LONG BEACH FINANCIAL CORP, 424B4, 1997-04-29

LONG BEACH FINANCIAL CORP
424B4, 1997-04-29
MORTGAGE BANKERS & LOAN CORRESPONDENTS

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<PAGE> 1
This filing is made
pursuant to Rule 424(b)(4)
under the Securities Act of
PROSPECTUS 1933 in connection with
Registration No. 333-22013

21,750,000 SHARES

LOGO LONG BEACH FINANCIAL CORPORATION

COMMON STOCK
------------------------

All of the shares of Common Stock, $.001 par value per share (the "Common
Stock"), of Long Beach Financial Corporation, a Delaware corporation ("LBFC"),
offered hereby are being sold by the sole stockholder of LBFC (the "Selling
Stockholder" or "Old Long Beach"), which prior to the Reorganization (as defined
below) operated LBFC's broker-sourced mortgage loan business. LBFC will not
receive any proceeds from the sale of shares by the Selling Stockholder.
Subsequent to this offering, the Selling Stockholder will own 13.0% of the
outstanding Common Stock. If the Underwriters' over-allotment option is
exercised in full, the Selling Stockholder will own no shares of LBFC. See
"Beneficial Ownership of Securities and Selling Stockholder."

Prior to this offering, there has been no public market for the Common
Stock. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Common Stock has been
approved for listing on the Nasdaq National Market under the symbol "LBFC."

SEE "RISK FACTORS" ON PAGES 8 THROUGH 16 FOR MATERIAL RISKS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
=========================================================================================================
PROCEEDS TO
PRICE TO SELLING
PUBLIC UNDERWRITING STOCKHOLDER(2)
DISCOUNTS AND
COMMISSIONS(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................................... $6.50 $0.455 $6.045
- ---------------------------------------------------------------------------------------------------------
Total(3)....................................... $141,375,000 $9,896,250 $131,478,750
=========================================================================================================
</TABLE>

(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses payable by the Selling Stockholder estimated to be
$850,000.
(3) The Selling Stockholder has granted the Underwriters a 30-day option to
purchase from the Selling Stockholder up to 3,250,000 additional shares of
Common Stock at the Price to Public less the Underwriting Discounts and
Commissions, solely to cover over-allotments, if any. If the Underwriters
exercise the option in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Selling Stockholder will be
$162,500,000, $11,375,000, and $151,125,000, respectively. See
"Underwriting."

The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or part. It is
expected that delivery of the shares of Common Stock will be made against
payment therefor at the offices of Friedman, Billings, Ramsey & Co., Inc.,
Arlington, Virginia, the representative of the several Underwriters (the
"Representative"), or in book entry form through the book entry facilities of
The Depository Trust Company, on or about May 2, 1997.

------------------------

FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is April 28, 1997

<PAGE> 2

[ARTWORK]

The Prospectus delivered to investors contains a map of the United States
of America that cannot be reproduced in an electronic filing. The map indicates
(i) by the placement of a star, the Southern California location of the LBFC
headquarters, (ii) by shading, that loans are originated and offices are located
in the states of Arizona, California, Colorado, Florida, Georgia, Hawaii, Idaho,
Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts,
Michigan, Minnesota, Missouri, New Jersey, New Mexico, New York, Nevada, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee,
Texas, Utah and Washington, (iii) by shading and the placement of dots, that
loans are originated but no offices are located in the states of Alabama,
Connecticut, Delaware, Maine, Mississippi, Montana, New Hampshire, Rhode Island,
Vermont, West Virginia, Wisconsin, and Wyoming, and (iv) by shading, that no
loans are originated and no offices are located in the states of Alaska,
Arkansas, Nebraska, North Dakota, South Dakota and Virginia.

<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
-------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loan Originations and Purchases................... $565,547 $592,542 $1,058,122
States in which Loans were Originated............. 27 35 43
Loan Origination Offices.......................... 24 45 63
States with Loan Origination Offices.............. 10 22 32
Account Executives................................ 79 64 120
Approved Independent Brokers...................... 4,004 5,043 7,463
</TABLE>

------------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

------------------------
<PAGE> 3

SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Except as otherwise specified, all information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option or of
outstanding options under the Company's 1997 Stock Incentive Plan. Unless the
context otherwise requires, (i) the information contained in this Prospectus
gives effect to the Reorganization described elsewhere herein, which will be
consummated prior to the completion of this Offering, (ii) all references to the
"Company" herein shall be deemed to include LBFC and its wholly-owned subsidiary
after giving effect to the Reorganization, the operations of the broker-sourced
mortgage lending division of Old Long Beach prior to the Reorganization and the
prior operations of the broker-sourced mortgage lending division of Long Beach
Bank, F.S.B., and (iii) all references to "Old Long Beach" herein shall be
deemed to include prior to the Reorganization all of the operations of the
Selling Stockholder (which included the operations of the Company) and after the
Reorganization shall be deemed to include all continuing operations that are not
being transferred to the Company. See "Reorganization."

Certain statements contained in this Prospectus that are not related to
historical results are forward-looking statements. 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.

THE COMPANY

The Company is a specialty finance company engaged in the business of
originating, purchasing and selling sub-prime residential mortgage loans secured
by one-to-four family residences. The Company originates loans primarily through
independent mortgage brokers (the "broker-sourced business"). Prior to the
Reorganization, the Company's business has been conducted as a division of Old
Long Beach. The Company's primary operating strategy is to generate positive
cash flow by selling for cash, at a premium, substantially all originated and
purchased loans to institutional purchasers several times a quarter. The Company
does not currently, nor does it have current plans to, sell loans through
securitizations and therefore retains no residual interests, or the related
risks, in the loans sold (except risks associated with servicing rights, which
the Company normally retains, and certain repurchase risks associated with
representations and warranties). As a result, the Company has less risk than is
typically inherent in a mortgage lender's business and has historically had a
source of cash flow to fund lending and growth, reducing the need for other
sources of financing. See "Business -- Financing and Sale of Loans." The
sub-prime mortgage lending industry is subject to certain risks, including risks
related to the significant growth in the number of sub-prime lenders in recent
years (see "Risk Factors -- Risk of Competition"), risks related to certain
potential new competitors (see "Risk Factors -- Risk of Competition from
Government-Sponsored Entities"), and risks related to the industry's focus on
credit impaired borrowers (see "Risk Factors -- Focus on Credit Impaired
Borrowers May Result in Increased Delinquency Rates, Foreclosures and Losses").
Substantially all loans originated or purchased by the Company are secured by a
first priority mortgage on the subject property. In 1996, less than .03% of the
principal balance of the loans originated and purchased were secured by second
priority mortgages. The Company's core borrower base consists of individuals who
do not qualify for traditional "A" credit because their credit history, income
or other factors cause them not to conform to standard agency lending criteria.
Approximately 69% of the principal balance of the loans originated by the
Company in 1996 were to borrowers with a Company risk classification of "A-" or
"B+," while the remainder were to borrowers with a Company risk classification
of "B," "B-," "C" or "C-." Approximately 2.31% of the total principal amount of
loans originated or purchased by the Company in 1996 were to borrowers with a
Company risk classification of "C-," which includes borrowers with numerous
derogatory credit items up to and including a bankruptcy in the most recent
twelve month period. See "Business -- Underwriting."

3
<PAGE> 4

The Company believes that its primary strengths are (i) its established
position in the sub-prime mortgage lending industry, (ii) the extensive
experience of its management, as well as many members of its staff, in the
sub-prime lending industry, (iii) its use of regional processing teams linked to
the home office by a computer network to expedite loan origination and
production, (iv) the thoroughness of the training received by its personnel, (v)
its use of technology to efficiently maximize work flow and (vi) the efficiency
of its operations as a result of its high volume of loans and consistency in
applying underwriting standards. See "Business -- General."

The Company began originating sub-prime mortgage loans in Southern
California in 1988 as a division of Long Beach Bank, F.S.B. and started to
expand its business outside of California on a limited basis in 1992. In 1994,
the Company began to focus on expansion outside of California. To facilitate
this expansion and to permit the Company to provide competitive products and
pricing, in October 1994 Long Beach Bank, F.S.B. ceased operations and the
Company commenced operations as a mortgage company. Since that time, the Company
has experienced significant growth in loan originations and purchases, with
approximately $1.1 billion of originations and purchases in 43 states during
calendar 1996 compared to $592.5 million in 35 states during calendar 1995 and
$565.5 million in 27 states during calendar 1994. Total originations and
purchases were $300.7 million during the fourth quarter of 1996, which
represents a $122.4 million increase from total originations and purchases
during the fourth quarter of 1995. This growth in originations and purchases has
resulted in the Company's earnings increasing to $9.4 million in 1996 compared
to earnings of $5.8 million and $22,000 in 1995 and 1994, respectively.

The Company sells substantially all of its originated and purchased loans
several times a quarter to institutional purchasers for cash, historically at a
premium over the principal balance of the loans. Prior to originating or
purchasing loans, the Company obtains a purchase commitment from an
institutional purchaser. The Company delivers loans and receives payments for
the loans shortly after funding. This strategy, as opposed to securitizations,
in which a residual interest in future payments on the loans is retained,
provides certain benefits. The Company receives cash revenue, rather than
recognizing non-cash revenue attributable to residual interests, as is the case
in securitizations. The Company thereby avoids the risk present in
securitizations of having to adjust revenue in future periods to reflect a lower
realization on residual interests because actual prepayments or defaults
exceeded levels assumed at the time of securitization. By selling its originated
and purchased loans, the Company also reduces its exposure to default risk
(other than certain first payment defaults) and the prepayment risk normally
inherent in a mortgage lender's business. The Company may also be required to
repurchase or substitute loans in the event of a breach of representations and
warranties, including any fraud or any misrepresentation made during the
mortgage loan origination process, and retains the risk of having to adjust
noncash revenues attributable to the realization of the retained servicing
rights. Management believes that the cash received in loan sales provides the
Company greater flexibility and operating leverage than a traditional portfolio
lender, which holds the loans it originates, by allowing the Company to generate
income through interest on loans held for sale and gain on loans sold. Loan
sales have been an important factor in generating the Company's historic
earnings and creating consistent positive cash flow to fund operations. See
"Business -- Financing and Sale of Loans."

The Servicing Division of Old Long Beach (the "Sub-Servicer") serviced
substantially all of the loans originated by the Company while it operated as a
division of Old Long Beach. The Sub-Servicer and the Company are entering into a
contract pursuant to which the Sub-Servicer will sub-service loans originated or
purchased by the Company following the Reorganization. Sub-servicing activities
include collecting and

4
<PAGE> 5

remitting loan payments, accounting for principal and interest, holding escrow
or impound funds for payment of taxes and insurance, if applicable, making
required inspections of the mortgaged property, contacting delinquent borrowers
and supervising foreclosures and property dispositions. The Sub-Servicer has
nine years of experience in the sub-prime mortgage loan servicing industry, with
a servicing portfolio of approximately $3.5 billion of sub-prime mortgage loans
at December 31, 1996. Since the servicing procedures of the Sub-Servicer were
developed while the Company was part of Old Long Beach and are coordinated with
the Company's origination practices, management believes that the Sub-Servicer
will be able to provide faster and more effective servicing of the Company's
loans than would another independent servicer. See "Business -- Servicing."

The Company actively originated loans during 1996 in 112 of the
approximately 300 metropolitan statistical areas ("MSAs") in the United States
having populations in excess of 100,000, as compared to loan originations in 54
of these MSAs during 1995. The Company seeks to expand its broker-sourced loan
business through increased penetration in its existing markets and expansion
into new geographic markets. In addition, although the Company currently
primarily conducts a broker-sourced business, the Company intends to develop a
direct-sourced loan origination business (i.e., where the lender deals directly
with the borrower and does not involve an independent broker). Direct lending
will provide the Company with an additional distribution channel for its
products and the ability to retain the origination fees for the loans it funds.
The Company plans to commence its direct-sourced lending operations in 1997 and
estimates it will expend approximately $1.0 million in 1997 for this purpose.
The Company's senior management is also experienced in direct-sourced loan
originations as several of the senior executives were involved in creating the
direct-sourced lending operations of Old Long Beach prior to the Reorganization.
No assurance can be given that the Company will be able to commence
direct-sourced loan origination operations as planned or that such operations
will be successful. See "Business -- Loan Origination and
Purchasing -- Direct-Sourced Loan Operations."

To facilitate the public sale of Old Long Beach's broker-sourced business,
Old Long Beach is reorganizing its business operations (the "Reorganization") by
transferring to LBFC the assets and personnel related to Old Long Beach's
broker-sourced lending and loan sales operations and approximately $40 million
in cash in exchange for 25,000,000 shares of Common Stock, 21,750,000 of which
are being sold pursuant to this Offering (25,000,000 if the Underwriters'
over-allotment option is exercised in full). The Company intends to use the $40
million contributed to it from Old Long Beach for working capital purposes and
to pay fees and expenses related to the Reorganization, estimated to be
approximately $2.0 million. The costs of the Offering are being paid by Old Long
Beach. The assets being transferred to LBFC do not include any funded loans or
funded loan servicing rights. LBFC will have no interest in Old Long Beach's
direct-sourced mortgage lending or servicing operations, which are being
retained by Old Long Beach after the Reorganization. In the Reorganization, LBFC
is acquiring the right to the "Long Beach Mortgage Company" name and the
benefits related to the name, which will be used after the Reorganization by a
wholly-owned subsidiary of LBFC ("New Long Beach") that will conduct the
broker-sourced business. The Company is not assuming any of the liabilities of
Old Long Beach arising from Old Long Beach's lending or loan servicing
activities prior to the Reorganization. LBFC will assume certain liabilities
associated with equipment leases and property leases related to assets acquired
in the Reorganization and certain accrued vacation and other employee benefits
arising before the Reorganization for the employees being transferred to LBFC.
Old Long Beach and the Company will be free to compete against each other after
the completion of this Offering. Old Long Beach and the Company are entering
into an agreement not to solicit or hire each other's employees for a specified
period following the Reorganization. See "Reorganization."

The principal executive offices of the Company are located at 1100 Town &
Country Road, Suite 900, Orange, California 92868, and its telephone number is
(714) 541-5378.

5
<PAGE> 6

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Selling
Stockholder(1)............................. 21,750,000 shares
Common Stock to be Outstanding after the
Offering(2)................................ 25,000,000 shares
Nasdaq National Market symbol................ LBFC
Risk Factors................................. See "Risk Factors" for a discussion of
certain material factors that should be
considered in connection with an investment
in the Common Stock offered hereby.
</TABLE>

- ---------------
(1) Prior to completion of this Offering, the Selling Stockholder (i.e., Old
Long Beach), as the sole stockholder of LBFC, will own 25,000,000 shares of
Common Stock. All of the 3,250,000 shares being retained by the Selling
Stockholder are subject to the Underwriters' over-allotment option. If the
over-allotment option is exercised in full, the Selling Stockholder will not
own any shares of Common Stock. See "Beneficial Ownership of Securities and
Selling Stockholder."

(2) Excludes 3,000,000 shares of Common Stock reserved for issuance under the
1997 Stock Incentive Plan. In connection with the Offering, options are
being granted at the public offering price to key officers and employees of
the Company. See "Management -- 1997 Stock Incentive Plan."

6
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA AND RATIOS)

The financial data set forth below should be read in conjunction with the
Financial Statements of the Company and related Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operation"
included elsewhere herein.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
PRO FORMA
1994 1995 1996 1996(1)
------- ------- ------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Gain on sales of loans..................................... $21,668 $31,691 $50,699 $ 49,465
Loan servicing and other fees.............................. -- -- -- 1,529(2)
Interest income............................................ 2,510 2,494 3,275 3,275
------- ------- ------- ----------
Total revenues......................................... 24,178 34,185 53,974 54,269
Expenses:
Compensation and employee benefits......................... 15,496 13,564 22,299 23,086
Rent and other occupancy costs............................. 2,565 3,258 4,188 4,188
Office supplies and courier service........................ 712 816 1,903 1,903
Depreciation............................................... 281 667 1,025 1,025
Legal and professional..................................... 1,443 1,082 1,828 1,828
Interest................................................... 1,814 2,312 2,814 3,140
Loan sub-servicing......................................... -- -- -- 1,990
Other...................................................... 1,831 2,525 3,945 3,945
------- ------- ------- ----------
Total expenses......................................... 24,142 24,224 38,002 41,105
------- ------- ------- ----------
Income before provision for income taxes..................... 36 9,961 15,972 13,164
Provision for income taxes................................... 14 4,169 6,580 5,424
------- ------- ------- ----------
Net income................................................... $ 22 $ 5,792 $ 9,392 $ 7,740
======= ======= ======= ==========
Pro forma earnings per share(3).............................. $ .31
==========
Pro forma weighted average number of shares outstanding(3)... 25,000,000
==========
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
---------------------------
ACTUAL PRO FORMA(1)
------- -------------
<S> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:

Cash.............................................................................. $ -- $40,000
Loans held for sale............................................................... 49,580 --
Deferred income taxes............................................................. 2,120 36,000
Total assets...................................................................... 79,750 78,215
Warehouse financing facility...................................................... 72,829 --
Total liabilities................................................................. 78,613 2,756
Stockholders' equity.............................................................. 1,137 75,459
</TABLE>

<TABLE>
<CAPTION>
AS OF OR FOR YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
-------- -------- ----------
<S> <C> <C> <C>
OPERATING DATA:

Loans originated and purchased.......................................... $565,547 $592,542 $1,058,122
Whole loan sales........................................................ 562,054 580,366 1,029,789
"A-" and "B+" loans as a percentage of total principal balance of
loans(4).............................................................. 44.6% 55.0% 69.2%
Average original loan principal balance................................. $ 116 $ 99 $ 105
31-60 day delinquencies as a percentage of total principal balance as of
period end(5)......................................................... 0.8% 1.5% 1.6%
61-90 day delinquencies as a percentage of total principal balance as of
period end(5)......................................................... 0.9 1.0 1.0
91 or more day delinquencies as a percentage of total principal balance
as of period end(5)................................................... 3.9 4.5 4.5
Total delinquencies as a percentage of total principal balance as of
period end(5)......................................................... 5.7 7.0 7.1
Total losses on loans as a percentage of average principal balance of
loans serviced(5)..................................................... 1.5 1.4 1.3
FINANCIAL RATIOS(4):
Weighted average interest rate on fixed rate loans...................... N/A 11.3% 10.5%
Weighted average interest rate on adjustable rate loans................. 8.6% 10.4 9.6
Weighted average interest rate on fixed/adjustable loans................ 9.5 11.3 10.0
Weighted average initial combined loan-to-value ratio................... 69.1 72.2 75.0
</TABLE>

- ---------------
(1) Gives pro forma effect to the Reorganization as if it had occurred as of
January 1, 1996 as to the Statement of Operations and December 31, 1996 as
to the Statement of Financial Condition Data. The pro forma results of
operations are not necessarily indicative of the future operations of the
Company. See "Unaudited Pro Forma Consolidated Financial Data."

(2) Net of amortization of capitalized mortgage servicing rights of $1.8
million.

(3) Historical earnings per share information for 1994, 1995 and 1996 was not
deemed meaningful.

(4) Calculated based on loans originated and purchased, net of loans rescinded
because the related lending transactions did not close. Such rescinded loans
aggregated approximately $1.0 million, $7.0 million and $3.0 million in
1994, 1995 and 1996, respectively.

(5) Calculated based on the total broker-sourced servicing portfolio of Old Long
Beach.

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<PAGE> 8

RISK FACTORS

The following risk factors should be carefully considered before making an
investment in the Company. This Prospectus contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors.

ECONOMIC SLOWDOWN AND DECLINE IN COLLATERAL VALUE MAY ADVERSELY AFFECT VOLUME OF
LOANS

Periods of economic slowdown may reduce the demand for mortgage loans as
people elect not to purchase new homes due to economic uncertainty and also may
adversely affect the financial condition of potential borrowers so that they do
not meet the Company's underwriting criteria. In addition, economic slowdowns
may cause a decline in real estate values. Any material decline in real estate
values will reduce the ability of borrowers to use home equity to support
borrowings by negatively affecting loan-to-value ratios of the home equity
collateral. To the extent that the loan-to-value ratios of prospective
borrowers' home equity collateral do not meet the Company's underwriting
criteria, the volume of loans originated by the Company could decline. A decline
in loan origination volumes could have a material adverse effect on the
Company's operations and financial condition.

FOCUS ON CREDIT IMPAIRED BORROWERS MAY RESULT IN INCREASED DELINQUENCY RATES,
FORECLOSURES AND LOSSES

The Company is a lender in the sub-prime mortgage banking industry, which
means that the Company focuses its marketing efforts on borrowers who may be
unable to obtain mortgage financing from conventional mortgage sources.
Approximately 2.31% of the total principal amount of loans originated or
purchased by the Company in 1996 were to borrowers with a Company risk
classification of "C-," which includes borrowers with numerous derogatory credit
items up to and including a bankruptcy in the most recent twelve month period.
Loans made to such borrowers may entail a higher risk of delinquency and higher
losses than loans made to borrowers who utilize conventional mortgage sources.
Delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions. Further, any material decline in real estate values
increases the loan-to-value ratios of loans previously made by the Company,
thereby weakening collateral coverage and increasing the possibility of a loss
in the event of a borrower default. Any sustained period of increased
delinquencies, foreclosures or losses after the loans are sold could adversely
affect the pricing of the Company's future loan sales and the ability of the
Company to sell its loans in the future.

DILUTION RISK

The initial public offering price per share of Common Stock will exceed the
net tangible book value per share of Common Stock. Accordingly, the purchasers
of Common Stock will experience immediate and substantial dilution (in the
amount of $3.48 per share based upon the initial public offering price of $6.50
per share) in the net tangible book value of their equity investment in the
Company. See "Dilution."

LOSS OF FUNDING SOURCES COULD ADVERSELY AFFECT RESULTS OF OPERATIONS

The Company will fund substantially all of the loans it originates or
purchases through borrowings under its $200 million secured revolving line of
credit (the "Warehouse Financing Facility"). These borrowings will be repaid
with the proceeds received by the Company from selling such loans. Any failure
to renew or obtain adequate funding under the Warehouse Financing Facility, or
other borrowings, or any substantial reduction in the size of, or prices
received in, the markets for the Company's loans, could have a material adverse
effect on the Company's results of operations and financial condition. In the
long term, to the extent that the Company is not successful in maintaining or
replacing the Warehouse Financing Facility, it would likely have to curtail its
loan production activities, thereby having a material adverse effect on the
Company's results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Reorganization."

8
<PAGE> 9

this Offering, the Company has obtained the Warehouse Financing Facility. See
"Business -- Financing and Sale of Loans -- Warehouse Financing Facility."

RELIANCE ON SECONDARY PURCHASERS OF LOANS COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS

Gain on sales of loans generated by the Company's loan sales represents the
primary source of the Company's revenues and net income. Furthermore, the
Company will rely almost entirely on proceeds from loan sales to generate cash
for repayment of borrowings under the Warehouse Financing Facility. The Company
has historically sold substantially all of its loan originations in the
secondary market to a limited number of institutional purchasers. There can be
no assurance that such purchasers will continue to purchase loans or will be
willing to purchase loans on the terms under which such purchasers have
historically purchased the Company's loans. To the extent that the Company could
not successfully replace such loan purchasers or negotiate favorable terms for
such loan purchases, the Company's results of operations and financial condition
could be materially and adversely affected.

