other acquisition proposals and which are approved or not opposed by a
majority of certain continuing members of the Board of Directors. A
corporation may exempt itself from the requirements of the statute by adopting
an amendment to its Certificate of Incorporation or Bylaws electing not to be
governed by Section 203. At the present time, the Board of Directors does not
intend to propose any such amendment.
Any proposal to acquire 10% of any class of equity security of the Company
generally would be subject to approval by the OTS under the Change in Bank
Control Act. The OTS requires all persons seeking control of a savings
institution, and, therefore, indirectly its holding company, to obtain
regulatory approval prior to offering to obtain control. Federal law generally
provides that no "person," acting directly or indirectly or through or in
concert with one or more other persons, may acquire directly or indirectly
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among
other things, that: (i) the acquisition would substantially lessen
competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings institution or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity
of the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by such person. Such change in control restrictions on
the acquisition of holding company stock are not limited to three years after
conversion but will apply for as long as the regulations are in effect.
Persons holding revocable or irrevocable proxies may be deemed to be
beneficial owners of such securities under OTS regulations and therefore
prohibited from voting all or the portion of such proxies in excess of the 10%
aggregate beneficial ownership limit. Such regulatory restrictions may prevent
or inhibit proxy contests for control of the Company or the Bank which have
not received prior regulatory approval.
89
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 25,000,000 shares of Common Stock having
a par value of $.01 per share and 5,000,000 shares of preferred stock having a
par value of $.01 per share (the "Preferred Stock"). The Company currently
expects to issue 3,211,716 shares of Common Stock and no shares of Preferred
Stock in the Exchange Share Offering and 2,500,000 shares in the Public
Offering. Except as discussed above in "Restrictions on Acquisition of the
Company," each share of the Company's Common Stock will have the same relative
rights as, and will be identical in all respects with, each other share of
Common Stock. Upon payment of the Purchase Price for the Common Stock, all
such stock will be duly authorized, fully paid and non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE
FDIC.
COMMON STOCK
Dividends. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are
imposed by law and applicable regulation. See "Dividend Policy" and
"Regulation." The holders of Common Stock of the Company will be entitled to
receive and share equally in such dividends as may be declared by the Board of
Directors of the Company out of funds legally available therefor. If the
Company issues Preferred Stock, the holders thereof may have a priority over
the holders of the Common Stock with respect to dividends.
Voting Rights. The holders of Common Stock of the Company will possess
exclusive voting rights in the Company. They will elect the Company's Board of
Directors and act on such other matters as are required to be presented to
them under Delaware law or the Company's Certificate of Incorporation or as
are otherwise presented to them by the Board of Directors. Except as discussed
in "Restrictions on Acquisition of the Company," each holder of Common Stock
will be entitled to one vote per share and will not have any right to cumulate
votes in the election of directors. If the Company issues Preferred Stock,
holders of the Preferred Stock may also possess voting rights. Certain matters
require an 80% shareholder vote. See "Restrictions on Acquisition of the
Company."
As a federal savings bank, corporate powers and control of the Bank are
vested in its Board of Directors, who elect the officers of the Bank and who
fill any vacancies on the Board of Directors. Subsequent to the
Reorganization, voting rights will be vested exclusively in the owners of the
shares of capital stock of the Bank, which will be the Company, and voted at
the direction of the Company's Board of Directors. Consequently, the holders
of the Common Stock will not have direct control of the Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) all assets of the Bank available for distribution. In the event of
liquidation, dissolution or winding up of the Company, the holders of its
Common Stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of the assets of the Company
available for distribution. If Preferred Stock is issued, the holders thereof
may have a priority over the holders of the Common Stock in the event of
liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Reorganization and the Public Offering. Such stock may be issued
with such preferences and designations as the Board of Directors may from time
to time determine. The Board of Directors can, without stockholder approval,
issue preferred stock with voting, dividend, liquidation and conversion rights
which could dilute the voting strength of the holders of the Common Stock and
may assist management in impeding an unfriendly takeover or attempted change
in control.
90
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Federal Stock Charter of the Bank authorizes the issuance of capital
stock consisting of 10,000,000 shares of common stock, stated value $8.00 per
share. Each share of Common Stock of the Bank will have the same relative
rights as, and will be identical in all respects with, each other share of
common stock. Currently, 1,070,572 shares of Common Stock are issued and
outstanding, held of record by approximately 407 stockholders.
COMMON STOCK
Dividends. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See
"Dividend Policy" for certain restrictions on the payment of dividends.
Voting Rights. Holders of the Bank's common stock will possess exclusive
voting rights in the Bank. Each holder of Common Stock will be entitled to one
vote for each share held of record on each matter submitted to a vote, subject
to the right of stockholders to cumulate their votes for the election of
directors.
Liquidation. In the event of any liquidation, dissolution, or winding up of
the Bank, the holders of common stock will be entitled to receive, after
payment of all debts and liabilities of the Bank (including all deposit
accounts and accrued interest thereon), all assets of the Bank available for
distribution in cash or in kind. Holders of Common Stock have no conversion,
preemptive or other subscription rights, and there are no redemption or
sinking fund provisions with respect to the Common Stock.
TRANSFER AGENT AND REGISTRAR
Chase Mellon Shareholder Services, Los Angeles, California is the transfer
agent and registrar for the Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Certificate of Incorporation authorizes the issuance of
25,000,000 shares of Common Stock. Upon completion of the Offerings, there
will be outstanding 5,711,716 shares of Common Stock (assuming no exercise of
the Underwriters' over-allotment option).
All shares of Common Stock issued in the Offerings will be available for
resale in the public market without restriction or further registration under
the Securities Act, except for shares purchased by affiliates of the Company
(in general, any person who has a control relationship with the Company) or
shares exchanged by affiliates in the Reorganization, which shares will be
subject to the resale limitations of Rule 144. After the Offerings, shares of
Common Stock held by affiliates will be considered to be "control shares" and
571,172 shares of Common Stock (608,672 shares if the Underwriters' over-
allotment option is exercised in full) issuable upon the exercise of options
that the Company has granted or agreed to grant will be "restricted
securities" within the meaning of Rule 144, and are eligible for sale in the
public market in compliance with Rule 144. At the first meeting of
stockholders of the Company, the Company intends to file a registration
statement on Form S-8 under the Securities Act registering approximately
571,172 shares of Common Stock (608,672 shares if the Underwriters' over-
allotment option is exercised in full) issuable upon the exercise of options
granted or to be granted pursuant to the Company's Option Plan. Upon
effectiveness of the registration statement, shares issued to nonaffiliates
upon the exercise of the options generally will be freely tradeable without
restriction or further registration under the Securities Act. All officers and
directors of the Company have agreed, subject to certain exceptions, that they
will not offer, sell or otherwise dispose of any shares of Common Stock owned
by them for
91
<PAGE>
a period of 90 days after the date of this Prospectus without the prior
written consent of the Representatives of the Underwriters. The Company has
agreed, subject to certain exceptions, that it will not offer, sell or
otherwise dispose of any shares of Common Stock for a period of 90 days after
the date of this Prospectus without the prior written consent of the
Representative of the Underwriters.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act,
is entitled to sell, within any three-month period, a number of restricted
shares as to which at least one year has elapsed from the later of the
acquisition of such shares from the Company or an affiliate of the Company in
an amount that does not exceed the greater of (i) one percent of the then
outstanding shares of Common Stock (57,117 shares based upon 5,711,716 shares
to be outstanding immediately after the Offerings), or (ii) if the Common
Stock is quoted on the National Market System of the Nasdaq Stock Market or a
stock exchange, the average weekly trading volume of the Common Stock during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain requirements as to the manner of sale, notice, and the
availability of current public information about the Company. However, a
person who is not deemed to have been an affiliate of the Company during the
90 days preceding a sale by such person and who has beneficially owned shares
as to which at least two years has elapsed from the later of the acquisition
of such shares from the Company or an affiliate of the Company is entitled to
sell them without regard to the volume, manner of sale, or notice requirements
of Rule 144.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement"), the underwriters named below (the "Underwriters"),
for whom FBR is acting as representative (the "Representative"), has severally
agreed to purchase from the Company the aggregate number of shares of Common
Stock set forth opposite its name below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc. ........................
---
Total........................................................
===
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, and that the Underwriters will
purchase all of the Common Stock offered hereby if any such Common Stock are
purchased.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Common Stock to the public at the initial
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealer may re-allow, a discount
not in excess of $ per share to certain other dealers. The offering of the
Common Stock is made for delivery when, as and if accepted by the Underwriters
and is subject to prior sale and to the Underwriters' right to reject any
order in whole or in part and to withdraw, cancel, or modify the offer without
notice. After the initial public offering of the Common Stock, the offering
price and other selling terms may be changed by the Underwriters.
The Underwriters have reserved 86,500 shares of Common Stock offered in the
Public Offering for sale at the initial public offering price to directors,
officers and employees of the Company and the Bank and to certain other
persons.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to an aggregate
of 375,000 additional shares of Common Stock at the initial public offering
price, less the underwriting discount, set forth on the cover page of this
Prospectus. The Underwriters may exercise such option only to cover over-
allotments, if any, made in connection with the sale
92
<PAGE>
of shares of Common Stock offered hereby. If purchased, the Underwriters will
offer such additional shares of Common Stock on the same terms as the
2,500,000 shares of Common Stock are being offered. To the extent that the
Underwriters exercise such option, each of the Underwriters will be obligated,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares of Common Stock to be purchased by it shown
in the above table bears to 2,500,000 shares and the Company will be
obligated, pursuant to the option, to sell such shares of Common Stock to the
Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the federal securities laws, or to
contribute to payments the Underwriter may be required to make in respect
thereof.
The Company, its directors and officers have agreed not to offer, sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable for shares of Common Stock of the Company for a period of
90 days after the date of this Prospectus without the prior written consent of
the Representative except for: (i) the sale of the shares hereunder, (ii) the
issuance by the Company of Common Stock pursuant to the exercise of options
under the Company's Option Plans disclosed in the Prospectus; (iii) the
granting by the Company of stock options after the date of this Prospectus
under the Option Plans; or (iv) as a bona fide gift to a third party or as a
distribution to the partners or stockholders of a Company stockholder,
provided that the recipient(s) thereof agree in writing to be bound by the
terms of the Lock-Up Agreement to which such stockholder is bound.
If the Underwriters create a short position in the Common Stock in
connection with the Public Offering, (i.e., if they sell more shares of Common
Stock than are set forth on the cover page of this Prospectus), the
Representative may reduce that short position by purchasing Common Stock in
the open market. The Representative also may elect to reduce any short
position by exercising all or part of the over-allotment option described
herein.
The Representative also may impose a penalty bid on certain Underwriters and
selling group members. This means that if the Representative purchases shares
of Common Stock in the open market to reduce the Underwriters' short position
or to stabilize the price of the Common Stock, it may reclaim the amount of
the selling concession from the Underwriters and selling group members who
sold those shares as part of the Public Offering. In general, purchases of a
security for the purpose of stabilization or to reduce a syndicate short
position could cause the price of the security to be higher than it might
otherwise be in the absence of such purchases. The imposition of a penalty bid
may have an effect on the price of a security to the extent that it were to
discourage resales of the security by purchasers in the Public Offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of, or any effect that the
transactions described above may have on, the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representative will engage in such transactions or,
once commenced, will not be discontinued without notice.
Prior to the Public Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price of the Common Stock was
determined by negotiations between the Company and the Representative. Among
the factors considered in such negotiations were the history of, and prospects
for the Company and the industry in which it competes, an assessment of
management, the Company's past and present operations, its past and present
earnings and the trend of such earnings, the prospects for future earnings of
the Company, the general condition of the securities markets at the time of
the Offerings and the market prices of publicly-traded common stocks of
comparable companies in recent periods.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
93
<PAGE>
EXPERTS
The financial statements of Life Savings Bank, Federal Savings Bank as of
December 31, 1996 and for the year then ended included in this Prospectus,
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein, and are included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The financial statements of Life Savings Bank, Federal Savings Bank as of
December 31, 1995 and for the year ended December 31, 1995 included in this
Prospectus have been audited by Grant Thornton LLP, independent auditors, as
stated in their report appearing herein, and are included in reliance upon
such report given the authority of such firm as experts in accounting and
auditing.
The financial statements of Life Savings Bank, Federal Savings Bank for the
year ended December 31, 1994 included in this Prospectus, have been audited by
Price Waterhouse LLP, independent accountants, as stated in their report
appearing herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the Common Stock will be passed upon for the Bank and the
Company by Muldoon, Murphy & Faucette, Washington, D.C., special counsel to
the Bank and the Company. Muldoon, Murphy & Faucette will rely as to certain
matters of Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell.
Certain legal matters will be passed upon for FBR by Manatt, Phelps &
Phillips, LLP, Los Angeles, California.
CHANGES IN ACCOUNTANTS
Prior to the year ended December 31, 1996 the Bank's financial statements
were audited by Grant Thornton LLP. Grant Thornton LLP was replaced on October
24, 1996 and Deloitte & Touche LLP was engaged and continues as the
independent auditors of the Bank. The decision to change auditors was
recommended by the Audit Committee and was approved by the Board of Directors.
Accordingly, the statement of financial condition as of December 31, 1995 and
related statements of operations, stockholders' equity and cash flows for the
year ended December 31, 1995, and included in this Prospectus, were audited by
Grant Thornton LLP.
For the year ended December 31, 1995 and up to the replacement of Grant
Thornton LLP, there were no disagreements with Grant Thornton LLP on any
matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure which, if not resolved to the satisfaction of
Grant Thornton LLP, would have caused it to make reference to the subject
matter of the disagreement in connection with its report. The independent
auditors' report on the financial statements for the year ended December 31,
1995 did not contain an adverse opinion or a disclaimer of opinion, and was
not qualified or modified as to uncertainty, audit scope or accounting
principles.
Prior to the year ended December 31, 1995 the Bank's financial statements
were audited by Price Waterhouse LLP. Price Waterhouse LLP was replaced on
October 26, 1995 and Grant Thornton LLP was engaged as independent auditors of
the Bank for the year ended December 31, 1995. The decision to change auditors
was recommended by the Audit Committee and was approved by the Board of
Directors. Accordingly, the Bank's statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1994, included in this
Prospectus, were audited by Price Waterhouse LLP.
For the year ended December 31, 1994 and up to the date of the replacement
of Price Waterhouse LLP, there were no disagreements with Price Waterhouse LLP
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which, if not resolved to the
satisfaction of Price Waterhouse LLP, would have caused it to make a reference
to the subject matter of the disagreement in
94
<PAGE>
connection with its reports. The independent accountants' report on the
financial statements for the year ended December 31, 1994 did not contain an
adverse opinion or a disclaimer of opinion, and was not qualified or modified
as to uncertainty, audit scope or accounting principles.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted
by the rules and regulations of the SEC, this Prospectus does not contain all
the information set forth in the registration statement. This Prospectus
contains a description of the material terms and features of all material
contracts, reports or exhibits to the registration statement required to be
described; however, the statements contained in this Prospectus as to the
contents of any contract or other document filed as an exhibit to the
registration statement are, of necessity, brief descriptions thereof and are
not necessarily complete; each such statement is qualified by reference to
such contract or document. Such information and all exhibits to the
Registration Statement can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C.
20549; and at the Pacific Regional Office of the Commission at 5670 Wilshire
Blvd., 11th Floor, Los Angeles, California 90036-3648, and copies of such
material can be obtained from the SEC at prescribed rates. In addition, the
SEC maintains a website (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC, including the Company.
The Company will register its Common Stock with the SEC under Section 12(g)
of the Exchange Act, and, upon such registration, the Company and the holders
of its stock will become subject to the proxy solicitation rules, reporting
requirements and restrictions on stock purchases and sales by directors,
officers and greater than 10% stockholders, the annual and periodic reporting
and certain other requirements of the Exchange Act.
95
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants for the year ended December 31, 1994.... F-1
Independent Auditors' Report for the year ended December 31, 1995......... F-2
Independent Auditors' Report for the year ended December 31, 1996......... F-3
Statements of Financial Condition as of December 31, 1996 and 1995........ F-4
Statements of Operations for each of the three years in the period ended
December 31, 1996........................................................ F-5
Statements of Stockholders' Equity for each of the three years in the pe-
riod ended December 31, 1996............................................. F-6
Statements of Cash Flows for each of the three years in the period ended
December 31, 1996........................................................ F-7
Notes to Financial Statements for each of the three years in the period
ended December 31, 1996.................................................. F-8
</TABLE>
All schedules are omitted because they are not required or applicable, or
the required information is shown in the financial statements or notes
thereto.
The financial statements of Life Financial Corp. have been omitted because
Life Financial Corp. has not yet issued any stock, has no assets and no
liabilities, and has not conducted any business other than of an
organizational nature.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Life Savings Bank, Federal Savings Bank
In our opinion, the accompanying statements of operations, of cash flows and
of stockholders' equity present fairly, in all material respects the results
of operations and cash flows of Life Savings Bank, Federal Savings Bank for
the year ended December 31, 1994, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Bank's management; our responsibility is to express an opinion on these
financial statements in accordance with generally accepted auditing standards
which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statements presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above. We have
not audited the financial statements of Life Savings Bank, Federal Savings
Bank for any period subsequent to December 31, 1994.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Los Angeles, California
January 31, 1995
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Life Savings Bank, Federal Savings Bank
We have audited the accompanying statement of financial condition of Life
Savings Bank, Federal Savings Bank as of December 31, 1995, and the related
statements of operations, stockholders' equity and cash flows for the year
then ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the 1995 financial statements referred to above present
fairly, in all material respects, the financial position of Life Savings Bank,
Federal Savings Bank as of December 31, 1995, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1995 the Bank changed
its method of accounting for mortgage servicing rights to conform with
Statement of Financial Accounting Standards No. 122.
/s/ Grant Thornton LLP
Grant Thornton LLP
Irvine, California
February 8, 1996 (except for the "Earnings Per Share" paragraph of Note 1, as
to which the date is March 29, 1996)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Life Savings Bank, Federal Savings Bank
We have audited the accompanying statement of financial condition of Life
Savings Bank, Federal Savings Bank as of December 31, 1996, and the related
statements of operations, stockholders' equity and cash flows for the year
then ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, such 1996 financial statements present fairly, in all material
respects, the financial position of Life Savings Bank, Federal Savings Bank as
of December 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, in 1995, the Bank changed
its method of accounting for mortgage servicing rights to conform with
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights.
/s/ Deloitte & Touche LLP
- -----------------------------------
Deloitte & Touche LLP
Costa Mesa, California
February 7, 1997 (March 14, 1997 as to Note 16)
F-3
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................... $ 13,265 $ 3,932
Restricted cash.............................................. 1,636
Securities held to maturity, estimated fair value of $7,981
(1996) and $1,985 (1995).................................... 8,023 1,985
Residual asset, at fair value................................ 5,700
Loans held for sale.......................................... 31,018 21,688
Loans held for investment, net of allowance for estimated
loan losses of $1,625 (1996) and $1,177 (1995).............. 36,895 41,693
Mortgage servicing rights.................................... 2,645 683
Accrued interest receivable.................................. 537 507
Foreclosed real estate, net.................................. 561 827
Premises and equipment, net.................................. 1,579 976
Federal Home Loan Bank stock................................. 814 715
Deferred income taxes........................................ 397 138
Other assets................................................. 940 992
-------- -------
TOTAL ASSETS............................................. $104,010 $74,136
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposit accounts........................................... $ 85,711 $67,535
Other borrowings........................................... 3,278
Accounts payable and other liabilities..................... 5,748 2,333
-------- -------
Total liabilities........................................ 94,737 69,868
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $8 stated value; 10,000,000 shares
authorized; 1,070,572 (1996) and 311,036 (1995) shares
issued and outstanding.................................... 8,565 2,488
Additional paid-in capital................................. 825 914
Retained earnings (deficit), partially restricted.......... (117) 866
-------- -------
Total stockholders' equity............................... 9,273 4,268
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $104,010 $74,136
======== =======
</TABLE>
See notes to financial statements.
F-4
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME:
Loans.............................................. $ 6,542 $ 5,433 $ 4,530
Securities held to maturity........................ 56 159 138
Other interest-earning assets...................... 331 233 156
------- ------- -------
Total interest income............................ 6,929 5,825 4,824
------- ------- -------
INTEREST EXPENSE:
Deposit accounts................................... 3,514 3,192 2,534
Federal Home Loan Bank advances and other
borrowings........................................ 252 256 187
------- ------- -------
Total interest expense........................... 3,766 3,448 2,721
------- ------- -------
NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED
LOAN LOSSES......................................... 3,163 2,377 2,103
PROVISION FOR ESTIMATED LOAN LOSSES.................. 963 1,194 1,306
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED
LOAN LOSSES......................................... 2,200 1,183 797
NONINTEREST INCOME:
Loan servicing and other fees...................... 496 231 164
Service charges on deposit accounts................ 128 111 84
Net gains from mortgage financing operations....... 8,352 3,575 1,428
Other income....................................... 136 103 12
------- ------- -------
Total noninterest income......................... 9,112 4,020 1,688
NONINTEREST EXPENSE:
Compensation and benefits.......................... 5,233 2,544 1,575
Premises and occupancy............................. 746 471 418
Data processing.................................... 390 208 167
Net loss on foreclosed real estate................. 158 53 280
FDIC insurance premiums............................ 174 184 186
SAIF special assessment............................ 448
Marketing.......................................... 189 65 55
Telephone.......................................... 246 143 128
Professional services.............................. 218 92 86
Other expense...................................... 879 629 561
------- ------- -------
Total noninterest expense........................ 8,681 4,389 3,456
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT).. 2,631 814 (971)
INCOME TAX PROVISION (BENEFIT)....................... 1,126 294 (300)
------- ------- -------
NET INCOME (LOSS).................................... $ 1,505 $ 520 $ (671)
======= ======= =======
EARNINGS (LOSS) PER SHARE............................ $ 1.90 $ 0.84 $ (1.08)
======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING.................. 790,260 622,072 622,072
======= ======= =======
</TABLE>
See notes to financial statements.
F-5
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
---------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994.. 311,036 $2,488 $914 $ 1,017 $4,419
Net loss.................. (671) (671)
--------- ------ ---- ------- ------
BALANCE, December 31,
1994..................... 311,036 2,488 914 346 3,748
Net income................ 520 520
--------- ------ ---- ------- ------
BALANCE, December 31,
1995..................... 311,036 2,488 914 866 4,268
Stock split effected in
the form of a dividend... 311,036 2,488 (2,488)
Net proceeds from issuance
of common stock.......... 448,500 3,589 (89) 3,500
Net income................ 1,505 1,505
--------- ------ ---- ------- ------
BALANCE, December 31,
1996..................... 1,070,572 $8,565 $825 $ (117) $9,273
========= ====== ==== ======= ======
</TABLE>
See notes to financial statements.
F-6
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ 1,505 $ 520 $ (671)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization................. 301 166 179
Provision for estimated loan losses........... 963 1,194 1,306
Accretion of deferred fees.................... (41) (11) (20)
Provision for estimated losses on foreclosed
real estate.................................. 145 104 187
Gain on sale of foreclosed real estate, net... (41) (137) (39)
Gain on sale and securitization of loans held
for sale..................................... (7,868) (3,549) (1,014)
Gain on bulk sale of mortgage servicing
rights....................................... (26) (414)
Unrealized gain on residual asset............. (484)
Net accretion of residual asset............... (29)
Valuation allowance on mortgage servicing
rights....................................... (12) 13
Amortization of mortgage servicing rights..... 320 268 20
Purchase and origination of loans held for
sale, net of loan fees....................... (227,156) (135,552) (72,613)
Proceeds from sales and securitization of
loans held for sale.......................... 212,226 130,086 66,408
Increase in restricted cash................... (1,636)
Increase in accrued interest receivable....... (30) (76) (2)
Deferred income taxes......................... (259) (81) 51
Decrease (increase) in income taxes
receivable................................... 479 (64)
Increase in accounts payable and other
liabilities.................................. 3,415 1,618 86
Federal Home Loan Bank stock dividend......... (34) (30) (20)
Decrease (increase) in other assets........... 52 (315) (271)
--------- --------- --------
Net cash used in operating activities........ (18,663) (5,329) (6,891)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loans.......................... 8,578 6,428 8,133
Proceeds from sale of foreclosed real estate... 1,471 1,097 1,424
Purchase of securities held to maturity........ (8,013) (8,969) (991)
Proceeds from maturities of securities held to
maturity...................................... 1,975 9,241 2,042
Purchase of mortgage servicing rights.......... (706) (128)
Proceeds from bulk sales of servicing rights... 632 522
Additions to premises and equipment, net....... (904) (523) (33)
Purchase of Federal Home Loan Bank stock....... (65) (82) (8)
--------- --------- --------
Net cash provided by investing activities.... 3,042 7,118 10,961
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts.... 18,176 1,846 (6,319)
(Decrease) increase in Federal Home Loan Bank
advances...................................... (1,250) 50
Proceeds from other borrowings................. 3,278
Net proceeds from issuance of common stock..... 3,500
--------- --------- --------
Net cash provided by (used in) financing
activities.................................. 24,954 596 (6,269)
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... 9,333 2,385 (2,199)
CASH AND CASH EQUIVALENTS, beginning of year... 3,932 1,547 3,746
--------- --------- --------
CASH AND CASH EQUIVALENTS, end of year......... $ 13,265 $ 3,932 $ 1,547
========= ========= ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid.................................. $ 3,773 $ 3,418 $ 2,729
========= ========= ========
Income taxes paid (refunded)................... $ 267 $ 191 $ (290)
========= ========= ========
NONCASH INVESTING ACTIVITIES DURING THE YEAR:
Transfers from loans held for sale to loans
held for investment........................... $ 856 $ -- $ --
========= ========= ========
Transfers from loans held for investment to
loans held for sale........................... $ -- $ -- $ 10,090
========= ========= ========
Transfers from loans to foreclosed real
estate........................................ $ 2,070 $ 1,983 $ 1,871
========= ========= ========
Loans to facilitate sales of foreclosed real
estate........................................ $ 761 $ 647 $ 1,516
========= ========= ========
NONCASH FINANCING ACTIVITIES DURING THE YEAR--
Stock dividends paid.......................... $ 2,488 $ -- $ --
========= ========= ========
</TABLE>
See notes to financial statements.
F-7
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business--Life Savings Bank, Federal Savings Bank (the Bank)
is a federally chartered savings bank which commenced operations in 1983. The
Bank has one branch in San Bernardino County and its deposit accounts are
insured by the Federal Deposit Insurance Corporation (FDIC).
The Bank originates, purchases, sells and services nonconventional mortgage
loans principally secured by first and second mortgages on one- to four-family
residences. The Bank focuses on loans for the purchase or refinance of
residential real property by borrowers who, because of prior credit problems
or the absence of a credit history, are considered "subprime borrowers." The
Bank also originates debt consolidation loans for up to 125% of the loan to
value ratio of such loans for borrowers whose credit history qualifies for
loans under federal agency programs. The Bank purchases and originates
mortgage loans and other real estate secured loans through a network of
approved correspondents and mortgage brokers on a nationwide basis, as well as
through the Bank's retail lending division. Except for a limited number of
loans specifically originated for retention in the Bank's portfolio as loans
held for investment, since 1994, loans originated or purchased are generally
originated for sale in the secondary mortgage market or in asset
securitizations. The Bank generally retains the majority of the servicing
rights to the loans sold or securitized and may sell servicing rights at a
later date depending on market opportunities. In addition, the Bank purchases
and originates for resale in the secondary market, smaller commercial real
estate and multi-family loans. The Bank funds substantially all of the loans
which it purchases or originates through deposits from customers concentrated
in the communities surrounding its home office in San Bernardino County,
internally generated funds and advances from the Federal Home Loan Bank.
The Bank has recently begun to focus efforts on the origination of multi-
family and commercial real estate as well as consumer-oriented loans secured
by real estate, primarily home equity lines of credit and second trust deeds.
Specifically, the Bank has targeted borrowers seeking loans secured by multi-
family properties or properties used for commercial business purposes such as
small office buildings or light industrial or retail facilities. Such loans
are generally originated for sale.
Securities Held to Maturity--Investments in debt securities that management
has the positive intent and ability to hold to maturity are reported at cost,
adjusted for premiums and discounts that are recognized in interest income
using the interest method over the period to maturity.
Loans--The Bank's real estate loan portfolio consists primarily of long-term
loans secured by first trust deeds on single-family residences. The adjustable
rate mortgage (ARM) is the Bank's primary loan investment.
The Bank originates mortgage loans for both portfolio investment and sale in
the secondary market. At origination or purchase, mortgage loans are
designated as held for sale or held for investment. Loans held for sale are
carried at the lower of cost or estimated market value determined on an
aggregate basis by outstanding investor commitments or current investor
requirements and include related loan origination costs and fees, as well as
premiums or discounts for purchased loans. Net unrealized losses, if any, are
recognized in a valuation allowance by charges to operations. Any transfers of
loans held for sale to the investment portfolio are recorded at the lower of
cost or estimated market value on the transfer date. At December 31, 1996, the
principal balance of loans held for sale consist of $25,414,000 in single
family residential mortgage loans, $2,628,000 in multi-family residential
mortgage loans and $2,412,000 in commercial mortgage loans. At December 31,
1995, all loans held for sale are single family residential mortgage loans.
Loans held for investment are carried at amortized cost and net of deferred
loan origination fees and costs and allowance for estimated loan losses. Net
deferred loan origination fees and costs on loans are amortized or
F-8
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
accreted using the interest method over the expected lives of the loans.
Amortization of deferred loan fees is discontinued for nonperforming loans.
Loans held for investment are not adjusted to the lower of cost or estimated
market value because it is management's intention, and the Bank has the
ability to, hold these loans to maturity.
Interest on loans is credited to income as earned. Interest receivable is
accrued only if deemed collectible. Generally, allowances are established for
uncollected interest on loans on which payments are more than 90 days past
due.
On January 1, 1995, the Bank adopted Statement of Financial Accounting
Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan--
Income Recognition and Disclosures. SFAS No. 114 generally requires all
creditors to account for impaired loans, except those loans that are accounted
for at fair value or at the lower of cost or fair value, at the present value
of the expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or
the fair value of the collateral if the loan is collateral dependent. SFAS No.
114 indicates that a creditor should evaluate the collectibility of both
contractual interest and contractual principal when assessing the need for a
loss accrual. The adoption of these statements did not have a material impact
on the results of operations or the financial position of the Bank, taken as a
whole.
The Bank considers a loan impaired when it is probable that the Bank will be
unable to collect all contractual principal and interest payments under the
terms of the original loan agreement. Loans are evaluated for impairment as
part of the Bank's normal internal asset review process. However, in
determining when a loan is impaired, management also considers the loan
documentation, current loan to value ratios, and the borrower's current
financial position. Included as impaired loans are all loans delinquent 90
days or more and all loans that have a specific loss allowance applied to
adjust the loan to fair value. The accrual of interest on impaired loans is
discontinued after a 90-day delinquent period or when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
the interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments
are received. Where impairment is considered other than temporary, a charge-
off is recorded; where impairment is considered temporary, an allowance is
established. Impaired loans which are performing under the contractual terms
are reported as performing loans, and cash payments are allocated to principal
and interest in accordance with the terms of the loans. The Bank uses the fair
value of collateral method for measuring impaired loans. The Bank applies such
measurement provision to all loans in its portfolio except for one- to four-
family residential mortgage loans and unsecured consumer loans, which are
collectively evaluated for impairment.
Allowances for Estimated Loan and Real Estate Losses--It is the policy of
the Bank to maintain allowances for estimated loan and real estate losses at
levels deemed appropriate by management to provide for known or inherent risks
in the portfolio. Specific loss allowances are established for loans that are
deemed impaired if the fair value of the loan or the collateral is estimated
to be less than the gross carrying value of the loan. In estimating losses,
management considers the estimated sales price, cost of refurbishment, payment
of delinquent taxes, cost of holding the property (if an extended period is
anticipated) and cost of disposal. Additionally, general valuation allowances
for loan and real estate losses have been established. Management's
determination of the adequacy of the loan and real estate loss allowances is
based on an evaluation of the composition of the portfolio, actual loss
experience, current and prospective economic conditions, industry trends and
other relevant factors, such as the recent adverse economic conditions
experienced (including declining real estate values) in the area in which the
Bank's lending and real estate activities are based, which may affect the
borrower's ability to pay and the value of the underlying collateral. In
addition, various regulatory agencies, as an integral part of
F-9
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgments different from those of management.
Although management uses the best information available to make these
estimates, future adjustments to the allowances may be necessary due to
economic, operating, regulatory and other conditions that may be beyond the
Bank's control.
Mortgage Financing Operations--The Bank sells and securitizes the majority
of loans held for sale with servicing retained. Under the servicing
agreements, the investor is paid its share of the principal collections
together with interest at an agreed-upon rate, which generally differs from
the loans' contractual interest rate. Such differences result in a "loan
servicing spread."
Effective July 1, 1995, the Bank adopted SFAS No. 122, Accounting for
Mortgage Servicing Rights, which amended SFAS No. 65, Accounting for Certain
Mortgage Banking Activities. SFAS No. 122 requires an institution that
purchases or originates mortgage loans and sells or securitizes those loans
with servicing rights retained to allocate the total cost of the mortgage
loans to the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values. The impact of adopting
SFAS No. 122 was an increase in pretax income of $594,000, net income of
$438,000 and earnings per share of $.70 for the year ended December 31, 1995.
In addition, SFAS No. 122 requires that all capitalized mortgage servicing
rights (MSRs) be evaluated for impairment based on the fair value of those
rights. The Bank's periodic evaluation is performed on a disaggregated basis
whereby MSRs are stratified based upon type of interest rate (variable or
fixed), loan type and original loan term. Impairment is recognized in a
valuation allowance for each pool in the period of impairment. The Bank
determines fair value based on the present value of estimated net future cash
flows related to servicing income. In estimating fair values at December 31,
1996, the Bank utilized a weighted average prepayment assumption of 23% and a
weighted average discount rate of 16.5%. The cost allocated to servicing
rights is amortized in proportion to and over the period of estimated net
future servicing fee income.
Prior to adoption of SFAS No. 122, the Bank used the methodology set forth
in Emerging Issues Task Force No. 88-11, Allocation of Recorded Investment
When a Loan or Part of a Loan is Sold, in accounting for loan sales.
Gains on bulk sales of mortgage loan servicing rights are recognized when
title and all risks and rewards have irrevocably passed to the buyer and there
are no significant unresolved contingencies.
Residual Asset--In December 1996, the Bank completed the securitization and
sale of approximately $51,900,000 in loans held for sale in the form of
mortgage pass-through certificates and recognized a gain of approximately
$4,300,000. These certificates are held in a trust independent of the Bank.
The Bank will act as servicer for the trust and receive a stated servicing
fee. The Bank has also retained a beneficial interest in the form of an
interest-only strip which represents the subordinated right to receive cash
flows from the pool of securitized loans after payment of the required amounts
to the holders of the securities and the costs associated with the
securitization. This interest-only strip receivable is classified as a trading
security and recorded at fair value with any unrealized gains or losses
recorded in the results of operations in the period of the change in fair
value. For the year ended December 31, 1996, a net unrealized gain of $484,000
resulting from changes in fair value is included in results of operations.
Valuations at origination and at each reporting period are based on
discounted cash flow analyses. The cash flows are estimated as the excess of
the weighted average coupon on each pool of loans sold over the sum of the
F-10
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
pass-through interest rate, a servicing fee, a trustee fee, an insurance fee
and an estimate of annual future credit losses related to the prepayment,
default, loss, and interest rate assumptions that market participants would
use for similar financial instruments subject to prepayment, credit and
interest rate risk and are discounted using an interest rate that a purchaser
unrelated to the seller of such a financial instrument would demand. At
origination, the Bank utilizes a prepayment assumption of 17.0%, an estimated
loss factor assumption of 1.5% and a weighted average discount rate of 13.5%
to value the residual asset. The valuation includes consideration of
characteristics of the loans including loan type and size, interest rate,
origination date, term and geographic location. The Bank also uses other
available information such as externally prepared reports on prepayment rates,
collateral value, economic forecasts and historical default and prepayment
rates of the portfolio under review. To the Bank's knowledge, there is no
active market for the sale of residual assets. The range of values
attributable to the factors used in determining fair value is broad.
Accordingly, the Bank's estimate of fair value is subjective.
In connection with its securitization transaction, the Bank initially
deposited cash in the amount of approximately $1,600,000 with a trustee and
will subsequently deposit a portion of the servicing spread collected on the
related loans. Such amounts serve as credit enhancement for the related trust.
The amount set aside is available for distribution to investors in the event
of certain shortfalls in amounts due to investors. These amounts are subject
to increase up to a reserve level as specified in the related securitization
documents. Cash amounts on deposit are invested in certain instruments as
permitted by the related securitization documents. To the extent amounts on
deposit exceed specified levels, distributions are made to the Bank; and, at
the termination of the related trust, any remaining amounts on deposit are
distributed to the Bank. The amount on deposit at December 31, 1996 is
classified as restricted cash in the accompanying statement of financial
condition.
Foreclosed Real Estate--Real estate properties acquired through or in lieu
of loan foreclosure are initially recorded at the lower of fair value or the
balance of the loan at the date of foreclosure through a charge to the
allowance for estimated loan losses. After foreclosure, valuations are
periodically performed by management and an allowance for losses is
established by a charge to operations if the carrying value of a property
exceeds its fair value less estimated cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in net gain
(loss) on foreclosed real estate in the statement of operations.
Premises and Equipment--Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed using both the straight-line and accelerated methods over the
estimated useful lives of the assets, which range from 15 years for leasehold
improvements, 7 years for furniture, fixtures and equipment, and 3 years for
computer equipment.
Income Taxes--The Bank accounts for income taxes under SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Bank's financial statements or tax returns.
In estimating future tax consequences, all expected future events other than
enactments of changes in the tax law or rates are considered. If necessary, a
valuation allowance is established based on management's determination of the
likelihood of realization of deferred tax assets.
Derivative Financial Instruments--The Bank has entered into various interest
rate exchange agreements (swaps) to manage exposure to changes in interest
rates. Net interest income (expense) on the swaps resulting from the
differential between exchanging floating and fixed rate interest payments is
recorded using the accrual method. No interest rate exchange agreements were
outstanding as of December 31, 1996 and 1995 (Note 13).
In the ordinary course of business, the Bank has entered into other off-
balance sheet financial instruments consisting of commitments to extend
credit. Such financial instruments are recorded in the financial statements
when they are funded or related fees are incurred or received.
F-11
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
Earnings Per Share--Earnings per share is based on the weighted average
number of shares outstanding adjusted retroactively to reflect the stock split
effected in the form of a dividend during 1996. The 1995 and 1994 per share
amounts and weighted average shares outstanding included in the accompanying
financial statements have been restated to reflect such stock split.
Presentation of Cash Flows--For purposes of reporting cash flows, cash and
cash equivalents include cash and federal funds sold. Generally, federal funds
are sold for one-day periods. At December 31, 1996 and 1995, federal funds
sold approximated $10,335,000 and $1,600,000, respectively.
Use of Estimates--In preparing the Bank's financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Stock-Based Compensation--In 1995, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123, Accounting for Stock-Based Compensation, which
encourages companies to account for stock compensation awards based on their
fair value at the date the awards are granted. SFAS No. 123 does not require
the application of the fair value method and allows for the continuance of
current accounting methods, which require accounting for stock compensation
awards based on their intrinsic value as of the grant date. However, SFAS No.
123 requires pro forma disclosure of net income and, if presented, earnings
per share, as if the fair value based method of accounting defined in this
Statement had been applied. The accounting and disclosure requirements of this
Statement are effective for financial statements for fiscal years beginning
after December 15, 1995. The Bank did not adopt the accounting method in SFAS
No. 123 with respect to its stock option plan and will account for such plan
in accordance with Accounting Principles Board Opinion No. 25.
Recent Accounting Developments--In June 1996, the Financial Accounting
Standards Board issued SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, which was amended by SFAS
No. 127. This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that
focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Under the financial-
components approach, after a transfer of financial assets, an entity
recognizes all financial and servicing assets it controls and liabilities it
has incurred and derecognizes financial assets it no longer controls and
liabilities that have been extinguished. The financial-components approach
focuses on the assets and liabilities that exist after the transfer. Many of
these assets and liabilities are components of financial assets that existed
prior to the transfer. If a transfer does not meet the criteria for a sale,
the transfer is accounted for as a secured borrowing with pledge of
collateral. The statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996. Retroactive application of this statement is not permitted. The
Company does not anticipate that the implementation of SFAS No. 125 will have
a material impact on its results of operations or financial condition.
Reclassifications--Certain reclassifications have been made to the 1995 and
1994 financial statements to conform to the 1996 presentation.
F-12
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
2. REGULATORY CAPITAL REQUIREMENTS AND OTHER REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors. Management believes, as of December 31, 1996,
that the Bank meets all capital adequacy requirements to which it is subject.
Qualitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined).
As of December 31, 1996, management believes that the Bank is considered as
adequately capitalized under the regulatory framework for prompt corrective
action. As of December 31, 1995, the most recent notification from the Office
of Thrift Supervision (OTS) categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as well-
capitalized or adequately capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table. There are no conditions or events since December 31, 1996 that
management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
TO BE ADEQUATELY TO BE WELL
CAPITALIZED UNDER CAPITALIZED UNDER
PROMPT CORRECTIVE PROMPT CORRECTIVE
ACTUAL ACTION PROVISIONS: ACTION PROVISIONS:
-------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ----------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996:
Total capital (to risk-
weighted assets)....... $ 10,446 9.43% $ 8,865 8.0% $ 11,081 10.0%
Tier 1 capital (to risk-
weighted assets)....... 9,273 8.37% 4,432 4.0% 6,649 6.0%
Tier 1 capital (to
average assets)........ 9,273 8.90% 4,169 4.0% 5,211 5.0%
<CAPTION>
TO BE ADEQUATELY TO BE WELL
CAPITALIZED UNDER CAPITALIZED UNDER
PROMPT CORRECTIVE PROMPT CORRECTIVE
ACTUAL ACTION PROVISIONS: ACTION PROVISIONS:
-------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ----------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1995:
Total capital (to risk-
weighted assets)....... $ 4,871 10.17% $ 3,832 8.0% $ 4,789 10.0%
Tier 1 capital (to risk-
weighted assets)....... 4,268 8.91% 1,916 4.0% 2,874 6.0%
Tier 1 capital (to
average assets)........ 4,268 5.69% 3,003 4.0% 3,753 5.0%
</TABLE>
The Bank has been required by the OTS since the Bank's examination completed
August 9, 1996 to compute its regulatory capital ratios based upon the higher
of (1) the average of total assets based on month-end results or (2) total
assets as of the quarter-end.
F-13
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
Under the framework, the Bank's capital levels at December 31, 1996 do not
allow the Bank to accept brokered deposits without prior approval from the
regulators. The Bank had approximately $2,200,000 of brokered deposits at
December 31, 1996. This is not expected to materially impact the Bank as it
has other sources of funds.
In accordance with the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA), the OTS established regulations requiring
the Bank to maintain (i) tangible capital equal to 1.5% of adjusted total
assets, (ii) core capital equal to 3% of adjusted total assets, and (iii)
risk-based capital equal to 8% of risk-weighted assets.
The following table summarizes the OTS regulatory capital requirements under
FIRREA for the Bank at December 31, 1996. As indicated in the table, the
Bank's capital levels exceed all three of the currently applicable minimum
capital requirements.
<TABLE>
<CAPTION>
TOTAL RISK-
TANGIBLE CAPITAL CORE CAPITAL BASED CAPITAL
----------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
----------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of year:
Equity per Bank financial
statements................. $ 9,273 $ 9,273 $ 9,273
Adjustments for regulatory
capital purposes--general
valuation allowance........ 1,173
--------- ------- ------- ----- ------- -----
Regulatory capital............ 9,273 8.90% 9,273 8.90% 10,446 9.43%
Minimum capital requirement... 1,563 1.50 3,127 3.00 8,865 8.00
--------- ------- ------- ----- ------- -----
Excess regulatory capital..... $ 7,710 7.40% $ 6,146 5.90% $ 1,581 1.43%
========= ======= ======= ===== ======= =====
</TABLE>
The OTS issued regulations which set forth the methodology for calculating
an interest rate risk component that is being incorporated into the OTS
regulatory capital rules. Under the new regulations, only savings institutions
with above normal interest rate risk exposure are required to maintain
additional capital. This additional capital would increase the amount of a
savings institution's otherwise required risk-based capital requirement. The
final rule became effective January 1, 1994, and implementation will not begin
until the Bank has been notified by the OTS.
Management believes that, under current regulations, the Bank will continue
to meet its minimum capital requirements in the foreseeable future. However,
events beyond the control of the Bank, such as changing interest rates or a
further downturn in the economy in areas where the Bank has most of its loans,
could adversely affect future earnings and, consequently, the ability of the
Bank to meet its future minimum capital requirements.
At periodic intervals, both the OTS and the FDIC routinely examine the
Bank's financial statements as part of their legally prescribed oversight of
the savings and loan industry. Based on these examinations, the regulators can
direct that the Bank's financial statements be adjusted in accordance with
their findings.
The OTS concluded an examination of the Bank in June 1996. Examination
results have been reflected in the financial statements presented herein.
Future examinations by the OTS or FDIC could include a review of certain
transactions or other amounts reported in the 1996 financial statements.
Adjustments, if any, cannot presently be determined.
F-14
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the Funds Act), which, among other things, imposes a
special one-time assessment on Savings Association Insurance Fund (SAIF)
member institutions, including the Bank, to recapitalize the SAIF. As required
by the Funds Act, the FDIC imposed a special assessment of 65.7 basis points
on SAIF-assessable deposits held as of March 31, 1995, payable November 27,
1996. The special assessment was recognized as an expense in the third quarter
of 1996 and is tax deductible. The Bank took a pretax charge of $448,000 as a
result of the SAIF special assessment.
The Funds Act also spreads the obligations for payment of the Financing
Corporation (FICO) bonds across all SAIF and Bank Insurance Fund (BIF)
members. Beginning on January 1, 1997, BIF deposits will be assessed for FICO
payments at a rate of 20% of the rate assessed on SAIF deposits. Based on
current estimates by the FDIC, BIF deposits will be assessed a FICO payment of
1.3 basis points, while SAIF deposits will pay an estimated 6.5 basis points
on the FICO bonds. Full pro rata sharing of the FICO payments between BIF and
SAIF members will occur on the earlier of January 1, 2000 or the date the BIF
and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be
merged on January 1, 1999 provided no savings associations remain as of that
time.
As a result of the Funds Act, the FDIC recently proposed to lower SAIF
assessments to 0 to 27 basis points effective January 1, 1997, a range
comparable to that of BIF members. However, SAIF members will continue to make
the higher FICO payments described above. Management cannot predict the level
of FDIC insurance assessments on an ongoing basis, whether the savings
association charter will be eliminated or whether the BIF and SAIF will
eventually be merged.
3. SECURITIES HELD TO MATURITY
The amortized cost and estimated fair value of securities held to maturity
were as follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1996
-----------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------ ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- -------- -------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and other agency
securities..................... $8,013 $ -- $ (42) $7,971
Mortgage-backed securities...... 10 10
------ -------- -------- ------
$8,023 $ -- $ (42) $7,981
====== ======== ======== ======
<CAPTION>
1995
-----------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------ ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- -------- -------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and other agency
securities..................... $1,974 $ -- $ -- $1,974
Mortgage-backed securities...... 11 11
------ -------- -------- ------
$1,985 $ -- $ -- $1,985
====== ======== ======== ======
</TABLE>
F-15
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
The maturity distribution of securities held to maturity at December 31,
1996 is as follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less.................................. $5,000 $4,976
Due from one to five years............................... 3,013 2,995
Mortgage-backed securities............................... 10 10
------ ------
$8,023 $7,981
====== ======
</TABLE>
The weighted average yield on securities held to maturity was 5.47% and
5.41% at December 31, 1996 and 1995, respectively.
4. LOANS HELD FOR INVESTMENT
Loans held for investment consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Mortgage loans:
Residential:
One- to four-family...................................... $28,861 $32,517
Multi-family............................................. 2,124 2,412
Commercial and land....................................... 7,247 7,615
------- -------
38,232 42,544
Other loans:
Loans secured by deposit accounts......................... 177 186
Unsecured commercial loans................................ 67 70
Unsecured consumer loans.................................. 65 63
------- -------
309 319
------- -------
38,541 42,863
Less:
Deferred loan origination fees (costs).................... 21 (7)
Allowance for estimated loan losses....................... 1,625 1,177
------- -------
1,646 1,170
------- -------
$36,895 $41,693
======= =======
Weighted average interest rate at end of period............ 8.06% 8.91%
======= =======
</TABLE>
The Bank grants residential and commercial loans held for investment to
customers located primarily in Southern California. Consequently, a borrower's
ability to repay may be impacted by economic factors in the region.
At December 31, 1996, included in loans held for investment and loans held
for sale are adjustable rate loans with principal balances of $58,648,000.
Adjustable rate loans are indexed primarily to COFI.
F-16
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
The following summarizes activity in the allowance for estimated loan losses
for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Balance, beginning of year........................... $1,177 $ 832 $ 436
Provision for estimated loan losses.................. 963 1,194 1,306
Recoveries........................................... 219 65 3
Charge offs.......................................... (734) (914) (913)
------ ------ ------
Balance, end of year................................. $1,625 $1,177 $ 832
====== ====== ======
</TABLE>
The Bank had nonaccrual loans at December 31, 1996, 1995 and 1994 of
$2,416,000, $1,397,000 and $1,889,000, respectively. If nonaccrual loans had
been performing in accordance with their original terms, the Bank would have
recorded interest income of $6,692,000, $5,500,000 and $4,637,000,
respectively, instead of interest income actually recognized of $6,542,000,
$5,434,000 and $4,531,000, respectively, for the years ended December 31,
1996, 1995 and 1994.
At December 31, 1996 and 1995, the Bank had impaired loans totaling
$2,878,000 and $1,397,000, respectively, with specific reserves of $452,000
and $382,000, respectively. During 1996 and 1995, the average recorded
investment in impaired loans was $2,300,000 and $1,980,000, respectively.
Total cash collected on impaired loans during 1996 and 1995 was $1,339,000 and
$1,079,000, respectively, of which $1,249,000 and $960,000, respectively, was
credited to principal. Interest income of $90,000 and $119,000 on impaired
loans was recognized for cash payments received in 1996 and 1995,
respectively.
At December 31, 1996 and 1995, troubled debt restructured loans amounted to
$131,000. There were no troubled debt restructurings effected during the year
ended December 31, 1996.
The Bank is not committed to lend additional funds to debtors whose loans
have been modified.
The Bank is subject to numerous lending-related regulations. Under FIRREA,
the Bank may not make real estate loans to one borrower in excess of 15% of
its unimpaired capital and surplus except for loans not to exceed $500,000.
This 15% limitation results in a dollar limitation of approximately $1,567,000
at December 31, 1996.
During 1996, the Bank originated a loan for $154,500 to an executive
officer. Immediately subsequent to origination, the loan was sold servicing
released.
5. MORTGAGE FINANCING OPERATIONS
Loans serviced for others at December 31, 1996, 1995 and 1994 totaled
$168,963,000, $189,451,000 and $48,204,000, respectively.
In connection with mortgage servicing activities, the Bank held funds in
trust for others totaling approximately $957,000 and $934,000 at December 31,
1996 and 1995, respectively. At December 31, 1996 and 1995, $266,000 and
$19,000, respectively, of these funds are included in deposit accounts of the
Bank (subject to FDIC insurance limits).
For the year ended December 31, 1996, 34.0% of the properties securing loans
funded by the Bank were located in California, 11.9% were located in Utah,
7.6% were located in Colorado, 6.8% were located in Florida
F-17
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
and the remainder were dispersed throughout the country. At December 31, 1996,
40% of the loan servicing portfolio was collateralized by real estate
properties located in California. No other state accounted for more than 10%.
In the ordinary course of business, the Bank has liability under
representations and warranties made to purchasers and insurers of mortgage
loans. Under certain circumstances, the Bank may become liable for the unpaid
principal and interest on the defaulted loans or other loans if there has been
a breach of representations or warranties.
The following is a summary of activity in mortgage servicing rights for the
years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ----- -----
<S> <C> <C> <C>
Balance, beginning of year............................. $ 683 $ -- $ --
Additions through originations......................... 2,270 864
Additions through purchase of servicing rights......... 706 128
Amortization........................................... (320) (268) (20)
Sales.................................................. (606) (108)
Change in valuation allowance.......................... 12 (13)
------ ----- -----
Balance, end of year................................... $2,645 $ 683 $ --
====== ===== =====
</TABLE>
The valuation allowance on mortgage servicing rights decreased by $12,000
from $13,000 at December 31, 1995 to $1,000 at December 31, 1996. There were
no direct write-downs charged against the allowance for the years ended
December 31, 1996 and 1995.
Net gains from mortgage financing operations for the years ended December 31
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Gains on sale and securitization of loans held for
sale................................................ $7,868 $3,549 $1,014
Unrealized gain on residual asset.................... 484
Gains on bulk sale of mortgage servicing rights...... 26 414
------ ------ ------
$8,352 $3,575 $1,428
====== ====== ======
</TABLE>
6. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Premises................................................... $ 569 $ --
Leasehold improvements..................................... 530 614
Furniture, fixtures and equipment.......................... 1,787 1,430
------- -------
2,886 2,044
Less accumulated depreciation and amortization............. (1,307) (1,068)
------- -------
$ 1,579 $ 976
======= =======
</TABLE>
F-18
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
The adoption of SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, did not have a material
impact on the results of operations or the financial condition of the Bank.
7. FORECLOSED REAL ESTATE
Activity in the allowance for estimated real estate losses is as follows for
the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----- ------ -----
<S> <C> <C> <C>
Balance, beginning of year............................ $ 44 $ 29 $ 94
Provision for estimated real estate losses............ 145 104 187
Recoveries............................................ 2
Charge offs........................................... (126) (89) (252)
----- ------ -----
Balance, end of year.................................. $ 65 $ 44 $ 29
===== ====== =====
Net loss on foreclosed real estate is summarized as follows for the years
ended December 31 (in thousands):
<CAPTION>
1996 1995 1994
----- ------ -----
<S> <C> <C> <C>
Net gain on sales of foreclosed real estate........... $ (41) $ (137) $ (39)
Other expenses, net................................... 54 86 132
Provision for estimated real estate losses............ 145 104 187
----- ------ -----
Net loss on foreclosed real estate.................... $ 158 $ 53 $ 280
===== ====== =====
</TABLE>
8. DEPOSIT ACCOUNTS
Deposit accounts at December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST RATE AMOUNT INTEREST RATE AMOUNT
------------- ------- ------------- -------
<S> <C> <C> <C> <C>
Checking accounts................ 2.22% $ 8,947 1.37% $ 6,735
Passbook accounts................ 2.10 4,117 2.10 4,842
Money market accounts............ 2.99 3,217 2.76 4,156
Certificate accounts:
Under $100,000................. 5.66 49,437 5.70 39,989
$100,000 and over.............. 5.63 19,993 5.80 11,813
------- -------
5.02% $85,711 4.84% $67,535
======= =======
</TABLE>
F-19
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
The aggregate annual maturities of certificate accounts at December 31, 1996
are approximately as follows (in thousands):
<TABLE>
<S> <C>
1997................................................................. $59,438
1998................................................................. 6,197
1999................................................................. 1,700
2000................................................................. 925
2001................................................................. 613
Thereafter........................................................... 557
-------
$69,430
=======
</TABLE>
Interest expense for the years ended December 31 is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Checking accounts....................................... $ 112 $ 92 $ 95
Passbook accounts....................................... 92 127 157
Money market accounts................................... 118 144 163
Certificate accounts.................................... 3,192 2,829 2,119
------ ------ ------
$3,514 $3,192 $2,534
====== ====== ======
</TABLE>
9. ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
As of December 31, 1996, the Bank had an available line of credit with the
Federal Home Loan Bank of San Francisco (FHLB) of $17,346,000, which is
contingent upon continued compliance with the Advances and Security Agreement
and other eligibility requirements established by the FHLB. Advances and/or
the line of credit are collateralized by pledges of certain real estate loans
with an aggregate principal balance of $20,474,000 and $24,426,000 at December
31, 1996 and 1995, respectively.
