<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1997
REGISTRATION NO. 333-20497
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 2 TO THE FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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LIFE FINANCIAL CORP.
(Exact name of registrant as specified in its certificate of incorporation)
DELAWARE 6035 APPLIED FOR
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
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)
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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)
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Copies to:
MARY M. SJOQUIST, ESQUIRE
GEOFFREY W. RYAN, ESQUIRE ROGER M. COHEN, ESQUIRE
MULDOON, MURPHY & FAUCETTE BROBECK PHLEGER & HARRISON LLP
5101 WISCONSIN AVENUE, N.W. 4675 MACARTHUR COURT, SUITE 1000
WASHINGTON, D.C. 20016 NEWPORT BEACH, CALIFORNIA 92660
(202) 362-0840 (714) 752-7535
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box.
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE PRICE FEE
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Common Stock $.01 par
Value................. 3,211,716 Shares $12.00 $38,540,592 11,679(2)
</TABLE>
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(1) Based on the 3,211,716 shares of Life Financial Corp. Common Stock (the
"Common Stock") to be issued in exchange for the 1,070,572 outstanding
shares of Common Stock of Life Savings Bank, Federal Savings Bank ("Life
Savings").
(2) 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. The registration fee of
$11,678 was previously paid upon the payment of $16,601 at the time of the
initial filing of the Form S-1 on January 27, 1997 and the additional
payment of $5,533 at the time of the filing of Pre-Effective Amendment No.
1 to the
Form S-1 filed on March 27, 1997 for an aggregate amount paid of $22,134.
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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
SECTION 8(A), MAY DETERMINE.
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<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
1598 EAST HIGHLAND AVENUE
SAN BERNARDINO, CALIFORNIA 92404
May __, 1997
Fellow Stockholders:
You are cordially invited to attend the annual meeting of stockholders
(the "Annual Meeting" or the "Adjourned Annual Meeting") of Life Savings Bank,
Federal Savings Bank (the "Bank" or "Life Savings"), which will be held on June
20, 1997, at 10:00 a.m., Pacific Time, at the Arrowhead Country Club, at 3433
Parkside Drive, San Bernardino, California 92404.
As you are undoubtedly aware, the Bank's Annual Meeting of
Stockholders was convened on May 21, 1997 and stockholders elected directors,
approved the Life Savings Bank 1996 Stock Option Plan, and ratified the
appointment of Deloitte & Touche LLP as independent auditors for the year
ending December 31, 1997. After those actions, the meeting was adjourned so
that stockholders could have the benefit of an effective registration statement
under the Securities Act of 1993 in connection with their consideration of and
vote on the proposed Reorganization.
The Prospectus and Proxy Statement under such registration statement
appears on the following pages and describes the proposed Reorganization to be
considered at the Adjourned Annual Meeting. We urge you to read carefully the
description of the proposed Reorganization. Directors and Officers of the Bank
will be present at the Adjourned Annual Meeting to respond to any questions that
our stockholders may have regarding the Reorganization.
The Board of Directors of the Bank has determined that the proposed
Reorganization into a holding company structure will provide greater flexibility
to meet the future competitive and financial needs of the Bank and is in the
best interest of the Bank and our Stockholders. FOR THE REASONS SET FORTH IN
THE PROSPECTUS AND PROXY STATEMENT, THE BOARD UNANIMOUSLY RECOMMENDS A VOTE
"FOR" THE PROPOSED REORGANIZATION.
YOUR VOTE IS IMPORTANT. PLEASE SIGN AND RETURN THE ENCLOSED PROXY
CARD PROMPTLY. YOUR COOPERATION IS APPRECIATED SINCE, IN ORDER TO OBTAIN
STOCKHOLDER APPROVAL, A MAJORITY OF THE COMMON STOCK OUTSTANDING MUST BE VOTED
IN FAVOR OF THE REORGANIZATION OF THE BANK.
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,
Daniel L. Perl
President, Chief Executive Officer
and Director
<PAGE>
LIFE FINANCIAL CORP.
AND
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
__________________________________
PROSPECTUS AND PROXY STATEMENT
__________________________________
ADJOURNED ANNUAL MEETING OF STOCKHOLDERS
PURPOSE OF THE ADJOURNED ANNUAL MEETING
This Prospectus and Proxy Statement 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 adjourned annual meeting of stockholders (the "Annual
Meeting" or the "Adjourned Annual Meeting") to be held on June 20, 1997 and at
any adjournments thereof. The Prospectus and Proxy Statement is first being
mailed to record holders on May __, 1997.
At the Adjourned 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 Life Financial Corp. (the "Company" or "Life Financial"), 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 Life Financial, copies of which are attached hereto.
The holders of common stock will also be asked to 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 deemed appropriate by the
Board. The approximate date of mailing of this Proxy Statement is May __, 1997.
This Prospectus and Proxy Statement also constitutes a Prospectus of the
Company under the Securities Act of 1933 with respect to the issuance, upon
consummation of the Reorganization, of a maximum of 3,211,716 shares of Company
Common Stock in exchange for all of the outstanding shares of the Bank's Common
Stock (the "Exchange Share Offering").
The Prospectus and Proxy Statement does not cover any resales of Company
Common stock received by the Bank's stockholders upon consummation of the
Reorganization, and no person is authorized to make any use of this Prospectus
and Proxy Statement in connection with any such resales.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus and Proxy Statement
is May __, 1997.
1
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TABLE OF CONTENTS
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<CAPTION> PAGE
<S> <C>
SUMMARY................................................ 4
SELECTED FINANCIAL AND OTHER DATA OF THE BANK.......... 11
RISK FACTORS........................................... 14
THE ADJOURNMENT........................................ 22
SOLICITATION AND VOTING OF PROXIES..................... 22
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF........ 22
PROPOSAL I HOLDING COMPANY REORGANIZATION............. 23
PROPOSAL II APPROVAL TO ADJOURN THE MEETING
TO SOLICIT ADDITIONAL PROXIES................ 27
DIVIDEND POLICY........................................ 27
MARKET FOR THE COMMON STOCK OF THE COMPANY............. 28
MARKET FOR THE COMMON STOCK OF THE BANK................ 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 29
LIFE FINANCIAL CORP.................................... 47
BUSINESS............................................... 48
FEDERAL AND STATE TAXATION............................. 90
REGULATION............................................. 91
THE BOARD OF DIRECTORS AND MANAGEMENT OF THE COMPANY... 99
THE BOARD OF DIRECTORS AND MANAGEMENT OF THE BANK...... 101
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY............ 113
DESCRIPTION OF CAPITAL STOCK OF THE BANK............... 114
</TABLE>
2
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COMPARISON OF STOCKHOLDER RIGHTS
AND CERTAIN ANTITAKEOVER CONSIDERATIONS...... 115
SHARES ELIGIBLE FOR FUTURE SALE........................ 122
EXPERTS................................................ 123
LEGAL MATTERS.......................................... 123
CHANGES IN ACCOUNTANTS................................. 124
ADDITIONAL INFORMATION................................. 124
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING.......... 125
FINANCIAL STATEMENTS................................... F-1
OTHER MATTERS.......................................... 126
AGREEMENT AND PLAN OF REORGANIZATION...................
CERTIFICATE OF INCORPORATION OF LIFE FINANCIAL CORP....
BYLAWS OF LIFE FINANCIAL CORP..........................
DISSENTER AND APPRAISAL RIGHTS.........................
</TABLE>
3
<PAGE>
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 AND PROXY STATEMENT. 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 PURSUANT TO THE PLAN OF
REORGANIZATION. UNLESS OTHERWISE INDICATED ALL REFERENCES TO THE COMPANY SHALL
BE DEEMED TO INCLUDE THE COMPANY AND ITS SUBSIDIARIES.
THIS PROSPECTUS AND PROXY STATEMENT CONTAINS CERTAIN STATEMENTS OF A
FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL
PERFORMANCE OF THE COMPANY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED OR
IMPLIED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
UNDER "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." FURTHER, CERTAIN FORWARD-
LOOKING STATEMENTS ARE BASED UPON ASSUMPTIONS AS TO FUTURE EVENTS THAT MAY NOT
PROVE TO BE ACCURATE.
HOLDING COMPANY REORGANIZATION
Stockholders are being asked to vote on a proposal to approve 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." Additional information summarizing the Reorganization appears
below.
Reasons for Reorganization and Public Offering. The Board of Directors
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 the 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 a
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. At the same
time, the Company's Articles of Incorporation contain certain new provisions,
including a limitation on director liability, as well as certain provisions that
may have an anti-takeover effect. See "Comparison of Stockholder Rights and
Certain Antitakeover Considerations."
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 will provide the initial capitalization for the Company
and will facilitate the Company's future business activities as described above.
Although the Company believes that the Public Offering will be completed
concurrently with the Reorganization, there are no assurances in this regard as
market conditions may prevent the Company from selling the additional shares of
the Company's Common Stock. In the event that the Public Offering is
substantially delayed or is terminated, the Bank intends to complete the
Reorganization. See "Proposal I -Holding Company Reorganization - Reasons for
Reorganization and Public Offering."
Description of Reorganization. The Company will become the holding company
for the Bank pursuant to the Plan of Reorganization described herein. Under the
Plan of Reorganization: (i) an interim federal savings bank will be organized
as a wholly-owned subsidiary of the Company; (ii) the interim savings bank will
be merged into Life Savings; and (iii) upon such merger, the holders of shares
of Life Savings common stock will receive in exchange therefore shares of the
Company's Common Stock, on a three-for-one basis. The stockholders of Life
Savings will thus become the sole stockholders of the Company in its form as the
holding company for Life Savings. See "Proposal I - Holding Company
Reorganization - Description of Reorganization" and "Public Offering." The
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Plan of Reorganization, which is attached as Exhibit A hereto, is hereby
incorporated into this Prospectus and Proxy Statement by reference thereto. The
Reorganization will be accounted for the same as a pooling-of-interests
transaction. See "Proposal I--Holding Company Reorganization--Accounting
Treatment of Reorganization".
Stockholder Vote Required for Approval. Approval of the proposed
Reorganization will require the affirmative vote of the holders of a majority of
the outstanding shares of Life Savings common stock. As a result, abstentions
and "broker non-votes" will have the same effect as a vote against the proposed
Reorganization. See "Solicitation and Voting of Proxies." As of April 22,
1997, the record date for determining stockholders entitled to notice of and to
vote at the adjourned Annual Meeting, directors and officers of Life Savings and
their affiliates were entitled to vote 250,680 shares of Life Savings common
stock, representing approximately 23.4% of the shares of Life Savings common
stock outstanding. See "The Board of Directors and Management of the
Bank."
Tax Consequences of Reorganization. The Reorganization is conditioned upon
receipt of an opinion of counsel to the effect, among other things, that no gain
or loss will be recognized by the stockholders of Life Savings upon the exchange
of their stock for stock of the Company in the Reorganization. See "Proposal I
- - Holding Company Reorganization - Tax Consequences of Reorganization."
Dissenters' Rights of Appraisal. Holders of the Bank's common stock will
have dissenters' rights of appraisal in connection with the Reorganization. See
"Proposal I - Holding Company Reorganization - Dissenters' Rights."
Regulatory Approvals. The Company has received the approval of the Office
of Thrift Supervision ("OTS") to become a savings and loan holding company to
acquire all of the issued and outstanding common stock of the Bank in the
Reorganization.
COMPARISON OF STOCKHOLDERS 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. Those differences should be noted by stockholders in connection with
their consideration of the proposed Reorganization. See "Comparison of
Stockholder Rights and Certain Antitakeover Considerations." 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.
REGULATION OF THE HOLDING COMPANY
The Company will be subject to regulation by the OTS as a savings and loan
holding company as well as the SEC. See "Proposal I - Holding Company
Reorganization."
5
<PAGE>
OTHER INFORMATION CONCERNING THE ADJOURNED ANNUAL MEETING
TIME AND PLACE OF ADJOURNED ANNUAL MEETING
The Adjourned Annual Meeting will be held at the Arrowhead Country Club,
3433 Parkside Drive, San Bernardino, California, on June 20, 1997 at 10:00 a.m.,
Pacific Time.
VOTING RECORD DATE
Only stockholders of record at the close of business on April 22, 1997 are
entitled to notice of and to vote at the Annual Meeting.
THE BANK
Background. The Bank is a federally chartered stock savings bank whose
primary business is the origination and sale of sub-prime one- to four-family
residential mortgage loans and, to a much lesser extent, multi-family
residential and commercial mortgage loans. The Bank was originally chartered in
1983 as a stock savings and loan association under the laws of the State of
California and became a federally chartered stock savings bank in 1991. The Bank
conducts its business from four locations: the Bank's headquarters in San
Bernardino, California, and three regional lending centers, one in Riverside,
California, one in Jacksonville, Florida and one recently established in the
Denver, Colorado metropolitan area. At March 31, 1997, the Bank had total assets
of $157.7 million, total deposits of $130.8 million and total equity of $11.5
million. During the three months ended March 31, 1997, the Bank originated or
purchased, through a network of approved correspondents and independent mortgage
brokers (the "Originators") $92.2 million of mortgage products, and sold or
securitized $83.2 million of such products. The Bank's deposits are insured up
to the maximum allowable amount by the Saving Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). The Bank's
headquarters are located at 1598 East Highland Avenue, San Bernardino,
California 92404, and its telephone number is (909) 886-9751.
During the early 1990's, as a result of reduced employment levels and
corporate relocations in Southern California and the general weakness of the
national economy, the Bank's market area experienced a weakening of real estate
values and a reduction in home sales and construction. When confronted with
increased competition and nominal growth during this same period, 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 response, in
1994, the Bank retained new management experienced in sub-prime lending to
redirect its business focus, revise its underwriting policies and procedures and
enhance its related servicing capabilities. A plan was developed pursuant to
which the Bank reorganized its lending operations from that of a thrift
emphasizing traditional mortgage banking and portfolio lending to that of a
diversified financial services operation focusing on the origination for sale or
securitization, with servicing retained, of various loan products. These loan
products include: (i) loans for the purchasing or refinancing of residential
real property by borrowers who may have had prior credit problems or who do not
have an adequate credit history, are considered "sub-prime borrowers"
("Liberator Series"); (ii) 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") ("Portfolio Series");
and (iii) to a much lesser extent, commercial and multi-family real estate
loans. Liberator Series loans and Portfolio Series loans are the Bank's "core
products." The Bank also adopted revised underwriting policies and instituted
more aggressive procedures for resolving problem loans and for reducing the
level of non-performing assets.
In 1994, the Bank began to implement its plan which resulted in:
. An increase in total purchases and originations of loans by 171.5% from
$82.0 million for the year ended December 31, 1993 to $222.6 million for
the year ended December 31, 1996. For the three month period ended March
31, 1997, loans originated and purchased totalled $92.2 million.
6
<PAGE>
. An increase in loan sales and securitizations by 191.0% from $71.0 million
for the year ended December 31, 1993 to $206.6 million for the year ended
December 31, 1996. For the three month period ended March 31, 1997, loan
sales and securitizations totalled $83.2 million.
. An increase in net income of 1,518.3% from $93,000 for the year ended
December 31, 1993, to $1.5 million for the year ended December 31, 1996.
For the three month period ended March 31, 1997, net income was $2.2
million.
. An increase in net gains from mortgage financing operations by 663.6% from
$1.1 million for the year ended December 31, 1993, to $8.4 million for the
year ended December 31, 1996. For the three month period ended March 31,
1997, net gains from mortgage financing operations totalled $5.9 million.
A decrease in non-performing assets by 25.0% from $4.0 million at December
31, 1993, to $3.0 million at December 31, 1996. As a percent of total
assets, non-performing assets decreased by 43.4% from 5.05% at December 31,
1993 to 2.86% at December 31, 1996. At March 31, 1997, non-performing
assets totalled $2.9 million and, as a percentage of total assets, were
1.85%.
. An increase in the allowance for estimated loan losses as a percent of
gross loans receivable by 263.1% from 0.65% at December 31, 1993 to 2.36%
at December 31, 1996. At March 31, 1997, the allowance for estimated loan
losses as a percent of gross loans receivable was 2.42%.
COMPETITIVE STRENGTHS
Management believes that it enjoys a competitive advantage when compared to
most other finance companies competing in its product areas as a result of the
following factors:
Expertise of Management. The change in direction of the Bank's business
focus commenced with the hiring in 1994 of Daniel L. Perl, the Bank's President
and Chief Executive Officer. Mr. Perl has more than twenty years of experience
in the financial services industry, including the areas of sub-prime lending,
commercial real estate lending, mortgage banking and investment banking. See
"Business--Competitive Strengths--Expertise of Management."
Efficiency of Operations. Management believes that the efficiency of its
operations allows the Bank to offer to its Originators very competitively priced
products. Management believes that this competitive pricing will increase the
volume of loans originated. See "Business--Competitive Strengths--Efficiency of
Operations."
Internal Controls. Management believes that it has established significant
internal controls which will help preserve and assure the overall quality of
loans originated by the Bank. See "Business--Competitive Strengths--Internal
Controls."
Flexible Funding Sources and Structure. As a federally-chartered savings
bank, the Bank has access to funds at a lower cost than its non-regulated
finance company competitors. The Bank's flexible funding structure will be
further enhanced by the Reorganization of the Bank into the holding company
structure. See "Business--Competitive Strengths--Flexible Funding Sources and
Structure."
Diversification Opportunities. Upon the Reorganization, the Company will
become a unitary savings and loan holding company which generally will not be
restricted in the types of business activities it may conduct provided that the
Bank continues to be a qualified thrift lender. See "Business--Competitive
Strengths--Diversification Opportunities."
7
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GROWTH AND OPERATING STRATEGIES
Management believes that, as a result of its competitive strengths, the
Bank and the Company will be able to implement the following growth and
operating strategies:
. Expanding Core Products Through a National Originator Network. The
Bank will continue to emphasize and to expand upon the origination of
its core products, Liberator Series loans and Portfolio Series loans,
for sale through securitizations and in the secondary market.
Continued growth of core products will result primarily from
geographic expansion and greater penetration in existing markets. In
particular, since the beginning of 1997, the Bank has widely
advertised its no income, no asset ("NINA") loan product, which is a
limited documentation, lower loan-to-value loan program within the
Liberator Series. NINA loans constituted $7.3 million of the $80.1
million of loans in the Bank's 1997-1 securitization during the first
quarter of 1997. In order to improve its ability to service its
expanding network of Originators, the Bank has established
strategically located, low cost regional lending centers in Riverside,
California, Jacksonville, Florida and in the Denver, Colorado
metropolitan area. Over the next twelve months, the Bank intends to
open two additional regional lending centers which are likely to be
strategically located in the Northeast and Midwest sectors of the
United States to better serve its Originators.
. Expanding Retail Lending Production. The Bank's retail lending
operations focus on retail loans located in the Bank's primary market
area of Southern California. To the extent that these loans meet the
criteria for Liberator Series loans or Portfolio Series loans, the
Bank's retail lending operation acts as an origination source for the
Life Financial Services Division of the Bank while loans not meeting
these criteria are sold to investors ("Loan Purchasers"). The Bank
intends to gradually and selectively expand its retail lending
operations beyond Southern California. As part of this process, the
Bank also plans to establish low cost retail offices selectively
throughout the country. In order to reduce the possibility that
borrowers will refinance their loans with other lenders, the Bank is
seeking to refinance such loans through its own retail lending
operation.
. Expanding Multi-Family and Commercial Lending. In continuing with its
tradition as a niche market lender and in an effort to diversify
product offerings, the Bank, through its Life Income Capital Division,
has recently begun to focus its efforts on the origination and
purchase of multi-family and commercial real estate loans in the range
of $50,000 to $750,000 both in its primary market area and throughout
the United States through a selected group of originators. The Bank
is currently purchasing such loans at a discount and, although there
can be no assurances, expects to be able to continue to purchase such
loans at a discount or low premium. The Bank employs underwriters who
specialize in commercial and multi-family real estate lending and
utilizes a select group of appraisers experienced in these products.
In addition, two members of senior management have considerable
expertise in multi-family and commercial real estate lending. The
Bank has been limited in its ability to originate multi-family and
commercial real estate loans by its level of available capital. The
Bank plans to gradually expand such originations as its available
capital increases. The Bank believes that it has the infrastructure
in place to accommodate this expansion. It is anticipated that all
multi-family and commercial real estate loans will be originated for
sale in the secondary market and may also be sold through
securitizations in the future. See "Business--Commercial Real Estate
and Multi-Family Real Estate Lending."
. Consistently Refining Operating Procedures. The Bank intends to
maintain loan quality by continuing to refine its underwriting
criteria. A meeting of the Bank's underwriting personnel is held each
week in part to discuss operational issues as well as refinements to
the Bank's underwriting policies. In addition, the Bank conducts a
weekly loan delinquency meeting to discuss problem areas in the Bank's
servicing portfolio in order to reduce the likelihood of the
recurrence of such problems in future loans. As necessary, the Bank
adds personnel to its loan processing staff and continues to utilize
advances in computer technology to provide prompt turnaround on loans,
efficient underwriting procedures and accurate credit verification.
In
8
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addition, in the fourth quarter of 1996, the Bank hired a senior
underwriter with corporate responsibility (the "Quality Control
Underwriter") who: is dedicated to maintaining quality control;
reviews loan files to assure that each complies with the Bank's
underwriting policies; reviews all loans upon first payment default
and loans sixty days delinquent; provides feedback and training to the
underwriters to minimize future defaults and delinquencies; and
investigates all fraudulent loans.
. Enhancing Servicing Capabilities. As the Bank has transitioned from a
traditional thrift to a diversified financial services operation, it
has expanded its servicing department from a total of four persons at
December 31, 1994 to 16 persons at March 31, 1997. In December 1996,
the Bank hired a department head with 24 years of experience in loan
servicing and collections including responsibility for a $10.0 billion
portfolio of approximately 255,000 loans and a staff of 70 people. In
anticipation of its future servicing needs, the Bank has dedicated
substantial space in its current Riverside facility to house loan
servicing operations and is in the process of implementing new
technology including computer imaging and power dialing. See
"Business--Loan Servicing."
. Diversifying Funding Sources. In addition to its traditional thrift
funding sources of deposits and loans from the Federal Home Loan Bank
of San Francisco ("FHLB"), the Bank has diversified its funding
sources in recent periods. During the fourth quarter of 1996 and the
first quarter of 1997, net cash received from the Bank's
securitizations provided a significant source of funding to the Bank,
aggregating $128.1 million for those two quarters. The Bank recently
has also entered into a retail mortgage warehouse line of credit with
a national investment banking firm in the amount of $35.0 million and
may enter into additional lines of credit in the future. Following
the Reorganization, the Company may further diversify the current
sources of funding through greater access to capital markets.
RESTRUCTURING
Historically, all operations have been conducted through the Bank and its
internal divisions, Life Financial Services Division, Life Income Capital
Division, Life Asset Management Division, Retail Lending Division and Banking
Depository Division. In order to increase operating flexibility and provide a
broader range of services to its customers, Management has determined (i) to
reorganize into the holding company form of organization, (ii) to form separate
holding company subsidiaries, and (iii) to restructure the Bank by forming
separate operating subsidiaries in order to realize possible future values from
such subsidiaries as follows:
<TABLE>
<CAPTION>
LIFE FINANCIAL CORP.
----------------------------------------
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK LIFE WAREHOUSE
(RETAIL LENDING DIVISION AND BANKING INVESTMENT FINANCING
DEPOSITORY DIVISION) HOLDINGS, SUBSIDIARY
INC.
- ------------------------------------------ ------------ ----------
<S> <C> <C> <C> <C>
LIFE LIFE LIFE
FINANCIAL INCOME ASSET
SERVICES, CAPITAL MANAGEMENT
INC. SERVICES, INC.
INC.
- ---------- ----------- --------
</TABLE>
9
<PAGE>
. Life Financial Services, Inc. ("Life Financial Services") will continue to
focus on the Bank's core products. See "Business--Core Lending Products."
Life Income Capital Services, Inc. ("Life Income Capital") expects to expand
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 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. See
"Business--Commercial Real Estate and Multi-Family Real Estate Lending."
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 Loan Purchasers . At March
31, 1997, the Bank's mortgage servicing portfolio totalled $316.6 million,
including $242.3 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 the Bank's securitization activities.
The Bank currently utilizes an independent third party trustee for this
purpose. Immediately following the completion of the Public Offering, Life
Investment will acquire residual assets from the Bank of approximately $12.5
million and $6.9 million in restricted cash resulting from the
securitizations completed by the Bank in the fourth quarter of 1996 and the
first quarter of 1997. It is intended that any future residuals and
restricted cash retained by the Company will be held by this subsidiary.
. Upon the completion of the Public Offering, 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
originate and securitize.
THE COMPANY
The Company was incorporated in Delaware in 1996. The Company has received
the approval of the OTS to become a savings and loan holding company 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 which was convened and adjourned
on May 21, 1997 and is scheduled to be held on June 20, 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, and three
regional lending centers located in Riverside, California, Jacksonville, Florida
and a recently established lending center in the Denver, Colorado metropolitan
area.
10
<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 and at or for the three months ended March 31, 1997 and 1996, set forth
below is derived in part from, and should be read in conjunction with, the
Financial Statements of the Bank and Notes thereto as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996
presented elsewhere in this Prospectus. Financial information at March 31, 1997,
and for the three month periods ended March 31, 1997 and 1996 is derived from
unaudited financial data, but in the opinion of management, reflects all
adjustments (consisting only of normal recurring adjustments) which are
necessary to present fairly the results for such interim periods. Interim
results at and for the three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. The Bank did not pay any cash dividends in any of the periods set forth.