RISK OF COMPETITION FROM OLD LONG BEACH

Old Long Beach was the parent of the Company before the Reorganization, and
Old Long Beach is thus familiar with the methodology, practices and procedures
used by the Company to develop its broker-sourced mortgage loan business. Old
Long Beach could use this knowledge to build a broker-sourced mortgage loan
business which would compete directly against the Company. Because of Old Long
Beach's knowledge of the Company, a broker-sourced mortgage loan business
developed by Old Long Beach might be able to compete more effectively against
the Company than could a typical competitor in the sub-prime mortgage loan
industry. The agreements that Old Long Beach and the Company are entering into
in connection with the Reorganization do not restrict their future competition,
but do restrict their ability to hire each others' employees.

REQUIRED COMPLIANCE WITH DEPARTMENT OF JUSTICE SETTLEMENT AGREEMENT

In September 1996, Old Long Beach entered into a settlement agreement with
the U.S. Department of Justice (the "DOJ") which is binding upon the Company, as
a successor to Old Long Beach. Pursuant to the settlement agreement, the Company
is required to (i) document any price exceptions from the Company's rate sheet
on broker-sourced loans, (ii) periodically review the results of its
broker-sourced lending operations for its compliance with fair lending laws (but
in no event shall the Company be required to disclose any documents or
information therewith, including the identities of any brokers with whom it does
business), (iii) retain all loan application files submitted for mortgage loans
and all loan-rider documents and notices relevant to any pricing decisions until
September 1999 and report to the DOJ semi-annually on compliance with the
settlement agreement, and (iv) provide to brokers information about the
Company's fair-lending and pricing procedures and an opportunity to participate
in fair-lending training. In addition, if, as expected, the Company commences
direct-sourced mortgage lending, it will be required to provide certain training
courses for Company employees involved in direct-sourced mortgage loan pricing,
use its best efforts to place mortgage loan applicants in appropriate risk
classifications based on objective credit and risk-related criteria, and
implement a direct-sourced mortgage loan monitoring system of mortgage loan
prices. Any failure of the Company to comply with the requirements of the DOJ
settlement agreement could allow the DOJ to seek injunctive relief against the
Company. See "Business -- Department of Justice Settlement Agreement."

While the Company believes it is in compliance with the broker-sourced
provisions of the settlement agreement and also expects to be able to comply
with the direct-sourced provisions of the settlement agreement, there can be no
assurance that the DOJ will not take a contrary position in the future and seek
to compel compliance by the Company.

ELIMINATION OF LENDER PAYMENTS TO BROKERS COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS

Lawsuits have been filed against several mortgage lenders, including Old
Long Beach, alleging that such lenders have made certain payments to independent
mortgage brokers in violation of the Federal Real Estate Settlement Procedures
Act of 1974, as amended ("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

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<PAGE> 10

these cases are resolved against the lenders, it may cause an industry-wide
change in the way independent mortgage brokers are compensated. The Company's
broker compensation programs permit such payments. Although the Company 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 Company to change its broker compensation practices. Such a change may have
a material adverse effect on the Company and the entire mortgage lending
industry. See "Business -- Legal Proceedings."

ELIMINATION OF DEDUCTIBILITY OF MORTGAGE INTEREST COULD ADVERSELY AFFECT RESULTS
OF OPERATIONS

Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Company's loans are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for the kind of
loans offered by the Company.

RISK OF VARIATIONS IN QUARTERLY OPERATING RESULTS

Several factors affecting the Company's business can cause significant
variations in its quarterly results of operations. In particular, variations in
the volume of the Company's loan originations and purchases, the differences
between the Company's costs of funds and the average interest rates of
originated or purchased loans, the inability of the Company to complete
significant loan sales transactions in a particular quarter, and problems
generally affecting the mortgage loan industry can result in significant
increases or decreases in the Company's revenues from quarter to quarter. A
delay in closing a particular loan sale transaction during a particular quarter
would postpone recognition of gain on sale of loans. In addition, unanticipated
delays in closing a particular loan sale transaction would also increase the
Company's exposure to interest rate fluctuations by lengthening the period
during which its variable rate borrowings under its Warehouse Financing Facility
are outstanding. If the Company were unable to sell a sufficient number of its
loans at a premium in a particular reporting period, the Company's revenues for
such period would decline, resulting in lower net income and possibly a net loss
for such period, which could have a material adverse effect on the Company's
results of operations and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

RISK OF COMPETITION

As an originator of mortgage loans, the Company faces intense competition,
primarily from mortgage banking companies, commercial banks, credit unions,
thrift institutions and finance companies. Many of these competitors are
substantially larger and have more capital and other resources than the Company
and may have lower costs of funds than the Company. Furthermore, the current
level of gains realized by the Company and its competitors on the sale of the
type of loans they originate and purchase is attracting and may continue to
attract additional competitors into the sub-prime mortgage market. Establishing
a broker-sourced loan business typically requires a substantially smaller
commitment of capital and personnel resources than a direct-sourced loan
business. This relatively low barrier to entry permits new competitors to enter
the broker-sourced loan market quickly, particularly existing direct-sourced
lenders which can draw upon existing branch networks and personnel in seeking to
sell products through independent brokers.

Increased competition could have the possible effects of (i) lowering gains
that may be realized on the Company's loan sales, (ii) reducing the volume of
the Company's loan originations and loan sales, (iii) increasing the demand for
the Company's experienced personnel and the potential that such personnel will
be recruited by the Company's competitors, and (iv) lowering the industry
standard for sub-prime underwriting guidelines (for example, by providing for
less stringent loan-to-value ratios) as competitors attempt to increase or
maintain market share in the face of increased competition. See "-- Economic
Slowdown and Decline in Collateral Value May Adversely Affect Volume of Loans"
and "-- Focus on Credit Impaired Borrowers May Result in Increased Delinquency
Rates, Foreclosures and Losses" for a description of the potential adverse
effects to the Company of impaired loan-to-value ratios.

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<PAGE> 11

Competition also may be affected by fluctuations in interest rates, general
economic conditions, and localized economic conditions. During periods of rising
interest rates, competitors that have "locked in" low borrowing costs may have a
competitive advantage. During periods of declining rates, competitors may
solicit the Company's customers to refinance their loans. During economic
slowdowns or recessions, the Company's borrowers may have new financial
difficulties and may be receptive to refinancing offers by the Company's
competitors. See "-- Focus on Credit Impaired Borrowers May Result in Increased
Delinquency Rates, Foreclosures and Losses."

There can be no assurance that the Company will be able to continue to
compete successfully in the markets it serves. Inability to compete successfully
would have a material adverse effect on the Company's results of operations and
financial condition.

RISK OF COMPETITION IN NEW MARKETS

As the Company expands into new geographic markets, it may face competition
from lenders with established positions in these locations. There can be no
assurance that the Company will be able to successfully compete with such
established lenders.

RISK OF COMPETITION FROM GOVERNMENT-SPONSORED ENTITIES

In the future, the Company may also face competition from, among others,
government-sponsored entities which may enter the sub-prime mortgage market.
Existing or new loan purchase programs may be expanded by the Federal National
Mortgage Association or the Government National Mortgage Association to include
sub-prime mortgages, particularly those in the "A-" category, which constitute a
significant portion of the Company's loan production.

NO HISTORY OF INDEPENDENT OPERATIONS

LBFC was formed in January 1997 and prior to the Reorganization its
mortgage lending operations have been conducted as a division of Old Long Beach.
The Company is developing certain systems and administrative capabilities
necessary to function as an independent entity. The Company and Old Long Beach
are entering into certain agreements pursuant to which certain administrative
functions will be provided by Old Long Beach for an interim period after the
Reorganization. The agreements have been developed in the context of a
parent/subsidiary relationship and therefore are not the result of arm's-length
negotiations between independent parties. Further, there can be no assurances
that the Company will be able to effectively function as an independent entity.
See "-- Risk of Contracted Services" and "Certain Relationships and Related
Transactions."

RISKS OF CONTRACTED SERVICES

The Company typically retains servicing rights upon the sale of loans
originated or purchased by the Company and agrees to certain servicing
performance criteria. If the Company does not meet such servicing performance
criteria, the loan purchaser may terminate the servicing rights of the Company.
The Company is entering into an agreement with the Sub-Servicer (a division of
Old Long Beach) pursuant to which the Sub-Servicer will sub-service loans
originated or purchased by the Company after the Reorganization. If the
Sub-Servicer fails to meet the servicing performance criteria set forth in the
relevant servicing agreements governing the loans, the Company's servicing
rights could be terminated. Any termination of servicing rights could have a
material adverse effect on the Company's results of operations and financial
condition.

In connection with the Reorganization, the Company and Old Long Beach are
entering into an administrative services agreement under which Old Long Beach
will continue to provide various services to the Company, including certain
employee benefits administration services, information services, data processing
functions and mailroom services. The Company currently anticipates it will have
the capability to perform the functions covered by the administrative services
agreement internally within one year from the date of the Reorganization. Once
the Company develops the internal capability to perform each such function, the
Company intends to terminate the administrative services agreement with respect
to that function. Any failure by Old Long Beach to provide such administrative
services to the Company during the term of the

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<PAGE> 12

administrative services agreement could have a material adverse effect on the
Company's operations and financial condition. See "Certain Relationships and
Related Transactions."

IMPAIRMENT OF VALUE OF LOAN SERVICING RIGHTS; DECLINING INTEREST RATES

The Company records gain on sales of loans based in part on the fair value
of retained servicing rights related to such loans. The fair value of such
servicing rights are in turn based in part on projected loan prepayment and
credit loss rates. Higher than anticipated rates of loan prepayment or credit
loss may be caused by, among other factors, a material decline in the level of
interest rates and could require the Company to write down the value of such
servicing rights which could have a material adverse effect on the Company's
results of operations and financial condition.

DEPENDENCE UPON INDEPENDENT MORTGAGE BROKERS

The Company depends largely on independent mortgage brokers, and, to a
lesser extent, smaller mortgage companies and commercial banks, for its
originations and purchases of mortgage loans. Substantially all of the
independent mortgage brokers with whom the Company does business deal with
multiple loan originators for each prospective borrower. Such originators,
including the Company, compete for business based upon pricing, service, loan
fees and costs and other factors. The Company's competitors also seek to
establish relationships with such independent mortgage brokers, mortgage
companies and commercial banks, none of whom is obligated by contract or
otherwise to continue to do business with the Company. In addition, the Company
expects the volume of broker-sourced loans purchased by the Company to increase.
The Company's future operating and financial results may be more susceptible to
fluctuations in the volume and cost of its broker-sourced loans resulting from,
among other things, competition from other purchasers of such loans.

RISKS RELATED TO REPRESENTATIONS AND WARRANTIES IN LOAN SALES

The Company engages in bulk loan sales pursuant to agreements that
generally require the Company to repurchase or substitute loans in the event of
a breach of a representation or warranty made by the Company to the loan
purchaser, any misrepresentation during the mortgage loan origination process
or, in some cases, upon any fraud or first payment default on such mortgage
loans.

For loans the Company purchases from mortgage companies, banks and other
originators, the Company generally limits the potential remedies of the
institutions to which the Company later sells the loans to the potential
remedies the Company receives from the parties from whom the Company purchased
the loans. However, in some cases, the remedies available to a purchaser of
loans from the Company may be broader than those available to the Company
against the originators of such loans, and, even where this is not the case,
should a purchaser enforce its remedies against the Company, the Company may not
always be able to enforce its remedies against the related originators.

Any claims asserted against the Company in the future by one of its loan
purchasers may result in liabilities or legal expenses that could have a
material adverse effect on the Company's results of operations and financial
condition.

CONCENTRATION OF OPERATIONS IN CALIFORNIA

Approximately 37% of the dollar volume of loans originated or purchased by
the Company during 1996 was secured by properties located in California. No
other state contained properties securing more than 10% of the dollar volume of
loans originated or purchased by the Company during 1996. Although the Company
has a nationwide independent broker network and a developing regional processing
center network, the Company is likely to continue to have a significant amount
of its loan originations and purchases in California for the foreseeable future,
primarily because California represents a significant portion of the national
mortgage marketplace. Consequently, the Company's results of operations and
financial condition are dependent upon general trends in the California economy
and its residential real estate market. The California economy experienced a
slowdown or recession in recent years that has been accompanied by a sustained
decline in the California real estate market. Residential real estate market
declines may adversely affect the values of the properties securing loans such
that the principal balances of such loans will equal or exceed the value of the

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<PAGE> 13

mortgaged properties. Reduced collateral value will adversely affect the volume
of the Company's loans as well as the pricing of the Company's loans and the
Company's ability to sell its loans. See "-- Economic Slowdown and Decline in
Collateral Value May Adversely Affect Volume of Loans" and "-- Focus on Credit
Impaired Borrowers May Result in Increased Delinquency Rates, Foreclosures and
Losses."

In addition, California historically has been vulnerable to certain natural
disaster risks, such as earthquakes and erosion-caused mudslides, which are not
typically covered by the standard hazard insurance policies maintained by
borrowers. Uninsured disasters may adversely impact borrowers' ability to repay
loans made by the Company. Because the Company sells its loans on a forward
basis, it is not exposed to the risk of loan delinquencies and defaults (except
to the extent they affect servicing rights) unless the Company is required to
repurchase or substitute a loan due to a breach of a representation or warranty
in connection with a loan sale, or, under certain circumstances, due to fraud or
default on the first payment due after sale. However, any sustained period of
increased delinquencies or defaults could adversely affect the pricing of the
Company's loan sales and the ability of the Company to sell its loans. The
existence of adverse economic conditions or the occurrence of such natural
disasters in California could have a material adverse effect on the Company's
results of operations and financial condition.

ABILITY OF THE COMPANY TO IMPLEMENT ITS GROWTH STRATEGY

The Company's growth strategy involves expanding its broker-sourced loan
business through increased penetration into existing markets and expansion into
new markets and developing a direct-sourced loan origination business while
maintaining its customary premiums on sale, interest rate spreads and
underwriting criteria. Implementation of this strategy will depend in large part
on the Company's ability to (i) expand its independent mortgage broker network
and establish direct-sourced origination activities in markets with a sufficient
concentration of borrowers meeting the Company's underwriting criteria, (ii)
hire, train and retain skilled employees, and (iii) continue to expand in the
face of increasing competition from other mortgage lenders. There can be no
assurance that the Company will be able to implement these growth strategies, or
that such strategies will be effective. See "Business."

DEPENDENCE ON A LIMITED NUMBER OF KEY PERSONNEL

The Company's growth and development to date have been largely dependent
upon the services of M. Jack Mayesh, Edward Resendez, and Frank Curry, Chairman
of the Board and Chief Executive Officer, President and Executive Vice President
of the Company, respectively. The loss of Messrs. Mayesh's, Resendez's or
Curry's services for any reason could have a material adverse effect on the
Company. The Company has entered into employment agreements with Messrs. Mayesh,
Resendez and Curry. See "Management -- Management Compensation and Employment
Agreements."

INCOME TAX RISK RELATED TO DEFERRED TAX ASSET

As discussed below, the Internal Revenue Service ("IRS") could assert that
the "anti-churning" rules under Section 197 of the Internal Revenue Code of
1986, as amended (the "Code"), should be applied to disallow amortization
deductions with respect to any goodwill, going concern value or certain
intangibles transferred to the Company pursuant to the Reorganization, and to
further disallow all or a significant portion of LBFC's $36.0 million net
deferred tax asset. Any adjustment to the net deferred tax asset will be charged
or credited to additional paid-in capital but will not affect the Company's
earnings.

As a result of the Offering, the tax basis of the assets transferred by Old
Long Beach to LBFC will be increased, in the hands of LBFC, to their fair market
value (determined by reference to the initial public offering price). Such tax
basis is generally expected to produce a tax benefit to LBFC in future years
through depreciation or amortization deductions or through decreased gain or
(subject to certain limitations) increased loss on a disposition of any LBFC
asset. However, the "anti-churning" rules under Section 197 of the Code, might
apply to disallow such amortization with respect to certain intangible assets of
LBFC. See "Reorganization -- Tax Consequences." LBFC will record a deferred tax
asset (with a corresponding credit to additional paid-in capital) for the tax
effect of the excess of the tax basis of LBFC assets following the Offering over
their

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<PAGE> 14

net book value amounting to $36.0 million. Solely for financial accounting and
reporting purposes, such excess tax basis will exclude the tax basis of certain
intangible assets to take into account LBFC's assessment of the possible
application of the "anti-churning" rules under Section 197 of the Code. LBFC's
best estimate of the amount of this uncertainty is subject to revisions and
resolution of the uncertainty may not occur until such time as an audit of
LBFC's tax return for the period ended December 31, 1997, or any subsequent year
in which amortization deductions are claimed, is completed by the IRS. In
accordance with Emerging Issues Task Force Issue No. 94-10, Accounting by a
Company for the Income Tax Effects of Transactions among or with Its
Shareholders under FASB Statement No. 109, any revisions to the deferred tax
asset resulting from resolution of this uncertainty will be offset by a
corresponding charge or credit directly to additional paid-in capital at the
time such resolution occurs and will have no impact on earnings. The Company
believes that based on historical earnings levels it is more likely than not
that the Company will generate sufficient taxable income to realize the benefits
associated with the net deferred tax asset through future tax deductions. As the
Company realizes the benefits associated with the deferred tax asset, there will
be a corresponding reduction in income taxes payable by the Company. As the
deferred tax benefit is realized through a reduction in the current tax payable,
the statement of operations will reflect an offsetting charge to the amount of
the deferred tax benefit, resulting in no effect on net income. If the Company
determines that estimated future earnings are not sufficient to realize the
deferred tax benefit, the Company will establish a valuation allowance, for the
impairment of the deferred tax asset, through a charge to the income tax
provision which will result in a reduction of earnings. No assurances can be
given that the anti-churning rules will not be applied to disallow amortization
with respect to all or a significant portion of LBFC's deferred tax asset, that
LBFC will generate sufficient taxable income to realize the deferred tax asset
through future deductions, or that changes in applicable tax law (possibly on a
retroactive basis) will not limit LBFC's ability to take such deductions.

Based upon the initial public offering price of $6.50 per share, the pro
forma excess of the tax basis of LBFC's net assets (determined for financial
accounting and reporting purposes as described above) over their pro forma net
book value at December 31, 1996 is approximately $117.5 million resulting in a
gross pro forma deferred tax asset of $47.0 million. Based upon LBFC's
preliminary assessments, the unaudited pro forma consolidated statement of
financial condition reflects a net deferred tax asset of $36.0 million to take
into account the potential that the IRS may disallow some portion of the
resulting deduction. For income tax purposes, LBFC intends to amortize over a
15-year period the intangible assets acquired from Old Long Beach in the
Reorganization. Old Long Beach will pay any tax associated with the gain on sale
of shares of LBFC. See "Reorganization -- Tax Consequences."

IMPACT OF LAWS AND REGULATIONS AFFECTING LENDING OPERATIONS

The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on a substantial portion of its operations. The Company's consumer
lending activities are subject to 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, as well as other federal and state statutes and
regulations affecting the Company's activities. The Company is also subject to
the rules and regulations of and examinations by the Department of Housing and
Urban Development and state regulatory authorities with respect to originating,
processing, underwriting, selling and servicing mortgage loans.

These rules and regulations, among other things, impose licensing
obligations on the Company, 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

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<PAGE> 15

mortgage loan repurchases, certain rights of rescission for borrowers, class
action lawsuits and administrative enforcement actions.

The Company is subject to licensing by state authorities. In addition, any
person who acquires more than 10% of the Company's stock will become subject to
certain state licensing regulations requiring such person periodically to file
certain financial and other information. If any person holding more than 10% of
the Company's stock refuses to adhere to such filing requirements, the Company's
existing licensing arrangements could be jeopardized. The loss of required
licenses could have a material adverse effect on the Company's results of
operations and financial condition.

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
"Business -- Regulation."

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the Common Stock may experience fluctuations that are
unrelated to the operating performance of the Company. In particular, the price
of the Common Stock may be affected by general market price movements as well as
developments specifically related to the mortgage finance industry or the
financial services sector generally, such as interest rate movements, quarterly
variations or changes in financial estimates by securities analysts and a
significant reduction in the price of the stock of another participant in the
mortgage finance industry. In addition, the Company's operating income on a
quarterly basis is significantly dependent upon, among other things, the
successful completion of the Company's loan sales at a premium in the secondary
market for sub-prime mortgages. See "-- Risk of Variations in Quarterly
Operating Results." The inability of the Company to complete significant loan
sales transactions in a particular quarter may have a material adverse effect on
the Company's results of operations for that quarter and could, therefore,
negatively impact the price of the Common Stock.

ABSENCE OF A PUBLIC MARKET; DETERMINATION OF OFFERING PRICE

Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price was determined through
negotiations between the Selling Stockholder and representatives of the
Underwriters. See "Underwriting" for factors considered in determining the
initial public offering price. There can be no assurance that a regular trading
market for the Common Stock will develop after this Offering or, if developed,
that a public trading market can be sustained. The initial public offering price
does not necessarily reflect, and may be higher than, the market price of the
Common Stock after this Offering.

ANTI-TAKEOVER EFFECT OF DELAWARE LAW

The Company is a Delaware corporation and is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law. In general,
Section 203 prevents an "interested stockholder" (defined generally as a person
owning 15% or more of the Company's outstanding voting stock) from engaging in a
"business combination" with the Company for three years following the date that
person became an interested stockholder unless the business combination is
approved in a prescribed manner. This statute could make it more difficult for a
third party to acquire control of the Company. See "Description of Capital
Stock -- Certain Provisions of Delaware Law."

RESTRICTIONS ON FUTURE SALES BY STOCKHOLDERS; EFFECT ON SHARE PRICE OF SHARES
AVAILABLE FOR FUTURE SALE

If the Underwriters' over-allotment option is not exercised in full, the
Selling Stockholder will be subject to certain lock-up restrictions with respect
to its ability to sell or otherwise dispose of any shares of Common Stock it
owns for a period of 180 days from the date of completion of this Offering
without the prior written consent of the Representative of the Underwriters and
the Company. When such lock-up restrictions lapse, such shares of Common Stock
may be sold in the public market or otherwise disposed of, subject to compliance
with applicable securities laws. Sales of a substantial number of shares of
Common Stock, or the perception that such sales could occur, could adversely
affect prevailing market prices for the Common Stock.

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See "Shares Eligible for Future Sale." In addition, if the Underwriters'
over-allotment option is not exercised in full, a substantial competitor of the
Company (the Selling Stockholder) will hold up to 3,250,000 shares of the
Company's Common Stock.

REORGANIZATION

DESCRIPTION OF REORGANIZATION

The Company's broker-sourced mortgage business was begun in 1988 by Long
Beach Savings and Loan Association (later known as Long Beach Bank, F.S.B.). In
order to gain greater operating flexibility and improve its ability to compete
against other financial services companies, in October 1994 Long Beach Bank,
F.S.B. ceased operations, voluntarily surrendered its federal thrift charter and
transferred the broker-sourced business, along with its direct-sourced business
and loan servicing operations, to Old Long Beach.