There were no FHLB advances outstanding at December 31, 1996 and 1995.
The following summarizes activities in advances from the FHLB for the years
ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Average balance outstanding....................... $ 4,259 $3,112 $1,863
Maximum amount outstanding at any month-end during
the period....................................... 13,900 7,600 7,000
Weighted average interest rate during the period.. 5.93% 6.55% 4.87%
</TABLE>
At December 31, 1996, the Bank had a borrowing of $3,278,000 with an
interest rate of 8.43% from a financial institution. The borrowing was
collateralized by certain real estate loans with an aggregate principal
balance of $3,278,000. The borrowing was repaid on January 17, 1997.
F-20
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
10. INCOME TAXES
Income taxes for the years ended December 31 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ---- -----
<S> <C> <C> <C>
Current provision (benefit):
Federal............................................... $1,073 $374 $(352)
State................................................. 312 1 1
------ ---- -----
1,385 375 (351)
------ ---- -----
Deferred (benefit) provision:
Federal............................................... (235) (81) 10
State................................................. (24) 41
------ ---- -----
(259) (81) 51
------ ---- -----
Total income tax provision (benefit)................. $1,126 $294 $(300)
====== ==== =====
</TABLE>
A reconciliation from the statutory federal income tax rate to the Bank's
effective income tax rate for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
Statutory federal income tax rate........................ 35.0% 35.0% (35.0)%
State taxes, net of federal income tax benefit........... 7.2 3.1
Other.................................................... 0.6 1.1 1.0
---- ---- -----
42.8% 36.1% (30.9)%
==== ==== =====
</TABLE>
Deferred tax assets (liabilities) were comprised of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses..................................... $ 479 $ 258
Capital loss carryforward..................................... 63 63
Loans held for sale........................................... 115 201
Other......................................................... 301 23
----- -----
958 545
----- -----
Deferred tax liabilities:
Depreciation.................................................. (61) (82)
Purchased servicing rights.................................... (14)
Originated servicing rights................................... (358) (179)
Federal Home Loan Bank dividends.............................. (106) (85)
----- -----
(525) (360)
----- -----
433 185
Less valuation allowance....................................... (36) (47)
----- -----
Net deferred tax asset......................................... $ 397 $ 138
===== =====
</TABLE>
F-21
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
Gross deferred tax assets are expected to be realized during 1997 through
2001.
At December 31, 1996, the Bank has approximately $555,000 of net capital
loss carryforwards available to offset future capital gains for state tax
purposes. If not utilized, the losses would expire in 1998. A valuation
allowance has been placed against the portion of this capital loss
carryforward for which realization is not assured.
The Bank's financial statement equity includes tax bad debt deductions for
which no provision for federal income taxes has been made. If distributions to
shareholders are made in excess of current or accumulated earnings and profits
or if stock of the Bank is partially redeemed, this tax bad debt reserve,
which approximates $330,000 at June 30, 1996, will be recaptured into income
at the then prevailing federal income tax rate. The related unrecognized
deferred tax liability is approximately $116,000. It is not contemplated that
the Bank will make any disqualifying distributions that would result in the
recapture of these reserves.
11. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK
The Bank is involved in various legal proceedings associated with normal
operations. In the opinion of management, based on the advice of legal
counsel, such litigation and claims are expected to be resolved without
material effect on the financial position of the Bank.
The Bank leases a portion of its facilities from nonaffiliates under
operating leases expiring at various dates through 2001. The following
schedule shows the minimum annual lease payments, excluding property taxes and
other operating expenses, due under these agreements (in thousands):
<TABLE>
<S> <C>
1997................................................................. $215
1998................................................................. 185
1999................................................................. 179
2000................................................................. 116
2001................................................................. 82
Thereafter...........................................................
----
$777
====
</TABLE>
Rental expense under all operating leases totaled $232,000, $124,000 and
$118,000 in 1996, 1995 and 1994, respectively.
The Bank has negotiated an employment agreement with its chief executive
officer. This agreement provides for the payment of a base salary, a bonus
based upon performance of the Bank and the payment of severance benefits upon
termination.
Lending Activities--Loans to subprime borrowers present a higher level of
risk of default than conforming loans because of the increased potential for
default by borrowers who may have had previous credit problems or who do not
have any credit history. Loans to subprime borrowers also involve additional
liquidity risks, as these loans generally have a more limited secondary market
than conventional loans. The actual rates of delinquencies, foreclosures and
losses on loans to subprime borrowers could be higher under adverse economic
conditions than those currently experienced in the mortgage lending industry
in general. While the Bank believes that the underwriting procedures and
appraisal processes it employs enable it to somewhat mitigate the higher risks
inherent in loans made to these borrowers, no assurance can be given that such
procedures or processes will afford adequate protection against such risks.
F-22
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
The debt consolidation loans the Bank originates for agency qualified
borrowers are primarily home equity lines of credit and second deeds of trust
generally up to 125% of the appraised value of the real estate underlying the
loans. In the event of a default on such a loan by a borrower, there generally
would be insufficient collateral to pay off the balance of such loan and the
Bank, as holder of a second position on the property, would likely lose a
substantial portion, if not all, of its investment. While the Bank believes
that the underwriting procedures it employs enable it to somewhat mitigate the
higher risks inherent in such loans, no assurance can be given that such
procedures will afford adequate protection against such risks. Approximately
65% of the loans included in the securitization transaction completed in 1996
consisted of this type of loan.
The Bank has been actively involved in the origination, purchase and sale to
institutional investors of real estate secured loans and, more recently, in
asset securitizations. Generally, the profitability of such mortgage financing
operations depends on maintaining a sufficient volume of loans for sale and
the availability of purchasers. Changes in the level of interest rates and
economic factors affect the amount of loans originated or available for
purchase by the Bank, and thus the amount of gains on sale of loans and
servicing fee income. Changes in the purchasing policies of institutional
investors or increases in defaults after funding could substantially reduce
the amount of loans sold to such investors or sold through asset
securitizations. Any such changes could have a material adverse effect on the
Bank's results of operations and financial condition.
The Bank's ability to originate, purchase and sell loans through its
mortgage financing operations is also significantly impacted by changes in
interest rates. Increases in interest rates may also reduce the amount of loan
and commitment fees received by the Bank. A significant decline in interest
rates could also decrease the size of the Bank's servicing portfolio and the
related servicing income by increasing the level of prepayments. The Bank does
not currently utilize any specific hedging instruments to minimize exposure to
fluctuations in the market price of loans and interest rates with regard to
loans held for sale in the secondary mortgage market. Therefore, between the
time the Bank originates the loans or purchase commitments are issued or asset
securitizations are completed, the Bank is exposed to downward movements in
the market price of such loans due to upward movements in interest rates.
The Bank depends largely on mortgage brokers and correspondents for its
purchases and originations of new loans. The Bank's competitors also seek to
establish relationships with the Bank's mortgage brokers and correspondents.
The Bank's future results may become increasingly exposed to fluctuations in
the volume and cost of its wholesale loans resulting from competition from
other purchasers of such loans.
Availability of Funding Sources--The Bank funds substantially all of the
loans which it originates or purchases through deposits, internally generated
funds or FHLB advances. The Bank competes for deposits primarily on the basis
of rates, and, as a consequence, the Bank could experience difficulties in
attracting deposits to fund its operations if the Bank does not continue to
offer deposit rates at levels that are competitive with other financial
institutions. The Bank also uses the proceeds generated by the Bank in selling
loans in the secondary market or pools of loans in asset securitizations to
fund subsequent originations or purchases. On an ongoing basis, the Bank
explores opportunities to access credit lines as an additional source of
funds. To the extent that the Bank is not able to maintain its currently
available funding sources or to access new funding sources, it would have to
curtail its loan production activities or sell loans earlier than is optimal.
Any such event would have a material adverse effect on the Bank's results of
operations and financial condition.
Dependence on Securitizations--In December 1996, the Bank completed its
first sale of loans through securitization. The Bank derived a significant
portion of its income in 1996 by recognizing such gain on sale. The Bank's
ability to complete securitizations is affected by several factors, including
conditions in the securities
F-23
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
markets generally and in the asset-backed securities markets specifically, the
credit quality of the Bank's loan portfolio and the Bank's ability to obtain
credit enhancements. Although the Bank obtained a credit enhancement in its
first securitization which facilitated a "AAA" rating for the securitization
interests, there can be no assurance that the Bank will be able to obtain
future credit enhancements on acceptable terms or that future securitizations
will be similarly rated. Any substantial reduction in the ability of the Bank
to complete asset securitizations could have a material adverse effect on the
Bank's results of operations and financial condition.
12. BENEFIT PLANS
401(k) Plan--The Bank maintains an Employee Savings Plan (the Plan) which
qualifies under section 401(k) of the Internal Revenue Code. Under the Plan,
employees may contribute from 1% to 15% of their compensation. The Bank will
match, at its discretion, 25% of the amount contributed by the employee up to
a maximum of 8% of the employee's salary. The amount of contributions made to
the Plan by the Bank were not material for the years ended December 31, 1996,
1995 and 1994.
Cash Bonus Plan--The Bank adopted a cash bonus plan (the Bonus Plan)
effective February 1996. All employees except for commissioned employees and
employees with employment contracts are eligible to participate. Approximately
$100,000 was accrued pursuant to the Bonus Plan at December 31, 1996. For
1997, the Bonus Plan will pay bonuses in the aggregate of 15% of the after tax
profits of the Bank in excess of a 15% return on average equity, as defined in
the Bonus Plan.
Stock Option Plan--On November 21, 1996, the Board of Directors of the Bank
adopted the Life Savings Bank 1996 Stock Option Plan (the Option Plan). The
Option Plan authorizes the granting of options equal to 107,200 shares of
common stock for issuance to executives, key employees, officers and
directors. The Option Plan will be in effect for a period of ten years from
the adoption by the Board of Directors. Options granted under the Option Plan
will be made at an exercise price equal to the fair market value on the date
of grant. Awards granted to officers and employees may include incentive stock
options, nonstatutory stock options and limited rights which are exercisable
only upon change in control of the Bank. Awards granted to nonemployee
directors are nonstatutory options. All 1996 options were granted at an
exercise price of $10.00 per share. Stock options will become vested and
exercisable in the manner specified by the Bank. The options granted by the
Bank will vest at a rate of 33.3% per year, beginning on November 21, 1999. No
options were exercisable at December 31, 1996.
The following is a summary of activity in the Option Plan during 1996:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------- ----------------
<S> <C> <C>
Options granted 107,180 $10.00
======= ======
Options outstanding at December 31, 1996 107,180 $10.00
======= ======
</TABLE>
All options granted have a remaining contractual life of 10 years.
F-24
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
The estimated fair value of the options granted during 1996 was $4.97 per
share. The Bank applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its Option Plan. Accordingly, no compensation
cost has been recognized for its Option Plan. Had compensation cost for the
Option Plan been determined based on the fair value at the grant date for
awards under the plan consistent with the method of SFAS No. 123, Accounting
for Stock-Based Compensation, the Bank's net income and earnings per share for
the year ended December 31, 1996 would have been reduced to the pro forma
amounts indicated below:
Net income to common stockholders:
<TABLE>
<S> <C>
As reported $1,505,000
Pro forma $1,489,000
Net income per common share:
As reported $1.90
Pro forma $1.88
</TABLE>
The fair value of options granted under the Option Plan during 1996 was
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used: no dividend yield, no
volatility, risk-free interest rate of 7% and expected lives of 10 years.
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit in the form of
originating loans or providing funds under existing lines of credit. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the accompanying statement of
financial condition.
During 1988 the Bank entered into agreements to pay fixed-rate interest
payments in exchange for the receipt of variable market-indexed interest
payments (interest rate swaps). The notional principal amount of interest rate
swaps outstanding at December 31, 1994 was $2,000,000, all of which matured in
1995. The weighted average fixed payment rate on such swap was 9.23%. At
December 31, 1994, the weighted average variable market-indexed interest rate
was 5.75%, which is based on LIBOR. The intent of these agreements was to match
the maturities of certain liabilities and convert variable rate liabilities
into fixed rate. The notional amount of interest rate swaps does not represent
exposure to credit loss. No new interest rate swap transactions were entered
into during 1996 and 1995.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates and may require payment of a fee. Since
many commitments are expected to expire, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The Bank's commitments to
extend credit at December 31, 1996 and 1995 totaled $9,217,000 and $9,933,000,
respectively.
F-25
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
The Bank regularly enters into commitments to sell certain dollar amounts of
loans to third parties under specific, negotiated terms. The terms include the
minimum maturity of the loans, yield to purchaser, servicing spread to the
Bank, and the maximum principal amount of the individual loans.
The Bank typically satisfies these commitments from its current production
of loans. These commitments have fixed expiration dates and may require a fee.
At December 31, 1996 and 1995, the Bank had outstanding commitments to sell
loans of $3,072,000 and $250,000, respectively.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Bank using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Bank could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
1996
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash and cash equivalents............................... $13,265 $13,265
Restricted cash......................................... 1,636 1,636
Securities held to maturity............................. 8,023 7,981
Residual asset.......................................... 5,700 5,700
Loans held for sale..................................... 31,018 31,288
Loans held for investment, net.......................... 36,895 37,475
Mortgage servicing rights............................... 2,645 2,984
FHLB stock.............................................. 814 814
Liabilities:
Deposit accounts........................................ 85,711 86,278
Other borrowings........................................ 3,278 3,278
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash and cash equivalents............................... $3,932 $3,932
Securities held to maturity............................. 1,985 1,985
Loans held for sale..................................... 21,688 22,125
Loans held for investment, net.......................... 41,693 41,902
Mortgage servicing rights............................... 683 784
FHLB stock.............................................. 715 715
Liabilities--
Deposits................................................ 67,535 67,688
</TABLE>
F-26
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
The Bank utilized the following methods and assumptions to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents--The carrying amount approximates fair value.
Restricted Cash--The carrying amount approximates fair value.
Securities Held to Maturity--Fair values are based on quoted market prices.
Loans Held for Sale--Fair values are based on quoted market prices or
dealer quotes.
Loans Held for Investment--The fair value of gross loans receivable has
been estimated using the present value of cash flow method, discounted
using the current rate at which similar loans would be made to borrowers
with similar credit ratings and for the same maturities, and giving
consideration to estimated prepayment risk and credit loss factors.
Residual Asset and Mortgage Servicing Rights--Fair values are estimated
using discounted cash flows based on current market values.
FHLB Stock--The fair value is based on its redemption value.
Deposit Accounts--The fair value of checking, passbook and money market
accounts is the amount payable on demand at the reporting date. The fair
value of certificate accounts is estimated using the rates currently
offered for deposits of similar remaining maturities.
Other Borrowings--The carrying amount approximates fair value as the
interest rate currently approximates market.
Financial Instruments with Off-Balance Sheet Risk--No fair value is
ascribed to the Bank's outstanding commitments to fund loans since
commitment fees are not significant and predominantly all such commitments
are variable-rate loan commitments.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1996 and 1995. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since that date; and, therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
F-27
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
15. SEGMENT INFORMATION
The Bank's operations within the financial services industry principally
focus on banking and mortgage financing activities. Information about these
segments as of or for the years ended December 31, 1996 and 1995 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1996
---------------------------
MORTGAGE
BANKING FINANCING TOTAL
------- --------- --------
<S> <C> <C> <C>
Revenue for the year............................ $ 3,898 $ 12,143 $ 16,041
Pre-tax operating income (loss) for the year.... (2,325) 4,956 2,631
Assets employed at year-end..................... 59,943 44,067 104,010
Depreciation and amortization for the year...... 120 501 621
Capital expenditures for the year............... 276 628 904
<CAPTION>
1995
---------------------------
MORTGAGE
BANKING FINANCING TOTAL
------- --------- --------
<S> <C> <C> <C>
Revenue for the year............................ $ 4,207 $ 5,638 $ 9,845
Pre-tax operating income (loss) for the year.... (1,128) 1,942 814
Assets employed at year-end..................... 49,201 24,935 74,136
Depreciation and amortization for the year...... 92 342 434
Capital expenditures for the year............... 56 467 523
</TABLE>
16. SUBSEQUENT EVENTS
Life Financial Corporation (LFC), a Delaware corporation, has been formed to
become the holding company for the Bank. LFC is contemplating an initial public
offering of 2,500,000 shares of its common stock and is also offering 3,211,716
shares of its common stock in connection with the reorganization of the Bank as
a result of which (i) the Bank will become a wholly-owned subsidiary of LFC,
and (ii) all of the outstanding shares of the Bank's common stock will be
converted on the basis of one share of the Bank's common stock for three shares
of common stock of LFC (the Reorganization).
On March 14, 1997, the Bank issued subordinated debentures (Debentures) in
the aggregate principal amount of $10 million through a private placement and
pursuant to a Debenture Purchase Agreement. The Debentures will mature on March
15, 2004 and bear interest at the rate of 13.5% per annum, payable semi-
annually. The Debentures qualify as supplementary capital under regulations of
the OTS which capital may be used to satisfy the risk-based capital
requirements in an amount up to 100% of the Bank's core capital. The Debentures
are direct, unconditional obligations of the Bank ranking with all other
existing and future unsecured and subordinated indebtedness of the Bank. They
are subordinated on liquidation, as to principal and interest, and premium, if
any, to all claims against the Bank having the same priority as savings account
holders or any higher priority.
The Debentures are redeemable at the option of the Bank, in whole or in part,
at any time after September 15, 1998, at the aggregate principal amount
thereof, plus accrued and unpaid interest, if any. Following the
Reorganization, the Bank may substitute LFC in its place as obligor on the
Debentures (the Substitution). If such Substitution occurs, holders of the
Debentures will have the option at September 15, 1998 or at such later time as
the Substitution occurs to require LFC to purchase all or part of the holder's
outstanding Debentures at a price equal to 100% of the principal amount
repurchased plus accrued interest through the repurchase date. If the
Substitution occurs, upon a change in control of LFC, holders of the Debentures
will have the option to require LFC to purchase all or part of the holder's
outstanding Debentures at a price equal to 101% of the principal amount
repurchased plus accrued interest through the repurchase date.
F-28
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY LIFE FINANCIAL CORP., THE BANK OR FRIEDMAN, BILLINGS, RAM-
SEY & CO., INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SO-
LICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PER-
SON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO
DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITA-
TION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF LIFE FINANCIAL CORP. OR THE BANK SINCE
ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE
HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
The Offering............................................................. 5
Selected Financial and Other Data of the Bank............................ 6
Quarterly Operating and Other Data of the Bank........................... 8
Recent Developments...................................................... 10
Risk Factors............................................................. 11
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Market for the Common Stock of the Company............................... 18
Market for the Common Stock of the Bank.................................. 19
Dilution................................................................. 19
Capitalization........................................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Life Financial Corp. .................................................... 34
Life Savings Bank, Federal Savings Bank.................................. 35
Business................................................................. 35
Federal and State Taxation............................................... 62
Regulation............................................................... 64
The Board of Directors and Management of the Company..................... 72
The Board of Directors and Management of the Bank........................ 74
The Reorganization....................................................... 85
Restrictions on Acquisition of the Company............................... 86
Description of Capital Stock of the Company.............................. 90
Description of Capital Stock of the Bank................................. 91
Transfer Agent and Registrar............................................. 91
Shares Eligible for Future Sale.......................................... 91
Underwriting............................................................. 92
Experts.................................................................. 94
Legal Matters............................................................ 94
Changes in Accountants .................................................. 94
Additional Information................................................... 95
Financial Statements..................................................... F-1
</TABLE>
-----------
UNTIL , 1997 OR 25 DAYS AFTER COMMENCEMENT OF THE OFFERING, IF ANY, WHICH-
EVER IS LATER, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURI-
TIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE-
LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,711,716 SHARES
[Logo of Life Financial Corp.]
COMMON STOCK
-----------
PROSPECTUS
-----------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the Company in connection
with the shares of Common Stock being registered.
<TABLE>
<S> <C>
SEC registration fee(1)........................................... $ 22,134
NASD filing fee(1)................................................ 5,978
OTS Filing fee(1)................................................. 2,000
Nasdaq Listing Fee(1)............................................. 32,700
Blue Sky qualification fees and expenses.......................... 15,000
Legal fees and expenses........................................... 220,000
Accounting fees and expenses...................................... 175,000
Marketing fees, selling commissions, and underwriter's expenses
(including counsel fees)......................................... 35,000
Transfer agent fees and expenses.................................. 10,000
Printing, postage and mailing..................................... 95,000
Certificate printing.............................................. 5,000
Telephone, temporary help and other equipment..................... 10,000
Miscellaneous..................................................... 32,188
--------
Total......................................................... $660,000
========
</TABLE>
- --------
(1) Actual expenses. SEC registration and NASD filing fees are based upon the
registration of 6,086,716 shares at $12.00 per share. All other expenses
are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the General Corporation Law of the State of Delaware
(being Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of the
Registrant's Certificate of Incorporation provide as follows:
Tenth:
A. Each person who was or is made a party or is threatened to be made
a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a
Director or an Officer of the Corporation or is or was serving at the
request of the Corporation as a Director, Officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is
alleged action in an official capacity as a Director, Officer, employee
or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but,
in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification
rights than such law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and
amounts paid in (or part thereof) initiated by such indemnitee only if
such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation.
B. The right to indemnification conferred in Section A of this
Article TENTH shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its
final disposition (hereinafter an "advancement of expenses"); provided,
however, that, if the
II-1
<PAGE>
Delaware General Corporation Law requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a Director or
Officer (and not in any other capacity in which service was or is
rendered by such indemnitee, including, without limitation, services to
an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking (hereinafter an "undertaking"), by or on
behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is
no further right to appeal (hereinafter a "final adjudication") that
such indemnitee is not entitled to be indemnified for such expenses
under this Section or otherwise. The rights to indemnification and to
the advancement of expenses conferred in Sections A and B of this
Article TENTH shall be contract rights and such rights shall continue
as to an indemnitee who has ceased to be a Director, Officer, employee
or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid
in full by the Corporation within sixty days after a written claim has
been received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be
twenty days, the indemnitee may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought
by the Corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the indemnitee shall be entitled to be
paid also the expenses of prosecuting or defending such suit. In (i)
any suit brought by the indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a defense
that, and (ii) in any suit by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication
that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law.
Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made
a determination prior to the commencement of such suit that
indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set
forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the indemnitee has
not met such applicable standard of conduct, shall create a presumption
that the indemnitee has not met the applicable standard of conduct or,
in the case of such a suit brought by the indemnitee, be a defense to
such suit. In any suit brought by the indemnitee to enforce a right to
indemnification or to an advancement of expenses hereunder, or by the
Corporation to recover an advancement of expenses pursuant to the terms
of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under
this Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
the Corporation's Certificate of Incorporation, Bylaws, agreement, vote
of stockholders or Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation
or subsidiary or Affiliate or another corporation, partnership, joint
venture, trust or other enterprise against any expense, liability or
loss, whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the Delaware
General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by
the Board of Directors, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to
the fullest extent of the provisions of this Article TENTH with respect
to the indemnification and advancement of expenses of Directors and
Officers of the Corporation.
II-2
<PAGE>
Eleventh:
A Director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except for liability (i) for any breach
of the Director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the Director derived an improper personal
benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the
Corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a Director of the Corporation existing at the time of
such repeal or modification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Life Savings Bank, Federal Savings Bank (the "Bank") sold in a private
placement completed on August 13, 1996 448,500 shares of common stock, $8.00
stated value (the "Private Placement"). Friedman, Billings, Ramsey & Co., Inc.
was the placement agent for the Private Placement. The aggregate offering
price was $4,036,000, with aggregate placement fees of $282,520. The
securities were offered and sold without registration pursuant to exemptions
from the registration requirements set forth in Sections 3(a)(5) and/or 4(2)
of the Securities Act, and Rule 506 of Regulation D of the Rules and
Regulations promulgated thereunder. In addition, the Private Placement was
exempt as a non-public offering from the offering circular delivery
requirements set forth in Part 563g of the Rules and Regulations of the Office
of Thrift Supervision ("OTS") based on incorporation in such OTS Rules and
Regulations of the private offering exemption in Section 4(2) of the
Securities Act. The issuer, Life Savings Bank, Federal Savings Bank, is a
federally-chartered savings bank. Further, the securities were sold to 21
accredited investors. No securities were sold to non-accredited investors.
The Bank sold in a private placement completed March 14, 1997 subordinated
debentures (the "Debentures") in the aggregate principal amount of $10 million
pursuant to a Debenture Purchase Agreement. The Debentures will mature on
March 15, 2004 and bear interest at a rate of 13 1/2% per annum, payable semi-
annually. Friedman, Billings, Ramsey & Co., Inc. was the placement agent for
the private placement of the Debentures, and received placement fees of
$325,000. The Debentures were offered and sold without registration pursuant
to exemptions from the registration requirements set forth in Section 3(a)(5)
and/or 4(2) of the Securities Act, and Rule 506 of Regulation D of the Rules
and Regulations promulgated thereunder. In addition, the private placement of
the Debentures is exempt as a non-public offering from the offering circular
delivery requirements set forth in Part 563g of the Rules and Regulations of
the OTS based on incorporation in such OTS Rules and Regulations of the
private offering exemption in Section 4(2) of the Securities Act. The issuer,
Life Savings Bank, Federal Savings Bank is a federally-chartered savings bank.
Further, the Debentures were sold to 12 accredited investors. No Debentures
were sold to non-accredited investors.
Ten shares of Common Stock of the Company were sold to the Bank at a cost of
$1.00 per share to facilitate the Reorganization of the Bank into a holding
company structure. The shares were sold on the condition that such shares will
be cancelled upon the effectiveness of the Reorganization and at that time
will no longer be deemed to be issued or outstanding for any purpose.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
<TABLE>
<C> <S>
1.1 Engagement letter between Life Financial Corp. and Friedman, Billings,
Ramsey & Co., Inc.*
1.2 Form of Underwriting Agreement
2.1 Agreement and Plan of Reorganization*
3.1 Certificate of Incorporation of Life Financial Corp.*
3.2 Bylaws of Life Financial Corp.*
4.0 Specimen Stock Certificate of Life Financial Corp.*
4.1 Life Savings Bank, Federal Savings Bank Debenture Purchase Agreement
5.0 Opinion of Muldoon, Murphy & Faucette regarding legality of the
securities to be registered
5.1 Opinion of Morris, Nichols, Arsht & Tunnell regarding certain matters of
Delaware law
8.0 Opinion of Muldoon, Murphy & Faucette regarding Federal Tax Matters
8.1 Opinion of Deloitte & Touche regarding State Tax Matters
10.1 Letter Agreement between Life Savings Bank, Federal Savings Bank and
Daniel L. Perl*
10.2 Draft Form of Employment Agreement between Life Financial Corp. and
Daniel L. Perl*
10.3 Draft Form of Employment Agreement between Life Savings Bank, Federal
Savings Bank and Daniel L. Perl*
10.4 Life Savings Bank, Federal Savings Bank 1996 Stock Option Plan
10.5 Draft Life Financial Corp. 1997 Stock Option Plan
10.6 Form of Life Financial Corp. Employee Stock Ownership Plan
10.7 Form of Life Financial Corp. Employee Stock Purchase Plan
16.1 Letter from Grant Thornton LLP regarding change in certifying accountant
Letter from Price Waterhouse LLP regarding change in certifying
16.2 accountant
23.1 Consent of Grant Thornton LLP
23.2 Consent of Price Waterhouse LLP
23.3 Consent of Deloitte & Touche, LLP
23.4 Consent of Muldoon, Murphy & Faucette*
23.5 Consent of Morris, Nichols, Arsht & Tunnell*
24.1 Powers of Attorney*
27.0 Financial Data Schedule
99.1 Notice of Annual Meeting of Stockholders and Proxy Statement of Life
Savings Bank, Federal Savings Bank
</TABLE>
- --------
* Previously filed.
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under
the rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration
II-4
<PAGE>
Statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
The undersigned registrant hereby undertakes to provide to the underwriter at
the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Riverside, State of
California, on March 26, 1997.
LIFE FINANCIAL CORP.
By /s/ Daniel L. Perl
------------------------------------------
Daniel L. Perl
President, Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
<C> <S> <C>
President, Chief
Executive Officer and
Director (principal
/s/ Daniel L. Perl executive officer) March 26, 1997
- ------------------------------------
Daniel L. Perl
Executive Vice
President--Chief
Financial Officer,
Treasurer and Secretary
(principal financial and
/s/ L. Bruce Mills, Jr. accounting officer) March 26, 1997
- ------------------------------------
L. Bruce Mills, Jr.
Chairman of the
* Board of Directors
- ------------------------------------
Ronald G. Skipper
* Director
- ------------------------------------
Richard C. Caldwell
* Director
- ------------------------------------
John D. Goddard
* Director
- ------------------------------------
Milton E. Johnson
- --------
* Pursuant to a Power of Attorney dated January 24, 1997 and filed as Exhibit
24.1 with the Commission on January 27, 1997.
/s/ Daniel L. Perl March 26, 1997
- ------------------------------------
</TABLE>
Daniel L. Perl
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Engagement letter between Life Financial Corp. and Friedman, Billings,
Ramsey & Co., Inc.*
1.2 Form of Underwriting Agreement
2.1 Agreement and Plan of Reorganization*
3.1 Certificate of Incorporation of Life Financial Corp.*
3.2 Bylaws of Life Financial Corp.*
4.0 Specimen Stock Certificate of Life Financial Corp.*
4.1 Life Savings Bank, Federal Savings Bank Debenture Purchase Agreement
5.0 Opinion of Muldoon, Murphy & Faucette regarding legality of the
securities to be registered
5.1 Opinion of Morris, Nichols, Arsht & Tunnell regarding certain matters
of Delaware law
8.0 Opinion of Muldoon, Murphy & Faucette regarding Federal Tax Matters
8.1 Opinion of Deloitte & Touche regarding State Tax Matters
10.1 Letter Agreement between Life Savings Bank, Federal Savings Bank and
Daniel L. Perl*
10.2 Draft Form of Employment Agreement between Life Financial Corp. and
Daniel L. Perl*
10.3 Draft Form of Employment Agreement between Life Savings Bank, Federal
Savings Bank and Daniel L. Perl*
10.4 Life Savings Bank, Federal Savings Bank 1996 Stock Option Plan
10.5 Draft Life Financial Corp. 1997 Stock Option Plan
10.6 Form of Life Financial Corp. Employee Stock Ownership Plan
10.7 Form of Life Financial Corp. Employee Stock Purchase Plan
16.1 Letter from Grant Thornton LLP regarding change in certifying
accountant
16.2 Letter from Price Waterhouse LLP regarding change in certifying
accountant
23.1 Consent of Grant Thornton LLP
23.2 Consent of Price Waterhouse LLP
23.3 Consent of Deloitte & Touche, LLP
23.4 Consent of Muldoon, Murphy & Faucette*
23.5 Consent of Morris, Nichols, Arsht & Tunnell*
24.1 Powers of Attorney*
27.0 Financial Data Schedule
99.1 Notice of Annual Meeting of Stockholders and Proxy Statement of Life
Savings Bank, Federal Savings Bank
</TABLE>
- --------
* Previously filed.
<PAGE>
EXHIBIT 1.2
2,500,000 Shares
(subject to increase of up to additional 375,000 shares
in the event of an oversubscription)
LIFE FINANCIAL CORP.
(A DELAWARE CORPORATION)
Common Stock
($0.01 par value per share)
UNDERWRITING AGREEMENT
_______________, 1997
Friedman, Billings, Ramsey & Co., Inc.
Lakeshore Towers
18101 Von Karman Avenue
Suite 1260
Irvine, California 92612
Dear Sirs:
Life Financial Corp., a Delaware corporation (the "Company"), confirms its
agreement with you whereby the Company proposes to issue and sell to you an
aggregate of 2,500,000 shares (the "Firm Common Shares") of its authorized but
unissued common stock, $0.01 par value per share (the "Common Stock"). In
addition, the Company agrees to grant to you an option to purchase up to an
aggregate of 375,000 additional shares of Common Stock (the "Optional Common
Shares") as provided in Section 1 hereof. The Firm Common Shares and, to the
extent such option is exercised, the Optional Common Shares are hereinafter
collectively referred to as the "Common Shares."
You have advised the Company that you propose to make a public offering of
the Common Shares on the effective date of the Registration Statement (as
hereinafter defined) or as soon thereafter as in your judgment is advisable (the
"Offering").
The Company hereby confirms its agreement with you as follows:
1
<PAGE>
1. Purchase, Sale and Delivery of Common Shares. On the basis of the
--------------------------------------------
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, (i) the Company agrees to issue and sell
to you an aggregate of 2,500,000 of the Firm Common Shares and (ii) you agree to
purchase from the Company such Firm Common Shares. The purchase price per share
to be paid by you to the Company shall be $____ per share.
The closing of the transactions contemplated by this Agreement shall be
held at 9:00 a.m. at the offices of Muldoon, Murphy & Faucette, Washington,
D.C., (or such other place as may be agreed upon by the Company and the
Representative) on the third (or, if the purchase set forth in the above
paragraph is determined after 4:30 p.m., Washington, D.C. time, the fourth)
business day following the first date that any of the Common Shares are released
by you for sale to the public (the "First Closing Date"); provided, however,
that if the Prospectus (as hereinafter defined) is at any time prior to the
First Closing Date recirculated to the public, the First Closing Date shall
occur upon the later of the third (or, if the purchase set forth in the above
paragraph is determined after 4:30 p.m., Washington, D.C. time, the fourth)
business day following the first date that any of the Common Shares are released
by you for sale to the public or the date that is 48 hours after the date that
the Prospectus has been so recirculated.
Delivery of certificates for the Firm Common Shares shall be made by or on
behalf of the Company to you, for your account, against payment by you for your
account of the purchase price therefor by wire transfer or certified or official
bank check payable in next day funds to the order of the Company. The
certificates for the Firm Common Shares shall be registered in such names and
denominations as you shall have requested at least two full business days prior
to the First Closing Date, and shall be made available for checking and
packaging on the business day preceding the First Closing Date at any office of
U.S. Stock Transfer Corporation designated by you. Time shall be of the
essence, and delivery at the time and place specified in this Agreement is a
further condition to your obligation.
In addition, on the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants to you an option to purchase any amount up to an aggregate
of 375,000 Optional Common Shares at the purchase price per share to be paid for
the Firm Common Shares, for use solely in covering any over-allotments made for
your account in the sale and distribution of the Firm Common Shares. The option
granted hereunder may be exercised at any time (but not more than once) within
30 days after the first date that any of the Common Shares are released by you
for sale to the public, upon notice by you to the Company setting forth the
aggregate number of Optional Common Shares as to which you are exercising the
option, the names and denominations in which the certificates for such shares
are to be registered and the time and place at which such certificates will be
delivered. Such time of delivery (which may not be earlier than the First
Closing Date), being herein referred to as the "Second Closing Date," shall be
determined by you, but if at any time other than the First Closing Date shall
not be earlier than three nor later than five full business days after delivery
of such notice of exercise. Certificates for the Optional Common Shares will be
made available for checking and packaging on the business day preceding the
Second Closing Date at any office of Wells Fargo Bank,
2
<PAGE>
N.A. (Transfer Agent Department) designated by you. The manner of payment for
and delivery of the Optional Common Shares shall be the same as for the Firm
Common Shares purchased from the Company as specified in the two preceding
paragraphs. At any time before lapse of the option, you may cancel such option
by giving written notice of such cancellation to the Company.
Subject to the terms and conditions hereof, you agree to make a public
offering of the Common Shares as soon after the effective date of the
Registration Statement (as hereafter defined) as in your judgment is advisable
and at the public offering price set forth on the cover page of, and on the
terms set forth in, the Prospectus.
2. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to you as of the date hereof as follows:
(a) A registration statement on Form S-1 (File No. 333-______) with
respect to the Common Shares has been prepared by the Company in conformity with
the requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations of the Securities and Exchange Commission (the
"Commission") promulgated thereunder (the "Rules and Regulations"), and has been
filed with the Commission. The Company has prepared and has filed or proposes to
file prior to the effective date of such registration statement an amendment or
amendments to such registration statement, which amendment or amendments have
been or will be similarly prepared. There has been delivered to you one signed
copy of such registration statement and amendments, together with two copies of
each exhibit filed therewith. Conformed copies of such registration statement
and amendments (but without exhibits) and of the related Preliminary Prospectus
(as defined below) have been delivered to you in such reasonable quantities as
you have requested. The Company will also file with the Commission one of the
following: (i) prior to effectiveness of such registration statement, a further
amendment thereto, including the form of final prospectus, or (ii) a final
prospectus in accordance with Rules 430A and 424(b) of the Rules and
Regulations. As filed, such amendment and form of final prospectus, or such
final prospectus, shall include all Rule 430A Information (as defined below)
and, except to the extent that you shall agree to a modification, shall be in
all substantive respects in the form furnished to you prior to the date and time
that this Agreement was executed and delivered by the parties hereto or, to the
extent not completed at such date and time, shall contain only such specific
additional information and other changes (beyond that contained in the latest
Preliminary Prospectus) as the Company shall have previously advised you in
writing would be included or made therein.
The term "Registration Statement" as used in this Agreement shall mean such
registration statement at the time such registration statement becomes effective
and, in the event any post-effective amendment thereto becomes effective prior
to the First Closing Date, shall also mean such registration statement as so
amended; provided, however, that such term shall also include all Rule 430A
Information deemed to be included in such registration statement at the time
such registration statement becomes effective as provided by Rule 430A of the
Rules and Regulations. The term "Preliminary Prospectus" shall mean any
preliminary prospectus referred to in the preceding paragraph and any
preliminary prospectus included in the Registration Statement at the
3
<PAGE>
time it becomes effective that omits Rule 430A Information. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Common Shares in the form in which it is first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations or, if no filing pursuant
to Rule 424(b) of the Rules and Regulations is required, shall mean the form of
final prospectus included in the Registration Statement at the time such
registration statement becomes effective. The term "Rule 430A Information" means
information with respect to the Common Shares and the offering thereof permitted
to be omitted from the Registration Statement when it becomes effective,
pursuant to Rule 430A of the Rules and Regulations.
(b) The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus, and the most recent Preliminary Prospectus
has conformed in all material respects to the requirements of the Act and the
Rules and Regulations and, as of its date, has not included any untrue statement
of a material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and at the time the Registration Statement becomes
effective, and at all times subsequent thereto up to and including each Closing
Date hereinafter mentioned, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, will contain all material statements and
information required to be included therein by the Act and the Rules and
Regulations and will conform to the requirements of the Act and the Rules and
Regulations, and neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, will include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, no representation or warranty
contained in this subsection 2(b) shall be applicable to information contained
in or omitted from any Preliminary Prospectus, the Registration Statement, the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
you or any Underwriter specifically for use in the preparation thereof.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware with
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and to enter into and
perform its obligations under this Agreement; and the Company is duly qualified
as a foreign corporation to transact business and is in good standing in the
State of California and in all other jurisdictions in which such qualification
is required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure to so qualify would not have a
material adverse effect on the financial condition, results of operations or
business of the Company, the Bank (as defined below) and the other Subsidiaries
(as defined below), taken as a whole.
(d) The only subsidiaries of the Company are Life Savings Bank, Federal
Savings Bank (the "Bank"), ___________________ and ___________________
(individually, a "Subsidiary" and collectively, the "Subsidiaries").
4
<PAGE>
(e) The Bank has been duly organized and is validly existing as a federal
savings bank in good standing under the laws of the United States, and each of
the other Subsidiaries has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
respective incorporation. All of the issued and outstanding capital stock of
each of the Subsidiaries has been duly authorized and validly issued, is fully
paid and nonassessable, and is owned by the Company in each case free and clear
of any security interest, mortgage, pledge, lien, encumbrance, claim or equity,
except for ______________.
(f) Each of the Subsidiaries has full corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Prospectus; each of the Subsidiaries is in possession of and is operating
in compliance in all material respects with all authorizations, licenses,
permits, consents, certificates, orders and other governmental authorizations
material to or required for the conduct of its business, all of which are valid
and in full force and effect, and has received no notice of any proceeding or
action relating to the revocation or modification of any such authorization,
license, permit, consent, certificate, order or other governmental
authorization; each of the Subsidiaries is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction in which the
ownership or leasing of properties or the conduct of its business requires such
qualification, except for jurisdictions in which the failure to so qualify would
not have a material adverse effect on the financial condition, results of
operations or business of the Company and the Subsidiaries, taken as a whole;
and neither the Company nor any of the Subsidiaries has received notice of any
proceeding in any such jurisdiction revoking, limiting or curtailing, or seeking
to revoke, limit or curtail, such power and authority or qualification.
(g) The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to legally applicable limits, and no proceedings for the
termination or revocation of such insurance are pending or, to the best
knowledge of the Company, threatened, and no approvals by or filings with the
Office of Thrift Supervision ("OTS"), FDIC or Board of Governors of the Federal
Reserve System ("Federal Reserve Board") are necessary to consummate the
Offering, except such as have already been obtained and are in effect.
(h) The Company has, and upon consummation of the Offering will have, an
authorized capitalization as set forth under the heading "Description of Capital
Stock" in the Prospectus. All of the issued and outstanding shares of capital
stock of the Company have been duly authorized and validly issued and are fully
paid and nonassessable. Except as described in the Prospectus, no Common Stock
is issued and outstanding and no stockholder of the Company or other person has
any right, option or warrant to acquire any Common Stock. Except as disclosed
in or contemplated by the Prospectus and the financial statements of the Company
and the related notes thereto included in the Prospectus, the Company does not
have outstanding any options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares of
its capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights to be
5
<PAGE>
granted and exercised thereunder set forth in the Prospectus, accurately and
fairly presents the information required to be shown with respect to such plans,
arrangements, options and rights.
(i) The Common Shares to be sold by the Company hereunder have been duly
authorized and, when issued, delivered and paid for in the manner set forth in
this Agreement, will be validly issued, fully paid and nonassessable, and will
conform to the description thereof contained in the Prospectus. No preemptive
rights or other rights to subscribe for or purchase exist with respect to sale
of the Common Shares by the Company pursuant to this Agreement. The
certificates used to evidence shares of Common Stock are in due and proper form.
(j) No approval, consent or authority of the stockholders of the Company
or the Board of Directors of the Company or any governmental agency or any other
third party will be required for the issuance and sale of the Common Shares to
be sold by the Company as contemplated herein or the entering into of this
Agreement, except such as have already been obtained.
(k) The Company has full legal right, power and authority to enter into
this Agreement and to perform the transactions contemplated hereby. This
Agreement has been duly and validly authorized by the Company and upon due
execution and delivery by the Company and the other parties thereto will
constitute the valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms, subject to limitations imposed by
general principles of equity (regardless of whether such enforceability is
considered in a proceeding at law or in equity) and subject to any bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or other laws, now
or hereafter in effect, relating to or limiting creditors' rights generally. The
making and performance of this Agreement by the Company and the consummation of
the transactions herein contemplated will not violate any provisions of the
Certificate of Incorporation or Bylaws, or other organizational document of the
Company or any of the Subsidiaries, and will not conflict with, result in the
breach or violation of, or constitute, either by itself or upon notice or the
passage of time or both, a default under any agreement, mortgage, deed of trust,
lease, franchise, license, indenture, permit or other instrument to which the
Company or any of the Subsidiaries is a party or by which the Company, any of
the Subsidiaries or any of their respective properties may be bound or affected,
any statute or any authorization, judgment, decree, order, rule or regulation of
any court or any regulatory body, administrative agency or other governmental
body applicable to the Company, any of the Subsidiaries or any of their
respective properties, except where any violation, conflict, breach or default,
whether individually or in the aggregate, would not have a material adverse
effect on the condition (financial or otherwise), business, properties, result
of operations, management or prospects of the Company or the Subsidiaries, taken
as a whole (hereinafter, a "Material Adverse Effect"). No consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body is required for the execution and delivery of
this Agreement or the consummation of the transactions contemplated hereby,
except for compliance with the Act, the Blue Sky laws applicable to the public
offering of the Common Shares by the Underwriter and the clearance of such
offering with the National Association of Securities Dealers, Inc. (the "NASD").
6
<PAGE>
(l) The accountants, Grant Thornton, LLP, Deloitte & Touche, LLP and Price
Waterhouse LLP, each of whom certified portions of the financial statements and
supporting schedules included in the Registration Statement, are each
independent public accountants within the meaning of the Code of Ethics of the
American Institute of Certified Public Accountants; and such accountants are,
with respect to the Company and each of the Subsidiaries, independent certified
public accountants as required by the Act and the Rules and Regulations.
(m) The financial statements and schedules of the Company, and the related
notes thereto, included in the Registration Statement and the Prospectus present
fairly the consolidated financial position of the Company as of the respective
dates of such financial statements and schedules, and the consolidated results
of operations and changes in financial position of the Company for the
respective periods covered thereby. Such statements, schedules and related
notes have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis as certified by the independent
accountants named in subsection 2(l). No other financial statements or
schedules are required to be included in the Registration Statement. The other
financial, statistical and pro forma information and related notes included in
the Registration Statement and the Prospectus (i) present fairly the information
shown therein on a basis consistent (except as otherwise noted therein) with the
audited financial statements of the Company included therein and (ii) are in
compliance in all material respects with the requirements of the Act.
(n) Neither the Company nor any of the Subsidiaries are (i) in violation
or default of any provision of their respective Certificate of Incorporation,
Charter or Articles of Incorporation, as the case may be, or Bylaws or other
organizational documents or (ii) except as disclosed in the Prospectus and
except as to defaults which individually or in the aggregate would not have a
Material Adverse Effect, in breach of or default with respect to any provision
of any agreement, judgment, decree, order, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which it is a party
or by which it or any of its properties are bound and, except as to defaults
which individually or in the aggregate would not have a Material Adverse Effect,
there does not exist any state of facts which constitutes an event of default on
the part of the Company as defined in such documents or which, with notice or
lapse of time or both, would constitute such an event of default.
(o) There are no contracts or other documents required to be described in
the Registration Statement or to be filed as exhibits to the Registration
Statement by the Act or by the Rules and Regulations which have not been
described or filed as required. The contracts so described in the Prospectus
are in full force and effect on the date hereof; the descriptions thereof or
references thereto are correct in all material respects; and except as to
defaults that individually or in the aggregate would not be material to the
Company, neither the Company, any of the Subsidiaries, nor, to the knowledge of
the Company, any other party is in material breach of or default under any of
such contracts.
(p) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or, to the knowledge of the
Company, threatened to which the Company or
7
<PAGE>
any of the Subsidiaries is or may be a party or of which property owned or
leased by the Company or any of the Subsidiaries is or may be the subject, which
actions, suits or proceedings might, individually or in the aggregate, prevent
or adversely affect the transactions contemplated by this Agreement or are
likely to result in a Material Adverse Effect, and no labor disturbance by any
employee of the Company or any of the Subsidiaries exists or is imminent which
might be expected to affect adversely the Company's condition, properties,
business, results of operations or prospects. Except as disclosed in the
Prospectus, no enforcement proceeding, whether formal or informal, has been
commenced against the Company or any of the Subsidiaries by the OTS, the FDIC
or, to the Company's knowledge, any other governmental authority, nor have any
such proceedings been instituted, threatened or recommended. Except as disclosed
in the Prospectus, neither the Company, any of the Subsidiaries, nor any of
their respective officers or directors is a party or subject to the provisions
of any regulatory action, injunction, judgment, decree or order of any court,
regulatory body, administrative agency or other governmental body affecting the
business of the Company or any of the Subsidiaries.
(q) Except as disclosed in the Prospectus, the Company and each of the
Subsidiaries have good and marketable title to all of their respective
properties and assets, free and clear of all liens, charges, encumbrances or
restrictions, except such as would not materially adversely affect the value of
such properties and assets and would not interfere with the use made or proposed
to be made of such properties and assets by the Company or a Subsidiary; all of
the leases and subleases material to the business of the Company or any of the
Subsidiaries or under which the Company or any of the Subsidiaries holds
properties described in the Prospectus are in full force and effect; and the
Company and the Subsidiaries have no notice of any material claim of any sort
which has been asserted by anyone adverse to the rights of the Company or a
Subsidiary as owner or as lessee or sublessee under any of the leases or
subleases mentioned above, or materially affecting or questioning the rights of
the Company or a Subsidiary to the continued possession of the leased or
subleased premises under any such lease or sublease. Except as disclosed in the
Prospectus and other than such leases and properties as are immaterial in the
aggregate, the Company and the Subsidiaries own or lease all properties as are
necessary to their respective operations as now conducted or as proposed to be
conducted.
(r) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) neither the Company nor any of
the Subsidiaries has incurred any material liabilities or obligations, indirect,
direct or contingent, or entered into any material verbal or written agreement
or other transaction whether or not arising in the ordinary course of business
or which could result in a material reduction in the future earnings of the
Company; (ii) there has not been any material increase in the consolidated long-
term debt of the Company or in the aggregate dollar or principal amount of the
assets held by the Company or the Bank which are classified as substandard,
doubtful or loss or loans which are 90 days or more past due or real estate
acquired by foreclosure; (iii) there has not been any material adverse change in
the condition (financial or otherwise), business, properties, results of
operations or prospects of the Company or any of the Subsidiaries, other than
changes resulting from changes in the economy generally; (iv) there has not been
any material
8
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adverse change in the aggregate dollar amount of the deposits or consolidated
net worth or spread of the Company or the Bank; (v) there has been no material
adverse change in the relationship between the Company or any of its
Subsidiaries and their respective insurance carriers, including, without
limitation, cancellation or other termination of a fidelity bond or any other
type of insurance coverage; (vi) there has been no material change in the
management of the Company or any of the Subsidiaries compared to the information
disclosed in the Prospectus; (vii) neither the Company nor any of the
Subsidiaries have sustained any material loss or interference with their
respective businesses or properties from fire, flood, windstorm, earthquake,
accident or other calamity, whether or not covered by insurance; (viii) the
Company has not paid or declared any dividends or other distributions with
respect to its capital stock and the Company is not in default in the payment of
principal or interest on any outstanding debt obligations; and (ix) there has
not been any change in the capital stock of the Company (other than upon the
sale of the Common Shares hereunder and pursuant to the Reorganization, as
described in the Prospectus).
(s) Except as disclosed in or specifically contemplated by the Prospectus,
the Company and the Subsidiaries have sufficient trademarks, trade names, patent
rights, copyrights, licenses, approvals and governmental authorizations to
conduct their respective businesses as now conducted; the expiration of any
trademarks, trade names, patent rights, copyrights, licenses, approvals or
governmental authorizations would not have a Material Adverse Effect; and the
Company has no knowledge of any material infringement by it of trademark, trade
name rights, patent rights, copyrights, licenses, trade secret or other similar
rights of others, and, to the Company's knowledge, there is no claim being made
against the Company or any of the Subsidiaries regarding trademark, trade name,
patent, copyright, license, trade secret or other infringement which could have
a Material Adverse Effect.
(t) Neither the Company nor any of the Subsidiaries have been advised or
have any reason to believe that the Company or any of the Subsidiaries is not
conducting business in compliance with all applicable laws, rules and
regulations; except as disclosed in the Prospectus or where failure to be so in
compliance would not have a Material Adverse Effect or where it is already in
the process of complying.
(u) Except as disclosed in the Prospectus, neither the Company nor any of
the Subsidiaries is in violation of any directive from the FDIC, the OTS or any
other governmental authority, including _______________________________, and the
Company and the Subsidiaries are in compliance with all federal and state laws
and regulations that regulate or relate to its business, including, without
limitation, the Financial Institutions Recovery, Reform and Enforcement Act of
1989 ("FIRREA"), the Federal Deposit Insurance Act (the "FDIA"), the National
Housing Act (the "NHA"), the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") and all other applicable laws and regulations where the
failure to comply would have a Material Adverse Effect.
(v) The Company and the Subsidiaries have filed or caused to be filed all
material federal, state and foreign income and franchise tax returns and have
paid all taxes shown as due
9
<PAGE>
thereon; and the Company has no knowledge of any tax deficiency which has been
asserted or threatened in writing against the Company or any of the Subsidiaries
which would have a Material Adverse Effect on the Company or any of the
Subsidiaries.
(w) Neither the Company nor any of the Subsidiaries is an "investment
company" within the meaning of the Investment Company Act of 1940, as amended
(the "Investment Company Act").
(x) The Company has not distributed any offering material in connection
with the offering and sale of the Common Shares other than the Preliminary
Prospectus, the Prospectus, the Registration Statement and the other materials
permitted by the Act.
(y) The Company and the Subsidiaries maintain insurance of the types and
in the amounts generally deemed adequate for their businesses, including, but
not limited to, insurance covering real and personal property owned or leased by
the Company or the Subsidiaries against theft, forgery, damage, destruction,
acts of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect.
(z) Neither the Company nor any of the Subsidiaries has at any time during
the last five years (i) made any unlawful contribution to any candidate for
foreign office, or failed to disclose fully any contribution in violation of
law, or (ii) made any payment to any federal or state governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof, the effect of which would have a Material Adverse
Effect.
(aa) All material transactions between the Company or the Subsidiaries and
their respective officers and directors and their affiliates have been
accurately disclosed in the Prospectus; and the terms of such transactions are
fair to the Company or the Subsidiaries, as the case may be.
(bb) Except as disclosed in the Prospectus or Registration Statement, the
Company has not: (i) placed any securities within the last 18 months; (ii) had
any material dealings with any member of the NASD or any person related to or
associated with such member, other than discussions and meetings relating to the
proposed Offering and routine purchases and sales of U.S. Government and agency
securities and other assets; (iii) entered into a financial or management
consulting agreement except as contemplated hereunder and except for the
engagement letter with the Representative, dated ________________; or (iv)
engaged any intermediary between the Representative and the Company in
connection with the Offering, and no person is being compensated in any manner
for such service.
(cc) The Company has not taken, directly or indirectly, any action designed
to cause or result in, or which has constituted or which reasonably might be
expected to constitute, the stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Common Stock.
10
<PAGE>
(dd) The Company has not relied upon you or your legal counsel for any
legal, tax or accounting advice in connection with the Offering (except with
respect to the qualification of the Shares for offering and sale under the
securities laws of certain states).