<TABLE>
<CAPTION>
AT
MARCH 31, AT DECEMBER 31,
-------- -------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
SELECTED BALANCE SHEET DATA: (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total assets................................... $157,707 $104,010 $74,136 $71,402 $78,256 $78,788
Securities held-to-maturity and FHLB stock..... 9,021 8,837 2,700 2,860 3,883 4,829
Loans held for sale............................ 38,296 31,018 21,688 17,070 2,348 4,499
Loans held for investment...................... 36,472 38,520 42,870 47,939 64,817 61,181
Allowance for estimated loan losses............ 1,801 1,625 1,177 832 436 308
Deposit accounts............................... 130,808 85,711 67,535 65,689 72,008 71,719
FHLB advances.................................. -- -- -- 1,250 1,200 2,000
Stockholders' equity........................... 11,515 9,273 4,268 3,748 4,419 4,326
Book value per share (pro forma)(1)............ $ 3.59 $ 2.89 $ 2.29 $ 2.01 $ 2.37 $ 2.55
Shares outstanding (pro forma)(1).............. 3,211,716 3,211,716 1,866,216 1,866,216 1,866,216 1,696,410
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
-----------------------
1996 1996 1996 1995 1994 1993 1992
--------- -------- --------- --------- --------- -------- --------
SELECTED OPERATING DATA: (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income...................... $ 2,304 $ 1,662 $ 6,929 $ 5,825 $ 4,824 $ 5,445 $ 6,143
Interest expense..................... 1,561 929 3,766 3,448 2,721 3,045 3,687
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income................. 743 733 3,163 2,377 2,103 2,400 2,456
Provision for estimated loan losses.. 500 68 963 1,194 1,306 404 129
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision
for estimated loan losses.......... 243 665 2,200 1,183 797 1,996 2,327
Net gains from mortgage financing
operations......................... 5,877 887 8,352 3,575 1,428 1,144 1,380
Other non-interest income........... 208 153 760 445 260 253 352
Non-interest expense:
Compensation and benefits........... 1,582 814 5,233 2,544 1,575 1,403 1,426
Net loss on foreclosed real
estate........................... 63 91 158 53 280 228 78
SAIF special assessment............. -- -- 448 -- -- -- --
Other expense....................... 847 616 2,842 1,792 1,601 1,562 2,045
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total non-interest expense.......... 2,492 1,521 8,681 4,389 3,456 3,193 3,549
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income tax
provision (benefit)................. 3,836 184 2,631 814 (971) 200 510
Income tax provision (benefit)....... 1,594 79 1,126 294 (300) 107 148
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ 2,242 $ 105 $ 1,505 $ 520 $ (671) $ 93 $ 362
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) per share
(pro forma)(2)...................... $ 0.70 $ 0.06 $ 0.63 $ 0.28 $ (0.36) $ 0.05 $ 0.22
========== ========== ========== ========== ========== ========== ==========
Weighted average shares outstanding
(pro forma)(2)..................... 3,211,716 1,866,216 2,370,779 1,866,216 1,866,216 1,823,765 1,644,886
========== ========== ========== ========== ========== ========== ==========
(continued on following page)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED AT OR FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------- -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- -------------------------------------------------------
SELECTED FINANCIAL RATIOS AND OTHER (DOLLARS IN THOUSANDS)
DATA(3):
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets................... 6.32% 0.48% 1.74% 0.69% (0.89)% 0.12% 0.46%
Return on average equity................... 90.48 9.73 24.99 13.64 (17.01) 2.11 8.92
Average equity to average assets........... 6.99 4.95 6.98 5.04 5.22 5.51 5.17
Equity to total assets at end of period.... 7.30 5.04 8.92 5.76 5.25 5.65 5.49
Average interest rate spread(4)............ 2.32 3.52 3.76 3.09 2.79 3.02 3.04
Net interest margin(5)..................... 2.44 3.71 3.94 3.25 2.88 3.14 4.29
Average interest-earning assets to
average interest-bearing liabilities...... 102.43 104.12 103.90 103.50 102.27 103.08 103.64
Efficiency Ratio(6)........................ 35.57 80.65 69.43 67.78 83.78 78.09 82.88
LOAN ORIGINATIONS AND PURCHASES............. $92,190 $50,928 $222,553 $134,772 $72,815 $82,015 $90,870
REGULATORY CAPITAL RATIOS(7):
Tangible capital........................... 7.19% 4.99% 8.90% 5.68% 5.25% 5.65% 5.49%
Core capital............................... 7.19 4.99 8.90 5.68 5.25 5.65 5.49
Risk-based capital......................... 10.51 8.91 9.43 10.17 10.00 10.87 10.56
ASSET QUALITY RATIOS:
Non-performing assets as a percent of
total assets(8)........................... 1.85 3.69 2.86 3.00 3.42 5.05 4.15
Allowance for estimated loan losses as a
percent of non-performing loans........... 103.62 52.65 67.26 84.25 44.04 20.02 16.29
</TABLE>
- -----------------------------
(1) Book value per share is based upon the shares outstanding at the end of each
period, adjusted for a 100% stock dividend which occurred during 1996. Book
value per share (pro forma) is then adjusted for the exchange of three
shares of Company Common Stock for one share of Bank common stock in the
Reorganization.
(2) Earnings per share is based upon the weighted average shares outstanding
during the period, adjusted for a 100% stock dividend which occurred during
1996. Earnings per share (pro forma) is then adjusted for the exchange of
three shares of Company Common Stock for one share of Bank common stock in
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 Public Offering.
(8) Non-performing assets consist of non-performing loans and REO. See
"Business - Lending Activities - Non-Accrual and Past-Due Loans" and "-
REO."
12
<PAGE>
QUARTERLY OPERATING AND OTHER DATA OF THE BANK
Financial information of the Bank at March 31, 1997 and December 31,
September 30, June 30 and March 31, 1996 and for the quarters ended March 31,
1997, and December 31, September 30, June 30 and March 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. Interim
results at or for the three months ended March 31, 1997 are not necessarily
indicative of the results for the year ending December 31, 1997.
<TABLE>
<CAPTION>
AT OR FOR THE QUARTER ENDED
----------------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1997 1996 1996 1996 1996
----------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income.......................................... $ 2,304 $ 2,007 $ 1,569 $ 1,691 $ 1,662
Interest expense......................................... 1,561 1,067 844 926 929
------- ------- ------- ------- -------
Net interest income..................................... 743 940 725 765 733
Provision for estimated loan losses...................... 500 604 251 40 68
------- ------- ------- ------- -------
Net interest income after provision
for estimated loan losses.............................. 243 336 474 725 665
Net gains from mortgage financing operations............. 5,877 4,593 1,599 1,273 887
Other non-interest income................................ 208 256 192 159 153
Non-interest expense:
Compensation and benefits............................... 1,582 2,026 1,056 1,337 814
Net loss (gain) on foreclosed real estate............... 63 (13) 71 9 91
SAIF Special Assessment................................. -- -- 448 -- --
Other expense........................................... 847 851 671 704 616
------- ------- ------- ------- -------
Total non-interest expense............................. 2,492 2,864 2,246 2,050 1,521
------- ------- ------- ------- -------
Income before income tax provision....................... 3,836 2,321 19 107 184
Income tax provision..................................... 1,594 984 17 46 79
------- ------- ------- ------- -------
Net income............................................... $ 2,242 $ 1,337 $ 2 $ 61 $ 105
======= ======= ======= ======= =======
Earnings per share (pro forma)(1)........................ $ 0.70 $ 0.42 $ 0.00 $ 0.03 $ 0.06
======= ======= ======= ======= =======
SELECTED FINANCIAL RATIOS AND OTHER
DATA(2):
PERFORMANCE RATIOS:
Return on average assets................................ 6.32% 5.56% 0.01% 0.30% 0.48%
Return on average equity................................ 90.48 61.35 0.12 5.44 9.73
Average equity to average assets........................ 6.99 8.77 8.42 5.56 4.95
Equity to total assets at end of period................. 7.30 8.92 9.40 5.62 5.04
Average interest rate spread(3)......................... 2.32 4.09 3.93 3.71 3.52
Net interest margin(4).................................. 2.44 4.22 3.95 3.85 3.71
Average interest-earning assets to
average interest-bearing liabilities................... 102.43 104.64 103.25 103.10 104.12
Efficiency Ratio(5)..................................... 35.57 49.70 86.45 92.90 80.65
LOAN ORIGINATIONS AND PURCHASES.......................... $92,190 $74,164 $44,536 $52,925 $50,928
REGULATORY CAPITAL RATIOS(6):
Tangible capital........................................ 7.19% 8.90% 9.40% 5.62% 4.99%
Core capital............................................ 7.19 8.90 9.40 5.62 4.99
Risk-based capital...................................... 10.51 9.43 16.06 9.82 8.91
ASSET QUALITY RATIOS:
Non-performing assets as a percent of total assets(7)... 1.85 2.86 3.36 3.59 3.69
Allowance for estimated loan losses as
a percent of non-performing loans..................... 103.62 67.26 55.66 66.06 52.65
- ------------------------
</TABLE>
(1) Earnings per share is based on the weighted average shares outstanding
during the period, adjusted for a 100% stock dividend which occurred during
1996. Earnings per share (pro forma) is then adjusted for the exchange of
three shares of Company Common Stock for one share of Bank common stock in
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
closing 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 Public Offering.
(7) Non-performing assets consist of non-performing loans and REO. See
"Business - Lending Activities - Non-Accrual and Past-Due Loans" and "-REO."
13
<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 BANK TO IMPLEMENT ITS BUSINESS STRATEGY
The Bank's business strategy is dependent upon its ability to increase its
loan volume through the nationwide growth of its network of Originators, 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 Bank's ability to: (i) expand its network of Originators in markets with
a sufficient concentration of borrowers meeting the Bank's underwriting
criteria; (ii) obtain adequate financing on favorable terms to fund its growth
strategy; (iii) profitably sell its loans through securitizations or in the
secondary market on a regular basis; (iv) attract and retain skilled employees;
and (v) continue to expand in the face of increasing competition from other
mortgage lenders. The Bank'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 Bank's results of operations and financial
condition. In addition, there can be no assurance that the Company will achieve
its planned expansion in a timely and cost-effective manner or, if achieved,
that the expansion will result in profitable operations. Although the Bank has
no current plans to modify its current strategy, because of the dynamic changes
occuring in the financial services industry, the Bank may revise its business
plan by developing new consumer or commercial loan products or expanding into
new markets. There can be no assurances that any such revised strategy would be
as profitable or successful as the existing strategy has been historically. See
"Business."
RISKS ASSOCIATED WITH MORTGAGE ORIGINATION, PURCHASE AND SALE ACTIVITIES
The Bank has been actively involved in the origination, purchase and sale
to Loan Purchasers and, more recently, in securitizations of real estate secured
loans. Generally, the profitability of such mortgage financing operations
depends on maintaining a sufficient volume of loans for sale and the
availability of Loan Purchasers. Changes in the level of interest rates and
economic factors may affect the amount of loans originated or available for
purchase by the Bank, and thus the availability of net gains from mortgage
financing operations and servicing fee income. Changes in the purchasing
policies of Loan Purchasers or increases in defaults after funding could
substantially reduce the amount of loans sold to such Loan Purchasers or through
asset securitizations. Any such changes could have a material adverse effect on
the Bank's results of operations and financial condition. Therefore, between the
time the Bank originates loans and purchase commitments are issued or
securitizations are completed, the Bank is exposed to downward movements in the
market price of such loans due to upward movements in interest rates. In order
to reduce these risks, the Bank has recently adopted a hedging policy. There can
be no assurances, however, that the Bank's exposure to such risks will be
reduced by pursuing this policy. See "Business--Core Lending Products--
Origination and Purchase of Loans" and "--Loan Sales and Asset Securitizations"
and "--Sources of Funds."
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 through its network of Originators. 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. The
Bank may not have the same depth of experience or knowledge about particular
markets in which it lends as other lenders with the staff physically located in
such market areas. 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--Geographic Distribution" and "--Lending Overview--Delinquencies and
Classified Assets."
DEPENDENCE ON ASSET SECURITIZATIONS AND IMPACT ON QUARTERLY OPERATING RESULTS
During the fourth quarter of 1996 and the first quarter of 1997, the Bank,
through its Financial Services Division, completed its first and second
securitizations, which involved $51.9 million and $83.2 million of loans,
14
<PAGE>
respectively, which generated net gains from securitizations of approximately
$4.3 million and $5.9 million, respectively. Although the Bank will not complete
a securitization in the second quarter of 1997, a significant component of the
management's business strategy is to generate revenue and net income and provide
funding for future originations and purchases of loans through securitizations
on a regular basis. There can be no assurance, however, that the Bank will be
able to successfully implement this strategy. Several factors will affect the
Bank's ability to complete securitizations, including conditions in the
securities 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. In addition, although the Bank has
tracked the performance of its portfolio of loans, it did not, prior to the
fourth quarter of 1996, have the ability to track loans by core products. As a
result, if loans do not perform up to original expectations, the Bank may not be
able to securitize loans on economic terms as favorable as those conducted to
date. Although the Bank obtained a credit enhancement in the securitizations
completed during the fourth quarter of 1996 and the first quarter of 1997 which
facilitated a "AAA" rating for the securitization interests in both instances,
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 securitizations could have a material adverse effect on the Bank's
results of operations and financial condition.
The Bank records net gains from mortgage financing operations 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 Bank to write down the value of such
residuals and result in a material adverse effect on the Bank's results of
operations and financial condition. The Bank 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.
The Bank's future revenues and net income are expected to fluctuate in
large part as a result of the timing and size of its future securitizations. A
delay in closing a scheduled securitization during a particular quarter would
postpone recognition of net gains from mortgage financing operations. In
addition, unanticipated delays in closing a securitization could also increase
the Bank's exposure to credit risks and interest rate fluctuations by increasing
the period during which the Bank holds its loans. If the Bank were unable to
profitably securitize a sufficient number of its loans in a particular reporting
period, the Bank'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 Bank's results of operations, financial condition
and capital ratios. In addition, the Bank projects the expected cash flows over
the life of the residual interests, using prepayment and default assumptions
that market participants would use for similar financial instruments that are
subject to prepayment, credit and interest rate risks. The Bank then determines
the present value of these cash flows using an interest rate commensurate with
the risks involved. If the Bank's actual experience differs materially from the
assumptions used in the determination of the present value of the residual
interests, future cash flows and earnings could be negatively impacted. See
"Business--Loan Sales and Asset Securitizations."
Although the Bank has typically maintained the deliquency, loss and
prepayment experience in its total loan portfolio, prior to its first
securitization in December 1996, the Bank did not separately track the
delinquency, loss and prepayment experience of core product loans in any
meaningful fashion. Consequently, the Bank does not have representative
historical delinquency, bankruptcy, foreclosure, default or prepayment
experience that may be referred to for purposes of estimating the future
delinquency, loss and prepayment experience of its core product loans. In view
of the Bank's lack of core product loan performance data, the Bank relied on a
third party evaluation of its core product loan portfolio and therefore it is
difficult to validate the Bank's loss or prepayment assumptions used to
calculate its gain on sale in connection with its securitizations or with future
securitizations. Any material difference between these assumptions and actual
performance could have a material adverse impact on the timing and/or receipt of
the Bank's future revenues, the value of the residential interests held on the
Bank's balance sheet and the Bank's cash flow.
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
(e.g. 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 an adequate 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. The FDIC has recently
issued a letter to all FDIC-insured institutions highlighting the special risks
associated with sub-prime lending and the need for management controls. 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
15
<PAGE>
against such risks. See "Business--Core Lending Products--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 and the first quarter of 1997, of the core product loans originated by the
Bank, 42.9% and 55.3%, respectively, consisted of Portfolio Series loans. See
"Business--Core Lending Products--Origination and Purchase of Loans," "--
Underwriting," and "--Loan Sales and Asset Securitizations."
CONTINGENT RISKS
Although the Bank sells substantially all of the mortgage loans it
originates or purchases without recourse, the Bank retains some degree of credit
risk on substantially all of the loans it sells. In addition, during the period
of time that the loans are held for sale, the Bank is subject to various
business risks associated with the lending business, including borrower default,
foreclosure and the risk that a rapid increase in interest rates would result in
a decline of the value of loans held for sale to potential purchasers.
In connection with its securitizations, the Bank is required to repurchase
or substitute loans in the event of a breach of a representation or warranty
made by the Bank. While the Bank may have recourse to the sellers of loans it
purchased, there can be no assurance of the sellers' abilities to honor their
respective obligations to the Bank. Likewise, in connection with its whole loan
sales, the Bank enters agreements which generally require the Bank 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 early
default on such mortgage loans. The remedies available to a Loan Purchaser from
the Bank are generally broader than those available to the Bank against the
sellers of such loans, and if a Loan Purchaser enforces its remedies against the
Bank, the Bank may not be able to enforce whatever remedies the Bank may have
against such sellers. If the loans were originated directly by the Bank, the
Bank will be solely responsible for any breaches of representations and
warranties.
In addition, borrowers, Loan Purchasers, monoline insurance carriers and
trustees in the Bank's securitizations may make claims against the Bank arising
from alleged breaches of fiduciary obligations, misrepresentations, errors and
omissions of employees, officers and agents of the Bank, including appraisers,
incomplete documentation and failure by the Bank to comply with various laws and
regulations applicable to its business. Any claims asserted in the future may
result in liabilities or legal expenses that could have a material adverse
effect on the Bank's results of operations, financial condition and business
prospects.
DEPENDENCE ON KEY PERSONNEL
The Bank 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 management of the Bank's mortgage
financing operations. The continued development of the Bank'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. In
addition, many members of senior management have had working relationships with
Mr. Perl prior to joining the Bank. The loss of such personnel, Mr. Perl or
other key personnel could materially adversely affect the Bank's and the
Company's business. The Bank has entered into an interim employment agreement
with Mr. Perl and concurrently with the closing of the Public Offering, 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."
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RISKS RELATED TO DEBENTURES
In March 1997, the Bank issued $10.0 million of subordinated debentures
("the Debentures") through a private placement and pursuant to a Debenture
Purchase Agreement (the "Debenture Offering"). In the event that the Company and
the Bank elect to substitute the Company as obligor on the Debentures (the
"Substitution") following the Public Offering, 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. 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 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. See "Business--Sources of Funds--Borrowings."
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 March 31, 1997, the carrying value of the Bank's mortgage
servicing rights totalled $4.1 million, up from $683,000 at December 31, 1995.
In addition, the pooling and servicing agreements relating to the Bank's
securitizations 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. The mortgage
servicing rights on the loans securitized during the fourth quarter of 1996 and
the first quarter of 1997 totalled approximately $2.3 million.
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 securitizations. 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 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 offering by these competitors of products similar to
those of the Bank's could have a material adverse effect on the Bank's results
of operations and financial condition. The Bank depends largely on Originators
with whom the Bank's competitors also seek to establish relationships. The
Bank's future results may become increasingly sensitive to fluctuations in the
volume and cost of its wholesale loan purchases resulting from competition from
other purchasers for such loans. In addition, as the Bank expands into new
geographic markets, it will face competition from lenders with established
positions in these locations. There can be no assurance that the Bank 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 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
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to offer deposit rates at levels that are competitive with other financial
institutions. Certificate of deposit accounts constitued $113.5 million or 86.7%
of total deposits at March 31, 1997, of which $103.5 million mature in one year
or less. Further increases in short-term certificate 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 has a large
amount of core deposits which, in turn, may result in further increases in the
Bank's cost of deposits. The Bank also uses the cash 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 recently entered into a line of credit with a national
investment banking firm in the amount of $35.0 million to fund loan
originations. See "Business--Sources of Funds--Borrowings." 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. See ""Business--Sources of Funds."
MULTI-FAMILY AND COMMERCIAL REAL ESTATE 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.
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. The Bank's
ability to originate, purchase and sell loans through its mortgage financing
operations is 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. 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. 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 Public Offering. 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."
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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, 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 Reorganization and the
Public Offering 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 Reorganization and the Public Offering (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 existing law and regulations is also subject to change by the federal
regulatory authorities. Any failure of the Bank to comply with any of the laws
and regulations to which it is subject or any change in the regulatory structure
or the applicable statutes, regulations whether by the OTS, the FDIC or the
Congress, could have a material adverse 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 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 and create a uniform financial institutions charter and
abolish the OTS
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were introduced in the 105th 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 which could limit
the activities permissible for the Company to activities that are financial in
nature. While such legislation was not acted upon by the past session of
Congress, no assurances can be made that similar legislation will not be
enacted by 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.
IMPACT OF LAWS AND REGULATIONS AFFECTING CERTAIN LENDING OPERATIONS
In addition to federal regulations on its banking operations, the Bank's
consumer lending activities are subject to consumer protection and other
statutes including the Federal Truth-in-Lending Act and Regulation Z (including
the Home Ownership and Equity Protection Act of 1994), the Federal Equal Credit
Opportunity Act and Regulation B, as amended, the Fair Credit Reporting Act of
1970, as amended, the Federal Real Estate Settlement Procedures Act of 1974, as
amended ("RESPA"), and Regulation X, the Fair Housing Act, the Home Mortgage
Disclosure Act and Regulation C and the Federal Debt Collection Practices
Act.
These rules and regulations, among other things, establish eligibility
criteria for mortgage loans, prohibit discrimination, provide for inspections
and appraisals of properties, require credit reports on loan applicants,
regulate assessment, collection, foreclosure and claims handling, investment and
interest payments on escrow balances and payment features, mandate certain
disclosures and notices to borrowers and, in some cases, fix maximum interest
rates, fees and mortgage loan amounts. Failure to comply with these
requirements can lead to loss of approved status, termination or suspension of
servicing contracts without compensation to the servicer, demands for
indemnifications or mortgage loan repurchases, certain rights of rescission for
borrowers, class action lawsuits and administrative enforcement actions.
Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, in the future more restrictive laws, rules and
regulations or the judicial interpretation of existing laws, rules and
regulations could make compliance more difficult or expensive. See
"Regulation."
ELIMINATION OF LENDER PAYMENTS TO BROKERS COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS
Lawsuits have been filed against several mortgage lenders alleging the such
lenders have made certain payments to independent mortgage brokers in violation
of RESPA. These lawsuits have generally been filed on behalf of a purported
nationwide class of borrowers alleging that payments made by a lender to a
broker in addition to payments made by the borrower to a broker are prohibited
by RESPA and are therefore illegal. If these cases are resolved against the
lenders, it may cause an industry-wide change in the way independent mortgage
brokers are compensated. The Bank's broker compensation programs permit such
payments. Although the Bank believes that its broker compensation programs
comply with all applicable laws and are consistent with long-standing industry
practice and regulatory interpretations, in the future new regulatory
interpretations or judicial decisions may require the Bank to change its broker
compensation practices. Such a change may have a material adverse effect on the
Bank and the entire mortgage lending industry.
DILUTION
The Reorganization will result in no dilution to stockholders of the Bank.
Upon completion of the Public Offering, there will be an immediate dilution to
investors in the Public Offering of the net tangible book value per share of
Common Stock of $____ per share based on the mid-point of the range of offering
prices of $_____ per
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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 Reorganization and the Public Offering, 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." In
addition, the Company's ability to pay dividends at any time may be limited by
the Bank's ability to pay dividends to its sole stockholder, the Company. See
"Regulation--Federal Savings Institution Regulation-- Limitation on Capital
Distributions.
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
Public Offering. 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.
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THE ADJOURNMENT
The Bank's Annual Meeting was convened on May 21, 1997 at which time the
stockholders voted on and approved the Life Savings Bank, Federal Savings Bank
1996 Stock Option Plan, elected three directors, Richard C. Caldwell, Milton E.
Johnson and Daniel L. Perl, for three year terms, and ratified the appointment
of Deloitte & Touche LLP as independent auditors of the Bank for the fiscal
year ending December 31, 1997. After those actions, the Annual Meeting was
adjourned to June 20, 1997, so that stockholders could have the benefit of an
effective registration statement under the Securities Act in connection with
their consideration and vote on the proposed Reorganization. The Adjourned
Annual Meeting is a continuation of the Annual Meeting convened on May 21,
1997.
SOLICITATION AND VOTING OF PROXIES
Regardless of the number of shares of Bank common stock owned, it is
important that your shares of common stock of the Bank be represented in person
or by proxy at the Adjourned 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 proposals to approve the Reorganization and to permit the
Board of Directors to adjourn the Annual Meeting if the requisite number of
votes to approve the Reorganization have not been received or for such other
reasons as the Board deems appropriate, the Board of Directors knows of no
additional matters that will be presented for consideration at the Adjourned
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 Adjourned 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 in person or
by telephone without additional compensation therefor. The Bank has also
retained Chase Mellon Shareholder Services to aid in the solicitation for an
estimated cost of $_________ 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 AND PRINCIPAL HOLDERS THEREOF
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
April 22, 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. The security ownership of
management is set forth under "The Board of Directors and Management of the
Bank--Security Ownership of Management and Other Beneficial Owners." In
addition, for information regarding Interests of Certain Persons in the
Reorganization, see "The Board of Directors and Management of the Bank--
Employment Agreements."
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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,
Interim will be merged with and into the Bank, with the Bank as the surviving
savings bank. The Bank has received the approval of the OTS for the
Reorganization.
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 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 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."
REASONS FOR REORGANIZATION AND PUBLIC OFFERING
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
the 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.
23
<PAGE>
PUBLIC OFFERING
Upon consummation of the Reorganization after the approval by stockholders
of the Bank, the Company intends to offer 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 will provide
the initial capitalization for the Company and will facilitate the Company's
future business activities as described above. Although the Company intends to
complete the Public Offering concurrently with the Reorganization, there are no
assurances in this regard. There also can be no assurances as to the number of
shares of Common Stock that will be sold or the price at which such shares will
be sold. The Company has filed a registration statement under the Securities
Act of 1933 with the Securities and Exchange Commission with respect to such
proposed Public Offering. As currently contemplated, the proposed Public
Offering relates to the offer for sale of 2,500,000 shares of Common Stock in an
underwritten offering at an estimated price per share of between $_____ and
$_____. The underwriter also would be granted a 30-day option to purchase up to
375,000 additional shares solely to cover overallotments. In the event that the
Public Offering is substantially delayed or is terminated, the Bank intends to
complete the Reorganization, if approved by stockholders, as management believes
that the holding company form of organization will enhance the Bank's
flexibility and will enable the Bank to remain competitive with other companies
in the financial services industry. To further the Company's ability to
transact business, the Bank may pay dividends to the Company in accordance with
regulatory requirements.
RECOMMENDATION OF THE BOARD OF DIRECTORS
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 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 also sets forth additional conditions which must
be satisfied before the Reorganization will be consummated, including the
following conditions: (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
24
<PAGE>
at the Annual Meeting; and (ii) 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. No such
governmental or third-party approvals, other than the OTS approval which has
been obtained, are currently anticipated to be required. 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 stock
and will act in the same capacity for the stock of the Company.
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.
25
<PAGE>
ACCOUNTING TREATMENT
The Reorganization, if completed as proposed, will be accounted for in a
manner similar to as a pooling of interests and accordingly, under generally
accepted accounting principles, the assets and liabilities of the Bank will be
recorded on the books of the Company at their respective book values at the
effective time of the Reorganization.
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. 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 June 20, 1997, the date of the Adjourned 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.
26
<PAGE>
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 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.
PROPOSAL II
APPROVAL TO ADJOURN THE MEETING
TO SOLICIT ADDITIONAL PROXIES
Approval of Proposal I requires the affirmative vote of a majority of the
total shares outstanding. In the event there are an insufficient number of
shares present in person or by proxy at the Annual Meeting to approve Proposal
I, the Board of Directors may adjourn the Meeting to a later date. The place
and date to which such Meeting would be adjourned would be announced at the time
of adjournment, but would in no event be more than 30 days after the date of the
Adjourned 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 Proposal I and would be advantageous to those in favor of the
Reorganization and disadvantageous to those opposing it.
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
and voting on the proposal. Abstentions will have the same effect as a vote
against the Proposal to Adjourn, and broker non-votes will not be counted in the
vote.
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."
27
<PAGE>
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 "Comparison of Stockholder's Rights and
Certain Antitakover Considerations--Comparison Between Bank and Company
Corporate Government Documents."
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 Reorganization and the Public Offering and
compliance with certain conditions including the presence of at least two
registered and active market makers. Keefe, Bruyette & Woods, Inc. ("KBW") has
indicated its intention to make a market in the Company's Common Stock. KBW 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 Reorganization,
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 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 Public Offering.
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
April 22, 1997, the Bank's common stock was held by approximately 406 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."