Prior to the Reorganization, Old Long Beach conducted its mortgage lending
business through four divisions -- the direct-sourced lending division, the
broker-sourced lending division, the loan sales division and the loan servicing
division. To facilitate the public sale of Old Long Beach's broker-sourced
mortgage lending business, Old Long Beach is reorganizing its business
operations by transferring to LBFC the assets (including independent broker
lists, trade name, office leases and furniture, fixtures and equipment) and
personnel related to Old Long Beach's broker-sourced mortgage lending and loan
sales operations and approximately $40 million in cash in exchange for
25,000,000 shares of Common Stock, 21,750,000 of which are being sold pursuant
to this Offering (25,000,000 if the Underwriters' over-allotment option is
exercised in full). The Company intends to use the $40 million contributed to it
from Old Long Beach for working capital purposes and to pay its expenses and
fees related to the Reorganization, estimated to be approximately $2.0 million.
The costs of the Offering are being paid by Old Long Beach. The assets being
transferred to LBFC include loans in process as of the time of the
Reorganization but do not include loans funded prior to the Reorganization or
servicing rights with respect to loans funded prior to the Reorganization. LBFC
will have no interest in Old Long Beach's direct-sourced mortgage lending or
loan servicing divisions, which are being retained by Old Long Beach after the
Reorganization. In the Reorganization, LBFC is acquiring the right to the "Long
Beach Mortgage Company" name and the benefits related to the name and Old Long
Beach will no longer use the name in its business. The Reorganization will occur
immediately prior to the consummation of the Offering.

After the Reorganization, LBFC's broker-sourced business will be conducted
by New Long Beach, a wholly owned subsidiary of LBFC, under the "Long Beach
Mortgage Company" name. The Company is not assuming any of the liabilities of
Old Long Beach arising from Old Long Beach's lending or loan servicing
activities prior to the Reorganization. See "Certain Relationships and Related
Transactions" for a description of certain contractual relationships being
entered into between Old Long Beach and LBFC in connection with the
Reorganization. However, as a successor to Old Long Beach, New Long Beach will
be bound by the terms of the settlement agreement between Old Long Beach and the
DOJ. See "Business -- Department of Justice Settlement Agreement."

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<PAGE> 17

Set forth below are two charts which demonstrate the corporate structure
and operating divisions of Ameriquest Capital Corporation ("Old Long Beach
Holdings"), a Delaware corporation and the sole stockholder of Old Long Beach,
and its subsidiaries that relate to their mortgage lending and related
operations as they existed (i) prior to the Reorganization and (ii) after the
Reorganization and this Offering.

[CHART]

The Prospectus delivered to investors contains two organizational charts
that cannot be reproduced in an electronic filing. The first chart is entitled
"Pre-Reorganization" and indicates that "Old Long Beach Holdings" is the parent
of "Old Long Beach" (Long Beach Mortgage Company), which consists of the
Broker-Sourced Lending Division, the Loan Sales Division, the Direct-Sourced
Lending Division and the Loan Servicing Division. "Old Long Beach" (Long Beach
Mortgage Company) is the parent of New Long Beach (Ameriquest Mortgage
Corporation) immediately preceding the consummation of the Reorganization.

The second chart is entitled "Post-Reorganization and Public Offering"
and indicates that after the Offering, "Old Long Beach Holdings" will be the
parent of "Old Long Beach" (Ameriquest Mortgage Company), which will consist of
the Direct-Sourced Lending Division and the Loan Servicing Division. Long Beach
Financial Corporation will be a separate entity, and will be the parent of "New
Long Beach" (Long Beach Mortgage Company), which will consist of the
Broker-Sourced Lending Division and the Loan Sales Division.

[END CHART]

Prior to the Reorganization, the Company funded loans by borrowing under
Old Long Beach's revolving warehouse credit facility. Because this facility will
not be available to the Company after the completion of this Offering, the
Company has obtained the Warehouse Financing Facility. See
"Business -- Financing and Sale of Loans -- Warehouse Financing Facility."

Old Long Beach has entered into two forward loan sales contracts pursuant
to which it has committed to sell certain loans expected to be originated by the
broker-sourced lending division of Old Long Beach after April 1, 1997. In
connection with the Reorganization, Old Long Beach has agreed to assign such
forward loan sales contracts to the Company and has agreed to sell to the
Company the loans originated or purchased by the broker-sourced mortgage lending
division of Old Long Beach from April 1, 1997 to the date of the Reorganization
to assist the Company in fulfilling this commitment. Such loans will be
purchased by the Company under the same terms set forth in the forward loan
sales contracts.

As part of the contribution agreement Old Long Beach, Old Long Beach
Holdings, New Long Beach and LBFC are entering into in connection with the
Reorganization, Old Long Beach and Old Long Beach Holdings have agreed to
indemnify the Company for certain income tax liabilities. See "Certain
Relationships and Related Transactions -- Contribution Agreement."

Following the Reorganization, the Company will not initially have the
internal capability to support various administrative services, such as certain
employee benefits administration services, data processing functions,
information services and mail room services, because these services have
historically been provided by Old Long Beach. Old Long Beach is contracting to
continue to provide these services to the Company after the Reorganization until
the Company develops the capability internally. The Company anticipates that it
will be able to perform these services internally within one year after the
Reorganization. See "Certain Relationships and Related
Transactions -- Administrative Services Agreements."

Because the personnel that have historically conducted Old Long Beach's
secondary market sales activities will be employed by the Company after the
Reorganization, Old Long Beach initially will not have the expertise to conduct
sales of the loans that it originates after the Reorganization. The Company is
agreeing to provide secondary market sales services to Old Long Beach until Old
Long Beach develops the necessary

17
<PAGE> 18

level of expertise to conduct loan sales itself. See "Certain Relationships and
Related Transactions -- Administrative Services Agreements."

Following the Reorganization, the Sub-Servicer (a division of Old Long
Beach) will sub-service the loans originated or purchased by the Company. See
"Business -- Servicing" and "Certain Relationships and Related
Transactions -- Loan Sub-Servicing Agreement."

Old Long Beach currently owns 100% of the issued and outstanding capital
stock of LBFC and is selling 87.0% of the capital stock in this Offering. The
remaining 13.0% is subject to the Underwriters' over-allotment option. If the
over-allotment option is exercised in full, Old Long Beach will have no
ownership interest in the Company after this Offering.

Old Long Beach and the Company will be free to compete against each other
after the completion of this Offering, although each is agreeing not to solicit
or hire the employees of the other for five years following the Reorganization.

TAX CONSEQUENCES

In connection with the Reorganization, Old Long Beach will be obligated to
sell the shares of Common Stock offered hereby at the time it transfers to LBFC
the assets and personnel related to its broker-sourced mortgage lending and loan
sales operations. In the opinion of counsel to the Company, the transfer of the
assets and personnel by Old Long Beach to LBFC in exchange for 25,000,000 shares
of Common Stock will be treated for federal income tax purposes as a taxable
sale of assets. As a result, the tax basis (for income tax purposes) of the
assets transferred from Old Long Beach to LBFC in the Reorganization will be
increased, in the hands of LBFC, to their fair market value (determined by
reference to the initial public offering price). As discussed more fully below,
such tax basis is generally expected to produce a tax benefit to LBFC in future
tax years through depreciation or amortization deductions or through decreased
gain or (subject to certain limitations) increased loss on a disposition of any
LBFC asset.

In general, Section 197 of the Code allows for the amortization over a
15-year period of intangible assets (including goodwill and going concern value)
acquired in a transaction such as the Reorganization. The so-called
"anti-churning" rules set forth in Section 197(f)(9) of the Code, however,
prohibit the amortization of goodwill, going concern value, and intangible
assets the useful lives of which cannot be determined with reasonable accuracy
where such assets are transferred between related parties and the transferor
held or used such intangible asset at any time on or after July 25, 1991, and on
or before August 10, 1993.

LBFC believes that the anti-churning rules should not apply to any
intangible assets (whether goodwill, going concern value or otherwise)
transferred from Old Long Beach to LBFC in the Reorganization. If LBFC is
correct in this belief, based upon the initial public offering price of $6.50
per share, the pro forma excess of the tax basis of LBFC's net assets over their
pro forma net book value at December 31, 1996, would be approximately $117.5
million, resulting in a pro forma gross deferred tax asset of approximately
$47.0 million.

Because the IRS could assert that the anti-churning rules apply to the
Reorganization, LBFC will limit the value of the deferred tax asset that is
recorded, solely for financial accounting and reporting purposes, to the amount
that would be recorded assuming the application of the anti-churning rules. LBFC
has appraised the value of certain intangible assets transferred in the
Reorganization that are of a type not subject to the anti-churning
rules -- i.e., assets that can be valued and to which LBFC can reasonably
ascertain useful lives ("Amortizable Intangibles"). Based in part upon such
valuation, LBFC will record a $36.0 million net deferred tax asset solely for
financial accounting and reporting purposes. No assurance can be given, however,
that the IRS will not challenge the value of the Amortizable Intangibles. If
such a challenge were successful, LBFC may be prevented from realizing all or a
portion of the future tax benefits reflected by the net deferred tax asset. In
accordance with Emerging Issues Task Force Issue No. 94-10, Accounting by a
Company for the Income Tax Effects of Transactions among or with Its
Shareholders under FASB Statement No. 109, any adjustment to the net deferred
tax asset will be charged or credited to additional paid-in capital and will
have no impact on earnings. For income tax purposes, LBFC intends to amortize
over a fifteen-year period the intangible assets acquired from Old Long Beach in
the Reorganization. The Company believes that based on

18
<PAGE> 19

historical earnings levels it is more likely than not that the Company will
generate sufficient taxable income to realize the benefits associated with the
net deferred tax asset through future tax deductions. As the Company realizes
the benefits associated with the deferred tax asset, there will be a
corresponding reduction in income taxes payable by the Company. As the deferred
tax benefit is realized through a reduction in the current tax payable, the
statement of operations will reflect an offsetting charge to the amount of the
deferred tax benefit, resulting in no effect on net income. If the Company
determines that estimated future earnings are not sufficient to realize the
deferred tax benefit, the Company will establish a valuation allowance, for the
impairment of the deferred tax asset, through a charge to the income tax
provision which will result in a reduction of earnings.

DIVIDENDS

LBFC has not declared or paid any dividends in the past and does not
anticipate declaring or paying any cash dividends in the foreseeable future.

DILUTION

The pro forma net tangible book value of the Company's Common Stock as of
December 31, 1996, was $75.5 million, or $3.02 per share. Pro forma net tangible
book value per share has been determined by dividing the pro forma tangible net
worth of the Company (total assets less intangible assets and total liabilities)
after giving effect to the Reorganization by 25,000,000 shares outstanding and
without taking into account any changes in such pro forma net tangible book
value after December 31, 1996. Based upon the initial public offering price of
$6.50 per share, new stockholders will experience immediate dilution of $3.48
per share. Dilution to new stockholders is determined by subtracting the pro
forma net tangible book value per share after this Offering from the initial
public offering price per share. The following table illustrates this dilution.

<TABLE>
<S> <C> <C>
Initial public offering price per share.................................... $ 6.50
Pro forma net tangible book value per share before Offering..... $3.02(1)
Increase per share attributable to sale of Common Stock......... --
-----
Pro forma net tangible book value per share after Offering................. 3.02(1)
------
Dilution per share to new investors........................................ $ 3.48
======
</TABLE>

- ---------------
(1) Includes $1.44 per share attributable to the deferred income tax asset.

See "Reorganization" and "Unaudited Pro Forma Consolidated Financial Data."

19
<PAGE> 20

CAPITALIZATION

The following table sets forth the actual capitalization of Long Beach
Mortgage Company Broker-Sourced Loan Division as of December 31, 1996 and the
pro forma capitalization to reflect the Reorganization and the sale of shares by
the Selling Stockholder. See "Reorganization." This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto
included elsewhere herein.

<TABLE>
<CAPTION>
ACTUAL PRO FORMA(1)(2)
-------- ---------------
(IN THOUSANDS)
<S> <C> <C>
DEBT:
Short-term borrowings due under warehouse financing facility.... $ 72,829 $ --
-------- --------
STOCKHOLDERS' EQUITY:
Divisional equity............................................... 1,137 --
Preferred Stock, $.001 par value, 25,000,000 shares authorized,
no shares outstanding actual and pro forma................... -- --
Common Stock, $.001 par value, 150,000,000 shares authorized, 1
share issued and outstanding (actual), 25,000,000 shares
issued and outstanding (pro forma)(3)........................ -- 25
Additional Paid-in Capital...................................... -- 75,434
Retained Earnings............................................... -- --
-------- --------
Total Stockholders' Equity.............................. 1,137 75,459
-------- --------
Total Capitalization.................................... $ 1,137 $ 75,459
======== ========
</TABLE>

- ---------------
(1) See "Unaudited Pro Forma Consolidated Financial Data."

(2) See "Reorganization."

(3) Excludes 3,000,000 shares of Common Stock reserved for issuance under the
1997 Stock Incentive Plan. See "Management -- 1997 Stock Incentive Plan."

20
<PAGE> 21

SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)

The following table sets forth selected consolidated financial data as of
the period ended or for the periods presented. The selected consolidated
financial data of the Company presented for the years ended December 31, 1994,
1995 and 1996 and as of December 31, 1995 and 1996 are derived from financial
statements of the Company audited by Deloitte & Touche LLP, independent
auditors. The selected consolidated financial data of the Company presented for
the years ended December 31, 1992 and 1993 and as of December 31, 1992, 1993 and
1994 are derived from unaudited financial statements of the Company. In the
opinion of the Company, such unaudited financial statements reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the results of such periods. The selected consolidated financial
data should be read in conjunction with, and is qualified in its entirety by,
the Financial Statements of the Company and related Notes thereto that appear
elsewhere in this Prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1996 1996(1)
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sales of loans...................... $33,107 $23,675 $21,668 $31,691 $50,699 $ 49,465
Loan servicing and other fees............... -- -- -- -- -- 1,529(2)
Interest income............................. 9,016 3,493 2,510 2,494 3,275 3,275
------- ------- ------- ------- ------- ----------
Total revenues....................... 42,123 27,168 24,178 34,185 53,974 54,269
Expenses:
Selling, general and administrative......... 13,498 12,823 22,328 21,912 35,188 37,965
Interest.................................... 5,558 2,453 1,814 2,312 2,814 3,140
------- ------- ------- ------- ------- ----------
Total expenses....................... 19,056 15,276 24,142 24,224 38,002 41,105
------- ------- ------- ------- ------- ----------
Income before provision for income taxes...... 23,067 11,892 36 9,961 15,972 13,164
Provision for income taxes.................... 12,182 6,280 14 4,169 6,580 5,424
------- ------- ------- ------- ------- ----------
Net income.................................... $10,885 $ 5,612 $ 22 $ 5,792 $ 9,392 $ 7,740
======= ======= ======= ======= ======= ==========
Pro forma earnings per share(3)............... $ .31
==========
Pro forma weighted average number of shares
outstanding(3).............................. 25,000,000
==========
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1996 1996(1)
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Cash.......................................... $ -- $ -- $ -- $ -- $ -- $ 40,000
Loans held for sale........................... 19,678 9,950 10,364 21,342 49,580 --
Deferred income taxes......................... -- -- -- 882 2,120 36,000
Total assets.................................. 20,525 10,887 12,529 24,778 79,750 78,215
Warehouse financing facility.................. -- -- 11,483 20,613 72,829 --
Total liabilities............................. 20,765 11,014 13,391 23,046 78,613 2,756
Stockholders' equity (deficit)................ (240) (127) (862) 1,732 1,137 75,459
</TABLE>

- ---------------

(1) Gives pro forma effect to the Reorganization as if it had occurred as of
January 1, 1996 as to the Statement of Operations Data and December 31, 1996
as to the Statement of Financial Condition Data. The pro forma results of
operations are not necessarily indicative of the future operations of the
Company. See "Unaudited Pro Forma Consolidated Financial Data."

(2) Net of amortization of capitalized mortgage servicing rights of $1.8
million.

(3) Historical earnings per share information for 1992 through 1996 was not
deemed meaningful.

21
<PAGE> 22

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company is a specialty finance company engaged in the business of
originating, purchasing and selling sub-prime residential mortgage loans secured
by one-to-four family residences. The Company's core borrower base consists of
individuals who do not qualify for traditional "A" credit because their credit
history, income or other factors cause them not to conform to standard agency
lending criteria. The Company originates loans through independent mortgage
brokers and, to a lesser extent, purchases loans from smaller mortgage companies
and commercial banks. Substantially all of the Company's loan originations and
purchases are sold in the secondary market through loan sales in which the
Company disposes of its entire economic interest in the loans for cash, except
for the related servicing rights which it retains in most cases. See "Business."

The following table shows the Company's loan originations and purchases and
loan sales for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
-------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loan originations and purchases................... $565,547 $592,542 $1,058,122
Loan sales........................................ 562,054 580,366 1,029,789
</TABLE>

Revenue is derived primarily from gain on sales of loans and interest
income from loans held for sale. The key factors that affect the Company's
revenue are (i) the volume of loans originated and purchased, (ii) the premium
over principal amount received in loan sales, (iii) origination points received
or paid, (iv) origination fees received and (v) the differential between the
interest rate on borrowings under the revolving warehouse credit facility and
the interest rate of loans held for sale. Loan sales premium is affected by,
among other things, the interest rate and/or margin of the loans sold. Revenues
increased to $54.0 million in 1996 compared to $34.2 million and $24.2 million
in 1995 and 1994, respectively.

Expenses are incurred for, among other things, compensation and employee
benefits, rent and other occupancy costs, office supplies and courier service,
depreciation, legal and professional services, and interest. Compensation and
employee benefits, which in 1996, 1995 and 1994 accounted for 58.7%, 56.0% and
64.2% of total expenses, respectively, is tied in part to the loan origination
volume because the Company's sales force is compensated on a commission basis.
Expenses increased to $38.0 million in 1996 compared to $24.2 million and $24.1
million in 1995 and 1994, respectively. Of the expenses incurred in 1996, 1995
and 1994, $8.9 million, $7.0 million and $9.7 million, respectively, consisted
of expenses incurred by Old Long Beach which were allocated to the Company.
These allocated expenses included executive compensation of parent company
corporate officers and legal and professional expenses.

The Company's net income increased to $9.4 million in 1996 compared to $5.8
million and $22,000 in 1995 and 1994, respectively.

BASIS OF FINANCIAL PRESENTATION

Prior to the Reorganization, the Company operated as a division of Old Long
Beach. As a result, the Company had no separate legal status or existence
through December 31, 1996. In the normal course of business, the Company had
various transactions with other divisions of Old Long Beach that are material in
amount. The financial statements of the Company have been prepared in part from
records maintained by Old Long Beach. The historical financial statements of the
Company may not necessarily be indicative of the conditions that would have
existed if the Company had operated as an independent entity.

The financial statements of the Company reflect the assets, liabilities,
revenues and expenses that were directly related to the continuing operations of
the Company as they were operated by Old Long Beach. Old Long Beach's historical
cost basis of the assets and liabilities has been carried over to the Company.
The

22
<PAGE> 23

financial statements reflect key assumptions regarding the allocation of certain
revenue and expense items and certain balance sheet accounts, many of which
could be material. In particular, in cases involving assets, liabilities,
revenues and expenses not specifically identifiable to any particular division
of Old Long Beach, certain allocations were made to reflect the operations of
the Company. These allocations were based on a variety of factors which
management believes provide a reliable basis for the financial statements.

Based upon the initial public offering price of $6.50 per share, the pro
forma excess of the tax basis of LBFC's net assets over their pro forma net book
value at December 31, 1996 is approximately $117.5 million resulting in a gross
pro forma deferred tax asset of $47.0 million. Based upon LBFC's preliminary
assessments, the unaudited pro forma consolidated statement of financial
condition reflects a net deferred tax asset of $36.0 million to take into
account the potential that the IRS may disallow some portion of the resulting
deduction. For income tax purposes, LBFC intends to amortize over a 15-year
period the intangible assets acquired from Old Long Beach in the Reorganization.
LBFC may be prevented from realizing all or a portion of the future income tax
benefits reflected by the net deferred tax asset if the IRS challenges the value
of the Amortizable Intangibles. The Company believes that based on historical
earnings levels it is more likely than not that the Company will generate
sufficient taxable income to realize the benefits associated with the net
deferred tax asset through future tax deductions. As the Company realizes the
benefits associated with the deferred tax asset, there will be a corresponding
reduction in income taxes payable by the Company. As the deferred tax benefit is
realized through a reduction in the current tax payable, the statement of
operations will reflect an offsetting charge to the amount of the deferred tax
benefit, resulting in no effect on net income. If the Company determines that
estimated future earnings are not sufficient to realize the deferred tax
benefit, the Company will establish a valuation allowance, for the impairment of
the deferred tax asset, through a charge to the income tax provision which will
result in a reduction of earnings. See "Income Tax Risk Related to Deferred Tax
Asset" and "Reorganization -- Tax Consequences."

RESULTS OF OPERATIONS

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

The Company had substantial growth in 1996 as a result of increased loan
originations and purchases in both existing and new markets. Total revenues
increased $19.8 million or 57.9% to $54.0 million in 1996 from $34.2 million in
1995. During the same period, the Company's total expenses increased $13.8
million or 56.9% to $38.0 million in 1996 compared to $24.2 million in 1995. As
a result, net income increased $3.6 million or 62.2% to $9.4 million in 1996
from $5.8 million in 1995.

Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Gain on sales of loans........................................... $31,691 $50,699
Interest income.................................................. 2,494 3,275
------- -------
Total revenues......................................... $34,185 $53,974
======= =======
</TABLE>

The increase in revenues was due primarily to an increase of $465.6 million
or 78.6% in loan originations and purchases to approximately $1.1 billion in
1996 compared to $592.5 million in 1995, which resulted in increased loan sales.
The increase in loan originations and purchases was due to both increased
production in existing markets and expansion into new markets.

Gain on sales of loans increased $19.0 million or 60.0% to $50.7 million in
1996 from $31.7 million in 1995. The increase was due primarily to the 78.6%
increase in loan originations and purchases during 1996. Total loans of
approximately $1.0 billion were sold in 1996 with a weighted average gain on
sale of 4.92%. During 1995, total loans of $580.4 million were sold with a
weighted average gain on sale of 5.46%. The decline in weighted average gain on
sale was attributable to fixed rate loans, which typically yield a lower

23
<PAGE> 24

average gain on sale than adjustable rate loans, constituting 37.1% of the loans
sold in 1996 compared to 13.3% of the loans sold in 1995.

Interest income increased $0.8 million or 31.3% to $3.3 million in 1996
from $2.5 million in 1995. This increase was due to a higher balance of loans
held for sale during 1996 as a result of the increase in loan originations and
purchases during the year. The Company's average balance of loans held for sale
increased $12.3 million or 61.1% to $32.6 million in 1996 from $20.2 million in
1995.

Expenses. The following table sets forth the components of the Company's
expenses for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Compensation and employee benefits............................... $13,564 $22,299
Rent and other occupancy costs................................... 3,258 4,188
Office supplies and courier service.............................. 816 1,903
Depreciation..................................................... 667 1,025
Legal and professional........................................... 1,082 1,828
Interest......................................................... 2,312 2,814
Other............................................................ 2,525 3,945
------- -------
$24,224 $38,002
======= =======
</TABLE>

Total expenses increased $13.8 million or 56.9% to $38.0 million in 1996
from $24.2 million in 1995, due in large part to increased compensation and
other personnel costs related to the 78.6% increase in loan originations and
purchases during 1996.