(ee) To their respective knowledge, none of the Company or any of the
Subsidiaries is in violation of any Federal, state, local or foreign law or
regulation relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata), including, without limitation, laws
and regulations relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum and petroleum products ("Materials of
Environmental Concern"), or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern (collectively, "Environmental Laws"), which
violation includes, but is not limited to, noncompliance with any permits or
other governmental authorizations required for the operation, as now conducted
or proposed to be conducted (as described in the Prospectus), of the business of
the Company or any of the Subsidiaries under applicable Environmental Laws, or
noncompliance with the terms and conditions thereof, and none of the Company or
any of the Subsidiaries has received any communication (written or oral),
whether from a governmental authority, citizens group, employee or otherwise,
that alleges that the Company or any of the Subsidiaries is in violation of any
such Environmental Laws, and there are no circumstances known to the Company
that are reasonably likely to lead to such violation in the future. In
addition, except as set forth in the Prospectus, there is no claim, action,
cause of action, investigation or notice (written or oral) by any person or
entity alleging potential liability for investigatory costs, cleanup costs,
governmental responses costs, natural resources damages, property damages,
personal injuries, attorney's fees or penalties arising out of, based on or
resulting from (a) the presence or release into the environment of any Material
of Environmental Concern at any location owned, controlled, leased, subject to
an option to lease or purchased or operated by the Company or any of the
Subsidiaries, now or in the past, or (b) circumstances forming the basis of any
violation or alleged violation of any Environmental Law (collectively,
"Environmental Claims"), pending or threatened against the Company or any of the
Subsidiaries or, to the best knowledge of the Company, against any person or
entity whose liability for any Environmental Claim the Company or any of the
Subsidiaries has retained or assumed either contractually or by operation of
law, except as set forth in the Prospectus or as would not result in a Material
Adverse Effect. There are no actions, activities, circumstances, conditions,
events or incidents, including, without limitation, the release, emission,
discharge, presence or disposal of any Material of Environmental Concern, that
could result in a violation of any Environmental Law or form the basis of any
potential Environmental Claim against the Company or any of the Subsidiaries or
against any person or entity whose liability for any Environmental Claim the
Company or any of the Subsidiaries has retained or assumed either contractually
or by operation of law.
(ff) None of the Company or any of the Subsidiaries has violated any
Federal, state or local law relating to discrimination in the hiring, promotion
or pay of employees, any applicable wage or hour laws, or any provisions of the
Employee Retirement Income Security Act of 1974
11
<PAGE>
("ERISA"), or the rules and regulations promulgated thereunder. There is (i) no
significant unfair labor practice complaint pending against the Company or any
of the Subsidiaries or, to the best knowledge of the Company, threatened against
any of them, before the National Labor Relations Board or any state or local
labor relations board, and no significant grievance or significant arbitration
proceeding arising out of or under any collective bargaining agreement is so
pending against the Company or any of the Subsidiaries and, to the best
knowledge of the Company, threatened against any of them, (ii) no labor dispute
in which the Company or any of the Subsidiaries is involved nor, to the best
knowledge of the Company, is any labor dispute imminent, other than routine
disciplinary and grievance matters; the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its principal customers or
vendors and (iii) no union representation question existing with respect to the
employees of the Company or any of the Subsidiaries and, to the best knowledge
of the Company, no union organizing activities are taking place, except (with
respect to any matter specified in clause (i), (ii) or (iii) above, singly or in
the aggregate) such as would not have a Material Adverse Effect.
Any certificate signed by any officer of the Company and delivered to you
or to your counsel shall be deemed a representation and warranty by the Company
to you as to the matters covered thereby. Any certificate delivered by the
Company to its counsel for purposes of enabling such counsel to render the
opinions referred to in Section 6(c) will also be furnished to the Underwriter
and its counsel and shall be deemed to be additional representations and
warranties by the Company to the Underwriter as to the matters covered thereby
and the Underwriter and its counsel are entitled to rely thereon.
3. Representations and Warranties of the Underwriter. You represent and
-------------------------------------------------
warrant to the Company as of the date hereof that the information set forth in
the Prospectus (i) on the cover page of the Prospectus with respect to price,
underwriting discounts and commissions and terms of the Offering, (ii) on the
inside cover page with respect to stabilization and (iii) under the caption
"Underwriting of Public Offering" in the Prospectus was furnished to the Company
by you and on your behalf for use in connection with the preparation of the
Registration Statement and the Prospectus and is complete and correct in all
material respects.
4. Covenants of the Company. The Company covenants and agrees that:
------------------------
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereto, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective. If the Registration Statement has become or becomes effective
pursuant to Rule 430A of the Rules and Regulations, or the filing of the
Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations,
the Company will file the Prospectus, properly completed, pursuant to the
applicable paragraph of Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to you of such timely
filing. The Company will promptly advise you in writing (i) of the receipt of
any comments of the Commission, (ii) of any request of the Commission for
amendment of or supplement to the Registration Statement (either before or after
it becomes effective), any
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<PAGE>
Preliminary Prospectus or the Prospectus or for additional information, (iii)
when the Registration Statement shall have become effective and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the institution of any proceedings for that
purpose. If the Commission shall enter any such stop order at any time, the
Company will use its best efforts to obtain the lifting of such order at the
earliest possible moment. The Company will not file any amendment or supplement
to the Registration Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus of which you have not first been
furnished with a copy a reasonable time prior to such filing or to which you
reasonably object or which is not in compliance with the Act or the Rules and
Regulations.
(b) The Company will prepare and file with the Commission, promptly upon
your request, any amendments or supplements to the Registration Statement or the
Prospectus which in your reasonable judgment may be necessary or advisable to
enable you to continue the distribution of the Common Shares and will use its
best efforts to cause the same to become effective as promptly as possible. The
Company will fully and completely comply with the provisions of Rule 430A of the
Rules and Regulations with respect to information omitted from the Registration
Statement in reliance upon such Rule.
(c) The Company will, if requested by you, prepare a Term Sheet that
complies with the requirements of Rule 434 under the Rules and Regulations, and
the Company will provide you with copies of such Term Sheet and the form of
Prospectus used in reliance on Rule 434, in such number as you may reasonably
request. The Company will timely file the Term Sheet, if any, with the
Commission pursuant to and in accordance with subparagraph (7) of Rule 424(b).
The Company will advise you promptly of any such filing pursuant to Rule 424(b)
and shall provide evidence satisfactory to you of such timely filing.
(d) If, at any time during the nine-month period referred to in Section
10(a)(3) of the Act during which a prospectus relating to the Common Shares is
required to be delivered under the Act, any event occurs, as a result of which
the Prospectus, including any amendments or supplements, would include an untrue
statement of a material fact, or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances then existing, not misleading, or if it is necessary at any time
to amend the Prospectus, including any amendments or supplements, to comply with
the Act or the Rules and Regulations, the Company will promptly advise you
thereof and will promptly prepare and file with the Commission, at its own
expense, an amendment or supplement which will correct such statement or
omission or an amendment or supplement which will effect such compliance and
will use its best efforts to cause the same to become effective as soon as
possible; and, in case you are required to deliver a Prospectus after such nine-
month period, the Company upon request, but at your expense, will promptly
prepare such amendment or amendments to the Registration Statement and such
Prospectus or Prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act.
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<PAGE>
(e) As soon as practicable, but not later than 45 days after the end of the
first quarter ending after one year following the "effective date of the
Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security holders
an earnings statement (which need not be audited) covering a period of 12
consecutive months beginning after the effective date of the Registration
Statement which will satisfy the provisions of the last paragraph of Section
11(a) of the Act.
(f) During such period as a Prospectus is required by law to be delivered
in connection with sales by an Underwriter or dealer, the Company, at its
expense, but only for the nine-month period referred to in Section 10(a)(3) of
the Act, will furnish to you or mail to your order copies of the Registration
Statement, the Prospectus, the Preliminary Prospectus and all amendments and
supplements to any such documents in each case as soon as available and in such
reasonable quantities as you may request, for the purposes contemplated by the
Act.
(g) The Company shall cooperate with you and your counsel to qualify or
register the Common Shares for sale under (or obtain exemptions from the
application of) the Blue Sky laws of such jurisdictions as you designate, will
comply with such laws and will continue such qualifications, registrations and
exemptions in effect so long as reasonably required for the distribution of the
Common Shares. The Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any such
jurisdiction where it is not presently qualified or where it would be subject to
taxation as a foreign corporation. The Company will advise you promptly of the
suspension of the qualification or registration of (or any such exemption
relating to) the Common Shares for offering, sale or trading in any jurisdiction
or any initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification, registration
or exemption, the Company, with your cooperation, will use its best efforts to
obtain the withdrawal thereof.
(h) The Company shall promptly prepare and file with the Commission, from
time to time, such reports as may be required to be filed by the Act and the
Exchange Act including, without limitation, reports with respect to the sale of
the Common Shares and the application of the proceeds thereof as may be required
in accordance with Rule 463 under the Act.
(i) During the period of five years after the date of this Agreement, the
Company will furnish to you: (i) at the same time as such are furnished to its
stockholders, copies of the Annual Report of the Company containing the
consolidated balance sheet of the Company and Subsidiaries as of the close of
such fiscal year and consolidated statements of income, stockholders' equity and
cash flows for the year then ended and the opinion thereon of the Company's
independent public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the NASD or any securities exchange; (iii) as soon
as available, copies of any report or communication of the Company mailed
generally to holders of its Common Stock; (iv) as soon as practicable after the
filing thereof, of each non-confidential report or other statement or document
filed by the Company with the Commission,
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<PAGE>
or with any national securities exchange or quotation system on which any
securities of the Company may be listed or quoted; and (v) from time to time,
such other non-confidential information concerning the Company as the
Underwriter may reasonably request.
(j) During the period of 180 days after the first date that any of the
Common Shares are released by you for sale to the public, the Company will not,
without your prior written consent (which consent may be withheld at your sole
discretion), issue, offer, sell, grant options to purchase or otherwise dispose
of any of the Company's equity securities or any other securities convertible
into or exchangeable with its Common Stock or other equity security, other than
options or other awards granted under the Company's ______ Stock Option Plan,
Employee Savings Plan or ___________.
(k) The Company will apply the net proceeds of the sale of the Common
Shares sold by it substantially in accordance with its statements under the
caption "Use of Proceeds" in the Prospectus.
(l) To the extent required by law, or applicable rules and regulations,
the Company will promptly take all steps necessary to register its Common Stock
under Section 12(g) of the Exchange Act.
(m) The Company will use its best efforts to list, subject to notice of
issuance, the Common Shares as a National Market System security on the Nasdaq
Stock Market.
(n) The Company will use its best efforts to ensure that the Bank will
maintain a system of internal accounting controls as required under applicable
law and the rules and regulations of the OTS and FDIC.
(o) The Company will not, directly or indirectly, distribute prior to the
First Closing Date any offering material in connection with the offering and
sale of the Common Shares other than the Preliminary Prospectus, the Prospectus,
the Registration Statement and the other materials permitted by the Act.
(p) The Company will not take, directly or indirectly, any action designed
to cause or result in, or which will or might be expected to constitute, the
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Common Shares.
(q) The Company will not rely upon you or your legal counsel for any
legal, tax or accounting advice in connection with the Offering, except with
respect to the qualification of the Common Shares for offering and sale under
the securities laws of certain states.
You may, in your sole discretion, waive in writing the performance by the
Company of any one or more of the foregoing covenants or extend the time for
their performance.
15
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5. Payment of Expenses
-------------------
(a) Whether or not the transactions contemplated hereunder are consummated
or this Agreement remains effective or is terminated, the Company agrees to pay
all costs, fees and expenses incurred in connection with the performance of its
obligations hereunder and in connection with the transactions contemplated
hereby, including without limiting the generality of the foregoing, (i) all
expenses incident to the issuance and delivery of the Common Shares (including
all printing and engraving costs), (ii) all fees and expenses of the registrar
and transfer agent of the Common Stock, (iii) all necessary issue, transfer and
other stamp taxes in connection with the issuance and sale of the Common Shares,
(iv) all fees and expenses of the Company's counsel and the Company's
independent accountants, (v) all costs and expenses incurred in connection with
the preparation, printing, filing, shipping and distribution of the Registration
Statement, each Preliminary Prospectus and the Prospectus (including all
exhibits and financial statements) and all amendments and supplements provided
for herein, (vi) where applicable, all filing fees, attorney's fees and
expenses incurred by the Company or the Underwriter in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Common Shares for offer and sale under
the Blue Sky laws (vii) the filing fee of the National Association of Securities
Dealers, Inc., (viii) all the costs and expenses incurred by the Company in
making road show presentations with respect to the Offering, (ix) all costs of
preparing, printing and distributing bound volumes of the transaction documents
for the Underwriter and its counsel, and (x) all other fees, costs and expenses
referred to in Item 13 of the Registration Statement. Except as provided in
this Section 5, and Section 8 hereof, the Underwriter shall pay all of its own
expenses, including the fees and disbursements of its own counsel (excluding
those relating to qualification, registration or exemption under the Blue Sky
laws and the Blue Sky memorandum referred to above).
(b) Whether or not the transactions contemplated hereunder are consummated
or this Agreement remains effective or is terminated, in addition to payment of
the expenses set forth in Section 5(a), the Company agrees to reimburse you for
your reasonable out-of pocket expenses in connection with the performance of
your activities under this Agreement, including, but not limited to, costs
relating to printing, facsimile, courier service, direct computer expenses,
accommodations, travel, reasonable fees and expenses of your outside legal
counsel and any other advisors, accountants, appraisers, or the like, blue sky
fees and expenses, including reasonable fees and disbursements of counsel, and
your road show related costs and expenses. Such reimbursed expenses shall not
exceed $_______ without the prior written permission of the Company. You shall
submit a detailed statement of your actual expenses to the Company at the First
Closing Date or from time-to-time before or within 30 days after the First
Closing Date, and the Company shall reimburse you therefor in full within 14
days of receipt of such statement or statements. For purposes of this Section 5,
you shall be deemed to have incurred expenses when they are billed, regardless
of whether such expenses have been paid. Nothing contained in this Section 5
shall affect or limit your right to receive all expenses (including counsel fees
and expenses) pursuant to the indemnification provisions of this Agreement.
16
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6. Conditions to the Obligations of the Underwriter. Your obligations to
------------------------------------------------
purchase and pay for the Firm Common Shares on the First Closing Date and the
Optional Common Shares on the Second Closing Date shall be subject to the
accuracy in all material respects of the representations and warranties on the
part of the Company herein set forth as of the date hereof and as of the First
Closing Date or the Second Closing Date, as the case may be, to the accuracy in
all material respects of the statements of Company officers made pursuant to the
provisions hereof, to the performance in all material respects by the Company of
its obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later than
5:00 p.m., Washington, D.C. Time, on the date of this Agreement, or at such
later time as shall have been consented to by you; if the filing of the
Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of
the Rules and Regulations, the Prospectus shall have been filed in the manner
and within the time period required by Rule 424(b) of the Rules and Regulations;
and prior to such closing date, no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge of
the Company or you, shall be contemplated by the Commission; and any request of
the Commission for inclusion of additional information in the Registration
Statement, or otherwise, shall have been complied with to your reasonable
satisfaction.
(b) You shall be reasonably satisfied that since the respective dates as of
which information is given in the Registration Statement and Prospectus, (i)
there shall not have been any change in the capital stock of the Company, except
as contemplated in the Prospectus for the Reorganization, or any material change
in the consolidated indebtedness (other than as disclosed in the Prospectus) of
the Company, (ii) except as set forth or contemplated by the Registration
Statement or the Prospectus, no material verbal or written agreement or other
transaction shall have been entered into by the Company, which is not in the
ordinary course of business and which could result in a material reduction in
the future earnings of the Company, (iii) no loss or damage (whether or not
insured) to the property of the Company shall have been sustained which
materially and adversely affects the condition (financial or otherwise),
business, results of operations or prospects of the Company, (iv) no legal or
governmental action, suit or proceeding affecting the Company which is material
to the Company or which affects or may affect the transactions contemplated by
this Agreement shall have been instituted or threatened, (v) no enforcement
proceeding, whether formal or informal, shall have been commenced against the
Company or any of the Subsidiaries by the FDIC, the OTS or any other
governmental agency, nor shall any such proceeding have been instituted,
threatened or recommended, except for _____________ as disclosed in the
Prospectus, and (vi) there shall not have been any material change in the
condition (financial or otherwise), business, management, results of operations
or prospects of the Company which makes it impractical or inadvisable in the
judgment of the Underwriter to proceed with the public offering or purchase the
Common Shares as contemplated hereby.
(c) There shall have been furnished to you, in form and substance
satisfactory to you except as otherwise expressly provided below:
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(i) The favorable opinion of Muldoon, Murphy & Faucette, counsel for the
Company, addressed to the Underwriter and dated as of the First Closing Date or
the Second Closing Date, as the case may be, and in form and substance
satisfactory to counsel for the Underwriter, to the effect that:
(1) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
(2) The Company and each of the Subsidiaries have full corporate
power and authority to own their respective properties and to conduct their
businesses as described in the Registration Statement and Prospectus, and the
Company has full corporate power and authority to enter into and perform its
obligations under this Agreement.
(3) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in the State of California and in each
jurisdiction in which the failure to so qualify would have a material adverse
effect upon the financial condition, results of operations or business of the
Company and the Subsidiaries, taken as a whole.
(4) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under "Capitalization."
(5) The Common Shares have been duly and validly authorized for
issuance and sale and, when issued and delivered by the Company against payment,
will be duly and validly issued, fully paid and nonassessable.
(6) The issuance of the Common Shares is not subject to preemptive or
other similar rights arising by operation of law or, to the best of such
counsel's knowledge, otherwise.
(7) (A) The Bank has been duly chartered, and at all times since the
date hereof and at the First Closing Date or Second Closing Date, as the case
may be, validly existing and in good standing under the laws of the United
States of America as a federal savings bank with full corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Registration Statement and the Prospectus; and (B) each of
the other Subsidiaries has been duly incorporated and at all times since the
date hereof and at the First Closing Date or Second Closing Date, as the case
may be, validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation or organization, as applicable, with full
corporate power and authority to own, lease and operate its
18
<PAGE>
properties and to conduct its business as described in the Registration
Statement and the Prospectus.
(8) Each of the Subsidiaries is duly qualified as a foreign corporation to
transact business in each jurisdiction in which the failure to so qualify would
have a material adverse effect upon its financial condition, results of
operations or business.
(9) The deposit accounts of the Bank are insured by the FDIC up to the
applicable limits.
(10) The activities of the Bank are permissible activities of federal
savings banks under federal law and the rules, regulations, resolutions and
practices of the OTS.
(11) All of the issued and outstanding shares of capital stock of each of
the Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable, and upon completion of the Reorganization, all such capital stock
will be owned of record and beneficially by the Company free and clear of any
security interest, mortgage, pledge, lien, encumbrance, or legal or equitable
claim, except for _____________.
(12) The execution and delivery of this Agreement, the issuance of the
Common Shares by the Company and the consummation of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action of the Company; the consummation of the transactions described
in the Prospectus as constituting the "Reorganization" have been duly and
validly authorized by all necessary actions of the Company and the Bank; the
Bank and the Company have received all approvals, authorizations, consents or
other orders of governmental bodies (including the OTS where applicable)
necessary to consummate the Reorganization; this Agreement constitutes the
legal, valid and binding agreement of the Company, enforceable in accordance
with its terms, except as rights to indemnity and contribution hereunder may be
limited under applicable law (it being understood that such counsel may avail
itself of customary exceptions concerning the effect of bankruptcy, insolvency
or similar laws and the availability of equitable remedies); and, to the best of
such counsel's knowledge, the execution and delivery of this Agreement, the
incurrence of the obligations herein set forth and the consummation of the
transactions contemplated herein will not conflict with or constitute a breach
of, or default under, and no event has occurred which, with notice or lapse of
time or both, would constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance that, individually or in the
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aggregate, would have a material adverse effect upon the financial condition,
results of operations or business of the Company pursuant to any contract,
indenture, mortgage, loan agreement, note, lease or other instrument to which
the Company or any of the Subsidiaries is a party or by which it may be bound,
or to which any of the property or assets of the Company or any of the
Subsidiaries is subject, nor will such execution or delivery result in any
violation of the provisions of the Certificate of Incorporation, Articles of
Incorporation, Bylaws or other organizational document, as the case may be, of
the Company or any of the Subsidiaries.
(13) The Registration Statement is effective under the Act and, to the best
of such counsel's knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued under the Act or proceedings therefor
initiated or threatened by the Commission.
(14) No further approval, authorization, consent or other order of any
federal or state board or body is required in connection with the execution and
delivery of this Agreement or the issuance of the Common Shares, except as may
be required under the securities or Blue Sky laws of various jurisdictions, as
to which no opinion need be rendered.
(15) At the time the Registration Statement became effective, the
Registration Statement (other than the financial statements and statistical and
financial data included therein, as to which no opinion need be rendered)
complied as to form in all material respects with the requirements of the Act
and the Rules and Regulations.
(16) The Common Stock conforms to the description thereof contained in the
Prospectus, and the form of certificate used to evidence the Common Stock is in
due and proper form and complies with all applicable statutory requirements.
(17) To the best of such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against or affecting the Company
or any of the Subsidiaries which are required, individually or in the aggregate,
to be disclosed in the Registration Statement or Prospectus, other than those
disclosed therein.
(18) The information contained in the Prospectus under "Risk Factors,"
"Supervision and Regulation," "Description of Capital Stock," "______ Stock
Option Plan," "____________," "____________" and "____________," to the extent
that such information constitutes matters of
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law, summaries of legal matters, documents or proceedings, or legal
conclusions, has been reviewed by such counsel and is correct in all
material respects.
(19) To the best of such counsel's knowledge, there are no contracts,
indentures, mortgages, loan agreements, notes, leases or other instruments
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as exhibits thereto, other than those described or
referred to therein or filed as exhibits thereto, and the descriptions
thereof or references thereto are correct in all material respects.
(20) To the best of such counsel's knowledge, the Company and each of
the Subsidiaries hold all licenses, permits and other governmental
authorizations currently required for the conduct of their respective
businesses under the federal laws of the United States, the laws of the
State of California and the Delaware General Corporation Law, as described
in the Registration Statement and Prospectus, except for such licenses,
approvals or authorizations the failure of which to hold would not result in
a material adverse change in the financial condition, results of operations
or the business of the Company and the Subsidiaries, taken as a whole; all
such licenses, permits and other governmental authorizations are in full
force and effect, and the Company and the Subsidiaries operate their
respective businesses in all material respects in compliance therewith.
(ii) Such opinion of Manatt, Phelps & Phillips, LLP, counsel for the
Underwriter, dated the First Closing Date or the Second Closing Date, as the
case may be, with respect to the incorporation of the Company, the sufficiency
of all corporate proceedings and other legal matters relating to this Agreement,
the validity of the Common Shares, the Registration Statement and the Prospectus
and other related matters as you may reasonably require, and such counsel shall
have received such documents and shall have exhibited to them such papers and
records as they may reasonably request for the purpose of enabling them to pass
upon such matters. In connection with such opinion, such counsel may also rely
as to certain matters on the opinion of Muldoon, Murphy & Faucette and on
representations or certificates of officers of the Company and governmental
officials.
(iii) A certificate of the Company executed by the Chairman of the Board or
President and the Chief Financial or Accounting Officer, dated the First Closing
Date or the Second Closing Date, as the case may be, to the effect that:
(1) The representations and warranties of the Company set forth in
Section 2 of this Agreement are true and correct in all material respects
and the Company has complied in all material respects with all the
agreements and satisfied all the conditions on its part to be performed
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or satisfied on or prior to such Closing Date.
(2) The Commission has not issued any order preventing or suspending
the use of the Prospectus or any Preliminary Prospectus filed as a part of
the Registration Statement or any amendment thereto; no stop order
suspending the effectiveness of the Registration Statement has been issued;
and to the best of the knowledge of the respective signers, no proceedings
for that purpose have been instituted or are pending or contemplated under
the Act.
(3) Neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto includes any untrue statement of a material
fact or omits to state any material fact required to be stated therein, or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(4) Since the initial date on which the Registration Statement was
filed with the Commission, no agreement, written or oral, transaction or
event has occurred which should have been set forth in an amendment to the
Registration Statement or in a supplement to or amendment of any prospectus,
which has not been disclosed in such a supplement or amendment.
(5) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus and except as disclosed in or
contemplated by the Prospectus, the Company has not sustained a material
loss or damage by strike, fire, flood, windstorm, earthquake, accident or
other calamity (whether or not insured).
(iv) At the time of the execution of this Agreement, a letter dated as of
the date hereof from Grant Thornton, LLP, Deloitte & Touche, LLP and Price
Waterhouse LLP, independent accountants, in form and substance satisfactory to
you, to the effect that (1) they are independent certified public accountants
with respect to the Company within the meaning of the Act and the Rules and
Regulations; (2) it is their opinion that the consolidated financial statements
and supporting schedules included in the Registration Statement and covered by
their opinions therein comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and Regulations; (3)
based upon limited procedures as agreed upon by you and them and set forth in
detail in such letter, nothing has come to their attention which causes them to
believe that (A) the unaudited financial statements and supporting schedules of
the Company (or its predecessor) and the Subsidiaries included in the
Registration Statement, if any, do not comply as to form in all material
respects with the applicable accounting requirements of the Act and the Rules
and Regulations or are not presented in conformity with generally accepted
accounting principles
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applied on a basis substantially consistent with that of the audited
financial statements included in the Registration Statement and the
Prospectus, (B) at a specified date not more than five days prior to the date
of this Agreement, there has been any increase in the consolidated long-term
or short-term debt, or any decrease in consolidated total assets, allowance
for loan losses, total deposits or net worth of the Company and the
Subsidiaries, in each case as compared with the amounts shown in the
financial statements included in the Registration Statement or, (C) during
the period from December 31, 1996 to a date not more than five days prior to
the date of this Agreement, there were any decreases, as compared with the
corresponding period in the preceding year, in net interest income, net
interest income after provision for loan losses, or net income of the Bank,
except in all instances for increases or decreases which the Registration
Statement and the Prospectus disclose have occurred or may occur; and (4) in
addition to the examination referred to in their opinions and the limited
procedures referred to in clause (3) above, they have carried out certain
specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information which are included in the
Registration Statement and Prospectus and which are specified by you, and
have found such amounts, percentages and financial information to be in
agreement with the relevant accounting, financial and other records of the
Company and the Subsidiaries identified in such letter.
(v) On the First Closing Date and the Second Closing Date (in the event of
a second closing), a letter addressed to you, from Grant Thornton, LLP,
Deloitte & Touche, LLP and Price Waterhouse LLP, independent accountants, the
first one to be dated the First Closing Date and the second one (in the event
of a second closing) to be dated the Second Closing Date, to the effect that
they reaffirm their statements made in the letter furnished to you pursuant
to Section 6(c)(iv) of this Agreement.
(vi) On or before the First Closing Date, letters from each director and
executive officer of the Company, in form and substance satisfactory to you,
confirming that for a period of one hundred and eighty (180) days after the
first date that any of the Common Shares are released by you for sale to the
public, such person will not directly or indirectly sell, offer to sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
right to acquire such shares without the prior written consent of the
Representative, which consent may be withheld at the sole discretion of the
Representative.
(d) As of the First Closing Date and the Second Closing Date, as the case
may be, the Common Stock shall have been approved for quotation on the Nasdaq
National Market upon notice of issuance.
(e) As of the First Closing Date and the Second Closing Date, as the case
may be, (i) there shall not have occurred any material adverse change in the
financial markets in the United States or elsewhere or any outbreak of
hostilities or escalation thereof or other calamity or crisis the effects of
which, in the judgment of the Representative, are so material and adverse as to
make it impracticable to market the Common Shares or to enforce contracts,
including subscriptions or
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orders, for the sale of the Common Shares, and (ii) trading generally on
either the American Stock Exchange or the New York Stock Exchange shall not have
been suspended, and minimum or maximum prices for trading shall not have been
fixed, or maximum ranges for prices for securities have been required, by either
of said Exchanges or by order of the Commission or any other governmental
authority, and a banking moratorium shall not have been declared by either
Federal or New York State authorities.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
to you and to Manatt, Phelps & Phillips, LLP, counsel for the Representative.
The Company shall furnish you with such manually signed or conformed copies of
such opinions, certificates, letters and documents as you reasonably request.
If any condition to the Underwriter's obligations hereunder to be satisfied
prior to or at the First Closing Date is not so satisfied, this Agreement at
your election will terminate upon written notification by you as Representative
to the Company without liability on the part of any Underwriter or the Company,
except for the expenses to be paid or reimbursed by the Company pursuant to
Section 5 hereof and except to the extent provided in Section 8 hereof.
7. Effectiveness of Registration Statement. Each party to this Agreement
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will use its best efforts to cause the Registration Statement to become
effective, to prevent the issuance of any stop order suspending the
effectiveness of the Registration Statement and, if such stop order be issued,
to obtain as soon as possible the lifting thereof.
8. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless the Underwriter and
each person, if any, who controls the Underwriter, as the case may be, within
the meaning of the Act against any losses, claims, damages, liabilities or
expenses, joint or several, to which the Underwriter or such controlling person
may become subject, under the Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or other federal or state law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of the Company), insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof
as contemplated below) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or based upon written information supplied by the Company
filed in any state or jurisdiction to register or qualify any or all of the
Common Shares or to claim an exemption therefrom, or provided to any state or
jurisdiction to exempt the Company as a broker-dealer or its officers, directors
and employees as broker-dealers or agents under the securities laws thereof
(collectively, the "Blue Sky Application"), or arise out of or are based upon
the omission or alleged omission to state in any of them a material fact
required to be stated therein or necessary to make the statements in any of them
not misleading, or arise from any theory of liability whatsoever relating to or
arising from or based upon the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or
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supplement thereto, or arise out of or are based in whole or in part upon any
inaccuracy in the representations and warranties of the Company contained herein
or any failure of the Company to perform its obligations hereunder or under law;
and will reimburse the Underwriter and each such controlling person for any
legal and other expenses as such expenses are reasonably incurred by the
Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 3 hereof; provided,
further, that the foregoing indemnity with respect to any Preliminary Prospectus
shall not inure to the benefit of the Underwriter from whom the person asserting
any such loss, claim, damage or liability purchased the Common Shares that are
the subject thereof if such person did not receive a copy of the Prospectus (or
the Prospectus as supplemented) at or prior to the confirmation of the sale to
such person in any case where such delivery is required by the Act and the
untrue statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as supplemented).
In addition to its other obligations under this Section 8(a), the Company agrees
that, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, or any inaccuracy
in the representations and warranties of the Company herein or failure to
perform its obligations hereunder, all as described in this Section 8(a), it
will reimburse the Underwriter (and, to the extent applicable, each controlling
person) on a monthly basis for all reasonable legal or other expenses incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse the Underwriter (and, to the extent applicable each
controlling person) for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement payment is so held to have
been improper, the Underwriter (and, to the extent applicable each controlling
person) shall promptly return it to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) announced from time
to time by Bank of America NT&SA, San Francisco, California (the "Prime Rate").
Any such interim reimbursement payments which are not made to the Underwriter
within 30 days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request. This indemnity agreement will be in addition
to any liability which the Company may otherwise have.
(b) You will indemnify and hold harmless the Company, each of its directors,
each of its officers who signed the Registration Statement, and each person, if
any, who controls the Company within the meaning of the Act, against any losses,
claims, damages, liabilities or expenses to which the Company or any such
director, officer, or controlling person may become subject, under the Act, the
Exchange Act, or other federal or state statutory law or regulation, or at
common law or
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<PAGE>
otherwise (including in settlement of any litigation, if such settlement is
effected with your written consent), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each such case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with the information furnished to the Company pursuant to Section 3
hereof; and will reimburse the Company or any such director, officer, or
controlling person for any legal and other expense reasonably incurred by the
Company or any such director, officer, or controlling person in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, liability, expense or action. In addition to the other obligations under
this Section 8(b), you agree that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in this Section 8(b) which relates to information furnished to the
Company pursuant to Section 3 hereof, it will reimburse the Company (and, to the
extent applicable, each officer, director, controlling person) on a monthly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of your obligation to reimburse the Company
(and, to the extent applicable, each officer, director, controlling person) for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Company
(and, to the extent applicable, each officer, director or controlling person)
shall promptly return it to you together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company within 30 days of a request for
reimbursement, shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability which you
may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section, notify the indemnifying party in writing of the commencement thereof,
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party for indemnity,
contribution or otherwise except to the extent the indemnifying party is
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it may wish, jointly
with all other indemnifying parties similarly notified, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party
26
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and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be a conflict between the positions of the indemnifying
party and the indemnified party in conducting the defense of any such action or
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of its election so to assume the defense of such action and approval by
the indemnified party of counsel, the indemnifying party will not be liable to
such indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed such counsel in
connection with the assumption of legal defenses in accordance with the proviso
to the next preceding sentence or (ii) the indemnifying party shall not have
employed counsel reasonably satisfactory to the indemnified party to represent
the indemnified party within a reasonable time after notice of commencement of
the action, in each of which cases the fees and expenses of counsel shall be at
the expense of the indemnifying party (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel representing the indemnified parties who are parties to such
action; provided, however, if an indemnified party in any such action shall have
concluded that there may be legal defenses or rights available to it which are
different from, in actual or potential conflict with, or additional to those
available to other indemnified parties, such party shall have the right to
select an additional law firm to act as its separate counsel).
(d) If the indemnification provided for in this Section 8 is required by
its terms but is for any reason held to be unavailable to or otherwise
insufficient to hold harmless an indemnified party under subsections (a), (b) or
(c) of this Section 8 in respect of any losses, claims, damages, liabilities or
expenses referred to herein, then each applicable indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of any losses, claims, damages, liabilities or expenses referred to herein (i)
in such proportion as is appropriate to reflect the relative benefits received
by the Company and you from the offering of the Common Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
you in connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company, on the one hand,
and you, on the other hand, shall be deemed to be in the same respective
proportions as the total proceeds (net of underwriting commissions, but before
deducting expenses) from the offering of the Common Stock received by the
Company and the total underwriting commissions received by you to the aggregate
public offering price of the Common Stock. The relative fault of the Company and
you shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact or the inaccurate or the alleged inaccurate
representation and/or warranty relates to information supplied by the Company or
you and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or
27
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omission. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in subsection (c) of this Section
8, any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim. The provisions
set forth in subsection (c) of this Section 8 with respect to notice of
commencement of any action shall apply if a claim for contribution is to be made
under this subsection (d); provided, however, that no additional notice shall be
required with respect to any action for which notice has been given under
subsection (c) for purposes of indemnification. The Company and you agree that
it would not be just and equitable if contribution pursuant to this Section 8
were determined solely by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in this paragraph. Notwithstanding the provisions of this Section 8, you
shall not be required to contribute any amount in excess of the amount of the
total underwriting discounts and commissions received by you in connection with
the Common Shares underwritten by you and distributed to the public. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
fraudulent misrepresentation.
(e) It is agreed that any controversy arising out of the operation of the
interim reimbursement arrangements set forth in Sections 8(a) and 8(b) hereof,
including the amounts of any requested reimbursement payments and the method of
determining such amounts, shall be settled by arbitration conducted pursuant to
the Code of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or written notice of
intention to arbitrate, therein electing the arbitration tribunal. In the event
the party demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand or
notice is authorized to do so. Such an arbitration would be limited to the
operation of the interim reimbursement provisions contained in Sections 8(a) and
8(b) hereof and would not resolve the ultimate propriety or enforceability of
the obligation to reimburse expenses which is created by the provisions of such
Sections 8(a) and 8(b) hereof.
9. Effective Date. This Agreement shall become effective immediately as
--------------
to Sections 5, 8, 10 and 11 and, as to all other provisions, (i) if at the time
of execution of this Agreement the Registration Statement has not become
effective, at 4:30 p.m., California Time, on the first full business day
following the effectiveness of the Registration Statement, or (ii) if at the
time of execution of this Agreement the Registration Statement has been declared
effective, at 4:30 p.m., California Time, on the first full business day
following the date of execution of this Agreement; but this Agreement shall
nevertheless become effective at such earlier time after the Registration
Statement becomes effective as you may determine as indicated by notice to the
Company or by release of any of the Common Shares for sale to the public. For
the purposes of this Section 9, the Common Shares shall be deemed to have been
so released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of telegrams offering
the Common Shares for sale to securities dealers, whichever may occur first.
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10. Termination. Without limiting the right to terminate this Agreement
-----------
pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you, or by
you by notice to the Company, at any time prior to the time this Agreement shall
become effective as to all of its provisions, and any such termination shall be
without liability on the part of the Company to you (except for the expenses to
be paid or reimbursed by the Company pursuant to Section 5 hereof and except to
the extent provided in Section 8 hereof) or of you to the Company (except to the
extent provided in Section 8 hereof).
(b) This Agreement may also be terminated by you prior to the First
Closing Date by notice to the Company (i) if trading in the Company's Common
Stock or other securities shall have been suspended by the Commission or any
securities exchange or market or additional material governmental restrictions,
not in force and effect on the date hereof, shall have been imposed upon trading
in securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over-the-counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or market, or a general
banking moratorium shall have been established by federal, New York or
California authorities, (ii) if an outbreak of major hostilities or other
national or international calamity or any substantial change in political,
financial or economic conditions shall have occurred or shall have accelerated
or escalated to such an extent, as, in your judgment, to affect materially and
adversely the marketability of the Common Shares, (iii) if any adverse event
shall have occurred or shall exist which makes untrue or incorrect in any
material respect any statement or information contained in the Registration
Statement or Prospectus or which is not reflected in the Registration Statement
or Prospectus but should be reflected therein in order to make the statements or
information contained therein in light of the circumstances under which they
were made, not misleading in any material respect, or (iv) if there shall be any
action, suit or proceeding pending or threatened, or there shall have been any
development or prospective development involving particularly the business or
properties or securities of the Company or the transactions contemplated therein
which, in your reasonable judgment, is reasonably likely to materially and
adversely affect the Company's business or earnings and makes it impracticable
or inadvisable to offer or sell the Common Shares. Any termination pursuant to
this subsection (b) shall be without liability on your part to the Company or on
the part of the Company to you, except for expenses to be paid or reimbursed by
the Company pursuant to Section 5 hereof (which shall not be required to be paid
upon termination pursuant to clause (i) or (ii) above) and except to the extent
provided in Section 8 hereof.
11. Representations and Indemnities to Survive Delivery. The respective
---------------------------------------------------
indemnities, agreements, representations, warranties and other statements of the
parties hereto and of their respective officers set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on your behalf, the Company or any of your or their
respective partners, officers or directors or any controlling person, as the
case may be, and will
29
<PAGE>
survive delivery of and payment for the Common Shares sold hereunder and any
termination of this Agreement.
12. Notices. All communications hereunder shall be in writing and, if
-------
sent to you shall be mailed, delivered or telegraphed and confirmed to you at
Friedman, Billings, Ramsey & Co., Inc., Lakeshore Towers, 18101 Von Karman
Avenue, Suite 1260, Irvine, California 92612 Attention: James C. Neuhauser, with
a copy to Manatt, Phelps & Phillips, LLP, 11355 West Olympic Boulevard, Los
Angeles, California 90064, Attention: Allen Z. Sussman, Esq.; and if sent to the
Company shall be mailed, delivered or telegraphed and confirmed to the Company
at _____________________________ Attention: ____________, President, with a copy
to Muldoon, Murphy & Faucette, _________________________, Attention: Mary
Sjoquist, Esq. The Company or you may change the address for receipt of
communications hereunder by giving notice to the other.
13. Successors. This Agreement will inure to the benefit of and be binding
----------
upon the parties hereto, and to the benefit of the officers and directors and
controlling persons referred to in Section 8, and in each case their respective
successors, personal representatives and assigns, and no other person will have
any right or obligation hereunder. Notwithstanding the foregoing, this
Agreement shall not be assignable by the parties. The term "successors" shall
not include any purchaser of the Common Shares from you as such, merely by
reason of such purchase.
14. Partial Unenforceability. The invalidity or unenforceability of any
------------------------
section, paragraph or provision of this Agreement shall not affect the validity
or enforceability of any other section, paragraph or provision hereof. If any
section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make the remainder of
this Agreement valid and enforceable.
15. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the internal laws (and not the laws pertaining to conflicts of
laws) of the State of California.
16. General. This Agreement constitutes the entire agreement of the
-------
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and you.
30
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed copies hereof, whereupon it will
become a binding agreement between the Company and you, all in accordance with
its terms.
Very truly yours,
LIFE FINANCIAL CORP.
By:_____________________________________
Name: Daniel L. Perl
Title: President and Chief Executive Officer
The foregoing Underwriting Agreement
is hereby confirmed and accepted by us
in Irvine, California as of the date
first above written.
FRIEDMAN, BILLING, RAMSEY & CO., INC.
By:_____________________________
Name: James C. Neuhauser
Title: Executive Vice President
31
<PAGE>
EXHIBIT 4.1
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
(the "Company")
13 1/2% SUBORDINATED DEBENTURES DUE March 15, 2004
DEBENTURE PURCHASE AGREEMENT
Dated as of March 12, 1997
<PAGE>
TABLE OF CONTENTS
(Not Part of Agreement)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. AUTHORIZATION OF ISSUE OF DEBENTURES............ 1
2. PURCHASE AND SALE OF DEBENTURES................. 1
3. CONDITIONS OF CLOSING........................... 1
4. PREPAYMENTS..................................... 2
5. COVENANTS....................................... 2
6. EVENTS OF DEFAULT............................... 5
7. REPRESENTATIONS, COVENANTS AND WARRANTIES....... 7
8. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS 9
9. SUBSEQUENT OFFERS AND RESALES OF THE SECURITIES. 10
10. DEFINITIONS..................................... 11
11. MISCELLANEOUS................................... 14
</TABLE>
PURCHASER SCHEDULE
EXHIBIT A -- FORM OF DEBENTURE
<PAGE>
TO THE PURCHASERS SET
FORTH IN SCHEDULE HERETO
Gentlemen:
The undersigned, Life Savings Bank, Federal Savings Bank (herein called the
"Bank"), hereby agrees with you as follows:
1. AUTHORIZATION OF ISSUE OF DEBENTURES. The Bank will authorize the
issue of its Subordinated Debentures (herein called the "Debentures") to be
issued in global form, in the aggregate principal amount of $10,000,000, to be
dated the date of issue thereof, to mature March 15, 2004, to bear interest on
the unpaid balance thereof from the date thereof until the principal thereof
shall have become due and payable at the rate of 13 1/2% per annum, which
interest shall be payable semi-annually, and to be substantially in the form of
Exhibit A attached hereto (the "Global Debenture"). The term "Debentures" as
used herein shall include the Global Debenture delivered pursuant to any
provision of this Agreement each Debenture delivered in substitution or exchange
for any such Debenture pursuant to any such provision and, to the extent the
context hereof requires, each Beneficial Interest in a Global Debenture held by
a Beneficial Holder thereof.
2. PURCHASE AND SALE OF DEBENTURES. Subject to the terms and conditions
herein set forth, the Bank hereby agrees to sell to you and you agree to
purchase from the Bank the aggregate principal amount of Debentures set forth
opposite your name in the Purchaser Schedule attached hereto at 100% of such
aggregate principal amount. Each purchaser identified in the Purchaser Schedule
is referred to herein as a "Purchaser".
Payment of the purchase price for and delivery of the Debentures to be
purchased by the Purchasers shall be made at the offices of Friedman, Billings,
Ramsey & Co., Inc., Arlington, Virginia or at the option of the Bank through the
systems of the Depository Trust Company or any successor entity (the
"Depository"), with delivery of the Debentures to the Depository for the
respective accounts of the Purchasers to be made against payment for the
Debentures in same day funds, or in such other manner as shall be agreed upon by
the Purchasers and the Bank, at 10:00 A.M. on March 14, 1997 (such time and date
being referred to herein, respectively, as the "Closing Time" and the "Closing
Date").
3. CONDITIONS OF CLOSING. Your obligation to purchase and pay for the
Debentures to be purchased by you hereunder is subject to the satisfaction, on
or before the Closing Date, of the following conditions:
3A. Opinion of Company's Counsel. You shall have received from Muldoon,
Murphy & Faucette, special counsel for the Bank, a favorable opinion reasonably
satisfactory to you and substantially in the form of Exhibit B attached hereto.
3B. Representations and Warranties; No Default. The representations and
warranties contained in Section 7 shall be true on and as of the Closing Date,
except to the extent of changes caused by the transactions herein contemplated;
there shall exist on the Closing Date no Event of Default or Default; and the
Bank shall have delivered to you an Officer's Certificate, dated the Closing
Date, as to both such effects.
3C. Proceedings. All corporate and other proceedings taken or to be taken
in connection with the transactions contemplated hereby and all documents
incident thereto shall be reasonably satisfactory in substance and
<PAGE>
form to you, and you shall have received all such counterpart originals or
certified or other copies of such documents as you may reasonably request.
4. PREPAYMENTS.
4A. Company Prepayments. Except for prepayments made pursuant to Sections
4B, 5J and 6A hereof, for a period of 18 months following the Closing Date the
Bank shall not, and shall not permit any of its Subsidiaries or Affiliates to,
prepay or otherwise retire in whole or in part prior to their stated final
maturity (other than upon acceleration of such final maturity pursuant to
paragraph 6A), any Debentures held by any Holder; provided, that, nothing herein
shall be deemed to limit the ability of the Bank, any Subsidiary or Affiliate to
repurchase Debentures at any time on such terms as the Bank, any Subsidiary or
Affiliate, as the case may be, and the Holder or Holders of Debentures may
agree. Notwithstanding the foregoing sentence, in the event that the Bank is
not then in compliance with any of the covenants contained in Sections 5(A),
(B), (C) or (G), the Bank shall not, and shall not permit any of its
Subsidiaries or Affiliates to, purchase any Debenture other than through a pro-
rata offer to purchase such aggregate principal amount of Debentures which has
been made to all Holders of Debentures. Voluntary prepayments by the Bank after
the initial 18 month period may be made in accordance with the procedure
described in the Debenture.
4B. Purchase Option. This paragraph 4B shall apply only if, pursuant to
paragraph 11D of this Purchase Agreement, the Company is substituted for the
Bank as a party to this Purchase Agreement and as obligor on the Debentures.
Any Holder may require the Company to prepay the Debenture early by giving
notice to the Company not more than 30 days before September 15, 1998 or if the
substitution of the Company for the Bank has not occurred by that date, not more
than 30 days after such substitution. If such notice is given, the Company
shall prepay the principal of the Debenture with respect to which such notice is
given within 90 days of September 15, 1998 or the date of the notice if it is
given after that date along with interest as provided in paragraph 1 of this
Purchase Agreement for the period prior to the prepayment date, provided that no
premium will be payable.
5. COVENANTS.
5A. Limitation on Funded Indebtedness and Indebtedness. The Bank will
not, and will not cause or permit any Subsidiary to create, assume, guarantee,
incur or in any manner become, directly or indirectly liable in respect of any
indebtedness unless, after giving effect thereto, Indebtedness shall not exceed
200% of consolidated net tangible equity capital.
5B. Consolidated Tangible Equity Capital. The Bank will not at any time
permit Consolidated Tangible Equity to be less than $9 million plus the
cumulative amount equal to fifty percent (50%) of the consolidated net income
(but not loss) for each fiscal quarter commencing March 31, 1997 plus the net
proceeds of the Offerings.
5C. Restrictions as to Dividends and Certain Other Payments. So long as
the Debentures are outstanding, the Bank will not, and will not permit any
Subsidiary to, declare or pay any dividend or make any other distribution on its
capital stock (other than on account of capital stock of a Subsidiary owned
legally and beneficially by the Bank or a Subsidiary) or to its respective
stockholders (other than dividends or distributions payable in its capital
stock) or purchase, redeem or otherwise acquire for value (except pursuant to a
bona fide pledge or employee benefit plan) any of its capital stock (other than
on account of capital stock of a Subsidiary owned legally and beneficially by
the Bank or a Subsidiary) (each, a "Restricted Payment") unless: (i)
immediately before, and after giving effect to such Restricted Payment, the
obligation under paragraph 5B would be met; (ii) at the time of and immediately
before, such declaration is made and after giving effect to, such Restricted
Payment, no Default or Event of Default exists or would exist as a result of
such Restricted Payment; and (iii) no Default or Event of Default shall have
occurred within 365 days of the declaration of such Restricted Payment.
2
<PAGE>
5D. Merger, Consolidation or Sale of Assets; Successor Corporations. The
Bank will not merge or consolidate with, or sell all or substantially all of its
assets to, any person, firm or corporation unless it is the successor
corporation in such transaction and, immediately thereafter, it is not in
default under this Agreement or, if it is not the successor corporation, the
successor corporation expressly assumes the Bank's obligations under this
Agreement and immediately after such transaction, it is not in default under
this Agreement. Any successor corporation shall succeed to and be substituted
for the Bank as if such successor corporation had been named as the Bank in this
Agreement.
5E. Modification of the Debentures or this Agreement. With the consent of
the Beneficial Holders of not less than 51% in principal amount of the
Debentures, any term, covenant, agreement, or condition of the Debentures or
this Agreement may be amended or compliance therewith may be waived, provided
that no amendment or waiver shall, without the consent of the Beneficial Holders
of all the Debentures affected thereby: (i) change the principal amount of any
Debenture or the maturity of the principal of any Debenture or (ii) reduce the
rate or extend the time of payment of interest on any Debenture or (iii) reduce
the percentage of Holders of Debentures required to consent to any such
amendment or waiver.
5F. Line of Business. So long as the Debentures are outstanding, the Bank
will remain principally engaged in the financial services business.
5G. Capital Adequacy. The Bank shall be classified as "well capitalized"
or "adequately capitalized" as defined in 12 C.F.R. Sec. 565.4 (or its
equivalent as such regulation may be amended from time to time).
5H. FDIC Membership. The Bank shall not at any time fail to have its
deposits insured by the FDIC.
5I. Limitation on Incurrence of Indebtedness by Subsidiaries. Any
Indebtedness incurred by any Subsidiary subsequent to the issuance of the
Debentures shall not include any covenant which would restrict the payment of
dividends to the Bank.
5J. Change of Control. This paragraph 5J shall apply only if, pursuant to
paragraph 11D of this Purchase Agreement, the Company is substituted for the
Bank as a party to this Purchase Agreement and as obligor on the Debentures.
(i) The Company shall maintain liquid assets in an amount equal to
interest on the aggregate outstanding Debentures for one year.
(ii) Notwithstanding anything in Section 4 of the contrary, the
Company shall, within 45 days following the date of the consummation
of a transaction resulting in a Change of control, notify the Holders
in writing of such Change of Control. To the extent that the
Debentures are in the form of a Global Debenture held by the
Depository for the benefit of the respective accounts of the
Beneficial Holders, in accordance with the procedures of the
Depository at that time, such notice shall contain all necessary
provisions to provide for the Beneficial Holders to receive
notification of such Change in Control through the Depository. Upon
receipt of such notification, each Beneficial Holder shall have the
option, through and in accordance with the procedures of the
Depository, to notify the Company that such Beneficial Holder requires
that the Company purchase all or a portion of such Beneficial Holder's
Beneficial Interest in the Global Debenture at a price equal to 101%
of the principal amount of such Beneficial Interest plus accrued
interest to the purchase date. The Company will purchase the
Beneficial Interests in the Debentures on a date specified in the
notification of Change of Control, which date will not be later than
60 days after the consummation of the transaction resulting in a
Change of Control.
3
<PAGE>
A "Change of Control" will be deemed to have occurred in the event that,
after the date of this Agreement, either (a) any person (as defined in Rules
13d-3 and 13d-5 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or any successor provision thereto) directly or indirectly,
shall beneficially own (as defined in Rule 13d-3 under the Exchange Act, or any
successor provision thereto) at least 50% of the aggregate voting power of all
classes of capital stock of the Company entitled to vote generally in the
election of directors or (b) any Person, directly or indirectly, shall succeed
in having a sufficient number of its nominees elected to the Board of Directors
of the Company such that such nominees, when added to any existing director
remaining on the Board of Directors of the Company after such election who is an
affiliate or related person of such Group, will constitute a majority of the
Board of Directors of the Company; provided however that, for purposes of this
Section 5J, in the case of (a) a Change in Control shall not be deemed to have
occurred, if at the time the Person becomes the beneficial owner of such
aggregate voting power, the Person has outstanding securities which have
received a rating from a nationally recognized statistical rating organization
(as that term is defined in Rule 15c3-1(c)(2)(vi)(F) under the Exchange Act)
which rating is in one of such rating organization's generic rating categories
which signifies "investment grade".
5K. Financial and Business Information.
The Bank for periods for which it or a parent holding company makes
periodic filings with the OTS or the Securities and Exchange Commission, in
accordance with procedures of the Depository, shall deliver or cause to be
delivered to each Beneficial Holder of the Debentures:
(i) as soon as practicable after the end of each quarterly fiscal
period in each fiscal year of the Bank (other than the last quarterly
fiscal period of each such fiscal year), and in any event within 45
days thereafter: (a) a consolidated statement of financial condition
of the Bank and its consolidated subsidiaries, as at the end of such
quarter, and (b) consolidated statements of operations, cash flows and
shareholders' equity of the Bank and its consolidated subsidiaries,
for such quarter and (in the case of the second and third quarters)
for the portion of the fiscal year ending with such quarter, setting
forth in each case, in comparative form, the figures for the
corresponding periods in the previous fiscal year, all in reasonable
detail, prepared in accordance with generally accepted accounting
principles, but in such detail as is customarily applied to quarterly
financial statements, and certified as complete and correct, subject
to changes resulting from year-end adjustments, by a Senior Financial
Officer, and accompanied by the certificate required by Section 5M;
provided, that delivery of copies of the Bank's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission (and any
successor agency) (the "Commission") within the time period specified
above shall be deemed to satisfy the requirements of this Section
5K(i) so long as such quarterly report contains or is accompanied by
the information and certificates specified in this Section 5K(i).
(ii) as soon as practicable after the end of each fiscal year of the
Bank, and in any event within 90 days thereafter (a) consolidated
statements of financial condition of the Bank and its consolidated
subsidiaries, as at the end of such year, and (b) consolidated and
consolidating statements of operations, cash flows and shareholders'
equity of the Bank and its consolidated subsidiaries, for such year,
setting forth in the case of each consolidated financial statement, in
comparative form, the figures for the previous fiscal year, all in
reasonable detail, prepared in accordance with generally accepted
accounting principles; and
(iii) promptly upon their becoming available, (a) each financial
statement, report, notice or proxy statement sent by the Bank or any
Subsidiary to stockholders generally, (b) each regular or periodic
report (including, without limitation, each Form 10-K, Form 10-Q and
Form 8-K), any registration statement which shall have become
effective, and each final prospectus and all amendments thereto filed
by the Bank or any Subsidiary with the Commission, and (c) each
regular
4
<PAGE>
or periodic report (including, without limitation, each call report)
filed by the Bank or any Subsidiary with the FDIC, or the OTS (and any
similar agency or successor agency).
5L. Officer's Certificates. Each set of financial statements delivered to
each Beneficial Holder of the Debentures pursuant to Section 5K(i) or Section
5K(ii) shall be accompanied by a certificate of a Senior Financial Officer,
setting forth:
(i) the information (including detailed calculations) required in
order to establish whether the Bank was in compliance with the
requirements of Section 5A through Section 5C, inclusive, as of the
end of the period covered by the financial statements then being
furnished (including with respect to each such section, where
applicable, the calculations of the maximum or minimum amount, ratio
or percentage, as the case may be, permissible under the terms of such
sections, and the calculation of the amount, ratio or percentage then
in existence); and
(ii) a statement that the signer has reviewed the relevant terms
hereof and has made, or caused to be made, under his or her
supervision, a review of the transactions and conditions of the Bank
and its consolidated subsidiaries from the beginning of the accounting
period covered by the income statements being delivered therewith to
the date of the certificate and that such review has not disclosed the
existence during such period of any condition or event that
constitutes a Default or an Event of Default or, if any such condition
or event existed or exists, specifying the nature and period of
existence thereof and what action the Bank has taken or proposes to
take with respect thereto.