28
<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. The condensed operating data for the three-month periods ended
March 31, 1997 and 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 for
such interim periods. The results of operations for the three months ended
March 31, 1997 are not necessarily indicative of the results of operations that
may be expected for the year ending December 31, 1997.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ----------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans....................................... $1,872 $1,598 $6,542 $5,433 $4,530
Securities held to maturity................. 106 25 56 159 138
Other interest-earning assets............... 326 39 331 233 156
------ ------ ------ ------ ------
Total interest income..................... 2,304 1,662 6,929 5,825 4,824
------ ------ ------ ------ ------
Interest expense:
Deposit accounts............................ 1,317 826 3,514 3,192 2,534
FHLB advances and other
borrowings............................... 173 103 252 256 187
Subordinated debentures..................... 71 -- -- -- --
------ ------ ------ ------ ------
Total interest expense.................... 1,561 929 3,766 3,448 2,721
------ ------ ------ ------ ------
Net interest income before provision
for estimated loan losses............... 743 733 3,163 2,377 2,103
Provision for estimated loan losses......... 500 68 963 1,194 1,306
------ ------ ------ ------ ------
Net interest income after
provision for estimated loan losses... 243 665 2,200 1,183 797
------ ------ ------ ------ ------
Non-interest income:
Loan servicing and other
fees...................................... 120 101 496 231 164
Service charges on deposit
accounts.................................. 30 33 128 111 84
Net gains from mortgage
financing operations...................... 5,877 887 8,352 3,575 1,428
Other income................................ 58 19 136 103 12
------ ------ ------ ------ ------
Total non-interest income................. 6,085 1,040 9,112 4,020 1,688
------ ------ ------ ------ ------
Non-interest expense:
Compensation and benefits................... 1,582 814 5,233 2,544 1,575
Premises and occupancy...................... 223 166 746 471 418
Data processing............................. 135 87 390 208 167
Net loss on foreclosed real
estate.................................... 63 91 158 53 280
FDIC insurance premiums..................... 18 44 174 184 186
SAIF special assessment..................... -- -- 448 -- --
Marketing................................... 68 39 189 65 55
Telephone................................... 85 40 246 143 128
Professional services....................... 58 27 218 92 86
Other expense............................... 260 213 879 629 561
------ ------ ------ ------ ------
Total non-interest expense................ 2,492 1,521 8,681 4,389 3,456
------ ------ ------ ------ ------
Income (loss) before income tax
provision (benefit)......................... 3,836 184 2,631 814 (971)
Income tax provision (benefit).............. 1,594 79 1,126 294 (300)
------ ------ ------ ------ ------
Net income (loss)........................ $2,242 $ 105 $1,505 $ 520 $ (671)
====== ====== ====== ====== ======
Earnings (loss) per share (pro forma)(1).... $ 0.70 $ 0.06 $ 0.63 $ 0.28 $(0.36)
====== ====== ====== ====== ======
</TABLE>
- -----------------
(1) Earnings per share is based on the weighted average shares outstanding
during the period, adjusted for a 100% stock dividend which occurred during
1996. Earnings per share (pro forma) is then adjusted for the exchange of
three shares of Company Common Stock for one share of Bank common stock in
the Reorganization.
29
<PAGE>
AVERAGE BALANCE SHEETS
The following tables set forth certain information relating to the Bank at
March 31, 1997, and for the three months ended March 31, 1997 and 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>
AT MARCH 31, 1997 THREE MONTHS ENDED MARCH 31, 1997 THREE MONTHS ENDED MARCH 31, 1996
------------------------- --------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/COST BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
------------ ------------ --------- -------- ---------- --------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-earning deposits and
short-term investments...... $ 43,551 5.29% $ 8,914 $ 139 6.24% $ 3,318 $ 34 4.10%
Investment securities(1)..... 9,012 5.65 8,628 120 5.56 2,689 30 4.46
Loans receivable, net(2)..... 72,967 10.04 98,890 1,872 7.57 72,916 1,598 8.77
Mortgage-backed securities(1) 9 6.88 10 -- -- 11 -- --
Residual assets.............. 12,519 13.50 5,131 173 13.49 -- -- --
-------- -------- ------ ------- ------
Total interest-earning
assets..................... 138,058 8.57 121,573 2,304 7.58 78,934 1,662 8.42
------ ------
Non-interest-earning
assets(3)................... 19,649 20,317 8,365
-------- -------- -------
Total assets(3)............. $157,707 $141,890 $87,299
======== ======== =======
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Passbook accounts............ $ 4,115 2.10 $ 3,959 20 2.02 $ 4,640 24 2.07
Money market accounts........ 3,032 2.98 3,025 23 3.04 3,871 29 3.00
Checking accounts............ 10,209 2.63 10,006 61 2.44 6,980 24 1.38
Certificate accounts......... 113,452 5.83 86,348 1,213 5.62 53,434 749 5.61
-------- -------- ------ ------- ------
Total deposit accounts...... 130,808 5.39 103,338 1,317 5.10 68,925 826 4.79
Borrowings................... 10,000 13.50 15,350 244 6.36 6,889 103 5.98
-------- -------- ------ ------- ------
Total interest-bearing
liabilities................ 140,808 5.97 118,688 1,561 5.26 75,814 929 4.90
------ ------
Non-interest-bearing
liabilities(3).............. 5,384 13,290 7,168
-------- -------- -------
Total liabilities(3)........ 146,192 131,978 82,982
Equity(3).................... 11,515 9,912 4,317
-------- -------- -------
Total liabilities and $157,707 $141,890 $87,299
equity(3).................. ======== ======== =======
Net interest income before
provision for estimated loan
losses...................... $ 743 $ 733
====== ======
Net interest rate spread(4).. 2.60 2.32 3.52
Net interest margin(5)....... 2.44 3.71
Ratio of interest-earning
assets to interest-bearing
liabilities................. 98.05 102.43 104.12
</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) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
30
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- -------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- --------- ----------- -------- --------- ----------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-earning deposits
and short-term investments. $ 5,618 $ 257 4.57% $ 4,225 $ 203 4.80% $ 3,736 $ 124 3.32%
Investment securities(1).... 1,912 100 5.23 3,458 188 5.44 3,763 169 4.49
Loans receivable, net(2).... 72,556 6,542 9.02 65,521 5,433 8.29 65,566 4,530 6.91
Mortgage-backed
securities(1).............. 11 1 9.09 12 1 8.33 14 1 7.14
Residual assets............. 199 29 14.57 -- -- -- -- -- --
------- ------ ------- ------ ------- ------
Total interest-earning
assets................... 80,296 6,929 8.63 73,216 5,825 7.96 73,079 4,824 6.60
------ ------ ------
Non-interest-earning
assets(3)................... 6,035 2,465 2,517
------- ------- -------
Total assets(3)........... $86,331 $75,681 $75,596
======= ======= =======
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Passbook accounts........... $ 4,401 92 2.09 $ 5,090 127 2.50 $ 7,048 157 2.23
Money market accounts....... 4,233 118 2.79 5,493 144 2.62 6,512 163 2.50
Checking accounts........... 7,048 112 1.59 6,434 92 1.43 6,180 95 1.54
Certificate accounts........ 57,333 3,192 5.57 50,608 2,829 5.59 49,851 2,119 4.25
------- ------ ------- ------ ------- ------
Total deposit accounts.... 73,015 3,514 4.81 67,625 3,192 4.72 69,591 2,534 3.64
Borrowings(4)............... 4,268 252 5.90 3,112 256 8.23 1,863 187 10.04
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities.............. 77,283 3,766 4.87 70,737 3,448 4.87 71,454 2,721 3.81
------ ------ ------
Non-interest-bearing
liabilities(3).............. 3,026 1,131 197
------- ------- -------
Total liabilities(3)...... 80,309 71,868 71,651
Equity(3).................... 6,022 3,813 3,945
------- ------- -------
Total liabilities and $86,331 $75,681 $75,596
equity(3)................ ======= ======= =======
Net interest income before
provision for estimated loan
losses.................. $3,163 $2,377 $2,103
====== ====== ======
Net interest rate spread(5).. 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.............. 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.
31
<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>
THREE MONTHS ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
COMPARED TO COMPARED TO COMPARED TO
THREE MONTHS ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------------- ----------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
------------------- ------------------- -------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
-------- --------- ------- -------- --------- ------- -------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits
and short-term
investments............... $ 80 $ 25 $105 $ 64 $(10) $ 54 $ 18 $ 60 $ 78
Investment securities, net.. 81 9 90 (81) (7) (88) (14) 34 20
Loans receivable, net(1).... 513 (239) 274 609 500 1,109 (2) 905 903
Residual assets............. 173 -- 173 29 - 29 - - -
Mortgage-backed securities.. -- -- -- - - - - - -
---- ----- ---- ---- ---- ------ ---- ---- ------
Total interest-earning
assets.................... 847 (205) 642 621 483 1,104 2 999 1,001
INTEREST-BEARING LIABILITIES:
Money market accounts....... (7) 1 (6) (35) 9 (26) $(27) 8 (19)
Passbook accounts........... (3) (1) (4) (16) (19) (35) (47) 17 (30)
Checking accounts........... 13 24 37 9 11 20 4 (7) (3)
Certificate accounts........ 462 2 464 374 (11) 363 33 677 710
Borrowings.................. 134 7 141 80 (84) (4) 108 (39) 69
---- ----- ---- ---- ---- ------ ---- ---- ------
Total interest-bearing
liabilities............... 599 33 632 412 (94) 318 71 656 727
---- ----- ---- ---- ---- ------ ---- ---- ------
Change in net interest income $248 $(238) $ 10 $209 $577 $ 786 $(69) $343 $ 274
==== ===== ==== ==== ==== ====== ==== ==== ======
</TABLE>
- -------------------------
(1) Includes interest on loans held for sale.
32
<PAGE>
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 may have had prior credit problems or who do not have
an adequate 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 Originators 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 the
cash proceeds, if any, received from 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 net gain on mortgage financing operations has been
significant. The Company anticipates utilizing a portion of the net proceeds
from the Public Offering to continue to expand the Bank's 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 THREE MONTHS ENDED MARCH 31, 1997 AND
MARCH 31, 1996
GENERAL
Net income increased from $105,000 for the three months ended March 31,
1996 to $2.2 million for the three months ended March 31, 1997. The increase
was due to the expansion of the mortgage financing operations and the increase
in gains with respect to such operations. The increase was partially offset by
an increase in non-interest expense, which was also a result of the expansion of
the mortgage financing operations.
Net gains from mortgage financing operations for the three months ended
March 31, 1996 totalled $887,000, compared to $5.9 million for the three months
ended March 31, 1997, due to the expansion of the mortgage financing operations
and increased marketing effort therefrom, along with the securitization of $83.2
million in loans which occurred during the three months ended March 31, 1997.
The expansion of the mortgage financing operations resulted in an increase in
loan originations and purchases from $50.9 million for the three months ended
March 31, 1996 to $92.2 million for the three months ended March 31, 1997. The
related sales and securitization of loans increased from $37.8 million for the
three months ended March 31, 1996 to $83.2 million for the three months ended
March 31, 1997. See "Business - Loan Sales and Asset Securitizations."
Although the Bank will not complete a securitization in the second quarter
of 1997, the Company currently intends to conduct asset securitizations on a
regular basis 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."
INTEREST INCOME
Interest income increased from $1.7 million for the three months ended
March 31, 1996 to $2.3 million for the three months ended March 31, 1997 due
primarily to an increase in the average balance of interest earning assets
offset in part by a decrease in the average yield on such assets. Average
interest earning assets increased from $78.9 million for the three months ended
March 31, 1996 to $121.6 million for the three months ended March 31, 1997. The
yield on interest earning assets decreased from 8.42% for the three months ended
March 31, 1996 to 7.58% for the three months ended March 31, 1997. The largest
single component of interest earning assets was loans
33
<PAGE>
receivable, net, which increased from $72.9 million with a yield of 8.77% for
the three months ended March 31, 1996 to $98.9 million with a yield of 7.57% for
the three months ended March 31, 1997. The decline in yield is a result of the
securitization of assets which occurred at the end of the three months ended
December 31, 1996. The loans securitized at the end of December 1996 had a
weighted average interest rate of 13.32%, which led to an immediate decline in
the yield on loans receivable, net, following the sale of these assets. The
increase in loans receivable was a result of an increase in loans held for sale,
which increased from $32.8 million as of March 31, 1996 to $37.8 million as of
March 31, 1997. Loans held for investment decreased from $41.9 million as of
March 31, 1996 to $36.5 million as of March 31, 1997. Generally, all loans are
originated or purchased for sale in the secondary market or through
securitizations. See "Business - Core Lending Products" and "- Loan Sales and
Asset Securitizations."
Other components of interest earning assets increased as well. Interest
earning deposits and short term investments increased from $3.3 million with a
yield of 4.10% for the three months ended March 31, 1996 to $8.9 million with a
yield of 6.24% for the three months ended March 31, 1997. Investment securities
increased from $2.7 million with a yield of 4.46% for the three months ended
March 31, 1996 to $8.6 million with a yield of 5.56% for the three months ended
March 31, 1997. Finally, the residual asset of $5.1 million resulting from the
Bank's securitization activities during the three months ended March 31, 1997
yielded 13.49% for the quarter. The Bank held no residual assets for the three
months ended March 31, 1996.
INTEREST EXPENSE
Interest expense increased from $929,000 for the three months ended March
31, 1996 to $1.6 million for the three months ended March 31, 1997 due to an
increase in the average total interest bearing liabilities and the composition
of the liabilities. Average total interest bearing liabilities increased from
$75.8 million with a yield of 4.90% for the three months ended March 31, 1996 to
$118.7 million with a yield of 5.26% for the three months ended March 31, 1997.
The largest component of average interest bearing liabilities was certificate
accounts, which increased from an average balance of $53.4 million with a yield
of 5.61% for the three months ended March 31, 1996 to an average balance of
$86.3 million with a yield of 5.62% for the three months ended March 31, 1997.
This increase in yield reflects the increased use of wholesale deposits to fund
the mortgage financing operations.
The second largest component of average interest bearing liabilities is
borrowings, which increased from an average balance of $6.9 million with a yield
of 5.98% for the three months ended March 31, 1996 to an average balance of
$15.4 million with a yield of 6.36% for the three months ended March 31, 1997.
In addition, during the three months ended March 31, 1997, the Bank issued
Subordinated Debentures totalling $10.0 million with a coupon of 13.5%. No
Subordinated Debentures were outstanding for the three months ended March 31,
1996. See "Risk Factors - Risks Related to Debentures" and "Business - Sources
of Funds - Borrowings."
NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN LOSSES
Net interest income before provision for estimated loan losses for the
three months ended March 31, 1996 was $733,000, compared to $743,000 for the
three months ended March 31, 1997. This increase is the net effect of an
increase in average interest earning assets and average interest bearing
liabilities, offset by a decline in the net interest margin and a decrease in
the ratio of interest earning assets to interest bearing liabilities. Average
interest earnings assets increased from $78.9 million with a yield of 8.42% for
the three months ended March 31, 1996 to $121.6 million with a yield of 7.58%
for the three months ended March 31, 1997. The ratio of interest earning assets
to interest bearing liabilities decreased from 104.12% for the three months
ended March 31, 1996 to 102.43% for the three months ended March 31, 1997.
PROVISION FOR ESTIMATED LOAN LOSSES
Provision for estimated loan losses increased from $68,000 for the three
months ended March 31, 1996 to $500,000 for the three months ended March 31,
1997 due to an increase in the size of the Bank's loan portfolio, a change in
the composition of loans receivable from December 31, 1996 to March 31, 1997 and
an increase in charge-offs. The increase in the provision resulted from the
Bank's quarterly analysis of its loan portfolio and the change in the
composition of the loan portfolio during the three months ended March 31, 1997.
34
<PAGE>
During the three months ended March 31, 1997, the Bank purchased consumer
loans totalling $3.3 million, which increased the Bank's investment in consumer
loans from $65,000 as of December 31, 1996 to $3.3 million as of March 31, 1997.
In addition, multi-family real estate loans increased from $4.8 million as of
December 31, 1996 to $9.9 million as of March 31, 1997, and commercial real
estate and land loans increased from $9.7 million as of December 31, 1996 to
$10.3 million as of March 31, 1997. Non-performing loans declined from $2.2
million, or 2.98% of gross loans receivable, as of March 31, 1996 to $1.7
million, or 2.34% of gross loans receivable, as of March 31, 1997. Allowance
for estimated loan losses as a percent of gross loans receivable increased from
2.36% as of December 31, 1996 to 2.42% as of March 31, 1997.
Loan charge-offs increased from $73,000 for the three months ended March
31, 1996 to $332,000 for the three months ended March 31, 1997 as $876,000 of
loans were transferred to REO and written down to fair value at the time of
transfer during this period. In addition, the ratio of net charge-offs to
average net loans outstanding increased from 0.10% for the three months ended
March 31, 1996 to 0.33% for the three months ended March 31, 1997. 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 March
31, 1997 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 resulting in reductions in the allowance in anticipation of losses.
See "Business - Lending Overview - Delinquencies and Classified Assets" and "-
Lending Overview - Allowance for Loan Losses."
NON-INTEREST INCOME
Net gains from mortgage financing operations for the three months ended
March 31, 1996 were $887,000 compared to $5.9 million for the three months ended
March 31, 1997. This increase was attributable to the increase in the level of
mortgage financing operations, with loans sold and securitized totalling $37.8
million for the three months ended March 31, 1996 compared to $83.2 million for
the three months ended March 31, 1997, combined with the effect of the
securitization of assets as compared to whole loans sales of assets. Net gains
from mortgage financing operations as a percent of loans sold increased from
2.34% for the three months ended March 31, 1996, compared to 7.07% for the three
months ended March 31, 1997. All loans sold during the three months ended March
31, 1996 were sold as whole loans, generally with servicing retained, while all
loans sold during the three months ended March 31, 1997 were sold through
securitization. Loans originated and purchased totalled $50.9 million for the
three months ended March 31, 1996 compared to $92.2 million for the three months
ended March 31, 1997, which also resulted in an increase in loan servicing and
other fees from $101,000 for the three months ended March 31, 1996 to $120,000
for the three months ended March 31, 1997. 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," "Business -Background of the Bank" and "- Growth and
Operation Strategies."
NON-INTEREST EXPENSE
Non-interest expense was $1.5 million for the three months ended March 31,
1996, compared to $2.5 million for the three months ended March 31, 1997. The
increase was due primarily to the expansion of the mortgage financing
operations. New loans originated and purchased increased from $50.9 million for
the three months ended March 31, 1996 to $92.2 million for the three months
ended March 31, 1997, which resulted in increased compensation and benefits and
other operating expenses.
Compensation and benefits increased from $814,000 for the three months
ended March 31, 1996 to $1.6 million for the three months ended March 31, 1997.
These costs are directly related to the expansion of the mortgage
35
<PAGE>
financing operations and the corresponding increase in personnel, from an
average of 87 for the three months ended March 31, 1996 to 161 for the three
months ended March 31, 1997.
Premises and occupancy expenses increased from $166,000 for the three
months ended March 31, 1996 to $223,000 for the three months ended March 31,
1997, due to the expansion of the mortgage financing operations. During the
three months ended March 31, 1997, the Company opened its regional operating
center in the Denver, Colorado metropolitan area, and also leased temporary
space on a month to month basis in Corona, California. The Corona facility
lease will be terminated upon completion of the new executive offices. As a
result of leasing office space for the Company's and the Bank's executive
offices and the western regional offices of Life Financial Services premises and
occupancy expenses are expected to increase to approximately $400,000 per
quarter. See "Business Properties."
As a result of the expansion of the mortgage financing operations, other
operating expenses increased as well. Data processing increased from $87,000
for the three months ended March 31, 1996 to $135,000 for the three months ended
March 31, 1997. Marketing, telephone, professional services and other expense
increased from $39,000, $40,000, $27,000 and $213,000, respectively, for the
three months ended March 31, 1996 to $68,000, $85,000, $58,000 and $260,000 for
the three months ended March 31, 1997.
FDIC insurance premiums declined from $44,000 for the three months ended
March 31, 1996 to $18,000 for the three months ended March 31, 1997. During the
three months ended September 30, 1996, the FDIC assessed a one time special
assessment in order to recapitalize the SAIF insurance fund. As a result of
this recapitalization, the FDIC reduced the insurance premiums to most SAIF
insured institutions, including the Bank.
INCOME TAXES
The provision for income taxes increased from $79,000 for the three months
ended March 31, 1996 to $1.6 million for the three months ended March 31, 1997
due to an increase in income before income tax provision. Income before income
tax provision increased from $184,000 for the three months ended March 31, 1996
to $3.8 million for the three months ended March 31, 1997. The effective tax
rate decreased from 42.9% for the three months ended March 31, 1996 to 41.6% for
the three months ended March 31, 1997.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND DECEMBER 31, 1996
Total assets increased from $104.0 million as of December 31, 1996 to
$157.7 million as of March 31, 1997. Cash and cash equivalents increased from
$13.3 million as of December 31, 1996 to $46.0 million as of March 31, 1997 due
to an increase in deposit accounts used to fund loans during the quarter which
were sold immediately prior to the end of the quarter.
Loans held for sale increased from $31.0 million as of December 31, 1996 to
$38.3 million as of March 31, 1997. During the three months ended March 31,
1997, the Bank funded $92.2 million in loans, which was offset by
securitizations of $83.2 million, and to a lesser extent principal repayments
and foreclosures. As a result of the securitization, residual assets and the
Reserve Account increased from $5.7 million and $1.6 million, respectively, as
of December 31, 1996 to $12.5 million and $6.9 million as of March 31, 1997.
Mortgage servicing rights increased from $2.6 million as of December 31, 1996 to
$4.1 million as of March 31, 1997 due to the securitization of loans during the
three months ended March 31, 1997. See "Business - Loan Sales and
Securitizations" and "Risk Factors - Dependence on Asset Securitizations and
Impact on Quarterly Operating Results" and "- Risks Related to Mortgage
Servicing Rights."
Foreclosed real estate, net increased from $561,000 as of December 31, 1996
to $1.2 million as of March 31, 1997 due to the transfer to REO of $876,000 in
mortgage loans during the three months ended March 31, 1997. As a result of
this transfer, non-accrual loans decreased from $2.4 million as of December 31,
1996 to $1.7 million as of March 31, 1997. Non-performing loans as a percent of
gross loans receivable decreased from 3.50% as of December 31, 1996 to 2.34% as
of March 31, 1997. Allowance for estimated loan losses increased from $1.6
million, or 2.36% of gross loans receivable, as of December 31, 1996 to $1.8
million, or 2.42% of gross loans receivable, as of March 31, 1997. Allowance
for estimated loan losses as a percent of total non-performing loans
36
<PAGE>
increased from 67.3% as of December 31, 1996 to 103.6% as of March 31, 1997.
Classified assets, gross, increased from $4.8 million as of December 31, 1996 to
$5.1 million as of March 31, 1997.
During the three months ended March 31, 1997, the Bank issued $10.0 million
in Subordinated Debentures in order to increase its risk based capital. The
additional funds, net of debt issuance costs, were used to fund loans during the
three months ended March 31, 1997. In addition, the Bank increased its
liabilities by increasing deposit accounts from $85.7 million as of December 31,
1996 to $130.8 million as of March 31, 1997. The major component of the
increase in deposits was certificate accounts, which increased from $69.4
million as of December 31, 1996 to $113.5 million as of March 31, 1997. In
addition, checking accounts increased from $8.9 million as of December 31, 1996
to $10.2 million as of March 31, 1997.
Stockholder's equity increased from $9.3 million as of December 31, 1996 to
$11.5 million as of March 31, 1997 due to an increase in retained earnings.
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.
Net 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 completion of the Bank's
first securitization during the quarter ended December 31, 1996. 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 fourth quarter
securitization) for the year ended December 31, 1996. As a result of this
securitization, the Bank recognized a gain on sale of $4.3 million. See
"Business--Loan Sales and Asset Securitizations."
The Company currently intends to conduct securitizations on a regular basis
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 year ended December 31, 1996, the Bank acquired the
Riverside, California property it had been leasing by exercising its lease
option at a price of $375,000. The Bank also increase its 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.
37
<PAGE>
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--Core Lending Products" and "--
Loan Sales and Asset Securitizations." 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.
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
38
<PAGE>
losses. See "Business--Lending Overview--Delinquencies and Classified Assets"
and "--Lending Overview--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 completed in the quarter ended December 31, 1996) 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
this 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 of the
Bank" and "--Growth and Operation Strategies."
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 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.
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<PAGE>
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 completed in the
quarter ended December 31, 1996. 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.
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.
40
<PAGE>
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
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-
41
<PAGE>
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 of the Bank." 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.
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
42
<PAGE>
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 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 Overview--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.
Between the time the Bank originates loans and purchase commitments are
issued, the Bank is exposed to both upward and downward movements in interest
rates which may have a material adverse effect on the Bank. The Board of
Directors of the Bank recently implemented a hedge management policy primarily
for the purpose of
43
<PAGE>
hedging the risks associated with loans held for sale in the Bank's mortgage
pipeline. In a flat or rising interest rate environment, this policy enables
management to utilize mandatory forward commitments to sell fixed rate assets as
the primary hedging vehicles to shorten the maturity of such assets. In a
declining interest rate environment, the policy enables management to utilize
put options. The hedge management policy also permits management to extend the
maturity of its liabilities through the use of short financial futures
positions, purchase of put options, interest rate caps or collars, and entering
into "long" interest rate swap agreements. Management may also utilize "short"
interest rate swaps to shorten the maturity of long-term liabilities when the
net cost of funds raised by using such a strategy is attractive, relative to
short-term CD's or borrowings. Since this policy was implemented after March
31, 1997, the Bank has little historical experience to determine whether or not
its hedging policies will act to reduce the risks associated with loans held for
sale. See "Risk Factors - Risks Associated with Mortgage Origination, Purchase
and Sales Activities."
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 in the event of a 200 basis point increase or decrease in
interest rates 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. As of December 31,
1996, the Bank's 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 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. In particular, the Bank's core products and residual assets which
are directly related to the Bank's core products do not behave in a manner which
the OTS model projects. Borrowers of Portfolio Series loans are less likely to
refinance or prepay such loans because of the high cost of obtaining a high loan
to value loan. In addition, management believes that borrowers of Liberator
Series loans are less likely to refinance or prepay such loans because of their
lack of an adequate credit rating or possible prior credit problems.
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.
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<PAGE>
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
NET PORTFOLIO VALUE PORTFOLIO
VALUE OF ASSETS
----------------------------------------------------------
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO %CHANGE
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
+ 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 Bank's primary sources of funds are deposits, FHLB advances, principal
and interest payments on loans, cash proceeds from the sale of loans and
securitizations, and to a lesser extent, interest payments on investment
securities and proceeds from the maturation of investment securities. 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 are a predictable source of funds, deposit flows
and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition. However, the Bank 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, and 12.6% and 5.6% for the three months
ended March 31, 1997 and 1996, respectively. Management currently attempts to
maintain a minimum liquidity ratio of 5.0%.
The Bank'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 $24.1 million and $13.7 million for
the three months ended March 31, 1997 and 1996, respectively, and 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 $93.9 million, $51.9
million, $227.2 million, $135.6 million and $72.6 million, net of proceeds from
the sale and securitization of loans held for sale of $80.0 million, $39.3
million, $212.2 million, $130.1 million and $66.4 million for the three months
ended March 31, 1997 and 1996 and 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 investment securities were $1.0 million and $1.0 million for the three months
ended March 31, 1997 and 1996, respectively, and $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 $45.1 million and $12.9 million for the three months
ended March 31, 1997 and 1996, respectively, and $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 and $10.0 million from
the sale of the Debentures in March 1997.
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<PAGE>
At March 31, 1997, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $11.5 million, or 7.19% of total
adjusted assets, which is above the required level of $2.4 million, or 1.50%;
core capital of $11.5 million, or 7.19% of total adjusted assets, which is above
the required level of $4.8 million, or 3.0%, and risk-based capital of $21.5
million, or 10.51% of risk-weighted assets, which is above the required level of
$16.4 million, or 8.0%. See "Capitalization" and "Regulation--Federal Savings
Institution Regulation--Capital Requirements."
The Bank'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 March 31, 1997,
cash and short-term investments totalled $46.0 million. The Company has other
sources of liquidity if a need for additional funds arises, including the
utilization of FHLB advances. At March 31, 1997, 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 recently entered into a mortgage warehousing
line of credit with a national investment banking firm in the amount of $35.0
million to fund loan originations. See "Risk Factors--Availability of Funding
Sources."