Compensation and employee benefits expense increased $8.7 million or 64.4%
to $22.3 million in 1996 from $13.6 million in 1995. The primary reason for the
increase was due to an increase in the number of employees from 175 at December
31, 1995 to 338 at December 31, 1996. The secondary reason for the increase was
due to increases in commissions paid to employees in 1996. Both of such
increases were due to an increase in loan volume from $592.5 million in 1995 to
approximately $1.1 billion in 1996.

Rent and other occupancy costs increased $0.9 million or 28.5% to $4.2
million in 1996 from $3.3 million in 1995. This was due to the establishment of
18 new loan origination offices and two regional processing centers and the
relocation of the corporate headquarters to a larger facility during 1996.

Office supplies and courier service expense increased $1.1 million or
133.2% to $1.9 million in 1996 from $0.8 million in 1995. The increase was due
to the expansion of the Company's loan origination office network and increased
loan originations during 1996.

Depreciation increased $0.4 million or 53.7% to $1.0 million in 1996 from
$0.7 million in 1995. The increase was attributable to additional computer and
office equipment necessary to support the Company's expanded work force.

Legal and professional expenses increased $0.7 million or 68.9% to $1.8
million in 1996 from $1.1 million in 1995. This was due primarily to the higher
level of legal and professional services required to complete the DOJ settlement
in September 1996. See "Business -- Department of Justice Settlement Agreement."

Interest expense increased $0.5 million or 21.7% to $2.8 million in 1996
from $2.3 million in 1995. The increase was due to greater short-term borrowings
in 1996 to fund the increased loan originations and purchases.

Other expenses increased $1.4 million or 56.2% to $3.9 million in 1996 from
$2.5 million in 1995. This was due in large part to the incurrence of $1.1
million of DOJ settlement costs in 1996 compared to $0.3 million of settlement
costs in 1995, as well as to a $0.4 million increase in marketing expenses
attributable to an expansion of the Company's marketing program.

24
<PAGE> 25

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

In 1995 the Company substantially improved its operating results by
increasing premiums on its loan sales and reducing expenses after a workforce
reduction. In addition, 1995 marked the first full year utilizing three new core
operating computer systems as well as the first full year operating as a
mortgage company rather than a federally-chartered thrift. As a mortgage
company, the Company was able to offer certain loan products that it could not
offer as a thrift. Total revenues increased $10.0 million or 41.4% to $34.2
million in 1995 from $24.2 million in 1994. During the same period, the
Company's total expenses increased $0.1 million or 0.3% to $24.2 million in 1995
from $24.1 million in 1994. As a result, net income increased to $5.8 million in
1995 from $22,000 in 1994.

Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Gain on sales of loans........................................... $21,668 $31,691
Interest income.................................................. 2,510 2,494
------- -------
$24,178 $34,185
======= =======
</TABLE>

The increase in revenues was due primarily to a 46.3% increase in gain on
sales of loans. Loan originations and purchases increased $27.0 million or 4.8%
to $592.5 million in 1995 from $565.5 million in 1994.

Gain on sales of loans increased $10.0 million or 46.3% to $31.7 million in
1995 from $21.7 million in 1994. This was due primarily to (i) a 41.5% increase
in weighted average gain on sale to 5.46% in 1995 from 3.86% in 1994 and (ii)
$4.1 million of gain recognized during 1995 due to the Company's adoption of
Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for
Mortgage Servicing Rights" as of January 1, 1995. The Company improved the
weighted average gain on sale by selling loans in 1995 to large institutional
purchasers who were willing to pay higher premiums than the Company's past
purchasers. These institutional buyers were willing to pay higher premiums
because their strategy of securitizing the loans and keeping the residual
interest supported a higher cost structure than that of the whole loan
purchasers to whom the Company had previously sold loans. SFAS No. 122 requires
the Company, upon the sale of servicing retained mortgages, to capitalize the
cost associated with the right to service loans based on their relative fair
values. As a result, the Company will recognize more revenue when a loan is sold
and less revenue over the period that such loan is serviced.

Interest income remained unchanged during 1995 compared to 1994, because a
reduction in the time period between the funding of loans and the delivery of
the loans to the whole loan purchasers was offset by an increase in the
differential between the interest rate on borrowings under Old Long Beach's
revolving warehouse credit facility and the interest rates of loans held for
sale. In 1995, the Company typically delivered loans to purchasers nine times
during each quarter compared to three times a quarter in 1994.

25
<PAGE> 26

Expenses. The following table sets forth the components of the Company's
expenses for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Compensation and employee benefits............................... $15,496 $13,564
Rent and other occupancy costs................................... 2,565 3,258
Office supplies and courier service.............................. 712 816
Depreciation..................................................... 281 667
Legal and professional........................................... 1,443 1,082
Interest......................................................... 1,814 2,312
Other............................................................ 1,831 2,525
------- -------
$24,142 $24,224
======= =======
</TABLE>

Total expenses increased $0.1 million or 0.3% to $24.2 million in 1995 from
$24.1 million in 1994. This was due in large part to increases in rent,
depreciation and interest expense, offset in part by decreases in compensation
and legal and professional services.

Compensation and employee benefit expense decreased $1.9 million or 12.5%
to $13.6 million in 1995 from $15.5 million in 1994. The primary reason for the
decrease was the elimination of several positions that were no longer required
after October 1994 when the Company ceased to operate as a division of a thrift.
The secondary reason for the decrease was a reduction in the Company's
non-production work force in January 1995 due to the implementation of the
Company's new computerized systems which resulted in substantially improved
processing efficiency. Such reduction was partially offset by an increase in the
Company's sales force.

Rent and other occupancy costs increased $0.7 million or 27.0% to $3.3
million in 1995 from $2.6 million in 1994. The increase was due to the
establishment of 21 new loan origination offices and the first regional
processing center during 1995.

Office supplies and courier service expense increased $0.1 million or 14.6%
to $0.8 million in 1995 from $0.7 million in 1994. The increase was due to the
expansion of the Company's loan origination office network and increased loan
originations.

Depreciation increased $0.4 million or 137.4% to $0.7 million in 1995 from
$0.3 million in 1994. This was due to additional computer equipment to support
the new loan origination system and the expanded loan origination office
network.

Legal and professional expenses decreased $0.4 million or 25.0% to $1.1
million in 1995 from $1.4 million in 1994. The decrease was due primarily to the
legal expenses incurred in 1994 in connection with the transition from a
federally-chartered thrift to a mortgage company.

Interest expense increased $0.5 million or 27.5% to $2.3 million in 1995
from $1.8 million in 1994. This was due to the fact that interest rates on
borrowings to fund loans were higher after October 1994 than before. Prior to
that time, the Company operated as a division of Long Beach Bank, F.S.B., and
funded loans through the bank's deposits, but after converting to a mortgage
company the Company funded loans through borrowings under Old Long Beach's
revolving warehouse credit facility.

Other expenses increased $0.7 million or 37.9% to $2.5 million in 1995 from
$1.8 million in 1994. The increase was due primarily to a $0.3 million accrual
in 1995 with respect to the DOJ settlement and a $0.2 million increase in
marketing expenses.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically generated positive cash flow. The Company's
sources of cash flow include loan sales at a premium, net interest income and
borrowings. The Company enters into forward loan sales

26
<PAGE> 27

contracts under which it commits to deliver loans to be originated or purchased
by the Company at a future date. The Company sells loans at a premium several
times a quarter pursuant to such contracts. The Company's uses of cash include
the funding of loan originations and purchases, payment of interest expenses,
repayment of its borrowings, operating and administrative expenses, income taxes
and capital expenditures. Capital expenditures totaled $1.2 million, $0.7
million and $1.7 million for the years ended December 31, 1996, 1995 and 1994,
respectively.

The Company funds its business through cash reserves and a revolving
warehouse credit facility under which it borrows money to finance the
origination and purchase of loans. The Company repays borrowings with the
proceeds of its loan sales. Prior to the Reorganization, the Company funded
loans by borrowing under Old Long Beach's revolving warehouse credit facility.
The Company has in place a $200 million Warehouse Financing Facility provided by
a syndicate of banks led by Texas Commerce Bank National Association. Borrowings
under the Warehouse Financing Facility for a particular loan may remain
outstanding for no more than 120 days, except for an aggregate amount not to
exceed $10 million, which may remain outstanding for up to 180 days. Borrowings
under the Warehouse Financing Facility are permitted up to 98% of the principal
balance of the originated and purchased loans and bear interest at rates ranging
from 1.375% to 1.625% over the 30-day reserve-adjusted London Inter Bank Offered
Rate ("LIBOR"), depending on the level of loan documentation the Company has
delivered to the agent for the syndicate of banks providing credit under the
Warehouse Financing Facility. The Warehouse Financing Facility also includes a
$60 million subline for loans not covered by a forward purchase commitment, a
$15 million subline for principal and interest advances and a $10 million
subline for other servicing advances made primarily to securityholders in
connection with securitizations by purchasers of the Company's loans in which
the Company serves as the master servicer, and a $5 million subline which may be
used to finance mortgage loans owned by the Company that are in the process of
collection or resale to investors. The sublines bear interest at rates ranging
from 1.875% to 2.0% over the 30-day reserve-adjusted LIBOR. The Warehouse
Financing Facility will expire on March 31, 1999, unless earlier terminated or
extended in accordance with its terms. The Warehouse Financing Facility contains
a number of financial covenants including: (i) New Long Beach maintain tangible
net worth equal to at least $25 million, plus 25% of cumulative positive net
earnings, (ii) delinquencies on New Long Beach's mortgage servicing portfolio
not exceed 12% and (iii) the ratio of total liabilities to adjusted tangible net
worth not exceed 9:1. The Warehouse Financing Facility also contains other
affirmative, negative and financial covenants typical of similar credit
facilities.

The Company's ability to continue to originate and purchase loans is
dependent in large part upon its ability to sell the loans at a premium in the
secondary market in order to generate cash proceeds to repay borrowings under
the Warehouse Financing Facility, thereby creating borrowing capacity to fund
new originations and purchases. The value of and market for the Company's loans
are dependent upon a number of factors, including the loan-to-value ratios and
interest rates on the loans, general economic conditions, interest rates and
governmental regulations. Adverse changes in such factors may affect the
Company's ability to sell loans for acceptable prices within a reasonable period
of time. A prolonged, substantial reduction in the size of the secondary market
for loans of the type originated or purchased by the Company may adversely
affect the Company's ability to sell loans in the secondary market with a
consequent adverse impact on the Company's results of operations, financial
condition and ability to fund future originations and purchases. During 1996,
1995 and 1994, the Company used cash in the approximate amounts of $1.1 billion,
$592.5 million and $565.5 million, respectively, for new loan originations and
purchases. During the same periods, the Company received cash proceeds from the
sale of loans of $1.0 billion, $580.4 million and $562.1 million, respectively,
representing the principal balance of loans sold. The Company received cash
proceeds from the premiums on such sale of loans of $48.7 million, $31.3 million
and $25.2 million, respectively, for 1996, 1995 and 1994. A large portion of the
Company's loan production in any month is funded during the last several
business days of that month. In 1996, changes in investor document inspection
procedures caused the Company to recognize a greater amount of cash proceeds in
the first half of the month following loan funding by the Company. Under the
prior procedures, the Company would typically receive the cash sale proceeds in
the month the loan was funded. The impact of this change, when measured at
month-end or year-end, was a reduction in the proceeds from sale of loans and a
corresponding increase in the amounts outstanding under the revolving warehouse

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<PAGE> 28

credit facility. In addition, at December 31, 1996 the Company held a receivable
for $25.1 million resulting from a loan sale on December 31, 1996 for which the
cash sale proceeds were not received until January 1997.

The Company believes that cash flow from operations, including the net
proceeds from loan sales, and the borrowings under the Warehouse Financing
Facility will be sufficient to fund cash needs and capital expenditures for the
next 12 months.

The Company intends to use the $40 million contributed to it from Old Long
Beach for working capital purposes and to pay its expenses and fees related to
the Reorganization, estimated to be approximately $2.0 million. The costs of the
Offering are being paid by Old Long Beach.

ACCOUNTING CONSIDERATIONS

Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
as amended by SFAS No. 127, was issued by the Financial Accounting Standards
Board in June 1996. SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
This statement also provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured borrowings.
It requires that liabilities and derivatives incurred or obtained by transferors
as part of a transfer of financial assets be initially measured at fair value.
SFAS No. 125 also requires that servicing assets be measured by allocating the
carrying amount between the assets sold and retained interests based on their
relative fair values at the date of transfer. Additionally, this statement
requires that the servicing assets and liabilities be subsequently measured by
(a) amortization in proportion to and over the period of estimated net servicing
income and (b) assessment for asset impairment or increased obligation based on
their fair values. As required by the statement, the Company has adopted the new
requirements effective January 1, 1997. Upon implementation, the statement did
not have material impact on the financial statements of the Company.

In February 1997, the Financial Accounting Standards Board issued Statement
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 Company does not believe that SFAS No. 128 will have a material impact on
its financial statements.

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<PAGE> 29

BUSINESS
GENERAL

The Company is a specialty finance company engaged in the business of
originating, purchasing and selling sub-prime residential mortgage loans secured
by one-to-four family residences. The Company's primary operating strategy is to
generate positive cash flow by selling for cash, at a premium, substantially all
originated and purchased loans to institutional purchasers several times a
quarter. The Company does not currently, nor does it have current plans to, sell
loans through securitizations and therefore retains no residual interests, or
the related risks, in the loans sold (except risks associated with servicing
rights, which the Company normally retains, and certain repurchase risks
associated with representations and warranties). As a result, the Company has
less risk than is typically inherent in a mortgage lender's business and has
historically had a source of cash flow to fund lending and growth, reducing the
need for other sources of financing. See "-- Financing and Sale of Loans."
Substantially all loans originated or purchased by the Company are secured by a
first priority mortgage on the subject property. In 1996, less than .03% of the
principal balance of the loans originated and purchased were secured by second
priority mortgages. The Company's core borrower base consists of individuals who
do not qualify for traditional "A" credit because their credit history, income
or other factors cause them not to conform to standard agency lending criteria.
Approximately 69% of the principal balance of the loans originated by the
Company in 1996 were to borrowers with a Company risk classification of "A-" or
"B+," while the remainder were to borrowers with a Company risk classification
of "B," "B-," "C" or "C-." Approximately 2.31% of the total principal amount of
loans originated or purchased by the Company in 1996 were to borrowers with a
Company risk classification of "C-," which includes borrowers with numerous
derogatory credit items up to and including a bankruptcy in the most recent
twelve month period. See "-- Underwriting."

The Company has relationships with approximately 7,500 independent approved
mortgage brokers located in 43 states. During 1996, approximately 5,000 of these
brokers submitted loan packages to the Company and the Company funded loans from
approximately 2,800 brokers. The Company's large independent broker network
provides comprehensive geographic coverage for the Company's products and
reflects the Company's strategy of using a diverse group of small brokers to
avoid becoming dependent on a few primary producers. During the year ended
December 31, 1996, the Company's single largest producing independent broker was
responsible for less than 1% of the principal balance of the Company's
originations. The Company maintains a close working relationship with brokers
through its team of 120 account executives located in 63 offices in 32 states.
The Company delivers a high level of customer service to brokers by (i) locating
its account executives and, to an increasing extent, its loan processing teams,
geographically close to the brokers, (ii) actively assisting the brokers in
identifying the appropriate product for the borrowers, (iii) applying lending
criteria in a consistent manner, (iv) promptly processing loan applications and
(v) providing other assistance to brokers to complete loan transactions. A high
level of customer service, together with each account executive's and loan
processing team's knowledge of the local market and the Company's products, is a
key part of the Company's origination strategy.

The Company (as a division of Long Beach Bank, F.S.B.) began originating
sub-prime mortgage loans in Southern California in 1988 and started to expand
its business outside of California on a limited basis in 1992. In 1994, the
Company began to focus on expansion outside of California. To facilitate this
expansion and to permit the Company to provide competitive products and pricing,
in October 1994 Long Beach Bank, F.S.B. ceased operations and the Company
commenced operations as a mortgage company. Since that time, the Company has
experienced significant growth in loan originations and purchases, with
approximately $1.1 billion of originations and purchases in 43 states during
calendar 1996 compared to $592.5 million in 35 states during calendar 1995 and
$565.5 million in 27 states during calendar 1994. Total originations and
purchases were $300.7 million during the fourth quarter of 1996, which
represents a $122.4 million increase from total originations and purchases
during the fourth quarter of 1995. This growth in originations and purchases has
resulted in the Company's earnings increasing to $9.4 million in 1996 compared
to earnings of $5.8 million and $22,000 in 1995 and 1994, respectively.

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<PAGE> 30

originating or purchasing loans, the Company obtains a purchase commitment from
an institutional purchaser. The Company delivers loans and receives payments for
the loans shortly after funding. This strategy, as opposed to securitizations,
in which a residual interest in future payments on the loans is retained,
provides certain benefits. The Company receives cash revenue, rather than
recognizing non-cash revenue attributable to residual interests, as is the case
in securitizations. The Company thereby avoids the risk present in
securitizations of having to adjust revenue in future periods to reflect a lower
realization on residual interests because actual prepayments or defaults
exceeded levels assumed at the time of securitization. By selling its originated
and purchased loans, the Company also reduces its exposure to default risk
(other than certain first payment defaults) and prepayment risk normally
inherent in a mortgage lender's business. The Company may also be required to
repurchase or substitute loans in the event of a breach of representations and
warranties, including any fraud or any misrepresentation during the mortgage
loan origination process, and retains the risk of having to adjust noncash
revenue attributable to the realization of the retained servicing rights.
Management believes that the cash received in loan sales provides the Company
greater flexibility and operating leverage than a traditional portfolio lender,
which holds the loans it originates, by allowing the Company to generate income
through interest on loans held for sale and gain on loans sold. Loan sales have
been an important factor in generating the Company's historic earnings and
creating consistent positive cash flow to fund operations.

Substantially all of the loans originated by the Company while it operated
as a division of Old Long Beach were serviced by the Sub-Servicer. The
Sub-Servicer and the Company are entering into a contract pursuant to which the
Sub-Servicer will sub-service loans originated or purchased by the Company
following the Reorganization. Sub-servicing activities include collecting and
remitting loan payments, accounting for principal and interest, holding escrow
or impound funds for payment of taxes and insurance, if applicable, making
required inspections of the mortgaged property, contacting delinquent borrowers
and supervising foreclosures and property dispositions. The Sub-Servicer has
nine years of experience in the sub-prime mortgage loan servicing industry, with
a servicing portfolio of approximately $3.5 billion of sub-prime mortgage loans
at December 31, 1996. Since the servicing procedures of the Sub-Servicer were
developed while the Company was part of Old Long Beach and are coordinated with
the Company's origination practices, management believes that the Sub-Servicer
will be able to provide faster and more effective servicing of the Company's
loans than would another independent servicer. See "-- Servicing."

The Company believes that its primary strengths are the following:

- Established Position in the Sub-Prime Mortgage Lending Industry. The
Company was one of the original lenders in the sub-prime mortgage lending
industry and its volume of loans originated or purchased has been
consistently strong even during past down-turns in the local and regional
economies in which it operates. Management believes that the Company is
recognized by independent brokers, institutional loan purchasers, issuers
of asset-backed securities and rating agencies as being able to
effectively originate and sell loans on a consistent basis.

- Experienced Personnel With Performance-Based Compensation. The Company's
management, as well as many members of its staff, have worked in the
sub-prime lending industry for many years. Messrs. Jack Mayesh, Edward
Resendez and Frank Curry, the Company's Chief Executive Officer,
President and Executive Vice President, respectively, have 45 years of
sub-prime industry experience collectively and have worked together at
the Company for nine years. The Company's compensation structure is
designed to incentivize its personnel to work toward maximizing overall
Company performance. The Company intends to use stock options to
incentivize key employees as well as senior management after this
Offering.

- Regional Processing Teams. The Company's markets are serviced by 15
regional processing teams. Each team is a self-contained mortgage banking
team linked to the home office through a computer network that, in most
cases, can conduct all loan origination and production functions in its
region within guidelines established by the home office. This concept of
regional processing teams, which the Company believes is unique in the
industry, enables the Company to more effectively anticipate and respond
to broker and borrower needs in each region and avoids origination and
production bottlenecks

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<PAGE> 31

that can occur in a system in which these functions are centralized at
the home office. In addition, management believes that these teams enable
the Company to move more rapidly into newly identified markets.

- Thoroughly Trained Personnel. Before commencing regular operations, each
new employee of the Company receives training through the Company's
three-part training program which includes computer-based training,
classroom training and extensive on-the-job training. In many cases, this
training includes cross-training regarding other functions to enhance
coordination between personnel. The Company believes that its training
program improves efficiency and the quality of the loans it produces.

- Extensive Technological Capability. The Company utilizes a nationwide
communication system and computer network in all aspects of operations
from origination through funding, which enables it to, among other
things, maximize work flow by efficiently originating, underwriting and
closing loans. In addition, these systems link Company personnel in the
field to the home office and enable senior management to monitor all
regional functions on a real time basis.

- Efficiency of Operations. The Company operates efficiently due to its
high volume of loans (which produce economies of scale) and consistency
in applying underwriting standards, which reduces non-qualifying
submissions from brokers, thereby increasing the Company's funding to
submission ratio. The Company believes its infrastructure is adequate to
support anticipated growth.

The Company seeks to profitably expand its broker-sourced loan business
through increased penetration in its existing markets and expansion into new
geographic markets. Elements in achieving these objectives include the
following: (i) expanding the account executive network to reach new brokers;
(ii) developing and implementing a centralized telemarketing campaign and
increasing coordination between the Company's centralized marketing efforts and
the account executives in the field; (iii) developing and implementing
electronic broker support systems (including electronic loan application
submission and risk classification through the Company's wide-area network); and
(iv) expanding the automation of the underwriting process in order to increase
the number of loan applications processed by each underwriter in a given day.

Although the Company currently conducts primarily a broker-sourced
business, the Company intends to develop a fully integrated mortgage banking
business. An important step in this expansion is the planned commencement during
1997 of direct-sourced loan origination activities, which will provide the
Company with an additional distribution channel for its products. See "-- Loan
Origination and Purchasing -- Direct-Sourced Loan Operations."

LOAN ORIGINATION AND PURCHASING

The Company originates loans through Company-approved independent mortgage
brokers and, to a lesser extent, purchases loans from other mortgage banking
companies. The following table shows certain combined data regarding the
Company's loan originations and purchases for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
-------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Aggregate Principal Balance....................... $565,547 $592,542 $1,058,122
Number of Loans................................... 4,883 6,008 10,041
Average Principal Balance per Loan................ $ 116 $ 99 $ 105
Combined Weighted Average Loan-to-Value(1)(2)..... 69.1% 72.2% 75.0%
Weighted Average Fixed Interest Rate(1)(3)........ N/A 11.3 10.5
Weighted Average Adjustable Interest Rate(1)...... 8.6% 10.4 9.6
Weighted Average Fixed/Adjustable Interest
Rate(1)......................................... 9.5 11.3 10.0
Loans on Single Unit Properties(1)................ $535,872 $551,871 $1,004,398
Loans on Two to Four Unit Properties(1)........... 28,204 34,106 50,488
"A-" and "B+" Loans as a Percentage of Total
Loans(1)(4)..................................... 44.6% 55.0% 69.2%
</TABLE>

(Footnotes continued on following page)

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<PAGE> 32

- ---------------

(1) Calculated based on loans originated and purchased, net of loans rescinded
because the related lending transactions did not close. Such rescinded loans
aggregated approximately $1.0 million, $7.0 million and $3.0 million in
1994, 1995 and 1996, respectively.