6. EVENTS OF DEFAULT.
6A. Acceleration. If any of the following events shall occur and be
continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise):
(i) default in the payment of the principal of or premium, if any,
on any Debenture when the same becomes due and payable at maturity,
upon redemption or otherwise;
(ii) default in the payment of interest on the Debentures when the
same becomes due and payable and the continuance of such default for a
period of 30 days;
(iii) failure to comply with any agreement or covenant of the Bank
in, or provisions of, the Debentures or this Agreement and the
continuance of such default for a period of 30 days after the date the
Bank has knowledge thereof;
(iv) an event of default occurs under any mortgage, bond, indenture,
loan agreement or other evidence of indebtedness under which there may
be issued or by which there may be secured or evidenced any
Indebtedness (other than non-recourse Indebtedness) for money borrowed
by the Bank or any Subsidiary thereof (or the payment of which is
guaranteed by the company or any Subsidiary), whether such
Indebtedness or guarantee now exists or shall be created hereafter;
provided, however, that no such event of default shall constitute an
-------- -------
Event of Default unless the effect of such Event of Default is to
cause the acceleration of such Indebtedness prior to its stated
maturity, which, together with the principal amount of any other such
Indebtedness so caused to be accelerated, aggregates $2 million or
more at any time;
5
<PAGE>
(v) a final judgment or final judgments for the payment of money
are entered by a court or courts of competent jurisdiction against the
Bank or any Subsidiary thereof which remains or remain undischarged
for a period of 60 days, provided that the aggregate of all such
judgments is $2 million or more at any time;
(vi) any representation or warranty made by the Bank in this
Agreement, or made by the Bank in any written statement or certificate
furnished by the Bank in connection with the issuance and sale of the
Debentures or furnished by the Bank pursuant to this Agreement proves
false in any material respect as of the date of the issuance or making
thereof and, if susceptible of cure, is not cured within 60 days of
notice thereof;
(vii) the entry of a decree or order by a court having jurisdiction
in the premises adjudging the Bank bankrupt or insolvent, or approving
as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Bank under the
Federal Bankruptcy Code or any other applicable Federal or State law,
or appointing a receiver, liquidator, assignee, trustee, sequestrator
(or other similar officials) of the Bank or of any substantial part of
its property, or ordering the winding up or liquidation of its
affairs, and the continuance of any such decree or order unstayed and
in effect for a period of 60 consecutive days or the appointment of
the FDIC or the OTS or any successor agency thereto as conservator or
receiver for the Bank and the continuance of such conservatorship or
receivership unstayed and in effect for a period of 30 consecutive
days; or
(viii) the Bank or any material Subsidiary thereof shall institute
proceedings to be adjudicated insolvent, or shall consent to the
filing of an insolvency proceeding against it, or shall file a
petition or answer or consent seeking reorganization, readjustment,
arrangement, composition, appointment of a receiver or similar relief
under the federal insolvency laws, or any other similar applicable law
of any governmental unit, domestic or foreign, or shall consent to the
appointment of a receiver, conservator, liquidator, trustee or
assignee in insolvency of it or of a substantial part of its property,
or shall make an assignment for the benefit of creditors, or shall
admit in writing its inability to pay its debts generally as they
become due, or if the Bank shall voluntarily suspend transaction of
its business, or if corporate action shall be taken by the Bank or any
Subsidiary thereof in furtherance of any of the aforesaid purposes;
then in the cases of clauses (i), (ii), (iv), (v), (vi), (vii) and (viii) above,
unless the principal of the Debentures shall have already become due and
payable, Beneficial Holders of no less than 51% in aggregate principal amount of
the Debentures then outstanding may declare the principal of the Debentures to
be immediately due and payable, anything in this Agreement or in the Debentures
to the contrary notwithstanding, except the limitations applicable with respect
to the FDIC as receiver described in the Debentures. In the case of clause
(iii) above, unless the principal of the Debentures shall have already become
due and payable, Beneficial holders of no less than 51% in aggregate principal
amount of the Debentures then outstanding may declare the principal of the
Debentures to be due and payable, along with all accumulated interest, 10 days
after the Bank has been in default under clause (iii) above. Overdue principal
and overdue interest in respect of the Debentures shall bear interest at a rate
of 13 1/2% per annum, subject to applicable law. A Holder, by written notice to
the Bank, may waive all defaults and rescind such acceleration and its
consequences as to the Debentures held by such Debenture Holder; but no such
waiver or rescission and annulment shall extend to or shall affect any
subsequent default or shall impair any right consequent upon any subsequent
default.
The Bank shall deliver to the Holders, within 15 days after it becomes
aware of the occurrence thereof, written notice of any event which with the
giving of notice or the lapse of time or both would become an Event of Default
under (iv) or (v) above, its status and what action the Bank is taking or
proposes to take with respect thereto.
6
<PAGE>
In the event Holders shall have proceeded to enforce any right under this
Agreement and such proceeding shall have been discontinued or abandoned or shall
have been determined adversely to the Holders, then in every such case the Bank
and the Holders shall be restored, respectively, to their former positions under
the Debentures and this Agreement, and all other rights, remedies and powers of
the Bank and the Holders, respectively, under the Debentures and this Agreement
shall continue as though no such proceedings had been undertaken.
6B. Other Remedies. If any Event of Default or Default shall occur and be
continuing, a Holder of any Debenture may proceed to protect and enforce its
rights under this Agreement and such Debenture by exercising such remedies as
are available to such Holder in respect thereof under applicable law, either by
suit in equity or by action at law, or both, whether for specific performance of
any covenant or other agreement contained in this Agreement or in aid of the
exercise of any power granted in this Agreement. No remedy conferred in this
Agreement upon the Holder of any Debenture is intended to be exclusive of any
other remedy, and each and every such remedy shall be cumulative and shall be in
addition to every other remedy conferred herein or now or hereafter existing at
law or in equity or by statute or otherwise.
7. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Bank represents,
covenants and warrants:
7A. Organization. The Bank has been duly organized and is validly
existing as a federal savings bank under the laws of the United States, each
material Subsidiary is duly organized and existing in good standing under the
laws of the jurisdiction in which it is incorporated, and the Bank and each
material Subsidiary has the corporate power to own its respective property and
to carry on its respective business as now being conducted.
7B. Financial Statements. The audited consolidated financial statements
of the Bank and its subsidiaries and other financial information included in the
Private Placement Memorandum, dated March 12, 1997 (the "Private Placement
Memorandum") present fairly the consolidated financial position of the Bank and
its Subsidiaries as of and at the dates indicated and the consolidated results
of their operations for the periods specified therein and said consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles applied on a basis consistent in all material respects
during the periods involved and the independent certified public accountants who
certified the audited financial statements included in the Private Placement
Memorandum are independent public accountants as required by the Securities Act
and the rules and regulations thereunder.
7C. Material Adverse Change. At the Closing Time, there shall not have
been, since the latest date as of which financial or statistical information is
presented in the Private Placement Memorandum, any change in the business
operations, profits, financial condition or Properties of the Bank or its
Subsidiaries except changes that in the aggregate, would not be reasonably
likely to have a Material Adverse Effect.
7D. Actions Pending. There is no action, suit, investigation or
proceeding pending or, to the knowledge of the Bank, threatened against the Bank
or any of its Subsidiaries, or any properties or rights of the Bank or any of
its Subsidiaries, by or before any court, arbitrator or administrative or
governmental body which has not been previously disclosed to the Purchasers and
which would be reasonably likely to have a Material Adverse Effect.
7E. Outstanding Debt. Neither the Bank nor any of its Subsidiaries has
outstanding any debt with a term in excess of one year except as disclosed in
the Private Placement Memorandum. There exists no default under the provisions
of any instrument evidencing such debt or of any agreement relating thereto.
7F. Title to Properties. The Bank has and each of its Subsidiaries has
good and indefeasible title to its respective real properties (other than
properties which it leases) and good title to all of its other respective
properties and assets, subject to no Lien of any kind, except for Liens for
taxes not yet due and payable and any other Liens, encumbrances or defects in
title which are not material to the Bank and its Subsidiaries, taken as a whole.
All leases necessary in any material respect for the conduct of the respective
businesses of the Bank and its Subsidiaries are valid and subsisting and are in
full force and effect.
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7G. Taxes. The Bank has and each of its Subsidiaries has filed all
Federal, State and other income tax returns which, to the best knowledge of the
officers of the Bank, are required to be filed, and each has paid all taxes as
shown on such returns and on all assessments received but it to the extent that
such taxes have become due, except such taxes as are being contested in good
faith by appropriate proceedings for which adequate reserves have been
established in accordance with generally accepted accounting principles.
7H. Environmental Compliance.
(i) After reasonable inquiry, to the best of the Bank's knowledge,
neither the Bank nor any Subsidiary is in violation of any applicable
Environmental Protection Law except for such violations that, in the
aggregate for all such violations, would not be reasonably likely to have a
Material Adverse Effect.
(ii) After reasonable inquiry, to the best of the Bank's knowledge,
neither the Bank nor any Subsidiary is subject to any liability under any
Environmental Protection Law that, in the aggregate for all such
liabilities, would be reasonably likely to have a Material Adverse Effect.
7I. Conflicting Agreements and Other Matters. Neither the Bank nor any of
its Subsidiaries is a party to any contract or agreement which materially and
adversely affects its business, property or assets, or financial condition.
Neither the execution nor delivery of this Agreement or the Debentures, nor the
offering, issuance and sale of the Debentures, nor fulfillment of nor compliance
with the terms and provisions hereof and of the Debentures will conflict with,
or result in a material breach of the terms, conditions or provisions of the
charter or by-laws of the Bank or any of its Subsidiaries, or constitute a
material default under, or result in any material violation of, or result in the
creation of any material Lien upon, any of the material properties or assets of
the Bank or any of its Subsidiaries pursuant to any award of any arbitrator or
any agreement (including any agreement with stockholders), instrument, order,
judgment, decree, statute, law, rule or regulation to which the Bank or any of
its Subsidiaries is subject. Neither the Bank nor any of its Subsidiaries is a
party to, or otherwise subject to any provision contained in, any instrument
evidencing indebtedness of the Bank or such Subsidiary, any agreement relating
thereto or any other contract or agreement (including its charter) which limits
the amount of, or otherwise imposes restrictions on the incurring of, debt of
the Bank of the type to be evidenced by the Debentures.
7J. Offering of Debentures. Neither the Bank nor, to the Bank's
knowledge, any agent acting on its behalf, has taken or will take any action
which would subject the issuance or sale of the Debentures to the provisions of
section 5 of the Securities Act, or to the provisions of any securities or blue
sky law of any applicable jurisdiction.
7K. Governmental Consent. Neither the nature of the Bank or of any
Subsidiary, nor any of their respective businesses or properties, nor any
relationship between the Bank or any Subsidiary and any other Person, nor any
circumstance in connection with the offering, issuance, sale or delivery of the
Debentures is such as to require any authorization, consent, approval, exemption
or other action by or notice to or filing with any court or administrative or
governmental body which have not already been obtained as of the date of this
Agreement (other than routine filings after the date of closing with the
Securities and Exchange Commission and/or any state securities commissions) in
connection with the execution and delivery of this Agreement, the offering,
issuance, sale or delivery of the Debentures or fulfillment of or compliance
with the terms and provisions hereof or of the Debentures.
7L. Disclosure. Neither this Agreement nor any other document,
certificate or statement furnished to you by the Bank or on behalf of the Bank
with the Bank's approval in connection herewith contains any untrue statement of
a material fact or omits to state a material fact necessary in order to make the
statements contained herein and therein not misleading.
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7M. Debentures Not Listed or Quoted. The Debentures will not be, at the
Closing Time, of the same class as securities listed on a national securities
exchange registered under Section 6 of the Exchange Act, or quoted in a U.S.
automated interdealer quotation system.
7N. No General Solicitation. None of the Bank, its affiliates (as defined
in Rule 501(b) under the Securities Act) or any person (other than the
Purchasers, as to whom the Bank makes no representation) acting on its behalf
has engaged, in connection with the offering of the Debentures, in any form of
general solicitation or general advertising within the meaning of Rule 502(c)
under the 1933 Act.
7O. No Sales or Offers of Similar Securities. The Bank has not, directly
or indirectly, sold or offered to sell the Debentures or any securities having
terms substantially similar to the Debentures in any one or more public or
private offerings during the last twelve months or otherwise approached or
negotiated with any potential purchaser for the purchase of any such securities
during such twelve-month period.
8. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.
8A. Each Purchaser hereby represents and warrants to, and agrees with, the
Bank that it (i) is a "qualified institutional buyer" within the meaning of Rule
144A under the Securities Act and or an "accredited investor" within the meaning
of Regulation D under the Securities Act; (ii) has not and will not solicit
offers for, or offer or sell, Debentures by means of any general solicitation or
general advertising within the meaning of Rule 502(c) under Regulation D under
the Securities Act; (iii) will otherwise act in accordance with the terms and
conditions set forth in this Agreement, including Section 9 hereof, in
connection with the placement of the Debentures contemplated hereby; (iv) has
received and read the Bank's Private Placement Memorandum dated March 12, 1997
(the "Memorandum"); (v) has had the opportunity to ask questions and receive
answers concerning the Bank, the terms and conditions of the offering
contemplated by the Memorandum, this Agreement, the Debentures, and the terms
and conditions thereof and to obtain any additional information which the Bank
possesses or can acquire without unreasonable effort or expense that is
necessary to verify the accuracy of the information contained in the Memorandum
or to evaluate the business and financial risk of investing in the Debentures;
(vi) relied only on, in purchasing the Debentures, information delivered or made
available by the Bank, Friedman, Billings, Ramsey and Co., Inc. and its
Affiliates; (vii) is acquiring the Debentures for its own account or an account
with respect to which it exercises sole investment discretion and that it or
such account has assets of at least $20 million and is an "Accredited Investor"
as defined in Regulation D under the Securities Act or "qualified institutional
buyer", as defined in Rule 144A (a "QIB"), acquiring the Debentures for
investment purposes and not with a view to offer for sale in connection with any
distribution of the Debentures; (viii) understands and agrees that such
Debentures are being offered only in a transaction not involving any public
offering and will constitute "restricted securities" within the meaning of the
Securities Act and the rules thereunder, and that: (A) such Debentures may be
resold, pledged or transferred only (1) to the Bank, (2) so long as such
Debentures are eligible for resale pursuant to rule 144A, to a person whom the
seller reasonably believes is a QIB that purchases for its own account or for
the account of a QIB to whom notice is given that the resale, pledge or other
transfer is being made in reliance on Rule 144A, (3) to a person whom the seller
reasonably believes is a QIB that purchases for its own account or for the
account of a QIB pursuant to another available exemption from the registration
requirements under the Securities Act, or (4) to a person whom the seller
reasonably believes is a QIB that purchases for its own account or for the
account of a QIB pursuant to an effective registration statement under the
Securities Act, in each case in accordance with any applicable securities laws
of any state of the United States; (B) the purchaser will, and each subsequent
holder is required to, notify any purchaser of Debentures from such holder of
the resale restrictions referred to in (A) above if then applicable; (C) with
respect to any transfer of Debentures pursuant to clause A above, the Bank will
require written confirmation from the transferee (or a U.S. registered
broker/dealer on the transferee's behalf) that the transfer is being made in
compliance with the applicable restrictions on transfer and the requirements of
the exemption from registration relied upon by the transferor (which exemption
shall be specified in the confirmation), together with, in the case of a
transfer under clause (3) above, such certificates, legal opinions, or other
information as the Bank may reasonably require to confirm that such transfer is
being made pursuant to an
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exemption from or in a transaction not subject to, the registration requirements
of the Securities Act; and (ix) understands that the notification requirements
referred to in (viii) above will be satisfied (except with respect to sales to
QIBs holding through DTC) by virtue of the fact that the legends on the Form of
Debenture attached hereto as Exhibit A will be placed on the Debentures unless
otherwise agreed by the Bank.
9. SUBSEQUENT OFFERS AND RESALES OF THE SECURITIES.
Each of the Purchasers and the Bank hereby establish and agree to observe
the following procedures in connection with the offer and sale by the Purchasers
of the Debentures.
9A. Offers and Sales Only to Qualified Institutional Buyers. Offers and
sales of the Debentures will be made by the Purchasers only (i) to the Bank,
(ii) so long as such Debentures are eligible for resale pursuant to Rule 144A,
to a person whom the seller reasonably believes is a QIB that purchases for its
own account or for the account of a QIB to whom notice is given that the resale,
pledge or other transfer is being made in reliance on Rule 144A, (iii) to a
person whom the seller reasonably believes is a QIB that purchases for its own
account or for the account of a QIB pursuant to another available exemption from
the registration requirements under the Securities Act, or (iv) to a person whom
the seller reasonably believes is a QIB that purchases for its own account or
for the account of a QIB pursuant to an effective registration statement under
the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States.
9B. No General Solicitation. If a Purchaser elects to resell any
Debentures, such Debentures will be offered by the Purchaser only by approaching
prospective purchasers on an individual basis. No general solicitation or
general advertising (as such terms are used in Regulation D under the Securities
Act) will be used in connection with offering any of the Debentures for resale.
9C. Purchasers by Non-Bank Fiduciaries. In the case of a non-bank
purchaser of a Debenture acting as a fiduciary for one or more third parties, in
connection with an offer and sale to such purchaser pursuant to Section 9A, each
third party shall, in the judgment of the applicable Purchaser, be a QIB.
9D. Minimum Principal Amount. No sale of the Debentures to any one
purchaser will be for less than U.S. $100,000 principal amount and no Debenture
will be issued in a smaller principal amount. If the purchaser is a non-bank
fiduciary acting on behalf of others, each person for whom it is acting must
purchase at least U.S. $100,000 principal amount of the Debentures.
9E. Restrictions on Transfer. The transfer restrictions and the other
provisions set forth in the Debentures shall apply to the Debentures except as
otherwise agreed by the Bank and the Purchasers. Following the sale of the
Debentures by the Purchasers to subsequent purchasers pursuant to the terms
hereof, no Purchaser shall be liable or responsible to the Bank for any losses,
damages or liabilities suffered or incurred by the Bank, including any losses,
damages or liabilities under the Securities Act, arising from or relating to any
resale or transfer of any Debenture by such subsequent purchaser. So long as
the Debentures qualify for inclusion in the depository system operated by the
Depository, the Debentures will be in global form held by the Depository as
securities custodian. Accordingly, transfers of Beneficial Interests in the
Debentures will be made in accordance with the procedures for such transfers
specified by the Depository. The Global Debenture may not be transferred except
(i) by the Depository to a nominee of the Depository;
(ii) by a nominee of the Depository to the Depository or another nominee
of the Depository; or
(iii) by the Depository or any such nominee to a successor Depository or
nominee of a successor Depository.
9F. Company to Provide Certain Information. The Bank will make
available, upon request, to any seller of the Debentures the information
specified in Rule 144A(d)(1) under the Securities Act.
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10. DEFINITIONS. For the purpose of this Agreement the following terms
shall have the meanings specified with respect thereto below:
"Affiliate" means any Person (i) which directly or indirectly through
one or more intermediaries controls, or is controlled by, or is under common
control with, the Bank, (ii) which beneficially owns or holds 5% or more of any
class of the voting stock of the Bank or (iii) which beneficially owns or holds
5% or more of the voting stock (or in the case of a Person which is not a
corporation, 5% or more of the equity interest) of the Bank or a Subsidiary
thereof. The term "control" means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
"Beneficial Holder" shall mean, from time to time, any Person which
holds at such time a Beneficial Interest, provided that if such Person is a
participant or member of the Depository who is acting as agent for another
Person, then that other Person shall be the "Beneficial Holder" for purposes
hereof.
"Beneficial Interest" shall mean, from time to time, a beneficial
ownership interest in the Global Debenture, as reflected by the Securities
Position List of the Depository for the Global Debenture for such time.
"Business Day" means a day other than a Saturday, a Sunday or a day on
which commercial banks in California are required by law (other than a general
banking moratorium or holiday for a period exceeding four consecutive days) to
be closed.
"Capitalized Lease" shall mean any rental obligation which, under
generally accepted accounting principles, is or will be required to be
capitalized on the books of the Bank or any Subsidiary, taken at the amount
thereof accounted for as indebtedness (net of interest expense) in accordance
with such principles.
"Company" shall mean Life Financial Corp., a company organized to be
the Bank's parent holding company.
"Consolidated Net Worth" shall mean Stockholders' Equity plus General
Valuation Allowance for Loan Losses.
"Consolidated Tangible Equity Capital" shall mean Consolidated Net
Worth minus Goodwill.
"Environmental Protection Law" shall mean any law, statute or
regulation enacted by any jurisdiction in connection with or relating to the
protection or regulation of the environment, including, without limitation,
those laws, statutes and regulations regulating the disposal, removal,
production, storing, refining, handling, transferring, processing or
transporting of hazardous or toxic substances, and any orders, decrees or
judgments issued by any court of competent jurisdiction in connection with any
of the foregoing.
"Event of Default" shall mean any of the events specified in Section
6A, provided that there has been satisfied any requirement in connection with
such event for the giving of notice, or the lapse of time, or the happening of
any further condition, event or act, and "Default" shall mean any of such
events, whether or not any such requirement has been satisfied.
"FDIC" shall mean the Federal Deposit Insurance Corporation and any
Person succeeding to the functions thereof.
"Funded Indebtedness" shall mean all indebtedness that matures more
than one year from the date of creation thereof, or that is extendible or
renewable at the option of any party thereto to a date more than one year from
the date of creation thereof (whether or not renewed or extended).
"Goodwill" shall mean unidentified intangibles which have been created
in connection with an acquisition transaction.
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"Holder" shall mean, at any time, the registered holder of a
Debenture.
"Indebtedness" shall mean all indebtedness, liabilities and other
obligations, direct or contingent (other than deferred income taxes and other
credits, outside minority interests and items of Stockholders' Equity) which
would, in accordance with generally accepted accounting principles, be
classified upon the consolidated balance sheet of the Bank as liabilities, but
in any event including without limitation:
(1) all guarantees, other than guarantees on secured indebtedness;
(2) all indebtedness, liabilities and other obligations arising under
any conditional sale or other title retention agreement, whether or
not the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale
of such property; provided, however, that the terms "Funded
-------- -------
Indebtedness" and "Indebtedness" shall not include any obligation of
the Bank or of any Subsidiary incurred in the ordinary course of its
business, with respect to:
(a) any deposits with it or funds collected by it;
(b) any banker's acceptance or letter of credit issued by it;
(c) any check, note, certificate of deposit, money order,
traveler's check, draft or bill of exchange issued, accepted or
endorsed by it;
(d) any discount with, borrowing from, or other obligation to any
Federal Reserve Bank, the FDIC or any Federal Home Loan Bank (or
successor organization) which discount or borrowing is in the
ordinary course of its banking business and not incurred in
connection with any unusual or extraordinary "rescue loan" by
such Federal Reserve Bank, the FDIC or the Federal Home Loan Bank
(or successor organization) to the Bank in connection with a
business to be acquired by the Bank or any Subsidiary;
(e) any agreement, made by it in the ordinary course of its
banking business, to purchase or repurchase securities, loans or
federal funds, or to participate in any such purchase or
repurchase;
(f) any transaction made by it in the ordinary course of its
banking business in the nature of any extension of credit,
whether in the form of a commitment, guarantee or otherwise,
undertaken by it for the account of a third party with the
application by it of the same banking considerations and legal
lending limits that would be applicable if the transaction were a
loan to such party;
(g) any transaction in which it acts solely in a fiduciary or
agency capacity;
(h) other obligations incurred by it in the ordinary course of
its banking, mortgage banking or trust business to its customers
solely in their capacities as such;
(i) any other liability or obligation of any Subsidiary incurred
in the ordinary course of its banking business not involving any
obligation for borrowed money;
(j) Capitalized Leases;
(k) any borrowing under mortgage warehousing lines of credit,
including, without limitation, commercial paper and medium term
note programs for the purpose of funding or carrying mortgage
loans;
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(l) any borrowings under any revolving line of credit with a
maturity date of less than one year up to an aggregate amount at
any time outstanding equal to 30% of Consolidated Net Worth;
(m) drafts outstanding or official bank checks outstanding used
to fund mortgage loan volume;
(n) indebtedness ranking junior to the Debentures in right of
payment or on liquidation;
provided, however, that notwithstanding the foregoing,
-------- -------
Indebtedness shall not be deemed to include the guaranty by the
Bank of any secured Indebtedness of any Subsidiary which is
permitted to be incurred pursuant to subsection 2(d) of this
definition of Indebtedness.
"IRC" shall mean the Internal Revenue Code of 1986, together with all
rules and regulations promulgated pursuant thereto, as amended from time to
time.
"Lien" shall mean any interest in Property securing an obligation owed
to, or a claim by, a Person other than the owner of the Property (for purposes
of this definition, the "Owner"), whether such interest is based on the common
law, statute or contract, and includes but is not limited to
(a) the security interest arising from a mortgage, encumbrance,
pledge, conditional sale or trust receipt or a lease, consignment or
bailment for security purposes, and the filing of any financing
statement under the Uniform Commercial Code of any jurisdiction, or an
agreement to give any of the foregoing,
(b) reservations, exceptions, encroachments, easements, rights-of-way,
covenants, conditions, restrictions, leases and other title exceptions
and encumbrances affecting real property,
(c) stockholder agreements, voting trust agreements, buy-back
agreements and all similar arrangements affecting the Owner's rights
in stock owned by the Owner, and
(d) any interest in any Property held by the Owner evidenced by a
conditional sale agreement, Capitalized Lease or other arrangement
pursuant to which title to such Property has been retained by or
vested in some other Person for security purposes.
"Material Adverse Effect" shall mean a material adverse effect on (i)
the business operations, profits, financial condition or Properties of the Bank
and the Subsidiaries, taken as a whole, (ii) the ability of the Bank to perform
its obligations set forth herein and in the Debentures, or (iii) the validity or
enforceability of this Agreement or the Debentures.
"Offerings" shall mean the exchange of each share of common stock of
the Bank for three shares of the Company's common stock and the offering and
selling to the public of 2,500,000 additional shares of common stock at a
proposed offering price of $7.00 to $9.00 per share.
"OTS" shall mean the federal Office of Thrift Supervision and any
Person succeeding to the functions thereof.
"Person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization and a government
or any department or agency thereof.
"Private Placement Memorandum" shall mean the offering document
pursuant to which the Debentures are being offered.
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"Properties" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, and whether tangible or intangible.
"Securities Position List" shall mean the securities position list of
the Depository listing the Persons that have a Beneficial Interest in the Global
Debenture and the amount of such Beneficial Interest.
"Senior Financial Officer" shall mean any one of the chief financial
officer and the principal accounting officer of the Bank.
"Stockholders' Equity", "General Valuation Allowance for Loan Losses",
"Consolidated Assets", "Net Income" and "Consolidated Net Loss" shall be defined
according to generally accepted accounting principles applicable to the Bank and
in effect on the date the Debentures are issued.
"Subsidiary" shall mean: any entity (i) that is organized under the
laws of the United States of America or any state thereof or the District of
Columbia and (ii) of which at least 50% (by number of votes) of the voting stock
of such entity and all outstanding shares of preferred stock, all outstanding
securities convertible into or exchangeable for shares of capital stock and all
outstanding warrants, rights or options to purchase shares of capital stock of
such entity are owned directly by the Bank or by another Subsidiary.
11. MISCELLANEOUS
11A. Paying Agent. The Bank shall appoint a Person with an office or
agency located in the continental United States (the "Paying Agent") where
Debentures may be presented for payment. The Bank appoints, as of the Closing
Date, Chemical Trust Company of California, as Paying Agent, with an office at
101 California Street, Suite 2725, San Francisco, CA 94111, and may thereafter
appoint successor Paying Agents or co-Paying Agents, from time to time, all of
which will for purposes hereof be deemed to be Paying Agents. The Bank shall
enter into appropriate written agreements with each Paying Agent (other than the
Bank) reflecting the relevant terms of the relationship with each Paying Agent.
All fees and expenses of the Paying Agent shall be paid by the Bank.
On or before 9:00 a.m. (local time of the Paying Agent) on each due date of
principal or interest on any Debenture and each due date, if any, of any other
amount payable in respect of the Debentures, the Bank shall deposit by federal
funds wire transfer in immediately available funds (or its equivalent) with the
Paying Agent, a sum sufficient to pay the amounts then due. The Bank shall
require each Paying Agent (other than the Bank) to agree in writing that the
Paying Agent will hold in trust for the ratable benefit of the Holders all
moneys held by the Paying Agent for the payment of principal or interest (and
any other amount that may be due) on the Debentures. So long as the Bank acts
as Paying Agent, it shall segregate and hold as a separate trust fund all
amounts held by it as Paying Agent. The Paying Agent shall promptly notify each
of the Holders of any failure by the Bank to deposit any moneys at the times and
dates, and in the amounts, required hereby.
11B. Debenture Payments.
(i) Manner of Payment. The Bank shall pay, or cause the Paying Agent to
pay, all amounts payable to the Purchasers in accordance with their instructions
or with respect to the Global Debenture in accordance with the instructions of
the Depository. In the absence of written directions, all amounts payable with
respect to any Debenture shall be paid by check mailed and addressed to the
Holder of the Debenture at the address shown in the records of Holders
maintained by the Bank or the Paying Agent, as the case may be.
(ii) Payments Due on Holidays. If any payment due on, or with respect to,
any Debenture shall fall due on a day other than a Business Day, then such
payment shall be made, in the same amount without adjustment, on the first
Business Day following the day on which such payment shall have so fallen due,
with the same force and effect as if made on the day the payment became due,
and, if so paid, no interest shall accrue for the period after such payment
date.
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11C. Survival of Representations and Warranties; Entire Agreement. All
representations and warranties contained herein or made in writing by or on
behalf of the Bank in connection herewith shall survive the execution and
delivery of this Agreement and the Debentures, the transfer by you of any
Debenture or portion thereof or interest therein and the payment of any
Debenture, and may be relied upon by any subsequent purchaser, regardless of any
investigation made at any time by or on behalf of you or any subsequent
purchaser. Subject to the preceding sentence, this Agreement and the Debentures
embody the entire agreement and understanding between you and the Bank and
supersede all prior agreements and understandings relating to the subject matter
hereof.
11D. Exchange of Debentures for Debentures of Holding Company. At any time
prior to maturity of the Debentures as defined therein the Bank may substitute
in its place as obligor on the Debentures and as a party to this Purchase
Agreement a holding company ("Holding Company") that owns substantially all of
the issued and outstanding common stock of the Bank, as follows:
(i) No less than ten days prior to such substitution, the Bank shall
provide notice to you in accordance with Section 11F hereof that it
intends to substitute the Holding Company for the Bank and the date of
such substitution ("Substitution Date"). The notice shall (i) include
the name and address of the Holding Company, (ii) be executed by the
Chief Executive Officers of the Bank and the Holding Company, (iii)
affirm on behalf of the Holding Company the provisions of paragraph 7
of this Purchase Agreement and (iv) enclose an opinion of the Holding
Company's counsel with respect to the Holding Company substantially in
the Form of Exhibit B attached hereto.
(ii) On the Substitution Date without further action the Holding
Company shall become the issuer of the Debentures and a party to the
Purchase Agreement in place of the Bank. All obligations of and
references to the Bank in and with respect to the Debentures and this
Purchase Agreement shall become obligations of and references to the
Holding Company, provided that the last reference to Bank in paragraph
6A(vii) shall continue to be a reference to the Bank.
11E. Successors and Assigns. All covenants and other agreements in this
Agreement contained by or on behalf of either of the parties hereto shall bind
and inure to the benefit of the respective successors and assigns of the parties
hereto (including, without limitation, any Beneficial Holder) whether so
expressed or not.
11F. Notices. All written communications provided for hereunder shall be
sent by first class mail or nationwide overnight delivery service (with charges
prepaid) and (i) if to you, addressed to you at the address specified for such
communications in the Purchaser Schedule attached hereto, or at such other
address as you shall have specified to the Bank in writing, (ii) if to any other
Holder of any Debenture, addressed to such other Holders at such address as such
other Holders shall have specified to the Bank in writing or, if any such other
Holders shall not have so specified an address to the Bank, then addressed to
such other Holder in care of the last Holder of such Debenture which shall have
so specified an address to the Bank, and (iii) if to the Bank, addressed to it
at Life Savings Bank, Federal Savings Bank, 4110 Tigris Way, Riverside,
California 92503, Attention: Daniel L. Perl, Chief Executive Officer or at such
other address as the Bank shall have specified to the Holder of each Debenture
in writing.
11G. Descriptive Headings. The descriptive headings of the several
Sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
11H. Governing Law. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the law of
the State of Delaware.
11I. Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original.
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If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this letter and return the same to the
Bank, whereupon this letter shall become a binding agreement between you and the
Bank.
Very truly yours,
By: /s/ Daniel L. Perl
------------------------------------------
Title: President and Chief Executive Officer
Accepted:
- -----------------------------------
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DEBENTURE
THIS DEBENTURE IS A GLOBAL DEBENTURE WITHIN THE MEANING OF THE DEBENTURE
PURCHASE AGREEMENT HEREIN AFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), OR A NOMINEE THEREOF.
THIS GLOBAL DEBENTURE MAY NOT BE EXCHANGED, IN WHOLE OR IN PART, FOR A DEBENTURE
REGISTERED IN THE NAME OF ANY PERSON OTHER THAN DTC OR A NOMINEE THEREOF, AND
MAY NOT BE TRANSFERRED, IN WHOLE OR IN PART, EXCEPT IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN THE DEBENTURE PURCHASE AGREEMENT. UNLESS THIS
DEBENTURE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC TO LIFE SAVINGS
BANK, FEDERAL SAVINGS BANK (THE "COMPANY") OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IN EXCHANGE FOR THIS
DEBENTURE IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS
REQUIRED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE
& CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OR
DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS
AN INTEREST HEREIN.
THIS DEBENTURE IS NOT A SAVINGS ACCOUNT OR A DEPOSIT AND IT IS NOT INSURED
BY THE UNITED STATES, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER AGENCY OR FUND OF THE UNITED STATES.
ABSENT PRIOR WRITTEN APPROVAL BY THE OFFICE OF THRIFT SUPERVISION ("OTS"),
THIS SECURITY IS NOT ELIGIBLE FOR PURCHASE BY ANY SAVINGS ASSOCIATION OR A
CORPORATE AFFILIATE THEREOF, EXCEPT THAT THIS SECURITY MAY BE PURCHASED BY
A CORPORATE AFFILIATE OF THE ISSUER OR BY ANY DIVERSIFIED SAVINGS AND LOAN
HOLDING COMPANY AND ANY NON-SAVINGS ASSOCIATION SUBSIDIARY THEREOF.
THIS DEBENTURE AS A SECURITY OF THE BANK HAS NOT BEEN OFFERED BY AN
OFFERING CIRCULAR FILED WITH AND DECLARED EFFECTIVE BY, THE OTS AND DUE
CARE SHOULD BE TAKEN TO ENSURE THAT THE SELLER OF THE SECURITY IS NOT AN
UNDERWRITER WITHIN THE MEANING OF 12 C.F.R. (S)563G.1(A)(14). THIS
DEBENTURE IF IT BECOMES A SECURITY OF A HOLDING COMPANY FOR THE BANK THE
FOLLOWING SHALL APPLY. THE SECURITIES WILL NOT BE REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). (A) THE HOLDER
HEREOF, BY PURCHASING THIS DEBENTURE ACKNOWLEDGES THAT THE DEBENTURES
CONSTITUTE "RESTRICTED SECURITIES" AND AGREES FOR THE BENEFIT OF THE ISSUER
THAT THIS DEBENTURE MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY
(1) TO THE ISSUER, (2) SO LONG AS SUCH DEBENTURES ARE ELIGIBLE FOR RESALE
PURSUANT TO RULE 144A, UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON
WHOM THE SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER",
AS DEFINED IN RULE 144A (A "QIB"), THAT PURCHASES FOR ITS OWN ACCOUNT OR
FOR THE ACCOUNT OF A QIB TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR
OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (3) TO A PERSON WHOM
THE SELLER REASONABLY BELIEVES IS A QIB PURSUANT TO ANOTHER AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, OR (4)
TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB THAT PURCHASES FOR
ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE
WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES; (B)
THE PURCHASER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY
PURCHASER OF DEBENTURES FROM SUCH HOLDER OF THE RESALE RESTRICTIONS
REFERRED TO IN (A) ABOVE IF THEN
<PAGE>
APPLICABLE; (C) WITH RESPECT TO ANY TRANSFER OF DEBENTURES PURSUANT TO
CLAUSE (A) ABOVE, THE ISSUER WILL REQUIRE WRITTEN CONFIRMATION FROM THE
TRANSFEREE (OR A U.S. REGISTERED BROKER/DEALER ON THE TRANSFEREE'S BEHALF)
THAT THE TRANSFER IS BEING MADE IN COMPLIANCE WITH THE APPLICABLE
RESTRICTIONS ON TRANSFER AND THE REQUIREMENTS OF THE EXEMPTION FROM
REGISTRATION RELIED UPON BY THE TRANSFEROR (WHICH EXEMPTION SHALL BE
SPECIFIED IN THE CONFIRMATION), TOGETHER WITH, IN THE CASE OF A TRANSFER
UNDER CLAUSE (3) ABOVE, SUCH CERTIFICATES, LEGAL OPINIONS, OR OTHER
INFORMATION AS THE BANK MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. BY
PURCHASING THIS DEBENTURE THE HOLDER HEREOF AGREES AND REPRESENTS FOR THE
BENEFIT OF THE BANK THAT THE HOLDER WILL NOTIFY ANY PURCHASER OF THIS
DEBENTURE FROM THE HOLDER OF THE RESALE RESTRICTIONS REFERRED TO ABOVE.
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
13 1/2% SUBORDINATED DEBENTURE DUE March 15, 2004
$10,000,000
CUSIP NUMBER: 53216PAA1
FOR VALUE RECEIVED, the undersigned, LIFE SAVINGS BANK, FEDERAL SAVINGS
BANK (herein called the "Bank"), a federally chartered savings bank hereby
promises to pay to Cede & Co., as nominee for the Depository Trust Company, or
registered assigns the principal sum of $10,000,000 on March 15, 2004
("Maturity") (unless earlier paid upon acceleration), with interest (computed on
the basis of a 360-day year comprised of 12 30-day months) on the unpaid balance
thereof at the rate of 13 1/2% per annum from the date hereof, payable
semiannually on the 15th day of March and September in each year (each, an
"Interest Payment Date"), commencing with the September 15 next succeeding the
date hereof, until the principal hereof shall have become due and payable.
In any case where the applicable Interest Payment Date or Maturity with
respect hereto, as the case may be, does not fall on a Business Day, payment of
principal or interest otherwise payable on such day need not be made on such
day, but may be made on the next succeeding Business Day with the same force and
effect as if made on the Interest Payment Date or at Maturity and no interest
shall accrue with respect to such payment for the period from and after the
Interest Payment Date or such Maturity, as the case may be, to the date of
payment.
This Global Debenture is issued pursuant to a Debenture Purchase Agreement,
dated as of March 12, 1997 (the "Debenture Purchase Agreement") between the Bank
and the respective original purchasers of the Debentures named in the Purchasers
Schedule attached thereto and is entitled to the benefits thereof. All
provisions, including without limitation paragraphs 4, 5, 6, 9, 11(a) and 11(d),
of the Debenture Purchase Agreement and obligations of the Bank thereunder are
incorporated herein by this reference. To the extent not defined in this
Debenture, all capitalized terms shall have the meaning set forth in the
Debenture Purchase Agreement.
The Debentures (including all of the obligations of the Bank hereunder) are
direct, unconditional obligations of the Bank and rank without preference or
priority among themselves and at least pari passu with all other existing and
---- -----
future unsecured and subordinated indebtedness of the Bank. The Debentures are
subordinated on liquidation, as to principal, interest, and premium, if any, to
all claims (including post-default interest) against the Bank having the same
priority as savings account holders or any higher priority, are unsecured by the
assets of the Bank, or any of its affiliates, and are not eligible as collateral
for any loan by the Bank.
The Debentures will not be subject to any sinking fund and will not be
redeemable or repayable prior to September 15, 1998. Thereafter, upon
notification of redemption by the Bank, the Debenture to be redeemed shall
2
<PAGE>
be surrendered for payment within 30 days of such notification and such
Debenture shall continue to earn interest through the date of such surrender but
not after the expiration of such 30 day period.
Payments of principal, premium, if any, and interest are to be made in
lawful money of the United States of America in the manner provided for in the
Debenture Purchase Agreement.
No voluntary prepayment of principal shall be made and no payment of
principal shall be accelerated without the approval of the OTS if the Bank is
failing to meet its regulatory capital requirements under Part 567 of the OTS
regulations or if after giving effect to such payment the Bank would fail to
meet such regulatory requirements.
In case an Event of Default, as defined in the Debenture Purchase
Agreement, shall occur and be continuing, the principal of this Debenture may be
declared or otherwise become due and payable in the manner and with the effect
provided in the Debenture Purchase Agreement.
The Debenture Purchase Agreement permits, with certain exceptions as
therein provided, the amendment thereof and the modification of the rights and
obligations of the Bank and the rights of Holders of the Debentures to be
affected thereby by the Bank with the consent of the Bank and the Beneficial
Holders of 51% of the aggregate principal amount of Debentures at the time
outstanding. The Debenture Purchase Agreement also contains provisions
permitting the Beneficial Holders of 51% in principal amount of the outstanding
Debentures to waive compliance by the Bank with certain provisions of the
Debenture Purchase Agreement. Any such consent or waiver by or on behalf of the
Holder of this Debenture shall be conclusive and binding upon Debenture issued
upon the registration of transfer hereof or in exchange herefor or in lieu
hereof, whether or not notation of such consent or waiver is made upon this
Debenture.
Neither the Bank nor any Paying Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Global Debenture or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
No provision of this Debenture or of the Debenture Purchase Agreement shall
alter or impair the obligations of the Bank, which are absolute and
unconditional, to pay the principal of and interest on this Debenture at the
time, place, and rate herein prescribed, provided, that at any time prior to
maturity of the Debentures the Bank may in accordance with Section 11D of the
Purchase Agreement substitute in its place as obligor on the Debentures and as a
party to the Purchase Agreement a holding company that owns substantially all of
the issued and outstanding common stock of the Bank.
No recourse shall be had for the payment of the principal of or interest on
this Note, or for any claim based hereon, or otherwise in respect hereof,
against any incorporator, stockholder, officer or director, as such, past,
present, or future, of the Bank or of any successor at law or by the enforcement
of any assessment or penalty or otherwise, all such liability being, by the
acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
Under 12 U.S.C. 1828(b) the Bank shall not pay interest on its capital
notes or debentures (if such interest is required to be paid only out of
profits) or distribute any of its capital assets while it remains in default in
the payment of any assessment due the Federal Deposit Insurance Corporation.
Notwithstanding anything to the contrary in this certificate (or in any
related document); (A) if the FDIC shall be appointed receiver for the issuer of
this certificate (the "issuer"), and in its capacity as such shall cause the
issuer to merge with or into another financial institution, or in such capacity
shall sell or otherwise convey part or all of the assets of the issuer to
another financial institution or shall arrange for the assumption of less than
all of the liabilities of the issuer by one or more other financial
institutions, the FDIC shall not have any obligation, either in its capacity as
receiver or in its corporate capacity, to contract for or to otherwise arrange
for the assumption of
3
<PAGE>
the obligation represented by this certificate in whole or in part by any
financial institution or institutions which results from any such merger or
which has purchased or otherwise acquired from the FDIC as receiver for the
issuer, any of the assets of the issuer, or which, pursuant to any arrangement
with the FDIC, has assumed less than all of the liabilities of the issuer. To
the extent that obligations represented by this certificate have not been
assumed in full by a financial institution with or into which the issuer may
have been merged, as described in this subparagraph (A), and/or by one or more
financial institutions which have succeeded to all or a portion of the assets of
the issuer, or which have assumed a portion but not all of the liabilities of
the issuer as a result of one or more transactions entered into by the FDIC as
receiver for the issuer, then the holder of this certificate shall be entitled
to payments on this obligation in accordance with the procedures and priorities
set forth in any applicable receivership regulations or in orders of the FDIC
relating to such receivership. (B) In the event that the obligation represented
by this certificate is assumed in full by another financial institution, which
shall succeed by merger or otherwise to substantially all of the assets and the
business of the issuer, or which shall be arrangement with the FDIC assume all
or portion of the liabilities of the issuer, and payment or provision for
payment shall have been made in respect of all matured installments of interest
upon the certificates together with all matured installments of principal on
such certificates which shall have become due otherwise than by acceleration,
then any default caused by the appointment of a receiver for the issuer shall be
deemed to have been cured, and any declaration consequent upon such default
declaring the principal and interest on the certificate to be immediately due
and payable shall be deemed to have been rescinded. (C) This security is not
eligible to be purchased or held by any savings association or corporate
affiliate thereof except that this security may be purchased or held by a
corporate affiliate of the issuer or by a diversified savings and loan holding
company and its non-savings association subsidiaries. The issuer of this
security may not recognize on its transfer books any transfer made to a savings
association or any corporate affiliate thereof (except as provided in the
preceding sentence) and will not be obligated to make any payments of principal
or interest on this security if the owner of this security is a savings
association or any corporate affiliate thereof (except as provided in the
preceding sentence).
This Debenture shall be construed and enforced in accordance with the law
of the State of Delaware.
By:
-------------------------------------
President and Chief Executive Officer
4
<PAGE>
EXHIBIT 5.0
[Muldoon, Murphy & Faucette letterhead]
March 26, 1997
The Board of Directors
Life Financial Corp.
4115 Tigris Way
Riverside, California 92503
Re: The offering of up to 6,086,716 shares of
Life Financial Corp. Common Stock
Gentlemen:
You have requested our opinion concerning certain matters of Delaware
law in connection with the offering (the "Public Offering") by Life Financial
Corp., a Delaware corporation (the "Company"), of up to 2,500,000 shares of its
common stock, par value $.01 per share ("Common Stock") (2,875,000 shares in the
event that the underwriters' overallotment option is exercised), in an initial
public offering, and in connection with the issuance (the "Exchange Share
Offering") of 3,211,716 shares of the Company's Common Stock in conjunction with
the reorganization of Life Savings Bank, Federal Savings Bank (the "Bank") as a
result of which (i) the Bank will become a wholly-owned subsidiary of the
Company and (ii) each outstanding share of the Bank's common stock will be
converted into the right to receive three shares of Common Stock of the Company
(the "Reorganization").
In connection with your request for our opinion, you have provided us
and we have reviewed the Company's certificate of incorporation filed with the
Delaware Secretary of State on December 6, 1996 and amended on January 21, 1997
(the "Certificate of Incorporation"); the Company's Bylaws; the Company's
Registration Statement on Form S-1, as filed with the Securities and Exchange
Commission initially on January 27, 1997 (the
<PAGE>
"Registration Statement"); resolutions of the Board of Directors of the Company
(the "Board") concerning the organization of the Company, the Public Offering
and the Exchange Share Offering (the "Offerings"), the issuance of shares in the
Offerings and designation of the Pricing Committee, the Amended Agreement and
Plan of Reorganization dated as of January 16, 1997 (the "Plan of
Reorganization") between the Company, the Bank and Life Interim Savings Bank, an
interim federal savings bank ("Interim"), a consent of the Company as the sole
stockholder of Interim approving the Reorganization, and the form of stock
certificate approved by the Board to represent shares of common stock to be
issued in the Offerings. We have also been furnished a certificate of the
Delaware Secretary of State certifying the Company's good standing as a Delaware
corporation. Capitalized terms used but not defined herein shall have the
meaning given them in the Certificate of Incorporation.
In rendering this opinion, we have relied upon the opinion of Morris,
Nichols, Arsht & Tunnell as to matters of Delaware law, upon which opinion we
believe you are justified in relying. We have examined the opinion of Morris,
Nichols, Arsht & Tunnell, which opinion is in form satisfactory to us.
Based upon and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware.
2. Upon the due adoption by the Pricing Committee or Board of Directors
of a resolution fixing the number of shares of Common Stock to be sold in the
Public Offering which number is in accordance with the terms set forth in the
Prospectus, the Common Stock to be issued in the Public Offering will be duly
authorized and, when such shares are sold and paid for in accordance with the
terms set forth in the Prospectus and such resolution of the Pricing Committee
or Board of Directors, and certificates representing such shares in the form
provided to us are duly and properly issued, will be validly issued, fully paid
and nonassessable.
3. Upon the completion of the actions provided for in Article V of the
plan of Reorganization, the common stock to be issued in the Exchange Share
Offering will be duly authorized and, when such shares are issued in accordance
with the Plan of Reorganization, and certificates representing such shares in
the form provided to us are duly and properly issued, will be validly issued,
fully paid and nonassessable.
<PAGE>
The following provisions of the Certificate of Incorporation may not be
given effect by a court applying Delaware law, but in our opinion the failure to
give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and nonassessable status of the Common Stock:
1. (a) Subsections C.3 and C.6 of Article FOURTH and Section D of
Article EIGHTH, which grant the Board the authority to construe
and apply the provisions of those Articles, subsection C.4 of
Article FOURTH, to the extent that subsection obligates any
person to provide to the Board the information such subsection
authorizes the Board to demand, and the provision of
Subsection C.7 of Article EIGHTH empowering the Board to
determine the Fair Market Value of property offered or paid for
the Company's stock by an Interested Stockholder, in each case
to the extent, if any, that a court applying Delaware law were
to impose equitable limitations upon the authority of the
directors of the Company under such provisions; and
(b) Article NINTH of the Certificate of Incorporation, which
authorizes the Board to consider the effect of any offer to
acquire the Company on constituencies other than
stockholders in evaluating any such offer.
We consent to the filing of this opinion as an exhibit to the
Registration Statement on Form S-1 and to the use of the name of our firm where
it appears in the Registration Statement and in the Prospectus.
Very truly yours,
/s/ MULDOON, MURPHY & FAUCETTE
------------------------------
MULDOON, MURPHY & FAUCETTE
<PAGE>
EXHIBIT 5.1
[Morris, Nichols, Arsht & Tunnell Letterhead]
MARCH 26, 1997
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, DC 20016
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of Delaware
law in connection with the offering (the "Public Offering") by Life Financial
------ --------
Corp., a Delaware corporation (the "Company"), of up to 2,500,000 shares of its
common stock, par value $.01 per share ("Common Stock"), (2,875,000 shares in
------ -----
the event that the underwriters' over-allotment option is exercised) in an
initial public offering, and in connection with the issuance (the "Exchange
--------
Share Offering") of 3,211,716 shares of Common Stock in conjunction with the
- --------------
reorganization of Life Savings Bank, Federal Savings Bank (the "Bank") as a
----
result of which (i) the Bank will become a wholly-owned subsidiary of the
Company (ii) each outstanding share of the Bank's common stock will be converted
into the right to receive three shares of Common Stock (the "Reorganization").
--------------
The Public Offering and the Exchange Share Offering are herein referred to as
the "Offerings".
---------
<PAGE>
Muldoon, Murphy & Faucette
MARCH 26, 1997
Page 2
In connection with your request for our opinion, you have provided to
us, and we have reviewed, the Company's certificate of incorporation, as amended
(the "Certificate of Incorporation"), its by-laws, the Registration Statement
----------------------------
filed with the Securities and Exchange Commission in connection with the
Offerings (the "Registration Statement"), including the prospectus constituting
----------------------
a part thereof (the "Prospectus"), a consent of the sole incorporator of the
----------
Company, resolutions of the Board of Directors of the Company (the "Board")
-----
concerning, inter alia, the organization of the Company, the Public Offering,
----- ----
the Exchange Share Offering and the issuance of shares of Common Stock in the
Offerings and the designation of a Pricing Committee of the Board (the "Pricing
-------
Committee"), the Amended Agreement and Plan of Reorganization dated as of
- ---------
January 16, 1997 (the "Plan of Reorganization") between the Company, the Bank
----------------------
and Life Interim Savings Bank, an interim federal savings bank ("Interim"),
-------
a consent of the Company as the sole stockholder of Interim approving the
Reorganization and the form of stock certificate approved by the Board to
represent shares of Common Stock. We have also obtained a certificate of the
Delaware Secretary of State as to the Company's good standing as a Delaware
corporation. Capitalized terms used but not defined herein shall have the
meanings given them in the Certificate of Incorporation.
We have assumed for purposes of this opinion the approval of the
Reorganization by the board of directors and stockholders of
<PAGE>
Muldoon, Murphy & Faucette
March 26, 1997
Page 3
the Bank and that all actions necessary to effect the Reorganization under
applicable federal law have been taken.
We call your attention to the fact that the opinions expressed herein are
limited in all respects to matters of Delaware corporate law. We express no
opinion concerning the requirements of any other law, rule or regulation, state
or federal, applicable to the Bank, the Company, the Offerings, or the
Reorganization, including, without limitation, those applicable to federally
chartered savings banks or their holding companies.
Based upon and subject to the foregoing, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware, with the
corporate power and authority to own its property and conduct its business as
now conducted as described in the Prospectus.
2. Upon the due adoption by the Pricing Committee or the Board of a
resolution fixing the number of shares of Common Stock to be sold in the Public
Offering, the Common Stock to be issued in the Public Offering will be duly
authorized and, when such shares are sold and paid for in accordance with the
terms set forth in the Prospectus and such resolution of the Pricing Committee
or the Board, and certificates representing such shares in the form provided to
us are duly and properly issued, will be validly
<PAGE>
Muldoon, Murphy & Faucette
March 26, 1997
Page 4
issued, fully paid and nonassessable, with no personal liability for the payment
of the Company's debts arising solely by virtue of the ownership thereof; such
issuance and sale will not be in violation of or subject to any preemptive
rights provided for by Delaware law or by the Certificate of Incorporation.
3. Upon the completion of the actions provided for in Article V of the
Plan of Reorganization, the Common Stock to be issued in the Exchange Share
Offering will be duly authorized and, when such shares are issued in accordance
with the Plan of Reorganization, and certificates representing such shares in
the form provided to us are duly and properly issued, will be validly issued,
fully paid and nonassessable, with no personal liability for the payment of the
Company's debts arising solely by virtue of the ownership thereof; such issuance
and sale will not be in violation of or subject to any preemptive rights
provided for by Delaware law or by the Certificate of Incorporation.
The following provisions of the Certificate of Incorporation may not be
given effect by a court applying Delaware law, but in our opinion the failure to
give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and nonassessable status of the Common Stock:
(a) Subsections C.3 and C.6 of Article FOURTH and Section D of Article
EIGHTH, which grant the Board the authority to construe and apply the provisions
of those Articles, subsection C.4
<PAGE>
Muldoon, Murphy & Faucette
March 26, 1997
Page 5
of Article FOURTH, to the extent that provision obligates any person to provide
to the Board the information such subsection authorizes the Board to demand, and
the provision of Section C.7 of Article EIGHTH empowering the Board to determine
the Fair Market Value of property offered or paid for the Company's stock by an
Interested Stockholder, to the extent, if any, that a court applying Delaware
law were to impose equitable limitations upon the authority of the directors of
the Company under such provisions.
(b) Article NINTH of the Certificate of Incorporation, which purports to
permit the Board to consider the effect of any offer to acquire the Company on
constituencies other than stockholders in evaluating any such offer.
Very truly yours,
/s/ MORRIS, NICHOLS, ARSHT & TUNNELL
<PAGE>
EXHIBIT 8.0
March 18, 1997
Board of Directors
Life Savings Bank, Federal Savings Bank
1598 East Highland Avenue
San Bernardino, California 92404
Board of Directors
Life Financial Corp.
4110 Tigris Way
Riverside, California 92503
Re: Federal Tax Consequences of Reorganization of
Life Savings Bank, Federal Savings Bank
into a Holding Company Form of Ownership
To the Members of the Board of Directors:
You have requested an opinion regarding certain federal income tax
consequences of a proposed transaction involving the reorganization of Life
Savings Bank, Federal Savings Bank ("Life Savings" or the "Bank") into a holding
company form of ownership. This transaction will be completed pursuant to the
Amended Agreement and Plan of Reorganization dated as of December 12, 1996 and
amended on January 16, 1997 (the "Plan"), between Life Savings, a federal stock
savings bank, Life Financial Corp., a Delaware corporation ("Life Financial
Corp." or the "Holding Company"), and Life Interim Federal Savings Bank, an
interim federal stock savings bank ("Interim").