The Bank had no material contractual obligations or commitments for capital
expenditures at March 31, 1997. However, the Bank is in the process of
developing an office to house the Company's and the Bank's executive offices and
the western regional offices of Life Financial Services at a cost of
approximately $1.0 million for leasehold improvements. In addition, the Bank
has entered into an agreement for an upgrade of the Bank's telephone services in
the amount of $930,000 and expects to spend an additional $500,000 for
furniture, fixtures and equipment. At March 31, 1997 the Bank had outstanding
commitments to originate mortgage loans and to purchase mortgage loans of $13.7
million and $6.2 million, respectively, compared to $5.0 million and $4.2
million, respectively, at December 31, 1996. The Bank anticipates that it will
have sufficient funds available to meet its current loan origination
commitments. See "Business--Background of the Bank." Certificates of deposit
which are scheduled to mature one year or less from March 31, 1997, totalled
$103.5 million. The Bank expects that a substantial portion of the maturing
certificates of deposit will be retained by the Bank 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 Bank's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank'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 results of operations or financial condition.
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
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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 adoption of SFAS
No. 125 did not have a material impact on the Bank's results of operations or
financial condition.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which
is effective for financial statements issued for periods ending after December
15, 1997. It replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. It also requires the presentation of
diluted earnings per share for entities with complex capital structures.
Diluted earnings per share takes into account the potential dilution that could
occur if securities or other contracts to issue common stock, such as options,
were exercised or converted into common stock. The Bank does not believe that
SFAS No. 128 will have a material impact on its financial statements.
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. In the event that the Public Offering is
completed, net proceeds received by the Company will be used to (i) acquire
approximately $12.5 million of residuals and restricted cash of $6.9 million
resulting from the Bank's securitizations completed during the fourth quarter of
1996 and 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 $9.8 million), see "Business--Sources
of Funds--Borrowings"; (ii) downstream proceeds to the Bank if necessary to fund
additional purchases and sales of loans; (iii) acquire an interest in or pay the
start-up costs to establish a subsidiary for the purpose of providing short term
warehouse lines of credit; and (iv) fund general business activities including
expansion of existing mortgage financing operations, possible acquisitions or
development costs 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."
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BUSINESS
BACKGROUND OF THE BANK
The Bank is a federally chartered stock savings bank whose primary business
is the origination and sale of sub-prime one- to four-family residential
mortgage loans and, to a much lesser extent, multi-family residential and
commercial mortgage loans. The Bank was originally chartered in 1983 as a stock
savings and loan association under the laws of the State of California and
became a federally chartered stock savings bank in 1991. The Bank conducts its
business from four locations: the Bank's headquarters in San Bernardino,
California, and three regional lending centers, one in Riverside, California,
one in Jacksonville, Florida and one recently established in the Denver,
Colorado metropolitan area. At March 31, 1997, the Bank had total assets of
$157.7 million, total deposits of $130.8 million and total equity of $11.5
million. During the three months ended March 31, 1997, the Bank originated or
purchased, through its Originators, $92.2 million of sub-prime mortgage
products and sold or securitized $83.2 million of such products. The Bank's
deposits are insured up to the maximum allowable amount by the SAIF of the FDIC.
During the early 1990's, as a result of reduced employment levels and
corporate relocations in Southern California and the general weakness of the
national economy, the Bank's market area experienced a weakening of real estate
values and a reduction in home sales and construction. When confronted with
increased competition and nominal growth during this same period, 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 response, in
1994, the Bank retained new management experienced in sub-prime lending to
redirect its business focus, revise its underwriting policies and procedures
and enhance its related servicing capabilities. A plan was developed pursuant
to which the Bank reorganized its lending operations from that of a thrift
emphasizing traditional mortgage banking and portfolio lending to that of a
diversified financial services operation focusing on the origination for sale or
securitization, with servicing retained, of various loan products to include
Liberator Series loans, Portfolio Series loans, and, to a much lesser extent,
commercial and multi-family real estate loans. The Bank also adopted revised
underwriting policies and instituted more aggressive procedures for resolving
problem loans and for reducing the level of non-performing assets. As a result
of these steps, 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. The five divisions include (i) the Financial Services Division which
emphasizes the wholesale origination of the Bank's core products; (ii) the
Income Capital Services Division which originates and sells commercial and
multi-family mortgage loans; (iii) the Retail Loan Division which concentrates
on offering loan products directly 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 Loan Purchasers; and (v) the Banking Division which offers
depository services to the public. In 1994, the Bank began to implement its plan
which resulted in:
. An increase in total purchases and originations of loans by 171.5% from
$82.0 million for the year ended December 31, 1993 to $222.6 million for
the year ended December 31, 1996. For the three month period ended March
31, 1997, loans originated and purchased totalled $92.2 million.
. An increase in loan sales and securitizations by 191.0% from $71.0 million
for the year ended December 31, 1993 to $206.6 million for the year ended
December 31, 1996. For the three month period ended March 31, 1997, loan
sales and securitizations totalled $83.2 million.
. An increase in net income of 1518.3% from $93,000 for the year ended
December 31, 1993, to $1.5 million for the year ended December 31, 1996.
For the three month period ended March 31, 1997, net income was $2.2
million.
. An increase in net gains from mortgage financing operations by 663.6% from
$1.1 million for the year ended December 31, 1993, to $8.4 million for the
year ended December 31, 1996. For the three month period ended March 31,
1997, net gains from mortgage financing operations totalled $5.9 million.
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. A decrease in non-performing assets by 25.0% from $4.0 million at December
31, 1993, to $3.0 million at December 31, 1996. As a percent of total
assets, non-performing assets decreased by 43.4% from 5.05% at December 31,
1993 to 2.86% at December 31, 1996. At March 31, 1997, non-performing
assets totalled $2.9 million and, as a percentage of total assets, were
1.85%.
. An increase in the allowance for estimated loan losses as a percent of
gross loans receivable by 263.1% from 0.65% at December 31, 1993 to 2.36%
at December 31, 1996. At March 31, 1997, the allowance for estimated loan
losses as a percent of gross loans receivable was 2.42%.
COMPETITIVE STRENGTHS
Management believes that it enjoys a competitive advantage when compared to
most other finance companies competing in its product areas as a result of the
following factors:
Expertise of Management. The change in direction of the Bank's business
focus commenced with the hiring in 1994 of Daniel L. Perl, currently the Bank's
President and Chief Executive Officer. Mr. Perl has more than twenty years of
experience in the financial services industry, including the areas of sub-prime
lending, commercial real estate lending, mortgage banking and investment
banking. Additional management expertise includes:
. Mr. Bruce Mills has more than 15 years in banking and regulatory
experience including service at the Federal Home Loan Bank, the
predecessor of the OTS and ten years as chief financial officer
of the Bank.
. Ms. Mary Darter has more than 13 years of lending experience
including sub-prime, bulk acquisition and warehouse lending. She
joined the Bank in March of 1994 having previously worked with
Mr. Perl from 1988 to 1991.
. Mr. Joseph R. L. Passerino has been in the financial services
industry for more than 20 years. His areas of expertise have
included conventional and sub-prime residential loans as well as
commercial lending. Mr. Passerino previously worked with Mr. Perl
from 1985 to 1988.
. Mr. Stephen Sandoval has more than 24 years of extensive
experience in the servicing and collection of mortgage and
consumer loans with a primary focus on loss mitigation including
workout alternatives, bankruptcy and foreclosure processing in
addition to traditional day to day loan servicing functions.
The Board has implemented competitive management incentives to attract and
retain qualified executives. See "The Board of Directors and Management of the
Bank - Benefits - Cash Bonus Plan" and "-Stock Option Plans."
Efficiency of Operations. Management believes that the efficiency of its
operations allows the Bank to offer to its Originators very competitively priced
products. Management believes that this competitive pricing will increase the
volume of loans originated. The efficiency of the Bank's operations results
from:
. Providing Originators with clear, concise and consistent
underwriting standards;
. Well defined core products;
. Low cost, strategically located loan facilities;
. Rapid turnaround time on loan applications;
. Limited number of strong and productive relationships with
Originators; and
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. Originations of loans at low premiums or at a discount from par.
Internal Controls. Management believes that the significant internal
controls that have been established help preserve and assure the overall quality
of loans originated by the Bank. These internal controls include:
. Dual signatures on all loan originations;
. Unanimous approval by a committee of three persons, including a
member of senior management, of any exceptions to the Bank's
underwriting policies;
. Exceptions to the Bank's underwriting policies are kept to a
minimum;
. A limited number of Board-approved appraisers perform or review
appraisals on all loans originated or purchased by the Bank;
. For all loans on first payment default or 60 days overdue, a
quality control review is completed by the Quality Control
Underwriter;
. Third party underwriting review of approximately 15.0% of all
loans originated; and
. Weekly underwriting and delinquency meetings are held to review
and update procedures and controls.
Flexible Funding Sources and Structure. As a federally-chartered savings
bank, the Bank has access to funds at a lower cost than its non-regulated
finance company competitors. This advantage is derived from the Bank's ability
to:
. Access a long-term stable funding base through the Bank's
deposits which are insured by the FDIC;
. Increase its deposit base through competitive pricing and
possible branch acquisitions or acquisitions of other depository
institutions; and
. Access funding through the FHLB.
This flexible funding structure will be further enhanced by the
Reorganization of the Bank into the holding company structure because:
. Upon the Reorganization, the Bank may sell its residual assets
and restricted cash to the Company, thereby reducing constraints
on its risk-based capital; and
. Following the Reorganization, subject to certain limitations, the
Bank may pay dividends to the Company, thereby increasing the
Company's cash flow and potentially reducing the Company's need
to raise additional equity capital.
Diversification Opportunities. Upon the Reorganization, the Company will
become a unitary savings and loan holding company which generally will not be
restricted in the types of business activities which it may conduct provided
that the Bank continues to be a qualified thrift lender. See "Regulation -
Federal Savings Institution Regulation - QTL Test." The Reorganization will
provide the Company with:
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. The opportunity to expand its current product line and enter into
possible new product areas;
. Broader investment opportunities than the Bank; and
. Alternative access, if necessary, to the capital markets than
merely financed at the Bank.
GROWTH AND OPERATING STRATEGIES
Management believes that, as a result of its competitive strengths, the
Bank and the Company will be able to implement the following growth and
operating strategies:
. Expanding Core Products Through a National Originator Network. The
Bank will continue to emphasize and to expand upon the origination of
its core products, Liberator Series loans and Portfolio Series loans,
for sale through securitizations and in the secondary market.
Continued growth of core products will result primarily from
geographic expansion and greater penetration in existing markets. In
particular, since the beginning of 1997, the Bank has widely
advertised its NINA loan product, which is a limited documentation,
lower loan-to-value loan program within the Liberator Series. NINA
loans constituted $7.3 million of the $80.1 million of loans in the
Bank's 1997-1 securitization during the first quarter of 1997. In
order to improve its ability to service its expanding network of
Originators, the Bank has established strategically located, low cost
regional lending centers in Riverside, California, Jacksonville,
Florida and in the Denver, Colorado metropolitan area. Over the next
twelve months, the Bank intends to open two additional regional
lending centers which are likely to be strategically located in the
Northeast and Midwest sectors of the United States to better serve its
Originators.
. Expanding Retail Lending Production. The Bank's retail lending
operations focuses on retail loans located in the Bank's primary
market area of Southern California. To the extent that these loans
meet the criteria for Liberator Series loans or Portfolio Series
loans, the Bank's retail lending operation acts as an origination
source for the Life Financial Services Division of the Bank while
loans not meeting these criteria are sold to Loan Purchasers. The
Bank intends to gradually and selectively expand its retail lending
operations beyond Southern California. As part of this process, the
Bank also plans to establish low cost retail offices selectively
throughout the country. In order to reduce the possibility that its
borrowers will refinance their loans with other lenders, the Bank is
seeking to refinance such loans through its own retail lending
operation.
. Expanding Multi-Family and Commercial Lending. In continuing with its
tradition as a niche market lender and in an effort to diversify
product offerings, the Bank, through its Life Income Capital Division,
has recently begun to focus its efforts on the origination and
purchase of multi-family and commercial real estate loans in the range
of $50,000 to $750,000 both in its primary market area and throughout
the United States through a selected group of originators. The Bank
is currently purchasing such loans at a discount and, although there
can be no assurances, expects to be able to continue to purchase such
loans at a discount or low premium. The Bank employs underwriters who
specialize in commercial and multi-family real estate lending and
utilizes a select group of appraisers experienced in these products.
In addition, two members of senior management have considerable
expertise in multi-family and commercial real estate lending. The
Bank has been limited in its ability to originate multi-family and
commercial real estate loans by its level of available capital. The
Bank plans to gradually expand such originations as its available
capital increases. The Bank believes that it has the infrastructure
in place to accommodate this expansion. It is anticipated that all
multi-family and commercial real estate loans will be originated for
sale in the secondary market and may also be sold through
securitizations in the future.
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. Consistently Refining Operating Procedures. The Bank intends to
maintain loan quality by continuing to refine its underwriting
criteria. A meeting of the Bank's underwriting personnel is held each
week in part to discuss operational issues as well as refinements to
the Bank's underwriting policies. In addition, the Bank conducts a
weekly loan delinquency meeting to discuss problem areas in the Bank's
servicing portfolio in order to reduce the likelihood of the
recurrence of such problems in future loans. As necessary, the Bank
adds personnel to its loan processing staff and continues to utilize
advancements in computer technology to provide prompt turnaround on
loans, efficient underwriting procedures and accurate credit
verification. In addition, in the fourth quarter of 1996, the Bank
hired a Quality Control Underwriter who: is dedicated to maintaining
quality control; reviews loan files to assure that each complies with
the Bank's underwriting policies; reviews all loans upon first
payment default and loans sixty days delinquent; provides feedback and
training to the underwriters to minimize future defaults and
delinquencies; and investigates all fraudulent loans.
. Enhancing Servicing Capabilities. As the Bank has transitioned from
that of a traditional thrift to a diversified financial services
operation, it has expanded its servicing department from a total of
four persons at December 31, 1994 to 16 persons at March 31, 1997. In
December 1996, the Bank hired a department head with 24 years of
experience in loan servicing and collections including responsibility
for a $10.0 billion portfolio of approximately 255,000 loans and a
staff of 70 people. In anticipation of its future servicing needs,
the Bank has dedicated substantial space in its current Riverside
facility to house loan servicing operations and is in the process of
implementing new technology including computer imaging and power
dialing.
. Diversifying Funding Sources. In addition to its traditional thrift
funding sources of deposits and loans from the FHLB, the Bank has
diversified its funding sources in recent periods. During the fourth
quarter of 1996 and the first quarter of 1997, net cash received from
the Bank's securitizations provided a significant source of funding to
the Bank, aggregating $128.1 million for those two quarters. The Bank
recently has also entered into a retail mortgage warehouse line of
credit with a national investment banking firm in the amount of $35.0
million and may enter into additional lines of credit in the future.
Following the Reorganization, the Company may further diversify the
current sources of funding through greater access to capital markets.
RESTRUCTURING
General. In order to increase operating flexibility and to provide a
broader range of services to its customers, management has determined (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 in order to realize possible future values from such
subsidiaries, and (iv) to raise additional capital to fund operations and
expansion.
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. Prior to the completion of the Public
Offering the Company will establish Life Investment Holdings, for the purpose of
holding residual assets created by its asset securitizations. The Bank currently
utilizes an independent third party trustee for this purpose. Immediately upon
the completion of the Public Offering, the Company will acquire from the Bank
$12.5 million of residuals and restricted cash of $6.9 million resulting from
the Bank's securitizations. Due to regulatory restrictions, the Bank is limited
in the amount of investment in
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residuals and restricted cash that it can retain. It is intended that any future
residuals and restricted cash 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 Public Offering,
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. It is expected that this financing relationship will in turn create
additional sources of loans for the Company to purchase and securitize. See "Use
of Proceeds."
Formation of Bank Operating Subsidiaries. Applications have been filed by
the Bank with the appropriate regulatory agencies to form several operating
subsidiaries. Although there can be no assurances, the Bank expects to receive
the necessary approvals from the OTS to form these subsidiaries.
. Life Financial Services will assume the functions of the Life
Financial Services Division of the Bank. This subsidiary will continue
to focus on Liberator Series loans and Portfolio Series loans, which
are the Bank's core products. Although the Bank will not complete an
asset securitization during the second quarter of 1997, it is
management's intention to regularly conduct asset securitizations
through this subsidiary. There can be no assurance, however, that any
asset securitizations will be completed in the future. In addition,
management intends to expand the activities of this subsidiary and
expects its operations to create a major source of revenue for the
Bank, although there can be no assurances in this regard.
. 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. At March 31, 1997, multi-
family and commercial real estate and land loans totalled $20.2
million, or 27.2%, of the Bank's gross loan portfolio. 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 Bank
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 its Loan
Purchasers.
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 and
agency securities. As part of the Bank's Community Reinvestment Act 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 March 31, 1997,
the Bank had committed to lend or invest $2.5 million in such projects during
1997. See "--Historical and Local Lending Portfolio."
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 $____ million in net
proceeds.
CORE LENDING PRODUCTS
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 may have had prior credit problems or who do not have an adequate
credit history, are considered "sub-prime borrowers."
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In addition, the Bank has originated a substantial number of Portfolio Series
loans which are debt consolidation loans for Agency Qualified Borrowers with
loan-to-value ratios of up to 125%.
The Bank purchases and originates mortgage loans and other real estate
secured loans through a network of Originators 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, loans originated or purchased since 1994
through the Bank's regional lending centers are generally originated for sale in
the secondary mortgage market and, more recently, in asset securitizations with
servicing retained by the Bank.
Marketing. The Bank's primary means of marketing its products is direct
contact between its account executives and Originators. Each of the Bank's 27
account executives is responsible for maintaining and expanding existing
Originator relationships within the account executive's assigned territory
through personal contact and promotional materials. Each account executive is
typically responsible for approximately 20 key Originators and is expected to
have weekly contact with each of these Originators. In addition, each account
executive is responsible for up to 30 additional Originators with whom the
account executive will have frequent contact. Each account executive also works
to develop Originator relationships through "cold calls" and following up on
inquiries made by Originators to the Bank's toll-free number. Each account
executive works as part of a team with one of the Bank's six loan coordinators
and seven assistant coordinators. Each loan coordinator and assistant loan
coordinator works with three or four account executives. The loan coordinators
and their assistants are responsible for inputting the new loans into the Bank's
data systems and for shepherding the loans from the point of origination through
funding. After origination, the whole loan coordinators and their assistants
are available to talk to Originators on a daily basis. Whole loan coordinators
and their assistants are located in each of the Bank's regional lending centers.
The Bank believes that the key element in developing, maintaining and
expanding its relationships with Originators is to provide the highest possible
level of product knowledge and customer service. Each account executive
receives comprehensive training prior to being assigned to a territory. In most
cases, training includes experience in the loan production department so that
the account executive will be familiar with all phases of loan origination and
production and will also become acquainted with the whole loan coordination
team. This training enables the account executive to quickly review a loan
application in order to identify the borrower's probable risk classification and
then assist the Originator in identifying the appropriate product for the
borrower, thereby enhancing the likelihood that the loan will be approved at the
rate and on the terms anticipated by the borrower. After a loan package is
submitted to the Bank, the loan coordination team provides assistance to the
Originator throughout the process to complete the loan transaction. Account
executives, loan coordinators and assistant coordinators are compensated based
on the number and the dollar volume of loans funded. A significant portion of a
regional manager's compensation is tied to the profitability of his or her
regional lending center and includes a component based on loan performance.
Origination and Purchase of Loans. Loans are originated both through the
Bank's wholesale network of Originators and on a retail basis through the Bank's
Retail Lending Division. The Bank has also made bulk purchases of loans from
time to time and has recently hired a senior management employee experienced in
bulk purchases to gradually expand the Bank's loan purchases.
The Bank's mortgage financing and servicing operations are conducted
primarily through regional lending centers located in Riverside, California,
Jacksonville, Florida and the Denver, Colorado metropolitan area. Over the next
twelve months, the Bank intends to open two additional low cost regional lending
centers which are likely to be strategically located in the Northeast and
Midwest sectors of the United States to better serve its Originators. From its
present locations, the Bank is able to originate or purchase its core products
in the District of Columbia and all 50 states with the exception of Louisiana,
Mississippi and Alaska.
54
<PAGE>
The following table sets forth aggregate dollar amounts and the percentage
of core products originated or purchased by the Bank in each state, where 5.0%
or more of the loans were originated or purchased, in either the fourth quarter
of 1996 or the first quarter of 1997, and for all other states as a group for
the periods shown:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------------------
DECEMBER 31, MARCH 31,
1996 1997
------------------ -------------------
$ % $ %
--------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
California....... $20,434 29.5% $26,421 29.8%
Utah............. 6,208 9.0 7,958 9.0
Virginia......... 5,810 8.4 5,884 6.6
Florida.......... 4,897 7.1 3,405 3.8
Maryland......... 4,881 7.1 4,492 5.1
North Carolina... 3,932 5.7 5,240 5.9
Other............ 22,998 33.2 35,239 39.8
------- ----- ------- -----
Total $69,160 100.0% $88,639 100.0%
======= ===== ======= =====
</TABLE>
The Bank's geographic markets are currently divided into three regions,
with a completely self-contained mortgage banking team assigned to each region.
Each team is headed up by a regional manager and includes dedicated account
executives, loan coordinators and assistant coordinators, underwriters,
appraisers and other production personnel so that the team can originate and
produce loans in that region. This concept of regional processing teams, which
the Bank believes is efficient but quite rare in the industry, enables the Bank
to more effectively anticipate and respond to Originator and borrower needs in
each region. Management believes that the concept also appeals to independent
brokers who may be reluctant to deal with a larger, more remote lender. Each
regional team is connected to senior management in Riverside, California by a
computer link that enables senior management to monitor all regional functions
on a real time basis.
Personnel staffing a regional lending center are trained in the Bank's
Riverside office. For a period of six to twelve months after the establishment
of a regional lending center all loans originated through that office are
reunderwritten by staff at the Riverside office to assure quality control. In
addition, the Quality Control Underwriter and the Bank's internal auditor
regularly visit the regional lending centers for quality control purposes.
In recent years, 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 may have had prior credit problems or who do not have
an adequate 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 management as being advantageous to the
Bank 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 Bank has the resources to adequately
service loans acquired pursuant to this program as well as the experience to
resolve loans that become non-performing. The Bank has established specific
underwriting policies and procedures, invested in facilities and systems and
developed correspondent relationships with Originators throughout the country
enabling it to develop its niche as an originator and purchaser of one-to four-
family residential loans to sub-prime borrowers. Since the beginning of 1997,
the Bank has widely advertised its NINA loan product, which is a limited
documentation, lower loan-to-value loan product within the Liberator Series loan
portfolio. The Bank intends to continue to expand the volume of Liberator
Series loans which it originates, to market areas throughout the country, to
sub-prime borrowers who meet its niche lending criteria. See "Risk Factors--
Risks Associated with Sub-Prime Lending."
55
<PAGE>
The following table sets forth selected information relating to
originations of Liberator Series loans during the periods shown:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Principal balance....................................... $39,465 $39,629
Average principal balance per loan...................... 85 100
Combined weighted average initial loan-to-value ratio... 73.4% 72.8%
Percent of first mortgage loans......................... 85.4 91.8
Property securing loans:
Owner occupied........................................ 86.4 77.3
Non-owner occupied.................................... 13.6 22.7
Weighted average interest rate:
Fixed-rate............................................ 11.3 10.8
ARMs.................................................. 9.6 9.1
</TABLE>
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, through its Life Financial Services Division, and through its
Retail Lending Division. These loans 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. Although the loan-to-value ratio on Portfolio Series loans is
higher than that offered by other mortgage products, management believes that
the higher yield and the low level of credit risk of the borrowers offsets the
risks involved. See "-- Underwriting" and "Risk Factors--High Loan to Value
Ratios of Portfolio Series Loans. "
56
<PAGE>
The following table sets forth selected information relating to
originations of Portfolio Series loans during the periods shown:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------
DECEMBER 31, MARCH 31,
1996 1997
-------------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Principal balance....................................... $29,695 $49,010
Average principal balance per loan...................... 31 32
Combined weighted average initial loan-to-value ratio... 108.4% 107.7%
Percent of first mortgage loans......................... 0.1 0.5
Property securing loans:
Owner occupied........................................ 99.5 99.8
Non-owner occupied.................................... 0.5 0.2
Weighted average interest rate:
Fixed-rate............................................ 14.1 13.8
ARMs.................................................. 11.2 10.3
</TABLE>
Use and Qualifications of Originators. The Bank purchases loans from
select 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 provides clear and concise criteria regarding its well-defined
core products to Originators with whom it may do business. If, following a
period of training and relationship building, Originators consistently fail to
present a high level of loans meeting the Bank's underwriting criteria, the Bank
will cease to do business with them. As a result, the Bank has developed, since
1994, a core group of Originators who form its nationwide network of
Originators. 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.
57
<PAGE>
<TABLE>
<CAPTION>
JUNIOR THIRD PARTY MORTGAGE
CORRESPONDENTS CORRESPONDENTS ORIGINATORS BROKERS(1)
-------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Net Worth(2) $250,000 $100,000 $50,000 N/A
Years in Business 2 2 2 N/A
Warehouse Credit Facility Yes Yes No No
Errors and Omissions $1.0 million $300,000 No No
Insurance
Number Doing Business 81 30 91 613
with the Bank at March
31, 1997
</TABLE>
________________________
(1) 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.
(2) The net worth of Correspondents is provided by audited financial statements
prepared in accordance with GAAP. Net worth of Junior Correspondents and
Third Party Originators is provided through unaudited financial information.
The Bank purchases substantially all loans are purchased on an individual
basis from qualified Originators. No single Originator accounted for more than
4.5% of the loans originated by the Bank for the quarter ended March 31, 1997.
It is the Bank's general policy to limit the percentage of loans closed by any
single Originator to approximately 5.0% of loans closed in any given period.
Underwriting. The underwriting and quality control functions are managed
through the Bank's regional lending center in Riverside, California. The Bank
believes that its underwriting process begins with the experience of its staff,
the education of its network of Originators, the quality of 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.
Personnel in the Bank's regional lending centers review in the entirety
each loan application submitted by the Bank, Originators or through bulk
purchases for approval. The Bank conducts its own underwriting review of each
loan, including those loans originated for or purchased by it from its
Originators. 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 Portfolio
Series and the Liberator Series loans, respectively. Based on the initial
review, the personnel in the regional lending center will inform the Originators
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 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 generally are funded within one day
following satisfaction of all conditions for approval of the loan which is
typically seven business days after the initial approval.
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 Originators, the Bank completes an
additional credit report on all applications received. Such report typically
contains
58
<PAGE>
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 what management believes to be
the most appropriate credit bureau in a particular zip code and combines that
information with the Bank's own 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 will include calculations for insurance and 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, 3% 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.
Prior to funding a loan, 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 Originators 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
Originators 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 Originators may rely
solely on the other information provided by the applicant. However, the Bank
does offer NINA loans at reduced loan-to-value ratios in lieu of documenting
cash flow and assets of the borrower. See "--Liberator Series (NINA)" for
further information on NINA loans.
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 borrower.
59
<PAGE>
The general criteria currently used by the Bank in classifying prospective
borrowers of its core loan products are summarized in the charts below.