(2) Determined by dividing the amount of the loan by the lesser of the purchase
price or the appraised value of the mortgaged property at origination.

(3) The Company did not offer fixed rate loans during 1994.

(4) Based on original principal balance.

Substantially all loans originated or purchased by the Company are secured
by a first priority mortgage on the subject property. In 1996, less than .03% of
the principal balance of the loans originated and purchased were secured by
second priority mortgages.

Geographic Markets

The approximately 7,500 approved independent mortgage brokers with whom the
Company has relationships are located in 43 states. During 1996, approximately
5,000 of these brokers submitted loan packages to the Company and the Company
funded loans from approximately 2,800 brokers. The following table shows
geographic distribution of (i) the aggregate principal balance of loan
originations and purchases for the periods shown, and (ii) Company-approved
independent mortgage brokers for the year ended December 31, 1996:

<TABLE>
<CAPTION>
LOAN ORIGINATIONS
AND PURCHASES INDEPENDENT MORTGAGE
YEAR ENDED DECEMBER 31, BROKERS
------------------------- --------------------
1994 1995 1996 DECEMBER 31, 1996
----- ----- ----- --------------------
<S> <C> <C> <C> <C>
STATES(1)(2):
California........................... 70.4% 43.1% 37.1% 51.1%
Colorado............................. 2.1 2.9 7.3 4.3
Illinois............................. 1.4 8.7 6.2 4.3
Utah................................. 4.3 6.6 5.1 1.4
Oregon............................... 2.7 4.0 4.3 1.8
Texas................................ 0.0 1.5 3.8 5.4
Washington........................... 8.2 5.3 3.7 3.8
Michigan............................. 0.2 3.9 3.7 1.5
Florida.............................. 0.1 1.5 3.5 4.7
All other States(3).................. 10.6 22.5 25.3 21.7
----- ----- ----- -----
Total........................ 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>

- ---------------

(1) States are listed in order of percentage of loan originations and purchases
for the year ended December 31, 1996.

(2) Calculated based on loans originated and purchased, net of loans rescinded
because the related lending transactions did not close.

(3) For the year ended December 31, 1996, loan originations and purchases in
each other state were less than 2.6% of total originations and purchases for
the year.

The Company currently actively originates loans in 112 of the approximately
300 MSAs in the United States having populations in excess of 100,000, as
compared to loan originations in 54 of these MSAs in 1995. Another 12 MSAs have
been identified as expansion opportunities in 1997 and the Company plans to add
approximately 120 new account executives during the year in order to more
effectively enter these new markets as well as further penetrate the Company's
existing markets.

The Company's geographic markets are divided into 15 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, 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 Company believes is unique in the industry, enables
the Company to more effectively anticipate and respond to broker 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

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<PAGE> 33

management by a computer link that enables senior management to monitor all
regional functions on a real time basis.

When a regional processing team is first established to serve a particular
region, the team is physically located at the Company's headquarters. Once the
Company determines that the level of current and projected business from a
region warrants creation of a regional processing center for that region, the
Company will establish a processing center in or near the region and relocate
the relevant regional processing team to the new center. Currently 11 of the 15
regional processing teams are located at the Company's headquarters in Orange,
California. One team is located in the Woodland Hills, California, processing
center, which was opened in 1995, two more teams are located in the Company's
Rolling Meadows, Illinois, center and a fourth team is located in San Diego,
California. The Rolling Meadows and San Diego centers were established in 1996.
The Company expects to relocate four more regional teams to new processing
centers during the first quarter of 1997 in Walnut Creek, California, Hingham,
Massachusetts (which will house two regional teams), and Fort Lauderdale,
Florida.

Products and Marketing

The Company offers both fixed rate and adjustable rate loans, as well as
loans with an interest rate that is initially fixed for a period of time after
which the interest rate converts to an adjustable rate. The Company's borrowers,
who use the loans primarily to consolidate other debt or purchase homes, fall
into six sub-prime risk classifications (see "-- Underwriting") and the
Company's products are available at different interest rates and with different
origination and application points and fees depending on the particular
borrower's risk classification. Substantially all loans originated or purchased
by the Company are secured by first priority mortgages on the subject property.
In 1996, less than .03% of the principal balance of the loans originated and
purchased were secured by second priority mortgages. The Company's core loan
products provide for loan amounts of up to $500,000 with loan-to-value ratios of
up to 85%, although loans of this type originated in 1996 had an average loan
amount of approximately $103,600 and an average loan-to-value ratio of 74.1%.
Core product loans represented approximately 91.2% of the principal balance of
the loans originated or purchased by the Company in 1996. The Company recently
introduced a "jumbo" product providing for loans of up to $1,000,000 with lower
loan-to-value ratios than the core products, and also offers products that
permit a loan-to-value ratio of up to 90% for selected borrowers with a risk
classification of "A-" or "B+." The Company frequently reviews its products and
pricing for competitiveness and introduces new products to meet the needs of its
borrowers.

The Company's primary means of marketing its products is direct contact
between its account executives and the independent mortgage brokers. Each
account executive is responsible for maintaining and expanding existing broker
relationships within the executive's assigned territory through personal contact
and promotional materials. Each account executive is typically responsible for
approximately five key brokers and is expected to have daily contact with each
of these brokers. In addition, each account executive is responsible for up to
50 additional brokers with whom the executive will have frequent, although
typically not daily, contact. Each account executive also works to develop new
broker relationships through "cold calls" and following up on inquiries made by
brokers to a toll-free number.

The Company believes that the key element in developing, maintaining and
expanding its independent mortgage broker relationships is to provide the
highest possible level of product knowledge and customer service to its brokers.
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. 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 broker 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 Company,
the account executive provides assistance to the broker throughout the process
to complete the loan transaction. Account executives are compensated based on
the number and the dollar volume of loans funded.

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<PAGE> 34

The marketing department designs and produces all of the Company's
marketing materials in-house. Marketing materials are delivered through the
account executives as well as through regional and national advertising outlets,
daily faxing, fax-on-demand, direct mail and the Company's recently established
interactive internet website. The Company has a presence at and is a sponsor of
substantially all national industry conventions and trade shows, as well as
substantially all state and regional industry conventions and trade shows in
states where the Company has an operating location. The Company conducts free
seminars at each of its operating locations designed to target new and existing
independent brokers.

Technology

The Company utilizes computer technology to maximize the efficiency and
volume of its loan originations. Most of the account executives are linked to
the Company's computer systems by a wide area network. Through this network, an
account executive receives daily status reports regarding pending loans so that
he or she can direct efforts to those cases that require attention to complete
the processing. Certain account executives, who are not on the network, receive
the same data by daily fax communication. The Company recently established an
internet website through which independent brokers can access information about
the Company and its products. Brokers also can use the website to submit
requests for loan prequalification. The website address is
http://www.lbmcwholesale.com.

The Company makes extensive use of computer technology in its underwriting
process. Each loan application file is computerized so that it can be accessed
immediately by the appropriate persons, thereby eliminating delay that would
otherwise be caused by not having physical access to the file. The system also
reduces the time required for an underwriter to make certain essential
calculations by enabling the underwriter to input specified raw data after which
the computer will automatically make such calculations.

The Company regularly reviews its computer capabilities to better utilize
and expand those capabilities. The Company is developing a system to enable its
account executives to use electronic risk classifying and loan application
technology to expedite the origination process. This system is expected to be
operational sometime during the second half of 1997. The Company is also working
to expand the automation of its underwriting process to increase the number of
loan applications processed by each underwriter in a given day.

The Company is currently dependent on Old Long Beach for many of these
computer systems. See "Risk Factors -- Risks of Contracted Services" and
"Certain Relationships and Related Transactions."

Correspondent Loan Purchasing

The Company augments its loan production by purchasing loans on a
correspondent basis from smaller mortgage companies and commercial banks after
such loans have been funded by the originator. The Company typically purchases
the servicing rights to the loans as well. The Company believes that purchasing
loans from such originators is attractive because the Company is able to acquire
a pool of loans in a single transaction on a cost-efficient basis. The cost
efficiency is due to the Company not having to incur origination and processing
costs with respect to the loans it purchases from an established originator such
as a bank or smaller mortgage company.

When it first begins buying loans from an originator, the Company works
closely with the originator's personnel to familiarize them with the process
necessary to produce loans that the Company is willing to purchase. This ensures
that the Company will be able to include these loans in its loan sales. In the
initial phase with a new originator, the Company processes the loan applications
as if they were the Company's own originations and then the loans are funded by
the originator. Once the Company is comfortable that the originator has
developed the capability to originate and process loans that comply with the
Company's guidelines and standards, the Company's active involvement in the
processing of the originator's loans ceases, although the Company reviews loans
submitted by the originator prior to accepting them in order to confirm that
each complies with the Company's underwriting guidelines and documentation
standards. It is at this point that the Company begins to recognize the cost
efficiency of purchasing loans.

When the Company purchases loans, it receives representations and
warranties and first payment default and fraud protections from the originators
that are similar to those that the Company provides to its loan purchasers. See
"-- Financing and Sale of Loans -- Loan Sales."

34
<PAGE> 35

The loan purchase program accounted for approximately 3% of the Company's
total loan volume by principal amount during 1996. The Company intends to expand
the loan purchase program in 1997, although it is expected that loan purchases
during the year will constitute less than 10% of the Company's loan volume for
1997. Expansion is expected to be accomplished through better integration of the
loan purchasing process into the Company's regional processing team structure.

Direct-Sourced Loan Operations

Although the Company currently originates primarily broker-sourced loans,
the Company intends to develop a fully integrated mortgage banking business. An
important step in this expansion is the planned commencement during 1997 of
direct-sourced loan origination activities. Direct-sourced lending will provide
the Company with an additional distribution channel for its products and the
ability to retain the origination fees for the loans it funds. The Company
expects that the gain on future sales of direct-sourced loans will be greater
than the gain on sales of broker-sourced loans because, unlike in the case of
broker-sourced originations, a third party does not share in the fees and points
paid by the borrower.

The Company expects that its direct-sourced loan operations will offer the
same products as those of the broker-sourced operations and will be sourced
primarily through technology-based marketing, relying to a great extent on
telemarketing rather than a network of sales offices. This will enable the
Company to commence these operations more rapidly and with less overhead than a
direct-sourced loan business that operates through a sales office network. The
Company's senior management is also experienced in direct-sourced loan
originations, since several of the senior executives were involved in creating
the direct-sourced lending operations of Old Long Beach prior to the
Reorganization. In addition, the Company expects to fill a portion of the
staffing needs of the direct-sourced loan operations with experienced personnel
currently working in the broker-sourced loan operations. The Company estimates
that it will expend approximately $1.0 million in 1997 in connection with its
commencement of direct-sourced loan operations.

The direct-sourced loan operations will compete directly with several well
established financial services companies, including Old Long Beach. No assurance
can be given that the Company will be able to commence direct-sourced loan
origination operations as planned or that such operations will be successful.

UNDERWRITING

The Company trains its underwriters and account executives to evaluate each
loan application and supporting documentation (a "loan package") against the
Company's underwriting guidelines. The Company utilizes experienced underwriters
who have been comprehensively trained. The Company's underwriters are required
to have had either one or more years of sub-prime underwriting experience with a
consumer finance company or other sub-prime lender or one or more years of
experience with the Company in other aspects of the sub-prime mortgage finance
industry before becoming part of the Company's underwriting department. Upon
joining the underwriting department, each underwriter is educated regarding the
Company's underwriting guidelines and trained to implement the Company's
underwriting procedures. The Company believes that its training program enables
its underwriters to quickly review and evaluate loan packages while
understanding and adhering to the Company's underwriting guidelines.

The Company's underwriting guidelines are primarily intended to evaluate
the value and adequacy of the mortgaged property as collateral and are also
intended to consider the borrower's credit standing and repayment ability. Loan
applications meeting the Company's guidelines for its core products may be
approved by a senior underwriter who is required to have a minimum of five years
experience in the sub-prime mortgage industry. On a case-by-case basis and only
with the approval of two or more senior lending officers, each of whom is
required to have a minimum of seven years experience in the sub-prime mortgage
industry, the Company may determine that, based upon compensating factors, a
prospective borrower not strictly qualifying under the Company's underwriting
guidelines warrants an underwriting exception. For example, a borrower may have
a negative credit history as a result of an isolated catastrophic incident such
as a death in the borrower's family, a temporary lapse in employment, unexpected
medical expenses or emergency travel (such as for an illness of an immediate
family member). In such cases, the Company's senior lending officers may
recognize that the negative credit history

35
<PAGE> 36

resulting from such isolated incidents is an aberration, rather than an accurate
representation of the borrower's creditworthiness, and thus may consider such
events to be compensating factors. Other compensating factors may include, but
are not limited to, low loan-to-value ratios, low debt-to-income ratios, prior
good credit history, capacity to repay the requested loan, stable employment
history and time in residence at the borrower's current address. The Company
risk classification of "C-" includes borrowers with numerous derogatory credit
items up to and including a bankruptcy in the most recent twelve month period.
See "-- Underwriting Criteria." The Company, however, will not provide an
underwriting exception for a borrower who will remain in bankruptcy after the
closing of the requested loan. In the year ended December 31, 1996, not more
than fifteen percent of the principal balance of the loans originated by the
Company qualified based on compensating factors.

All of the loans originated by the Company are based on loan packages
submitted through mortgage brokers directly or through Company account
executives or are purchased from Company-approved originators. Loan packages
submitted through mortgage brokers, which are required to include in each case
relevant credit, property and underwriting information, are compiled by the
submitting mortgage brokers and submitted to the Company for approval and
funding. The mortgage brokers receive a portion of the loan origination fee
charged to the borrower at the time the loan is funded.

Each prospective borrower is required to complete an application which
includes information with respect to the borrower's liabilities, income, credit
history and employment history, as well as certain other personal information.
After the loan package is received by the Company and entered into the Company's
computerized underwriting system, the underwriters on the appropriate regional
processing team or the underwriting department of the originator of a purchased
loan typically review and verify the prospective borrower's sources of income,
calculate the amount of income from all sources indicated on the loan
application, review the credit history of the prospective borrower, calculate
the debt-to-income ratio to determine the prospective borrower's ability to
repay the loan, and review the mortgaged property for compliance with Company
guidelines. The prospective borrower must generally provide to the Company or
the originator of a purchased loan a letter explaining all late payments on
mortgage debt and, generally, consumer debt. The Company or the originator of a
purchased loan also obtains a credit report on each prospective borrower from an
established credit reporting company. The report typically contains information
relating to such matters as credit history with local and national merchants and
lenders, installment debt payments and any record of default, bankruptcy,
repossession, suits or judgments. Self-employed individuals are generally
required to submit their two most recent federal income tax returns. As part of
its quality control system, the Company reverifies information with respect to
any of the foregoing matters that has been provided by the mortgage brokers
prior to funding a loan and periodically audits files based on a random sample
of closed loans. In the course of its pre-funding audit, the Company reverifies
the income of each borrower or, for a self-employed individual, reviews the
income documentation obtained pursuant to the Company's guidelines. The Company
generally also verifies the source of funds for the downpayment. In addition,
the Company reviews loan packages submitted by originators prior to accepting
them in order to confirm that each complies with the Company's underwriting
guidelines and documentation standards.

The Company strives to process each loan application as quickly as possible
in accordance with the Company's underwriting criteria. Accordingly, most loan
applications receive decisions within 24 to 48 hours of receipt and are funded,
on average, within 25 calendar days of submission. The Company also utilizes
four different income documentation programs which impose less rigorous
documentation standards than those described above, namely, the full income
documentation program (pursuant to which a prospective borrower's income is
evaluated based on tax returns, W-2 forms and pay stubs), the limited income
documentation program (pursuant to which a prospective borrower's income is
evaluated based on bank statements and profit and loss statements), the stated
income program (pursuant to which a prospective borrower's employment, rather
than income, is verified) and the no ratio loan program (pursuant to which a
prospective borrower's credit history and collateral values, rather than income
or employment, are verified).

The Company believes its underwriting procedure complies with applicable
federal and state laws and regulations. The Company requires (i) an appraisal of
the mortgaged property which conforms to agency

36
<PAGE> 37

standards and (ii) a review of such appraisal, which review may be conducted by
a Company-trained underwriter, a Company staff appraiser or a Company-approved
independent appraiser and, depending upon the original principal balance and
loan-to-value ratio of the mortgaged property, may include a drive-by review
appraisal of the mortgaged property.

Mortgaged properties that are to secure mortgage loans underwritten by the
Company are appraised by qualified independent appraisers who are approved by
the Company's internal chief appraiser. In most cases, properties in
below-average condition and with below-average marketability (including
properties requiring major deferred maintenance) are not acceptable as security
for the Company's mortgage loans. Each appraisal includes a market data analysis
based on recent sales of comparable homes in the area and, where deemed
appropriate, replacement cost analysis based on the current cost of constructing
a similar home. Every independent appraisal is reviewed by a Company-trained
underwriter, a Company staff appraiser or a Company-approved independent
appraiser before the loan is funded.

With respect to the borrower's credit standing and repayment ability, the
Company's guidelines are less stringent than the standards generally acceptable
to the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). Borrowers who qualify under the Company's
guidelines generally have payment histories and debt ratios which would not
satisfy FNMA and FHLMC underwriting guidelines and may have a record of major
derogatory credit items such as outstanding judgments or prior bankruptcies. The
Company's guidelines establish the maximum permitted loan-to-value ratio for
each loan type based upon these and other risk factors.

The Company requires all mortgage loans to be covered by title insurance
and to be secured by liens on real property. The Company also requires fire and
extended coverage casualty insurance to be maintained on the secured property in
an amount at least equal to the principal balance of the related loan. Flood
insurance is also required for all properties located in a defined flood zone.
If the borrower fails to provide fire and extended coverage insurance (and flood
insurance if required) prior to closing of the borrower's loan or if the
borrower's coverage is subsequently canceled or not renewed at any time during
the loan period and the borrower fails to obtain new coverage, the Company,
through an outside insurance vendor who monitors whether insurance is
maintained, will provide coverage on the borrower's behalf under policies
insuring the Company's interest in the collateral (a "forced placement" of
insurance). The amount and type of insurance and the circumstances under which
the Company can force place insurance are subject to state and federal
regulations with which the Company believes it is in compliance.

Upon completion of the underwriting process, the closing of the loan is
scheduled with a Company-approved closing attorney or agent. The closing
attorney or agent is responsible for completing the loan closing transaction in
accordance with applicable law and the Company's operating procedures. The
closing attorney or agent is typically selected by the mortgage broker through
which the Company originated the loan. The Company audits the selected closing
attorney or agent to ensure such attorney or agent is a fully licensed and
experienced professional from an established firm or company. In addition, the
Company requires that the closing attorneys and agents it utilizes maintain
insurance against the errors and omissions of such closing attorneys and agents.

Underwriting Criteria

The Company has established classifications with respect to the credit
profiles of loans based on certain of the prospective borrower's characteristics
to grade the likelihood that the borrower will satisfy the repayment condition
of the mortgage loan. Each prospective borrower currently is placed into one of
six letter ratings ("A-", "B+", "B", "B-", "C" and "C-"). Ratings are based upon
a number of factors including the prospective borrower's credit history, the
value of the property, the loan-to-value ratio and loan amount, the occupancy
status of the mortgaged property and the borrower's debt ratio. In general, high
credit risk mortgage loans are graded in categories which permit higher debt
ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies; to counteract such risk, the
Company imposes lower maximum loan-to-value ratios and maximum loan amounts for
loans graded in such categories. Terms of loans made by the Company, as well as
the maximum loan-to-value ratio and debt service-to-income coverage vary
depending upon the classification of the borrower.

37
<PAGE> 38

The general criteria currently used by the Company in classifying
prospective borrowers of its core loan products who have provided the basic
documentation described above are summarized in the chart below:

<TABLE>
<CAPTION>
UNDERWRITING
CRITERIA/RISK
CLASSIFICATION "A-" RISK "B+" RISK "B" RISK "B-" RISK "C" RISK "C-" RISK
- ------------- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
LOAN-TO-VALUE
RATIO...... 85% for purchases 80% for purchases 80% for purchases 75% for purchases 75% for purchases 70% for purchases
or refinancings or refinancings or refinancings or refinancings or refinancings and 65% for
of single family of single family of single family of properties of properties refinancings of
residences which residences which residences which which are owner which are owner properties which
are owner are owner are owner occupied; 65% for occupied; 60% for are owner
occupied; 75% for occupied; 75% for occupied; 75% for any non-owner any non-owner occupied; 50%
purchases or purchases or purchases or occupied occupied ratio is
refinancings of 2 refinancings of 2 refinancings of 2 properties or properties or considered on a
to 4 unit to 4 unit to 4 unit second homes second homes case-by-case
dwellings and dwellings and dwellings and basis on any
condominiums; 70% condominiums; 70% condominiums; 70% non-owner
for non-owner for non-owner for non-owner occupied
occupied single occupied single occupied single properties or
family family family second homes
residences, residences, residences,
planned unit planned unit planned unit
developments or developments or developments and
condominiums; 65% condominiums; 65% condominiums; 65%
for non-owner for non-owner for non-owner
occupied 2 to 4 occupied 2 to 4 occupied 2 to 4
unit dwellings or unit dwellings or unit dwellings or
second homes second homes second homes
MAXIMUM DEBT
RATIO...... 47%(1) 50%(1) 50%(1) 55% 55%; 55% to 60% 55%; 55% to 60%
considered on a considered on a
case-by-case case-by-case
basis basis
CONSUMER
CREDIT..... With certain With certain With certain Derogatory credit Other derogatory Other derogatory
exceptions, no exceptions, no exceptions, no items are less credit items are credit items are
payments more payments more payments more than 50% of total considered on a considered on a
than 30 days late than 60 days late than 60 days late items on credit case-by-case case-by-case
in the past 12 in the past 12 in the past 12 report(3); no basis; no basis; not
months(2); months(2); months(2); bankruptcies in bankruptcies in currently in
derogatory credit derogatory credit derogatory credit the last 24 the last 12 bankruptcy
items are less items are less items are less months months
than 25% of total than 35% of total than 50% of total
items on credit items on credit items on credit
report(3); no report(3); no report(3); no
bankruptcies in bankruptcies in bankruptcies in
the last 36 the last 36 the last 24
months months months
MORTGAGE
CREDIT(4)... Maximum of 1 30- Maximum of 2 30- Maximum of 4 30- Maximum of 1 60- Maximum of 2 60- Maximum of 2 60-
day late payment day late payments day late payments day late payment day late payments day late payments
in the past 12 in the past 12 in the past 12 in the past 12 and 1 90-day late and 1 90-day late
months; no months; no months; no months; maximum payment or 3 60- payment or 3 60-
notices of notices of notices of of a 30 day day late payments day late payments
default or default or default or delinquency at and no 90-day and no 90-day
foreclosures in foreclosures in foreclosures in the time of late payments in late payments in
the last 36 the last 36 the last 24 application/ the last 12 the last 12
months months months funding; no months; maximum months; may have
notices of of a 60 day notices of
default or delinquency at default or
foreclosures in the time of foreclosures in
the last 24 funding; no the last 24
months notices of months on a
default or case-by-case
foreclosures in basis
the last 12
months
</TABLE>

- ---------------
(1) Debt ratios may be increased if the loan-to-value ratio is decreased under
certain circumstances.