Under the terms of the Plan, the Bank has caused Life Financial Corp. to be
organized under Delaware law as a wholly-owned subsidiary for the purpose of
becoming the holding company of the Bank. The Reorganization will be
accomplished by causing Life Financial Corp. to become the sole stockholder of
the newly formed Interim, and then merging Interim into the Bank, so that as
part of the merger each of the outstanding shares of common stock of the Bank
will automatically be converted into three shares of common stock of Life
Financial Corp., which would then become the sole stockholder of the Bank
("Reorganization").
<PAGE>
Board of Directors
March 18, 1997
Page 2
The proposed transaction will be described in the section of this letter
entitled "STATEMENT OF FACTS," and the federal income tax consequences of the
proposed transaction will be set forth in the section of this letter entitled
"OPINION."
STATEMENT OF FACTS
Life Financial Corp. is a recently organized Delaware corporation formed by
the Bank as a financial services holding company to facilitate the
Reorganization. Life Financial Corp. has no prior operating history. Pursuant
to the Plan of Reorganization, Life Financial Corp. will become a savings and
loan holding company subject to the Home Owners' Loan Act. The Reorganization
will be accomplished by means of the steps set forth in the Plan.
Life Financial Corp. intends to organize as its wholly-owned subsidiary an
interim federal stock savings bank, with the name, Life Interim Federal Savings
Bank ("Interim"), in order to effect the Reorganization. If the Reorganization
is approved by the shareholders of the Bank, and subject to satisfaction of all
other conditions set forth in the Plan of Reorganization, on the Effective Date,
Interim will be merged with and into the Bank ("Merger"), with Life Savings as
the Resulting Institution.
Upon the Effective Date of the Reorganization, all shares of common stock
of Life Financial Corp. held by Life Savings shall be cancelled and shall no
longer be deemed to be issued or outstanding for any purpose. On the Effective
Date, each share of common stock, $8.00 stated value, of Life Savings (the "Bank
Common Stock") issued and outstanding immediately prior to the Effective Date
shall, by virtue of the Merger and without any action on the part of the holder
thereof, be converted into and become three (3) shares of fully paid and non-
assessable common stock, par value $.01 per share, of Life Financial Corp. (the
"Company Common Stock"). From and after the Effective Date, each certificate
which, prior to the Effective Date, represented shares of the Bank, shall
evidence ownership of Life Financial Corp. on the basis set forth in the Plan.
Following the Merger, the existence of Life Savings shall continue
unaffected and unimpaired by the Merger, with all the rights, privileges,
immunities and powers, and subject to all the duties and liabilities, of a stock
savings bank organized under federal law, with a charter and bylaws in the form
approved by the Office of Thrift Supervision; and the Charter and Bylaws of Life
Savings, as in effect on the Effective Date, shall continue in full force and
effect and shall not be changed in any manner whatsoever by the Merger.
From and after the Effective Date, and subject to the actions of the Board
of Directors of Life Savings, the business presently conducted by the Bank will
continue to be conducted
<PAGE>
Board of Directors
March 18, 1997
Page 3
by the Resulting Institution. It is the parties' intention that the continuity
of operation of Life Savings' business will be maintained as a wholly-owned
subsidiary of the Company.
The Plan of Reorganization sets forth several conditions which must be
satisfied before the Reorganization will be consummated. We have assumed that
the Reorganization will be completed as set out in the Plan and that all
conditions will be satisfied prior to the Reorganization.
* * *
You have also provided the following representations concerning the above
described transaction:
(a) The fair market value of the Holding Company stock received by each
Bank shareholder is approximately equal to the fair market value of
the Bank stock surrendered in the exchange.
(b) There is no plan or intention by the shareholders of the Bank who own
five percent or more of the Bank stock, and to the best of the
knowledge of the management of the Bank, there is no plan or intention
on the part of the remaining shareholders of the Bank to sell,
exchange, or otherwise dispose of a number of shares of Holding
Company stock received in the transaction that would reduce the Bank
shareholders' ownership of Holding Company stock to a number of shares
having a value, as of the date of the transaction, of less than 50
percent of the value of all of the formerly outstanding stock of the
Bank as of the same date. Shares of Bank stock and shares of Holding
Company stock held by Bank shareholders and otherwise sold, redeemed,
or disposed of prior or subsequent to the transaction will be
considered in making this representation.
(c) Following the transaction, the Bank will hold at least 90 percent of
the fair market value of its net assets and at least 70 percent of the
fair market value of its gross assets and at least 90 percent of the
fair market value of Interim's net assets and at least 70 percent of
the fair market value of Interim's gross assets held immediately prior
to the transaction. For purposes of this representation, amounts used
by the Bank or Interim to pay reorganization expenses, and all
redemptions and distributions (except for regular, normal dividends)
will be included as assets of the Bank or Interim, respectively,
immediately prior to the transaction.
<PAGE>
Board of Directors
March 18, 1997
Page 4
(d) Prior to the transaction, the Holding Company was in control of
Interim within the meaning of section 368(c) of the Code (i.e., owned
at least 80% in vote and value of all classes of stock).
(e) The Bank has no plan or intention to issue additional shares of its
stock that would result in the Holding Company losing control of the
Bank within the meaning of section 368(c) of the Code.
(f) The Holding Company has no plan or intention to reacquire any of its
stock issued in the transaction.
(g) The Holding Company has no plan or intention to liquidate the Bank; to
merge the Bank with or into another corporation; to sell or otherwise
dispose of the stock of the Bank except for transfers of stock to
corporations controlled by the Holding Company; or to cause the Bank
to sell or otherwise dispose of any of its assets or of any of the
assets acquired from Interim, except for dispositions made in the
ordinary course of business or transfers of assets to a corporation
controlled by the Bank.
(h) Interim had no liabilities assumed by the Bank, and did not transfer
to the Bank any assets subject to liabilities, in the transaction.
(i) Following the transaction, the Bank will continue its historic
business or use a significant portion of its historic business assets
in a business.
(j) Interim, the Holding Company, the Bank and Bank shareholders will pay
their respective expenses, if any, incurred in connection with the
transaction.
(k) There is no intercorporate indebtedness existing between/among any of
the parties to the transaction that was issued, acquired, or will be
settled at a discount.
(l) In the transaction, shares of Bank stock representing control of the
Bank, as defined in section 368(c) of the Code, will be exchanged
solely for voting stock of the Holding Company. For purposes of this
representation, shares of Bank stock exchanged for cash or other
property originating with Holding Company will be treated as
outstanding Bank stock on the date of the transaction.
(m) At the time of the transaction, the Bank did not have outstanding any
warrants, options, convertible securities, or any other type of right
pursuant to which any person could acquire stock in the Bank that, if
exercised or converted, would
<PAGE>
Board of Directors
March 18, 1997
Page 5
affect the Holding Company's acquisition or retention of control of
the Bank, as defined in section 368(c) of the Code.
(n) At the time of the transaction, the Holding Company did not own, nor
had it owned during the five years preceding the transaction, any
shares of stock of the Bank.
(o) None of the parties to the transaction is an investment company as
defined in sections 368(a)(2)(F)(iii) and (iv) of the Code.
(p) On the date of the transaction, the fair market value of the assets of
the Bank exceeded the sum of its liabilities, plus the amount of
liabilities, if any, to which the assets were subject.
(q) At the time of the transaction, the Bank was not under the
jurisdiction of a bankruptcy court in a Title 11 or similar case
within the meaning of section 368(a)(3)(A) of the Code.
(r) Immediately after the assumption of the Stock Option Plan by the
Holding Company, the spread between the aggregate fair market value of
the shares subject to the options over the aggregate option price of
such shares was not (or will not be) greater than such spread
immediately before the assumption.
(s) The ratio of the option price to the fair market value of the stock
subject to the options immediately after the assumption of the Stock
Option Plan by the Holding Company is not more favorable to the
holders than the ratio of the option price to the fair market value of
the stock subject to the options immediately before such assumption.
(t) The options under the Stock Option Plan were not traded on an
established securities market prior to the transaction, and will not
be traded on an established securities market after the transaction.
(u) None of the compensation received by any shareholder-employees of the
Bank is separate consideration for, or allocable to, any of their
shares of Bank stock; none of the shares of Holding Company stock
received by any shareholder-employees is separate consideration for,
or allocable to, any employment agreement; and the compensation paid
to any shareholder-employees is for services actually rendered and is
commensurate with amounts paid to third parties bargaining at arm's
length for similar services.
<PAGE>
Board of Directors
March 18, 1997
Page 6
(v) The Bank has been entitled to take a deduction for additions to its
reserve for bad debts under section 593 of the Code.
LIMITATIONS ON OPINION
Our opinions expressed herein are based solely upon current provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), including applicable
regulations thereunder and current judicial and administrative authority. Any
future amendments to the Code or applicable regulations, or new judicial
decisions or administrative interpretations, any of which could be retroactive
in effect, could cause us to modify our opinion. This opinion is based on the
assumption that the transaction will be consummated in accordance with the Plan
of Reorganization as well as all the information and representations referred to
herein. Any change in the transaction could cause us to modify our opinion. No
opinion is expressed herein with regard to the federal, state, or local tax
consequences of the proposed transactions under any section of the Code (or
under state or local tax law) except if and to the extent specifically
addressed.
OPINION
Based solely upon the foregoing representations and information and
assuming the transaction occurs in accordance with the Plan of Reorganization,
and taking into consideration the limitations outlined in this opinion, it is
our opinion that under current federal income tax law:
1. Provided that the proposed merger of Interim into the Bank qualifies
as a statutory merger under applicable federal law, and provided that
the Bank will hold substantially all of its assets and substantially
all of the assets of Interim, and in the transaction the shareholders
of the Bank will exchange an amount of stock constituting control of
the Bank (within the meaning of section 368(c) of the Code) solely for
Holding Company Common Stock, the proposed merger will constitute a
reorganization within the meaning of section 368(a)(1)(A) of the Code.
The reorganization will not be disqualified by reason of the fact that
the voting stock of the Holding Company is used in the merger (section
368(a)(2)(E)). The Bank, Holding Company and Interim will each be "a
party to a reorganization" within the meaning of section 368(b).
2. No gain or loss will be recognized by the stockholders of the Bank
upon the transfer of their Common Stock in the Bank to Bank solely in
exchange for the Holding Company's Common Stock. Section 354(a)(1) of
the Code.
<PAGE>
Board of Directors
March 18, 1997
Page 7
3. The basis of Life Financial Corp.'s Common Stock to be received by the
stockholders of the Bank in the transaction will, in each instance, be
the same as the basis of such Common Stock of the Bank exchanged
therefor. Section 358(a)(1) of the Code.
4. The holding period of Life Financial Corp. Common Stock received by
the stockholders of the Bank in the transaction will, in each
instance, include the period during which the stockholders held the
Bank Common Stock exchanged therefor, provided that the Bank's Common
Stock is held as a capital asset on the date of the transaction.
Section 1223(1) of the Code.
5. No gain or loss will be recognized by Interim as a result of the
reorganization. Section 361 of the Code.
6. No gain or loss will be recognized by Bank upon the receipt of the
assets of Interim in exchange for Bank Common Stock. Section 1032(a)
of the Code.
7. No gain or loss will be recognized by the Holding Company upon its
receipt of the Bank's common stock in exchange for the surrender of
its Interim Common Stock solely for Bank Common Stock. Section
354(a)(1) of the Code.
Accordingly, the transaction will have no adverse federal income tax
effects on Life Financial Corp., the Bank, or the stockholders of the Bank.
However, as we have previously advised, each Bank stockholder should consult his
or her tax counsel as to the specific federal, state and local tax consequences
of the transaction, if any, applicable to such stockholder.
Sincerely,
/s/ MULDOON, MURPHY & FAUCETTE
------------------------------
MULDOON, MURPHY & FAUCETTE
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF DELOITTE & TOUCHE LLP APPEARS HERE]
March 19, 1997
Board of Directors
Life Savings Bank, Federal Savings Bank
1598 East Highland Avenue
San Bernardino, California 92404
Board of Directors
Life Financial Corp.
4110 Tigris Way
Riverside, California 92503
Re: California Franchise Tax Consequences of Reorganization of Life Savings
Bank, Federal Savings Bank into a Holding Company Form of Ownership
Dear Members of The Board of Directors:
You have requested our opinion regarding certain California Franchise Tax
consequences of a proposed transaction involving the reorganization of Life
Savings Bank ("Life Savings" or the "Bank") into a holding company form of
ownership. This transaction will be completed pursuant to the Amended Agreement
and Plan of Reorganization dated as of December 12, 1996, and amended on
January 16, 1997, (the "Plan") between Life Savings, a federal stock savings
bank, Life Financial Corp., a Delaware corporation ("Life Financial Corp." or
"Holding Company"), and Life Interim Federal Savings Bank, an interim federal
stock savings bank ("Interim").
Under the terms of the Plan, the Bank has caused Life Financial Corp. to be
organized under Delaware law as a wholly-owned subsidiary for the purpose of
becoming the holding company of the Bank. The Reorganization will be
accomplished by causing Life Financial Corp. to become the sole stockholder of
the newly formed Interim, and then merging Interim into the Bank, so that as
part of the merger each of the outstanding shares of common stock of the Bank
will automatically be converted into three shares of common stock of Life
Financial Corp., which would then become the sole stockholder of the Bank
("Reorganization").
<PAGE>
March 19, 1997
Board of Directors
Page 2
STATEMENT OF FACTS
The statement of facts and the representations set forth in the opinion
rendered by the law firm of Muldoon, Murphy & Faucette, dated March 18,1997,
addressing the federal tax consequences of this transaction, are fully
incorporated by reference into our opinion.
PROVISIONS OF CALIFORNIA INCOME TAX LAW INCORPORATING
RELEVANT PROVISIONS OF FEDERAL INCOME TAX LAW
1. The California Bank and Corporation Tax Law ("BCTL") incorporates the
reorganization provisions of the Internal Revenue Code as enacted on January 1,
1993. BCTL Sections 24451 and 23051.5(a). The California Personal Income Tax
Law ("PITL") Sections 17321 and 17024.5(a) also incorporates such reorganization
provisions as of January 1, 1993. This includes Internal Revenue Code ("IRC")
Sections 354, 358, 361 and 368. BCTL Section 24990 incorporates Subchapter P of
the IRC, which includes IRC Section 1223. PITL Section 18151 also incorporates
Subchapter P. BCTL Section 24942 incorporates IRC Section 1032.
2. The California Supreme court has held that, where state legislation is
patterned after federal legislation which has been judicially construed by
federal courts, there is a very strong presumption of intent to adopt the
federal construction. This principle has been applied to the BCTL and PITL.
Union Oil Associates v. Johnson, 2 Cal. 2d 727 (1935); Fullerton Oil Co. v.
- ------------------------------- --------------------
Johnson, 2 Cal. 2d 162 (1935); and Holmes v. McColgan, 17 Cal. 2d 426 (1941).
- ------- ------------------
Furthermore, it has been held that federal cases decided after California's
adoption of the federal provision are accorded great weight in interpreting
similar California statutes. Meanley v. McColgan, 49 Cal. App. 2d 203 (1942).
-------------------
3. BCTL Section 23051.5(d) and PITL Section 17024.5(d) provide for
California conformity to Treasury regulations that reflect underlying IRC
provisions as enacted on January 1, 1993.
4. The California Franchise Tax Board, in FTB Notice 89-277, Paragraph H,
May 10, 1989, has stated that where the provisions of the BCTL and the PITL are
in substantial conformity with the Internal Revenue Code, it will follow IRS
rulings and procedures.
<PAGE>
March 19, 1997
Board of Directors
Page 3
LIMITATIONS ON OPINION
Our opinion is based solely upon the current provisions of the California
Bank and Corporation Tax Law ("BCTL"), the California Personal Income Tax Law
("PITL"), and those portions of the federal tax law (Internal Revenue Code,
federal judicial precedent, Treasury regulations and Internal Revenue Service
administrative positions) that are currently incorporated into the BCTL and
PITL. Future amendments to the California law, the federal law, or the rules
governing the incorporation of the latter into the BCTL or PITL, could have
retroactive effect and cause us to modify our opinion. This opinion is based
upon the facts and representations as incorporated above, and the assumption
that the transaction will be consummated in accordance with the Plan of
Reorganization. No opinion is expressed herein with regard to tax consequences
under the BCTL and PITL except as and to the extent specifically addressed. No
opinion is expressed with respect to any local taxes or other state taxes
outside of the BCTL and PITL.
OPINION
Based solely upon the incorporated statement of facts and representations and
assuming the transaction occurs in accordance with the Plan of Reorganization,
and taking into consideration any limitations set forth in this opinion, it is
our opinion that under current BCTL and PITL (Where appropriate and necessary
where federal provisions are incorporated into the BCTL and/or the PITL ("as
incorporated"), it is so noted parenthetically):
1. Provided that the proposed merger of Interim into the Bank qualifies as a
statutory merger under applicable law, and provided that the Bank will hold
substantially all of its assets and substantially all of the assets of Interim,
and in the transaction the shareholders of the Bank will exchange an amount of
stock constituting control of the Bank (within the meaning of Section 368(c) of
the IRC, as incorporated) solely for Holding Company Common stock, the proposed
merger will constitute a reorganization (within the meaning of Section
368(a)(1)(A) of the IRC, as incorporated). The reorganization will not be
disqualified by reason of the fact that the voting stock of the Holding Company
is used in the merger (IRC Section 368(a)(2)(E), as incorporated). The Bank,
Holding Company and Interim will each be a "party to a reorganization" (within
the meaning of IRC Section 368(b), as incorporated).
2. No gain or loss will be recognized by the stockholders of the Bank upon
the transfer of their Common Stock in the Bank to the Bank solely in exchange
for the Holding Company's Common Stock (IRC Section 354(a)(1), as incorporated).
<PAGE>
March 19, 1997
Board of Directors
Page 4
3. The basis of Life Financial Corp.'s Common Stock to be received by the
stockholders of the Bank in the transaction will, in each instance, be the same
as the basis of such Common Stock of the Bank exchanged therefore (IRC section
358(a)(1), as incorporated).
4. The holding period of Life Financial Corp. Common Stock received by the
stockholders of the Bank in the transaction will, in each instance, include the
period during which the stockholders held the Bank Common Stock exchanged
therefor, provided that the Bank's Common Stock is held as a capital asset on
the date of the transaction (IRC Section 1223(1), as incorporated).
5. No gain or loss will be recognized by Interim as a result of the
reorganization (IRC Section 361, as incorporated).
6. No gain or loss will be recognized by Bank upon the receipt of the
assets of Interim in exchange for Bank Common Stock (IRC Section 1032, as
incorporated).
7. No gain or loss will be recognized by the Holding Company upon its
receipt of the Bank's common stock in exchange for its surrender of its Interim
Stock solely for Bank Common Stock (IRC Section 354(a)(1), as incorporated).
The foregoing opinions are based upon federal statutory, judicial and
administrative rules that are all incorporated into the BCTL and PITL in
accordance with the authorities referenced in the section entitled "Provisions
Of California Income Tax Law Incorporating Relevant Provisions Of Federal Income
Tax Law."
Accordingly, the transaction will have no adverse California income tax
effects on Life Financial Corp., the Bank, or the stockholders of the Bank.
However, it is imperative that each Bank stockholder should consult his or her
tax counsel as to the specific federal, state and local tax consequences of the
transaction, if any, applicable to such stockholder.
Sincerely,
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
<PAGE>
EXHIBIT 10.4
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
1996 STOCK OPTION PLAN
1. DEFINITIONS.
-----------
(a) "Affiliate" means (i) a member of a controlled group of corporations
of which the Bank is a member or (ii) an unincorporated trade or business which
is under common control with the Bank as determined in accordance with Section
414(c) of the Internal Revenue Code of 1986, as amended, (the "Code") and the
regulations issued thereunder. For purposes hereof, a "controlled group of
corporations" shall mean a controlled group of corporations as defined in
Section 1563(a) of the Code determined without regard to Section 1563(a)(4) and
(e)(3)(C).
(b) "Award" means a grant of one or some combination of one or more
Non-statutory Stock Options, Incentive Stock Options and Option related rights
under the provisions of this Plan.
(c) "Bank" means Life Savings Bank, Federal Savings Bank.
(d) "Board of Directors" or "Board" means the board of directors of the
Bank.
(e) "Change in Control" means a change in control of the Bank of a nature
that; (i) would be required to be reported in response to Item 1 of the current
report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act");
or (ii) results in a Change in Control within the meaning of the Home Owners'
Loan Act of 1933, as amended ("HOLA") and the Rules and Regulations promulgated
by the Office of Thrift Supervision ("OTS") (or its predecessor agency), as in
effect on the date hereof (provided, that in applying the definition of change
in control as set forth under such rules and regulations the Board shall
substitute its judgment for that of the OTS); or (iii) without limitation such a
Change in Control shall be deemed to have occurred at such time as (A) any
"person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Bank, or a holding
company to be formed by the Bank, representing 20% or more of the Bank's or its
holding company's outstanding securities except for any securities of the Bank
purchased by a holding company formed by the Bank for that purpose in connection
with the reorganization of the Bank and any securities purchased by any tax
qualified employee benefit plan of the Bank; or (B) individuals who constitute
the Board on the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by the Bank's stockholders was approved by the
same Nominating Committee serving under an Incumbent Board, shall be, for
purposes of this
<PAGE>
clause (B), considered as though he were a member of the Incumbent Board; or (C)
a plan of reorganization, merger, consolidation, sale of all or substantially
all the assets of the Bank or similar transaction occurs in which the Bank is
not the resulting entity; or (D) a solicitation of shareholders of the Bank, by
someone other than the current management of the Bank, seeking stockholder
approval of a plan of reorganization, merger or consolidation of the Bank or
similar transaction with one or more corporations, as a result of which the
outstanding shares of the class of securities then subject to the plan are
exchanged for or converted into cash or property or securities not issued by the
Bank or (E) a tender offer is made for 20% or more of the voting securities of
the Bank.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "Committee" means a committee consisting of the entire Board of
Directors or consisting solely of two or more members of the Board of Directors
who are non-employee directors as such term is defined under Rule 16b-3(b)(3)(i)
under the Exchange Act as promulgated by the Securities and Exchange Commission.
(h) "Common Stock" means the Common Stock of the Bank, stated value,
$8.00 per share or any stock exchanged for shares of Common Stock pursuant to
Section 14 hereof.
(i) "Date of Grant" means the effective date of an Award.
(j) "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of a Participant to perform the work
customarily assigned to him, or in the case of a Director, to serve on the
Board. Additionally, a medical doctor selected or approved by the Board of
Directors must advise the Committee that it is either not possible to determine
when such Disability will terminate or that it appears probable that such
Disability will be permanent during the remainder of said Participant's
lifetime.
(k) "Effective Date" means November 21, 1996, the effective date of the
Plan.
(l) "Employee" means any person who is currently employed by the Bank or
an Affiliate, including officers, but such term shall not include Outside
Directors.
(m) "Employee Participant" means an Employee who holds an outstanding
Award under the terms of the Plan.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(o) "Exercise Price" means the purchase price per share of Common Stock
deliverable upon the exercise of each Option in order for the option to be
exchanged for shares of Common Stock.
2
<PAGE>
(p) "Fair Market Value" means, when used in connection with the Common
Stock on a certain date, the average of the high and low bid prices of the
Common Stock as reported by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), the New York Stock Exchange ("NYSE") or
the American Stock Exchange ("AMEX") (as published by the Wall Street Journal,
if published) on such date or if the Common Stock was not traded on such date,
on the next preceding day on which the Common Stock was traded thereon or the
last previous date on which a sale is reported. If the Common Stock is not
reported on the NASDAQ, AMEX or the NYSE, the Fair Market Value of the Common
Stock is the value so determined by the Board in good faith.
(q) "Incentive Stock Option" means an Option granted by the Committee to a
Participant, which Option is designated by the Committee as an Incentive Stock
Option pursuant to Section 7 hereof and is intended to be such under Section 422
of the Code.
(r) "Limited Right" means the right to receive an amount of cash based
upon the terms set forth in Section 8 hereof.
(s) "Non-statutory Stock Option" means an Option granted by the Committee
to a Participant pursuant to Section 6 hereof, which is not designated by the
Committee as an Incentive Stock Option or which is redesignated by the Committee
under Section 7 as a Non-Statutory Stock Option.
(t) "Option" means the right to buy a fixed amount of Common Stock at the
Exercise Price within a limited period of time designated as the term of the
option as granted under Section 6 or 7 hereof.
(u) "Outside Director" means a member of the Board of Directors of the
Bank or its Affiliates, who is not also an Employee.
(v) "Outside Director Participant" means an Outside Director who holds an
outstanding Award under the terms of the Plan.
(w) "Participant" means any Employee or Outside Director who holds an
outstanding Award under the terms of the Plan.
(x) "Retirement" with respect to an Employee Participant means termination
of employment which constitutes retirement under any tax qualified plan
maintained by the Bank. However, "Retirement" will not be deemed to have
occurred for purposes of this Plan if a Participant continues to serve on the
Board of Directors of the Bank or its Affiliates even if such Participant is
receiving retirement benefits under any retirement plan of the Bank or its
Affiliates. With respect to an Outside Director Participant "Retirement" means
the termination of service from the Board of Directors of the Bank or its
Affiliates following written notice to the Board as a whole of such Outside
Director's intention to retire or retirement as determined by the Bank (or
Affiliate's) bylaws, or by reaching age 65, except that an Outside Director
shall not be
3
<PAGE>
deemed to have retired for purposes of the Plan in the event he continues to
serve as a consultant to the Board or as an advisory director.
(y) "Termination for Cause" shall mean, in the case of an Outside
Director, removal from the Board of Directors, or, in the case of an Employee,
termination of employment, in both such cases as determined by the Board of
Directors, because of a material loss to the Bank or one of its Affiliates
caused by the Participant's intentional failure to perform stated duties,
personal dishonesty, willful violation of any law, rule, regulation, (other than
traffic violations or similar offenses) or final cease and desist order. No act,
or the failure to act, on Participant's part shall be "willful" unless done, or
omitted to be done, not in good faith and without reasonable belief that the
action or omission was in the best interest of the Bank or one of its
Affiliates.
2. ADMINISTRATION.
--------------
(a) The Plan as regards Awards to employees of the Bank or its Affiliates,
shall be granted and administered by the Committee. The Committee is
authorized, subject to the provisions of the Plan, to grant awards to Employees
and Outside Directors and to establish such rules and regulations as it deems
necessary for the proper administration of the Plan and to make whatever
determinations and interpretations in connection with the Plan it deems
necessary or advisable. All determinations and interpretations made by the
Committee shall be binding and conclusive on all Participants in the Plan and on
their legal representatives and beneficiaries.
(b) Awards to Outside Directors shall be granted and administered by the
Committee, pursuant to the terms of this Plan.
3. TYPES OF AWARDS AND RELATED RIGHTS.
----------------------------------
The following Awards and related rights as described in Sections 6 through
11 hereof may be granted under the Plan:
(a) Non-statutory Stock Options;
(b) Incentive Stock Options;
(c) Limited Rights
4. STOCK SUBJECT TO THE PLAN.
-------------------------
Subject to adjustment as provided in Section 14, the maximum number of
shares reserved for Awards under the Plan is 107,200 shares of the Common Stock.
These shares of Common Stock may be either authorized but unissued shares or
authorized shares previously issued and reacquired by the Bank. To the extent
that Awards are granted under the Plan, the shares underlying such Awards will
be unavailable for any other use including future grants under the Plan except
that, to the extent that Awards terminate, expire, are forfeited or are
cancelled without having been exercised (in the case of Limited Rights,
exercised for cash), new Awards may be made with respect to these shares.
4
<PAGE>
5. ELIGIBILITY.
-----------
Subject to the terms herein all Employees and Outside Directors shall be
eligible to receive Awards under the Plan.
6. NON-STATUTORY STOCK OPTIONS.
---------------------------
The Committee may, subject to the limitations of the Plan and the
availability of shares reserved but unawarded in the Plan, from time to time,
grant Non-statutory Stock Options to Employees and Outside Directors and, upon
such terms and conditions as the Committee may determine, grant Non-statutory
Stock Options in exchange for and upon surrender of previously granted Awards
under this Plan. Non-statutory Stock Options granted under this Plan are
subject to the following terms and conditions:
(a) Exercise Price. The Exercise Price of each Non-statutory Stock Option
--------------
shall be determined by the Committee on the date the option is granted. Such
Exercise Price shall not be less than 100% of the Fair Market Value of the
Common Stock on the Date of Grant. Shares may be purchased only upon full
payment of the Exercise Price or upon operation of an Alternate Option Payment
Mechanism set out in Section 9 hereof.
(b) Terms of Options. The term during which each Non-statutory Stock
----------------
Option may be exercised shall be determined by the Committee, but in no event
shall a Non-statutory Stock Option be exercisable in whole or in part more than
10 years from the Date of Grant. The Committee shall determine the date on
which each Non-statutory Stock Option shall become exercisable. The shares
comprising each installment may be purchased in whole or in part at any time
during the term of such Option after such installment becomes exercisable. The
Committee may, in its sole discretion, accelerate the time at which any
Non-statutory Stock Option may be exercised in whole or in part. The
acceleration of any Non-statutory Stock Option under the authority of this
paragraph creates no right, expectation or reliance on the part of any other
Participant or that certain Participant regarding any other unaccelerated
Non-statutory Stock Options.
(c) Termination of Employment or Service. Unless otherwise determined by
------------------------------------
the Committee, upon the termination of a Participant's employment or service for
any reason other than Disability, death or Termination for Cause, a
Non-statutory Stock Option shall be exercisable only as to those shares that
were immediately exercisable by the Participant at the date of termination and
only for a period of one year following termination. Notwithstanding any
provisions set forth herein or contained in any Agreement relating to an award
of an Option, in the event of termination for Disability, death, Retirement or a
Change in Control, all Options shall immediately vest and be exercisable for one
year after such termination, and in the event of Termination for Cause all
rights under the Participant's Non-Statutory Stock Options shall expire
immediately upon termination.
5
<PAGE>
(d) Change in Control. Unless otherwise determined by the Committee, in
-----------------
the event of the termination of the Participant's employment or service
following a Change in Control, all Non-statutory Stock Options held by the
Participant, whether or not exercisable at such time, shall become exercisable
by the Participant or his legal representatives or beneficiaries and remain
exercisable for one year or such longer period as determined by the Committee
following the date of the termination of employment or service, provided that in
no event shall the period extend beyond the expiration of the term of the
Non-statutory Stock Option.
7. INCENTIVE STOCK OPTIONS.
-----------------------
The Committee may, subject to the limitations of the Plan and the
availability of shares reserved but unawarded in the Plan, from time to time,
grant Incentive Stock Options to Employees. Incentive Stock Options granted
pursuant to the Plan shall be subject to the following terms and conditions:
(a) Exercise Price. The Exercise Price of each Incentive Stock Option
--------------
shall be not less than 100% of the Fair Market Value of the Common Stock on the
Date of Grant. However, if at the time an Incentive Stock Option is granted to
a Participant, the Participant owns Common Stock representing more than 10% of
the total combined voting securities of the Bank (or, under Section 424(d) of
the Code, is deemed to own Common Stock representing more than 10% of the total
combined voting power of all classes of stock of the Bank, by reason of the
ownership of such classes of stock, directly or indirectly, by or for any
brother, sister, spouse, ancestor or lineal descendent of such Participant, or
by or for any corporation, partnership, estate or trust of which such
Participant is a shareholder, partner or beneficiary), ("10% Owner"), the
Exercise Price per share of Common Stock deliverable upon the exercise of each
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
the Common Stock on the Date of Grant. Shares may be purchased only upon
payment of the full Exercise Price or upon operation of an Alternate Option
Payment Mechanism set out in Section 9 hereof.
(b) Amounts of Options. Incentive Stock Options may be granted to any
------------------
Employee in such amounts as determined by the Committee; provided that the
amount granted is consistent with the terms of Section 422 of the Code. In the
case of an option intended to qualify as an Incentive Stock Option, the
aggregate Fair Market Value (determined as of the time the Option is granted) of
the Common Stock with respect to which Incentive Stock Options granted are
exercisable for the first time by the Participant during any calendar year
(under all plans of the Participant's employer corporation and its parent and
subsidiary corporations) shall not exceed $100,000. The provisions of this
Section 7(b) shall be construed and applied in accordance with Section 422(d) of
the Code and the regulations, if any, promulgated thereunder. To the extent an
award under this Section 7 exceeds this $100,000 limit, the portion of the
Options in excess of such limit shall be deemed a Non-statutory Stock Option.
The Committee shall have discretion to redesignate Options granted as Incentive
Stock Options as Non-Statutory Stock Options. Such redesignation shall not be
deemed to be a new grant or a regrant of such Options. Such Non-statutory Stock
Options shall be subject to Section 6 hereof.
6
<PAGE>
(c) Terms of Options. The term during which each Incentive Stock Option
----------------
may be exercised shall be determined by the Committee, but in no event shall an
Incentive Stock Option be exercisable in whole or in part more than 10 years
from the Date of Grant. If at the time an Incentive Stock Option is granted to
a Participant who is a 10% Owner, the Incentive Stock Option granted to such
Employee Participant shall not be exercisable after the expiration of five years
from the Date of Grant. No Incentive Stock Option granted under this Plan is
transferable except by will or the laws of descent and distribution and is
exercisable in his lifetime only by the Employee Participant to whom it is
granted.
The Committee shall determine the date on which each Incentive Stock Option
shall become exercisable. The shares comprising each installment may be
purchased in whole or in part at any time during the term of such option after
such installment becomes exercisable. The Committee may, in its sole
discretion, accelerate the time at which any Incentive Stock Option may be
exercised in whole or in part. The acceleration of any Incentive Stock Option
under the authority of this paragraph creates no right, expectation or reliance
on the part of any other Participant or that certain Participant regarding any
other unaccelerated Incentive Stock Options.
(d) Termination of Employment. Unless otherwise determined by the
-------------------------
Committee, upon the termination of an Employee Participant's service for any
reason other than Disability, Retirement, death, Change in Control or
Termination for Cause, the Employee Participant's Incentive Stock Options shall
be exercisable only as to those shares that were immediately exercisable by the
Employee Participant at the date of termination and only for a period of three
months following termination. Notwithstanding any provisions set forth herein
or contained in any Agreement relating to an award of an Option, in the event of
termination for Disability, Retirement or death, all Options shall immediately
vest and be exercisable for one year after such termination, (however, in the
event of Retirement, exercising after three months will result in loss of
incentive stock option treatment under the Code) and in the event of Termination
for Cause all rights under the Employee Participant's Incentive Stock Options
shall expire immediately upon termination.
(e) Change in Control. Unless otherwise determined by the Committee, in
-----------------
the event of the termination of the Employee Participant's employment following
a Change in Control, all Incentive Stock Options held by the Participant,
whether or not exercisable at such time, shall become exercisable by the
Participant or his legal representatives or beneficiaries and remain exercisable
for one year or such longer period as determined by the Committee following the
date of termination of the Employee Participant's employment, provided however,
that such option shall not be eligible for treatment as an Incentive Stock
Option in the event such option is exercised more than three months following
the date of termination of employment, and provided further, that in no event
shall the period extend beyond the expiration of the term of the Incentive Stock
Option.
(f) Compliance with Code. The Options granted under this Section are
--------------------
intended to qualify as incentive stock options within the meaning of Section 422
of the Code, but the Bank makes no warranty as to the qualification of any
option as an incentive stock option within the
7
<PAGE>
meaning of Section 422 of the Code. All Options that do not so quality shall be
treated as Non-statutory Stock Options.
8. LIMITED RIGHTS.
--------------
Simultaneously with the grant of any Option to an Employee, the Committee
may grant a Limited Right with respect to all or some of the shares covered by
such Option. Limited Rights granted under this Plan are subject to the
following terms and conditions:
(a) Terms of Rights. In no event shall a Limited Right be exercisable in
---------------
whole or in part before the expiration of six months from the Date of Grant of
the Limited Right. A Limited Right may be exercised only in the event of a
Change in Control.
The Limited Right may be exercised only when the underlying Option is
eligible to be exercised, and only when the Fair Market Value of the underlying
shares on the day of exercise is greater than the Exercise Price of the
underlying Option.
Upon exercise of a Limited Right, the underlying Option shall cease to be
exercisable. Upon exercise or termination of an Option, any related Limited
Rights shall terminate. The Limited Rights may be for no more than 100% of the
difference between the purchase price and the Fair Market Value of the Common
Stock subject to the underlying option. The Limited Right is transferable only
when the underlying option is transferable and under the same conditions.
(b) Payment. Upon exercise of a Limited Right, the holder shall promptly
-------
receive from the Bank an amount of cash or some other payment option found in
Section 12, equal to the difference between the Exercise Price of the underlying
option and the Fair Market Value of the Common Stock subject to the underlying
Option on the date the Limited Right is exercised, multiplied by the number of
shares with respect to which such Limited Right is being exercised. Payments
shall be less an applicable tax withholding as set forth in Section 15.
9. ALTERNATE OPTION PAYMENT MECHANISM
----------------------------------
The Committee has sole discretion to determine what form of payment it will
accept for the exercise of an Option. The Committee may indicate acceptable
forms in the Award Agreement covering such Options or may reserve its decision
to the time of exercise. No Option is to be considered exercised until payment
in full is accepted by the Committee or its agent.
(a) Cash Payment. The exercise price may be paid in cash or by certified
------------
check.
(b) Borrowed Funds. To the extent permitted by law, the Committee may
--------------
permit all or a portion of the exercise price of an Option to be paid through
borrowed funds.
8
<PAGE>
(c) Exchange of Common Stock.
------------------------
(i) The Committee may permit payment by the tendering of
previously acquired shares of Common Stock. This includes the use of "pyramiding
transactions" whereby some number of Options are exercised. The shares gained
through the exercise are then tendered back to the Bank as payment for some
other number of Options. This transaction may be repeated as needed to exercise
all of the Options available.
(ii) Any shares of Common Stock tendered in payment of the exercise
price of an Option shall be valued at the Fair Market Value of the Common Stock
on the date prior to the date of exercise.
10. RIGHTS OF A SHAREHOLDER
-----------------------
No Participant shall have any rights as a shareholder with respect to any
shares covered by an Option until the date of issuance of a stock certificate
for such shares. Nothing in this Plan or in any Award granted confers on any
person any right to continue in the employ or service of the Bank or its
Affiliates or interferes in any way with the right of the Bank or its Affiliates
to terminate a Participant's services as an officer or other employee at any
time.
11. NON-TRANSFERABILITY
-------------------
Except to the extent permitted or restricted by the Code, the rules
promulgated under Section 16(b) of the Exchange Act or any successor statutes or
rules:
(i) The recipient of an Award shall not sell, transfer, assign,
pledge, or otherwise encumber shares subject to the Award until full vesting of
such shares has occurred. For purposes of this section, the separation of
beneficial ownership and legal title through the use of any "swap" transaction
is deemed to be a prohibited encumbrance.
(ii) Unless determined otherwise by the Committee and except in the
event of the Participant's death or pursuant to a domestic relations order, an
Award is not transferable and may be earned in his lifetime only by the
Participant to whom it is granted. Upon the death of a Participant, an Award is
transferable by will or the laws of intestate succession. The designation of a
beneficiary does not constitute a transfer.
(iii) If a recipient of an Award is subject to the provisions of
Section 16 of the Exchange Act, shares of Common Stock subject to such Award may
not, without the written consent of the Committee (which consent may be given in
the Stock Award Agreement), be sold or otherwise disposed of within six months
following the date of grant of the Award.
9
<PAGE>
12. AGREEMENT WITH GRANTEES.
-----------------------
Each Award will be evidenced by a written agreement, executed by the
Participant and the Bank or its Affiliates that describes the conditions for
receiving the Awards including the date of Award, the Exercise Price, the terms
or other applicable periods, and other terms and conditions as may be required
or imposed by the Plan, the Committee, the Board of Directors, tax law
considerations or applicable securities law considerations.
13. DESIGNATION OF BENEFICIARY.
--------------------------
A Participant may, with the consent of the Committee, designate a person or
persons to receive, in the event of death, any Award to which the Participant
would then be entitled. Such designation will be made upon forms supplied by
and delivered to the Bank and may be revoked in writing. If a Participant fails
effectively to designate a beneficiary, then the Participant's estate will be
deemed to be the beneficiary.
14. DILUTION AND OTHER ADJUSTMENTS.
------------------------------
In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend or split, recapitalization, merger, consolidation,
spin-off, reorganization, combination or exchange of shares, or other similar
corporate change, or other increase or decrease in such shares without receipt
or payment of consideration by the Bank, the Committee will make such
adjustments to previously granted Awards, to prevent dilution or enlargement of
the rights of the Participant including any or all of the following:
(a) adjustments in the aggregate number or kind of shares of Common Stock
that may underlie future Awards under the Plan;
(b) adjustments in the aggregate number or kind of shares of Common Stock
underlying Awards already made under the Plan;
(c) adjustments in the purchase price of outstanding Incentive and/or
Non-statutory Stock Options, or any Limited Rights attached to such
Options.
No such adjustments may, however, materially change the value of benefits
available to a Participant under a previously granted Award. All awards under
this Plan shall be binding upon any successors or assigns of the Bank.
15. TAX WITHHOLDING.
---------------
Awards under this Plan shall be subject to tax withholding to the extent
required by any governmental authority. Any withholding shall comply with Rule
16b-3, if applicable, or any amendment or successor rule. Shares of Common
Stock withheld to pay for tax withholding
10
<PAGE>
amounts shall be valued at their Fair Market Value on the date the Award is
deemed taxable to the Participant.
16. AMENDMENT OF THE PLAN.
---------------------
The Board of Directors may at any time, and from time to time, modify or
amend the Plan in any respect, prospectively or retroactively; provided however,
that provisions governing grants of Incentive Stock Options, unless permitted by
the rules and regulations or staff pronouncements promulgated under the Code,
shall be submitted for shareholder approval to the extent required by such law,
regulation or interpretation.
Failure to ratify or approve amendments or modifications by shareholders
shall be effective only as to the specific amendment or modification requiring
such ratification. Other provisions, sections, and subsections of this Plan
will remain in full force and effect.
No such termination, modification or amendment may affect the rights of a
Participant under an outstanding Award without the written permission of such
Participant.
17. EFFECTIVE DATE OF PLAN.
----------------------
The Effective Date of the Plan shall be the date of its adoption by the
Board of Directors.
18. TERMINATION OF THE PLAN.
-----------------------
The right to grant Awards under the Plan will terminate upon the earlier of
ten (10) years after the Effective Date of the Plan or the exercise of Options,
or related Limited Rights equivalent to the maximum number of shares reserved
under the Plan as set forth in Section 4. The Board of Directors has the right
to suspend or terminate the Plan at any time, provided that no such action will,
without the consent of a Participant or Outside Director Participant, adversely
affect his vested rights under a previously granted Award.
19. APPLICABLE LAW.
--------------
The Plan will be administered in accordance with the laws of the State of
California to the extent not superceded by federal law.
20. SUCCESSORS AND ASSIGNS.
----------------------
All awards under this Plan shall be binding upon any successors or assigns
of the Bank including any holding company that may be formed by the Bank. Upon
the formation of a holding company, this Plan shall be amended to become the
plan of such holding company.
11
<PAGE>
21. DELEGATION OF AUTHORITY.
-----------------------
The Committee may delegate all authority for: the determination of forms of
payment to be made by or received by the Plan; the execution of Award
Agreements; the determination of Fair Market Value; the determination of all
other aspects of administration of the Plan to the executive officer(s) of the
Bank. The Committee may rely on the descriptions, representations, reports and
estimates provided to it by the management of the Bank for determinations to be
made pursuant to the Plan.
IN WITNESS WHEREOF, the Bank has established this Plan, as amended to be
executed by its duly authorized executive officer and the corporate seal to be
affixed and duly attested, effective as of the 21st day of November, 1996.
[CORPORATE SEAL] LIFE SAVINGS BANK,
FEDERAL SAVINGS BANK
November 21, 1996 By: /s/ Daniel L. Perl
- ----------------- -----------------------------
Date Daniel L. Perl
Chief Executive Officer
ADOPTED BY THE BOARD OF DIRECTORS:
November 21, 1996 By: /s/ L. Bruce Mills, Jr.
- ----------------- -----------------------------
Date L. Bruce Mills, Jr.
Secretary
APPROVED BY STOCKHOLDERS:
By:
- -------------------------------------- -----------------------------
Date Secretary
12
<PAGE>
EXHIBIT 10.5
DRAFT
FORM OF
LIFE FINANCIAL CORP.
1997 STOCK OPTION PLAN
1. DEFINITIONS.
-----------
(a) "Affiliate" means (i) a member of a controlled group of corporations of
which the Company is a member or (ii) an unincorporated trade or business which
is under common control with the Company as determined in accordance with
Section 414(c) of the Internal Revenue Code of 1986, as amended, (the "Code")
and the regulations issued thereunder. For purposes hereof, a "controlled group
of corporations" shall mean a controlled group of corporations as defined in
Section 1563(a) of the Code determined without regard to Section 1563(a)(4) and
(e)(3)(C).
(b) "Alternate Option Payment Mechanism" refers to one of several methods
available to a Participant to fund the exercise of a stock option set out in
Section 13 hereof. These mechanisms include: broker assisted cashless exercise
and stock for stock exchange.
(c) "Award" means a grant of one or some combination of one or more Non-
statutory Stock Options, Incentive Stock Options and Option related rights under
the provisions of this Plan.
(d) "Bank" means Life Savings Bank, Federal Savings Bank.
(e) "Board of Directors" or "Board" means the board of directors of the
Company.
(f) "Change in Control" means a change in control of the Bank or the
Company of a nature that; (i) would be required to be reported in response to
Item 1 of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"); or (ii) results in a Change in Control within the
meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA") and the Rules
and Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its
predecessor agency), as in effect on the date hereof (provided, that in applying
the definition of change in control as set forth under such rules and
regulations the Board shall substitute its judgment for that of the OTS); or
(iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (A) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Bank or the Company,
<PAGE>
representing 20% or more of the Bank's or Company's outstanding securities
except for any securities of the Bank purchased by the Company formed by the
Bank for that purpose in connection with the reorganization of the Bank and any
securities purchased by any tax qualified employee benefit plan of the Bank or
Company; or (B) individuals who constitute the Board on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Company's stockholders was approved by the same Nominating Committee serving
under an Incumbent Board, shall be, for purposes of this clause (B), considered
as though he were a member of the Incumbent Board; or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or Company or similar transaction occurs in which the Bank or
Company is not the resulting entity; or (D) a solicitation of shareholders of
the Company, by someone other than the current management of the Company,
seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Bank or Company or similar transaction with one or more
corporations, as a result of which the outstanding shares of the class of
securities then subject to the plan are exchanged for or converted into cash or
property or securities not issued by the Bank or Company; or (E) a tender offer
is made for 20% or more of the voting securities of the Bank or Company.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
(h) "Committee" means a committee consisting of the entire Board of
Directors or consisting solely of two or more members of the Board of Directors
who are non-employee directors as such term is defined under Rule 16b-3(b)(3)(i)
under the Exchange Act as promulgated by the Securities and Exchange Commission.
(i) "Common Stock" means the Common Stock of the Company, par value, $.01
per share or any stock exchanged for shares of Common Stock pursuant to Section
14 hereof.
(j) "Company" means Life Financial Corp.
(k) "Date of Grant" means the effective date of an Award.
(l) "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of a Participant to perform the work
customarily assigned to him, or in the case of a Director, to serve on the
Board. Additionally, a medical doctor selected or approved by the Board of
Directors must advise the Committee that it is either not possible to determine
when such Disability will terminate or that it appears probable that such
Disability will be permanent during the remainder of said Participant's
lifetime.
(m) "Effective Date" means ___________ __, 1997, the effective date of the
Plan.
(n) "Employee" means any person who is currently employed by the Company or
an
2
<PAGE>
Affiliate, including officers, but such term shall not include Outside
Directors.
(o) "Employee Participant" means an Employee who holds an outstanding Award
under the terms of the Plan.
(p) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(q) "Exercise Price" means the purchase price per share of Common Stock
deliverable
upon the exercise of each Option in order for the option to be exchanged for
shares of Common Stock.
(r) "Fair Market Value" means, when used in connection with the Common
Stock on a certain date, the average of the high and low bid prices of the
Common Stock as reported by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), the New York Stock Exchange ("NYSE") or
the American Stock Exchange ("AMEX") (as published by the Wall Street Journal,
if published) on such date or if the Common Stock was not traded on such date,
on the next preceding day on which the Common Stock was traded thereon or the
last previous date on which a sale is reported. If the Common Stock is not
reported on the NASDAQ, AMEX or the NYSE, the Fair Market Value of the Common
Stock is the value so determined by the Board in good faith.
(s) "Incentive Stock Option" means an Option granted by the Committee to a
Participant, which Option is designated by the Committee as an Incentive Stock
Option pursuant to Section 7 hereof and is intended to be such under Section 422
of the Code.
(t) "Initial Public Offering" means the offering of shares of the Company's
Common Stock concurrently with the Bank's Reorganization.
(u) "Limited Right" means the right to receive an amount of cash based upon
the terms set forth in Section 8 hereof.
(v) "Non-statutory Stock Option" means an Option granted by the Committee
to a Participant pursuant to Section 6 hereof, which is not designated by the
Committee as an Incentive Stock Option or which is redesignated by the Committee
under Section 7 as a Non-Statutory Stock Option.
(w) "Option" means the right to buy a fixed amount of Common Stock at the
Exercise Price within a limited period of time designated as the term of the
option as granted under Section 6 or 7 hereof.
(x) "Outside Director" means a member of the Board of Directors of the
Company or its Affiliates, who is not also an Employee.
3
<PAGE>
(y) "Outside Director Participant" means an Outside Director who holds an
outstanding Award under the terms of the Plan.
(z) "Participant" means any Employee or Outside Director who holds an
outstanding Award under the terms of the Plan.
(aa) "Reorganization" means the formation by the Bank of the Company and
the subsequent reorganization pursuant to which the Bank will be a wholly-owned
subsidiary of the Company.
(bb) "Retirement" with respect to an Employee Participant means termination
of employment which constitutes retirement under any tax qualified plan
maintained by the Bank or the Company. However, "Retirement" will not be deemed
to have occurred for purposes of this Plan if a Participant continues to serve
on the Board of Directors of the Company or its Affiliates even if such
Participant is receiving retirement benefits under any retirement plan of the
Bank or the Company. With respect to an Outside Director Participant
"Retirement" means the termination of service from the Board of Directors of the
Company or its Affiliates following written notice to the Board as a whole of
such Outside Director's intention to retire or retirement as determined by the
Bank (or the Company's) bylaws, or by reaching age 65, except that an Outside
Director shall not be deemed to have retired for purposes of the Plan in the
event he continues to serve as a consultant to the Board or as an advisory
director.
(cc) "Termination for Cause" shall mean, in the case of an Outside
Director, removal from the Board of Directors, or, in the case of an Employee,
termination of employment, in both such cases as determined by the Board of
Directors, because of a material loss to the Company or one of its Affiliates
caused by the Participant's intentional failure to perform stated duties,
personal dishonesty, willful violation of any law, rule, regulation, (other than
traffic violations or similar offenses) or final cease and desist order. No
act, or the failure to act, on Participant's part shall be "willful" unless
done, or omitted to be done, not in good faith and without reasonable belief
that the action or omission was in the best interest of the Bank or one of its
Affiliates.
2. ADMINISTRATION.
--------------
(a) The Plan as regards Awards to employees of the Company or its
Affiliates, shall be granted and administered by the Committee. The Committee
is authorized, subject to the provisions of the Plan, to grant awards to
Employees and Outside Directors and to establish such rules and regulations as
it deems necessary for the proper administration of the Plan and to make
whatever determinations and interpretations in connection with the Plan it deems
necessary or advisable. All determinations and interpretations made by the
Committee shall be binding and conclusive on all Participants in the Plan and on
their legal representatives and beneficiaries.
(b) Awards to Outside Directors shall be granted and administered by the
Committee, pursuant to the terms of this Plan.
4
<PAGE>
3. TYPES OF AWARDS AND RELATED RIGHTS.
----------------------------------
The following Awards and related rights as described in Sections 6 through
11 hereof may be granted under the Plan:
(a) Non-statutory Stock Options;
(b) Incentive Stock Options;
(c) Limited Rights
4. STOCK SUBJECT TO THE PLAN.
-------------------------
Subject to adjustment as provided in Section 14, the maximum number of
shares reserved for Awards under the Plan is 250,000 shares of the Common Stock
or, 287,500 shares, in the event of an exercise of an over-allotment option by
the underwriters in the Initial Public Offering. These shares of Common Stock
may be either authorized but unissued shares or authorized shares previously
issued and reacquired by the Company. To the extent that Awards are granted
under the Plan, the shares underlying such Awards will be unavailable for any
other use including future grants under the Plan except that, to the extent that
Awards terminate, expire, are forfeited or are cancelled without having been
exercised (in the case of Limited Rights, exercised for cash), new Awards may be
made with respect to these shares.
5. ELIGIBILITY.
-----------
Subject to the terms herein all Employees and Outside Directors shall be
eligible to receive Awards under the Plan.
6. NON-STATUTORY STOCK OPTIONS.
---------------------------
The Committee may, subject to the limitations of the Plan and the
availability of shares reserved but unawarded in the Plan, from time to time,
grant Non-statutory Stock Options to Employees and Outside Directors and, upon
such terms and conditions as the Committee may determine, grant Non-statutory
Stock Options in exchange for and upon surrender of previously granted Awards
under this Plan. Non-statutory Stock Options granted under this Plan are
subject to the following terms and conditions:
(a) Exercise Price. The Exercise Price of each Non-statutory Stock Option
--------------
shall be determined by the Committee on the date the option is granted. Such
Exercise Price shall not be less than 100% of the Fair Market Value of the
Common Stock on the Date of Grant. Shares may be purchased only upon full
payment of the Exercise Price or upon operation of an Alternate Option Payment
Mechanism set out in Section 9 hereof.
(b) Terms of Options. The term during which each Non-statutory Stock
----------------
Option may be exercised shall be determined by the Committee, but in no event
shall a Non-statutory Stock
5
<PAGE>
Option be exercisable in whole or in part more than 10 years from the Date of
Grant. The Committee shall determine the date on which each Non-statutory Stock
Option shall become exercisable. The shares comprising each installment may be
purchased in whole or in part at any time during the term of such Option after
such installment becomes exercisable. The Committee may, in its sole discretion,
accelerate the time at which any Non-statutory Stock Option may be exercised in
whole or in part. The acceleration of any Non-statutory Stock Option under the
authority of this paragraph creates no right, expectation or reliance on the
part of any other Participant or that certain Participant regarding any other
unaccelerated Non-statutory Stock Options.
(c) Termination of Employment or Service. Unless otherwise determined by
------------------------------------
the Committee, upon the termination of a Participant's employment or service for
any reason other than Disability, death or Termination for Cause, a Non-
statutory Stock Option shall be exercisable only as to those shares that were
immediately exercisable by the Participant at the date of termination and only
for a period of one year following termination. Notwithstanding any provisions
set forth herein or contained in any Agreement relating to an award of an
Option, in the event of termination for Disability, death, Retirement or a
Change in Control, all Options shall immediately vest and be exercisable for one
year after such termination, and in the event of Termination for Cause all
rights under the Participant's Non-Statutory Stock Options shall expire
immediately upon termination.
(d) Change in Control. Unless otherwise determined by the Committee, in the
-----------------
event of the termination of the Participant's employment or service following a
Change in Control, all Non-statutory Stock Options held by the Participant,
whether or not exercisable at such time, shall become exercisable by the
Participant or his legal representatives or beneficiaries and remain exercisable
for one year or such longer period as determined by the Committee following the
date of the termination of employment or service, provided that in no event
shall the period extend beyond the expiration of the term of the Non-statutory
Stock Option.