LIBERATOR SERIES (FULL DOCUMENTATION)(1)
<TABLE>
<CAPTION>
"AX" RISK "A-" RISK "B" RISK "C" RISK "CX" RISK
------------ ------------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Maximum
Loan-to-Value Ratio:
Primary residence.......... 95% 95% 80% 75% 65%
Secondary residence........ 90% 90% 70% 70% 60%
Investor property.......... 90% 85% 65% 65% 60%
Home equity line
of credit(1)............. 90% 90% 80% -- --
Debt Service to
Income Ratio............... 42-50% 42-50% 50% 50% 60%
Mortgage Credit.............. Maximum one Maximum two Maximum four Maximum six Currently
30-day late 30-day late 30-day late 30-day late delinquent
payment in the payments in the payments or one payments, two
last 12 months last 12 months 60-day late 60-day late
payment in the payments or one
last 12 months 90-day late
payment in last
12 months
Major Consumer Credit(2)..... Maximum one Maximum one No more than 60 No more than 90 Sporadic
30-day late 30-day late days late on any days late on payment
payment in the payment in last account in last any account in pattern;
last 12 months; 12 months; 12 months; last 12 months; apparent
maximum two overall good overall average overall fair disregard
30-day late credit; maximum credit credit toward timely
payments in the 25% of credit payments or
last 24 months accounts credit standing
delinquent in
last 24 months
Minor Consumer Credit(3) Maximum two Maximum one No more than 60 No more than 90 Sporadic
30-day late 30-day late days late on any days late on payment
payments in the payment in last account in last any account in pattern;
last 12 months; 12 months; 12 months; last 12 months; apparent
maximum three isolated 60-day isolated minor isolated late disregard
30-day late late payment 90-day late payment over 90 toward timely
payments in last allowed with payment allowed days allowed payments or
24 months compensating with with credit standing
factors; maximum compensating compensating
25% of credit factors factors
accounts
delinquent in
last 24 months
Bankruptcy Filings........... No bankruptcy in No bankruptcy in No bankruptcy in No bankruptcy Discharged
last 36 months, last 24 months, last 24 months, in last 12 within 12
except under except under except under months months
certain certain certain preceding
circumstances circumstances circumstances application;
current Chapter
13 or
foreclosure
acceptable when
paid in full or
cured from loan
proceeds
Minimum FICO Score........... 650 620 580 540 less than 540
</TABLE>
_____________________
(1) Also includes Portfolio Series home equity lines of credit which are fully
collateralized by the underlying property and which have a loan-to-value
ratio of 90% or less.
(2) Any nationally recognized credit cards and any installment debt.
(3) Department store credit cards, regional credit cards or oil company credit
cards
60
<PAGE>
LIBERATOR SERIES (NINA)
<TABLE>
<CAPTION>
"AX" RISK "A-" RISK "B" RISK "C" RISK "CX" RISK
------------------ ------------------ ------------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Loan-to-Value Ratio:
Primary residence........... 80% 75% 70% 70% 65%
Secondary residence......... 75% 70% 65% 65% 60%
Investor property........... 75% 70% 65% 65% 60%
Mortgage Credit.............. Maximum one Maximum two Maximum four Maximum six Currently
30-day late 30-day late 30-day late 30-day late delinquent
payment in the payments in the payments or one payments, two
last 12 months last 12 months 60-day late 60-day late
payment in the payments or one
last 12 months 90-day late
payment in last
12 months
Major Consumer Credit(1)..... Maximum one Maximum one No more than 60 No more than 90 Sporadic
30-day late 30-day late days late on any days late on payment
payment in the payment in last account within any account in patterns;
last 12 months; 12 months; last 12 months; last 12 months; apparent
maximum two overall good overall average overall fair disregard
30-day late credit; maximum credit credit toward timely
payments in the 25% of credit payments or
last 24 months accounts credit standing
delinquent in
last 24 months
Minor Consumer Credit(2)..... Maximum two Maximum one No more than 60 No more than 90 Sporadic
30-day late 30-day late days late on any days late on payment
payments in the payment in last account in last any account in patterns;
last 12 months; 12 months, 12 months; last 12 months; apparent
maximum three isolated 60-day isolated minor isolated late disregard
30-day late late payment 90-day late payment over 90 toward timely
payments in last allowed with payment allowed days allowed payments or
24 months compensating with with credit standing
factors; maximum compensating compensating
25% of credit factors factors
accounts
delinquent in
last 24 months
Bankruptcy Filings........... No bankruptcy in No bankruptcy in No bankruptcy No bankruptcy Discharged
last 36 months, last 24 months, within last 24 in last 12 within 12
except under except under months, except months months
certain certain under certain preceding
circumstances circumstances circumstances application;
current Chapter
13 or
foreclosure
acceptable when
paid in full or
cured from loan
proceeds
Minimum FICO Score........... 650 620 580 540 less than 540
</TABLE>
_____________________
(1) Any nationally recognized credit cards and any installment debt.
(2) Department store credit cards, regional credit cards or oil company credit
cards
61
<PAGE>
PORTFOLIO SERIES(1)
<TABLE>
<CAPTION>
"A+" RISK "AX" RISK "A-" RISK "B+" RISK
------------------------ --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Loan-to-Value Ratio:
100% Second Mortgage.... 100% 100% 100% 100%
125% Second Mortgage.... 125% 125% 125% 125%
100% Home Equity
Line of Credit...... 100% 100% 100% 100%
Debt Service to Income
Ratio:
100% Second Mortgage.... 45-50% 45-50% 45-50% 45%
125% Second Mortgage.... 45-50% 45-50% 45-50% 45%
100% Home Equity
Line of Credit........ 45-50% 45-50% 45-50% 45%
Mortgage History:
100% Second Mortgage.... No 30-day late No 30-day late No 30-day late One 30-day late
payments payments in last 36 payments in last 12 payment in last 12
in last 36 months months months; one 30-day months or two 30-
late payment in last day late payments
24 months in last 24 months
125% Second Mortgage.... No 30-day late No 30-day late No 30-day late One 30-day late
payments payments in last 36 payments in last 24 payment in last 24
in last 36 months months months months
100% Home Equity No 30-day late No 30-day late No 30-day late One 30-day late
Line of Credit........ payments payments in last 36 payments in last 12 payment in last 12
in last 36 months months months; one 30-day months or two 30-
late payment in last day late payments
24 months in last 24 months
Bankruptcy Filings:
100% Second Mortgage.... None in last 5 years None in last 5 years None in last 3 years None in last 3 years
125% Second Mortgage.... None in last 5 years None in last 5 years None in last 3 years None in last 3 years
100% Home Equity
Line of Credit........ None in last 5 years None in last 5 years None in last 3 years None in last 3 years
Minimum FICO Score:
100% Second Mortgage.... 700 670 640 620
125% Second Mortgage.... 700 670 640 620
100% Home Equity
Line of Credit......... 700 670 640 620
</TABLE>
_________________________
(1) Excludes Portfolio Series home equity lines of credit which are fully
collateralized by the underlying property and which have a loan-to-value
ratio of 90% or less.
62
<PAGE>
Loan Production by Borrower Risk Classification. The following table sets
forth information concerning the Bank's principal balance of fixed rate and
adjustable rate loan production by borrower risk classification for the periods
shown:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
--------------------------------------------- --------------------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE WEIGHTED
PRODUCT/RISK % OF INTEREST AVERAGE % OF INTEREST AVERAGE
CLASSIFICATIONS(1) VOLUME TOTAL RATE(2) MARGIN(3) VOLUME TOTAL RATE(2) MARGIN(3)
- ------------------------ -------- ------- ---------- ----------- -------- ------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liberator Series (Full
documentation)
Ax $18,925 48.0% 9.94% 5.24% $17,159 43.3% 9.35% 5.11%
A- 8,790 22.3 10.16 5.52 9,241 23.3 9.85 5.52
B 6,806 17.2 10.26 5.33 7,992 20.2 9.39 4.91
C 2,026 5.1 11.16 5.68 2,555 6.4 10.98 5.77
Cx 2,918 7.4 13.07 7.06 2,682 6.8 11.74 6.62
------- ----- ------- -----
Totals $39,465 100.0% 10.34 5.46 $39,629 100.0% 9.74 5.31
======= ===== ======= =====
Portfolio Series
A+ $ 2,669 9.0% 13.58 2.50 $ 9,980 20.4 13.22 1.74
Ax 14,452 48.7 13.87 2.18 18,733 38.2 13.53 1.83
A- 9,866 33.2 14.35 3.24 15,193 31.0 14.05 3.27
B+ 2,708 9.1 14.10 3.73 5,104 10.4 14.07 2.70
------- ----- ------- -----
Totals $29,695 100.0% 14.03 2.74 $49,010 100.0% 13.68 2.32
======= ===== ======= =====
</TABLE>
- -------
(1) For the three months ended March 31, 1997, only 3.0% of the core products
originated by the Bank were Class Cx loans.
(2) Weighted average interest rate includes both ARM loan products and fixed
rate loan products.
(3) Weighted average margin is based solely on ARM products.
Appraisal. All mortgaged properties relating to mortgage loans where
collateral assessment is an integral part of the evaluation process are
appraised by state licensed or certified appraisers. All of the appraisals are
either performed or reviewed by appraisers or appraisal firms approved by the
Bank's Board of Directors. These appraisers are screened and actively reviewed
on a regular basis. 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.
Each approved appraiser must have a minimum of $2.0 million of errors and
omissions insurance. 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.
Once a loan application file is complete, the file is reviewed to determine
whether the property securing the loan should undergo a desk or field review.
This determination is made based on the loan-to-value ratio of 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 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.
63
<PAGE>
The value of the mortgaged property has lesser importance with respect to
the Portfolio Series loans in light of their high 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 written real estate
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
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.
All loans underwritten by the Bank require the approval and signature of
two underwriters. Where there are exceptions to the Bank's underwriting
criteria, the loan must be unanimously approved by the underwriter, supervisory
underwriter and the Senior Vice President of the Bank or, if not unanimously
approved, by the Bank's President and Chief Executive Officer. It has been the
Bank's policy to adhere strictly to its underwriting standards with few
exceptions. Additionally, 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:
<TABLE>
<CAPTION>
LEVEL OF APPROVAL
-----------------------------------------------------------------------------------
ONE STAFF TWO STAFF LOAN LOAN COMMITTEE AND
TYPE OF LOAN UNDERWRITER UNDERWRITER COMMITTEE BOARD OF DIRECTORS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage loans -- $550,000 or less -- $550,000 or more
held for sale
Mortgage loans -- $250,000 or less More than $250,000 $550,000 or more
held for but less than
investment $550,000
Other loans Personal loans All other loans All other loans All other loans in
secured by Bank $25,000 or less more than $25,000 excess of $50,000
deposits but less than
$50,000
</TABLE>
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 March 31, 1997, the
Bank's loans to one borrower limit equalled $1.9 million. See "Regulation--
Federal Savings Institution Regulation--Loans-to-One Borrower."
LOAN SALES AND ASSET SECURITIZATIONS
Loans are sold by the Bank through securitizations and whole loan sales.
With the exception of customary provisions relating to breaches of
representations and warranties, loans securitized or sold by the Bank are sold
without recourse to the Bank and generally are sold with servicing retained. See
"Risk Factors--Contingent Risks." For the three months ended March 31, 1996 and
the years ended December 31, 1996, 1995 and 1994, the Bank sold
64
<PAGE>
$37.8 million, $154.6 million, $126.9 million and $65.7 million in loans,
respectively. No loans were sold during the three months ended March 31, 1997.
For the three months ended March 31, 1997 and the year ended December 31, 1996,
the Bank securitized $83.2 million and $51.9 million, respectively. No loans
were securitized for the three months ended March 31, 1996 or the years ended
December 31, 1995 or 1994.
In a securitization, the Bank will generally transfer a pool of loans to a
trust with the Bank retaining the excess cash flows, known as residuals, from
the securitization which consist of the difference between the interest 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. The
cash generally will be used to repay advances on lines of credit used to finance
the pool of loans that were acquired by the Bank. Generally, the holders of the
securities from the asset securitization are entitled to receive scheduled
principal collected on the pool of 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 Bank recognizes gain on sale of
the loans in the securitization, which represents the excess of the estimated
fair value of the residuals, net of closing and underwriting costs, less the
carrying value of the loans sold in the fiscal quarter in which such loans are
sold. Management believes that it has made reasonable estimates of the present
value of the residual interests on its balance sheets. Concurrent with
recognizing such gain on sale, the Bank records the residual interests as assets
on its balance sheet. The recorded value of these residual interests are
amortized as cash distributions are received from the trust holding the
respective loan pool and are marked to market on a quarterly basis.
The Bank 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 or cash flow generated by 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 of
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 trust of
collections from the pool until a specified over-collateralization amount has
been attained. In the case of the Bank's securitizations in the fourth quarter
of 1996 and the first quarter of 1997, the over-collateralization was in the
form of a cash deposit. The purpose of the over-collateralization is to provide
a source of payment 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 holders of the residual interest; and at the
termination of the related trust, any remaining amounts on deposit are
distributed to the holders of the residual interest. Losses resulting from
defaults by borrowers on the payment of principal or interest on the loans in a
securitization will reduce the over-collateralization to the extent that funds
are available and may result in a reduction in the value of the residual
interest. See "Risk Factors--Dependence on Asset Securitizations and Impact on
Quarterly Operating Results."
65
<PAGE>
The Bank has completed two securitizations, one during the fourth quarter
of 1996 and one during the first quarter of 1997. The characteristics and
results of these securitizations are as follows:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
---------------------------- ------------------------------------------------------
1996-1 1997-1A 1997-1B
---------------------------- ---------------------- ---------------------------
<S> <C> <C> <C>
Type of loan securitized....... Fixed Rate Liberator Adjustable Rate Fixed Rate Liberator
Series and Portfolio Liberator Series Series and Portfolio
Series Series
Weighted average coupon........ 13.32% 9.45% 13.02%
Amount of certificates issued $55.0 million $38.5 million $61.5 million
Pass-through rate.............. 6.95% 1 month LIBOR plus 7.49%
21 b.p.
Amount of loans securitized(1). $51.9 million $33.6 million $46.5 million
Credit enhancement............. MBIA Insurance MBIA Insurance MBIA Insurance
Corporation Corporation Corporation
Initial funding of reserve
accounts...................... $1.6 million $941,000 $3.1 million
Required reserve level to be
funded........................ 9.0% of original 5.5% of original 10.6% of original
outstanding balance of outstanding balance of outstanding balance of
loans loans loans
Gain on sale of loans.......... $4.3 million $5.7 million(2) $5.7 million(2)
Gain on sale of loans as a
percent of loans sold......... 8.29% 7.12%(2) 7.12%(2)
Estimated prepayment speed..... 17.0% H.E.P. (3) 25.0% C.P.R. (3) 17.0% H.E.P.
Discount factor................ 13.5% 13.5% 13.5%
Annual estimated loss
assumption.................... 1.5% 0.5% 0.5% of Liberator Series
loans;
1.5% of Portfolio Series
loans
Servicing fees................. 0.50% for the first .65% for the first 1.00% on fixed rate
six twelve months and loans sold.
months and 1.00% 1.00% thereafter
thereafter
Rating (S&P/Moody's)........... AAA/Aaa AAA/Aaa AAA/Aaa
</TABLE>
- ---------
(1) For 1996-1, an additional $3.1 million was funded during quarter ended
March 31, 1997 which created a gain on sale of loans of $267,000. For
1997-1A, $4.9 million was funded in April 1997. For 1997-1B, $15.0 million
was funded in April 1997. All of these prefunded amounts were sold under
the same terms and conditions as set forth in the table above.
(2) The combined gain on sales of loans for 1997-1A and 1997-1B was $5.7
million. The percentages are based on the combined 1997-1A and 1997-1B
securitizations.
(3) Home Equity Prepayment ("H.E.P.") and Constant Prepayment Rate ("C.P.R.")
are methods of estimating prepayment speeds.
66
<PAGE>
Although the Bank will continue to sell whole loans, it plans to sell most
loans in the future through securitizations. Securitizations are expected to
increase the Bank's cash flow thereby allowing the Bank to increase its loan
acquisition and origination volume. Securitizations are also expected to reduce
the risks associated with interest rate fluctuations and provide access to
longer term funding sources. The Bank currently intends to conduct regular
securitizations either through private placements or in public offerings. There
can be no assurance that the Bank will be able to successfully implement this
strategy in the future. See "Risk Factors--Dependence on Asset Securitizations
and Impact on Quarterly Operating Results."
To the extent that loans are not sold in securitizations, whole loans will
be sold pursuant to purchase, sale and servicing agreements negotiated with Loan
Purchasers to purchase loans meeting the Bank's underwriting criteria. At March
31, 1997 there were no outstanding commitments to deliver any specific amount of
mortgage loans. The Bank retains the servicing rights on the majority of loans
sold. However, the Bank also sells loans on a servicing released basis and may
continue to subservice the loans for a fee for a period of time. The Bank
sells loans to a number of different investors with which it does business. As
such, Management believes that no one relationship with a Loan Purchaser
constitutes the predominant source of sales for the Bank and the Bank does not
rely on any specific entities for sales of its loans.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY REAL ESTATE LENDING
Consistent with its strategy of developing niche lending markets, the Bank
has recently begun to focus its efforts on the origination and purchase of
multi-family and commercial real estate loans both in its primary market area
and throughout the United States. Specifically, the Bank has begun to target the
market for borrowers seeking loans in the range of $50,000 to $750,000, subject
to the Bank's loans-to-one borrower limit, currently $1.9 million, which are
secured by multi-family properties or properties used for commercial business
purposes such as small office buildings, light industrial or retail facilities.
Since the Bank has been able to acquire such loans at a discount and expects to
be able to continue to acquire such loans at a discount or low premium,
management believes that the origination and subsequent sale of commercial and
multi-family real estate loans will increase the Bank's cash flow. The Bank has
streamlined and standardized its processing and commercial and multi-family real
estate loans with a view to sale in the secondary market or securitization.
Since 1994, substantially all commercial and multi-family real estate loans
originated by the Bank have been sold in the secondary market without recourse.
Although there can be no assurances in this regard, management intends to
gradually expand the operations of this subsidiary, thereby adding a source of
revenue for the Bank as well as providing loans for future securitizations.
There can be no assurances, however, that any such securitization will be
completed in the future. Securitization of commercial and multi-family real
estate loans is significantly less standardized and streamlined than
securitization of one- to four-family residential mortgage loans.
Management believes that it has the infrastructure in place to safely
diversify its product line into this niche market. Two of the Bank's senior
executive officers, Daniel L. Perl and Joseph R. L. Passerino, have combined
experience of approximately 27 years in commercial and multi-family real estate
lending and have developed substantial relationships with commercial and multi-
family real estate originators throughout the United States. In addition, the
Bank works primarily with a select group of approximately 100 mortgage brokers
nationwide with specifically delineated credentials. The Bank also works with
two correspondents and expects to expand that number of approved correspondents
to 15 in the near future. Commercial and multi-family real estate loan
correspondents in the Bank's network must have a net worth of at least $1.0
million, a two to three year history of funding and servicing multi-family and
commercial real estate loans and errors and omissions insurance of at least $1.0
million. In addition, an on-site inspection of the facilities of each of these
correspondents is conducted by Mr. Passerino. Where loans are originated by
other than this pre-approved group of correspondents, the Bank will underwrite
the loan. The Bank also works with a contract appraiser with nationwide
experience in appraising commercial and multi-family real estate loans who
appraises or reviews the appraisals on all such properties.
The Bank's policy is not to make commercial or multi-family real estate
loans to borrowers who are in bankruptcy, foreclosure, have loans more than 30
days delinquent or other combinations of credit weaknesses unacceptable to the
Bank. The Bank targets high to medium credit quality borrowers. 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 creditworthiness. Multi-family real estate loans may be made in
amounts
67
<PAGE>
up to 75% of the appraised value of the property. Commercial real estate loans
and multi-family real estate loans may be either fixed rate or adjustable rate
loans. These loans include prepayment penalties if repaid within the first
three to five years. When evaluating a commercial or multi-family real estate
loan, the Bank considers the net operating income of the property and the
borrower's expertise, credit history and personal cash flows. The Bank has
generally required that the properties securing commercial real estate and
multi-family 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 March 31, 1997 was
$558,000 and is secured by a nine unit strip shopping center located in
Redlands, California while the largest multi-family real estate loan in the
Bank's held for sale portfolio at March 31, 1997 was $713,000 secured by a
multi-family property located in Miami, Florida. At March 31, 1997 the Bank's
commercial real estate portfolio was $10.3 million, or 13.8% of total gross
loans, $3.2 million of which were held for sale. The Bank's multi-family real
estate portfolio at that same date was $9.9 million, or 13.4% of total gross
loans, $7.8 million of which were held for 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."
HISTORICAL AND LOCAL LENDING PORTFOLIO
The Bank's portfolio of loans held for investment (the "historical loan
portfolio") was primarily originated prior to 1994. Such loans generally
consist of adjustable rate one- to four-family loans and adjustable rate multi-
family and commercial real estate loans. The Bank's gross historical loan
portfolio has decreased in size from $47.9 million at December 31, 1994 to $38.5
million at December 31, 1996 and was $36.5 million at March 31, 1997. The
largest loan in the Bank's held for investment portfolio at March 31, 1997 was
$590,000 secured by a hotel located in San Bernardino, California. At March 31,
1997, substantially all of the Bank's historical loan portfolio was secured by
properties located in California. For a discussion of loss experience on the
historical and local lending portfolio, see "-Lending Overview - Allowance for
Loan Losses and Non-Accrual and Past Due Loans."
As part of the Bank's ongoing Community Reinvestment Act commitment to the
Southern California area, and more specifically the Inland Empire region, the
Bank has committed to lend and invest $2.5 million through December 31, 1997,
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 through the Savings Association Mortgage Company, Inc.
("SAMCO") consortium. Similar commitments are expected to be made by the Bank in
the future.
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 March 31,
1997, the Bank's consumer and other loan portfolio was $3.5 million or 4.8% of
total gross loans. Of this amount, $3.3 million consisted of unsecured home
improvement loans purchased from a single originator in March, 1997. These
loans were purchased as part of management's evaluation of new product lines for
possible future growth.
LOAN SERVICING
Through December 31, 1993, the Bank's loan servicing portfolio consisted
solely of loans originated directly by the Bank and retained for investment or
sold, primarily as participations, to others. Commencing in January of 1994
through June of 1995, the Bank purchased mortgage servicing rights to FNMA and
FHLMC loans in order to
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<PAGE>
expand the size of its loan servicing department and to further develop its loan
servicing capabilities. The entire FHLMC servicing portfolio was resold in
December 1995. Effective July 1, 1995, with the adoption of SFAS No. 122, which
required the Bank to capitalize the value of originated mortgage servicing
rights, the Bank began to retain substantially all servicing rights on loans
sold. In addition, the Bank intends to retain the servicing rights to the loans
it securitizes. The pooling and servicing agreements related to the
securitizations completed in the fourth quarter of 1996 and the first quarter of
1997 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 and $1.6 million were retained in the securitizations completed during
the fourth quarter of 1996 and the first quarter of 1997, respectively. At March
31, 1997, the Bank serviced $316.6 million of loans of which $242.3 million were
serviced for others.
The loan servicing and collections department has increased in size from
four persons at December 31, 1994 to 16 persons at March 31, 1997. Within this
department, personnel have experience in both sub-prime lending and also in
managing the Bank's non-performing loans in its historical local lending
portfolio. This experience was gained in part during the economic downturn in
Southern California and resulted in a low loss experience for the Bank. See "--
Lending Overview--Allowance for Loan Losses." In addition, in December 1996,
the Bank hired a department head with more than 24 years of experience in loan
servicing and collections, including responsibility for a $10.0 billion
portfolio of approximately 255,000 loans and a staff of 70 people. Substantial
space in the existing Riverside, California facility will be allocated to the
loan servicing and collections operations upon the opening of the additional
Riverside facility and the transfer of the origination and administrative
functions to these facilities during the third quarter of 1997. In order to
provide the infrastructure to increase productivity, the Bank is in the process
of enhancing its computer and telephonic systems by adding imaging, which
creates an image of each document in a loan file accessible through the Bank's
wide area network and power dialing, respectively. These new systems are
expected to be implemented by year end.
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.
While most of the Bank's servicing portfolio is generated through its
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 historically 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."
In addition to weekly loan delinquency meetings which are attended by
members of senior management, the loan committee of 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
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<PAGE>
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 in person. 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.
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<PAGE>
Credit Quality of Servicing Portfolio. The following table illustrates the
Bank's delinquency and charge-off experience with respect to its loan servicing
portfolio:
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
1997 1996 1995
-------------------------------- -------------------------------- -------------------------------
NUMBER OF % OF NUMBER OF % OF NUMBER OF % OF
LOANS/ LOANS PRINCIPAL LOANS/ LOANS PRINCIPAL LOANS/ LOANS PRINCIPAL
PROPERTIES SERVICED BALANCE PROPERTIES SERVICED BALANCE PROPERTIES SERVICED BALANCE
---------- -------- --------- ---------- -------- -------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Delinquency percentage(1)(2)
30-59 days................. 22 0.35% $1,490 10 0.26% $ 860 22 0.74% $2,118
60-89 days................. 1 0.02 92 -- -- -- 9 0.30 482
90 days and over........... 3 0.05 143 3 0.08 143 10 0.33 762
-- ---- ------ -- ---- ------ -- ---- ------
Total delinquency.......... 26 0.42% $1,725 13 0.34% $1,003 41 1.37% $3,362
== ==== ====== == ==== ====== == ==== ======
Default percentage(3)
Foreclosure................ 59 0.95% $6,244 56 1.48% $6,279 7 0.23% $ 793
Bankruptcy................. 17 0.27 1,220 9 0.24 778 2 0.07 288
Real estate owned(4)....... 13 0.21 1,508 9 0.24 1,197 8 0.27 1,221
</TABLE>
- ----------------
(1) The delinquency percentage represents the number and outstanding principal
balance of loans for which payments are contractually past due, exclusive of
loans in foreclosure, bankruptcy, real estate owned or forbearance
(2) The past due period is based on the actual number of days that a payment is
contractually past due. A loan as to which a monthly payment was due 60-89
days prior to the reporting period is considered 60-89 days past due, etc.
(3) The default percentage represents the number and outstanding principal
balance of loans in foreclosure, bankruptcy or real estate owned.
(4) An "REO Property" is a property acquired and held as a result of foreclosure
or deed in lieu of foreclosure.
71
<PAGE>
LENDING OVERVIEW
Loan Portfolio Composition. At March 31, 1997, the Bank's gross loans
outstanding totalled $74.3 million, of which $37.8 million, or 50.9%, were held
for sale and $36.5 million, or 49.1%, were held for investment. The types of
loans that the Bank may originate are subject to federal and state law and
regulations. Interest rates charged by the Bank 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.
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,
AT MARCH 31, ---------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
--------------- ---------------- --------------- --------------- -------------- --------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ------- ------ ------- ------ ------- ------ ------ ------ ------- ------ -----
(DOLLARS IN THOUSANDS)
Real estate(1):
Residential:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family..... $50,543 68.02 $54,275 78.67% $54,007 84.04% $53,755 82.62% $55,841 83.01% $53,816 81.68%
Multi-family............. 9,939 13.37 4,752 6.89 2,412 3.75 2,685 4.12 2,296 3.41 2,338 .55
Commercial and land........ 10,286 13.84 9,659 14.00 7,522 11.71 8,131 12.50 8,389 12.47 8,930 .55
Other loans:
Loans secured by deposit
accounts.................. 156 0.21 177 0.25 186 0.29 213 0.33 396 0.59 381 .58
Unsecured commercial loans. 66 0.09 67 0.10 70 0.11 197 0.30 190 0.28 224 .34
Unsecured consumer loans... 3,321 4.47 65 0.09 63 0.10 84 0.13 162 0.24 200 .30
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total gross loans........ 74,311 100.00% 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...... (457) (543) (298) 56 109 209
Allowance for estimated
loan losses............... 1,801 1,625 1,177 832 436 308
------ ------- ------- ------- ------- ------
Loans receivable,
net.....................$72,967 $67,913 $63,381 $64,177 $66,729 $65,372
</TABLE>
- --------------------------
(1) Includes second trust deeds.