(2) For "A-" risk classifications, 60-day late payments in the last 12 months
are permitted but may not (i) represent more than 25% of the items reported
on a credit report during that period unless approved by a Company officer
or wholesale credit manager or (ii) exceed three items. For "B+" risk
classifications, 60-day and 90-day late payments in the last 12 months are
permitted but may not (i) represent more than 35% of the items reported on a
credit report during that period unless approved by a Company officer or
wholesale credit manager or (ii) exceed four items. For "B" and "B-" risk
classifications, 60-day and 90-day late payments in the last 12 months are
permitted but may not (i) represent more than 50% of items reported on a
credit report during that period unless approved by a Company officer or
wholesale credit manager or (ii) exceed five items.

(3) Non-mortgage and consumer-related credit, collections or judgments may be
disregarded on a case-by-case basis. Thirty-day credit may be disregarded
and is not included in the percentage of derogatory credit items.

(4) Consecutive rolling consumer and mortgage 30-day delinquencies up to six
months reported on a credit report may be counted as one late payment.

38
<PAGE> 39

The Company's core loan products represented approximately 91.2% of the
loans originated and purchased by the Company in 1996. In addition to its core
loan products, the Company recently introduced a "jumbo" product providing for
loans of up to $1,000,000 with lower loan-to-value ratios than the core
products, and also offers products that permit a loan-to-value ratio of up to
90% for selected borrowers with a risk classification of "A-" or "B+."

The following table sets forth certain information with respect to the
Company's loan purchases and originations by product and risk classification,
along with weighted average interest rates and margins, for the periods shown.
The table has been compiled based on loans originated and purchased, net of
loans rescinded because the related lending transactions did not close. Such
rescinded loans aggregated approximately $1.0 million, $7.0 million and $3.0
million in 1994, 1995 and 1996, respectively.
<TABLE>
<CAPTION>
1994 1995 1996
-------------------------------------------- -------------------------------------------- --------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE WEIGHTED
PRODUCT/RISK % OF INTEREST AVERAGE % OF INTEREST AVERAGE
CLASSIFICATIONS VOLUME TOTAL RATE(1) MARGIN(2) VOLUME TOTAL RATE(1) MARGIN(2) VOLUME
- ------------------ ------------ ------ -------- --------- ------------ ------ -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED RATE:
A-............... $ 38,896,090 49.86% 10.95% $ 231,791,811
B+............... 18,576,798 23.81 11.25 53,183,511
B................ 6,365,227 8.16 11.23 36,257,423
B-............... Product Not Offered 4,358,785 5.59 11.74 28,698,749
C................ 9,597,677 12.30 12.46 39,593,871
C-............... 219,450 0.28 12.83 1,820,230
------------ ------ ----- --------------
Totals......... $ 78,014,027 100.00% 11.28% $ 391,345,595
ADJUSTABLE RATE:
A-............... $181,389,102 32.78% 8.04% 5.35% $207,152,082 43.11% 9.70% 5.80% $ 293,519,071
B+............... 63,797,497 11.53 8.06 5.30 42,810,928 8.91 10.13 5.84 67,306,298
B................ 37,766,717 6.81 8.68 5.67 42,050,074 8.75 10.50 6.29 51,769,516
B-............... 105,467,270 19.06 8.48 5.56 63,323,882 13.18 10.64 6.29 45,080,472
C................ 122,937,538 22.22 9.13 5.89 100,768,358 20.97 11.28 6.58 86,777,574
C-............... 42,041,084 7.60 10.02 6.22 24,378,019 5.08 12.33 6.87 22,001,379
------------ ------ ----- ---- ------------ ------ ----- ---- --------------
Totals......... $553,399,208 100.00% 8.56% 5.60% $480,483,343 100.00% 10.40% 6.13% $ 566,454,310
FIXED/ADJUSTABLE
RATE:
A-............... $ 5,717,490 53.55% 9.15% 4.90% $ 11,803,892 42.96% 10.61% 5.24% $ 70,948,782
B+............... 598,375 5.60 9.19 4.88 2,853,825 10.39 10.78 5.35 13,462,405
B................ 734,880 6.88 9.85 5.20 2,877,870 10.47 11.17 5.18 6,648,603
B-............... 1,503,425 14.09 9.73 4.96 3,921,375 14.27 11.57 5.58 1,987,247
C................ 1,721,500 16.12 10.42 5.77 4,826,445 17.56 12.53 5.74 3,521,179
C-............... 401,200 3.76 10.36 6.14 1,195,467 4.35 13.37 6.10 518,050
------------ ------ ----- ---- ------------ ------ ----- ---- --------------
Totals......... $ 10,676,870 100.00% 9.53% 5.11% $ 27,478,874 100.00% 11.28% 5.42% $ 97,086,266
ALL PRODUCTS
A-............... $187,106,592 33.17% $257,852,064 44.01% $ 596,259,664
B+............... 64,395,872 11.42 64,241,551 10.96 133,952,214
B................ 38,501,597 6.83 51,293,171 8.75 94,675,542
B-............... 106,970,695 18.96 71,604,042 12.22 75,766,468
C................ 124,659,038 22.10 115,192,480 19.66 129,892,624
C-............... 42,442,284 7.52 25,792,936 4.40 24,339,659
------------ ------ ------------ ------ --------------
Totals......... $564,076,078 100.00% $585,976,244 100.00% $1,054,886,171

WEIGHTED
AVERAGE WEIGHTED
PRODUCT/RISK % OF INTEREST AVERAGE
CLASSIFICATIONS TOTAL RATE(1) MARGIN(2)
- ------------------ ------ -------- ---------
<S> <<C> <C> <C>
FIXED RATE:
A-............... 59.23% 10.20%
B+............... 13.59 10.43
B................ 9.26 10.76
B-............... 7.33 10.97
C................ 10.12 11.66
C-............... 0.47 11.36
------ -----
Totals......... 100.00% 10.49%
ADJUSTABLE RATE:
A-............... 51.82% 8.98% 6.09%
B+............... 11.88 9.30 6.15
B................ 9.14 9.90 6.39
B-............... 7.96 10.00 6.49
C................ 15.32 10.73 6.64
C-............... 3.88 11.89 6.85
------ ----- ----
Totals......... 100.00% 9.57% 6.27%
FIXED/ADJUSTABLE
RATE:
A-............... 73.08% 9.84% 5.58%
B+............... 13.86 10.30 6.00
B................ 6.85 10.46 6.17
B-............... 2.05 10.72 6.41
C................ 3.63 11.19 6.77
C-............... 0.53 11.11 6.87
------ ----- ----
Totals......... 100.00% 10.02% 5.75%
ALL PRODUCTS
A-............... 56.52%
B+............... 12.70
B................ 8.98
B-............... 7.18
C................ 12.31
C-............... 2.31
------
Totals......... 100.00%
</TABLE>

- ---------------

(1) Each Fixed Rate loan bears interest at a fixed rate set on its date of
funding and lasting through the term of the loan. Loans bearing interest at
the Adjustable Rate adjust every six months to a new rate through the term
of the loan. The Weighted Average Interest Rate for loans bearing interest
at an Adjustable Rate is the weighted average of the rates of such loans
during the initial six month period. Loans bearing interest at the
Fixed/Adjustable Rate bear interest at a fixed rate for an initial period
commencing on the date of funding (e.g., two years, five years or ten years)
and thereafter adjust to new rates every six months for the remaining term
of the loans. The Weighted Average Interest Rate for loans bearing interest
at a Fixed/Adjustable Rate is the weighted average of the rates of such
loans during the initial period.

(2) The Margin for a loan is a fixed amount set for the life of the loan, which
when added to the Index (as described below) determines the interest rate on
the loan (subject to interest rate floors, ceilings and caps). The Index
used by the Company is the six-month London Inter Bank Offered Rate, as
published each Monday in The Wall Street Journal. Fixed Rate loans have no
Margin because such loans are not tied to an index.

39
<PAGE> 40

FINANCING AND SALE OF LOANS

Warehouse Financing Facility

The Company will finance its origination and purchase of loans primarily
with the proceeds of borrowings under its $200 million mortgage Warehouse
Financing Facility (which has been obtained in connection with the
Reorganization). The Warehouse Financing Facility is provided by a syndicate of
banks led by Texas Commerce Bank National Association. Borrowings under the
Warehouse Financing Facility for a particular loan may remain outstanding for no
more than 120 days, except for an aggregate amount not to exceed $10 million,
which may remain outstanding for up to 180 days. Borrowings under the Warehouse
Financing Facility are permitted up to 98% of the principal balance of the
originated and purchased loans and bear interest at rates ranging from 1.375% to
1.625% over the 30-day reserve-adjusted LIBOR (i.e., the London Inter Bank
Offered Rate), depending on the level of loan documentation the Company has
delivered to the agent for the syndicate of banks providing credit under the
Warehouse Financing Facility. The Warehouse Financing Facility also includes a
$60 million subline for loans not covered by a forward purchase commitment, a
$15 million subline for principal and interest advances and a $10 million
subline for other servicing advances made primarily to securityholders in
connection with securitizations by purchasers of the Company's loans in which
the Company serves as the master servicer, and a $5 million subline which may be
used to finance mortgage loans owned by the Company that are in the process of
collection or resale to investors. The sublines bear interest at rates ranging
from 1.875% to 2.0% over the 30-day reserve-adjusted LIBOR. The Warehouse
Financing Facility will expire on March 31, 1999, unless earlier terminated or
extended in accordance with its terms. The Warehouse Financing Facility contains
a number of financial covenants including: (i) New Long Beach maintain tangible
net worth equal to at least $25 million, plus 25% of cumulative positive net
earnings, (ii) delinquencies on New Long Beach's mortgage servicing portfolio
not exceed 12% and (iii) the ratio of total liabilities to adjusted tangible net
worth not exceed 9:1. The Warehouse Financing Facility also contains other
affirmative, negative and financial covenants typical of similar credit
facilities.

Loan Sales

The Company follows a strategy of selling for cash substantially all of its
loan originations and purchases (while retaining the related servicing rights in
most cases) in the secondary market through loan sales in which the Company
disposes of its entire economic interest in the loans (other than the servicing
rights) for a cash price that represents a premium over the principal balance of
the loans sold. The Company sold $562.1 million, $580.4 million and
approximately $1.0 billion of loans through loan sales during 1994, 1995 and
1996, respectively. The Company did not sell any loans directly through
securitizations during these periods; however, substantially all of the loans
sold during these periods were ultimately securitized by the purchasers thereof.

Loans generally are sold to institutional purchasers. Upon the consummation
of loan sales, the Company receives a "premium," representing a cash payment in
excess of the par value of the loans (par value representing the unpaid
principal balance of the loan). Premiums on loan sales represented 90.3% of the
Company's total revenues in 1996. The Company maximizes its premium on loan sale
revenue by closely monitoring institutional purchasers' requirements and
focusing on originating or purchasing the types of loans that meet those
requirements and for which institutional purchasers tend to pay higher rates.
During 1996, the Company sold loans to eight institutional purchasers. The
Company's loan purchasers typically resell the loans through securitizations.

The Company makes loan sales by obtaining commitments from its whole loan
purchasers 30 to 90 days in advance of funding the loans to be purchased. The
Company's loan sales program utilizes a competitive bidding process typically
involving four to nine potential purchasers (including Wall Street firms,
financial institutions and conduits, along with banks and other institutional
purchasers) who in most cases have purchased loans from the Company in the past.
The Company typically does not have a forward sales commitment with any investor
that extends beyond one quarter. The successful bidder is committed to a minimum
quantity of loans at a determined price, and is generally granted the option to
purchase more than the minimum quantity at a negotiated price. A successful
bidder is not obligated to purchase loans other than those to which its bid
applies. The Company continuously monitors its loan production and purchasing
against its unfilled purchase commitments to identify potential shortfalls or
overages in loans available for delivery. As loans are funded, the Company
packages them and delivers them to the purchaser on a periodic basis.

40
<PAGE> 41

Loan sales are made on a non-recourse basis pursuant to a purchase
agreement containing customary representations and warranties by the Company
regarding the underwriting criteria and the origination process. The Company,
therefore, may be required to repurchase or substitute loans in the event of a
breach of its representations and warranties. In addition, the Company sometimes
commits to repurchase or substitute a loan if a payment default occurs within
the first month following the date the loan is funded, unless other arrangements
are made between the Company and the purchaser. The Company is also required in
some cases to repurchase or substitute a loan if the loan documentation is
alleged to contain fraudulent misrepresentations made by the borrower.

Securitization

The Company has not sold loans directly through securitizations for several
years and while it currently does not plan to securitize loans, it will review
its loan sale strategy from time to time and may decide to sell loans directly
through securitizations in the future if management determines that such sales
are more beneficial. Because the Company's loan purchasers usually purchase
those loans for resale in securitizations and the Company typically assists with
such securitizations, management is experienced with the securitization process
and market. In addition, rating agencies and bond insurers have evaluated and
are familiar with the Company's procedures and underwriting guidelines in
connection with such securitizations.

Typically in a securitization, the issuer aggregates mortgages into a real
estate mortgage investment conduit trust. The regular interests or the senior
tranches of the trust are investment grade. While the issuer generally retains
the residual interests in the trust, it immediately sells the regular interests
and generally uses the proceeds to repay borrowings that were used to fund or
purchase the loans in the securitized pool. The holders of the regular interests
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
for such interests. The residual interests represent the subordinated right to
receive cash flows from the pool of securitized loans after payment of the
required amounts to the holders of the regular interests and the costs
associated with the securitization. The issuer recognizes non-cash revenue
relating to the residual interest at the time of the securitization.

SERVICING

The Company typically sells all of its originated and purchased loans for
cash and does not retain residual interests in the performance of portfolios
after they are sold (other than servicing rights, which the Company normally
retains). After the consummation of this Offering, the Company will retain no
servicing rights which relate to loans funded prior to the Reorganization.

While the performance of the servicing portfolio will not directly impact
the Company's performance, any material change in the performance of the
portfolio could affect the pricing of the Company's future loan sales and the
ability of the Company to sell its loans in the future.

The following table shows certain combined data regarding the performance
of the broker-sourced servicing portfolio of Old Long Beach.

<TABLE>
<CAPTION>
AS OF OR FOR YEAR
ENDED DECEMBER 31,
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
31-60 day delinquencies as a percentage of total principal
balance as of period end(1)................................. 0.8 % 1.5 % 1.6 %
61-90 day delinquencies as a percentage of total principal
balance as of period end(1)................................. 0.9 1.0 1.0
91 or more day delinquencies as a percentage of total
principal balance as of period end(1)....................... 3.9 4.5 4.5
Total delinquencies as a percentage of total principal balance
as of period end(1)......................................... 5.7 7.0 7.1
Total losses on loans as a percentage of principal balance of
average loans serviced(1)................................... 1.5 1.4 1.3
</TABLE>

- ---------------

(1) Calculated based on the total broker-sourced servicing portfolio of Old Long
Beach.

41
<PAGE> 42

Because the Company will not have internal servicing capabilities
immediately after the Reorganization, the loans originated by the Company will
continue to be serviced by the Sub-Servicer, a division of Old Long Beach, the
Company's parent company prior to the completion of this Offering.

The Sub-Servicer began servicing sub-prime mortgage loans in 1988 and had a
servicing portfolio of approximately $3.5 billion of sub-prime mortgage loans at
December 31, 1996. Management of the Company believes that the Sub-Servicer's
success is due to the sub-prime experience of the Sub-Servicer's management, the
individualized attention the Sub-Servicer's loan counselors pay to borrowers and
the streamlined collection procedures the Sub-Servicer has implemented. With
nine years of experience in the sub-prime mortgage loan servicing industry, the
Sub-Servicer is one of the oldest established sub-prime mortgage loan servicers
in the industry. The Sub-Servicer's loan counselors place emphasis on giving
personal attention to borrowers and routinely contact borrowers following the
funding of loans to confirm loan terms and due dates. Finally, the
Sub-Servicer's use of computer technology has streamlined its collection
procedures as well as the procedures governing the timing of the notice of
intent to foreclose for certain high risk borrowers. This computerization has
improved the efficiency of the Sub-Servicer's collections and the possibility of
collection of certain high risk debt. In addition, the Sub-Servicer's servicing
procedures were developed while the Company was part of Old Long Beach and are
coordinated with the Company's origination practices. Because of these factors,
management believes that the Sub-Servicer is able to provide faster and more
effective servicing of the Company's loans than could another independent
servicer.

The Company is entering into a three-year agreement with the Sub-Servicer
under which the Sub-Servicer will sub-service mortgage loans originated or
purchased by the Company after the Reorganization. Sub-servicing will be
provided by the Sub-Servicer at an agreed-upon rate and with default terms
comparable to industry standards. The agreement contains other customary terms
and conditions and either party has the right to terminate the agreement at any
time effective after 18 months upon six months' prior written notice to the
other party. In the event of a termination, either party may request that the
loans that were sub-serviced by the Sub-Servicer be transferred to the Company
or its designee for servicing, subject to obtaining any required consents to
such transfer. The Company may conduct its own servicing operations or select an
alternate servicer following termination or expiration of the agreement with the
Sub-Servicer. See "Certain Relationships and Related Transactions -- Loan
Sub-Servicing Agreement."

REGULATION

New Long Beach's consumer lending activities are subject to the Federal
Truth-in-Lending Act ("TILA") and Regulation Z (including the Home Ownership and
Equity Protection Act of 1994), the Equal Credit Opportunity Act of 1974, as
amended ("ECOA") and Regulation B, the Fair Credit Reporting Act of 1970, as
amended, the Real Estate Settlement Procedures Act of 1974, as amended ("RESPA")
and Regulation X, the Home Mortgage Disclosure Act ("HMDA") and Regulation C,
the Federal Debt Collection Practices Act and the Fair Housing Act, as well as
other federal and state statutes and regulations affecting New Long Beach's
activities. 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 indemnification or mortgage loan
repurchases, certain rights of rescission for mortgage loans, class action
lawsuits and administrative enforcements actions.

New Long Beach is subject to the rules and regulations of, and examinations
by, the Department of Housing and Urban Development, the Federal Housing
Administration and other federal and state regulatory authorities with respect
to originating, underwriting, funding, acquiring, selling and servicing mortgage
loans. In addition, there are other federal and state statutes and regulations
affecting such activities. These rules and regulations, among other things,
impose licensing obligations on New Long Beach, establish eligibility criteria
for loans, prohibit discrimination, provide for inspection and appraisals of
properties, require credit reports on prospective borrowers, regulate payment
features and, in some cases, fix maximum interest rates, fees and loan amounts.
New Long Beach is required to submit annual audited financial statements to
various governmental regulatory agencies that require the maintenance of
specified net worth levels.

42
<PAGE> 43

New Long Beach is a FNMA approved seller/servicer and is subject to the
supervision of FNMA. In addition, New Long Beach's operations are subject to
supervision by state authorities (typically state banking or consumer credit
authorities), many of which generally require that New Long Beach be licensed to
conduct its business. This normally requires state examinations and reporting
requirements on an annual basis.

TILA requires a written statement showing an annual percentage rate of
finance charges and requires that other information be presented to debtors when
consumer credit contracts are executed. RESPA requires written disclosure
concerning settlement fees and charges, mortgage servicing transfer practices
and escrow or impound account practices. It also prohibits the payment or
receipt of kickbacks or referral fees in connection with the performance of
settlement services. The Fair Credit Reporting Act requires certain disclosures
to applicants concerning information that is used as a basis for denial of
credit. HMDA requires collection and reporting of statistical data concerning
the loan transaction. ECOA prohibits discrimination against applicants with
respect to any aspect of a credit transaction on the basis of sex, marital
status, race, color, religion, national origin, age, derivation of income from
public assistance programs, or the good faith exercise of a right under the
Federal Consumer Credit Protection Act. The Fair Housing Act prohibits
discrimination in mortgage lending on the basis of race, color, religion, sex,
handicap, familial status or national origin.

The interest rates which New Long Beach may charge on its loans are subject
to state usury laws, which specify the maximum rate which may be charged to
consumers. In addition, both federal and state truth-in-lending regulations
require that New Long Beach disclose to its borrowers prior to execution of the
loans all material terms and conditions of the financing, including the payment
schedule and total obligation under the loans. New Long Beach believes that it
is in compliance in all material respects with such regulations.

As a condition to funding of its loans, New Long Beach requires each
borrower to obtain and maintain in force a policy of insurance providing
coverage for improvements on any real property securing the borrower's loan. If
the borrower fails to provide fire and extended coverage insurance (and flood
insurance if required) prior to closing of the borrower's loan or if the
borrower's coverage is subsequently canceled or not renewed at any time during
the loan period and the borrower fails to obtain new coverage, New Long Beach,
through an outside insurance vendor who monitors whether insurance is
maintained, will provide coverage on the borrower's behalf under policies
insuring New Long Beach's interest in the collateral. Such practice is commonly
referred to as a "forced placement" of insurance. The insurance which can be
required and insurance which is forced placed is subject to regulation under
TILA, the National Flood Insurance Act, and state insurance regulatory and
lender statutes. Such laws and regulations generally impose disclosure and
notice requirements which must be satisfied in connection with insurance
requirements and the forced placement of coverage, limitations on the amount of
coverage that a lender may obtain to protect its interest in the collateral and
restrictions on fees and charges that New Long Beach may assess in connection
with such insurance.

Failure to comply with any of the foregoing federal and state laws and
regulations could result in the imposition of civil and criminal penalties on
New Long Beach, class action lawsuits and administrative enforcement actions.

DEPARTMENT OF JUSTICE SETTLEMENT AGREEMENT

In September 1996, Old Long Beach entered into a settlement agreement with
the U.S. Department of Justice (the "DOJ") arising out of a DOJ investigation
and complaint which alleged that Long Beach Bank, F.S.B. during the period from
January 1991 through June 1994 charged certain African-American, Hispanic,
female and older borrowers more than younger, white male borrowers in violation
of fair lending laws. Old Long Beach denied all allegations in the complaint and
all claims of discrimination. Old Long Beach also disputed the validity of the
statistical analysis relied upon by the DOJ as the principal basis for its
claims and further maintained that the DOJ theories of liability regarding
broker-sourced lending were legally unsupportable. Nonetheless, to avoid costly,
protracted litigation, Old Long Beach agreed to establish a $3 million fund to
reimburse up to 1,200 borrowers identified by the DOJ as the maximum number of
individuals who may have been affected by the alleged fair lending violations.
Old Long Beach asserted that the better solution to the issues

43
<PAGE> 44

raised by the DOJ was an intensive national effort in consumer education and
industry-wide initiatives directed at employee and broker education and
training. For this reason, Old Long Beach also agreed to contribute an
additional $1 million (payable over 3 years) to fund consumer education programs
in conjunction with civil rights groups. Old Long Beach has established all
funds required by the settlement agreement.