7. INCENTIVE STOCK OPTIONS.
-----------------------
The Committee may, subject to the limitations of the Plan and the
availability of shares reserved but unawarded in the Plan, from time to time,
grant Incentive Stock Options to Employees. Incentive Stock Options granted
pursuant to the Plan shall be subject to the following terms and conditions:
(a) Exercise Price. The Exercise Price of each Incentive Stock Option
--------------
shall be not less than 100% of the Fair Market Value of the Common Stock on the
Date of Grant. However, if at the time an Incentive Stock Option is granted to
a Participant, the Participant owns Common Stock representing more than 10% of
the total combined voting securities of the Bank (or, under Section 424(d) of
the Code, is deemed to own Common Stock representing more than 10% of the total
combined voting power of all classes of stock of the Bank, by reason of the
ownership of such classes of stock, directly or indirectly, by or for any
brother, sister, spouse, ancestor or lineal descendent of such Participant, or
by or for any corporation, partnership, estate or trust of
6
<PAGE>
which such Participant is a shareholder, partner or beneficiary), ("10% Owner"),
the Exercise Price per share of Common Stock deliverable upon the exercise of
each Incentive Stock Option shall not be less than 110% of the Fair Market Value
of the Common Stock on the Date of Grant. Shares may be purchased only upon
payment of the full Exercise Price or upon operation of an Alternate Option
Payment Mechanism set out in Section 9 hereof.
(b) Amounts of Options. Incentive Stock Options may be granted to any
------------------
Employee in such amounts as determined by the Committee; provided that the
amount granted is consistent with the terms of Section 422 of the Code. In the
case of an option intended to qualify as an Incentive Stock Option, the
aggregate Fair Market Value (determined as of the time the Option is granted) of
the Common Stock with respect to which Incentive Stock Options granted are
exercisable for the first time by the Participant during any calendar year
(under all plans of the Participant's employer corporation and its parent and
subsidiary corporations) shall not exceed $100,000. The provisions of this
Section 7(b) shall be construed and applied in accordance with Section 422(d) of
the Code and the regulations, if any, promulgated thereunder. To the extent an
award under this Section 7 exceeds this $100,000 limit, the portion of the
Options in excess of such limit shall be deemed a Non-statutory Stock Option.
The Committee shall have discretion to redesignate Options granted as Incentive
Stock Options as Non-Statutory Stock Options. Such redesignation shall not be
deemed to be a new grant or a regrant of such Options. Such Non-statutory Stock
Options shall be subject to Section 6 hereof.
(c) Terms of Options. The term during which each Incentive Stock Option
----------------
may be exercised shall be determined by the Committee, but in no event shall an
Incentive Stock Option be exercisable in whole or in part more than 10 years
from the Date of Grant. If at the time an Incentive Stock Option is granted to
a Participant who is a 10% Owner, the Incentive Stock Option granted to such
Employee Participant shall not be exercisable after the expiration of five years
from the Date of Grant. No Incentive Stock Option granted under this Plan is
transferable except by will or the laws of descent and distribution and is
exercisable in his lifetime only by the Employee Participant to whom it is
granted.
The Committee shall determine the date on which each Incentive Stock Option
shall become exercisable. The shares comprising each installment may be
purchased in whole or in part at any time during the term of such option after
such installment becomes exercisable. The Committee may, in its sole
discretion, accelerate the time at which any Incentive Stock Option may be
exercised in whole or in part. The acceleration of any Incentive Stock Option
under the authority of this paragraph creates no right, expectation or reliance
on the part of any other Participant or that certain Participant regarding any
other unaccelerated Incentive Stock Options.
(d) Termination of Employment. Unless otherwise determined by the
-------------------------
Committee, upon the termination of an Employee Participant's service for any
reason other than Disability, Retirement, death, Change in Control or
Termination for Cause, the Employee Participant's Incentive Stock Options shall
be exercisable only as to those shares that were immediately exercisable by the
Employee Participant at the date of termination and only for a period of three
months following termination. Notwithstanding any provisions set forth herein or
contained in
7
<PAGE>
any Agreement relating to an award of an Option, in the event of termination for
Disability, Retirement or death, all Options shall immediately vest and be
exercisable for one year after such termination, (however, in the event of
Retirement, exercising after three months will result in loss of incentive stock
option treatment under the Code) and in the event of Termination for Cause all
rights under the Employee Participant's Incentive Stock Options shall expire
immediately upon termination.
(e) Change in Control. Unless otherwise determined by the Committee, in
-----------------
the event of the termination of the Employee Participant's employment following
a Change in Control, all Incentive Stock Options held by the Participant,
whether or not exercisable at such time, shall become exercisable by the
Participant or his legal representatives or beneficiaries and remain exercisable
for one year or such longer period as determined by the Committee following the
date of termination of the Employee Participant's employment, provided however,
that such option shall not be eligible for treatment as an Incentive Stock
Option in the event such option is exercised more than three months following
the date of termination of employment, and provided further, that in no event
shall the period extend beyond the expiration of the term of the Incentive Stock
Option.
(f) Compliance with Code. The Options granted under this Section are
--------------------
intended to qualify as incentive stock options within the meaning of Section 422
of the Code, but the Company makes no warranty as to the qualification of any
option as an incentive stock option within the meaning of Section 422 of the
Code. All Options that do not so quality shall be treated as Non-statutory
Stock Options.
8. LIMITED RIGHTS.
--------------
Simultaneously with the grant of any Option to an Employee, the Committee
may grant a Limited Right with respect to all or some of the shares covered by
such Option. Limited Rights granted under this Plan are subject to the
following terms and conditions:
(a) Terms of Rights. In no event shall a Limited Right be exercisable in
---------------
whole or in part before the expiration of six months from the Date of Grant of
the Limited Right. A Limited Right may be exercised only in the event of a
Change in Control.
The Limited Right may be exercised only when the underlying Option is
eligible to be exercised, and only when the Fair Market Value of the underlying
shares on the day of exercise is greater than the Exercise Price of the
underlying Option.
Upon exercise of a Limited Right, the underlying Option shall cease to be
exercisable. Upon exercise or termination of an Option, any related Limited
Rights shall terminate. The Limited Rights may be for no more than 100% of the
difference between the purchase price and the Fair Market Value of the Common
Stock subject to the underlying option. The Limited Right is transferable only
when the underlying option is transferable and under the same conditions.
8
<PAGE>
(b) Payment. Upon exercise of a Limited Right, the holder shall promptly
-------
receive from the Company an amount of cash or some other payment option found in
Section 12, equal to the difference between the Exercise Price of the underlying
option and the Fair Market Value of the Common Stock subject to the underlying
Option on the date the Limited Right is exercised, multiplied by the number of
shares with respect to which such Limited Right is being exercised. Payments
shall be less an applicable tax withholding as set forth in Section 15.
9. ALTERNATE OPTION PAYMENT MECHANISM
----------------------------------
The Committee has sole discretion to determine what form of payment it will
accept for the exercise of an Option. The Committee may indicate acceptable
forms in the Award Agreement covering such Options or may reserve its decision
to the time of exercise. No Option is to be considered exercised until payment
in full is accepted by the Committee or its agent.
(a) Cash Payment. The exercise price may be paid in cash or by certified
------------
check.
(b) Borrowed Funds. To the extent permitted by law, the Committee may
--------------
permit all or a portion of the exercise price of an Option to be paid through
borrowed funds.
(c) Exchange of Common Stock.
------------------------
(i) The Committee may permit payment by the tendering of previously
acquired shares of Common Stock. This includes the use of "pyramiding
transactions" whereby some number of Options are exercised. The shares gained
through the exercise are then tendered back to the Bank as payment for some
other number of Options. This transaction may be repeated as needed to exercise
all of the Options available.
(ii) Any shares of Common Stock tendered in payment of the exercise
price of an Option shall be valued at the Fair Market Value of the Common Stock
on the date prior to the date of exercise.
10. RIGHTS OF A SHAREHOLDER
-----------------------
No Participant shall have any rights as a shareholder with respect to any
shares covered by an Option until the date of issuance of a stock certificate
for such shares. Nothing in this Plan or in any Award granted confers on any
person any right to continue in the employ or service of the Company or its
Affiliates or interferes in any way with the right of the Company or its
Affiliates to terminate a Participant's services as an officer or other employee
at any time.
11. NON-TRANSFERABILITY
-------------------
Except to the extent permitted or restricted by the Code, the rules
promulgated under Section 16(b) of the Exchange Act or any successor statutes or
rules:
9
<PAGE>
(i) The recipient of an Award shall not sell, transfer, assign, pledge,
or otherwise encumber shares subject to the Award until full vesting of such
shares has occurred. For purposes of this section, the separation of beneficial
ownership and legal title through the use of any "swap" transaction is deemed to
be a prohibited encumbrance.
(ii) Unless determined otherwise by the Committee and except in the event
of the Participant's death or pursuant to a domestic relations order, an Award
is not transferable and may be earned in his lifetime only by the Participant to
whom it is granted. Upon the death of a Participant, an Award is transferable
by will or the laws of intestate succession. The designation of a beneficiary
does not constitute a transfer.
(iii) If a recipient of an Award is subject to the provisions of Section
16 of the Exchange Act, shares of Common Stock subject to such Award may not,
without the written consent of the Committee (which consent may be given in the
Stock Award Agreement), be sold or otherwise disposed of within six months
following the date of grant of the Award.
12. AGREEMENT WITH GRANTEES.
-----------------------
Each Award will be evidenced by a written agreement, executed by the
Participant and the Company or its Affiliates that describes the conditions for
receiving the Awards including the date of Award, the Exercise Price, the terms
or other applicable periods, and other terms and conditions as may be required
or imposed by the Plan, the Committee, the Board of Directors, tax law
considerations or applicable securities law considerations.
13. DESIGNATION OF BENEFICIARY.
--------------------------
A Participant may, with the consent of the Committee, designate a person or
persons to receive, in the event of death, any Award to which the Participant
would then be entitled. Such designation will be made upon forms supplied by
and delivered to the Company and may be revoked in writing. If a Participant
fails effectively to designate a beneficiary, then the Participant's estate will
be deemed to be the beneficiary.
14. DILUTION AND OTHER ADJUSTMENTS.
------------------------------
In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend or split, recapitalization, merger, consolidation,
spin-off, reorganization, combination or exchange of shares, or other similar
corporate change, or other increase or decrease in such shares without receipt
or payment of consideration by the Company, the Committee will make such
adjustments to previously granted Awards, to prevent dilution or enlargement of
the rights of the Participant including any or all of the following:
(a) adjustments in the aggregate number or kind of shares of Common Stock
that may underlie future Awards under the Plan;
10
<PAGE>
(b) adjustments in the aggregate number or kind of shares of Common Stock
underlying Awards already made under the Plan;
(c) adjustments in the purchase price of outstanding Incentive and/or Non-
statutory Stock Options, or any Limited Rights attached to such
Options.
No such adjustments may, however, materially change the value of benefits
available to a Participant under a previously granted Award. All awards under
this Plan shall be binding upon any successors or assigns of the Company.
15. TAX WITHHOLDING.
---------------
Awards under this Plan shall be subject to tax withholding to the extent
required by any governmental authority. Any withholding shall comply with Rule
16b-3, if applicable, or any amendment or successor rule. Shares of Common
Stock withheld to pay for tax withholding amounts shall be valued at their Fair
Market Value on the date the Award is deemed taxable to the Participant.
16. AMENDMENT OF THE PLAN.
---------------------
The Board of Directors may at any time, and from time to time, modify or
amend the Plan in any respect, prospectively or retroactively; provided however,
that provisions governing grants of Incentive Stock Options, unless permitted by
the rules and regulations or staff pronouncements promulgated under the Code,
shall be submitted for shareholder approval to the extent required by such law,
regulation or interpretation.
Failure to ratify or approve amendments or modifications by shareholders
shall be effective only as to the specific amendment or modification requiring
such ratification. Other provisions, sections, and subsections of this Plan
will remain in full force and effect.
No such termination, modification or amendment may affect the rights of a
Participant under an outstanding Award without the written permission of such
Participant.
17. EFFECTIVE DATE OF PLAN.
----------------------
The Effective Date of the Plan shall be the date of its adoption by the
Board of Directors.
18. TERMINATION OF THE PLAN.
-----------------------
The right to grant Awards under the Plan will terminate upon the earlier of
ten (10) years after the Effective Date of the Plan or the exercise of Options,
or related Limited Rights equivalent to the maximum number of shares reserved
under the Plan as set forth in Section 4. The Board of Directors has the right
to suspend or terminate the Plan at any time, provided that no such action will,
without the consent of a Participant or Outside Director Participant, adversely
11
<PAGE>
affect his vested rights under a previously granted Award.
19. APPLICABLE LAW.
--------------
The Plan will be administered in accordance with the laws of the State of
California to the extent not superseded by federal law.
20. SUCCESSORS AND ASSIGNS.
----------------------
All awards under this Plan shall be binding upon any successors or assigns
of the Company including any holding company that may be formed by the Company.
12
<PAGE>
21. DELEGATION OF AUTHORITY.
-----------------------
The Committee may delegate all authority for: the determination of forms of
payment to be made by or received by the Plan; the execution of Award
Agreements; the determination of Fair Market Value; the determination of all
other aspects of administration of the Plan to the executive officer(s) of the
Company. The Committee may rely on the descriptions, representations, reports
and estimates provided to it by the management of the Company for determinations
to be made pursuant to the Plan.
IN WITNESS WHEREOF, the Company has established this Plan, to be executed
by its duly authorized executive officer and the corporate seal to be affixed
and duly attested, effective as of the __________day of ________________ , 1997.
[CORPORATE SEAL] LIFE FINANCIAL CORP.
By:
- --------------------------- -------------------------------
Date President and
Chief Executive Officer
ADOPTED BY THE BOARD OF DIRECTORS:
By:
- --------------------------- -------------------------------
Date Secretary
13
<PAGE>
EXHIBIT 10.6
FORM OF LIFE FINANCIAL CORP.
EMPLOYEE STOCK OWNERSHIP PLAN
Effective __________, 199__
<PAGE>
LIFE FINANCIAL CORP.
EMPLOYEE STOCK OWNERSHIP PLAN
CERTIFICATION
I, Daniel L. Perl, President and Chief Executive Officer of Life Financial
Corp. (the "Company"), hereby certify that the attached Life Financial Corp.
Employee Stock Ownership Plan was adopted at a duly held meeting of the Board of
Directors of the Company on _____________, 199__.
The Company adopted the Life Financial Corp. Employee Stock Ownership Plan
setting forth the terms and conditions pertaining to contributions, and the
payment of benefits to participants and beneficiaries, effective _____________,
199__.
ATTEST: LIFE FINANCIAL CORP.
By:
- ----------------------------- -------------------------------------------
Secretary Daniel L. Perl
President and Chief Executive Officer
<PAGE>
C O N T E N T S
<TABLE>
<CAPTION>
<C> <S> <C>
Section 1. Plan Identity....................................... 1
-------------
1.1 Name.................................... 1
----
1.2 Purpose................................. 1
-------
1.3 Effective Date.......................... 1
--------------
1.4 Fiscal Period........................... 1
-------------
1.5 Single Plan for All Employers........... 1
-----------------------------
1.6 Interpretation of Provisions............ 1
----------------------------
Section 2. Definitions......................................... 1
-----------
Section 3. Eligibility for Participation....................... 8
-----------------------------
3.1 Initial Eligibility..................... 8
-------------------
3.2 Terminated Employees.................... 9
--------------------
3.3 Certain Employees Ineligible............ 9
----------------------------
3.4 Participation and Reparticipation....... 9
---------------------------------
Section 4. Employer Contributions and Credits.................. 9
----------------------------------
4.1 Discretionary Contributions............. 9
---------------------------
4.2 Contributions for Stock Obligations..... 9
-----------------------------------
4.3 Definitions Related to Contributions.... 10
------------------------------------
4.4 Conditions as to Contributions.......... 11
------------------------------
Section 5. Limitations on Contributions and Allocations........ 11
--------------------------------------------
5.1 Limitation on Annual Additions.......... 11
------------------------------
5.2 Coordinated Limitation With Other Plans. 12
---------------------------------------
5.3 Effect of Limitations................... 13
---------------------
5.4 Reserve................................. 13
-------
5.5 Limitations as to Certain Participants.. 13
--------------------------------------
Section 6. Trust Fund and Its Investment....................... 14
-----------------------------
6.1 Creation of Trust Fund.................. 14
----------------------
6.2 Stock Fund and Investment Fund.......... 14
------------------------------
6.3 Acquisition of Stock.................... 14
--------------------
6.4 Participants' Option to Diversify....... 15
---------------------------------
Section 7. Voting Rights and Dividends on Stock................ 15
------------------------------------
7.1 Voting and Tendering of Stock........... 15
-----------------------------
7.2 Dividends on Stock...................... 16
------------------
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
Section 8. Adjustments to Accounts............................................................. 16
-----------------------
8.1 Adjustments for Transactions............................................ 16
----------------------------
8.2 Valuation of Investment Fund............................................ 17
----------------------------
8.3 Adjustments for Investment Experience................................... 17
-------------------------------------
8.4 Adjustments for Capital Changes......................................... 17
-------------------------------
Section 9. Vesting of Participants' Interests.................................................. 17
----------------------------------
9.1 Deferred Vesting in Accounts............................................ 17
----------------------------
9.2 Computation of Vesting Years............................................ 18
----------------------------
9.3 Full Vesting Upon Certain Events........................................ 18
--------------------------------
9.4 Full Vesting Upon Plan Termination...................................... 18
----------------------------------
9.5 Forfeiture, Repayment, and Restoral..................................... 18
-----------------------------------
9.6 Accounting for Forfeitures.............................................. 19
--------------------------
9.7 Vesting and Nonforfeitability........................................... 19
-----------------------------
Section 10. Payment of Benefits................................................................. 19
-------------------
10.1 Benefits for Participants............................................... 19
-------------------------
10.2 Benefits on a Participant's Death....................................... 20
---------------------------------
10.3 Marital Status.......................................................... 20
--------------
10.4 Delay in Benefit Determination.......................................... 21
------------------------------
10.5 Accounting for Benefit Payments......................................... 21
-------------------------------
10.6 Options to Receive and Sell Stock....................................... 21
---------------------------------
10.7 Restrictions on Disposition of Stock.................................... 22
------------------------------------
10.8 Direct Transfer of Eligible Plan Distributions.......................... 22
----------------------------------------------
Section 11. Rules Governing Benefit Claims and Review of Appeals................................ 23
----------------------------------------------------
11.1 Claim for Benefits...................................................... 23
------------------
11.2 Notification by Committee............................................... 23
-------------------------
11.3 Claims Review Procedure................................................. 24
-----------------------
Section 12. The Committee and Its Functions..................................................... 24
-------------------------------
12.1 Authority of Committee.................................................. 24
----------------------
12.2 Identity of Committee................................................... 24
---------------------
12.3 Duties of Committee..................................................... 24
-------------------
12.4 Valuation of Stock...................................................... 25
------------------
12.5 Compliance with ERISA................................................... 25
---------------------
12.6 Action by Committee..................................................... 25
-------------------
12.7 Execution of Documents.................................................. 25
----------------------
12.8 Adoption of Rules....................................................... 25
-----------------
12.9 Responsibilities to Participants........................................ 26
--------------------------------
12.10 Alternative Payees in Event of Incapacity............................... 26
-----------------------------------------
12.11 Indemnification by Employers............................................ 26
----------------------------
12.12 Nonparticipation by Interested Member................................... 26
-------------------------------------
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
Section 13. Adoption, Amendment, or Termination of the Plan........ 26
-----------------------------------------------
13.1 Adoption of Plan by Other Employers........ 26
-----------------------------------
13.2 Adoption of Plan by Successor.............. 27
-----------------------------
13.3 Plan Adoption Subject to Qualification..... 27
--------------------------------------
13.4 Right to Amend or Terminate................ 27
---------------------------
Section 14. Miscellaneous Provisions............................... 28
------------------------
14.1 Plan Creates No Employment Rights.......... 28
---------------------------------
14.2 Nonassignability of Benefits............... 28
----------------------------
14.3 Limit of Employer Liability................ 28
---------------------------
14.4 Treatment of Expenses...................... 28
---------------------
14.5 Number and Gender.......................... 28
-----------------
14.6 Nondiversion of Assets..................... 29
----------------------
14.7 Separability of Provisions................. 29
--------------------------
14.8 Service of Process......................... 29
------------------
14.9 Governing State Law........................ 29
-------------------
Section 15. Top-Heavy Provisions................................... 29
--------------------
15.1 Determination of Top-Heavy Status.......... 29
---------------------------------
15.2 Minimum Contributions...................... 31
---------------------
15.3 Minimum Vesting............................ 31
---------------
</TABLE>
<PAGE>
LIFE FINANCIAL CORP.
EMPLOYEE STOCK OWNERSHIP PLAN
Section 1. Plan Identity.
--------------
1.1 Name. The name of this Plan is "Life Financial Corp. Employee
----
Stock Ownership Plan."
1.2 Purpose. The purpose of this Plan is to describe the terms and
--------
conditions under which contributions made pursuant to the Plan will be credited
and paid to the Participants and their Beneficiaries.
1.3 Effective Date. The Effective Date of this Plan is
---------------
__________________, 199__.
1.4 Fiscal Period. This Plan shall be operated on the basis of a
--------------
___________ -______________ fiscal year for the purposes of keeping the Plan's
books and records and distributing or filing any reports or returns required by
law.
1.5 Single Plan for All Employers. This Plan shall be treated as a
------------------------------
single plan with respect to all participating Employers for the purpose of
crediting contributions and forfeitures and distributing benefits, determining
whether there has been any termination of Service, and applying the limitations
set forth in Section 5.
1.6 Interpretation of Provisions. The Employers intend this Plan and
-----------------------------
the Trust to be a qualified stock bonus plan under Section 401(a) of the Code
and an employee stock ownership plan within the meaning of Section 407(d)(6) of
ERISA and Section 4975(e)(7) of the Code. The Plan is intended to have its
assets invested primarily in qualifying employer securities of one or more
Employers within the meaning of Section 407(d)(5) of ERISA and Section
4975(e)(8) of the Code, and to satisfy any requirement under ERISA or the Code
applicable to such a plan. Accordingly, the Plan and Trust Agreement shall be
interpreted and applied in a manner consistent with this intent and shall be
administered at all times and in all respects in a nondiscriminatory manner.
Section 2. Definitions. The following capitalized words and phrases shall
------------
have the meanings specified when used in this Plan and in the Trust Agreement,
unless the context clearly indicates otherwise:
"Account" means a Participant's interest in the assets accumulated under
this Plan, as expressed in terms of a separate account balance which is
periodically adjusted to reflect his Employer's contributions, the Plan's
investment experience, and distributions and forfeitures.
"Active Participant" means any Employee who has satisfied the eligibility
requirements of Section 3 and who qualifies as an Active Participant for a
particular Plan Year under Section 4.3.
<PAGE>
"Bank" means Life Savings Bank, Federal Savings Bank, and any entity which
succeeds to the business of the Bank.
"Beneficiary" means the person or persons who are designated by a Participant
to receive benefits payable under the Plan on the Participant's death. In the
absence of any designation, or if all the designated Beneficiaries shall die
before the Participant dies or shall die before all benefits have been paid, the
Participant's Beneficiary shall be his surviving Spouse, if any, or his estate
if he is not survived by a Spouse. The Committee may rely upon the advice of
the Participant's executor or administrator as to the identity of the
Participant's Spouse.
"Break in Service" means any five or more consecutive 12-month periods
beginning ____________________ in which an Employee has 500 or fewer Hours of
Service per period. Solely for this purpose, an Employee shall be considered
employed for his normal hours of paid employment during a Recognized Absence,
unless he does not resume his Service at the end of the Recognized Absence.
Further, if an Employee is absent for any period (i) by reason of the Employee's
pregnancy, (ii) by reason of the birth of the Employee's child, (iii) by reason
of the placement of a child with the Employee in connection with the Employee's
adoption of the child, or (iv) for purposes of caring for such child for a
period beginning immediately after such birth or placement, the Employee shall
be credited with the Hours of Service which would normally have been credited
but for such absence, up to a maximum of 501 Hours of Service, in the first 12-
month period which would otherwise be counted toward a Break in Service.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee responsible for the administration of this
Plan in accordance with Section 12.
"Company" means Life Financial Corp., and any entity which succeeds to the
business of the Company and adopts this Plan as its own pursuant to Section
13.2.
"Disability" means a condition which renders the Participant totally and
permanently disabled due to sickness or injury, such disability is likely to be
continuous and permanent, and such disability renders the Participant unable to
continue a like gainful occupation. In any event, the Committee's good faith
decision as to whether a Participant's Service has been terminated by Disability
shall be final and conclusive.
"Effective Date" means _________________, 199__.
"Employee" means any individual who is or has been employed by the Company.
"Employee" also means an individual employed by a leasing organization who,
pursuant to an agreement between an Employer and the leasing organization, has
performed services for the Employer and any related persons (within the meaning
of Section 414(n)(6) of the Code) on a substantially full-time basis for more
than one year, if such services are of a type historically performed by
employees in the Employer's business field. However, such a "leased employee"
2
<PAGE>
shall not be considered an Employee if (i) he participates in a money purchase
pension plan sponsored by the leasing organization which provides for immediate
participation, immediate full vesting, and an annual contribution of at least 10
percent of the individual's Total Compensation, and (ii) leased employees do not
constitute more than 20 percent of the Employer's total work force (including
leased employees, but excluding Highly Compensated Employees and any other
Employees who have not performed services for the Employer on a substantially
full-time basis for at least one year).
"Employer" means the Company or any affiliate within the purview of Sections
414(b), (c) or (m) and 415(h) of the Code, any other corporation, partnership,
or proprietorship which adopts this Plan with the Company's consent pursuant to
Section 13.1, and any entity which succeeds to the business of any Employer and
adopts the Plan pursuant to Section 13.2.
"Entry Date" means the Effective Date of the Plan and the first day of each
__________ and ____________ thereafter.
"ERISA" means the Employee Retirement Income Security Act of 1974 (P.L. 93-
406), as amended.
"Highly Compensated Employee" for any Plan Year beginning after December 31,
1996, means an Employee who: (A) owned more than five percent of the outstanding
equity interest or the outstanding voting interest in any Employer during the
year or the preceding year, or (B) for the year or the preceding year (i) had
Total Compensation exceeding $80,000 (as adjusted pursuant to section 415(d) of
the Code), and, (ii) if the Employer elects with respect to a preceding year,
was among the most highly paid one-fifth of all Employees for such preceding
year. For this purpose:
(a) "Total Compensation" shall include any amount which is excludable
from the Employee's gross income for tax purposes pursuant to Sections 125,
402(e)(3), 402(h)(1)(B), or 403(b) of the Code.
(b) The number of Employees in "the most highly compensated one-fifth
of all Employees" shall be determined by taking into account all individuals
working for all related employer entities described in the definition of
"Service", but excluding any individual who has not completed six months of
Service, who normally works fewer than 17-1/2 hours per week or in fewer than
six months per year, who has not reached age 21, whose employment is covered
by a collective bargaining agreement, or who is a nonresident alien who
receives no earned income from United States sources.
(c) A former Employee shall be treated as a Highly Compensated Employee
if such Employee was a Highly Compensated Employee when such Employee
separated from Service, or if such Employee was a Highly Compensated Employee
at any time after attaining age 55.
3
<PAGE>
(d) The determination of who is a Highly Compensated Employee,
including the determinations of the number and identity of Employees in the
top-paid group and the compensation that is considered, will be made in
accordance with Section 414(q) of the Code and the regulations thereunder.
"Hours of Service" means hours to be credited to an Employee under the
following rules:
(a) Each hour for which an Employee is paid or is entitled to be
paid for services to an Employer is an Hour of Service.
(b) Each hour for which an Employee is directly or indirectly paid
or is entitled to be paid for a period of vacation, holidays, illness,
Disability, lay-off, jury duty, temporary military duty, or leave of absence is
an Hour of Service. However, except as otherwise specifically provided, no more
than 501 Hours of Service shall be credited for any single continuous period in
which an Employee performs no duties. Further, no Hours of Service shall be
credited on account of payments made solely under a plan maintained to comply
with worker's compensation, unemployment compensation, or disability insurance
laws, or to reimburse an Employee for medical expenses.
(c) Each hour for which back pay (ignoring any mitigation of
damages) is either awarded or agreed to by an Employer is an Hour of Service.
However, no more than 501 Hours of Service shall be credited for any single
continuous period during which an Employee would not have performed any duties.
(d) Hours of Service shall be credited in any one period only under
one of the foregoing paragraphs (a), (b) and (c); an Employee may not receive
double credit for the same period.
(e) If an Employer finds it impractical to count the actual Hours
of Service for any class or group of non-hourly Employees, each Employee in that
class or group shall be credited with 45 Hours of Service for each weekly pay
period in which he has at least one Hour of Service. However, an Employee shall
be credited only for his normal working hours during a paid absence.
(f) Hours of Service to be credited on account of a payment to an
Employee (including back pay) shall be recorded in the period of Service for
which the payment was made. If the period overlaps two or more Plan Years, the
Hours of Service credit shall be allocated in proportion to the respective
portions of the period included in the several Plan Years. However, in the case
of periods of 31 days or less, the Administrator may apply a uniform policy of
crediting the Hours of Service to either the first Plan Year or the second.
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<PAGE>
(g) In all respects an Employee's Hours of Service shall be counted
as required by Section 2530.200b-2(b) and (c) of the Department of Labor's
regulations under Title I of ERISA.
"Investment Fund" means that portion of the Trust Fund consisting of assets
other than Stock.
"Normal Retirement Age" means a the later of the Participant's 65th birthday
or the fifth anniversary of the Participant's participation in the Plan.
"Normal Retirement Date" means the first day of the month coincident with or
next following attainment of Normal Retirement Age.
"Participant" means any Employee who is participating in the Plan, or who
has previously participated in the Plan and still has a balance credited to his
Account.
"Plan Year" means the 12 consecutive month period commencing
_________________ and ending ________________ of each year.
"Plan" means the Life Financial Corp. Employee Stock Ownership Plan, as set
forth herein, and as amended from time to time.
"Recognized Absence" means a period for which --
(a) an Employer grants an Employee a leave of absence for a limited
period, but only if an Employer grants such leaves on a nondiscriminatory
basis; or
(b) an Employee is temporarily laid off by an Employer because of
a change in business conditions; or
(c) an Employee is on active military duty, but only to the extent
that his employment rights are protected by the Military Selective Service
Act of 1967 (38 U.S.C. sec. 2021).
"Service" means an Employee's period(s) of employment or self-employment
with an Employer, excluding for initial eligibility purposes any period in which
the individual was a nonresident alien and did not receive from an Employer any
earned income which constituted income from sources within the United States.
An Employee's Service shall include any service which constitutes service with a
predecessor employer within the meaning of Section 414(a) of the Code. An
Employee's Service shall also include any service with an entity which is not an
Employer, but only either (i) for a period after 1975 in which the other entity
is a member of a controlled group of corporations or is under common control
with other trades and businesses within the meaning of Sections 414(b) or 414(c)
of the Code, and a member of the controlled group or one of the trades and
businesses is an Employer, or (ii) for a period after 1979 in which
5
<PAGE>
the other entity is a member of an affiliated service group within the meaning
of Section 414(m) of the Code, and a member of the affiliated service group is
an Employer.
"Spouse" means the individual, if any, to whom a Participant is lawfully
married on the date benefit payments to the Participant are to begin, or on the
date of the Participant's death, if earlier.
"Stock" means shares of the voting common stock or preferred stock meeting
the requirements of Section 409(e)(3) of the Code issued by an Employer.
"Stock Fund" means that portion of the Trust Fund consisting of Stock.
"Stock Obligation" means an indebtedness arising from any extension of
credit to the Plan or the Trust which was obtained for the purpose of buying
Stock and which satisfies the requirements set forth in Section 6.3.
"Total Compensation" means a Participant's wages, salary, overtime, bonuses,
commissions, and any other amounts received for personal services rendered while
in Service from any Employer or an affiliate (within the purview of Section
414(b), (c), and (m) of the Code), plus his earned income from any such entity
as defined in Section 401(c)(2) of the Code if he is self-employed. "Total
Compensation" shall include (i) severance payments and amounts paid as a result
of termination, (ii) amounts excludable from gross income under Section 911 of
the Code, (iii) amounts described in Sections 104(a)(3), 105(a), and 105(h) of
the Code to the extent includable in gross income, (iv) amounts received from an
Employer for moving expenses which are not deductible under Section 217 of the
Code, (v) amounts includable in gross income in the year of, and on account of,
the grant of a nonqualified stock option, (vi) amounts includable in gross
income pursuant to Section 83(b) of the Code, and (vii) amounts includable in
gross income under an unfunded nonqualified plan of deferred compensation, but
shall exclude (viii) Employer contributions to or amounts received from a funded
or qualified plan of deferred compensation, (ix) Employer contributions to a
simplified employee pension account to the extent deductible under Section 219
of the Code, (x) Employer contributions to a Section 403(b) annuity contract,
and (xi) amounts includable in gross income pursuant to Section 83(a) of the
Code, (xii) amounts includable in gross income upon the exercise of nonqualified
stock option or upon the disposition of stock acquired under any stock option,
and (xiii) any other amounts expended by the Employer on the Participant's
behalf which are excludable from his income or which receive special tax
benefits. A Participant's Total Compensation shall exclude any compensation in
any limitation year in excess of the limit currently in effect under Section
401(a)(17) of the Code.
"Trust" or "Trust Fund" means the trust fund created under this Plan.
"Trust Agreement" means the agreement between the Bank and the Trustee
concerning the Trust Fund. If any assets of the Trust Fund are held in a co-
mingled Trust Fund with assets of other qualified retirement plans, "Trust
Agreement" shall be deemed to include the trust agreement governing that co-
mingled Trust Fund. With respect to the allocation of investment
6
<PAGE>
responsibility for the assets of the Trust Fund, the provisions of Section 2 of
the Trust Agreement are incorporated herein by reference.
"Trustee" means one or more corporate persons and individuals selected from
time to time by the Bank to serve as trustee or co-trustees of the Trust Fund.
"Unallocated Stock Fund" means that portion of the Stock Fund consisting of
the Plan's holding of Stock which has been acquired in exchange for one or more
Stock Obligations and which has not yet been allocated to the Participant's
Accounts in accordance with Section 4.2.
"Valuation Date" means the last day of the Plan Year and each other date as
of which the Committee shall determine the investment experience of the
Investment Fund and adjust the Participants' Accounts accordingly.
"Valuation Period" means the period following a Valuation Date and ending
with the next Valuation Date.
"Vesting Year" means a unit of Service credited to a Participant pursuant to
Section 9.2 for purposes of determining his vested interest in his Account.
Section 3. Eligibility for Participation.
------------------------------
3.1 Initial Eligibility. An Employee shall enter the Plan as of the
--------------------
Entry Date coinciding with or on the next date an Employee completes an
eligibility computation period with the Employer, during which the Employee
completes at least 1,000 Hours of Service for the Employer and attains age 21.
However, if an Employee is not in active Service with an Employer on the
date he would otherwise first enter the Plan, his entry shall be deferred until
the next day he is in Service.
For purposes of this Plan, a Participant's initial eligibility computation
period shall be the twelve consecutive month period beginning with the day a
Participant first completes an Hour of Service. A Participant's subsequent
eligibility computation periods shall be the Plan Year, commencing with the Plan
Year which includes the first anniversary of the day the Participant first
completed an Hour of Service.
3.2 Terminated Employees. No Employee shall have any interest or
---------------------
rights under this Plan if he is never in active Service with an Employer on or
after the Effective Date.
3.3 Certain Employees Ineligible. No Employee shall be eligible to
-----------------------------
participate in the Plan while he is employed by a division or subsidiary of the
Company, other than the Bank, unless such division or subsidiary has, with the
approval of the Company, adopted the Plan for its Employees. Additionally, no
Employee shall participate in the Plan while his Service is covered by a
collective bargaining agreement between an Employer and the Employee's
collective
7
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bargaining representative if (i) retirement benefits have been the subject of
good faith bargaining between the Employer and the representative and (ii) the
collective bargaining agreement does not provide for the Employee's
participation in the Plan. No Employee shall participate in the Plan while he
is actually employed by a leasing organization rather than an Employer.
3.4 Participation and Reparticipation. Subject to the satisfaction of
----------------------------------
the foregoing requirements, an Employee shall participate in the Plan during
each period of his Service from the date on which he first becomes eligible
until his termination. For this purpose, an Employee returning within five
years of his or her termination who previously satisfied the initial eligibility
requirements shall re-enter the Plan as of the date of his return to Service
with an Employer.
Section 4. Employer Contributions and Credits.
-----------------------------------
4.1 Discretionary Contributions. Each Employer shall from time to time
----------------------------
contribute, with respect to a Plan Year, such amounts as it may determine from
time to time. An Employer shall have no obligation to contribute any amount
under this Plan except as so determined in its sole discretion. The Employers'
contributions and available forfeitures for a Plan Year shall be credited as of
the last day of the year to the Accounts of the Active Participants in
proportion to their amounts of Cash Compensation (as defined below) while a
Participant.
4.2 Contributions for Stock Obligations. If the Trustee, upon
------------------------------------
instructions from the Committee, incurs any Stock Obligation upon the purchase
of Stock, the Employer shall, subject to any regulatory prohibitions, contribute
for each Plan Year an amount sufficient to cover all payments of principal and
interest as they come due under the terms of the Stock Obligation. If there is
more than one Stock Obligation, the Employers shall designate the one to which
any contribution is to be applied. The Employer's obligation to make
contributions under this Section 4.2 shall be reduced to the extent of any
investment earnings realized on such contributions and any dividends paid by the
Employers on Stock held in the Unallocated Stock Account, which earnings and
dividends shall be applied to the Stock Obligation related to that Stock.
In each Plan Year in which Employer contributions, earnings on
contributions, or dividends on unallocated Stock are used as payments under a
Stock Obligation, a certain number of shares of the Stock acquired with that
Stock Obligation which is then held in the Unallocated Stock Fund shall be
released for allocation among the Participants. The number of shares released
shall bear the same ratio to the total number of those shares then held in the
Unallocated Stock Fund (prior to the release) as (i) the principal and interest
payments made on the Stock Obligation in the current Plan Year bears to (ii) the
sum of (i) above, and the remaining principal and interest payments required (or
projected to be required on the basis of the interest rate in effect at the end
of the Plan Year) to satisfy the Stock Obligation.
At the direction of the Committee, the current and projected payments of
interest under a Stock Obligation may be ignored in calculating the number of
shares to be released in each year if (i) the Stock Obligation provides for
annual payments of principal and interest at a cumulative
8
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rate that is not less rapid at any time than level annual payments of such
amounts for 10 years, (ii) the interest included in any payment is ignored only
to the extent that it would be determined to be interest under standard loan
amortization tables, and (iii) the term of the Stock Obligation, by reason of
renewal, extension, or refinancing, has not exceeded 10 years from the original
acquisition of the Stock.
For these purposes, each Stock Obligation, the Stock purchased with it, and
any dividends on such Stock, shall be considered separately. The Stock released
from the Unallocated Stock Fund in any Plan Year shall be credited as of the
last day of the year to the Accounts of the Active Participants in proportion to
their amounts of Cash Compensation (as defined below) while a Participant.
4.3 Definitions Related to Contributions. For the purposes of this
-------------------------------------
Plan, the following terms have the meanings specified:
"Active Participant" means a Participant who has satisfied the eligibility
requirements under Section 3. However, a Participant shall not qualify as an
Active Participant unless (i) he is in active Service with an Employer as of the
last day of the Plan Year, or (ii) he is on a Recognized Absence as of that
date, or (iii) his Service terminated during the Plan Year by reason of Normal
Retirement, Disability or death.
"Cash Compensation" means the Participant's base compensation reportable on
Form W-2. A Participant's Cash Compensation shall exclude any compensation in
excess of the limit currently in effect under Section 401(a)(17) of the Code.
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any provision of the Plan to the contrary, the annual
compensation of each employee taken in to account under the Plan shall not
exceed the Omnibus Budget Reconciliation Act of 1993 ("OBRA 1993") annual
compensation limit. The OBRA 1993 annual compensation limit is $150,000, as
adjusted by the Commissioner of the Internal Revenue Service for increases in
the cost-of-living in accordance with Section 401(a)(17)(B) of the Code. The
cost-of-living adjustment in effect for a calendar year applies to any period,
not exceeding 12 months, over which compensation is determined (the
"Determination Period") beginning in such calendar year. If a Determination
Period consists of fewer than 12 months, the OBRA 1993 annual compensation
limitation will be multiplied by a fraction, the numerator of which is the
number of months in the Determination Period, and the denominator of which is
12. For Plan Years commencing prior to December 31, 1996, for purposes of
applying the limitations of Section 401(a)(17) of the Code, the rules relating
to the family members of a Highly Paid Employee will apply, except that the only
the employee's spouse and lineal descendants who have not attained age 19 will
be included in as family members. Notwithstanding the preceding, for Plan Years
beginning after December 31, 1996, the aggregation rules relating to the family
members of a Highly Compensated Employee will not apply.
4.4 Conditions as to Contributions. Employers' contributions shall in
-------------------------------
any event be subject to the limitations set forth in Section 5. Contributions
may be made in the form of
9
<PAGE>
cash, or securities and other property to the extent permissible under ERISA,
including Stock, and shall be held by the Trustee in accordance with the Trust
Agreement. In addition to the provisions of Section 13.3 for the return of an
Employer's contributions in connection with a failure of the Plan to qualify
initially under the Code, any amount contributed by an Employer due to a good
faith mistake of fact, or based upon a good faith but erroneous determination
of its deductibility under Section 404 of the Code, shall be returned to the
Employer within one year after the date on which the contribution was originally
made, or within one year after its nondeductibility has been finally determined.
However, the amount to be returned shall be reduced to take account of any
adverse investment experience within the Trust Fund in order that the balance
credited to each Participant's Account is not less that it would have been if
the contribution had never been made.
Section 5. Limitations on Contributions and Allocations.
---------------------------------------------
5.1 Limitation on Annual Additions. Notwithstanding the provisions of
-------------------------------
Section 4, the annual addition to a Participant's Accounts under this and any
other defined contribution plans maintained by the Employers or an affiliate
(within the purview of Sections 414(b), (c), and (m) and Section 415(h) of the
Code, which affiliate shall be deemed an Employer for this purpose) shall not
exceed for any limitation year an amount equal to the lesser of --
5.1-1 $30,000, or the one-fourth of the dollar limitation currently in
effect under Section 415(b)(1)(A) of the Code; or
5.1-2 25 percent of the Participant's Total Compensation for such
limitation year.
For purposes of this Section 5.1 and the following Section 5.2, "annual
addition" means the sum for any year of (a) Employer contributions and
forfeitures allocable to a Participant under all plans (or portions thereof)
maintained by an Employer subject to Section 415(c) of the Code, (b) the
Participant's Employee contributions under all such plans (or portions thereof),
and (c) amounts described in Section 419A(d)(2) of the Code (relating to post-
retirement medical benefits of key Employees) or allocated to a pension plan
individual medical account described in Section 415(1) of the Code, to the
extent includible for purposes of Section 415(c)(2) of the Code. A
Participant's Employee contributions described in (a) above shall be determined
without regard to (i) any rollover contributions, (ii) any repayments of loans,
or (iii) any prior distributions repaid upon the exercise of buy-backs rights.
The $___________ and Code Section 415(b)(1)(A) limitations referred to shall,
for each limitation year, be automatically adjusted to the new dollar
limitations determined by the Commissioner of Internal Revenue for the calendar
year beginning in that limitation year. Notwithstanding the foregoing, if the
special limitations on annual additions described in Section 415(c)(6) of the
Code applies, the limitations described in this section shall be adjusted
accordingly. A "limitation year" means each 12 consecutive month period
beginning February 1.
5.2 Coordinated Limitation With Other Plans. For Plan Years commencing
----------------------------------------
prior to December 31, 1999, aside from the limitation prescribed by Section 5.1
with respect to the
10
<PAGE>
annual addition to a Participant's Accounts for any single limitation year, if a
Participant has ever participated in one or more defined benefit plans
maintained by an Employer or an affiliate, then the benefits provided under the
defined benefit plan on his account shall be limited on a cumulative basis so
that the sum of his defined contribution plan fraction and his defined benefit
plan fraction does not exceed one. For this purpose:
5.2-1 A Participant's defined contribution plan fraction with
respect to a Plan Year shall be a fraction, (i) the numerator of which is
the sum of the annual additions to his accounts under all defined
contribution plans (whether or not terminated) maintained by the Employer
for the current year and all prior limitation years (including annual
additions of the Participant's nondeductible employee contributions to all
defined benefit plans, whether or not terminated, maintained by an Employer,
and the annual additions attributable to all welfare benefit plans,
individual medical accounts, and simplified employee pensions maintained by
the Employer), and (ii) the denominator of which is the sum of the lesser of
the following amounts -A- and -B- determined for the current limitation year
and each prior limitation year of Service with an Employer: -A- is 1.25
times the dollar limitation determined under Section 415(c)(1)(A) of the
Code, or 1.0 times such dollar limitation if the Plan is top-heavy, and -B-
is 35 percent of the Participant's Total Compensation for such year. If the
Employee was a Participant as of the end of the first limitation year
beginning after ___________, 19__ in one or more defined contribution plans
maintained by an Employer which plan(s) were in existence on May 6, 1986,
and if the sum of this fraction and the defined benefit fraction (described
below) would otherwise exceed 1.0 under the terms of this Plan, the
numerator of this fraction will be adjusted. To affect this adjustment, an
amount equal to the product of the excess of the sum of the fractions over
1.0, multiplied by the denominator of this fraction shall be permanently
subtracted from the numerator of this fraction. This adjustment shall be
calculated using the fractions as they would be computed as of the end of
the last limitation year beginning before January 1, 1987, and disregarding
any changes in the terms and conditions of the Plan made after May 5, 1986,
but using the limitation applicable under Section 415 of the Code for the
first limitation year beginning on or after January 1, 1987.
5.2-2 A Participant's defined benefit plan fraction with respect
to a limitation year shall be a fraction, (i) the numerator of which is his
projected annual benefit payable at normal retirement under the Employers'
defined benefit plans, and (ii) the denominator of which is the lesser of
(a) 1.25 times $90,000, or 1.0 times such dollar limitation if the Plan is
top-heavy, and (b) 1.4 times the Participant's average Total Compensation
during his highest-paid three consecutive limitation years.
5.2-3. This subsection applies if, in addition to this Plan, a
Participant is covered under another qualified defined contribution plan or
a welfare benefit fund, as defined in Section 419(e) of the Code, maintained
by the Employer, or an individual medical account, as defined in Section
415(l)(2) of the Code, maintained by the Employer which provides a annual
addition during any limitation year. The annual additions which may be
credited to a Participant's account under this Plan for any such limitation
year will
11
<PAGE>
not exceed the maximum permissible amount (as determined under Section 5.1)
reduced by the annual additions credited to a Participant's account under
the other plans and welfare benefit funds for the same limitation year. If
the allocations to a Participant's Account otherwise required under this
Plan for any Plan Year would cause the limitations of Section 5.1 to be
exceeded for that Plan Year, contributions otherwise required with respect
to such Participant under this Plan, shall be reduced to the extent
necessary to comply with the limitations of Section 5.1; provided, however,
that in the event that the limitations of Section 5.1 shall be exceeded by
reason of the combined amounts contributed under all of the Employer's
defined contribution plans, it is intended that contributions made under the
Employer's other defined contribution plans be reduced first.
Notwithstanding the preceding, for Plan Years commencing after December 31,
1999, subsections 5.2-1 and 5.2-2 shall no longer be applicable.
5.3 Effect of Limitations. The Committee shall take whatever action
----------------------
may be necessary from time to time to assure compliance with the limitations set
forth in Sections 5.1 and 5.2. Specifically, the Committee shall see that each
Employer restrict its contributions for any Plan Year to an amount which, taking
into account the amount of available forfeitures, may be completely allocated to
the Participants consistent with those limitations. Where the limitations would
otherwise be exceeded by any Participant, further allocations to the Participant
shall be curtailed to the extent necessary to satisfy the limitations. Where an
excessive amount is contributed on account of a mistake as to one or more
Participants' compensation, or there is an amount of forfeitures which may not
be credited in the Plan Year in which it becomes available, the amount shall be
held in a suspense account to be allocated in lieu of any Employer contributions
in future years until it is eliminated, and to be returned to the Employer if it
cannot be credited consistent with these limitations before the termination of
the Plan.
5.4 Reserve
5.5 Limitations as to Certain Participants. Aside from the limitations
---------------------------------------
set forth in Section 5.1 and 5.2, in no event shall more than one-third of the
Employer contributions to the Plan be allocated to the Accounts of Highly
Compensated Employees. The Committee shall take whatever action may be
necessary from time to time to assure compliance with the limitations set forth
in this Section 5.5. Specifically, the Committee shall, beginning with the
Participants whose Cash Compensation (as defined in Section 4.3) amounts are in
excess of the limit under Section 401(a)(17) of the Code, reduce the amount of
Cash Compensation of such Highly Compensated Employees on a pro-rata basis per
individual that would otherwise be taken into account for purposes of allocating
benefits under Section 4.2 of this Plan. If, in order to satisfy this Section
5.5, such Participants' Cash Compensation amount per individual must be reduced
to an amount that is lower than the Cash Compensation amount of the next most
Highly Compensated Employee (the "breakpoint amount"), then, for purposes of
allocating benefits under Section 4.2 of the Plan, the Cash Compensation amounts
of all Participants shall be reduced to an amount not to exceed such breakpoint
amount.
12
<PAGE>
Section 6. Trust Fund and Its Investment.
------------------------------
6.1 Creation of Trust Fund. All amounts received under the Plan from
-----------------------
an Employer and investments shall be held as the Trust Fund pursuant to the
terms of this Plan and of the Trust Agreement between the Bank and the Trustee.
The benefits described in this Plan shall be payable only from the assets of the
Trust Fund, and none of the Bank, any other Employer, its board of directors or
trustees, its stockholders, its officers, its Employees, the Committee, and the
Trustee shall be liable for payment of any benefit under this Plan except from
the Trust Fund.
6.2 Stock Fund and Investment Fund. The Trust Fund held by the Trustee
-------------------------------
shall be divided into the Stock Fund, consisting entirely of Stock, and the
Investment Fund, consisting of all assets of the Trust other than Stock. The
Trustee shall have no investment responsibility for the Stock Fund, but shall
accept any Employer contributions made in the form of Stock, and shall acquire,
sell, exchange, distribute, and otherwise deal with and dispose of Stock in
accordance with the instructions of the Committee.
6.3 Acquisition of Stock. From time to time the Committee may, in its
---------------------
sole discretion, direct the Trustee to acquire Stock from the issuing Employer
or from shareholders, including shareholders who are or have been Employees,
Participants, or fiduciaries with respect to the Plan. The Trustee shall pay
for such Stock no more than its fair market value, which shall be determined
conclusively by the Committee pursuant to Section 12.4. The Committee may
direct the Trustee to finance the acquisition of Stock by incurring or assuming
indebtedness to the seller or another party which indebtedness shall be called
a "Stock Obligation". Any Stock Obligation shall be subject to the following
conditions and limitations:
6.3-1 A Stock Obligation shall be for a specific term, shall not
be payable on demand except in the event of default, and shall bear a
reasonable rate of interest.
6.3-2 A Stock Obligation may, but need not, be secured by a
collateral pledge of either the Stock acquired in exchange for the Stock
Obligation, or the Stock previously pledged in connection with a prior Stock
Obligation which is being repaid with the proceeds of the current Stock
Obligation. No other assets of the Plan and Trust may be used as collateral
for a Stock Obligation, and no creditor under a Stock Obligation shall have
any right or recourse to any Plan and Trust assets other than Stock
remaining subject to a collateral pledge.
6.3-3 Any pledge of Stock to secure a Stock Obligation must
provide for the release of pledged Stock in connection with payments on the
Stock Obligations in the ratio prescribed in Section 4.2.
6.3-4 Repayments of principal and interest on any Stock Obligation
generally shall be made by the Trustee from cash contributions designated
for such payments, from
13
<PAGE>
earnings on such contributions, and from cash dividends received on Stock
held in the Unallocated Stock Fund.
6.4 Participants' Option to Diversify. The Committee shall provide for
----------------------------------
a procedure under which each Participant may, during the first five years of a
certain six-year period, elect to have up to 25 percent of the value of his
Account committed to alternative investment options within the Investment Fund.
For the sixth year in this period, the Participant may elect to have up to 50
percent of the value of his Account committed to other investments. The six-
year period shall begin with the Plan Year following the first Plan Year in
which the Participant has both reached aged 55 and completed 10 years of
participation in the Plan; a Participant's election to diversify his Account
must be made within the 90-day period immediately following the last day of each
of the six Plan Years. The Committee shall see that the Investment Fund
includes a sufficient number of investment options to comply with Section
401(a)(28)(B) of the Code. The Trustee shall comply with any investment
directions received from Participants in accordance with the procedures adopted
from time to time by the Committee under this Section 6.4.
Section 7. Voting Rights and Dividends on Stock.
-------------------------------------
7.1 Voting and Tendering of Stock. The Trustee generally shall vote
------------------------------
all shares of Stock held under the Plan. However, if any Employer has
registration-type class of securities within the meaning of Section 409(e)(4) of
the Code, or if a matter submitted to the holders of the Stock involves a
merger, consolidation, recapitalization, reclassification, liquidation,
dissolution, or sale of substantially all assets of an entity, then (i) the
shares of Stock which have been allocated to Participants' Accounts shall be
voted by the Trustee in accordance with the Participants' written instructions,
and (ii) the Trustee shall vote any shares of Stock which have been allocated to
Participants' Accounts but for which no written instructions have been received
and any unallocated Stock in a manner calculated to most accurately reflect the
instructions it has received from Participants regarding the allocated Stock.
In the event no shares of Stock have been allocated to Participants' Accounts at
the time Stock is to be voted, each Participant shall be deemed to have one
share of Stock allocated to his or her Account for the sole purpose of providing
the Trustee with voting instructions. Notwithstanding any provision hereunder
to the contrary, all shares of Stock which have been allocated to Participants'
Accounts and for which the Trustee has received no written instructions and all
unallocated shares of Stock must be voted by the Trustee in a manner determined
by the Trustee to be solely in the interest of the Participants and
Beneficiaries. Whenever such voting rights are to be exercised, the Employers,
the Committee, and the Trustee shall see that all Participants and Beneficiaries
are provided with the same notices and other materials as are provided to other
holders of the Stock, and are provided with adequate opportunity to deliver
their instructions to the Trustee regarding the voting of Stock allocated to
their Accounts. The instructions of the Participants with respect to the voting
of allocated shares hereunder shall be confidential.
7.1-1 In the event of a tender offer, Stock shall be tendered by
the Trustee in the same manner as set forth above with respect to the voting
of Stock. Notwithstanding
14
<PAGE>
any provision hereunder to the contrary, Stock must be tendered by the
Trustee in a manner determined by the Trustee to be solely in the interest
of the Participants and Beneficiaries.
7.2 Dividends on Stock. Dividends on Stock which are received by the
-------------------
Trustee in the form of additional Stock shall be retained in the Stock Fund,
and shall be allocated among the Participant's Accounts and the Unallocated
Stock Fund in accordance with their holdings of the Stock on which the dividends
have been paid. Dividends on Stock credited to Participants' Accounts which are
received by the Trustee in the form of cash shall, at the direction of the
Company paying the dividends, either (i) be credited to the Accounts in
accordance with Section 8.3 and invested as part of the Investment Fund, (ii) be
distributed immediately to the Participants in proportion with the Participants'
Account balance; (iii) be distributed to the Participants within 90 days of the
close of the Plan Year in which paid in proportion with the Participants'
Account balance; or (iv) be used to repay principal and interest on the Stock
Obligation used to acquire Stock on which the dividends were paid. Dividends on
Stock held in the Unallocated Stock Fund which are received by the Trustee in
the form of cash shall be applied as soon as practicable to payments of
principal and interest under the Stock Obligation incurred with the purchase of
the Stock.