72
<PAGE>
Loan Maturity. The following table shows the contractual maturity of the
Bank's gross loans at March 31, 1997. There were $38.3 million of loans held for
sale at March 31, 1997. The table does not reflect prepayment assumptions.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
-----------------------------------------------------------------
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............................ $ 611 $ -- $ 917 $ 247 $ 1,775
After one year:
More than one year to three years........ 954 -- 341 293 1,588
More than three years to five years...... 546 683 2,881 1,641 5,751
More than five years to 10 years......... 1,110 275 1,775 1,362 4,522
More than 10 years to 20 years........... 13,979 961 1,088 -- 16,028
More than 20 years....................... 33,343 8,020 3,284 -- 44,647
------- ------ ------- ------ -------
Total amount due....................... 50,543 9,939 10,286 3,543 74,311
Less (plus):
Unamortized discounts (premiums), net.... (571) -- -- -- (571)
Deferred loan origination fees (costs)... (35) 106 43 -- 114
Allowance for estimated loan losses...... 1,344 66 150 241 1,801
------- ------ ------- ------ -------
Total loans, net....................... 49,805 9,767 10,093 3,302 72,967
Loans held for sale...................... 24,207 7,723 3,137 3,229 38,296
------- ------ ------- ------ -------
Loans receivable, net.................... $25,598 $2,044 $ 6,956 $ 73 $34,671
======= ====== ======= ====== =======
</TABLE>
73
<PAGE>
The following table sets forth at March 31, 1997, the dollar amount of
gross loans receivable contractually due after March 31, 1998, and whether such
loans have fixed interest rates or adjustable interest rates. The Bank
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.
<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 1998
---------------------------------
FIXED ADJUSTABLE TOTAL
---------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Real estate loans:
Residential:
One- to four-family............. $19,399 $30,533 $49,932
Multi-family.................... 1,236 8,703 9,939
Commercial and land.............. 593 8,776 9,369
Other loans...................... 3,296 -- 3,296
------- ------- -------
Total gross loans receivable... $24,524 $48,012 $72,536
======= ======= =======
</TABLE>
The following tables set forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
----------------------------- -------------------------------
1997 1996 1996 1995 1994
----------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gross loans(1):
Beginning balance............... $ 68,995 $ 64,260 $ 64,260 $ 65,065 $ 67,274
Loans originated:
One- to four-family(2)....... 52,961 16,722 100,745 38,259 34,740
Multi-family................. 5,220 550 2,976 - 85
Commercial and land.......... 779 3,050 7,172 - 266
Other loans.................. 50 40 126 358 452
-------- -------- -------- -------- --------
Total loans originated........ 59,010 20,362 111,019 38,617 35,543
Loans purchased(3).............. 33,180 30,566 111,534 96,155 37,272
-------- -------- -------- -------- --------
Total......................... 161,185 115,118 286,813 199,837 140,089
Less:
Principal repayments.......... 2,824 1,976 9,184 6,719 7,440
Sales of loans................ -- 37,838 154,620 126,875 65,713
Securitizations of loans...... 83,174 -- 51,944 -- --
Transfer to REO............... 876 700 2,070 1,983 1,871
-------- -------- -------- -------- --------
Total loans.............. 74,311 74,674 68,995 64,260 65,065
Loans held for sale........... 37,819 32,761 30,454 21,397 17,146
-------- -------- -------- -------- --------
Ending balance loans held for
Investment..................... $ 36,492 $ 41,913 $ 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.
(3) Loans purchased consist predominantly of one- to four-family
residential Liberator Series and Portfolio Series loans.
74
<PAGE>
Delinquencies and Classified Assets. 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 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.
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 March 31, 1997. At March 31, 1997 the Bank had $2.2 million of
assets classified as Special Mention, $4.0 million of assets classified as
Substandard, no assets classified as Doubtful and $456,000 of assets classified
as Loss. As of March 31, 1997, assets classified as Special Mention include 19
loans totalling $1.7 million secured by one- to four-family residential
properties. At March 31, 1997, the largest loan classified as Special Mention
had a loan balance of $301,000 and is secured by commercial real estate. As set
forth below, as of March 31, 1997, assets classified as Substandard, Doubtful
and Loss include 43 loans totalling $3.2 million.
75
<PAGE>
<TABLE>
<CAPTION>
AT MARCH 31, 1997
-------------------------------------------------------------------------------------------------------
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........ $3,026 $2,607 40 $1,266 $1,183 10 $4,292 $3,790 50
Multi-family............... 45 45 1 -- -- -- 45 45 1
Commercial and land.......... 131 131 1 -- -- -- 131 131 1
Other loans.................. 10 -- 1 -- -- -- 10 -- 1
------ ------ -- ------ ------ -- ------ ------ --
Total loans............... $3,212 $2,783 43 $1,266 $1,183 10 $4,478 $3,966 53
====== ====== == ====== ======= == ====== ====== ==
</TABLE>
- --------------
(1) Net balances are reduced for specific loss allowances established against
substandard loans and real estate.
76
<PAGE>
Non-Accrual and Past-Due Loans. The following table sets forth information
regarding non-accrual loans, troubled-debt restructurings and REO in the Bank's
loans held for investment. There were no troubled-debt restructured loans within
the meaning of SFAS 15, and ten REO properties at March 31, 1997. Until March
31, 1996 it was the policy of the Bank to cease accruing interest on loans at
the time foreclosure proceedings commenced, which typically occurred 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 three months ended March 31, 1997 and 1996 and 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 $56,000, $41,000,
$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 $0, $3,000, $12,000, $11,000, $10,000, $1,000, and $0.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------------------ -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- --------- -------- -------- -------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential real estate:
One- to four-family............... $ 1,683 $2,226 $2,361 $1,305 $1,766 $1,919 $1,606
Multi-family...................... 45 -- 45 -- -- -- --
Commercial and land................. -- -- -- 82 78 197 283
Other loans......................... 10 -- 10 10 45 62 2
------- ------ ------ ------ ------ ------ ------
Total............................. 1,738 2,226 2,416 1,397 1,889 2,178 1,891
REO, net(1).......................... 1,183 975 561 827 555 1,772 1,377
------- ------ ------ ------ ------ ------ ------
Total non-performing
assets.......................... $ 2,921 $3,201 $2,977 $2,224 $2,444 $3,950 $3,268
======= ====== ====== ====== ====== ====== ======
Restructured loans................... $ 131 $ 131 $ 131 $ 131 $ -- $ 15 $ --
Classified assets, gross............. 4,478 3,923 4,829 3,929 3,951 4,165 4,827
Allowance for estimated
loan losses as a percent
of gross loans receivable(2)........ 2.42% 1.57% 2.36% 1.83% 1.28% 0.65% 0.47%
Allowance for estimated
loan losses as a percent
of total non-performing
loans(3)............................ 103.62 52.65 67.26 84.25 44.04 20.02 16.29
Non-performing loans
as a percent of gross loans
receivable(2)(3).................... 2.34 2.98 3.50 2.17 2.90 3.24 2.87
Non-performing assets
as a percent
of total assets(3).................. 1.85 3.69 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. Following March 31, 1996, non-
performing loans consisted of all loans 90 days or more past due and all
other non-accrual loans.
77
<PAGE>
The following table sets forth delinquencies in the Bank's loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
At March 31, 1997 At December 31, 1996
----------------------------------------------- -------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
--------------------- --------------------- -------------------- --------------------
Principal Principal Principal Principal
Number Balance Number Balance of Number Balance Number Balance
of Loans of Loans of Loans 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.......... 2 $ 198 21 $1,683 3 $ 354 21 $2,361
Multi-family................. - - 1 45 - - 1 45
Commercial and land.......... 1 131 - - - - - -
Other loans.................. - - 1 10 - - 1 10
------ ----- -- ------ ------ ----- -- ------
Total....................... 3 $ 329 23 $1,738 3 $ 354 23 $2,416
====== ===== == ====== ====== ===== == ======
Delinquent loans to total
gross loans................ 0.44% 2.34% 0.51% 3.50%
==== ==== ===== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1995 At December 31, 1994
----------------------------------------------- -------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
--------------------- --------------------- -------------------- --------------------
Principal Principal Principal Principal
Number Balance Number Balance of Number Balance Number Balance
of Loans of Loans of Loans 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.......... 8 $446 13 $1,286 5 $ 375 8 $1,728
Multi-family................. - - - - - - - -
Commercial and land.......... - - - - - - 1 77
Other loans.................. - - 1 10 - - - -
------ ---- -- ------ ------ ----- -- ------
Total....................... 8 $446 14 $1,296 5 $ 375 9 $1,805
====== ==== == ====== ====== ===== == ======
Delinquent loans to total
gross loans................ 0.58% 2.01% 0.58% 2.78%
==== ==== ==== ====
</TABLE>
78
<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 March 31, 1997, the
Bank's allowance for loan losses was 2.42% of gross loans compared to 2.36% as
of December 31, 1996. The Bank had non-accrual loans of $1.7 million and $2.4
million at March 31, 1997 and December 31, 1996, 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 THREE
MONTHS ENDED
MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1996 1995 1994 1993 1992
---------------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of period... $ 1,625 $ 1,177 $ 1,177 $ 832 $ 436 $ 308 $ 299
Provision for loan losses........ 500 68 963 1,194 1,306 404 129
Charge-offs:
Real Estate:
One- to four-family............ 332 63 668 736 771 301 60
Multi-family................... - - 45 - - - -
Commercial and land............ - - 11 111 47 - -
Other loans..................... - 10 10 67 95 - 60
------- ------- ------- ------- ------- ------- -------
Total........................ 332 73 734 914 913 301 120
Recoveries....................... 8 - 219 65 3 25 -
------- ------- ------- ------- ------- ------- -------
Balance at end of period......... $ 1,801 $ 1,172 $ 1,625 $ 1,177 $ 832 $ 436 $ 308
======= ======= ======= ======= ======= ======= =======
Average net loans outstanding.... $98,890 $72,916 $72,556 $65,521 $65,566 $68,511 $62,522
Net charge-offs to average net
loans outstanding............... 0.33% 0.10% 0.71% 1.30% 1.39% 0.40% 0.19%
</TABLE>
79
<PAGE>
The following table sets 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 March 31,
-----------------------------------------------------------------------------------------------
1997 1996
------------------------------------------------- ------------------------------------------
Percent of Percent of
Gross Loans in Gross Loans in
Percent of Each Percent of Each
Allowance Category Allowance Category
to Total to Total to Total to Total
Amount Allowance Gross Loans Amount Allowance Gross Loans
------------ ------------- --------------- --------- ----------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family.......... $ 1,353 75.12% 68.02% $ 967 82.51% 81.54%
Multi-family................. 66 3.66 13.37 18 1.54 4.01
Commercial
and land................... 150 8.33 13.84 178 15.18 14.04
Other........................ 232 12.89 4.77 9 0.77 0.41
------- ------ ------ ------ ------ ------
Total allowance
for loan losses......... $ 1,801 100.00% 100.00% $1,172 100.00% 100.00%
======= ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------- ------------------------------------- -------------------
Percent of Percent of
Gross Gross
Loans Loans
in Each in Each
Percent of Category Percent of Category Percent of
Allowance to Total Allowance to Total Allowance
to Total Gross to Total Gross to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance
------- --------- ---------- ------- --------- ---------- ------ ---------
(Dollars in thousands)
<S> <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%
Multi-family................. 20 1.23 6.89 14 1.19 3.75 10 1.20
Commercial
and land................... 124 7.63 14.00 143 12.15 11.71 164 19.71
Other........................ 19 1.17 0.44 19 1.61 0.50 54 6.49
----- ------ ----- ----- ----- ----- --- -----
Total allowance
for loan losses............. $1,625 100.00% 100.00% $1,177 100.00% 100.00% $832 100.00%
====== ====== ====== ====== ====== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------
1994 1993 1992
---------- ------------------------------------- -------------------------------------
(Dollars in thousands)
Percent of Percent of Percent of
Gross Gross Gross
Loans Loans Loans
in Each in Each in Each
Category Percent of Category Percent of Category
to Total Allowance to Total Allowance to Total
Gross to Total Gross to Total Gross
Loans Amount Allowance Loans Amount Allowance Loans
---------- -------- --------- --------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.......... 82.62% $287 65.83% 83.01% $225 73.05% 81.68%
Multi-family................. 4.12 10 2.29 3.41 6 1.95 3.55
Commercial
and land................... 12.50 98 22.48 12.47 57 18.51 13.55
Other........................ 0.76 41 9.40 1.11 20 6.49 1.22
----- ---- ----- ----- ---- ----- -----
Total allowance
for loan losses............. 100.00% $436 100.00% 100.00% $308 100.00% 100.00%
====== ==== ====== ====== ==== ====== ======
</TABLE>
<PAGE>
REO
At March 31, 1997, the Bank had $1.2 million 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 March 31, 1997 the Bank had $9,000 in its mortgage-backed securities
portfolio, all of which were insured or guaranteed by the FHLMC and are being
held-to-maturity. The Bank 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.
At March 31, 1997, the residual assets, which resulted from the Bank's
asset securitizations conducted during the fourth quarter of 1996 and the first
quarter of 1997, of $12.5 million were classified as trading securities. For
regulatory reasons, the residual assets and the Reserve Account will be sold to
Life Investment Holdings immediately following the Public 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 or disposed of
in some other transaction. The residual assets 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 "--Loan Sales and Asset Securitizations."
81
<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 MARCH 31, AT DECEMBER 31,
---------------------- ---------------------------------------------------------
1997 1996 1995 1994
---------------------- ---------------- --------------- -----------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE
--------- ------- -------- ------- -------- ------ -------- -------
Securities: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
U.S. Treasury and other agency
securities.................... $9,012 $8,980 $8,827 $8,785 $2,689 $2,689 $2,846 $2,838
FHLMC......................... 9 10 10 10 11 11 13 13
------ ------ ------ ------ ------ ------ ------ ------
Total securities held-to-
maturity.................... $9,021 $8,990 $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 March 31, 1997. There were no securities available for sale at
March 31, 1997.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
-------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
------------------------ ------------------------ -------------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- --------- -------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Securities:
Held-to-maturity:
U.S. Treasury and
other agency securities.... $4,006 5.78% $4,008 6.06% $ -- --%
FHLMC....................... -- -- --
------ ------ ------
Total held-to-maturity..... 4,006 5.78 4,008 6.06% --
FHLB stock.................. 998 -- --
------ ------- ------
Total securities $5,004 $4,008 $ --
held-to-maturity.......... ====== ====== ======
<CAPTION>
AT MARCH 31, 1997
------------------------------------------------------
MORE THAN TEN YEARS TOTAL
------------------------ ------------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
--------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities:
Held-to-maturity:
U.S. Treasury and
other agency securities.... $ -- --% $8,014 5.92%
FHLMC....................... 9 6.88 9 6.88
------ ------
Total held-to-maturity..... 9 6.88% 8,023 5.92%
FHLB stock.................. -- 998
------ ------
Total securities $ 9 $9,021
held-to-maturity.......... ====== ======
</TABLE>
82
<PAGE>
SOURCES OF FUNDS
General. Deposits, loan repayments and prepayments, proceeds from sales
and securitization of loans, cash flows generated from operations and borrowings
are the primary sources of the Bank's funds for use in lending, investing and
for other general purposes.
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 three months ended March 31, 1997, certificates of deposit constituted
83.6% of total average deposits. The term of the fixed-rate certificates of
deposit offered by the Bank vary from 30 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 March 31, 1997, the Bank had $103.5 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 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 March 31, 1997, the Bank had no
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. Notwithstanding
the foregoing, the Bank believes that it will continue to have access to
sufficient amounts of certificate of deposit accounts which, together with other
funding sources, will provide it with the the necessary level of liquidity to
continue to implement its business strategies.
The following table presents the deposit activity of the Bank for the periods
indicated:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS FOR THE YEAR ENDED DECEMBER
ENDED MARCH 31, 31,
---------------- -----------------------------
1997 1996 1996 1995 1994
---------------- -----------------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net deposits (withdrawals).............. $43,797 $2,233 $15,700 $(1,329) $(8,880)
Interest credited on deposit accounts... 1,300 830 2,476 3,175 2,561
------- ------ ------- ------- -------
Total increase (decrease)
in deposit accounts................. $45,097 $3,063 $18,176 $ 1,846 $(6,319)
======= ====== ======= ======= ========
</TABLE>
At March 31, 1997, the Bank had $33.1 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........... $14,573 5.81%
Over three through 12 months... 17,230 5.86
Over 12 months................. 1,263 5.70
-------
Total......................... $33,066 5.83
=======
</TABLE>
83
<PAGE>
The following table sets forth the distribution of the Bank's average deposit
accounts for the periods indicated and the weighted average interest rates on
each category of deposits presented.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
-------------------------- ------------------------------------------------------------------------------
1997 1996 1995 1994
---------------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
------------------------------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Passbook accounts.......$ 3,959 3.83% 2.02% $ 4,401 6.03% 2.09% $ 5,090 7.53% 2.50% $ 7,048 10.13% 2.23%
Money market accounts... 3,025 2.93 3.04 4,233 5.80 2.79 5,493 8.12 2.62 6,512 9.36 2.50
Checking accounts....... 10,006 9.68 2.44 7,048 9.65 1.59 6,434 9.51 1.43 6,180 8.88 1.54
-------- ------- ------- ------ ------- ------ ------- ------
Total................... 16,990 16.44 2.45 15,682 21.48 2.05 17,017 25.16 2.13 19,740 28.37 2.10
Certificate accounts:
Three months or less.... 35,385 34.24 5.18 3,994 5.47 5.66 11,570 17.11 5.09 16,952 24.36 3.60
Four through 12 months.. 31,021 30.02 6.40 36,519 50.01 5.23 20,762 30.71 5.44 21,768 31.28 4.19
13 through 36 months.... 13,794 13.35 4.97 10,204 13.98 6.25 11,188 16.54 5.93 7,218 10.37 5.11
37 months or greater.... 6,148 5.95 5.69 6,616 9.06 6.36 7,088 10.48 6.32 3,913 5.62 5.86
-------- ------- ------- ------ ------- ------ ------- ------
Total certificate
accounts.............. 86,348 83.56 5.62 57,333 78.52 5.57 50,608 74.84 5.59 49,851 71.63 4.25
-------- ------- ------- ------ ------- ------ ------- ------
Total average deposits..$103,338 $100.00% 5.10 $73,015 100.00% 4.81 $67,625 100.00% 4.72 $69,591 100.00% 3.64
======= ======= ====== ======= ====== ======= ======
</TABLE>
84
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at March 31, 1997.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM MARCH 31, 1997 AT DECEMBER 31,
------------------------------------------------------------------- ---------------------------
THREE MORE
TWO TO TO FOUR TO THAN
LESS THAN ONE TO THREE FOUR FIVE FIVE
ONE YEAR TWO YEARS YEARS YEARS YEARS YEARS TOTAL 1996 1995 1994
--------- --------- ------ ----- ------- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Certificate accounts:
0 to 4.00%...................$ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 477 $ 9,674
4.01 to 5.00%................ 2,251 280 89 1 4 61 2,686 3,504 5,710 16,098
5.01 to 6.00%................ 77,825 5,490 547 180 465 61 84,568 60,145 32,298 15,282
6.01 to 7.00%................ 23,096 567 543 220 19 82 24,527 3,891 10,676 5,481
7.01 to 8.00%................ 178 200 767 79 94 253 1,571 1,890 2,641 1,487
8.01 to 9.00%................ 100 -- -- -- -- -- 100 -- - 22
Over 9.01%................... -- -- -- -- -- -- -- -- - -
-------- ------ ------ ---- ---- ---- -------- ------- ------- -------
Total...................... $103,450 $6,537 $1,946 $480 $582 $457 $113,452 $69,430 $51,802 $48,044
======== ====== ====== ==== ==== ==== ======== ======= ======= =======
</TABLE>
85
<PAGE>
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 March 31, 1997, the Bank had no outstanding advances from the
FHLB.
The Bank recently entered into a mortgage warehousing line of credit with a
national investment banking firm in the amount of $35.0 million. The line of
credit will be used for the origination or purchase of residential 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--Growth and
Operation Strategies".
On March 14, 1997, the Bank issued Debentures in the aggregate principal
amount of $10.0 million through 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 material adverse impact on the Company's liquidity after
September 15, 1998. See "Risk Factors--Risks Related to Debentures".
86
<PAGE>
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
THREE MONTHS
ENDED AT OR FOR THE YEAR
MARCH 31, ENDED DECEMBER 31,
--------------------- -----------------------------
1997 1996 1996 1995 1994
--------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FHLB advances:
Average balance outstanding............. $11,824 $ 6,889 $ 4,259 $3,112 $1,863
Maximum amount outstanding at any
month-end during the period.......... 19,950 13,900 13,900 7,600 7,000
Balance outstanding at end of period.... -- 9,800 -- -- 1,250
Weighted average interest rate during
the period........................... 5.63% 5.98% 5.93% 6.55% 4.87%
Debentures:
Average balance outstanding............. $ 3,526 -- -- -- --
Maximum amount outstanding at any
month-end during the period.......... 10,000 -- -- -- --
Balance outstanding at end of period.... 10,000 -- -- -- --
Weighted average interest rate during
the period........................... 13.50% -- -- -- --
Total:
Average balance outstanding............. $15,350 $ 6,889 $ 4,259 $3,112 $1,863
Maximum amount outstanding at any
month-end during period............... 19,950 13,900 13,900 7,600 7,000
Balance outstanding at end of period.... 10,000 9,800 -- -- 1,250
Weighted average interest rate
during the period..................... 6.36% 5.98% 5.93% 6.55% 4.87%
</TABLE>
Asset Securitizations. The Bank completed two asset securitizations, one
during the fourth quarter of 1996 and one during the first quarter of 1997. Net
cash proceeds to the Bank from these asset securitizations for each of these
periods were $50.0 million and $78.1 million, respectively, As the Bank
anticipates that it will conduct regular asset securitizations in the future, it
is expected that gain on sale of loans securitized will constitute a substantial
source of cash flow for the Bank's future loan originations, although there can
be no assurance in this regard. See "Risk Factors--Dependence on Asset
Securitizations and Impact on Quarterly Operating Results."
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
87
<PAGE>
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 Originators for its purchases and originations
of new loans. The Bank's competitors also seek to establish relationships with
the Bank's Originators. 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.
88
<PAGE>
PROPERTIES
As of March 31, 1997, the Bank conducted its business through five offices.
The Bank has entered into a lease on a property in Riverside, California, which
will house, as of the third quarter of 1997, the Company's and the Bank's
executive offices and the western regional office of Life Financial Services.
Projected leasehold improvements on this property are expected to be
approximately $1.0 million. The Bank has also entered into a lease on an
additional property located in Riverside in which it intends to open a second
branch office of the Bank in the third quarter of 1997.
<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE
YEAR OF PROPERTY OR
LEASED LEASED DATE OF LEASEHOLD
OR OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION MARCH 31, 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1598 E. Highland Avenue Leased 1986 2001 $249,000
San Bernardino, CA
4110 Tigris Way Owned 1996 - 543,000
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 93,000
Aurora, CO
</TABLE>
________________
(1) The property in Corona is rented on a month-to-month basis.
SUBSIDIARIES
As of March 31, 1997 the Bank had no subsidiaries. For a discussion of the
Company's restructuring plan and establishment of subsidiaries, see "Summary"
and "--Growth and Operation Strategies."
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 March 31, 1997, the Bank had 164 full-time employees and six 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 and the
Bank's employees.
89
<PAGE>
FEDERAL AND STATE 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
interests 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 March 31, 1997, 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 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
90
<PAGE>
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.
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the insurer of the Bank's
deposit accounts. 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.
91
<PAGE>
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 abolition 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 does 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 OTS and FDIC 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. Specifically, commercial loans are limited to 20% of total
assets and amounts in excess of 10% of assets may only be used for small
business loans. Consumer loans are limited to 35% of 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 but excludes real estate. At March 31, 1997, the Bank's general
limit on loans-to-one borrower was $1.9 million. At March 31, 1997, the Bank's
largest aggregate amount of loans-to-one borrower consisted of $713,000.
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 and 50% of the dollar amount of
residential mortgages originated by the institution and sold with 90 days) in at
least 9 months out of each 12 month period. A savings association that fails the
QTL test must either convert to a bank charter or operate under certain
restrictions. As of March 31, 1997, the Bank maintained 91.68% 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
92
<PAGE>
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 three months ended March 31, 1997 was 12.6%, 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 and Supervision of the Bank.Savings institutions are required
by regulation to pay assessments to the OTS to fund the agency's operations and
supervision of the Bank. 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 three months ended March 31,
1997 and the year ended December 31, 1996 totalled $14,000 and $27,000,
respectively.
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 the Bank, 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 covered 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.
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 who
participate in the conduct of the affairs of the institution, and independent
contractors (including attorneys, appraisers and accountants) who knowingly or
recklessly participate in a wrongful action likely to have a significant 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 itself
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
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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, and
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 will be subject to certain
restrictions. See "--Prompt Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of a ratio of total capital (which is defined as core capital plus
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-term
preferred stock and, within specified limits, the general 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
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 March 31, 1997, the Bank met each of its capital requirements. 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 as of the quarter end. Total assets at the end of the quarter ended
March 31, 1997 were higher than the month end averages, and
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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
March 31, 1997 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 undercapitalization.
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 (Tier 1 capital is equivalent to core
capital). A savings institution that has a total risk-based capital ratio 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 each parent holding company, subject to an aggregate limit
on liability. 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 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 could 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 at the rate 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
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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 voted to lower SAIF assessments to 0
to 27 basis points as of January 1, 1997, a range comparable to that of BIF
members and recently voted to maintain the same rate range for the second half
of 1997. 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 three months ended March 31, 1997 and
the year ended December 31, 1996 was 9 and 26 basis points, respectively, and
the premium paid for these periods was $17,000 and $622,000 (including the SAIF
Special Assessment), respectively. 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 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 the federal thrift charter, create a
uniform financial institutions charter and abolish the OTS have been introduced
in the Congress. However, the Bank is unable to predict whether such legislation
would be enacted and, if so, the extent to which the legislation would restrict
the Bank's ability to engage in certain activities or otherwise 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 certain 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 apply 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 which 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.
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<PAGE>
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 other things, procedures
which must be followed by mortgage lenders and servicers, 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 requirement with an investment in FHLB stock at March 31, 1997 of $1.0
million. 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 March 31, 1997, 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.
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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 limited, with narrow "grandfather"
rights for existing savings and loan holding companies, 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 thereof,
without prior written approval of the OTS; from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association; 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 Public Offering and a registration statement on a Form S-4 under the
Securities Act for the registration of the Company's Common Stock to be issued
in the Reorganization. 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 Reorganization does not cover the resale of such shares. Shares
of the Common Stock purchased in the Public Offering 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
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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.
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 48 Director, President and Chief
Executive Officer
L. Bruce Mills, Jr. 40 Executive Vice President, Chief Financial
Officer and Corporate Secretary
Ronald G. Skipper 56 Chairman of the Board
Richard C. Caldwell 56 Director
John D. Goddard 58 Director
Milton E. Johnson 59 Director
</TABLE>
- --------------
(1) As of March 31, 1997.
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 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 1997 as the Chief Financial Officer.
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 31 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 1995. From 1982 to 1995, 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.
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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 Central
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.
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
Daniel L. Perl(2) 48 Director, President and 1996 1997
Chief Executive Officer
John D. Goddard 58 Director 1988 1999
Milton E. Johnson 59 Director 1983 1997
Edgar C. Keller 76 Director 1983 1999
Ronald G. Skipper 56 Director 1983 1998
- --------------
</TABLE>
(1) As of March 31, 1997.
(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. 40 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 March 31, 1997.
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<PAGE>
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.
Joseph R. L. Passerino joined the Bank in February 1994. He was named
senior vice president in September 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 September 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.