Pursuant to the settlement agreement, the Company, as a successor to Old
Long Beach, is required to (i) document any price exceptions from the Company's
rate sheet on broker-sourced loans, (ii) periodically review the results of its
broker-sourced lending operations for its compliance with fair lending laws (but
in no event shall the Company be required to disclose any documents or
information therewith, including the identities of any brokers with whom it does
business), (iii) retain all loan application files submitted for mortgage loans
and all loan-rider documents and notices relevant to any pricing decisions until
September 1999 and report to the DOJ semi-annually on compliance with the
settlement agreement, and (iv) provide to brokers information about the
Company's fair-lending and pricing procedures and an opportunity to participate
in fair-lending training. Any failure of the Company to comply with the
requirements of the DOJ settlement agreement could allow the DOJ to seek
injunctive relief against the Company.

In addition, if, as expected, the Company commences direct-sourced mortgage
lending, it will be required to provide certain training courses for Company
employees involved in direct-sourced mortgage loan pricing, use its best efforts
to place mortgage loan applicants in appropriate risk classifications based on
objective credit and risk-related criteria, and implement a direct-sourced
mortgage loan monitoring system of mortgage loan prices.

ENVIRONMENTAL MATTERS

In the course of its business, the Company has acquired, and may acquire in
the future, properties securing loans that are in default. It is possible that
hazardous substances or waste, contaminants, pollutants or sources thereof could
be discovered on such properties after acquisition by the Company. In such
event, the Company 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 Company
would have adequate remedies against the prior owner or other responsible
parties or (iii) the Company would not find it difficult or impossible to sell
the affected properties either prior to or following such removal.

EMPLOYEES

As of March 31, 1997, the Company had a total of 374 employees, two of whom
were part-time employees and 372 of whom were full-time employees. The Company
has 152 employees working at its corporate headquarters. None of the Company
employees are covered by a collective bargaining agreement. The Company
considers its relations with its employees to be good.

PROPERTIES

The Company's corporate headquarters are located at 1100 Town & County
Road, Orange, California 92868, where Old Long Beach leases approximately 23,000
square feet of office space used by the Company. The Old Long Beach lease
expires on May 14, 2001, and Old Long Beach has an option to renew the lease for
five years. The current annual rent on such space is approximately $412,700. The
lease provides for certain scheduled increases in annual rent. The Company has
signed a separate lease for such office space which contains terms substantially
similar to the Old Long Beach lease.

The Company also leases or subleases space for five regional processing
centers and approximately 60 account executive offices. The regional processing
centers range in size from 2,388 to 6,160 square feet and the account executive
offices are between approximately 150 and 1,500 square feet. The Company
believes that these spaces are being leased at market rates.

In connection with the Reorganization, the Company plans to lease
approximately 9,000 additional square feet of office space for its corporate
headquarters. The Company believes its facilities are both suitable

44
<PAGE> 45

and adequate for the current business activities conducted at its regional
centers and at its existing sales offices. As part of the Company's geographic
expansion, the Company anticipates leasing additional office space in the
future.

LEGAL PROCEEDINGS

When the Company operated as a division of Old Long Beach, it was involved
in various lawsuits incidental to its business, none of which had a material
adverse effect on the Company. In the Reorganization the Company is not assuming
any liabilities that may arise out of any lending or loan servicing activities
of Old Long Beach prior to the Reorganization, nor is the Company indemnifying
Old Long Beach against any such liabilities. As such, the Company is not
involved currently in any litigation. See "Reorganization."

Old Long Beach is the defendant in a lawsuit filed in November 1996 in the
United States District Court for the District of Massachusetts, which alleges
that Old Long Beach made certain payments to mortgage brokers in violation of
the Federal Real Estate Settlement Procedures Act of 1974, as amended ("RESPA").
RESPA requires written disclosure concerning settlement fees and charges,
mortgage servicing transfer practices and escrow or impound account practices.
It also prohibits the payment or receipt of kickbacks or referral fees in
connection with the performance of settlement services. The plaintiff has
requested that the case be treated as a nationwide class action, but no court
has ruled on that request. Old Long Beach intends to defend vigorously against
this action, and in January 1997 filed its answer to the complaint denying all
allegations of illegal or improper activities. Old Long Beach believes that its
mortgage broker compensation programs comply with all applicable laws and are
consistent with long-standing industry practice and regulatory interpretations.
The Company is not a party to the Old Long Beach lawsuit and none of the loans
underlying the claim are being transferred to the Company.

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<PAGE> 46

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

Old Long Beach is reorganizing its business operations (i.e., the
Reorganization) by transferring certain assets (including independent broker
lists, trade name, office and equipment leases, certain other contract rights,
furniture, fixtures and equipment) and personnel related to the broker-sourced
lending and loan sales operations of Old Long Beach and approximately $40
million in cash to the Company. The assets being transferred to the Company
include loans in process as of the time of the Reorganization but do not include
loans funded prior to the Reorganization or servicing rights with respect to
loans funded prior to the Reorganization.

The following unaudited pro forma consolidated financial data have been
prepared based on the Company's historical audited consolidated financial
statements for the year ended December 31, 1996. The unaudited pro forma
consolidated financial data give effect to the necessary adjustments to
illustrate the estimated effects of the Reorganization and the Offering as if
each had occurred as of January 1, 1996 as to the statement of operations and
December 31, 1996 as to the statement of financial condition. The unaudited pro
forma consolidated financial data are for illustrative purposes only and do not
purport to represent what the results of operations or financial position of the
Company would have actually been if the Reorganization had occurred on such date
or to project the results of operations or financial position of the Company for
any future date or period. The unaudited pro forma consolidated financial data
should be read together with the Financial Statements of the Company and related
Notes included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION (UNAUDITED):
Cash................................................. $ -- $ 40,000(1) $40,000
Loans held for sale.................................. 49,580 (49,580)(2) --
Receivable from sales of loans....................... 25,103 (25,103)(2) --
Premises and equipment, net.......................... 2,033 -- 2,033
Deferred income taxes................................ 2,120 (2,120)(2) 36,000
36,000(3)
Prepaid expenses and other assets.................... 914 (732)(2) 182
------- --------- -------
Total assets............................... $79,750 $ (1,535) $78,215
======= ========= =======
Liabilities:
Warehouse financing facility......................... $72,829 $ (72,829)(2) $ --
Accounts payable and accrued liabilities............. 5,784 (5,028)(2) 2,756
2,000(8)
------- --------- -------
Total liabilities.......................... 78,613 (75,857) 2,756
Stockholders' equity................................. 1,137 40,000(1) 75,459
322(2)
36,000(3)
(2,000)(8)
------- --------- -------
Total liabilities and stockholders'
equity................................... $79,750 $ (1,535) $78,215
======= ========= =======
</TABLE>

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<PAGE> 47

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
----------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND
SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS (UNAUDITED):
Revenue:
Gain on sales of loans............................. $50,699 $ (1,234)(4) $ 49,465
Loan servicing and other fees...................... -- 1,529(5) 1,529
Interest income.................................... 3,275 -- 3,275(10)
------- ------- ----------
Total revenues................................ 53,974 295 54,269
Expenses:
Compensation and employee benefits................. 22,299 600(5) 23,086
187(6)
Rent and other occupancy costs..................... 4,188 -- 4,188
Office supplies and courier service................ 1,903 -- 1,903
Depreciation....................................... 1,025 -- 1,025
Legal and professional............................. 1,828 -- 1,828
Interest........................................... 2,814 326(7) 3,140
Loan sub-servicing................................. -- 1,990(5) 1,990
Other.............................................. 3,945 -- 3,945
------- ------- ----------
Total expenses................................ 38,002 3,103 41,105
------- ------- ----------
Income before provision for income taxes.............. 15,972 (2,808) 13,164
Provision for income taxes............................ 6,580 (1,156)(9) 5,424
------- ------- ----------
Net income............................................ $ 9,392 $ (1,652) $ 7,740
======= ======= ==========
Pro forma earnings per share.......................... $ .31
==========
Pro forma weighted average number of shares
outstanding........................................ 25,000,000
==========
</TABLE>

- ---------------
(1) Reflects the cash proceeds received by the Company from Old Long Beach
pursuant to the Reorganization. See "Reorganization."

(2) Reflects the elimination of the receivable from the sales of loans, loans
held for sale, certain prepaid expenses and other assets, deferred income
taxes, Old Long Beach's revolving warehouse financing facility, certain
accounts payable and accrued liabilities which are to be retained by Old
Long Beach pursuant to the Reorganization. See "Reorganization."
Liabilities assumed by the Company represent capital lease obligations and
accrued vacation liability.

(3) Reflects the inclusion of the deferred income taxes pursuant to the
Reorganization (see "Reorganization").

(4) Gain on sales of loans has been decreased to reflect the elimination of the
gain on sales of loans originated prior to January 1, 1996 (the effective
date of the Reorganization for the pro forma statement of operations).

(5) Reflects the inclusion of loan servicing fees, net of the amortization of
mortgage servicing rights of $1.8 million, and loan sub-servicing costs
related to loans originated during the period. Pursuant to the Loan
Sub-Servicing Agreement, the Company retains the loan servicing fees and
mortgage servicing rights related to loans it originates and incurs
sub-servicing costs of 45 basis points per annum, paid monthly, on the
declining principal balance of each loan serviced. Other fees and
compensation expense have been increased to reflect the administrative
services agreement pursuant to which the Company will perform all functions
necessary on behalf of Old Long Beach to sell the mortgage loans originated
by Old Long Beach.

(6) Reflects additional compensation expense for the new Chief Financial
Officer and General Counsel in excess of the historical expense allocated
to the Company.

(7) Reflects an adjustment to interest expense pursuant to the terms of the
Company's Warehouse Financing Facility. The Warehouse Financing Facility
bears interest at a rate based on London Inter Bank Offered Rate ("LIBOR")
for U.S. dollar deposits which is 1/8% less than the interest rate on Old
Long Beach's revolving warehouse financing facility. The pro forma
amortization of debt issuance costs for the Warehouse Financing Facility is
$662,000 which is $417,000 greater than the historical amortization
expense. Interest expense also reflects the inclusion of interest charges
related to the financing of servicing-related advances to loan purchasers.

(8) Reflects accrued liabilities related to the Reorganization.

(9) Reflects the tax impact of the reduction in earnings related to the pro
forma adjustments to earnings before taxes as discussed above.

(10) The Company expects to invest substantially all of the $40 million of cash
proceeds (after utilization of $2.0 million for Reorganization costs) from
the Reorganization. The pro forma consolidated statement of operations does
not reflect potential interest income from the expected investment.

47
<PAGE> 48

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the name, age and position with the Company
of the persons who serve as directors and executive officers of the Company.
Officers of the Company are elected by the Board of Directors of the Company and
serve at the discretion of the Board.

<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ----------------------------------- --- ------------------------------------------------
<S> <C> <C>
M. Jack Mayesh..................... 55 Chairman of the Board and Chief Executive
Officer
Edward Resendez.................... 40 President, Director
Frank J. Curry..................... 35 Executive Vice President
James H. Leonetti ................. 37 Senior Vice President, Chief Financial Officer
James J. Sullivan ................. 39 Senior Vice President, General Counsel,
Secretary
David S. Engelman.................. 59 Director
C. Stephen Mansfield............... 57 Director
</TABLE>

The Company intends to add at least one additional non-management director
to the Board of Directors within 60 days after the completion of this Offering.

M. Jack Mayesh has served as Chief Executive Officer and Chairman of the
Board of LBFC since January 1997. Prior to the Reorganization, he served as
President of Old Long Beach since its formation in October 1994. Mr. Mayesh was
employed by Long Beach Savings and Loan Association (later known as Long Beach
Bank, F.S.B.) ("Long Beach Bank") in a variety of positions between 1983 and
1994, including serving as President between 1993 and 1994 and as Executive Vice
President, with responsibility for liability management and secondary market
loan sales activities, from 1986 to 1993.

Edward Resendez has served as President and a director of LBFC since
January 1997. He served as President of the broker-sourced mortgage loan
division of Old Long Beach between August 1995 and January 1997. From January
1995 through August 1995, Mr. Resendez served as First Vice President of the
broker-sourced mortgage loan division of Old Long Beach, where he oversaw
residential lending and production. From October 1994 through January 1995, he
served as First Vice President of the broker-sourced and direct-sourced mortgage
loan divisions of Old Long Beach, where he oversaw residential lending and
production, and held the same position for Long Beach Bank from November 1993
through October 1994. From 1987 through 1993, Mr. Resendez served as Vice
President of Long Beach Bank, with a variety of managerial responsibilities in
the broker-sourced and direct-sourced mortgage loan divisions, including loan
production, risk management, internal auditing and regulatory compliance.

Frank J. Curry has served as Executive Vice President of LBFC since January
1997. He served as Executive Vice President of the broker-sourced mortgage loan
division of Old Long Beach between October 1994 and January 1997, with
responsibility for production and processing, and held the same position with
Long Beach Bank from 1993 to October 1994. Mr. Curry was employed by Long Beach
Bank in a variety of other positions between 1988 and 1993, including serving as
a Regional Vice President in charge of expansion of the broker-sourced mortgage
loan division from 1992 to 1993, as a regional manager of broker-sourced
mortgage loan activities from 1990 to 1992, and as a sales manager responsible
for broker-sourced mortgage loan production from 1988 to 1990.

James H. Leonetti, C.P.A., has served as Senior Vice President and Chief
Financial Officer of LBFC since March 1997. From 1989 to March 1997, Mr.
Leonetti was employed by California Federal Bank, where he most recently served
as Senior Vice President and Controller, with a variety of responsibilities,
including functioning as Chief Financial Officer for the bank's consumer finance
and real estate subsidiaries, directing the corporate accounting functions and
related activities of the bank. From 1984 to 1989, Mr. Leonetti served as Vice
President and Assistant Controller of FarWest Financial Corp., where he managed
accounting functions.

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<PAGE> 49

James J. Sullivan, C.P.A., J.D., has served as Senior Vice President,
General Counsel and Secretary of LBFC since March 1997. From July 1991 to March
1997, Mr. Sullivan served as Vice President and Legal Counsel of American
Savings Bank, F.A., with a variety of responsibilities, including serving as the
lead corporate attorney for the bank and its subsidiaries, the attorney in
charge of the bank's finance division, and the lead transactional attorney for
the bank's loan servicing division. From 1985 to July 1991, Mr. Sullivan was
employed as an associate at the law firm of Gibson, Dunn & Crutcher LLP, where
his practice focused on mergers and acquisitions, public and private financings,
asset-based lending, general Securities and Exchange Commission compliance work,
and bank regulatory advice.

David S. Engelman has served as director of LBFC since March 1997. He also
serves as a director of MGIC Investment Corporation. Mr. Engelman served as
Chairman, Chief Executive Officer and President of UnionFed Financial
Corporation from 1991 until March 1997, and held the same positions at its
subsidiary, Union Federal Bank, until the Office of Thrift Supervision appointed
a receiver for the bank in August 1996. From 1989 to 1991, Mr. Engelman was a
consultant to Portland General Corporation, a diversified public utility holding
company, with responsibility for the management and liquidation of real estate
assets.

C. Stephen Mansfield has served as a director of LBFC since January 1997.
Mr. Mansfield also serves as a director of Noel Joanna, Inc. and Marine National
Bank. Mr. Mansfield was a partner with Deloitte & Touche and its predecessors
from 1977 until he retired as a senior partner in 1990. Mr. Mansfield was a
director of Old Long Beach and a director of the sole stockholder of Old Long
Beach but has resigned from such boards.

THE BOARD OF DIRECTORS

The Board of Directors currently has four members and is divided into three
classes. Class I Directors will serve until the annual meeting of stockholders
in 1998 and thereafter for terms of three years until their successors have been
elected and qualified. Class II Directors will serve until the annual meeting of
stockholders in 1999 and thereafter for terms of three years until their
successors have been elected and qualified. Class III Directors will serve until
the annual meeting of stockholders in 2000 and thereafter for terms of three
years until their successors have been elected and qualified. Edward Resendez is
a Class I Director; M. Jack Mayesh and David S. Engelman are Class II Directors;
and C. Stephen Mansfield is a Class III Director.

COMMITTEES OF THE BOARD OF DIRECTORS

Audit Committee

The Board of Directors will establish an audit committee (the "Audit
Committee"). The Audit Committee, among other things, will make recommendations
to the Board of Directors concerning the engagement of independent public
accountants; monitor and review the quality and activities of the Company's
internal audit function and those of its independent accountants; and monitor
the adequacy of the Company's operating and internal controls as reported by
management and the independent or internal auditors. The members of the Audit
Committee will be C. Stephen Mansfield (Chairman), David S. Engelman and at
least one other independent director.

Compensation Committee

The Board of Directors will establish a compensation committee (the
"Compensation Committee"). The Compensation Committee, among other things, will
review salaries, benefits and other compensation, including stock based
compensation under the Company's 1997 Stock Incentive Plan, of directors,
officers and other employees of the Company and make recommendations to the
Board of Directors. The members of the Compensation Committee will be David S.
Engelman (Chairman), C. Stephen Mansfield and at least one other independent
director.

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<PAGE> 50

NON-EMPLOYEE DIRECTORS COMPENSATION

The Company intends to pay its non-employee directors an annual retainer of
$25,000 and a fee of $1,000 for each board or committee meeting attended ($500
for committee meetings on a Board meeting date). Each chairman of a committee of
the Board of Directors also will receive an annual retainer of $3,000. All
directors will be reimbursed for expenses incurred to attend meetings of the
Board of Directors or committees thereof. In addition, each non-employee
director will receive an option to purchase 25,000 shares of the Company's
Common Stock at an exercise price per share equal to the Company's initial
offering price, under the terms and conditions of the Company's stock incentive
plan. (See "-- 1997 Stock Incentive Plan"). The Company anticipates that each
non-employee director will also receive additional option grants on an annual
basis under the Company's stock incentive plan.

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth information concerning the compensation paid
by Old Long Beach for services rendered during 1996 to Old Long Beach by the
Company's Chief Executive Officer and its four other most highly compensated
executive officers.

<TABLE>
<CAPTION>
NAME SALARY BONUS
----------------------------------------------- -------- --------
<S> <C> <C>
M. Jack Mayesh................................. $250,000 $250,000
Edward Resendez................................ 200,000 200,000
Frank J. Curry................................. 150,000 150,000
James H. Leonetti(1)........................... -- --
James J. Sullivan(1)........................... -- --
</TABLE>

- ---------------

(1) Messrs. Leonetti and Sullivan were first employed by the Company in 1997.

Following the Reorganization, the Company will pay compensation to its
Chief Executive Officer and its four other most highly compensated executive
officers pursuant to the terms of their respective employment agreements
described below.

MANAGEMENT COMPENSATION AND EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with each of its
executive officers for a specified term. The employment agreements for Messrs.
Mayesh, Resendez and Curry provide for an annual salary of $200,000 per year
plus an annual bonus of up to 100% of base salary. The employment agreement for
Mr. Leonetti provides for an annual salary of $175,000 per year plus an annual
bonus of up to 75% of base salary, and the employment agreement for Mr. Sullivan
provides for an annual salary of $160,000 per year plus an annual bonus of up to
50% of base salary. Salaries paid to executives are subject to increase as
recommended by the Compensation Committee of the Board of Directors of the
Company. Each of the Company's executive officers is also entitled to specified
benefits and reimbursement of expenses. Under the employment agreements, each
executive officer is entitled to severance and other payments following
termination of his employment in certain circumstances, including termination by
the Company without cause and termination by such officer for good reason
(including the material reduction or material adverse modification of authority
or duties, any material breach by the Company of the employment agreement, or
any requirement to move such officer's principal place of employment outside of
Orange County, California). Under such circumstances, the officer is entitled to
receive monthly severance payments from the Company for twelve months following
termination, with monthly payments equal to the officer's monthly base salary
plus bonus, plus the acceleration of vesting of all initial option grants for
Messrs. Mayesh, Resendez and Curry and options vesting during such twelve months
for Messrs. Leonetti and Sullivan. The agreements require each officer to devote
his best efforts to the interests and business of the Company and contain
proprietary information provisions and nonsolicitation provisions for specified
periods following termination of employment. Each of Messrs. Mayesh, Resendez
and Curry will receive an option to purchase 500,000 shares of the Company's
Common Stock, and each of Messrs. Leonetti and Sullivan will receive an option
to purchase 100,000 shares of the Company's Common Stock. Such options will be
at an exercise price equal to the initial Offering price of the Common Stock and
will vest 20% per year over five years.

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<PAGE> 51

1997 STOCK INCENTIVE PLAN

LBFC has established the 1997 Stock Incentive Plan (the "Plan") to enable
directors, executive officers, independent contractors and other key employees
of LBFC to participate in the ownership of LBFC. The Plan covers 3,000,000
shares of Common Stock. Concurrently with the pricing of the Common Stock
offered hereby, LBFC will grant options to acquire an aggregate of 2,200,000
shares of Common Stock to approximately 30 officers and key employees. These
options expire on the earlier of ten years from the date of grant or thirty days
after a holder's termination of service.

Purpose and Eligibility

The Plan is intended to promote the interests of LBFC and its stockholders
by using investment interests in LBFC to attract, retain and motivate its
management and other persons, to encourage and reward their contributions to the
performance of LBFC and to align their interests with the interests of LBFC's
stockholders. The persons eligible to receive an Award under the Plan include
directors, officers, employees, consultants, and advisors of LBFC and its
affiliated entities.

Administration, Amendment and Termination

The administering body for the Plan is the Compensation Committee. As long
as LBFC has a class of equity securities registered under Section 12 of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), the Compensation
Committee will be composed solely of "non-employee directors" within the meaning
of Rule 16b-3 under the Exchange Act. The administering body will have the power
to construe the Plan and the rights of recipients of Awards granted thereunder.
The administering body will also have the power to (i) discontinue, suspend or
amend the Plan in any manner (subject to certain limited exceptions, including
increases in the number of shares available that may be the subject of Awards
under the Plan and stockholder approval of other amendments that would
materially increase the benefits accruing to participants) and (ii) modify,
extend, renew or exchange outstanding Awards. The Plan, as amended from time to
time shall, in the discretion of the Compensation Committee, apply to and govern
Awards granted under the Plan prior to the date of such amendment, provided that
the consent of an Award holder is required if such amendment would alter,
terminate, impair or adversely affect an Award. Awards may be granted under the
Plan until the tenth anniversary of the adoption of the Plan by LBFC's Board of
Directors.

Securities Subject to the Plan

The Plan provides for the grant ("Award") of stock options (including
incentive stock options or nonqualified stock options), stock appreciation
rights, stock payments, dividend equivalents, stock bonuses, stock sales,
phantom stock and other stock-based benefits. Stock options granted under the
Plan may be incentive stock options ("ISOs") intended to qualify under the
provisions of Section 422 of the Internal Revenue Code ("Code") or non-qualified
stock options that do not so qualify. The maximum number of shares of Common
Stock that may be the subject of Awards granted under the Plan may not exceed
3,000,000 shares in the aggregate, subject to adjustments for stock splits or
other adjustments as discussed below. The shares available under the Plan may
either be authorized and unissued shares or shares reacquired by LBFC through
open market purchases or otherwise. If any Award granted under the Plan expires,
terminates or is forfeited before the exercise thereof or the payment in full
thereof, the shares covered by the unexercised or unpaid portion will become
available for new grants under the Plan.