Section 8. Adjustments to Accounts.
------------------------
8.1 Adjustments for Transactions. An Employer contribution pursuant to
-----------------------------
Section 4.1 shall be credited to the Participants' Accounts as of the last day
of the Plan Year for which it is contributed. Stock released from the
Unallocated Stock Fund upon the Trust's repayment of a Stock Obligation
pursuant to Section 4.2 shall be credited to the Participants' Accounts as of
the last day of the Plan Year in which the repayment occurred. Any excess
amounts remaining from the use of, or the use of the proceeds of, a sale of
Stock from the Unallocated Stock Fund to repay a Stock Obligation shall be
allocated as of the last day of the Plan Year in which the repayment occurred
among the Participants' Accounts as earnings, in proportion to the opening
balance in each Account and shall not be deemed annual additions within the
meaning of Section 415(c)(2) of the Code. Any benefit which is paid to a
Participant or Beneficiary pursuant to Section 10 shall be charged to the
Participant's Account as of the first day of the Valuation Period in which it is
paid. Any forfeiture or restoral shall be charged or credited to the
Participant's Account as of the first day of the Valuation Period in which the
forfeiture or restoral occurs pursuant to Section 9.6.
8.2 Valuation of Investment Fund. As of each Valuation Date, the
-----------------------------
Trustee shall prepare a balance sheet of the Investment Fund, recording each
asset (including any contribution receivable from an Employer) and liability at
its fair market value. Any liability with respect to short positions or options
and any item of accrued income or expense and unrealized appreciation or
depreciation shall be included; provided, however, that such an item may be
estimated or excluded if it is not readily ascertainable unless estimating or
excluding it would result in a material distortion. The Committee shall then
determine the net gain or loss of the Investment Fund since the preceding
Valuation Date, which shall mean the entire income of the Investment Fund,
including realized and unrealized capital gains and losses, net of any expenses
to be
15
<PAGE>
charged to the general Investment Fund and excluding any contributions by the
Employer. The determination of gain or loss shall be consistent with the
balance sheets of the Investment Fund for the current and preceding Valuation
Dates.
8.3 Adjustments for Investment Experience. Any net gain or loss of the
--------------------------------------
Investment Fund during a Valuation Period, as determined pursuant to Section
8.2, shall be allocated as of the last day of the Valuation Period among the
Participants' Accounts in proportion to the opening balance in each Account, as
adjusted for benefit payments and forfeitures during the Valuation Period,
without regard to whatever Stock may be credited to an Account.
8.4 Adjustments for Capital Changes. In the event of any change in the
-------------------------------
outstanding shares of Stock by reason of any stock dividend or split,
recapitalization, merger, consolidation, spin-off, reorganization, combination
or exchange of shares, or other similar corporate change, or other increase or
decrease in such shares effected without receipt or payment of consideration by
the bank issuing the Stock, the Committee shall adjust the number of shares of
Stock allocated to the Participants' Accounts to prevent dilution or enlargement
of such Accounts.
Section 9. Vesting of Participants' Interests.
-----------------------------------
9.1 Deferred Vesting in Accounts. A Participant's vested interest in
-----------------------------
his Account shall be based on his Vesting Years in accordance with the following
table, subject to the balance of this Section 9:
<TABLE>
<CAPTION>
Vesting Years Percentage of Interest Vested
-------------- -----------------------------
<S> <C>
fewer than 1 0%
1 20%
2 40%
3 60%
4 80%
five or more 100%
</TABLE>
9.2 Computation of Vesting Years. For purposes of this Plan, a
-----------------------------
"Vesting Year" means a twelve (12) consecutive month period beginning with the
day the Employee first completes an Hour of Service. A Participant's subsequent
Vesting Years shall be the twelve (12) consecutive month periods coinciding with
the Plan Year commencing with the Plan Year which includes the first anniversary
of the date the Participant first completed an Hour of Service with the
Employer. However, a Participant's Vesting Years shall be computed subject to
the following conditions and qualifications:
(a) A Participant's vested interest in his Account accumulated
before a Break in Service shall be determined without regard to any Service
after the break. Notwithstanding the foregoing, in the event a Participant
has an eligibility computation period (as defined in Section 3.1 of the
Plan) during which he performs 500 or fewer Hours
16
<PAGE>
of Service (a "one year Break in Service"), and then returns to Service
prior to having a Break in Service, his Service performed both before and
after his break in employment shall be taken into account in determining his
Vesting Years. Generally, if a Participant has a Break in Service before
his interest in his Account has become vested to some extent, he shall lose
credit for any Vesting Year before the Break in Service. However, if a
Participant separates from Service before his interest in his Account has
become vested to some extent, and returns to Service after a Break in
Service, the Participant's Vesting Years both prior to and after the Break
in Service will count as Vesting Years for his Account accumulated after the
Break in Service if the number of the Participant's consecutive one year
Breaks in Service is less than the number of years of Service prior to the
Break in Service.
(b) Unless otherwise specifically excluded, a Participant's Vesting
Years shall include any period of active military duty to the extent
required by the Military Selective Service Act of 1967 (38 U.S.C. Section
2021).
9.3 Full Vesting Upon Certain Events. Notwithstanding Section 9.1, a
---------------------------------
Participant's interest in his Account shall fully vest on the Participant's
Normal Retirement Date, provided the Participant is in Service on or after that
date. The Participant's interest shall also fully vest in the event that his
Service is terminated by Disability or by death.
9.4 Full Vesting Upon Plan Termination. Notwithstanding Section 9.1, a
-----------------------------------
Participant's interest in his Account shall fully vest if he is in active
Service upon termination of this Plan or upon the permanent and complete
discontinuance of contributions to this Plan by his Employer. In the event of a
partial termination, the interest of each Participant who is in Service shall
fully vest with respect to that part of the Plan which is terminated.
9.5 Forfeiture, Repayment, and Restoral. If a Participant's Service
------------------------------------
terminates before his interest in his Account is fully vested, that portion
which has not vested shall be forfeited if he either (i) receives a distribution
of his entire vested benefit, or (ii) has a Break in Service. If a Participant
who has received his entire vested interest returns to Service before he has a
Break in Service, he may repay to the Trustee an amount equal to the
distribution. The Participant may repay such amount at any time within five
years after he has returned to Service. The amount shall be credited to his
Account as of the last day of the Plan Year in which it is repaid; an additional
amount equal to the portion of his Account which was previously forfeited shall
be restored to his Account at the same time from other Employees' forfeitures
and, if such forfeitures are insufficient, from a special contribution by his
Employer for that year. In the case of a terminated Participant who does not
receive a distribution of his entire vested interest and whose Service resumes
after a Break in Service, any undistributed balance from his prior participation
which was not forfeited shall be maintained as a fully vested subaccount with
his Account. If a portion of a Participant's Account is forfeited, assets other
that Stock must be forfeited before any Stock may be forfeited. In the case of
a Participant who has incurred a Break in Service and then returns to Service,
all years of Service after the Break in Service will be disregarded for the
purpose of vesting his Account accrued before the Break in Service, but
17
<PAGE>
both pre-Break and post-Break Service will count for the purpose of vesting the
Participant's Account that accrues after the Break in Service. If a
Participant's Service terminates prior to his Account having become vested, such
Participant shall be deemed to have received a distribution of his entire vested
interest as of the Valuation Date next following his termination of Service.
9.6 Accounting for Forfeitures. A forfeiture shall be charged to the
---------------------------
Participant's Account as of the first day of the first Valuation Period in which
the forfeiture becomes certain pursuant to Section 9.5. Except as otherwise
provided in that Section, a forfeiture shall be added to the contributions of
the terminated Participant's Employer which are to be credited to other
Participants pursuant to Section 4.1 as of the last day of the Plan Year in
which the forfeiture becomes certain.
9.7 Vesting and Nonforfeitability. A Participant's interest in his
------------------------------
Account which has become vested shall be nonforfeitable for any reason.
Section 10. Payment of Benefits.
--------------------
10.1 Benefits for Participants. A Participant whose Service ends for
--------------------------
any reason shall receive the vested portion of his Account in a single payment
on a date selected by the Committee. That date shall be on or before the 60th
day after the end of the Plan Year in which his Service ends. Notwithstanding
the foregoing, if the balance credited to his Account exceeds, or at the time of
any prior distribution exceeded, $3,500, his benefit shall not be paid before
the latest of his 65th birthday or the tenth anniversary in which he commenced
participation in the Plan, unless he elects an early payment date in a written
election filed with the Committee. A Participant may modify such an election at
any time, provided any new benefit payment date is at least 30 days after a
modified election is delivered to the Committee. Such an election is not valid
unless it is made after the Participant has received the required notice under
Section 1.411(a)-11(c) of the Income Tax Regulations that provides a general
description of the material features of a lump sum distribution and the
Participant's right to defer receipt of his benefit. The Notice shall be
provided no less than 30 days and no more than 90 days before the first day on
which all events have occurred which entitle the Participant to such benefit.
Written consent of the Participant to the distribution generally may not be made
within 30 days of the date the Participant receives the notice and shall not be
made more than 90 days from the date the Participant receives the notice.
However, a distribution may be made less than 30 days after the notice provided
under Section 1.411(a)-11(c) of the Income Tax Regulations is given, if:
(a) the Committee clearly informs the Participant that he has a right to
period of at least 30 days after receiving the notice to consider the decision
of whether or not to elect a distribution (and if applicable, a particular
distribution option), and
(b) the Participant, after receiving the notice, affirmatively elects a
distribution.
In all events, a Participant's benefits shall be paid by April 1st of the
calendar year following the calendar year in which he reaches age 70-1/2. A
Participant's benefits from that portion of his
18
<PAGE>
Account committed to the Investment Fund shall be calculated on the basis of the
most recent Valuation Date before the day of payment.
For Plan Years beginning after December 31, 1996, with respect to all
Participants other than those who are 5% owners within the meaning of Section
416 of the Code, such Participant's benefits shall be paid by April 1st of the
later of (i) the calendar year following the calendar year in which he reaches
age 70-1/2, or (ii) the calendar year in which he retires. With respect to all
Participants who are 5% owners within the meaning of Section 416 of the Code,
such Participants benefits shall be paid by April 1st of the calendar year
following the calendar year in which he reaches age 70-1/2.
10.2 Benefits on a Participant's Death. If a Participant dies before
----------------------------------
his benefits are paid pursuant to Section 10.1, the balance credited to his
Account shall be paid to his Beneficiary in a single distribution on or before
the 60th day after the end of the Plan Year in which he died. The benefits from
that portion of the Account committed to the Investment Fund shall be calculated
on the basis of the most recent Valuation Date before the date of payment.
If a married Participant dies before his benefit payments begin, then unless
he has specifically elected otherwise the Committee shall cause the balance in
his Account to be paid to his Spouse. No election by a married Participant of
a different Beneficiary shall be valid unless the election is accompanied by the
Spouse's written consent, which (i) must acknowledge the effect of the election,
(ii) must explicitly provide either that the designated Beneficiary may not
subsequently be changed by the Participant without the Spouse's further consent,
or that it may be changed without such consent, and (iii) must be witnessed by
the Committee, its representative, or a notary public. This requirement shall
not apply if the Participant establishes to the Committee's satisfaction that
the Spouse may not be located.
10.3 Marital Status. The Committee shall from time to time take
---------------
whatever steps it deems appropriate to keep informed of each Participant's
marital status. Each Employer shall provide the Committee with the most
reliable information in the Employer's possession regarding its Participants'
marital status, and the Committee may, in its discretion, require a notarized
affidavit from any Participant as to his marital status. The Committee, the
Plan, the Trustee, and the Employers shall be fully protected and discharged
from any liability to the extent of any benefit payments made as a result of the
Committee's good faith and reasonable reliance upon information obtained from a
Participant and his Employer as to his marital status.
10.4 Delay in Benefit Determination. If the Committee is unable to
-------------------------------
determine the benefits payable to a Participant or Beneficiary on or before the
latest date prescribed for payment pursuant to Section 10.1 or 10.2, the
benefits shall in any event be paid within 60 days after they can first be
determined, with whatever makeup payments may be appropriate in view of the
delay.
19
<PAGE>
10.5 Accounting for Benefit Payments. Any benefit payment shall be
--------------------------------
charged to the Participant's Account as of the first day of the Valuation Period
in which the payment is made.
10.6 Options to Receive and Sell Stock. Unless ownership of virtually
----------------------------------
all Stock is restricted to active Employees and qualified retirement plans for
the benefit of Employees pursuant to the certificates of incorporation or by-
laws of the Employers issuing Stock, a terminated Participant or the Beneficiary
of a deceased Participant may instruct the Committee to distribute the
Participant's entire vested interest in his Account in the form of Stock. In
that event, the Committee shall apply the Participant's vested interest in the
Investment Fund to purchase sufficient Stock from the Stock Fund or from any
owner of stock to make the required distribution. In all other cases, the
Participant's vested interest in the Stock Fund shall be distributed in shares
of Stock, and his vested interest in the Investment Fund shall be distributed in
cash.
Any Participant who receives Stock pursuant to Section 10.1, and any person
who has received Stock from the Plan or from such a Participant by reason of the
Participant's death or incompetency, by reason of divorce or separation from the
Participant, or by reason of a rollover contribution described in Section 402(c)
of the Code, shall have the right to require the Employer which issued the Stock
to purchase the Stock for its current fair market value (hereinafter referred to
as the "put right"). The put right shall be exercisable by written notice to
the Committee during the first 60 days after the Stock is distributed by the
Plan, and, if not exercised in that period, during the first 60 days in the
following Plan Year after the Committee has communicated to the Participant its
determination as to the Stock's current fair market value. However, the put
right shall not apply to the extent that the Stock, at the time the put right
would otherwise be exercisable, may be sold on an established market in
accordance with federal and state securities laws and regulations. If the put
right is exercised, the Trustee may, if so directed by the Committee in its sole
discretion, assume the Employer's rights and obligations with respect to
purchasing the Stock.
The Employer or the Trustee, as the case may be, may elect to pay for the
Stock in equal periodic installments, not less frequently than annually, over a
period not longer than five years from the 30th day after the put right is
exercised, with adequate security and interest at a reasonable rate on the
unpaid balance, all such terms to be set forth in a promissory note delivered to
the seller with normal terms as to acceleration upon any uncured default.
Nothing contained herein shall be deemed to obligate any Employer to
register any Stock under any federal or state securities law or to create or
maintain a public market to facilitate the transfer or disposition of any Stock.
The put right described herein may only be exercised by a person described in
the second preceding paragraph, and may not be transferred with any Stock to any
other person. As to all Stock purchased by the Plan in exchange for any Stock
Obligation, the put right be nonterminable. The put right for Stock acquired
through a Stock Obligation shall continue with respect to such Stock after the
Stock Obligation is repaid or the Plan ceases to be an employee stock ownership
plan. Except as provided above, in accordance with the provisions
20
<PAGE>
of Sections 54.4975-7(b)(4) of the Treasury Regulations, no Stock acquired with
the proceeds of a Stock Obligation may be subject to any put, call or other
option or buy-sell or similar arrangement while held by and when distributed
from the Plan, whether the Plan is then an employee stock ownership plan.
10.7 Restrictions on Disposition of Stock. Except in the case of Stock
-------------------------------------
which is traded on an established market, a Participant who receives Stock
pursuant to Section 10.1, and any person who has received Stock from the Plan or
from such a Participant by reason of the Participant's death or incompetency, by
reason of divorce or separation from the Participant, or by reason of a rollover
contribution described in Section 402(c) of the Code, shall, prior to any sale
or other transfer of the Stock to any other person, first offer the Stock to the
issuing Employer and to the Plan at its current fair market value. This
restriction shall apply to any transfer, whether voluntary, involuntary, or by
operation of law, and whether for consideration or gratuitous. Either the
Employer or the Trustee may accept the offer within 14 days after it is
delivered. Any Stock distributed by the Plan shall bear a conspicuous legend
describing the right of first refusal under this Section 10.7, as well as any
other restrictions upon the transfer of the Stock imposed by federal and state
securities laws and regulations.
10.8 Direct Transfer of Eligible Plan Distributions. A Participant or
----------------------------------------------
Beneficiary may direct that an "eligible rollover distribution" (as defined
below) included in such payment be paid directly to an "eligible retirement
plan" (as defined below).
To effect such a direct transfer, the Participant or Beneficiary must notify
the Committee that a direct transfer is desired and provide to the Committee the
eligible retirement plan to which the payment is to be made. Such notice shall
be made in such form and at such time as the Committee may prescribe. Upon
receipt of such notice, the Committee shall direct the Trustee to make a
trustee-to-trustee transfer of the eligible rollover distribution to the
eligible retirement plan so specified.
For purposes of this Section 10.8, an "eligible rollover distribution" shall
have the meaning set forth in Section 402(c)(4) of the Code and any regulations
promulgated thereunder. To the extent such meaning is not inconsistent with the
above references, an eligible rollover distribution shall mean any distribution
of all or any portion of the Participant's Account, except that such term shall
not include any distribution which is one of a series of substantially equal
periodic payments (not less frequently than annually) made (i) for the life (or
life expectancy) of the Participant or the joint lives (or joint life
expectancies) of the Participant and a designated Beneficiary, or (ii) for a
period of ten years or more. Further, the term "eligible rollover distribution
shall not include any distribution required to be made under Section 401(a)(9)
of the Code.
For purposes of this Section 10.8, an "eligible retirement plan" shall have
the meaning set forth in Section 402(c)(8) of the Code and any regulations
promulgated thereunder. To the extent such meaning is not inconsistent with the
above references, an eligible retirement plan shall mean: (i) an individual
retirement account described in Section 408(a) of the Code; (ii) an individual
21
<PAGE>
retirement annuity described in Section 408(b) of the Code (other than an
endowment contract), (iii) a qualified trust described in Section 401(a) of the
Code and exempt under Section 501(a) of the Code, and (iv) an annuity plan
described in Section 403(a) of the Code.
Section 11. Rules Governing Benefit Claims and Review of Appeals.
-----------------------------------------------------
11.1 Claim for Benefits. Any Participant or Beneficiary who qualifies
-------------------
for the payment of benefits shall file a claim for his benefits with the
Committee on a form provided by the Committee. The claim, including any
election of an alternative benefit form available under the Plan, if any, shall
be filed at least 30 days before the date on which the benefits are to begin.
If a Participant or Beneficiary fails to file a claim by the 30th day before the
date on which benefits become payable, he shall be presumed to have filed a
claim for payment for the Participant's benefits in the standard form prescribed
by Sections 10.1 or 10.2
11.2 Notification by Committee. Within 90 days after receiving a claim
--------------------------
for benefits (or within 180 days, if special circumstances require an extension
of time and written notice of the extension is given to the Participant or
Beneficiary within 90 days after receiving the claim for benefits), the
Committee shall notify the Participant or Beneficiary whether the claim has been
approved or denied. If the Committee denies a claim in any respect, the
Committee shall set forth in a written notice to the Participant or Beneficiary:
(i) each specific reason for the denial;
(ii) specific references to the pertinent Plan provisions on which
the denial is based;
(iii) a description of any additional material or information which
could be submitted by the Participant or Beneficiary to support his
claim, with an explanation of the relevance of such information;
and
(iv) an explanation of the claims review procedures set forth in
Section 11.3.
11.3 Claims Review Procedure. Within 60 days after a Participant or
-----------------------
Beneficiary receives notice from the Committee that his claim for benefits has
been denied in any respect, he may file with the Committee a written notice of
appeal setting forth his reasons for disputing the Committee's determination.
In connection with his appeal the Participant or Beneficiary or his
representative may inspect or purchase copies of pertinent documents and records
to the extent not inconsistent with other Participants' and Beneficiaries'
rights of privacy. Within 60 days after receiving a notice of appeal from a
prior determination (or within 120 days, if special circumstances require an
extension of time and written notice of the extension is given to the
Participant or Beneficiary and his representative within 60 days after receiving
the notice of appeal), the Committee shall furnish to the Participant or
Beneficiary and his representative, if any, a written statement of the
Committee's final decision with respect to his claim, including the reasons for
such decision and the particular Plan provisions upon which it is based.
22
<PAGE>
Section 12. The Committee and Its Functions.
--------------------------------
12.1 Authority of Committee. The Committee shall be the "plan
-----------------------
administrator" within the meaning of ERISA and shall have exclusive
responsibility and authority to control and manage the operation and
administration of the Plan, including the interpretation and application of its
provisions, except to the extent such responsibility and authority are otherwise
specifically (i) allocated to the Company, the Employers, or the Trustee under
the Plan and Trust Agreement, (ii) delegated in writing to other persons by the
Company, the Employers, the Committee, or the Trustee, or (iii) allocated to
other parties by operation of law. The Committee shall have exclusive
responsibility regarding decisions concerning the payment of benefits under the
Plan. The Committee shall have full investment responsibility with respect to
the Investment Fund except to the extent, if any, specifically provided in the
Trust Agreement. In the discharge of its duties, the Committee may employ
accountants, actuaries, legal counsel, and other agents (who also may be
employed by an Employer or the Trustee in the same or some other capacity) and
may pay their reasonable expenses and compensation.
12.2 Identity of Committee. The Committee shall consist of three or
----------------------
more individuals selected by the Company. Any individual, including a director,
trustee, shareholder, officer, or Employee of an Employer, shall be eligible to
serve as a member of the Committee. The Bank shall have the power to remove any
individual serving on the Committee at any time without cause upon 10 days
written notice, and any individual may resign from the Committee at any time
upon 10 days written notice to the Company. The Company shall notify the
Trustee of any change in membership of the Committee.
12.3 Duties of Committee. The Committee shall keep whatever records may
--------------------
be necessary to implement the Plan and shall furnish whatever reports may be
required from time to time by the Company. The Committee shall furnish to the
Trustee whatever information may be necessary to properly administer the Trust.
The Committee shall see to the filing with the appropriate government agencies
of all reports and returns required of the plan Committee under ERISA and other
laws.
Further, the Committee shall have exclusive responsibility and authority
with respect to the Plan's holdings of Stock and shall direct the Trustee in all
respects regarding the purchase, retention, sale, exchange, and pledge of Stock
and the creation and satisfaction of Stock Obligations. The Committee shall at
all times act consistently with the Company's long-term intention that the Plan,
as an employee stock ownership plan, be invested primarily in Stock. Subject to
the direction of the Committee with respect to Stock Obligations pursuant to the
provision of Section 4.2, and subject to the provisions of Sections 6.4 and 10.6
as to Participants' rights under certain circumstances to have their Accounts
invested in Stock or in assets other than Stock, the Committee shall determine
in its sole discretion the extent to which assets of the Trust shall be used to
repay Stock Obligations, to purchase Stock, or to invest in other assets to be
selected by the Committee or an investment manager. No provision of the Plan
relating to the allocation or vesting of any interests in the Stock Fund or the
Investment Fund shall restrict the Committee from changing any holdings of the
Trust, whether the changes involve an increase or
23
<PAGE>
a decrease in the Stock or other assets credited to Participants' Accounts. In
determining the proper extent of the Trust's investment in Stock, the Committee
shall be authorized to employ investment counsel, legal counsel, appraisers, and
other agents to pay their reasonable expenses and compensation.
12.4 Valuation of Stock. If the valuation of any Stock is not
-------------------
established by reported trading on a generally recognized public market, the
Committee shall have the exclusive authority and responsibility to determine its
value for all purposes under the Plan. Such value shall be determined as of
each Valuation Date, and on any other date as of which the Plan purchases or
sells such Stock. The Committee shall use generally accepted methods of valuing
stock of similar corporations for purposes of arm's length business and
investment transactions, and in this connection the Committee shall obtain, and
shall be protected in relying upon, the valuation of such Stock as determined by
an independent appraiser experienced in preparing valuations of similar
businesses.
12.5 Compliance with ERISA. The Committee shall perform all acts
----------------------
necessary to comply with ERISA. Each individual member or employee of the
Committee shall discharge his duties in good faith and in accordance with the
applicable requirements of ERISA.
12.6 Action by Committee. All actions of the Committee shall be
--------------------
governed by the affirmative vote of a number of members which is a majority of
the total number of members currently appointed, including vacancies. The
members of the Committee may meet informally and may take any action without
meeting as a group.
12.7 Execution of Documents. Any instrument executed by the Committee
-----------------------
shall be signed by any member or employee of the Committee.
12.8 Adoption of Rules. The Committee shall adopt such rules and
------------------
regulations of uniform applicability as it deems necessary or appropriate for
the proper administration and interpretation of the Plan.
12.9 Responsibilities to Participants. The Committee shall determine
---------------------------------
which Employees qualify to enter the Plan. The Committee shall furnish to each
eligible Employee whatever summary plan descriptions, summary annual reports,
and other notices and information may be required under ERISA. The Committee
also shall determine when a Participant or his Beneficiary qualifies for the
payment of benefits under the Plan. The Committee shall furnish to each such
Participant or Beneficiary whatever information is required under ERISA (or is
otherwise appropriate) to enable the Participant or Beneficiary to make whatever
elections may be available pursuant to the provisions of Sections 6 and 10, and
the Committee shall provide for the payment of benefits in the proper form and
amount from the assets of the Trust Fund. The Committee may decide in its sole
discretion to permit modifications of elections and to defer or accelerate
benefits to the extent consistent with applicable law and the best interests of
the individuals concerned.
24
<PAGE>
12.10 Alternative Payees in Event of Incapacity. If the Committee finds
------------------------------------------
at any time that an individual qualifying for benefits under this Plan is a
minor or is incompetent, the Committee may direct the benefits to be paid, in
the case of a minor, to his parents, his legal guardian, a custodian for him
under the Uniform Transfers to Minors Act, or the person having actual custody
of him, or, in the case of an incompetent, to his Spouse, his legal guardian, or
the person having actual custody of him, the payments to be used for the
individual's benefit. The Committee and the Trustee shall not be obligated to
inquire as to the actual use of the funds by the person receiving them under
this Section 12.10, and any such payment shall completely discharge the
obligations of the Plan, the Trustee, the Committee, and the Employers to the
extent of the payment.
12.11 Indemnification by Employers. Except as separately agreed in
-----------------------------
writing, the Committee, and any member or employee of the Committee, shall be
indemnified and held harmless by the Employers, jointly and severally, to the
fullest extent permitted by law against any and all costs, damages, expenses,
and liabilities reasonably incurred by or imposed upon it or him in connection
with any claim made against it or him or in which it or he may be involved by
reason of its or his being, or having been, the Committee, or a member or
employee of the Committee, to the extent such amounts are not paid by insurance.
12.12 Nonparticipation by Interested Member. Any member of the Committee
--------------------------------------
who also is a Participant in the Plan shall take no part in any determination
specifically relating to his own participation or benefits, unless his
abstention would leave the Committee incapable of acting on the matter.
Section 13. Adoption, Amendment, or Termination of the Plan.
------------------------------------------------
13.1 Adoption of Plan by Other Employers. With the consent of the
------------------------------------
Company, any entity may become a participating Employer under the Plan by (i)
taking such action as shall be necessary to adopt the Plan, (ii) becoming a
party to the Trust Agreement establishing the Trust Fund, and (iii) executing
and delivering such instruments and taking such other action as may be necessary
or desirable to put the Plan into effect with respect to the entity's Employees.
13.2 Adoption of Plan by Successor. In the event that any Employer
------------------------------
shall be reorganized by way of merger, consolidation, transfer of assets or
otherwise, so that an entity other than an Employer shall succeed to all or
substantially all of the Employer's business, the successor entity may be
substituted for the Employer under the Plan by adopting the Plan and becoming a
party to the Trust Agreement. Contributions by the Employer shall be
automatically suspended from the effective date of any such reorganization until
the date upon which the substitution of the successor entity for the Employer
under the Plan becomes effective. If, within 90 days following the effective
date of any such reorganization, the successor entity shall not have elected to
become a party to the Plan, or if the Employer shall adopt a plan of complete
liquidation other than in connection with a reorganization, the Plan shall be
automatically terminated with respect to Employees of the Employer as of the
close of business on the 90th day
25
<PAGE>
following the effective date of the reorganization, or as of the close of
business on the date of adoption of a plan of complete liquidation, as the case
may be.
13.3 Plan Adoption Subject to Qualification. Notwithstanding any other
---------------------------------------
provision of the Plan, the adoption of the Plan and the execution of the Trust
Agreement are conditioned upon their being determined initially by the Internal
Revenue Service to meet the qualification requirements of Section 401(a) of the
Code, so that the Employers may deduct currently for federal income tax purposes
their contributions to the Trust and so that the Participants may exclude the
contributions from their gross income and recognize income only when they
receive benefits. In the event that this Plan is held by the Internal Revenue
Service not to qualify initially under Section 401(a) of the Code, the Plan may
be amended retroactively to the earliest date permitted by U.S. Treasury
Regulations in order to secure qualification under Section 401(a) of the Code.
If this Plan is held by the Internal Revenue Service not to qualify initially
under Section 401(a) of the Code, either as originally adopted or as amended,
each Employer's contributions to the Trust under this Plan (including any
earnings thereon) shall be returned to it and this Plan shall be terminated.
In the event that this Plan is amended after its initial qualification and the
Plan as amended is held by the Internal Revenue Service not to qualify under
Section 401(a) of the Code, the amendment may be modified retroactively to the
earliest date permitted by U.S. Treasury Regulations in order to secure approval
of the amendment under Section 401(a) of the Code.
13.4 Right to Amend or Terminate. The Company intends to continue this
----------------------------
Plan as a permanent program. However, each participating Employer separately
reserves the right to suspend, supersede, or terminate the Plan at any time and
for any reason, as it applies to that Employer's Employees, and the Company
reserves the right to amend, suspend, supersede, merge, consolidate, or
terminate the Plan at any time and for any reason, as it applies to the
Employees of all Employers. No amendment, suspension, supersession, merger,
consolidation, or termination of the Plan shall reduce any Participant's or
Beneficiary's proportionate interest in the Trust Fund, or shall divert any
portion of the Trust Fund to purposes other than the exclusive benefit of the
Participants and their Beneficiaries prior to the satisfaction of all
liabilities under the Plan. Except as is required for purposes of compliance
with the Code or ERISA, each as amended from time to time, neither the
provisions of Section 4.1 and 4.2 relating to the crediting of contributions,
forfeitures and shares of Stock released from the Unallocated Stock Fund, nor
any other provision of the Plan relating to the allocation of benefits to
Participants, may be amended more frequently than once every six months.
Moreover, there shall not be any transfer of assets to a successor plan or
merger or consolidation with another plan unless, in the event of the
termination of the successor plan or the surviving plan immediately following
such transfer, merger, or consolidation, each participant or beneficiary would
be entitled to a benefit equal to or greater than the benefit he would have
been entitled to if the plan in which he was previously a participant or
beneficiary had terminated immediately prior to such transfer, merger, or
consolidation. Following a termination of this Plan by the Bank, the Trustee
shall continue to administer the Trust and pay benefits in accordance with the
Plan as amended from time to time and the Committee's instructions.
26
<PAGE>
Section 14. Miscellaneous Provisions.
-------------------------
14.1 Plan Creates No Employment Rights. Nothing in this Plan shall be
----------------------------------
interpreted as giving any Employee the right to be retained as an Employee by an
Employer, or as limiting or affecting the rights of an Employer to control its
Employees or to terminate the Service of any Employee at any time and for any
reason, subject to any applicable employment or collective bargaining
agreements.
14.2 Nonassignability of Benefits. No assignment, pledge, or other
-----------------------------
anticipation of benefits from the Plan will be permitted or recognized by the
Employers, the Committee, or the Trustee. Moreover, benefits from the Plan
shall not be subject to attachment, garnishment, or other legal process for
debts or liabilities of any Participant or Beneficiary, to the extent permitted
by law. This prohibition on assignment or alienation shall apply to any
judgment, decree, or order (including approval of a property settlement
agreement) which relates to the provision of child support, alimony, or property
rights to a present or former Spouse, child or other dependent of a Participant
pursuant to a State domestic relations or community property law, unless the
judgment, decree, or order is determined by the Committee to be a qualified
domestic relations order within the meaning of Section 414(p) of the Code.
14.3 Limit of Employer Liability. The liability of the Employers with
----------------------------
respect to Participants under this Plan shall be limited to making contributions
to the Trust from time to time, in accordance with Section 4.
14.4 Treatment of Expenses. All expenses incurred by the Committee and
----------------------
the Trustee in connection with administering this Plan and Trust Fund shall be
paid by the Trustee from the Trust Fund to the extent the expenses have not been
paid or assumed by the Employers or by the Trustee.
14.5 Number and Gender. Any use of the singular shall be interpreted to
------------------
include the plural, and the plural the singular. Any use of the masculine,
feminine, or neuter shall be interpreted to include the masculine, feminine, or
neuter, as the context shall require.
14.6 Nondiversion of Assets. Except as provided in Sections 5.3 and
-----------------------
13.3, under no circumstances shall any portion of the Trust Fund be diverted to
or used for any purpose other than the exclusive benefit of the Participants and
their Beneficiaries prior to the satisfaction of all liabilities under the Plan.
14.7 Separability of Provisions. If any provision of this Plan is held
---------------------------
to be invalid or unenforceable, the other provisions of the Plan shall not be
affected but shall be applied as if the invalid or unenforceable provision had
not been included in the Plan.
14.8 Service of Process. The agent for the service of process upon the
-------------------
Plan shall be the president of the Company, or such other person as may be
designated from time to time by the Company.
27
<PAGE>
14.9 Governing State Law. This Plan shall be interpreted in accordance
--------------------
with the laws of California to the extent those laws are applicable under the
provisions of ERISA.
Section 15. Top-Heavy Provisions.
---------------------
15.1 Determination of Top-Heavy Status. The Committee shall determine
----------------------------------
on a regular basis whether each Plan Year is or is not a "Top-Heavy Year" for
purposes of implementing the provisions of Sections 15.2, and 15.3, which apply
only to the extent the Plan is top-heavy or super top-heavy within the meaning
of Section 416 of the Code and the Treasury Regulations promulgated thereunder.
In making this determination, the Committee shall use the following definitions
and principles:
15.1-1 The "Employer" includes all business entities which are
considered commonly controlled or affiliated within the meaning of Sections
414(b), 414(c), and 414(m) of the Code.
15.1-2 The "plan aggregation group" includes each qualified
retirement plan maintained by the Employer (i) in which a Key Employee is a
Participant during the Plan Year, (ii) which enables any plan described in
clause (i) to satisfy the requirements of Section 401(a)(4) or 410 of the
Code, or (iii) which provides contributions or benefits comparable to those
of the plans described in clauses (i) and (ii) and which is designated by
the Committee as part of the plan aggregation group.
15.1-3 The "determination date," with respect to the first Plan
Year of any plan, means the last day of that Plan Year, and with respect to
each subsequent Plan Year, means the last day of the preceding Plan Year. If
any other plan has a determination date which differs from this Plan's
determination date, the top-heaviness of this Plan shall be determined on
the basis of the other plan's determination date falling within the same
calendar years as this Plan's determination date.
15.1-4 A "Key Employee," with respect to a Plan Year, means an
Employee who at any time during the five years ending on the top-heavy
determination date for the Plan Year has received compensation from an
Employer and has been (i) an officer of the Employer having Total
Compensation greater than 50 percent of the limit then in effect under
Section 415(b)(1)(A) of the Code, (ii) one of the 10 Employees owning the
largest interests in the Employer having Total Compensation greater than the
limit then in effect under Section 415(c)(1)(A) of the Code, (iii) an owner
of more than five percent of the outstanding equity interest or the
outstanding voting interest in any Employer, or (iv) an owner of more than
one percent of the outstanding equity interest or the outstanding voting
interest in an Employer whose Total Compensation exceeds $150,000. In
determining which individuals are Key Employees, the rules of Section 416(i)
of the Code and Treasury Regulations promulgated thereunder shall apply.
The Beneficiary of a Key Employee shall also be considered a Key Employee.
28
<PAGE>
15.1-5 A "Non-key Employee" means an Employee who at any time
during the five years ending on the top-heavy determination date for the
Plan Year has received compensation from an Employer and who has never been
a Key Employee, and the Beneficiary of any such Employee.
15.1-6 The "aggregated benefits" for any Plan Year means (i) the
adjusted account balances in defined contribution plans on the determination
date, plus (ii) the adjusted value of accrued benefits in defined benefit
plans, calculated as of the annual valuation date coinciding with or next
preceding the determination date, with respect to Key Employees and Non-key
Employees under all plans within the plan aggregation group which includes
this Plan. For this purpose, the "adjusted account balance" for and the
"adjusted value of accrued benefit" for any Employee shall be increased by
all Plan distributions made with respect to the Employee during the five
years ending on the determination date. Further, the adjusted account
balance under a plan shall not include any amount attributable to a rollover
contribution or similar transfer to the plan initiated by an Employee and
made after 1983, unless both plans involved are maintained by the Employer,
in which event the transferred amount shall be counted in the transferee
plan and ignored for all purposes in the transferor plan. Finally, the
adjusted value of accrued benefits under any defined benefit plan shall be
determined by assuming whichever actuarial assumptions were applied by the
Pension Benefit Guaranty Corporation to determine the sufficiency of plan
assets for plans terminating on the valuation date.
15.1-7 This Plan shall be "top-heavy" for any Plan Year in which
the aggregated benefits of the Key Employees exceed 60 percent of the total
aggregated benefits for both Key Employees and Non-key Employees.
15.1-8 This Plan shall be "super top-heavy" for any Plan Year in
which the aggregated benefits of the Key Employees exceed 90 percent of the
total aggregated benefits for both Key Employees and Non-key Employees.
15.1-9 A "Top-Heavy Year" means a Plan Year in which the Plan is
top-heavy.
15.2 Minimum Contributions. For any Top-Heavy Year, each Employer shall
----------------------
make a special contribution on behalf of each Participant to the extent that the
total allocations to his Account pursuant to the provisions of Section 4 is less
than the lesser of (i) four percent of his Total Compensation for that year, or
(ii) the highest ratio of such allocation to Total Compensation received by any
Key Employee for that year. For purposes of the special contribution of this
Section 15.2, a Key Employee's Total Compensation shall include amounts the Key
Employee elected to defer under a qualified 401(k) arrangement. Such a special
contribution shall be made on behalf of each Participant who is employed by an
Employer on the last day of the Plan Year, regardless of the number of his Hours
of Service, and shall be allocated to his Account.
29
<PAGE>
For any Plan Year when (1) the Plan is top-heavy and (2) a Non-key
Employee is a Participant in both this Plan and a defined benefit plan included
in the plan aggregation group which is top heavy, the sum of the Employer
contributions and forfeitures allocated to the Account of each such Non-key
Employee shall be equal to at least five percent (5%) of such Non-key Employee's
Total Compensation for that year.
15.3 Minimum Vesting. For any Plan Year in which this Plan is top-heavy,
---------------
as determined under this Section 15, the Vesting Schedule in Section 9.1 will be
followed, as such schedule already satisfies the requirements of Section 416 of
the Code.
30
<PAGE>
EXHIBIT 10.7
FORM OF LIFE FINANCIAL
EMPLOYEE STOCK PURCHASE PLAN
1. General
-------
The Life Financial Employee Stock Purchase Plan (the "Plan") offers a
convenient and economical way for eligible employees of Life Financial Corp.
(the "Company") to commence or increase their ownership of shares of the
Company's Common Stock. Once an employee is enrolled as a participant of the
Plan, his payroll deductions will be used to purchase new issue Common Stock
under the terms of the Plan. The participant pays no brokerage commissions or
service charges for purchases made under the Plan.
The Plan is not subject to the provisions of the Employee Retirement Income
Security Act of 1974.
2. Administration
--------------
The Company's Board of Directors has appointed a committee ("Committee")
composed of ____________ to administer the Plan and make purchases of Common
Stock as agent for the participants. The Board of Directors has the authority to
make changes in the Committee, or to appoint itself to administer the Plan, at
any time. Until changed by further notice, any notices or communications to the
Committee should be directed to ______________________.
If an eligible employee decides to participate in the Plan, the Committee
will keep a continuous record of his participation and send him a statement of
his account under the Plan for each month in which a purchase of Common Stock
for him takes place. The Committee will also hold and act as custodian of shares
purchased under the Plan. This will relieve participants of the responsibility
for safekeeping of multiple certificates for shares purchased and protect
against loss, theft or destruction of stock certificates. Normally, certificates
for shares purchased under the Plan will not be issued to participants. The
number of shares credited to a participant's account under the Plan will be
shown on his statement of account. However, certificates for any number of whole
shares credited to a participant's account under the Plan will be issued to him
upon his written request to the Committee, delivered to the Company's address.
In addition, any time that more than 50 shares are credited to a participant's
account, a certificate for 50 shares will be issued to the participant. In
either case, any remaining shares will continue to be credited to the
participant's account. Certificates for fractional share interests will not be
issued.
The Committee reserves the right to interpret and regulate the Plan. The
Committee may establish such procedures and make such other provisions for the
administration and operation of the Plan as it deems appropriate to give effect
to its purpose.
<PAGE>
3. Eligibility
-----------
As of Jan 1, 1997, the effective date of the Plan, all regular, full-
time employees of the Company and of any corporation ("Subsidiary") that, along
with the Company, is a member of a controlled group of corporations (as defined
in Section 1563 of the Internal Revenue Code) who have been so employed for at
least 12 months, are eligible to participate in the Plan. Thereafter, each
employee of the Company or subsidiary will become eligible as of the last day of
the pay period in which he completes 12 months of employment. For these
purposes, an employee will receive credit for a month of employment if he works
at least 20 days in a calendar month, counting vacations and authorized leaves
of absence, and will receive credit for a year of employment after he completes
12 months of employment, whether or not those months of employment were
consecutive.
4. Election to Participate
-----------------------
An eligible employee may join the Plan by completing the Authorization Card
provided by the Company and returning it to the Committee. Authorization Cards
will be furnished to eligible employees at any time upon request to the Company.
An eligible employee may join the Plan at any time.
5. Payroll Deductions
------------------
The Authorization Card directs the Company to pay to the Committee the
amount withheld from the participant's paycheck. The Authorization Card also
directs the Committee to use these payments to purchase new issue shares of
Common Stock.
After an Authorization Card has been received by the Committee and the
authority for the payroll deductions has been noted on the Company's payroll
records, the Company will withhold from a participant's paycheck the amount
authorized by the participant. The withholding will be made each month from the
paycheck for the first pay period ending in that month. The amounts withheld
from all participants' paychecks will be pooled and forwarded to the Committee
to buy new issue shares of Common Stock for the accounts of all participants
under the Plan on the next "Investment Date" (the first day on which the
National Market System of the Nasdaq Stock Market is open for trading in each
month).
The payroll deduction authorizations are effective for an indefinite
period of time, until the termination of the Plan. The employee will specify on
the Authorization Card the monthly amount to be withheld from his pay.
Deductions may be authorized in even multiples of $5.00 from a minimum of $10.00
to a maximum of $50.00. No interest will be paid on payroll deduction amounts.
2
<PAGE>
The amount of a participant's payroll deductions can be revised, changed,
or terminated by the participant at any time by written notice to the Committee.
An Authorization Card should be used for these purposes. Commencement, revision
or termination of deductions will become effective as soon as practicable after
an employee's request is received by the Committee.
6. Purchase Price
--------------
The price of the shares bought with the participant's payroll deductions
will be _______% of the average of the high and low prices for the Company's
Common Stock on the Composite Tape as properly reported in the _______ Edition
of The Wall Street Journal for the Investment Date on which the shares are
purchased. If no trading occurs in the Company's Common Stock on the Investment
Date, the purchase price will be the average of the high and low prices on the
next preceding day on which sales of Common Stock occur on the National Market
System of the Nasdaq Stock Market or such other exchange on which the Common
Stock is listed. Any fraction of a cent will be rounded up.
7. Number of Shares Purchased
--------------------------
On each Investment Date, accumulated payroll deductions from all
participants will be pooled and used to purchase new issue shares of Common
Stock for the accounts of the participants. The maximum number of whole shares
will be purchased. Any payroll deductions remaining after purchase of such
maximum number of whole shares will be retained and applied to the purchase of
shares on the next Investment Date. Each participant's account will be credited
with his pro rata share (computed to four decimal places) of the shares
purchased and any additional payroll deductions which have been accumulated. The
number of shares credited to each participant's account will depend on the
amount of the participant's payroll deductions and the price of the shares
determined as provided under the heading "Purchase Price."
8. Fees and Expenses
-----------------
Participants will incur no brokerage commissions or service charges for
purchases made under the Plan. Certain charges as described under the heading
"Withdrawal" may be incurred upon a participant's withdrawal from the plan or
upon termination of the Plan.
9. Withdrawal
----------
A participant may withdraw from the Plan at any time.
To withdraw from the Plan, a participant must notify the Committee in
writing of his withdrawal. In the event a participant withdraws, or in the event
of the termination of the Plan, certificates for whole shares credited to the
account of the withdrawing participant, or all participants in the case of a
termination of the Plan, will be delivered by the Committee and a cash payment
will be made for the sale price (less brokerage commission and transfer taxes,
if any) of any fractional share interest and any additional payroll deductions
credited to the account
3
<PAGE>
of the withdrawing participant, or all participants in the case of a termination
of the Plan. The Committee may establish such equitable arrangements for the
sale of fractional share interests as it shall deem appropriate. As an
alternative to receiving certificates for whole shares, a participant may
request the Committee to sell all of the shares held in his account under the
Plan. The proceeds from the sale, less any brokerage commissions and any
transfer taxes, will be remitted to him. Sale requests may be accumulated and
sales transactions, if necessary, will occur at least every twenty-five business
days.
If a request to withdraw is received by the Committee at least five
business days prior to any Investment Date, the amount of the participant's
payroll deductions which would otherwise have been invested on such Investment
Date will be repaid to him as soon as practicable. If a request to withdraw is
received by the Committee within five business days prior to any Investment
Date, the amount of the payroll deductions scheduled to be invested on such
Investment Date will be so invested. In either event, no subsequent payroll
deductions will be made from the paychecks of the employee, unless he completes
a new Authorization Card providing for such deductions.
10. Voting and Tendering of Shares
------------------------------
Each participant will have authority to direct the Committee in the manner
of voting the number of whole shares held in his account. The aggregate number
of remaining shares representing fractional share interest under all
participants' accounts shall be voted by the Committee in its sole discretion.
In the event that a tender offer occurs with respect to shares held under
the Plan, the Committee shall give each participant the opportunity to direct,
on a confidential basis, whether the whole shares held in his account shall be
tendered. The Committee shall tender fractional shares as nearly as possible in
the same proportion as whole shares.
Whole shares as to which no direction is received from participants will
not be voted or tendered as the case may be.
11. Cash Dividends
--------------
Cash dividends paid on shares credited to a participant's account will be
paid to the participant as soon as practicable following the dividend payment
date. Dividend amounts payable to participants will be rounded to the nearest
whole cent in the case of fractional share interests.
12. Stock Dividends, Stock Splits, or Rights Offering
-------------------------------------------------
Any shares distributed by the Company as a stock dividend on shares
credited to a participant's account under the Plan, or upon any split of such
shares, will be credited to his account.
4
<PAGE>
13. Authorized Shares
-----------------
The Company has reserved _______ shares of Common Stock for issuance under
the Plan. Unless terminated earlier by the Company, the Plan will terminate when
all such shares have been purchased by participants. If, on any Investment Date,
there are insufficient shares remaining to fill all purchases then to be made,
such shares as are available shall be allocated on a pro rata basis among
purchasing participants.
14. Amendments and Termination
--------------------------
Although the Company intends to continue the Plan as long as Common Stock
reserved for issuance under it remains, the Company reserves the right to
suspend, modify or terminate the Plan at any time. Any such suspension,
modification, or termination shall not affect a participant's right to shares of
Common Stock already purchased for him (except that the Company may take any
action necessary to comply with applicable law). Upon the termination of the
Plan, the Company shall return to participants their accumulated payroll
deductions as soon as practicable.
15. Reports
-------
Each participant will receive a statement of his account for each month in
which a purchase of Common Stock for his account takes place. Participants will
also receive the Annual Report for the Plan, and communications sent to other
stockholders, including the Annual Report of the Company, and its Notice of
Annual Meeting and Proxy Statement. Participants will receive information
necessary for reporting income realized by them under the Plan.
16. Withholding
-----------
All taxes subject to withholding payable with respect to the amount of each
participant's payroll deductions under the Plan will be deducted from the
participant's salary and will not reduce the amounts to be paid to the
Committee.
5
<PAGE>
EXHIBIT 16.1
[LETTERHEAD OF GRANT THORNTON LLP APPEARS HERE]
March 26, 1997
Securities and Exchange Commission
Division of Corporate Finance
Washington D.C. 20549
Re: Life Financial Corp., Amendment No. 1 to the Form S-1
File No. 333-20497
Dear Sir or Madam:
We have read the first two paragraphs under the caption "Changes in Accountants"
in the Prospectus accompanying the Amendment No. 1 to the Form S-1 filed by Life
Financial Corp. (File No. 333-20497) relating to the change of independent
auditors made on October 24, 1996. With respect to the comments made in such
paragraphs, we agree with the statements contained therein.
Very truly yours,
/s/ GRANT THORNTON LLP
- ----------------------
GRANT THORNTON LLP
<PAGE>
EXHIBIT 16.2
March 26, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
Ladies and Gentlemen:
We have read the section titled "Change in Accountants" set forth in the
Prospectus which is a part of Amendment No. 1 to the Registration Statement on
Form S-1 of Life Financial Corporation dated March 26, 1997, and are in
agreement with the statements contained in paragraphs 3 and 4 therein.
Yours very truly,
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We have issued our report dated February 8, 1996, (except for the "Earnings
per Share" paragraph of Note 1, as to which the date is March 29, 1996)
accompanying the financial statements of Life Savings Bank, Federal Savings
Bank contained in the Pre-effective Amendment No. 1 to the Registration
Statement on Form S-1 and Prospectus included therein. We consent to the use
of the aforementioned report in the Amendment No. 1 to Registration Statement
on Form S-1 and Prospectus included therein, and to the use of our name as it
appears under the captions "Experts" and "Changes in Accountants."
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Irvine, California
March 26, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-1 of our report dated
January 31, 1995 relating to the financial statements of Life Savings Bank,
Federal Savings Bank for the year ended December 31, 1994, which appears in
such Prospectus. We also consent to the references to us under the headings
"Experts" and "Changes in Accountants" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Los Angeles, California
March 26, 1997
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-effective Amendment No. 1 to Registration
Statement No. 333-20497 of Life Financial Corp. on Form S-1 of our report
dated February 7, 1997 (March 14, 1997 as to Note 16) on the financial
statements of Life Savings Bank, Federal Savings Bank, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "The
Reorganization" and "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Costa Mesa, California
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM S-1 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,882
<INT-BEARING-DEPOSITS> 33
<FED-FUNDS-SOLD> 10,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 8,023
<INVESTMENTS-MARKET> 7,981
<LOANS> 69,538
<ALLOWANCE> 1,625
<TOTAL-ASSETS> 104,010
<DEPOSITS> 85,711
<SHORT-TERM> 3,278
<LIABILITIES-OTHER> 5,748
<LONG-TERM> 0
0
0
<COMMON> 8,565
<OTHER-SE> 708
<TOTAL-LIABILITIES-AND-EQUITY> 104,010
<INTEREST-LOAN> 6,542
<INTEREST-INVEST> 101
<INTEREST-OTHER> 286
<INTEREST-TOTAL> 6,929
<INTEREST-DEPOSIT> 3,514
<INTEREST-EXPENSE> 3,766
<INTEREST-INCOME-NET> 3,163
<LOAN-LOSSES> 963
<SECURITIES-GAINS> 26
<EXPENSE-OTHER> 8,681
<INCOME-PRETAX> 2,631
<INCOME-PRE-EXTRAORDINARY> 2,631
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,505
<EPS-PRIMARY> 1.90
<EPS-DILUTED> 1.90
<YIELD-ACTUAL> 8.33
<LOANS-NON> 2,416
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 354
<ALLOWANCE-OPEN> 1,177
<CHARGE-OFFS> 734
<RECOVERIES> 219
<ALLOWANCE-CLOSE> 1,625
<ALLOWANCE-DOMESTIC> 1,625
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
[LOGO OF LIFE SAVINGS]
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
1598 EAST HIGHLAND AVENUE
SAN BERNARDINO, CALIFORNIA 92404
March 28, 1997
Fellow Stockholders:
You are cordially invited to attend the annual meeting of stockholders (the
"Annual Meeting") of Life Savings Bank, Federal Savings Bank (the "Bank" or
"Life Savings"), which will be held on April 18, 1997, at 10:00 a.m., Pacific
Time, at the Arrowhead Country Club, at 3433 Parkside Drive, San Bernardino,
California 92404.
The Notice of Annual Meeting of Stockholders and Proxy Statement and
Prospectus appear on the following pages and describe certain details of the
formal business to be transacted at the meeting. We urge you to read carefully
the description of the Proposals. Directors and Officers of the Bank will be
present at the Annual Meeting to respond to any questions that our
stockholders may have regarding the business to be transacted.
The Board of Directors of the Bank has determined that the matters to be
considered at the Annual Meeting, including the holding company structure
which will provide greater flexibility to meet the future competitive and
financial needs of the Bank, are in the best interest of the Bank and our
Stockholders. FOR THE REASONS SET FORTH IN THE PROXY STATEMENT AND THE
PROSPECTUS, THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" EACH MATTER TO BE
CONSIDERED.
YOUR VOTE IS IMPORTANT. PLEASE SIGN AND RETURN THE ENCLOSED PROXY CARD
PROMPTLY. YOUR COOPERATION IS APPRECIATED SINCE A MAJORITY OF THE COMMON STOCK
OUTSTANDING MUST BE REPRESENTED, EITHER IN PERSON OR BY PROXY, TO CONSTITUTE A
QUORUM FOR THE CONDUCT OF BUSINESS.
On behalf of the Board of Directors and all the employees of the Bank, I
wish to thank you for your continued support. We appreciate your interest.
Sincerely yours,
/s/ Daniel L. Perl
Daniel L. Perl
President, Chief Executive Officer
and Director
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LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
1598 EAST HIGHLAND AVENUE
SAN BERNARDINO, CALIFORNIA 92404
(909) 886-9751
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 18, 1997
----------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders ("Annual
Meeting") of Life Savings Bank, Federal Savings Bank (the "Bank") will be held
on April 18, 1997, at 10:00 a.m., Pacific Time, at the Arrowhead Country Club,
3433 Parkside Drive, San Bernardino, California 92404.
The Annual Meeting is for the purpose of considering and voting upon the
following matters:
I. The approval of an Agreement and Plan of Reorganization (the "Plan
of Reorganization") pursuant to which (i) the Bank will be
reorganized into a holding company structure and become a wholly-
owned subsidiary of Life Financial Corp. and (ii) each outstanding
share of the Bank's common stock will be converted into three
shares of common stock of Life Financial Corp. The transaction is
hereinafter referred to as the "Reorganization";
II. The ratification of the Life Savings Bank, Federal Savings Bank
1996 Stock Option Plan;
III. The election of three directors for terms of three years each or
until their successors are elected and qualified;
IV. The ratification of the appointment of Deloitte & Touche LLP as
independent auditors of the Bank for the fiscal year ending
December 31, 1997;
V. Approval of the Board of Directors to vote the proxy in favor of
adjourning the Annual Meeting for up to 30 days, if necessary, in
order to solicit further proxies if a majority of the votes
eligible to be cast at the Annual Meeting does not submit proxies
voting in favor of any of the Proposals; and
VI. Such other business as may properly come before the meeting or any
adjournments thereof.