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 and Goddard. 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. 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 and Mills.
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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.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth, for the year ended
December 31, 1996, the cash compensation paid by the Bank, as well as certain
other compensation paid or accrued for those years, to the chief executive
officer and each of the two other most highly compensated executive officers of
the Bank whose compensation exceeded $100,000 in fiscal year 1996 (the "Named
Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
COMPENSATION AWARDS PAYOUTS
-------------------------------------------- ------------------------- -----------
RESTRICTED SECURITIES
OTHER STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
POSITIONS(1) YEAR SALARY($) BONUS($) ($) ($) (#) ($) ($)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Daniel L. Perl 1996 $75,000 $1,464,374(2) $ - $ - 192,960 $ - $ 2,370(3)
President and Chief
Executive Officer
Nora Vineyard 1996 76,083 - - - - - 88,300(4)
President and
Chief Executive
Officer
Joseph R.L. Passerino 1996 29,000 217,199 - - 12,540 - 2,370(3)
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) Includes $1,079,185 earned by Mr. Perl during 1996 which was paid in 1997.
See "- Previous Employment Agreement."
(3) Represents amount contributed by the Bank pursuant to the Bank's 401(k)
Plan.
(4) 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."
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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
which 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")
which is tax deductible to the Bank as compensation expense subject to
applicable law. 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.
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 within the continental
United States for a period of one year following termination. 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 Public Offering. The continued success of
the Bank and the Company depends to a significant degree on the skills and
competence of Mr. Perl.
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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 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 to 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
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<PAGE>
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.
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
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<PAGE>
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 Public 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 Public Offering.
ESOP. In connection with the Reorganization and Public 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 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 321,600 shares for issuance under the Bank
Option Plan. The Bank Option Plan was approved by stockholders of the Bank at an
annual meeting held on May 21, 1997. Upon completion of the Reorganization, 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 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
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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 192,960, and 12,540 shares
respectively to Messrs. Perl and Passerino and has granted options to purchase
an aggregate of 25,080 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 Public 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
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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
9,180 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 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 Public 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.
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The following table lists all grants of options and stock appreciation
rights ("SARs") under the 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.
OPTIONS GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTIONS(1)
- -------------------------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTION/SARS EXERCISE OR
OPTIONS/ GRANTED TO BASE PRICE
SARS GRANTED EMPLOYEES IN PER EXPIRATION
NAME (#)(2)(3)(4)(5) FISCAL YEAR SHARE DATE(6) 5% 10%
- ------------------------------------------------------------------------------------------------------------------
Daniel L. Perl.......... 192,960 60.00% $3.33 11/21/06 $404,811 $1,021,665
Joseph R.L. Passerino... 12,540 3.90 3.33 11/21/06 26,308 66,396
- ----------------------------
</TABLE>
(1) The amounts represent certain assumed rates of appreciation. Actual gains,
if any, on stock option exercises and Common Stock holdings are dependent on
the future performance of the Common Stock and overall stock market
conditions. There can be no assurance that the amounts reflected in this
table will be realized.
(2) Options granted pursuant to the Bank Option Plan become exercisable in equal
installments at an annual rate of 33.3% beginning November 21, 1999, unless
otherwise accelerated.
(3) The purchase price may be paid in cash or in Common Stock.
(4) Under limited circumstances, such as death or disability of an employee, the
employee (or his beneficiary) may request that the Company, in exchange for
the employee's surrender of an option, pay to the employee (or beneficiary),
the amount by which the fair market value of the Common Stock exceeds the
exercise price of the option on the date of the employee's termination of
employment. It is within the Company's discretion to accept or reject such
a request.
(5) To the extent possible, options will be treated as incentive options.
(6) The option term is ten years.
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The following table provides certain information with respect to the number
of shares of Common Stock represented by outstanding options held by the Named
Executive Officers as of December 31, 1996. Also reported are the values for
"in-the-money" options which represent the positive spread between the exercise
price of any such existing stock options and the year end price of the Common
Stock.
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTION/SARS AT
FISCAL YEAR END(#) FISCAL YEAR END($)
---------------------------- ----------------------------
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 and become
exercisable at an annual rate of 33.3% beginning November 21, 1999. The
options will expire ten 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. 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.
SECURITY OWNERSHIP OF MANAGEMENT AND OTHER BENEFICIAL OWNERS
At March 31, 1997, 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.
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<PAGE>
The following table sets forth, as of March 31, 1997, on an historical and
on a pro forma basis, giving effect to the Reorganization, 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.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE THE AFTER THE
REORGANIZATION REORGANIZATION
------------------------- ---------------------
NAME OF POSITION(S)
BENEFICIAL OWNER WITH THE BANK SHARES PERCENT SHARES PERCENT
----------------------------- ----------------- ------------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Richard C. Caldwell Chairman of 60,226 (1) 5.6% 180,678 5.6%
the Board
John D. Goddard Director 56,642 (3) 5.3 169,926 5.3
Ronald G. Skipper Director 52,000 (2) 4.9 156,000 4.9
Milton E. Johnson Director 37,842 (4) 3.5 113,526 3.5
Daniel L. Perl Director, 24,974 (5) 2.3 74,922 2.3
President and
Chief
Executive
Officer
Edgar C. Keller Director 17,174 (6) 1.6 51,522 1.6
Joseph R.L. Passerino Senior Vice 1,456 * 4,368 *
President
Bay Pond Investors Bermuda LP(7)
Bay Pond Partners LP(7) 105,500 9.9% 316,500 9.9
One Pierpoint Plaza
Brooklyn, New York 11201
Rath Foundation 100,000 9.3 300,000 9.3
3140 Box Canyon Road
Santa Ynez, California 93460
Maritime Global Subsidiary 1 LTD(8) 93,500 8.7 280,500 8.7
Pine Boston Partners LP(8)
Boston Provident Partners LP (8)
BP Institutional Partners LP(8)
2050 Center Avenue
Suite 300
Fort Lee, New Jersey 07024
All Executive Officers 250,680(9)(10) 23.4 752,040 23.4
and Directors as a
Group (9 persons)
- --------------------------
</TABLE>
(footnotes on following page)
112
<PAGE>
(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) Bay Pond Investors Bermuda LP holds 26,500 shares and Bay Pond Partners LP
holds 79,000 shares.
(8) Of the 93,500 shares, 12,100 are held by Maritime Global Subsidiary - LTD,
12,200 are held by Pine Boston Partner LP, 60,800 are held by Boston
Provident Partners LP and 8,400 are held by BP Institutional Partners LP.
(9) 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.
(10) Does not include 8,160 shares held by Louis E. Yeager who retired from the
Bank's Board of Directors on May 21, 1997.
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 Reorganization 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
or any governmental agency.
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,
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<PAGE>
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 or 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.
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 as of April 22, 1997 by approximately 406 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.
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<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS
AND CERTAIN ANTITAKEOVER CONSIDERATIONS
COMPARISON BETWEEN BANK AND COMPANY CORPORATE GOVERNANCE DOCUMENTS
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." 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.
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. Regulatory restrictions may also
make it difficult for persons or companies to acquire control of the Company. In
addition, under certain circumstances, the Company may be subject to section
2115 of the California General Corporation Law. This 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, eliminating cumulative voting, electing and
removing directors, calling of special meetings and approval of certain
corporate transactions. In addition, Califoria law is more restrictive than
Delaware law as to the payment of dividends. However, if its securities remain
listed on the National Market System of the Nasdaq Stock Market and there are at
least 800 stockholders, or if fewer than 50% of the Company's stockholders have
addresses outside California, the Company will be exempt from the provisions of
Section 2115.
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
Public 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 proposed Public 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 proposed Public 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."
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 in the Public Offering and upon exercise of stock options to
be issued pursuant to the terms of the Stock Option Plan.
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." 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. Since the Company initially will have
no
115
<PAGE>
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 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."
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 classified Boards are 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. 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.
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, shareholders 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.
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<PAGE>
Limitation on Voting Rights. The Company's Certificate of Incorporation
----------------------------
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).
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 10 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.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Company's 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
117
<PAGE>
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 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.
The Bank's Charter and Bylaws contain no special provisions relating to
"Business Combinations," including mergers, consolidations and sales of all or
substantially all of the assets of the Bank. Pursuant to OTS regulations, a
federal savings association generally may enter into combinations only after
prior written notice to or approval of the OTS and the approval of two-thirds of
the outstanding voting stock of the savings association.
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.
The Bank's Charter and Bylaws contain no provisions outlining the factors
the Board of Directors may consider when evaluating any offer of a person to:
(i) make a tender offer or exchange offer for any equity security of the Bank;
(ii) merge or consolidate the Bank with another corporation or entity; or (iii)
purchase or otherwise acquire all or substantially all of the properties and
assets of the Bank.
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.
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Amendments to the Charter of the Bank must first be proposed by the Board
of Directors of the Bank, then preliminarily approved by the OTS, and thereafter
approved by the stockholders by a majority of the votes eligible to be cast at a
legal meeting. Amendments to the Bylaws of the Bank may be made, subject to the
notice requirements of the OTS, by a majority vote of the full Board of
Directors or by a majority vote of the votes cast by the stockholders of the
Bank at any legal meeting.
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.
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.
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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 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,
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<PAGE>
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.
The provisions regarding the Company 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 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.
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<PAGE>
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.
REGULATORY RESTRICTIONS ON THE ACQUISITION OF THE COMPANY
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.
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 Reorganization, there
will be 3,211,716 shares of Common Stock outstanding.
All shares of Common Stock issued in the Reorganization will be available
for resale in the public market without restriction or further registration
under the Securities Act, except for shares exchanged by affiliates of the
Company (in general, any person who has a control relationship with the Company)
in the Reorganization, which shares will be subject to the resale limitations of
Rule 144. After the Public Offering shares of Common Stock held by affiliates
will be considered to be "control shares" and _______ shares of Common Stock
issuable upon the exercise of options that the Bank 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 _______ shares of Common Stock issuable upon the exercise of
options granted pursuant to the Bank's Option Plan. In the event that the Public
Offering is completed, the Registration on Form S-8 will include _______ shares
of Common Stock granted or to be granted pursuant to the Company's Option Plan
(or _______ shares if the Underwriters' over-allotment option is exercised in
full). See "The Board of Directors and Management of the Bank - Stock Option
Plans." 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
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exceptions, that they will not offer, sell or otherwise dispose of any shares of
Common Stock owned by them for a period of 180 days after the date of this
Prospectus without the prior written consent of Keefe, Bruyette & Woods, Inc.
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 180 days
after the date of this Prospectus without the prior written consent of Keefe,
Bruyette & Woods, Inc.
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 (32,117 shares based upon 3,211,716 shares to be outstanding
immediately after the Reorganization), 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.
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 Keefe, Bruyette & Woods, Inc. by Brobeck,
Phleger & Harrison LLP, Newport Beach, California.
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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 date of 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 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.
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STOCKHOLDER PROPOSALS FOR 1998
ANNUAL MEETING
Stockholder proposals intended to be presented at the 1998 Annual Meeting
of Stockholders of the Company must be received no later than _______________,
1997. Any such proposals shall be subject to the requirements of the proxy
rules adopted under the Securities Exchange Act of 1934, as amended.
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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 as of and for the year ended December 31,
1995..................................................................... F-2
Independent Auditors' Report as of and for the year ended December 31,
1996..................................................................... F-3
Statements of Financial Condition as of March 31, 1997 (unaudited) and De-
cember 31, 1996 and 1995................................................. F-4
Statements of Operations for the three months ended March 31, 1997 and
1996 (unaudited) and for each of the three years in the period ended De-
cember 31, 1996.......................................................... F-5
Statements of Stockholders' Equity for the three months ended March 31,
1997 (unaudited) and for each of the three years in the period ended De-
cember 31, 1996.......................................................... F-6
Statements of Cash Flows for the three months ended March 31, 1997 and
1996 (unaudited) and for each of the three years in the period ended De-
cember 31, 1996.......................................................... F-7
Notes to Financial Statements............................................. 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
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------
1997 1996 1995
----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents........................ $ 45,987 $ 13,265 $ 3,932
Restricted cash.................................. 6,898 1,636
Securities held to maturity, estimated fair value
of $7,992 (1997), $7,981 (1996) and $1,985
(1995).......................................... 8,023 8,023 1,985
Residual assets, at fair value................... 12,519 5,700
Loans held for sale.............................. 38,296 31,018 21,688
Loans held for investment, net of allowance for
estimated loan losses of $1,801 (1997), $1,625
(1996) and $1,177 (1995)........................ 34,671 36,895 41,693
Mortgage servicing rights........................ 4,071 2,645 683
Accrued interest receivable...................... 666 537 507
Foreclosed real estate, net...................... 1,183 561 827
Premises and equipment, net...................... 1,660 1,579 976
Federal Home Loan Bank stock..................... 998 814 715
Deferred income taxes............................ 387 397 138
Other assets..................................... 2,348 940 992
-------- -------- -------
TOTAL ASSETS................................. $157,707 $104,010 $74,136
======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposit accounts............................... $130,808 $ 85,711 $67,535
Other borrowings............................... 3,278
Subordinated debentures........................ 10,000
Accounts payable and other liabilities......... 5,384 5,748 2,333
-------- -------- -------
Total liabilities............................ 146,192 94,737 69,868
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $8 stated value; 10,000,000
shares authorized; 1,070,572 (1997 and 1996)
and 311,036 (1995) shares issued and
outstanding................................... 8,565 8,565 2,488
Additional paid-in capital..................... 825 825 914
Retained earnings (deficit), partially
restricted.................................... 2,125 (117) 866
-------- -------- -------
Total stockholders' equity................... 11,515 9,273 4,268
-------- -------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $157,707 $104,010 $74,136
======== ======== =======
</TABLE>
See notes to financial statements.
F-4
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------- -----------------------
1997 1996 1996 1995 1994
--------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans............................ $ 1,872 $ 1,598 $ 6,542 $ 5,433 $ 4,530
Securities held to maturity...... 106 25 56 159 138
Other interest-earning assets.... 326 39 331 233 156
--------- ------- ------- ------- -------
Total interest income.......... 2,304 1,662 6,929 5,825 4,824
--------- ------- ------- ------- -------
INTEREST EXPENSE:
Deposit accounts................. 1,317 826 3,514 3,192 2,534
Federal Home Loan Bank advances
and other borrowings............ 173 103 252 256 187
Subordinated debentures.......... 71
--------- ------- ------- ------- -------
Total interest expense......... 1,561 929 3,766 3,448 2,721
--------- ------- ------- ------- -------
NET INTEREST INCOME BEFORE
PROVISION FOR ESTIMATED LOAN
LOSSES............................ 743 733 3,163 2,377 2,103
PROVISION FOR ESTIMATED LOAN
LOSSES............................ 500 68 963 1,194 1,306
--------- ------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR ESTIMATED LOAN LOSSES......... 243 665 2,200 1,183 797
NONINTEREST INCOME:
Loan servicing and other fees.... 120 101 496 231 164
Service charges on deposit
accounts........................ 30 33 128 111 84
Net gains from mortgage financing
operations...................... 5,877 887 8,352 3,575 1,428
Other income..................... 58 19 136 103 12
--------- ------- ------- ------- -------
Total noninterest income....... 6,085 1,040 9,112 4,020 1,688
NONINTEREST EXPENSE:
Compensation and benefits........ 1,582 814 5,233 2,544 1,575
Premises and occupancy........... 223 166 746 471 418
Data processing.................. 135 87 390 208 167
Net loss on foreclosed real
estate.......................... 63 91 158 53 280
FDIC insurance premiums.......... 18 44 174 184 186
SAIF special assessment.......... 448
Marketing........................ 68 39 189 65 55
Telephone........................ 85 40 246 143 128
Professional services............ 58 27 218 92 86
Other expense.................... 260 213 879 629 561
--------- ------- ------- ------- -------
Total noninterest expense...... 2,492 1,521 8,681 4,389 3,456
--------- ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION (BENEFIT)............... 3,836 184 2,631 814 (971)
INCOME TAX PROVISION (BENEFIT)..... 1,594 79 1,126 294 (300)
--------- ------- ------- ------- -------
NET INCOME (LOSS).................. $ 2,242 $ 105 $ 1,505 $ 520 $ (671)
========= ======= ======= ======= =======
EARNINGS (LOSS) PER SHARE.......... $ 2.09 $ 0.17 $ 1.90 $ 0.84 $ (1.08)
========= ======= ======= ======= =======
WEIGHTED AVERAGE SHARES
OUTSTANDING....................... 1,070,572 622,072 790,260 622,072 622,072
========= ======= ======= ======= =======
</TABLE>
See notes to financial statements.
F-5
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
STATEMENTS OF STOCKHOLDERS' EQUITY
(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
Net income (unaudited).... 2,242 2,242
--------- ------ ---- ------- -------
BALANCE, March 31, 1997
(unaudited).............. 1,070,572 $8,565 $825 $ 2,125 $11,515
========= ====== ==== ======= =======
</TABLE>
See notes to financial statements.
F-6
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------ ------------------------------
1997 1996 1996 1995 1994
-------- -------- --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss).......... $ 2,242 $ 105 $ 1,505 $ 520 $ (671)
Adjustments to reconcile
net income (loss) to net
cash used in operating
activities:
Depreciation and
amortization............. 100 65 301 166 179
Provision for estimated
loan losses.............. 500 68 963 1,194 1,306
Accretion of deferred
fees..................... (1) (2) (41) (11) (20)
Provision for estimated
losses on foreclosed real
estate................... 26 72 145 104 187
Gain on sale of foreclosed
real estate, net......... (3) (1) (41) (137) (39)
Gain on sale and
securitization of loans
held for sale............ (5,358) (887) (7,868) (3,549) (1,014)
Gain on bulk sale of
mortgage servicing
rights................... (26) (414)
Unrealized gain on
residual asset........... (519) (484)
Net accretion of residual
asset.................... (202) (29)
Valuation allowance on
mortgage servicing
rights................... 3 (12) 13
Amortization of mortgage
servicing rights......... 172 39 320 268 20
Purchase and origination
of loans held for sale,
net of loan fees......... (93,866) (51,929) (227,156) (135,552) (72,613)
Proceeds from sales and
securitization of loans
held for sale............ 80,025 39,323 212,226 130,086 66,408
Increase in restricted
cash..................... (5,262) (1,636)
Increase in accrued
interest receivable...... (129) (9) (30) (76) (2)
Deferred income taxes..... 10 (118) (259) (81) 51
Decrease (increase) in
income taxes receivable.. 479 (64)
Increase (decrease) in
accounts payable and
other liabilities........ (364) (262) 3,415 1,618 86
Federal Home Loan Bank
stock dividend........... (13) (8) (34) (30) (20)
Decrease (increase) in
other assets............. (1,408) (112) 52 (315) (271)
-------- -------- --------- --------- --------
Net cash used in
operating activities.... (24,050) (13,653) (18,663) (5,329) (6,891)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net decrease in loans...... 4,440 2,060 8,578 6,428 8,133
Proceeds from sale of
foreclosed real estate.... 65 318 1,471 1,097 1,424
Purchase of securities held
to maturity............... (1,000) (996) (8,013) (8,969) (991)
Proceeds from maturities of
securities held to
maturity.................. 1,000 1,000 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............ (181) (88) (904) (523) (33)
Purchase of Federal Home
Loan Bank stock........... (171) (17) (65) (82) (8)
Cash received on residual
assets.................... 800
-------- -------- --------- --------- --------
Net cash provided by
investing activities.... 4,953 2,277 3,042 7,118 10,961
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net increase (decrease) in
deposit accounts.......... 45,097 3,063 18,176 1,846 (6,319)
(Decrease) increase in
Federal Home Loan Bank
advances.................. 9,800 (1,250) 50
Proceeds from (repayments
of) other borrowings...... (3,278) 3,278
Net proceeds from issuance
of common stock........... 3,500
Issuance of subordinated
debentures............... 10,000
-------- -------- --------- --------- --------
Net cash provided by
(used in) financing
activities.............. 51,819 12,863 24,954 596 (6,269)
-------- -------- --------- --------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS............... 32,722 1,487 9,333 2,385 (2,199)
CASH AND CASH EQUIVALENTS,
beginning of period....... 13,265 3,932 3,932 1,547 3,746
-------- -------- --------- --------- --------
CASH AND CASH EQUIVALENTS,
end of period............. $ 45,987 $ 5,419 $ 13,265 $ 3,932 $ 1,547
======== ======== ========= ========= ========
SUPPLEMENTAL CASH FLOW
DISCLOSURES:
Interest paid.............. $ 1,507 $ 930 $ 3,773 $ 3,418 $ 2,729
======== ======== ========= ========= ========
Income taxes paid
(refunded)................ $ 1,240 $ 208 $ 267 $ 191 $ (290)
======== ======== ========= ========= ========
NONCASH INVESTING
ACTIVITIES DURING THE
PERIOD:
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.... $ 876 $ 700 $ 2,070 $ 1,983 $ 1,871
======== ======== ========= ========= ========
Loans to facilitate sales
of foreclosed real
estate.................... $ 166 $ 163 $ 761 $ 647 $ 1,516
======== ======== ========= ========= ========
NONCASH FINANCING
ACTIVITIES DURING THE
PERIOD--
Stock dividends paid...... $ -- $ 2,488 $ 2,488 $ -- $ --
======== ======== ========= ========= ========
</TABLE>
See notes to financial statements.
F-7
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Insofar as these financial statements and notes relate to information at
March 31, 1997 and for the three month periods ended March 31, 1997 and 1996,
they are unaudited. In the opinion of management, such unaudited financial
statements and notes thereto reflect all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of financial
position, results of operations and cash flows for such periods. The financial
position at March 31, 1997 and results of operations for the three months then
ended are not necessarily indicative of the financial position that may be
expected at December 31, 1997 or results of operations that may be expected
for the year ending December 31, 1997.
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
F-8
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 March 31, 1997 and
December 31, 1996, respectively, the principal balance of loans held for sale
consist of $23,581,000 and $25,414,000 in single family residential mortgage
loans, $7,829,000 and $2,628,000 in multi-family residential mortgage loans,
$3,180,000 and $2,412,000 in commercial mortgage loans and $3,229,000 and $0
in other 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 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.
F-9
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 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.
F-10
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Residual Asset--In March 1997 and December 1996, the Bank completed the
securitization and sale of approximately $83,200,000 and $51,900,000,
respectively, in loans held for sale in the form of mortgage pass-through
certificates and recognized gains of approximately $5,900,000 and $4,300,000,
respectively. 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 three months ended March 31, 1997 and the year ended December
31, 1996, a net unrealized gain of $519,000 and $484,000, respectively,
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
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 utilized a prepayment assumption ranging from 17.0% to
25.0%, an estimated loss factor assumption ranging from 0.5% to 1.5% and a
weighted average discount rate of 13.5% to value the residual assets. 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 transactions, the Bank initially
deposited cash 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 March 31, 1997 and 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.
F-11
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 March 31, 1997 and 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.
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 March 31, 1997 and December 31, 1996 and
1995, federal funds sold approximated $35,500,000, $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
F-12
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
Implementation of SFAS No. 125 did not have a material impact on the Bank's
results of operations or financial condition.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which
is effective for financial statements issued for periods ending after December
15, 1997. It replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. It also requires the presentation of
diluted earnings per share for entities with complex capital structures.
Diluted earnings per share takes into account the potential dilution that
could occur if securities or other contracts to issue common stock, such as
options, were exercised or converted into common stock. The Bank does not
believe that SFAS No. 128 will have a material impact on its financial
statements.
Reclassifications--Certain reclassifications have been made to the 1995 and
1994 financial statements to conform to the 1996 presentation.
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 March 31, 1997 and
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 March 31, 1997 and 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 March 31, 1997 and December 31, 1996 that management believes have
changed the Bank's category.
F-13
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 MARCH 31, 1997
(UNAUDITED):
Total capital (to risk-
weighted assets)....... $21,487 10.51% $ 16,361 8.00% $ 20,451 10.00%
Tier 1 capital (to risk-
weighted assets)....... 11,515 5.63% 8,180 4.00% 12,271 6.00%
Tier 1 capital (to
average assets)........ 11,515 7.83% 5,881 4.00% 7,352 5.00%
<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.
Under the framework, the Bank's capital levels at March 31, 1997 and
December 31, 1996 do not allow the Bank to accept brokered deposits without
prior approval from the regulators. The Bank had approximately $792,000 and
$2,200,000 of brokered deposits at March 31, 1997 and December 31, 1996,
respectively. 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.
F-14
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The following table summarizes the OTS regulatory capital requirements under
FIRREA for the Bank at March 31, 1997 (unaudited) and 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>
MARCH 31, 1997 (UNAUDITED)
---------------------------------------------
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 period:
Equity per Bank financial
statements................... $ 11,515 $11,515 $11,515
Adjustments for regulatory
capital purposes:
Qualifying subordinated
debentures.................. 8,600
General valuation allowance.. 1,372
--------- ------ ------- ---- ------- -----
Regulatory capital.............. 11,515 7.19% 11,515 7.19% 21,487 10.51%
Minimum capital requirement..... 2,403 1.50 4,805 3.00 16,361 8.00
--------- ------ ------- ---- ------- -----
Excess regulatory capital....... $ 9,112 5.69% $ 6,710 4.19% $ 5,126 2.51%
========= ====== ======= ==== ======= =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
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.
F-15
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 1997 and 1996 financial
statements. Adjustments, if any, cannot presently be determined.
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.
F-16
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
3. SECURITIES HELD TO MATURITY
The amortized cost and estimated fair value of securities held to maturity
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- -------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
U.S. Treasury and other agency
securities..................... $8,014 $ -- $ (32) $7,982
Mortgage-backed securities...... 9 1 10
------ -------- -------- ------
$8,023 $ 1 $ (32) $7,992
====== ======== ======== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 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
====== ======== ======== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 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>
The maturity distribution of securities held to maturity is as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
(UNAUDITED)
<S> <C> <C>
Due in one year or less.................................. $4,006 $3,999
Due from one to five years............................... 4,008 3,983
Mortgage-backed securities............................... 9 10
------ ------
$8,023 $7,992
====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------
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>
F-17
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The weighted average yield on securities held to maturity was 5.92%, 5.47%
and 5.41% at March 31, 1997 and December 31, 1996 and 1995, respectively.
4. LOANS HELD FOR INVESTMENT
Loans held for investment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------
1997 1996 1995
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Mortgage loans:
Residential:
One- to four-family..... $26,962 $28,861 $32,517
Multi-family............ 2,110 2,124 2,412
Commercial and land...... 7,106 7,247 7,615
------- ------- -------
36,178 38,232 42,544
Other loans:
Loans secured by deposit
accounts................ 156 177 186
Unsecured commercial
loans................... 66 67 70
Unsecured consumer
loans................... 92 65 63
------- ------- -------
314 309 319
------- ------- -------
36,492 38,541 42,863
Less:
Deferred loan origination
fees (costs)............ 20 21 (7)
Allowance for estimated
loan losses............. 1,801 1,625 1,177
------- ------- -------
1,821 1,646 1,170
------- ------- -------
$34,671 $36,895 $41,693
======= ======= =======
Weighted average interest
rate at end of period.... 7.72% 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 March 31, 1997 and December 31, 1996, included in loans held for
investment and loans held for sale are adjustable rate loans with principal
balances of $49,125,000 and $58,648,000, respectively. Adjustable rate loans
are indexed primarily to COFI.
F-18
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The following summarizes activity in the allowance for estimated loan losses
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------
1997 1996 1996 1995 1994
--------- --------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of
period...................... $ 1,625 $ 1,177 $ 1,177 $ 832 $ 436
Provision for estimated loan
losses...................... 500 68 963 1,194 1,306
Recoveries................... 8 219 65 3
Charge offs.................. (332) (73) (734) (914) (913)
--------- --------- ------- ------- -------
Balance, end of period....... $ 1,801 $ 1,172 $ 1,625 $ 1,177 $ 832
========= ========= ======= ======= =======
</TABLE>
The Bank had nonaccrual loans at March 31, 1997 and December 31, 1996, 1995
and 1994 of $1,738,000, $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 $1,928,000, $1,639,000,
$6,692,000, $5,500,000 and $4,637,000, respectively, instead of interest
income actually recognized of $1,872,000, $1,598,000, $6,542,000, $5,434,000,
and $4,531,000, respectively, for the three months ended March 31, 1997 and
1996 and for the years ended December 31, 1996, 1995 and 1994.
At March 31, 1997 and December 31, 1996 and 1995, the Bank had impaired
loans totaling $1,845,000, $2,878,000 and $1,397,000, respectively, with
specific reserves of $456,000, $452,000 and $382,000, respectively. During the
three months ended March 31, 1997 and 1996 and the years ended December 31,
1996 and 1995, the average recorded investment in impaired loans was
$3,373,000, $2,570,000, $2,300,000 and $1,980,000, respectively. Total cash
collected on impaired loans during the three months ended March 31, 1997 and
1996 and the years ended December 31, 1996 and 1995 was $210,000, $491,000,
$1,339,000 and $1,079,000, respectively, of which $163,000, $452,000,
$1,249,000 and $960,000, respectively, was credited to principal. Interest
income of $47,000, $39,000, $90,000 and $119,000 on impaired loans was
recognized for cash payments received in the three months ended March 31, 1997
and 1996 and the years ended December 31, 1996 and 1995, respectively.
At March 31, 1997 and December 31, 1996 and 1995, troubled debt restructured
loans amounted to $131,000. There were no troubled debt restructurings
effected during the three months ended March 31, 1997 and 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 $1,941,000
and $1,567,000 at March 31, 1997 and December 31, 1996, respectively.
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 March 31, 1997 and December 31, 1996, 1995 and
1994 totaled $242,263,000, $168,963,000, $189,451,000 and $48,204,000,
respectively.
F-19
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
In connection with mortgage servicing activities, the Bank held funds in
trust for others totaling approximately $1,201,000, $957,000, and $934,000 at
March 31, 1997 and December 31, 1996 and 1995, respectively. At March 31, 1997
and December 31, 1996 and 1995, $37,000, $266,000 and $19,000, respectively,
of these funds are included in deposit accounts of the Bank (subject to FDIC
insurance limits).
For the three months ended March 31, 1997 and the year ended December 31,
1996, 26.2% and 34.0%, respectively, of the properties securing loans funded
by the Bank were located in California, 9.2% and 11.9%, respectively, were
located in Utah, 2.8% and 7.6%, respectively, were located in Colorado, 4.2%
and 6.8% were located in Florida and the remainder were dispersed throughout
the country. At March 31, 1997 and 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%.
Although the Bank sells without recourse, substantially all of the mortgage
loans it originates or purchases the Bank retains some degree of risk on
substantially all of the loans it sells. In addition, during the period of
time that the loans are held for sale, the Bank is subject to various business
risks associated with the lending business, including borrower default,
foreclosure and the risk that a rapid increase in interest rates would result
in a decline of the value of loans held for sale to potential purchasers.
In connection with its securitizations, the Bank is required to repurchase
or substitute loans in the event of a breach of a representation or warranty
made by the Bank. While the Bank may have recourse to the sellers of loans it
purchased, there can be no assurance of the seller's abilities to honor their
respective obligations to the Bank. Likewise, in connection with its whole
loan sales, the Bank enters agreements which generally require the Bank 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
early default on such mortgage loans. The remedies available to a purchaser of
mortgage loans from the Bank are generally broader than those available to the
Bank against the sellers of such loans, and if a loan purchaser enforces its
remedies against the Bank, the Bank may not be able to enforce whatever
remedies the Bank may have against such sellers. If the loans were originated
directly by the Bank, the Bank will be solely responsible for any breaches of
representations or warranties.
In addition, borrowers, loan purchasers, monoline insurance carriers and
trustees in the Bank's securitizations may make claims against the Bank
arising from alleged breaches of fiduciary obligations, misrepresentations,
errors and omissions of employees, officers and agents of the Bank, including
appraisers, incomplete documentation and failure by the Bank to comply with
various laws and regulations applicable to its business. Any claims asserted
in the future may result in liabilities or legal expenses that could have a
material adverse effect on the Bank's results of operations, financial
condition and business prospects.
The following is a summary of activity in mortgage servicing rights (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
--------------------- -----------------------
1997 1996 1996 1995 1994
---------- --------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period... $ 2,645 $ 683 $ 683 $ -- $ --
Additions through
originations.................. 1,598 179 2,270 864
Additions through purchase of
servicing rights.............. 706 128
Amortization................... (172) (39) (320) (268) (20)
Sales.......................... (606) (108)
Change in valuation allowance.. (3) 12 (13)
---------- -------- ------- ------ ------
Balance, end of period......... $ 4,071 $ 820 $ 2,645 $ 683 $ --
========== ======== ======= ====== ======
</TABLE>
F-20
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
At March 31, 1997, the valuation allowance on mortgage servicing rights is
$1,000, unchanged from December 31, 1996. 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 three months ended March 31, 1997 and the years ended
December 31, 1996 and 1995.
Net gains from mortgage financing operations consisted of the following (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
------------------- --------------------
1997 1996 1996 1995 1994
---------- -------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gains on sale and securitization of
loans held for sale................. $ 5,358 $ 887 $7,868 $3,549 $1,014
Unrealized gain on residual assets... 519 484
Gains on bulk sale of mortgage
servicing rights.................... 26 414
---------- -------- ------ ------ ------
$ 5,877 $ 887 $8,352 $3,575 $1,428
========== ======== ====== ====== ======
</TABLE>
6. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------
1997 1996 1995
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Premises.................................... $ 569 $ 569 $ --
Leasehold improvements...................... 530 530 614
Furniture, fixtures and equipment........... 1,930 1,787 1,430
------- ------- -------
3,029 2,886 2,044
Less accumulated depreciation and
amortization............................... (1,369) (1,307) (1,068)
------- ------- -------
$ 1,660 $ 1,579 $ 976
======= ======= =======
</TABLE>
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.
F-21
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
7. FORECLOSED REAL ESTATE
Activity in the allowance for estimated real estate losses is as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
-------------- ------------------
1997 1996 1996 1995 1994
------ ------ ----- ---- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period.............. $65 $ 44 $ 44 $ 29 $ 94
Provision for estimated real estate
losses................................... 26 72 145 104 187
Recoveries................................ 2
Charge offs............................... (8) (65) (126) (89) (252)
----- ------ ----- ---- -----
Balance, end of period.................... $83 $ 51 $ 65 $ 44 $ 29
===== ====== ===== ==== =====
</TABLE>
Net loss on foreclosed real estate is summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
--------------- -----------------
1997 1996 1996 1995 1994
------ ------ ---- ----- ----
<S> <C> <C> <C> <C> <C>
Net gain on sales of foreclosed real
estate.................................... $ (3) $ (1) $(41) $(137) $(39)
Other expenses, net........................ 40 20 54 86 132
Provision for estimated real estate
losses.................................... 26 72 145 104 187
------ ------ ---- ----- ----
Net loss on foreclosed real estate......... $63 $ 91 $158 $ 53 $280
====== ====== ==== ===== ====
</TABLE>
8. DEPOSIT ACCOUNTS
Deposit accounts are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
MARCH 31, 1997 1996 1995
---------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
INTEREST RATE AMOUNT INTEREST RATE AMOUNT INTEREST RATE AMOUNT
------------- -------- ------------- ------- ------------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Checking accounts....... 2.63% $ 10,209 2.22% $ 8,947 1.37% $ 6,735
Passbook accounts....... 2.10 4,115 2.10 4,117 2.10 4,842
Money market accounts... 2.98 3,032 2.99 3,217 2.76 4,156
Certificate accounts:
Under $100,000........ 5.83 80,386 5.66 49,437 5.70 39,989
$100,000 and over..... 5.83 33,066 5.63 19,993 5.80 11,813
-------- ------- -------
5.39% $130,808 5.02% $85,711 4.84% $67,535
======== ======= =======
</TABLE>
F-22
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The aggregate annual maturities of certificate accounts are approximately as
follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Within one year..................................... $103,450 $59,438
One to two years.................................... 6,537 6,197
Two to three years.................................. 1,946 1,700
Three to four years................................. 480 925
Four to five years.................................. 582 613
Thereafter.......................................... 457 557
-------- -------
$113,452 $69,430
======== =======
</TABLE>
Interest expense is summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
------------- -----------------------
1997 1996 1996 1995 1994
------- ----- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Checking accounts.................. $ 61 $ 24 $ 112 $ 92 $ 95
Passbook accounts.................. 20 24 92 127 157
Money market accounts.............. 23 29 118 144 163
Certificate accounts............... 1,213 749 3,192 2,829 2,119
------- ----- ------- ------- -------
$ 1,317 $ 826 $ 3,514 $ 3,192 $2,534
======= ===== ======= ======= =======
</TABLE>
9. ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
As of March 31, 1997 and December 31, 1996, the Bank had an available line
of credit with the Federal Home Loan Bank of San Francisco (FHLB) of
$14,219,000 and $17,346,000, respectively, 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 $19,434,000, $20,474,000 and $24,426,000 at March 31,
1997 and December 31, 1996 and 1995, respectively.
There were no FHLB advances outstanding at March 31, 1997 and December 31,
1996 and 1995.
F-23
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The following summarizes activities in advances from the FHLB (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- --------------------------
1997 1996 1996 1995 1994
--------- --------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Average balance
outstanding............ $11,824 $ 6,889 $ 4,259 $ 3,112 $ 1,863
Maximum amount
outstanding at any
month-end during the
period................. 19,950 13,900 13,900 7,600 7,000
Balance outstanding at
end of period.......... -- 9,800 -- -- 1,250
Weighted average
interest rate during
the period............. 5.63% 5.98% 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.
10. INCOME TAXES
Income taxes are summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
------------- ----------------------
1997 1996 1996 1995 1994
------- ----- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current provision (benefit):
Federal............................. $ 1,304 $ 62 $ 1,073 $ 374 $ (352)
State............................... 280 17 312 1 1
------- ---- ------- ----- ------
1,584 79 1,385 375 (351)
------- ---- ------- ----- ------
Deferred (benefit) provision:
Federal............................. 8 (235) (81) 10
State............................... 2 (24) 41
------- ---- ------- ----- ------
10 (259) (81) 51
------- ---- ------- ----- ------
Total income tax provision
(benefit)......................... $ 1,594 $ 79 $ 1,126 $ 294 $ (300)
======= ==== ======= ===== ======
</TABLE>
A reconciliation from the statutory federal income tax rate to the Bank's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
---------------- -----------------------
1997 1996 1996 1995 1994
------- ------- ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statutory federal income tax
rate.......................... 35.0% 35.0% 35.0% 35.0% (35.0)%
State taxes, net of federal
income tax benefit............ 7.0 7.0 7.2 3.1
Other.......................... (0.4) 0.9 0.6 1.1 1.0
------- ------- ------ ------ -------
41.6% 42.9% 42.8% 36.1% (30.9)%
======= ======= ====== ====== =======
</TABLE>
F-24
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Deferred tax assets (liabilities) were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------
1997 1996 1995
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses....................... $ 465 $ 479 $ 258
Capital loss carryforward....................... 63 63 63
Loans held for sale............................. 167 115 201
Other........................................... 273 301 23
----- ------ ------
968 958 545
----- ------ ------
Deferred tax liabilities:
Depreciation.................................... (61) (61) (82)
Purchased servicing rights...................... (14)
Originated servicing rights..................... (378) (358) (179)
Federal Home Loan Bank dividends................ (106) (106) (85)
----- ------ ------
(545) (525) (360)
----- ------ ------
423 433 185
Less valuation allowance......................... (36) (36) (47)
----- ------ ------
Net deferred tax asset........................... $ 387 $ 397 $ 138
===== ====== ======
</TABLE>
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 December 31, 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.
F-25
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 $48,000, $39,000,
$232,000, $124,000, and $118,000 for the three months ended March 31, 1997 and
1996, and for the years ended December 31, 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.
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.
F-26
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 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
$201,000 and $100,000 was accrued pursuant to the Bonus Plan at March 31, 1997
F-27
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
and December 31, 1996, respectively. 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>
There was no activity in the Option Plan during the three months ended March
31, 1997.
All options granted have a remaining contractual life of 10 years.
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. 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.
F-28
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 the three months ended March 31, 1997 and the years
ended December 31, 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 March 31, 1997 and December 31, 1996
and 1995 totaled $19,872,000, $9,217,000 and $9,933,000, respectively.
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 March 31, 1997 and December 31, 1996 and 1995, the Bank had outstanding
commitments to sell loans of $20,075,000, $3,072,000 and $250,000,
respectively.
F-29
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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>
MARCH 31, 1997
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Assets:
Cash and cash equivalents............................... $45,987 $45,987
Restricted cash......................................... 6,898 6,898
Securities held to maturity............................. 8,023 7,992
Residual assets......................................... 12,519 12,519
Loans held for sale..................................... 38,296 38,632
Loans held for investment, net.......................... 34,671 35,200
Mortgage servicing rights............................... 4,071 4,486
FHLB stock.............................................. 998 998
Liabilities:
Deposit accounts........................................ 130,808 130,879
Subordinated debentures................................. 10,000 10,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 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>
F-30
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
DECEMBER 31, 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:
Deposit accounts........................................ 67,535 67,688
</TABLE>
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 Assets 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.
Subordinated Debentures and 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. There were no significant unrealized
gains and losses on commitments to sell loans.
The fair value estimates presented herein are based on pertinent information
available to management as of March 31, 1997 and 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-31
<PAGE>
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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>
DECEMBER 31, 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>
DECEMBER 31, 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-32
<PAGE>
OTHER MATTERS
Management of Life Savings knows of no other business to be presented at
the Adjourned Annual Meeting. If other matters are presented at the Adjourned
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
________________________________
L. Bruce Mills
Corporate Secretary
San Bernardino, California
June __, 1997
126
<PAGE>
EXHIBIT B
552.14 DISSENTER AND APPRAISAL RIGHTS.
(a) Right to demand payment of fair or appraised value. Except as provided
in paragraph (b) of this section, any stockholder of a Federal stock association
combining in accordance with 552.13 of this part shall have the right to demand
payment of the fair or appraised value of his stock: Provided, that such
stockholder has not voted in favor of the combination and complies with the
provisions of paragraph (c) of this section.
(b) Exceptions. No stockholder required to accept only qualified
consideration for his or her stock shall have the right under this section to
demand payment of stock's fair or appraised value, if such stock was listed on a
national securities exchange or quoted on the National Association of Securities
Dealers' Automated Quotation System ("NASDAQ") on the date of the meeting at
which the combination was acted upon or stockholder action is not required for a
combination made pursuant to 552.13 (h)(12) of this part. "Qualified
consideration" means cash, shares of stock of any association or corporation
which at the effective date of the combination will be listed on a national
securities exchange or quoted on NASDAQ or any combination of such shares of
stock and cash.
(c) Procedure.
(1) NOTICE. Each constituent Federal stock association shall notify
all stockholders entitled to rights under this section, not less than twenty
days prior to the meeting at which the combination agreement is to be submitted
for stockholder approval, of the right to demand payment of appraised value of
shares, and shall include in such notice a copy of this section. Such written
notice shall be mailed to stockholders of record and may be part of the
management's proxy solicitation for such meeting.
(2) DEMAND FOR APPRAISAL AND PAYMENT. Each stockholder electing to
make a demand under this section shall deliver to the Federal stock association,
before voting on the combination, a writing identifying himself or herself and
stating his or her intention thereby to demand appraisal of and payment for his
or her shares. Such demand must be in addition to and separate from any proxy
or vote against the combination by the stockholder.
(3) NOTIFICATION OF EFFECTIVE DATE AND WRITTEN OFFER. Within ten
days after the effective date of the combination, the resulting association
shall:
(i) Give written notice by mail to stockholders of constituent
Federal Stock associations who have complied with the provisions
of paragraph (c)(2) of this section and have not voted in favor
of the combination, of the effective date of the combination;
(ii) Make a written offer to each stockholder to pay for
dissenting shares at a specified price deemed by the resulting
association to be the fair value thereof; and
(iii) Inform them that, within sixty days of such date, the
respective requirements of paragraphs (c)(5) and (6) of this
section (set out in the notice) must be satisfied.
The notice and offer shall be accompanied by a balance sheet and statement
of income of the association the shares of which the dissenting stockholder
holds, for a fiscal year ending not more than sixteen months before the date of
notice and offer, together with the latest available interim financial
statements.
(4) ACCEPTANCE OF OFFER. If within sixty days of the effective date
of the combination the fair value is agreed upon between the resulting
association and any stockholder who has complied with the provisions of
paragraph (c)(2) of this section, payment therefor shall be made within ninety
days of the effective date of the combination.
<PAGE>
(5) PETITION TO BE FILED IF OFFER NOT ACCEPTED. If within sixty days
of the effective date of the combination the resulting association and any
stockholder who has complied with the provisions of paragraph (c)(2) of this
section do not agree as to the fair value, then any such stockholder may file a
petition with the Office, with a copy by registered or certified mail to the
resulting association, demanding a determination of the fair market value of the
stock of all such stockholders. A stockholder entitled to file a petition under
this section who fails to file such petition within sixty days of the effective
date of the combination shall be deemed to have accepted the terms offered under
the combination.
(6) STOCK CERTIFICATES TO BE NOTED. Within sixty days of the
effective date of the combination, each stockholder demanding appraisal and
payment under this section shall submit to the transfer agent his certificates
of stock for notation thereon that an appraisal and payment have been demanded
with respect to such stock and that appraisal proceedings are pending. Any
stockholder who fails to submit his stock certificates for such notation shall
no longer be entitled to appraisal rights under this section and shall be deemed
to have accepted the terms offered under the combination.
(7) WITHDRAWAL OF DEMAND. Notwithstanding the foregoing, at any time
within sixty days after the effective date of the combination, any stockholder
shall have the right to withdraw his or her demand for appraisal and to accept
the terms offered upon the combination.
(8) VALUATION AND PAYMENT. The Director shall, as he or she may
elect, either appoint one or more independent persons or direct appropriate
Staff of the Office to appraise the shares to determine their fair market value,
as of the effective date of the combination, exclusive of any element of value
arising from the accomplishment or expectation of the combination. Appropriate
Staff of the Office shall review and provide an opinion on appraisals prepared
by independent persons as to the suitability of the appraisal methodology and
the adequacy of the analysis and supportive data. The Director after
consideration of the appraisal report and the advice of the appropriate Staff,
shall if he or she concurs in the valuation of shares, direct payment by the
resulting association of the appraised fair market value of the shares, upon
surrender of the certificates representing such stock. Payment shall be made,
together with interest from the effective date of the combination, at a rate
deemed equitable by the Director.
(9) COSTS AND EXPENSES. The costs and expenses of any proceeding
under this section may be apportioned and assessed by the Director as he or she
may deem equitable against all of some of the parties. In making this
determination the Director shall consider whether any party has acted
arbitrarily, vexatiously, or not in good faith in respect to the rights provided
by this section.
(10) VOTING AND DISTRIBUTION. Any stockholder who has demanded
appraisal rights as provided in paragraph (c)(2) of this Section shall
thereafter neither be entitled to vote for such stock for any purpose nor be
entitled to the payment of dividends or other distributions on the stock (except
dividends or other distribution payable to, or a vote to be taken by
stockholders of record at a date which is on or prior to, the effective date of
the combination): Provided, that if any stockholder becomes unentitled to
appraisal and payment of appraised value with respect to such stock and accepts
or is deemed to have accepted the terms offered upon the combination, such
stockholder shall thereupon be entitled to vote and receive the distributions
described above.
(11) STATUS. Shares of the resulting association into which shares of
the stockholders demanding appraisal rights would have been converted or
exchanged, had they assented to the combination, shall have the status of
authorized and unissued shares of the resulting association.
2
<PAGE>
REVOCABLE PROXY--LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
ANNUAL MEETING OF STOCKHOLDERS
June 20, 1997
10:00 a.m.
The undersigned hereby appoints the Board of Directors of Life Savings
Bank, Federal Savings Bank, with full power 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, which was convened on May 21, 1997
and adjourned to June 20, 1997, at 10:00 a.m., at the Arrowhead Country Club, at
3433 Parkside Drive, San Bernardino, California, and at any and all adjornments
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
LISTED. 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
-- FOLD AND DETACH HERE --
<PAGE>
Please mark
your vote as [X]
indicated in
this example
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED PROPOSALS.
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 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
Proposal I.
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 Prospectus and Proxy Statement
dated June __, 1997 and a Notice of Annual Meeting dated April 25, 1997.
Dated:__________________________________
________________________________________
Signature of Shareholder
________________________________________
Signature of Shareholder
Pease sign exactly as your name appears on this card. When signing as attorney,
executor, administrator, trustee or guardian, please give you 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"
-- FOLD AND DETACH HERE --
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 settlement) reasonably incurred or
suffered by such indemnitee in connection therewith; provided, however, that,
except as provided in Section C hereof with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such indemnitee
in connection with a proceeding (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 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
II-1
<PAGE>
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.
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 21. 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>
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
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
8.0 Opinion of Muldoon, Murphy & Faucette regarding Federal Tax Matters*
8.1 Opinion of Deloitte & Touche LLP regarding State Tax Matters*
10.1 Letter Agreement between Life Savings Bank, Federal Savings Bank and
Daniel L. Perl*
10.2 Form of Employment Agreement between Life Financial Corp. and Daniel L.
Perl*
10.3 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 Form of 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*
10.8 Master Loan and Security Agreement between Life Savings Bank, Federal
Savings Bank and Morgan Stanley Mortgage Capital, Inc.+
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
</TABLE>
- --------
* Previously filed.
+ To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
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 as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant to
the paragraph immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes 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.
II-3
<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 May 29, 1997.
LIFE FINANCIAL CORP.
/s/ Daniel L. Perl
By:-----------------------------------
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.
Name Title Date
/s/ Daniel L. Perl President, Chief Executive Officer and May 29,
- ------------------------- Director (principal executive officer) 1997
Daniel L. Perl
/s/ L. Bruce Mills, Jr. Executive Vice President, Chief Financial May 29,
- ------------------------- Officer, Treasurer and Secretary 1997
L. Bruce Mills, Jr. (principal financial and accounting
officer)
* Chairman of the Board
- -------------------------
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 May 29,
- ------------------------- 1997
Daniel L. Perl
II-4
<PAGE>
TABLE OF CONTENTS
LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
<TABLE>
<C> <S>
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 LLP regarding State Tax Matters*
10.1 Letter Agreement between Life Savings Bank, Federal Savings Bank and
Daniel L. Perl*
10.2 Form of Employment Agreement between Life Financial Corp. and Daniel L.
Perl*
10.3 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 Form of 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*
10.8 Master Loan and Security Agreement between Life Savings Bank, Federal
Savings Bank and Morgan Stanley Mortgage Capital, Inc.+
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
</TABLE>
- --------
* Previously filed
+ To be filed by amendment
<PAGE>
[LETTERHEAD OF MULDOON, MURPHY & FAUCETTE]
EXHIBIT 5.0
May 29, 1997
The Board of Directors
Life Financial Corp.
4115 Tigris Way
Riverside, California 92503
Re: The offering of up to 3,211,716 shares of
Life Financial Corp. Common Stock
Gentlemen:
You have requested our opinion concerning certain matters of Delaware law
in connection with the issuance by Life Financial Corp., a Delaware corporation
(the "Company") of 3,211,716 shares of its common stock, par value $.01 per
share, ("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, as filed initially with the Securities and Exchange
Commission on January 27, 1997 on Form S-1, as amended on March 27, 1997 on Form
S-1 and as amended on May 29, 1997 on Form S-4 (the "Registration Statement");
resolutions of the Board of Directors of the Company (the "Board") concerning
the organization of the Company, the Exchange Share Offering, the issuance of
shares in the Exchange Share Offering, 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 Exchange
Share Offering. 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
<PAGE>
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 completion of the actions provided for in Article V of the Plan
of Reorganization, the common stock to be issued in the Reorganization 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.
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.
<PAGE>
We consent to the filing of this opinion as an exhibit to the Registration
Statement on Form S-4 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
GWR/ssa
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF MORRIS, NICHOLS, ARSHT & TUNNELL]
May 29, 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 issuance (the "Exchange Share Offering") by Life
-------- ----- --------
Financial Corp., a Delaware corporation (the "Company"), of 3,211,716 shares of
-------
its common stock, par value $.01 per share (the "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 (the
"Reorganization").
- ---------------
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 Company's Registration
----------- -- -------------
Statement on Form S-4 filed with the Securities and Exchange Commission in
connection with the
<PAGE>
Muldoon, Murphy & Faucette
May 29, 1997
Page 2
Exchange Share Offering (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 Exchange Share Offering, the issuance of shares of Common Stock in the
Exchange Share Offering 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 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
<PAGE>
Muldoon, Murphy & Faucette
May 29, 1997
Page 3
of any other law, rule or regulation, state or federal, applicable to the Bank,
the Company, the Reorganization, or the Exchange Share Offering, 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 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 Incorpora tion may not
be given effect by a court applying Delaware law, but in our opinion the failure
to give effect to such provisions will
<PAGE>
Muldoon, Murphy & Faucette
May 29, 1997
Page 4
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 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 stock holders in evaluating any such offer.
Very truly yours,
/s/ Morris, Nichols, Arsht & Tunnell
<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. 2 to the Registration Statement on Form S-4 and
Prospectus included therein. We consent to the use of the aforementioned report
in the Amendment No. 2 to Registration Statement on Form S-4 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
May 29, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Pre-Effective Amendment No. 2 to the Registration Statement on Form S-4 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
May 28, 1997
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-effective Amendment No. 2 to Registration
Statement No. 333-20497 of Life Financial Corp. on Form S-4 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 "Tax Consequences
of Reorganization" and "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Costa Mesa, California
May 29, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE PRE-EFFECTIVE AMENDMENT NO. 2 TO THE FORM S-4 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 17,793
<INT-BEARING-DEPOSITS> 8,051
<FED-FUNDS-SOLD> 35,500
<TRADING-ASSETS> 12,519
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 9,021
<INVESTMENTS-MARKET> 8,990
<LOANS> 74,768
<ALLOWANCE> 1,801
<TOTAL-ASSETS> 157,707
<DEPOSITS> 130,808
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,384
<LONG-TERM> 10,000
0
0
<COMMON> 8,565
<OTHER-SE> 2,950
<TOTAL-LIABILITIES-AND-EQUITY> 157,707
<INTEREST-LOAN> 1,872
<INTEREST-INVEST> 106
<INTEREST-OTHER> 326
<INTEREST-TOTAL> 2,304
<INTEREST-DEPOSIT> 1,317
<INTEREST-EXPENSE> 1,561
<INTEREST-INCOME-NET> 743
<LOAN-LOSSES> 500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,492
<INCOME-PRETAX> 3,836
<INCOME-PRE-EXTRAORDINARY> 3,836
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,242
<EPS-PRIMARY> 2.09
<EPS-DILUTED> 2.09
<YIELD-ACTUAL> 2.44
<LOANS-NON> 1,738
<LOANS-PAST> 0
<LOANS-TROUBLED> 131
<LOANS-PROBLEM> 2,633
<ALLOWANCE-OPEN> 1,625
<CHARGE-OFFS> 332
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 1,801
<ALLOWANCE-DOMESTIC> 1,801
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