Note: The Board of Directors is not aware of any other business to come
before the Annual Meeting.
Pursuant to the Bylaws of the Bank, the Board of Directors has fixed
February 28, 1997 as the record date for the determination of stockholders
entitled to notice of and to vote at the Annual Meeting, or any adjournments
thereof. Only record holders of common stock of the Bank as of the close of
business on such record date will be entitled to vote at the Annual Meeting or
any adjournments thereof.
By Order of the Board of Directors
/s/ L. Bruce Mills
L. Bruce Mills
Corporate Secretary
San Bernardino, California
March 28, 1997
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
ANNUAL MEETING OF STOCKHOLDERS
PURPOSE OF THE ANNUAL MEETING
This Proxy Statement, together with the Prospectus of Life Financial Corp.
(sometimes referred to hereinafter as the "Company") attached hereto,
constitutes the Proxy Statement for, and is being furnished to the
stockholders of Life Savings Bank, Federal Savings Bank, a federally chartered
savings bank ("Life Savings" or the "Bank"), in connection with the
solicitation by the Board of Directors of the Bank of proxies to be used at
the annual meeting of stockholders ("Annual Meeting") to be held on April 18,
1997 and at any adjournments thereof. The Proxy Statement and Prospectus are
first being mailed to record holders on March 28, 1997.
At the Annual Meeting, holders of shares of the Bank's common stock will be
asked to vote upon a proposal to approve and authorize the Board of Directors
of the Bank to effectuate an Amended Agreement and Plan of Organization dated
as of January 16, 1997 ("Plan of Reorganization") and any amendments to such
Plan of Reorganization that may be adopted by the Board of Directors of the
Bank, as a result of which (i) the Bank will become a wholly owned subsidiary
of the Company, a Delaware corporation and (ii) each of the outstanding shares
of the Bank's common stock will be converted into three outstanding shares of
the common stock of Life Financial Corp. ("Common Stock"). This transaction is
hereinafter referred to as the "Reorganization." Voting in favor of or against
the Plan of Reorganization includes a vote for or against the adoption of the
Certificate of Incorporation and Bylaws of the Company, copies of which are
attached hereto.
The holders of common stock will also be asked to (i) ratify the adoption of
the Life Savings Bank, Federal Savings Bank 1996 Stock Option Plan; (ii) elect
three directors for a term of three years each; (iii) ratify the appointment
of independent auditors for the year ending December 31, 1997; and (iv) vote
upon a proposal to approve and authorize the Board of Directors to vote the
proxy in favor of adjourning the Annual Meeting for up to 30 days, if
necessary, in order to solicit further proxies if a majority of the votes
eligible to be cast at the Annual Meeting does not submit proxies voting in
favor of any of the proposals. The approximate date of mailing of this
Prospectus and Proxy Statement is March 28, 1997.
SOLICITATION AND VOTING OF PROXIES
Regardless of the number of shares of Bank common stock owned, it is
important that record holders of a majority of the shares of common stock of
the Bank be represented in person or by proxy at the Annual Meeting.
Stockholders are requested to vote by completing the enclosed proxy card and
returning it signed and dated in the enclosed postage-paid envelope.
Stockholders are urged to indicate their vote in the spaces provided on the
proxy card. PROXIES SOLICITED BY THE BOARD OF DIRECTORS OF THE BANK WILL BE
VOTED IN ACCORDANCE WITH THE DIRECTIONS GIVEN THEREIN. WHERE NO INSTRUCTIONS
ARE INDICATED, SIGNED PROXY CARDS WILL BE VOTED FOR EACH OF THE PROPOSALS.
Other than the matters set forth in the attached Notice of Annual Meeting of
Stockholders, the Board of Directors knows of no additional matters that will
be presented for consideration at the Annual Meeting. Execution of a proxy,
however, confers on the designated proxy holders discretionary authority to
vote the shares in accordance with their best judgment on such other business,
if any, that may properly come before the Annual Meeting and at any
adjournments thereof.
A proxy may be revoked at any time prior to its exercise by filing with the
Secretary of the Bank a written notice of revocation, by delivering to the
Bank a duly executed proxy bearing a later date, or by attending the Annual
Meeting and voting in person. However, if you are a stockholder whose shares
are not registered in your own name, you will need additional documentation
from your record holder to vote personally at the meeting.
The cost of soliciting the proxies on behalf of management will be borne by
the Bank. In addition to the solicitation of proxies by mail, proxies may be
solicited by Directors, officers or regular employees of the Bank
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in person or by telephone without additional compensation therefor. The Bank
will also retain Chase Mellon Shareholder Services to aid in the solicitation
for an estimated cost of $3,500 plus out-of-pocket expenses. The Bank will also
request persons, firms and corporations holding shares in their names, or in
the names of their nominees, which are beneficially owned by others, to send
proxy material to and obtain proxies from such beneficial owners and will
reimburse such holders for their reasonable expenses in so doing.
VOTING SECURITIES
The securities which may be voted at the Annual Meeting consist of shares of
common stock of the Bank, with each share entitling its owner to one vote on
all matters to be voted on at the Annual Meeting. The close of business on
February 28, 1997 has been fixed by the Board of Directors as the record date
("Record Date") for the determination of stockholders entitled to notice of and
to vote at the Annual Meeting and any adjournment thereof. The total number of
shares of the Bank's common stock outstanding on the record date was 1,070,572
shares.
The presence, in person or by proxy, of at least a majority of the total
number of outstanding shares of common stock entitled to vote is necessary to
constitute a quorum at the Annual Meeting. In the event there are not
sufficient votes for a quorum or to approve any Proposal at the time of the
Annual Meeting, the Annual Meeting may be adjourned in order to permit further
solicitation of proxies.
PROPOSAL I
HOLDING COMPANY REORGANIZATION
PLAN OF REORGANIZATION
The Board of Directors of the Bank has unanimously approved the Plan of
Reorganization and recommends that stockholders vote "FOR" the Plan of
Reorganization. The Plan of Reorganization would result in Life Savings
becoming a wholly-owned subsidiary of the Company and each share of the Bank's
common stock being exchanged for three shares of Life Financial Corp. Common
Stock. A copy of the Plan of Reorganization, including the Certificate of
Incorporation and Bylaws of Life Financial Corp. is attached hereto as Exhibit
A and the following discussion is qualified in its entirety by reference to the
Plan of Reorganization.
Life Financial Corp. is a newly organized Delaware corporation formed as an
indirect subsidiary of Life Savings solely to effect the Reorganization;
therefore, Life Financial Corp. has no prior operating history. Pursuant to the
Plan of Reorganization, Life Financial Corp. will become a non-diversified
unitary savings and loan holding company pursuant to the Home Owners Loan Act
of 1933, as amended (the "HOLA"). Life Financial Corp. intends to organize as
its wholly-owned subsidiary, an interim federal savings bank, Interim Federal
Savings Bank ("Interim"), in order to effect the Reorganization. If the
Reorganization is approved by the stockholders of the Bank, and subject to
satisfaction of all other conditions set forth in the Plan of Reorganization,
including receipt of approval of the Office of Thrift Supervision ("OTS") of
the Reorganization, Interim will be merged with and into the Bank, with the
Bank as the surviving savings bank.
Upon the Effective Date of the Reorganization, each share of the Bank's
common stock outstanding immediately prior to the Reorganization will be
converted, automatically, by operation of law, into three shares of Life
Financial Corp.'s Common Stock with the result that stockholders of Life
Savings will become stockholders of the Company and will no longer be
stockholders of Life Savings. Shares of common stock of Interim outstanding
prior to the merger will be converted in the merger on a one-for-one basis into
shares of Life Savings common stock, with the result that all the outstanding
Life Savings common stock will be owned by the Company.
After the Reorganization, the Bank will continue its existing business and
operations as a wholly-owned subsidiary of Life Financial Corp. and the
consolidated capitalization, assets, liabilities, income and financial
statements, and management of Life Financial Corp. immediately following the
Reorganization will be
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substantially the same as those of the Bank immediately prior to consummation
of the Reorganization. Deloitte & Touche LLP, the current independent public
accountants of the Bank, will serve as Life Financial Corp.'s independent
public accountants. The Federal Charter and the Bylaws of the Bank will
continue in effect, and will not be affected in any manner by the
Reorganization. The corporate existence of the Bank will continue unaffected
and unimpaired by the Reorganization except that all of its outstanding stock
will be owned by Life Financial Corp. The deposits in Life Savings will
continue to be insured by the Savings Association Insurance Fund ("SAIF") and
Life Savings will continue to be a member of the Federal Home Loan Bank of San
Francisco, and will be regulated by the OTS. Life Financial Corp. will be
required to register with the OTS and will be subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution. See "Regulation" in the Prospectus.
REASONS FOR REORGANIZATION AND RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Bank believes that the Reorganization will
provide greater operating flexibility than is currently enjoyed by the Bank,
will facilitate the acquisition of related businesses as opportunities arise
and its ability to engage in various corporate and investment activities and,
by means of its ability to diversify through the Company's structure, will
enhance its ability to remain competitive in the future with other companies in
the financial services industry organized in the holding company structure.
Although no specific plans have been made, after the Reorganization, Life
Financial Corp. also may be in a position to take advantage of acquisition
opportunities not otherwise available to the Bank.
Concurrently with the Reorganization, the Company is offering 2,500,000
shares of its Common Stock to the public in a firm commitment underwritten
public offering (or 2,875,000 shares, in the event that the underwriters
exercise their overallotment option) (the "Public Offering"). The net proceeds
from the Public Offering, which are expected to be $24.9 million at an assumed
price of $11.00 per share (or $28.8 million, in the event that the underwriters
exercise their overallotment option) will provide the initial capitalization
for the Company and will facilitate the Company's future business activities as
described above.
The Board of Directors believes that the Reorganization is in the best
interest of the Bank and its stockholders and unanimously recommends a vote FOR
approval of the Plan of Reorganization. Approval of the Plan of Reorganization
will constitute approval of Life Financial Corp.'s Certificate of Incorporation
and By-Laws, which are attached hereto as Exhibit A. There are certain
provisions in the Company's Certificate of Incorporation and Bylaws authorized
under Delaware law that may have the additional effect of preventing or
discouraging a hostile takeover and which may make the removal of management
more difficult. There are also provisions in the Company's Certificate of
Incorporation regarding limitations on personal liability and indemnification
rights for directors and officers. In addition, the Delaware General
Corporation Law contains provisions that protect Delaware corporations from
abusive takeover practices. Accordingly, to the extent that management may be
deemed to benefit from these provisions, management may be viewed as having a
conflict of interest in recommending the approval of the Plan of
Reorganization. The affirmative vote of the holders of a majority of the shares
of the Bank's common stock outstanding is required to obtain approval for the
Reorganization.
THE BOARD OF DIRECTORS OF LIFE SAVINGS UNANIMOUSLY RECOMMENDS A VOTE "FOR"
THE PLAN OF REORGANIZATION.
DESCRIPTION OF REORGANIZATION
The Reorganization will be accomplished through the following steps: (1) Life
Financial Corp. has been incorporated under the laws of the State of Delaware
and has become a wholly-owned subsidiary of the Bank; (2) Life Financial Corp.
will organize Interim as a wholly-owned subsidiary; (3) Interim will be merged
with and into Life Savings, which will be the surviving institution; (4) at the
effective time of the merger, each
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outstanding share of the Bank's common stock will be converted automatically,
by operation of law, into three shares of Life Financial Corp.'s Common Stock,
with the result that the stockholders of the Bank will become the stockholders
of Life Financial Corp.; and (5) the one outstanding share of common stock of
Interim, owned by Life Financial Corp., will be converted into one share of the
Bank's common stock, with the result that all the outstanding common stock of
the Bank will be owned by Life Financial Corp.
CONDITIONS TO REORGANIZATION
The Plan of Reorganization sets forth several conditions which must be
satisfied before the Reorganization will be consummated, including the
following conditions which have not yet been satisfied: (i) approval of the
Reorganization by the affirmative vote of the holders of a majority of
outstanding shares of the Bank's common stock eligible to be cast at the
Special Meeting; (ii) approval of the Reorganization by the OTS; and (iii) the
receipt of all approvals, reviews, and consents from any other governmental
agencies or other third parties which may be required for the lawful
consummation of the Reorganization (although no such governmental or third-
party approvals are currently anticipated to be required). There cannot be any
assurance that the regulatory approvals referred to above will be obtained. It
is anticipated that all such approvals will be obtained after the vote by the
Bank's common stockholders on the Plan of Reorganization.
If conditions are imposed by the OTS on its approval of the Reorganization
which would have a material impact on operations of Life Financial Corp. and
the Bank, a resolicitation of stockholders may be required. The imposition or
nature of such material conditions cannot be anticipated by the Bank.
Stockholder approval of the Plan of Reorganization, if obtained, will remain
valid until the Reorganization is approved, or disapproved, by the OTS, or
until a resolicitation of stockholders is conducted because of the imposition
of any unanticipated, material conditions by the OTS. If stockholder or
regulatory approval is not obtained, the Reorganization will not be
consummated.
EFFECTIVE DATE
The "Effective Date" of the Reorganization will be the date upon which all
conditions of the Reorganization are satisfied and the Articles of Combination
pertaining to the Reorganization are filed with, and endorsed by, the OTS, or
such date thereafter as is acceptable to the OTS, Life Savings and the Company.
TREATMENT OF STOCK CERTIFICATES
After the Effective Date, each certificate previously representing shares of
the Bank's common stock will automatically represent three shares of the
Company's Common Stock. After the Effective Date, stockholders will be
entitled, but not required, to exchange their stock certificates for new
certificates evidencing three shares of the Company's stock. Chase Mellon
Shareholder Services is the transfer agent and registrar for the Bank's common
stock and will act in the same capacity for the Common Stock of the Company.
DISSENTERS' RIGHTS
If the Reorganization is consummated, pursuant to regulations of the OTS, any
stockholder of record of Bank common stock who (i) objects to the
Reorganization, (ii) does not vote any of such holder's shares in favor of the
Reorganization, and (iii) fully complies with all of the provisions of 12
C.F.R. Section 552.14 will be entitled to demand and receive payment in an
amount equal to the fair or appraised value of such holder's shares of Bank
common stock. For the purpose of determining the amount to be received in
connection with the exercise of dissenters' rights pursuant to regulations of
the OTS, the fair value of a dissenting stockholder's Bank common stock equals
the fair market value of the shares as of the Effective Time.
Any Bank stockholder desiring to receive payment of the fair value of such
holder's Bank common stock in accordance with the requirements of 12 C.F.R.
Section 552.14 must (i) deliver to the Bank, prior to voting on the
Reorganization, a writing identifying such holder and stating such holder's
intention to demand appraisal of and payment for such holder's shares of Bank
common stock and (ii) not vote in favor of the Reorganization.
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Any written notice of intent to demand appraisal of and payment for shares of
Bank common stock should be sent to: Daniel L. Perl, President and Chief
Executive Officer, Life Savings Bank, Federal Savings Bank, 4110 Tigris Way,
Riverside, California 92503 prior to April 18, 1997, the date of the Annual
Meeting. A vote against the Reorganization will not satisfy the requirements
for the separate written notice of intent to demand appraisal of and payment
for shares of Bank common stock referred to in condition (i) above. Rather,
such demand must be made prior and in addition to and separate from any proxy
or vote against the Reorganization by the dissenting stockholder.
Within ten days of the Effective Time, the Bank must (i) give written notice
of the Effective Time by mail to any stockholder who complied with the
provisions above and did not vote in favor of the Reorganization and (ii) make
a written offer to each such stockholder to pay for such holder's shares at a
price estimated to be the fair value of the shares. Such notice and offer must
be accompanied by the Bank's balance sheet and statement of income for a fiscal
year ending not more than 16 months before the date of notice and offer,
together with the latest available interim financial statements and a statement
of the procedures that must be followed if the stockholder elects under 12
C.F.R. Section 552.14(c)(5) and (6) to demand appraisal and payment of a
different amount than that offered by the Bank.
If within 60 days of the Effective Time the stockholder accepts the Bank's
offer of the fair value for such holder's shares, or the fair value is
otherwise agreed upon between the Bank and the dissenting stockholder, the Bank
must make payment for the dissenting stockholder's shares within 90 days of the
Effective Time. At any time within 60 days of the Effective Time, a dissenting
stockholder may withdraw a demand for appraisal and accept the terms of the
Reorganization, and such shares of Bank common stock will become shares of
Company Common Stock in accordance with the terms of the Plan of
Reorganization.
If the dissenting stockholder and the Bank do not agree as to the fair value
of the dissenting stockholder's shares within 60 days of the Effective Time,
the dissenting stockholder must file a petition with the OTS, with a copy by
registered or certified mail to the Bank, demanding a determination of the fair
market value of the shares. Each stockholder demanding appraisal of and payment
for such holder's shares of Bank common stock in compliance with 12 C.F.R.
Section 552.14 must deliver such holder's shares of Bank common stock to the
Transfer Agent for notation thereon that an appraisal proceeding is pending. If
a dissenting stockholder fails to file a petition with the OTS demanding a
determination of fair value within 60 days of the Effective Time or fails to
deliver such holder's shares of Bank common stock to the Transfer Agent, such
dissenting stockholder will be deemed to have accepted the terms of the Plan of
Reorganization, and such stockholder's shares of Bank common stock will become
shares of the Company Common Stock in accordance with the terms of the Plan of
Reorganization.
The director of the OTS (the "Director") may appoint either appropriate OTS
staff or one or more independent persons to appraise the shares of a dissenting
stockholder who has complied fully with 12 C.F.R. Section 552.14. Appraisals
prepared by independent persons will be subject to review by OTS staff. If the
Director concurs in the final valuation of the shares, the Director will
instruct the Bank to pay the appraised fair market value, together with accrued
interest, upon the surrender of the dissenting stockholder's Bank common stock.
The Director, at his or her discretion, may apportion or assess the cost of the
appraisal proceeding against some or all of the parties to the proceeding.
The foregoing does not purport to be a complete statement of the provisions
of the OTS regulations relating to dissenter and appraisal rights and is
qualified in its entirety by reference to the dissenter and appraisal rights
provisions of 12 C.F.R. Section 552.14, which section is reproduced in Exhibit
B to this Proxy Statement and which hereby is incorporated by reference herein.
AMENDMENT OR TERMINATION
The Boards of Directors of the Bank and Life Financial Corp. and the
organizers of Interim may amend or terminate the Plan of Reorganization if they
determine for any reason that such amendment or termination would
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be advisable. Such amendment may occur at any time prior to the completion of
the Reorganization, whether before or after stockholder approval of the Plan of
Reorganization, except that, after stockholder approval, the Plan of
Reorganization may not be amended in any respect deemed to be material by any
of such Boards of Directors or organizers. Such termination may occur at any
time prior to the completion of the Reorganization.
COMPARISON OF STOCKHOLDER RIGHTS AND CERTAIN ANTITAKEOVER CONSIDERATIONS
As a result of the Reorganization, holders of the common stock of the Bank,
whose rights are presently governed by federal law and the Charter and Bylaws
of the Bank, will become stockholders of Life Financial Corp., a Delaware
corporation. Accordingly, their rights will be governed by the Delaware General
Corporation Law and the Certificate of Incorporation and Bylaws of Life
Financial Corp. rather than the charter and bylaws of Life Savings. There are
differences between the provisions of the Certificate of Incorporation and
Bylaws of Life Financial Corp. and those of the current Charter and Bylaws of
the Bank. See "Regulation" and "Restrictions on Acquisition of the Company" in
the Prospectus. Those differences should be noted by stockholders in connection
with their consideration of the proposed Reorganization. The Certificate of
Incorporation and Bylaws of Life Financial Corp. are attached hereto as Exhibit
A, are incorporated herein by reference, and should be read carefully.
Currently, stockholders of Life Savings have all of the voting rights in Life
Savings. Upon completion of the Reorganization, exclusive voting rights will be
vested in the Company as the sole holder of the outstanding capital stock of
Life Savings. Voting rights of the Company will be vested in the holders of the
Company Common Stock. Current stockholders of Life Savings will no longer have
any voting rights directly in Life Savings. As stockholders of the Company upon
the conversion of their shares of common stock of Life Savings into shares of
Company Common Stock or through the purchase of Common Stock in the Company,
they will have only indirect voting rights in Life Savings. Not only will such
voting rights be indirect but, unless current stockholders of Life Savings
purchase a sufficient amount of Common Stock in the Company's Offering, such
voting rights will be diluted.
Capital Stock. Life Savings is authorized to issue 10,000,000 shares of
common stock of which 1,070,572 shares are currently outstanding, and no shares
of preferred stock. The Company is authorized to issue 25,000,000 shares of
Common Stock and 5,000,000 shares of preferred stock. Upon the issuance of the
Company's Common Stock in the Reorganization, the Company will have 3,211,716
shares of common stock outstanding and upon the issuance of additional Common
Stock in the Offering will have a total of 5,711,716 shares of common stock
outstanding assuming 2,500,000 shares of Company Common Stock are issued in the
Offering (or 6,086,716 shares in the event that the underwriters exercise their
overallotment option). The Company will initially have no preferred stock
outstanding. See "Description of Capital Stock of the Company" in the
Prospectus.
Payment of Dividends. Subject to applicable law, the Bylaws of the Bank and
those of Life Financial Corp. each provide for the payment of dividends. The
ability of the Bank to pay dividends on the Bank common stock is restricted by
OTS regulations and by tax considerations relating to depository institutions.
See "Dividend Policy" and "Description of Capital Stock of the Bank" in the
Prospectus. Unlike the Bank, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders. The Company is
subject, however, to the requirements of Delaware law, which generally limit
dividends to an amount equal to the excess of the net assets of the Company
(the amount by which total assets exceed total liabilities) over its statutory
capital, or if there is no such excess, to its net profits for the current
and/or immediately preceding fiscal year. For a discussion of certain
circumstances under which the Company may become subject to certain provisions
of the California Corporation Code, see "Restrictions on Acquisition of the
Company" in the Prospectus. Since the Company initially will have no
significant source of income other than dividends from the Bank and earnings
from the net proceeds retained by the Company, the payment of dividends by the
Company may be dependent, in part, upon dividends from the Bank, which is
subject to various tax and regulatory restrictions on the payment of dividends.
Life Savings will be able to pay dividends to the Company only in compliance
with the restrictions described above. In addition, the Company would be
required to give advance
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notice to the OTS prior to any dividend by Life Savings, and the OTS could
object to any such dividend. See "Dividend Policy," "Description of Capital
Stock of the Company" and "Regulation" in the Prospectus.
Board of Directors. The Boards of Directors of Life Savings and Life
Financial Corp. are divided into three classes, each of which shall contain
approximately one-third of the whole number of members of the Board. Each class
serves staggered terms of three years, with approximately one-third of the
total number of Directors being elected each year.
The Certificate of Incorporation of the Company provides that a director may
be removed from the Board of Directors prior to the expiration of his term only
for cause, upon the vote of 80% of the outstanding shares of voting stock. In
the absence of these provisions, the vote of the holders of a majority of the
shares could remove the entire Board, with or without cause. In contrast, under
the Life Savings Bylaws, stockholders may remove directors for cause upon the
vote of a majority of the shares then entitled to vote at an election of
directors. If less than the entire board is to be removed, no one of the
directors may be removed if the votes cast against the removal would be
sufficient to elect a director if then cumulatively voted at an election of the
class of directors of which such director is a part.
Cumulative Voting. The Bank's Charter provides that at each election for
directors, every stockholder entitled to vote shall have the right to vote, in
person or by proxy, the number of shares owned by him for as many persons as
there are directors to be elected and for whose election he has a right to vote
or to cumulate his votes.
Life Financial Corp.'s Certificate of Incorporation does not provide for
cumulative voting for any purpose. Cumulative voting entitles a stockholder to
cast a total number of votes equal to the number of directors to be elected
multiplied by the number of his or her shares and to distribute that number of
votes among any number of the nominees. The absence of cumulative voting for
directors limits the ability of minority stockholder to elect directors.
Because the holder of less than a majority of the Company Common Stock cannot
be assured of representation on the Board of Directors, the absence of
cumulative voting may discourage accumulation of Life Financial Corp. Common
Stock or proxy contests that could result in changes in Life Financial Corp.'s
management. Cumulative voting was not provided for in Life Financial Corp.'s
Certificate of Incorporation because management believes that each director
should represent and act in the interest of all stockholders and not any
special group of stockholders. The Board of Directors also believes that the
absence of cumulative voting will help to assure continuity and stability of
management and policies by making it more difficult for the holders of less
than a majority of Life Financial Corp. Common Stock to elect their designees
to the Board of Directors.
Special Meetings of Stockholders and Action by Written Consent. Under the
Bank's Bylaws, special meetings of the stockholders may be called at any time
by the Chairman of the Board, the President, or a majority of the Board of
Directors and shall be called by the Chairman of the Board, the President, or
the Secretary upon the written request of the holders of not less than one-
tenth of all the outstanding capital stock of the Bank entitled to vote at the
meeting. The Bank's Bylaws also provide that any action required to be taken at
a meeting of stockholders may be taken without a meeting if consent in writing,
setting forth the action so taken, is given by all the stockholders entitled to
vote with respect to the subject matter of such action. Life Financial Corp.'s
Certificate of Incorporation provides that a special meeting of stockholders
may only be called by the Company's Board of Directors. The Certificate of
Incorporation also provides that any action required or permitted to be taken
by the stockholders of the Company may be taken only at an annual or special
meeting and prohibits stockholder action by written consent in lieu of a
meeting. See "Restrictions on Acquisition of Control of the Company" in the
Prospectus.
Limitation on Voting Rights. The Certificate of Incorporation of the Company
contains limitations on the ability of a record owner of any outstanding Common
Stock beneficially owned directly or indirectly by a person in excess of 10% of
the then outstanding shares of Common Stock (the "Limit") to vote the shares
held in excess of the Limit. See "Restrictions on Acquisition of the Company--
Restrictions in the Company's Certificate of Incorporation" in the Prospectus.
7
<PAGE>
New Business. Under the Bank's Bylaws, any new business to be taken up at the
annual meeting shall be stated in writing and filed with the Secretary of the
Bank at least five days before the date of the annual meeting, and all business
so stated, proposed and filed shall be considered at the annual meeting, but no
other proposal shall be acted upon at the annual meeting. The Bylaws of Life
Financial Corp. require a stockholder who intends to raise new business at a
stockholder meeting to give at least 90 days advance notice to the Secretary of
Life Financial Corp.; provided, however, that in the event that less than 100
days notice or prior disclosure of the meeting is given by Life Financial
Corp., notice of new business to be proposed by a stockholder to be timely must
be received by the Secretary within ten days of the date of such notice or
disclosure of the date of the meeting by Life Financial Corp.
Nomination of Directors. The Bank's Bylaws provide that stockholder
nominations for directors must be stated in writing and delivered to the
Secretary of the Bank at least five days before the annual meeting of
stockholders in order to be voted on at the meeting. The Bylaws also provide
that the Board of Directors shall act as the nominating committee. Life
Financial Corp.'s Bylaws provide that nominations for the election of directors
may be made by a majority of the Board of Directors or by stockholders.
Stockholders intending to nominate candidates for election as directors must
deliver written notice to Life Financial Corp. not less than 90 days prior to
the date of the scheduled annual meeting; provided, however, that in the event
that less than 100 days notice or prior disclosure of the meeting is given by
Life Financial Corp., notice of a nomination proposed by a stockholder to be
timely must be received by the Secretary within ten days of the date of such
notice or disclosure of the meeting by Life Financial Corp. The Bylaws further
provide that the stockholder's notice shall set forth certain information
concerning each nominee. In addition, the stockholder giving the notice is
required to state the name and address of such stockholder and the identity of
other stockholders known by such stockholder to be supporting such nominees and
the extent of such persons' beneficial ownership of Life Financial Corp.'s
stock. A majority of the Board of Directors may reject a nomination by a
stockholder not timely made in accordance with the requirements of the Bylaws.
Limitations on Director Liability. In accordance with the Delaware General
Corporation Law, the Certificate of Incorporation of Life Financial Corp.
provides that a director of Life Financial Corp. will not have any personal
liability to Life Financial Corp. or its stockholders for monetary damages for
breaches of fiduciary duty as a director for actions taken in good faith
performance of their duties as directors. This provision does not limit
personal liability of Life Financial Corp.'s Directors for monetary damages for
breaches of their duty of loyalty, acts or omissions not in good faith or
involving intentional misconduct or knowing violations of the law, unlawful
purchases or redemptions of stock, payments of unlawful dividends or the
receipt or payment of improper personal benefits. This provision applies to
actions taken by a director only in that capacity; it does not apply to actions
taken in any other capacity, including that of an officer. In addition, this
provision does not limit the liability of directors arising in causes of action
brought under the federal securities laws. The Certificate of Incorporation
also provides that any repeal or modification of this provision by stockholders
of Life Financial Corp. will not adversely affect any right or protection of a
director of Life Financial Corp. existing at the time of the repeal or
modification and that if the Delaware General Corporation Law is amended after
approval of the Certificate of Incorporation to further limit the personal
liability of directors, the liability of a director of Life Financial Corp.
will be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law as amended.
While the Certificate of Incorporation provides directors with protection
from awards of monetary damages for breaches of their duty of care, it does not
eliminate their duty of care. Equitable remedies, such as an injunction or
recision, continue to exist to enforce this duty of care. Moreover, the
limitation on liability does not preclude or limit recovery of damages by third
parties. The Certificate of Incorporation also allows a recovery of damages for
the unlawful payment of dividends and in certain other circumstances. This
provision of the Certificate of Incorporation is designed to ensure that the
ability of Life Financial Corp.'s Directors to exercise their business judgment
in managing Life Financial Corp.'s affairs, subject to their continuing
fiduciary duties of loyalty to Life Financial Corp. and its stockholders, is
not unreasonably impeded by exposure to the potentially high personal costs or
other uncertainties of litigation.
8
<PAGE>
The nature of the tasks and responsibilities undertaken by directors of
publicly-held corporations such as Life Financial Corp. often require such
persons to make difficult judgments of great importance which can expose such
persons to personal liability, but from which they will acquire no personal
benefit. In recent years, litigation against publicly-held corporations and
their directors and officers, challenging good faith business judgments and
involving no allegations of personal wrongdoing, has become common. Such
litigation regularly involves damage claims in huge amounts which bear no
relationship to the amount of compensation received by the directors or
officers, particularly in the case of directors who are not officers of the
corporation. The expense of such litigation, well-founded or not, can be
enormous. Individual directors and officers can seldom bear either the legal
defense costs involved or the risk of a large judgment.
In order to attract and retain competent and conscientious directors and
officers in the face of these potentially serious risks, corporations have
historically provided for corporate indemnification in their bylaws and have
obtained liability insurance protecting the company and its directors and
officers against the costs of litigation and related expenses. Recent changes
in the market for directors' liability insurance, including difficulty in
obtaining adequate policies which are not prohibitively expensive, may result
in individuals being unwilling, in many instances, to serve as directors
without at least a partial substitute for the protection which such insurance
has historically provided. This concern is particularly a factor with respect
to outside directors (directors who are not employees of a corporation), who
are especially valuable in providing unbiased advice to a corporation. The
provisions of the Certificate of Incorporation relating to director liability
and the Delaware law authorizing such provisions are intended to reduce, in
appropriate cases, the risk incident to serving as a director. The Bank is not
presently aware of any pending or threatened litigation which, if instituted
against Life Financial Corp., would be affected by this provision. Life
Savings' Charter does not provide for limitations of liability for Life
Savings' directors nor are such limitations provided under OTS regulations.
Indemnification of Officers and Directors. Under the Delaware General
Corporation Law, directors and officers, as well as other employees and
individuals, may be indemnified against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation--a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
stockholders, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard of
care is applicable in the case of derivative actions, except that
indemnification extends only to expenses (including attorneys' fees) incurred
in connection with defense or settlement of such an action. Delaware law
permits a corporation to advance expenses to directors or officers upon the
corporation's receipt of an undertaking by such person to repay the advance in
the event of a specific determination that such person was not entitled to
indemnification.
Delaware law requires court approval before there may be any indemnification
where the person seeking indemnification has been found liable to the
corporation in a derivative action by reason of the fact that he is or was a
director, officer, employee or agent of the corporation. Delaware law, however,
provides that the termination of any proceeding (other than an action by or in
the right of the corporation) by judgment, order, settlement, conviction or
upon a plea of nolo contendere does not create a presumption adverse to the
director, officer or other person.
The Bank's Board of Directors believes that it is in the best interests of
its stockholders to provide mandatory indemnification for Life Financial
Corp.'s directors and officers to the fullest extent permitted by Delaware law.
Accordingly, the Certificate of Incorporation provides that each person who is
involved in any litigation or other proceeding because he or she is or was a
director or officer of Life Financial Corp. or, among other things, of another
related entity shall be indemnified by Life Financial Corp. to the fullest
extent authorized by Delaware law (but, in the case of any future amendment to
Delaware law, the right to indemnification shall be adjusted only to the extent
that such amendment permits Life Financial Corp. to provide broader
indemnification rights than prior to such amendment), against all expense,
liability or loss reasonably incurred by such person in connection therewith.
The Certificate of Incorporation also provides that indemnification to
9
<PAGE>
directors or officers is a contract right and such right includes the right to
be paid the expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that, if Delaware law requires, the
advancement of such expenses will be made only after the person delivers an
undertaking to Life Financial Corp. to repay any amounts advanced if it is
ultimately determined that he or she is not entitled to indemnification. The
purpose of providing that the right of indemnification is a contract right is
to provide an indemnified party with an enforceable claim that may not be
unilaterally affected by actions taken by Life Financial Corp. (e.g., there
would be a claim under contract law to indemnification as to conduct which
occurred while this provision of the Certificate of Incorporation was in
effect, regardless of subsequent changes thereto). If Life Financial Corp. does
not pay a proper claim for indemnification in full within 30 days after a
written claim for such indemnification is received by Life Financial Corp., the
Certificate of Incorporation authorizes the claimant to bring a suit against
Life Financial Corp. and prescribes what does and does not constitute a defense
to such action. Such right to indemnification and advancement of expenses also
may be conferred upon any employee or agent of Life Financial Corp. if, and to
the extent, authorized by Life Financial Corp.'s Bylaws or its Board of
Directors. Life Financial Corp.'s Bylaws provide that indemnification may be
available to employees and agents.
In any action by a person seeking indemnification, it is a defense that such
person has not met any applicable standard for indemnification as set forth in
Delaware General Corporation Law. However, neither the failure of Life
Financial Corp. to have made a determination that the applicable standard has
been satisfied, or an actual determination by Life Financial Corp. that such
person has not satisfied the applicable standard, shall create a presumption
that such standard was not satisfied, or be a defense to such action. The
burden of proving that the applicable standard of conduct has not been
satisfied, and that such person is not entitled to indemnification, shall be on
Life Financial Corp.
The Certificate of Incorporation further states that the right to
indemnification and the advancement of expenses conferred by the Certificate of
Incorporation is not exclusive of any other right which any person may have or
hereinafter acquire under any statute, provision of the Certificate of
Incorporation or Bylaws of Life Financial Corp., vote of stockholders or
disinterested directors, or otherwise. In addition, the Certificate of
Incorporation authorizes Life Financial Corp. to maintain insurance, at its
expense, to protect itself and certain individuals, including officers and
directors of Life Financial Corp., against any expense, liability, or loss,
whether or not Life Financial Corp. would have the power to indemnify the
person under Delaware law.
Although the indemnification provisions contained in the Certificate of
Incorporation are not specifically intended to provide indemnification of
officers and directors for violations of the Securities Act, it is conceivable
that such a claim for indemnification could be asserted thereunder. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling Life Financial Corp.
pursuant to the foregoing provisions, Life Financial Corp. has been informed
that, in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
These provisions have been included in Life Financial Corp.'s Certificate of
Incorporation in recognition of the need to protect directors and officers of
Life Financial Corp. so as to attract and retain the best personnel available.
In light of the complexities and pressures placed on directors of publicly held
corporations, and especially companies involved in the complex and fast-
changing financial services industry, the Board of Directors believes that the
time, efforts and talent of officers and directors of Life Financial Corp. and
its subsidiaries should be directed toward managing Life Financial Corp.'s
business, rather than being forced to act defensively out of concern over
costly personal litigation. By including these indemnification provisions in
Life Financial Corp.'s Certificate of Incorporation, directors and officers of
Life Financial Corp. will have the assurance that they will be indemnified for
actions taken in good faith and in a manner believed to be in the best interest
of the stockholders.
The Bank's Charter and Bylaws do not address indemnification of its officers
and directors. The OTS regulations do provide indemnification for officers and
directors of savings banks. These provisions are more limited, however, than
the related provisions of Life Financial Corp.'s Certificate of Incorporation
and Bylaws.
10
<PAGE>
DIVIDEND INFORMATION AND PRICE OF COMMON STOCK
There is no established market for the common stock of the Bank. As of
February 28, 1997, the Bank's common stock was held by approximately 407
holders of record. The Bank has not paid cash dividends on its common stock.
The Board of Directors declared a 100% stock dividend to stockholders of record
as of February 28, 1996, payable as of March 31, 1996.
PROPOSAL II
RATIFICATION OF THE LIFE SAVINGS BANK, FEDERAL SAVINGS BANK1996 STOCK OPTION
PLAN
The Board of Directors of the Bank adopted the Life Savings Bank, Federal
Savings Bank 1996 Stock Option Plan (the "Bank Option Plan"), a stock-based
benefit plan which provides for the granting of stock options to eligible
officers, employees and directors of the Bank, on November 21, 1996 (a copy of
which is attached hereto as Exhibit C). The Board of Directors of the Bank has
reserved 107,200 (321,600 post-Reorganization) shares for issuance under the
Bank Option Plan.
The stock option benefits provided under the Bank Option Plan are designed to
attract and retain qualified directors and personnel in key positions, provide
directors, officers and key employees with a proprietary interest in the
Company, and as an incentive to contribute to the success of the Bank and the
Company and reward key employees for outstanding performance. The Bank Option
Plan provides for the grant of: (i) options to purchase the Company's Common
Stock intended to qualify as incentive stock options under Section 422 of the
Code ("Incentive Stock Options"); (ii) options that do not so qualify ("Non-
Statutory Stock Options"); and (iii) Limited Rights. Limited Rights are
exercisable only upon a change in control of the Bank or the Company. Upon
exercise of "Limited Rights" in the event of a change in control, the employee
will be entitled to receive a lump sum cash payment equal to the difference
between the exercise price of the related option and the fair market value of
the shares of common stock subject to the option on the date of exercise of the
right in lieu of purchasing the stock underlying the option. Except for options
granted to directors, all options granted contemporaneously with adoption of
the Bank Option Plan are intended to be Incentive Stock Options to the extent
permitted under Section 422 of the Code. The Bank Option Plan will be in effect
for a period of ten years from the adoption by the Board of Directors;
provided, however, that in the event that the Bank's stockholders do not ratify
the Bank Option Plan at the Annual Meeting, all options granted pursuant to the
Bank Option Plan shall be Non-Statutory Stock Options.
Under the Bank Option Plan, the Personnel/Compensation Committee determines
which officers and employees will be granted options and Limited Rights,
whether such options are to be incentive or non-statutory stock options, the
number of shares subject to each option, the exercise price of each stock
option, whether such options may be exercised by delivering other shares of
Common Stock and when such options become exercisable. The per share exercise
price of a stock option is required to be at least equal to the fair market
value of a share of Common Stock on the date the option is granted under the
Bank Option Plan. In November 1996, the Committee granted options to purchase
64,320 (192,960 post-Reorganization) and 4,180 (12,540 post-Reorganization)
shares respectively to Messrs. Perl and Passerino and granted options to
purchase an aggregate of 8,360 (25,080 post-Reorganization) shares to two other
executive officers as a group at an exercise price of $3.33, on a pro forma
basis as of December 31, 1996. An additional 25,000, 15,000 and 30,000 options
have been granted to Messrs. Perl and Passerino and two other executive
officers, as a group, respectively, at the Offering Price effective as of the
Reorganization pursuant to an option plan adopted by the Board of Directors of
the Company (the "Company Option Plan"). For additional information regarding
grants under the Company Option Plan see "The Board of Directors and Management
of the Bank--Stock Option Plans" in the Prospectus.
An optionee will not be deemed to have received taxable income upon grant or
exercise of any Incentive Stock Option, provided that such shares received
through the exercise of such option are not disposed of by the employee for at
least one year after the date the stock is received in connection with the
option exercise and two
11
<PAGE>
years after the date of grant of the option. No compensation deduction would be
able to be taken by the Bank as a result of the grant or exercise of Incentive
Stock Options, provided such shares are not disposed of before the expiration
of the period described above (a "disqualifying disposition"). In the case of a
Non-Statutory Stock Option and in the case of a disqualifying disposition of an
Incentive Stock Option, an optionee will be deemed to receive ordinary income
upon exercise of the stock option in an amount equal to the amount by which the
exercise price is exceeded by the fair market value of the Common Stock
purchased by exercising the option on the date of exercise. The amount of any
ordinary income deemed to be received by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an
Incentive Stock Option would be a deductible expense for tax purposes for the
Company. In the case of Limited Rights, upon exercise, the option holder would
have to include the amount paid to him or her upon exercise in his gross income
for federal income tax purposes in the year in which the payment is made and
the Bank would be entitled to a deduction for federal income tax purposes of
the amount paid.
Stock options will become vested and exercisable in the manner specified by
the Committee. The options granted by the Committee in connection with the
adoption of the Bank Option Plan will vest at a rate of 33.3% per year,
beginning on the third anniversary date of the grant, November 21, 1999.
Incentive Stock Options granted in connection with the Bank Option Plan could
be exercisable for three months following the date on which the employee ceases
to perform services for the Bank or the Company, except that in the event of
death, disability, retirement or termination of an employee's service following
change in control of the Bank or the Company, options accelerate and become
fully vested and could be exercisable for up to one year thereafter or such
longer period as determined by the Bank or the Company. However, any Incentive
Stock Options exercised more than three months following the date the employee
ceases to perform services as an employee would be treated as a Non-Statutory
Stock Option as described above. In the event of retirement, if the optionee
continues to perform services as a director on behalf of the Bank, the Company
or an affiliate, unvested options would continue to vest in accordance with
their original vesting schedule until the optionee ceases to serve as a
director. Non-Statutory Stock Options granted in connection with the Bank
Option Plan could be exercisable for one year following the date on which the
employee ceases to perform services for the Bank or the Company, except that in
the case of death, disability, retirement or termination of the optionee's
service following a change in control, options accelerate and become fully
vested and could be exercisable for up to one year thereafter or such longer
period as determined by the Bank or the Company.
All Options granted by the Committee to outside directors under the Bank
Option Plan would be Non-Statutory Stock Options and will vest and become
exercisable commencing three years after the date of adoption of the Bank
Option Plan at the rate of 33.3% per year, and would expire upon the earlier of
ten years following the date of grant or one year following the date the
optionee ceases to be a director or consulting director. The Committee has
granted options to purchase 3,060 (9,180 post-Reorganization) shares to each of
the outside directors of the Bank at an exercise price of $3.33, on a pro forma
basis as of December 31, 1996. In the event of the death or disability of a
participant or termination of a participant's service following a change in
control of the Company or the Bank, all previously granted options would
immediately vest and become fully exercisable.
A change in control is defined in the Bank Option Plan generally to occur
when a person or group of persons acting in concert acquires beneficial
ownership of 20% or more of any class of equity security of the Company or the
Bank or in the event of a tender or exchange offer, merger or other form of
business combination, sale of all or substantially all of the assets of the
Company or the Bank or contested election of directors which resulted in the
replacement of a majority of the Board of Directors by persons not nominated by
the directors in office prior to the contested election.
Upon completion of the Reorganization and the Public Offering, the Bank
Option Plan will, by operation of law and pursuant to the Bank Option Plan,
become an option plan of the Company. Stock options with respect to shares of
the Bank's common stock granted under the Bank Option Plan and outstanding
prior to completion of the Reorganization will automatically become options to
purchase three shares of the Company's Common Stock upon identical terms and
conditions. The Company will assume all of the Bank's obligations with respect
12
<PAGE>
to the Bank Option Plan. For information on the Company Option Plan adopted by
the Company's Board of Directors, see "The Board of Directors and Management of
the Bank--Stock Option Plans" in the Prospectus.
UNLESS MARKED TO THE CONTRARY, THE SHARES REPRESENTED BY THE ENCLOSED PROXY
CARD, IF EXECUTED AND RETURNED, WILL BE VOTED "FOR" THE RATIFICATION OF THE
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK 1996 STOCK OPTION PLAN.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE RATIFICATION OF THE
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK 1996 STOCK OPTION PLAN.
PROPOSAL III
ELECTION OF DIRECTORS
Pursuant to its bylaws, the number of directors of the Bank is set at seven.
Three directors will be elected at the Annual Meeting, all of whom will be
elected for a three-year term expiring at the annual meeting of the Bank in the
year 2000 or until their successors are elected and qualified. The three
nominees nominated for election for three-year terms are Messrs. Caldwell,
Johnson and Perl.
UNLESS DIRECTIONS ARE GIVEN TO THE CONTRARY, IT IS INTENDED THAT THE PROXIES
SOLICITED BY THE BOARD OF DIRECTORS WILL BE VOTED "FOR" THE ELECTION OF SAID
NOMINEES. If any nominee is unable to serve, the shares represented by all
valid proxies will be voted for the election of such substitute as the Board of
Directors may recommend. At this time, all nominees have agreed to serve and
the Board of Directors knows of no reasons why any nominee might be unable or
unwilling to serve. No person nominated as a director is being proposed for
election pursuant to any agreement or understanding between any person and the
Bank.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH NOMINEE.
INFORMATION WITH RESPECT TO THE NOMINEES AND CONTINUING DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR EXPIRATION
NAME SINCE OF TERM
---- -------- ----------
<S> <C> <C>
BOARD NOMINEES
Richard C. Caldwell 1983 2000
Milton E. Johnson 1983 2000
Daniel L. Perl 1996 2000
CONTINUING DIRECTORS
John D. Goddard 1988 1999
Edgar C. Keller 1983 1999
Ronald G. Skipper 1983 1998
Louis E. Yeager 1983 1998
</TABLE>
Information concerning the nominees, continuing directors and executive
officers, their ages, principal occupation or employment for the past five
years and position with the Bank, and the amount of common stock of the Bank
and the percent thereof beneficially owned by each and all directors and
executive officers as a group is set forth under "The Board Of Directors And
Management Of The Bank" in the Prospectus.
In addition, information concerning the Committees and meetings of the Board
of Directors of the Bank and compensation of the directors and executive
officers of the Bank is set forth under "The Board of Directors and Management
of the Bank" in the Prospectus.
13
<PAGE>
At each election of directors, every stockholder entitled to vote has the
right to vote, in person or by proxy, the number of shares held of record by
him for as many persons as there are directors to be elected to a particular
class, or to cumulate his votes by giving one candidate as many votes as the
number of such directors to be elected multiplied by the number of shares held
by such stockholder, or by distributing such votes on the same principal among
any number of candidates. A stockholder may also withhold authority from the
Board of Directors to vote as proxy for the election of any or all of the
nominees for director. Directors will be elected by a plurality of shares voted
for the directors, without regard to either (i) proxies as to which authority
to vote for one or more of the nominees being proposed is withheld; or (ii)
broker non-votes, if applicable. Directors will be elected by a plurality of
shares voted for directors.
PROPOSAL IV
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Bank's independent auditors for the year ended December 31, 1996 were
Deloitte & Touche LLP. The Board of Directors has reappointed Deloitte & Touche
LLP to continue as independent auditors for the Bank for the year ending
December 31, 1997, subject to ratification of such appointment by stockholders.
A representative of Deloitte & Touche LLP is expected to be present at the
Annual Meeting to respond to stockholders' questions and will have the
opportunity to make a statement if he or she so desires.
Prior to the year ended December 31, 1996, the Bank's financial statements
were audited by Grant Thornton, LLP and prior to the year ended December 31,
1995, the Bank's financial statements were audited by Price Waterhouse LLP.
Information concerning the changes in accountants is set forth under "Changes
in Accountants" in the Prospectus.
The ratification of independent accountants shall be determined by a majority
of the votes cast as to the matter.
UNLESS MARKED TO THE CONTRARY, THE SHARES REPRESENTED BY THE ENCLOSED PROXY
CARD WILL BE VOTED "FOR" RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE
LLP AS THE INDEPENDENT AUDITORS OF THE BANK.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR RATIFICATION OF THE
APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE INDEPENDENT AUDITORS OF THE BANK.
PROPOSAL V
APPROVAL TO ADJOURN THE MEETINGTO SOLICIT ADDITIONAL PROXIES
In the event there are an insufficient number of shares present in person or
by proxy at the Annual Meeting to approve Proposals I, II, III or IV, the Board
of Directors may adjourn the Annual Meeting to a later date. The place and date
to which the Annual Meeting would be adjourned would be announced at the Annual
Meeting, but would in no event be more than 30 days after the date of the
Annual Meeting.
While such an adjournment would not invalidate any proxies previously filed,
including those filed by stockholders voting against the subject proposals, it
would give the Bank the opportunity to solicit additional proxies in favor of
Proposals I, II, III and IV and would be advantageous to those in favor of such
proposals and disadvantageous to those opposing them.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
ADJOURNMENT UNDER THE CIRCUMSTANCES DESCRIBED HEREIN. Approval of the
adjournment requires the affirmative vote of the holders of a majority of the
shares of Bank common stock present in person or by proxy at the Annual
Meeting.
14
<PAGE>
OTHER MATTERS
Management of Life Savings knows of no other business to be presented at the
Annual Meeting. If other matters are presented at the Annual Meeting, or any
adjournments thereof, which are proper subjects for action by stockholders, it
is the intention of those named in the accompanying proxy to vote such proxy in
accordance with their best judgment on such matters.
By Order of the Board of Directors
LOGO
L. Bruce Mills
Corporate Secretary
San Bernardino, California
March 28, 1997
15
<PAGE>
AVAILABLE INFORMATION
The Proxy Statement and the Prospectus constitute part of the Registration
Statement filed with the Securities and Exchange Commission ("SEC" or
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), in connection with the Reorganization described herein. The summaries or
description of documents or statutes in the Proxy Statement and the Prospectus
do not purport to be complete; reference is made to the copies of such
documents attached hereto or otherwise filed as a part of the Registration
Statement and to such statutes for a full and complete statement of their
provisions, and such summaries and descriptions are qualified in their entirety
by such reference. The Proxy Statement and the Prospectus do not contain all of
the information set forth in the Registration Statement and all exhibits
relating thereto, certain portions of which have been omitted pursuant to the
rules and regulations of the SEC. The Registration Statement, including
exhibits, may be inspected without charge at the offices of the Commission.
Copies may be obtained at prescribed rates at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Life Financial Corp. is currently a wholly-owned subsidiary of the Bank and
was formed solely for the purpose of effecting the Reorganization. As a wholly-
owned subsidiary, Life Financial Corp. has not previously been subject to the
requirements of the Exchange Act and there is currently no public market for
its stock. If the Reorganization is consummated, Life Financial Corp. will
become subject to the reporting and proxy statement requirements of the
Exchange Act and, in accordance therewith, file reports, proxy statements and
other information with the SEC. In addition, in connection with the annual
meeting of stockholders of Life Financial Corp., proxy statements, accompanied
or preceded by annual reports to stockholders, will be furnished to
stockholders of Life Financial Corp. Such reports will contain financial
information that has been examined and reported upon, with an opinion expressed
thereon, by an independent certified public accountant. Life Financial Corp.
has received conditional approval to have its Common Stock quoted on the
National Market System of the Nasdaq Stock Market as of the Effective Date.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THE PROXY STATEMENT AND THE PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THE PROXY STATEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER
TO SELL A SECURITY, OR A SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH,
OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THE PROXY STATEMENT AND THE PROSPECTUS
NOR ANY DISTRIBUTION OF THE SECURITIES MADE UNDER THE PROXY STATEMENT AND THE
PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE BANK OR OF LIFE FINANCIAL CORP. SINCE
THE DATE OF THE PROXY STATEMENT AND THE PROSPECTUS.
16
<PAGE>
REVOCABLE PROXY-LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
ANNUAL MEETING OF STOCKHOLDERS
APRIL 18, 1997
10:00 A.M.
The undersigned hereby appoints the Board of Directors of Life Savings
Bank, Federal Savings Bank, with full power of substitution, to act as
attorneys and proxies for the undersigned, and to vote all shares of common
stock of Life Savings Bank, Federal Savings Bank, which the undersigned is
entitled to vote only at the Annual Meeting of Stockholders, to be held at the
Arrowhead Country Club, at 3433 Parkside Drive, San Bernadino, California, April
18, 1997, at 10:00 a.m., and at any and all adjournments thereof, as indicated
on the reverse side.
THIS PROXY IS REVOCABLE AND WILL BE VOTED AS DIRECTED, BUT IF NO
INSTRUCTIONS ARE SPECIFIED, THIS SIGNED PROXY WILL BE VOTED "FOR" THE PROPOSALS
LIST. IF ANY OTHER BUSINESS IS PRESENTED AT THE ANNUAL MEETING, THIS PROXY WILL
BE VOTED BY THOSE NAMED IN THIS PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT
TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE
ANNUAL MEETING.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
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FOLD AND DETACH HERE
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED PROPOSALS.
Please mark your notes as indicated in this example [X]
1. The approval of the Agreement and Plan of Reorganization, pursuant to which
(i) the Bank will be reorganized into a holding company structure and become
a wholly-owned subsidiary of Life Financial Corp. and (ii) each outstanding
share of the Bank's common stock will be converted into three shares of
Common Stock of Life Financial Corp.
FOR [_] AGAINST [_] ABSTAIN [_]
2. The ratification of the Life Savings Bank, Federal Savings Bank 1996 Stock
Option Plan.
FOR [_] AGAINST [_] ABSTAIN [_]
3. The election of all listed nominees for terms of three years each or until
their successors are elected and qualified (except as marked to the
contrary).
VOTE
FOR [_] WITHHELD [_]
Messrs. Richard C. Caldwell, Milton E. Johnson and Daniel L. Perl
INSTRUCTION: To withhold your vote for any individual nominee, strike through
that nominee's name on the line above. You are allowed to cumulate voting for
the nominees. In voting for directors, a stockholder is entitled to three votes
for each share of common stock held, one for each of the three nominees. A
stockholder may cast his/her votes evenly for all nominees or may cumulate such
votes and cast all for one nominee or distribute them among the three nominees.
To cumulate votes for any nominee, write the nominee's name and the number of
votes cast in his favor on the line below.
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4. The ratification of the appointment of Deloitte & Touche LLP as independent
auditors for Life Savings Bank, Federal Savings Bank, for the fiscal year
ending December 31, 1997.
FOR [_] AGAINST [_] ABSTAIN [_]
5. The approval of the adjournment of the Annual Meeting for up to 30 days, if
necessary, in order to solicit proxies if a majority of the votes eligible to
be cast at the Annual Meeting does not submit proxies voting in favor of any
of the Proposals.
FOR [_] AGAINST [_] ABSTAIN [_]
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
The undersigned acknowledges receipt from Life Savings Bank, Federal Savings
Bank, prior to the execution of this proxy of a Notice of Annual Meeting and of
a Prospectus/Proxy Statement dated March 28, 1997.
Dated:
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Signature of Shareholder
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Signature of Shareholder
Please sign exactly as your name appears on this card. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder may sign but only one signature
is required.
["PLEASE MARK INSIDE BLUE BOXES SO THAT DATA
PROCESSING EQUIPMENT WILL RECORD YOUR VOTES"]
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FOLD AND DETACH HERE