If (i) the outstanding shares of Common Stock of LBFC are increased,
decreased or exchanged for a different number or kind of shares or other
securities, or if additional shares or new or different shares or other
securities are distributed in respect of such shares of Common Stock (or any
stock or securities received with respect to such Common Stock), through merger,
consolidation, sale or exchange of all or substantially all of the properties of
LBFC, reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split, spin-off or other distribution with respect to such
shares of Common Stock (or any stock or securities received with respect to such
Common Stock) or (ii) the value of the outstanding shares of Common Stock of
LBFC is reduced by reason of an extraordinary cash dividend, an appropriate and

51
<PAGE> 52

proportionate adjustment may be made in (1) the maximum number and kind of
shares subject to the Plan, (2) the number and kind of shares or other
securities subject to then outstanding Awards, and/or (3) the price for each
share or other unit of any other securities subject to then outstanding Awards.
Any adjustments under the Plan will be made by the Compensation Committee, whose
determination as to any adjustment will be final, binding and conclusive.

As of the effective time and date of any change in control of LBFC, the
Plan and any then outstanding Awards (whether or not vested) shall automatically
terminate unless (i) provision is made in writing in connection with such
transaction for the continuance of the Plan and for the assumption of such
Awards, or for the substitution for such Awards of new awards covering the
securities of a successor entity or an affiliate thereof with appropriate
adjustments as to the number and kind of securities and exercise prices, in
which event the Plan and such outstanding Awards shall continue or be replaced,
as the case may be, in the manner and under the terms so provided; or (ii) the
Board otherwise shall provide for the cancellation of Awards and their automatic
conversion into the right to receive the securities, cash or other consideration
that a holder of the shares underlying such Awards would have been entitled to
receive upon consummation of such change in control had such shares been issued
and outstanding immediately prior to the effective date and time of the change
in control (net of the appropriate option exercise prices). If, pursuant to the
foregoing provisions of the Plan, the Plan and the Awards shall terminate by
reason of the occurrence of a change in control without provision for any of the
action(s) described in clause (i) or (ii) above, then any recipient holding
outstanding Awards shall have the right, at such time immediately prior to the
consummation of the change in control as the Board shall designate, to exercise
the recipient's Awards to the full extent not theretofore exercised, including
any installments which have not yet become vested.

Terms and Conditions of Awards Under the Plan

The Compensation Committee will select the recipients of Awards granted
under the Plan and will determine the dates, amounts, exercise prices, vesting
periods and other relevant terms of the Awards. The maximum number of shares of
Common Stock with respect to which an Award or Awards may be granted to any
eligible person in any one year shall not exceed 1,000,000 shares, subject to
antidilution adjustment as provided in the Plan.

Award Pricing. The pricing of Awards, including the exercise price for
stock options granted under the Plan, shall be determined by the Compensation
Committee as of the date the Award is granted, provided that the exercise price
shall be no less than 100% of the fair market value (as determined under the
Plan) of the underlying shares as of such date.

Award Vesting. Awards granted under the Plan vest and become exercisable
as determined by the Compensation Committee in its discretion. Awards granted
under the Plan may be exercised at any time after they vest and before the
expiration date determined by the Compensation Committee, provided that no Award
may be exercised more than ten years after its grant (five years after grant in
the case of any Award intended to qualify as incentive stock options under the
Code and granted to certain holders of significant amounts of LBFC's outstanding
Common Stock). Furthermore, in the absence of a specific agreement to the
contrary, options will generally expire and become unexercisable immediately
upon termination of the recipient's employment with LBFC for cause, 30 days in
the case of termination without cause, or six months after the termination of
the recipient's employment with LBFC by reason of death, permanent disability or
normal retirement. The Compensation Committee may accelerate the vesting of any
options and may also extend the period following termination of employment with
LBFC during which options may vest and/or be exercised (subject to a maximum ten
year term from date of grant).

Award Payments. The exercise price for Awards may be paid in cash or in
any other consideration the Compensation Committee deems acceptable, including
securities of LBFC surrendered by the Award holder or withheld from the shares
otherwise deliverable upon exercise. LBFC may extend or arrange for the
extension of credit to any Award holder to finance the Award holder's purchase
of shares upon exercise of the holder's Award on terms approved by the
Compensation Committee, subject to restrictions under applicable laws and
regulations, or allow exercise in a broker's transaction in which the exercise
price will not be received

52
<PAGE> 53

until after exercise and subsequent sale of the underlying Common Stock.
Consideration received by LBFC upon exercise of Awards granted under the Plan
will be used for general working capital purposes.

Limited Transferability of Awards. Awards are generally not transferable
by the recipient during the life of the recipient.

Awards Documentation. Awards granted under the Plan will be evidenced by
an agreement duly executed on behalf of LBFC and by the recipient or a
confirming memorandum issued by LBFC to the recipient, setting forth such terms
and conditions applicable to the Award. The adoption of the Plan shall not
affect any other stock option, incentive or other compensation plans in effect
for LBFC, and the Plan shall not preclude LBFC from establishing any other forms
of incentive or other compensation for employees, directors, advisors or
consultants of LBFC, whether or not approved by stockholders.

Rights With Respect to Common Stock. No recipient of an Award under the
Plan and no beneficiary or other person claiming under or through such
individual will have any right, title or interest in or to any shares of Common
Stock subject to any Award or any rights as a stockholder unless and until such
Award is duly exercised pursuant to the terms of the Plan and the exercise of
such Award results in the issuance of shares of Common Stock to the recipient.

Plan Provisions Regarding Section 162(m) the Internal Revenue Code. In
general, Section 162(m) of the Code imposes a $1,000,000 limit on the amount of
compensation that may be deducted by LBFC in any tax year with respect to the
Chief Executive Officer of LBFC and its other four most highly compensated
employees, including any compensation relating to an Award under the Plan. To
prevent compensation relating to an Award under the Plan from being subject to
the $1,000,000 limit of Code Section 162(m), the Plan provides that no one
eligible person shall be granted any Awards with respect to more than 1,000,000
shares of Common Stock in any one calendar year if such grant would otherwise be
subject to Code Section 162(m). Furthermore, if Code Section 162(m) would
otherwise apply and if the amount of compensation an eligible person would
receive under an Award is not based solely on an increase in the value of the
underlying common stock of LBFC after the date of grant or award, the
Compensation Committee can condition the grant, vesting, or exercisability of
such an Award on the attainment of a preestablished objective performance goal.
For this purpose, a preestablished objective performance goal may include one or
more of the following performance criteria: (a) cash flow, (b) earnings per
share (including earnings before interest, taxes, and amortization), (c) return
on equity, (d) total stockholder return, (e) return on capital, (f) return on
assets or net assets, (g) income or net income, (h) operating income or net
operating income, (i) operating margin, (j) return on operating revenue, and (k)
any other similar performance criteria.

DEFERRED COMPENSATION PLAN

The Company has established a Deferred Compensation Plan (the "Deferred
Plan") to provide certain key employees of the Company enhanced deferred
compensation benefits, which are designed to attract and retain outstanding
individuals in key positions within the Company.

Administration

The Deferred Plan will be administered by the Compensation Committee. The
Compensation Committee will have the authority to delegate those administrative
tasks the Compensation Committee determines are in the best interest of the
Deferred Plan, participants or the Company. Amendment or termination of the
Deferred Plan shall be and remain a function of the Board of Directors of the
Company.

Eligibility

Each key employee of the Company designated by the Compensation Committee
shall be eligible to participate in the Deferred Plan upon execution of a
Deferred Compensation Agreement.

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<PAGE> 54

Amount of Deferral

An eligible employee who elects to participate in the Deferred Plan may
designate in his or her Agreement with the Company any percentage of such
employee's compensation to be deferred by the Company. Compensation shall
include the employee's basic salary, bonuses, commissions, incentive
compensation, overtime pay and all other forms of cash compensation before
giving effect to amounts deferred pursuant to the Deferred Plan. An eligible
employee shall make his or her deferral election with respect to his or her base
salary separately from his or her deferral election with respect to other
compensation. Any election to commence participation or to change the amount
deferred shall be effective as of the beginning of the first pay period
beginning after the January 1 next following the date on which the employee
gives written notice to the Company of such election. In the case of an employee
who first becomes eligible to participate in the Deferred Plan in the first
calendar year in which the Deferred Plan is adopted, participants shall have 30
days after notice of eligibility to provide an election to participate. Deferral
shall be effected by reduction in the amount of salary, and/or bonuses and other
incentive compensation, if applicable, paid through the payroll system. Amounts
deferred shall be credited on the Company's books to a bookkeeping account for
each participant of the Deferred Plan and will be accumulated until payable.

Payment of Amounts Deferred

Concurrently with his or her election to participate in the Deferred Plan,
an eligible employee shall designate a specified future date to which payment of
the amount covered by such election is to be deferred and shall also designate
the method of payment, which shall be either a lump sum payment on the
designated payment date or substantially equal installments for a two, three,
four or five-year period commencing on the designated date. Upon the death or
permanent disability of the participant, payment of all amounts deferred by such
participant shall be paid as soon as reasonably practicable following the date
of such death or disability. In the event of the death of the participant,
amounts payable pursuant to the Deferred Plan shall be paid to the beneficiary
specifically designated in the participant's agreement, or if the beneficiary is
not designated, or the designated beneficiary is not living, then to the
participant's estate. No interest shall be paid by the Company on amounts
deferred by an eligible employee under this Deferred Plan unless the employee's
Agreement with the Company specifically provides therefor.

Withdrawal of Deferred Amounts

No deferrals under the Deferred Plan may be withdrawn by the employee prior
to the designated payment date, except in cases of extreme financial hardship or
for good cause as demonstrated by the employee to and accepted by the
Compensation Committee. Any distribution by reason of financial hardship shall
not exceed the amount reasonably necessary to eliminate the extreme financial
hardship.

Unsecured General Creditor

All title to and beneficial interest in all funds maintained or held by the
Company on account of this Deferred Plan, whether or not earmarked for that
purpose, shall be and remain in the Company and no employee shall have any
interest in such funds. The Company shall have no obligation to any employee to
maintain a fund, separate from the Company's general accounts, on account of the
Deferred Plan and the Company's obligation under the Deferred Plan shall be
merely that of an unfunded and unsecured promise of the Company to pay money in
the future.

Assignment

A participant shall have no right to sell, assign, transfer, pledge,
anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in
advance of actual receipt any amounts payable under the Deferred Plan. No part
of the amounts payable under the Deferred Plan shall, prior to actual payment,
be subject to seizure or sequestration for payment of debts, judgments, alimony
or separate maintenance owed by a participant or any other person or be
transferable by operation of law in the event of a participant's or any other
person's bankruptcy or insolvency.

Withholding

To the extent required by federal, state, local or foreign law, the Company
shall have the right to withhold from payments made under the Deferred Plan, any
taxes required to be withheld.

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<PAGE> 55

Deferred Plan Amendment

The Deferred Plan may be amended by the Board of Directors of the Company
at any time and from time to time, provided that no such amendment shall operate
to adversely affect a participant's rights under the Deferred Plan with respect
to amounts deferred prior to the date of such amendment.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee will be formed prior to the closing of the
Offering. The Company intends that none of the executive officers of the Company
will serve on the compensation committee of another entity or on any other
committee of the board of directors of another entity performing similar
functions.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Old Long Beach presently owns 100% of the outstanding Common Stock of the
Company. Upon consummation of this Offering, if the Underwriters exercise the
over-allotment option in full, Old Long Beach will have no continuing interest
in the Company. In connection with the Reorganization, Old Long Beach and the
Company are entering into certain agreements for the purpose of providing
certain services and defining their ongoing relationship. The agreements have
been developed in the context of a parent/subsidiary relationship and therefore
are not the result of arm's-length negotiations between independent parties. It
is the intention of the Company and Old Long Beach that such agreements and the
transactions provided for therein, taken as a whole, are fair to both parties,
while continuing certain mutually beneficial arrangements. However, there can be
no assurance that each of such agreements, or the transactions provided for
therein, are or will be on terms at least as favorable to the Company as could
have been obtained from unaffiliated parties.

Additional or modified arrangements and transactions may be entered into by
the Company, Old Long Beach and their respective affiliates after completion of
this Offering. Any such future arrangements and transactions will be determined
through negotiations between the Company and Old Long Beach.

The following is a summary of the arrangements and transactions between the
Company and Old Long Beach being entered into in connection with the
Reorganization and the Indemnification Agreements between the Company and its
executive officers and directors. For a chart depicting the corporate
relationship between the Company and Old Long Beach, see "Reorganization."

CONTRIBUTION AGREEMENT

Pursuant to a contribution agreement (the "Contribution Agreement") among
Old Long Beach Holdings, New Long Beach, LBFC and Old Long Beach that is being
entered into in connection with the Reorganization, Old Long Beach will transfer
to LBFC all personnel and the assets of the broker-sourced lending and loan
sales operations of Old Long Beach in exchange for 25,000,000 shares of Common
Stock. The assets being transferred include independent broker lists, trade
name, office and equipment leases, certain other contract rights, furniture,
fixtures and equipment. In addition, all mortgage loans in process, that are not
yet funded at the time of the Reorganization, are also being transferred to
LBFC. No funded loans or other personnel and assets from the other operations of
Old Long Beach are being transferred to LBFC, and Old Long Beach shall be solely
responsible for any liabilities that may arise from such retained operations,
personnel and assets. LBFC is not assuming any liabilities arising out of Old
Long Beach's lending or loan servicing activities prior to the Reorganization.
LBFC will assume certain liabilities associated with equipment leases and
property leases related to assets acquired in the Reorganization and certain
accrued vacation and other employee benefits arising before the Reorganization
for the employees being transferred to LBFC. As part of the Contribution
Agreement, the Company and Old Long Beach will agree not to solicit or hire the
employees of the other for a period of five years.

Old Long Beach and Old Long Beach Holdings have also agreed to indemnify
and hold the Company harmless from any tax liability attributable to periods
ending on or before the consummation of this Offering. For periods ending after
the consummation of this Offering, the Company will pay its tax liability
directly to the appropriate taxing authorities. Old Long Beach Holdings
generally will control audits and administrative

55
<PAGE> 56

and judicial proceedings with respect to periods ending on or before the
consummation of this Offering, although Old Long Beach Holdings cannot
compromise or settle any issue that increases the Company's liability without
first obtaining the consent of the Company. The Company generally will control
all other audits and administrative and judicial proceedings.

The Internal Revenue Service and the California Franchise Tax Board are
currently auditing Old Long Beach in connection with issues relating to the
timing of recognition of income and expenses. Under the Contribution Agreement,
Old Long Beach Holdings will indemnify the Company against any liability
incurred by the Company in connection with such audit.

ADMINISTRATIVE SERVICES AGREEMENTS

The Company (while operating as a division of Old Long Beach) has been
historically allocated portions of total expenses of various administrative
services provided to it by Old Long Beach. The costs of such services primarily
included general corporate overhead, such as data processing, information
services and cash management services, employee benefits and other
administrative functions. These expenses were calculated as a pro rata share of
certain administrative costs based on a variety of factors which take into
consideration loan origination volume and historical ratios of direct expenses
incurred by the various divisions of Old Long Beach to total direct expenses,
which management believed was a reasonable method of allocation. The allocation
of expenses to the Company for the years ended December 31, 1994, 1995 and 1996
was approximately $9.7 million, $7.0 million, and $8.9 million, respectively.

In connection with the Reorganization, the Company and Old Long Beach are
entering into an administrative services agreement under which Old Long Beach
will continue to provide various services to the Company, including certain
employee benefits administration services, information services, data processing
functions and mail room services. Certain precautions are being taken to
eliminate the opportunity for Old Long Beach to improperly use the confidential
information relating to the Company to which Old Long Beach will have access
after the Reorganization as a result of the services provided pursuant to the
administrative services agreement.

Old Long Beach will charge the Company a fixed fee of $125,000 per month
for the information systems and data processing services that Old Long Beach
will provide under the administrative services agreement. Old Long Beach will
charge the Company for the other services that are provided under the
administrative services agreement in an amount substantially equal to the cost
of providing such services. The administrative services agreement will have a
one-year term, unless earlier terminated by the Company upon 30 days' written
notice. The Company currently anticipates it will have the capability to perform
the functions covered by the administrative services agreement internally within
one year from the date of the Reorganization. Once the Company develops the
internal capability to perform each such function, the Company intends to
terminate the administrative services agreement with respect to that function.

In addition, the Company and Old Long Beach are entering into a second
administrative services agreement pursuant to which the Company will assist Old
Long Beach in selling the mortgage loans originated by Old Long Beach and
provide investor coordination and information for the existing loan portfolio as
well as new loan originations. The administrative services agreement will have a
one-year term, unless earlier terminated by Old Long Beach upon 30 days' written
notice. There will be a fixed fee of $55,000 per month for such services. The
Company currently anticipates Old Long Beach will have the capability to
internally perform these sales functions within one year from the date of the
Reorganization. Once Old Long Beach develops such internal capability, it is
anticipated that Old Long Beach will terminate this administrative services
agreement.

LOAN SUB-SERVICING AGREEMENT

In connection with the Reorganization, New Long Beach and the Sub-Servicer
(a division of Old Long Beach) are entering into a three-year loan sub-servicing
agreement (the "Loan Sub-Servicing Agreement") pursuant to which the
Sub-Servicer will sub-service mortgage loans originated or purchased by New Long
Beach after the Reorganization. New Long Beach expects to retain substantially
all of the servicing rights for

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<PAGE> 57

such loans, including loans sold to investors. Sub-servicing activities include
collecting and remitting loan payments, accounting for principal and interest,
holding escrow or impound funds for payment of taxes and insurance, if
applicable, making required inspections of the mortgaged property, contacting
delinquent borrowers and supervising foreclosures and property dispositions.
Under the Loan Sub-Servicing Agreement, New Long Beach is obligated to pay the
Sub-Servicer a 45 basis point annual servicing fee on the declining balance of
each loan serviced.

The Sub-Servicer is required to pay all expenses related to the performance
of its duties under the Loan Sub-Servicing Agreement. However, New Long Beach
will provide the funding for required advances on delinquent mortgage payments,
taxes and required insurance premiums that are not collected from borrowers with
respect to any mortgage loan.

New Long Beach may terminate for cause the Loan Sub-Servicing Agreement
with notice upon the occurrence of one or more of the events specified in such
agreement, generally relating to the Sub-Servicer's proper and timely
performance of its duties and obligations under the Loan Sub-Servicing
Agreement. Either New Long Beach or the Sub-Servicer may terminate the Loan
Sub-Servicing Agreement without cause at any time effective after 18 months upon
six months' prior written notice to the other party. In the event of a
termination, either party may request that the loans that were sub-serviced by
the Sub-Servicer be transferred to New Long Beach or its designee for servicing,
subject to obtaining any required consents to such transfer. New Long Beach may
in the future commence its own servicing operations.

Under the Loan Sub-Servicing Agreement, New Long Beach is entitled to all
late payment charges, penalties and assumption fees collected in connection with
the mortgage loans. New Long Beach also receives any benefit derived from
interest earned on collected principal and interest payments between the date of
collection and the date of remittance to New Long Beach and, to the extent
allowed by law, from interest earned on tax and insurance impound funds.

INDEMNIFICATION AGREEMENTS

The Company will enter into indemnification agreements with its executive
officers and directors which require the Company to indemnify each in certain
circumstances, in the manner and to the fullest extent permitted by the Delaware
General Corporation Law.

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<PAGE> 58

BENEFICIAL OWNERSHIP OF SECURITIES AND SELLING STOCKHOLDER

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock after giving effect to the
Reorganization, and as adjusted to reflect the sale of 21,750,000 shares of
Common Stock by the Selling Stockholder offered hereby, by (i) each director of
the Company, (ii) the Company's most highly compensated executive officers,
(iii) each person known to the Company to be the beneficial owner of more than
5% of the Common Stock and (iv) all directors and executive officers of the
Company as a group.

<TABLE>
<CAPTION>
COMMON COMMON
STOCK OWNED STOCK TO BE
PRIOR TO OWNED AFTER
OFFERING(1) NUMBER OF THE OFFERING(4)
---------------------- SHARES TO BE ----------------------
NUMBER OF SOLD IN THE NUMBER OF
NAME(2) SHARES PERCENT OFFERING SHARES PERCENT
- ------------------------------------ ---------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
Old Long Beach(3)................... 25,000,000 100% 21,750,000 3,250,000(5) 13%(5)
M. Jack Mayesh...................... -- -- -- -- --
Edward Resendez..................... -- -- -- -- --
Frank J. Curry...................... -- -- -- -- --
James H. Leonetti................... -- -- -- -- --
James J. Sullivan................... -- -- -- -- --
David S. Engelman................... -- -- -- -- --
C. Stephen Mansfield................ -- -- -- -- --
All Directors and Officers as a
Group (seven persons)............. -- -- -- -- --
</TABLE>

- ---------------

(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned.

(2) Each of such persons may be reached at 1100 Town & Country Road, Suite 900,
Orange, California 92868.

(3) Before the Reorganization, Old Long Beach was the parent of the Company. Old
Long Beach is a wholly-owned subsidiary of Old Long Beach Holdings, of which
Roland E. Arnall owns 69.9% of the currently outstanding common stock.

(4) Certain officers and directors of the Company are being offered the
opportunity to purchase shares of Common Stock at the Offering price. In
addition, certain officers of the Company are being granted options to
purchase shares of Common Stock pursuant to the 1997 Stock Incentive Plan.
See "Management -- 1997 Stock Incentive Plan."

(5) Assumes no exercise of the Underwriters' over-allotment option. If the
Underwriters' over-allotment option is exercised in full, Old Long Beach
will own no shares of LBFC. See "Underwriting."

58
<PAGE> 59

DESCRIPTION OF CAPITAL STOCK

GENERAL

The authorized capital stock of LBFC consists of (i) 25,000,000 shares of
preferred stock, $.001 par value (the "Preferred Stock"), and (ii) 150,000,000
shares of common stock, $.001 par value (the "Common Stock").

COMMON STOCK

All of the outstanding Common Stock is beneficially owned by the Selling
Stockholder. Upon completion of the Offering, there will be 25,000,000 shares of
Common Stock outstanding, 3,250,000 of which will be owned by the Selling
Stockholder (assuming no exercise of the Underwriters' over-allotment option).
If the Underwriters' over-allotment option is exercised in full, the Selling
Stockholder will own no shares of Common Stock. The issued and outstanding
shares of Common Stock have been duly authorized, validly issued, fully paid and
nonassessable.

Holders of Common Stock are entitled to one vote for each share held of
record. Shares of Common Stock do not have cumulative voting rights with respect
to the election of directors.

Holders of Common Stock do not have any preemptive rights or rights to
subscribe for additional securities of LBFC. Shares of Common Stock are not
redeemable and there are no sinking fund provisions. The shares of Common Stock
are not convertible into any other series or class of LBFC's securities.

Subject to the preferences applicable to Preferred Stock outstanding at the
time, holders of shares of Common Stock are entitled to dividends as may be as
declared by the Board of Directors from time to time out of assets or funds of
LBFC legally available therefor, and are entitled, in the event of liquidation,
to share ratably in all assets remaining after payment of debts and liabilities
and Preferred Stock preferences, if any.

LBFC's Board of Directors will have five members following completion of
this Offering. Either the directors or the stockholders may amend the Bylaws to
change the size of the Board of Directors, subject to the requirement in the
Bylaws that the entire Board of Directors must consist of at least five and no
more than nine directors. After the initial term, each director serves for a
term ending on the date of the third annual meeting following the annual meeting
at which such director was elected and until his or her successor is duly
elected and qualified or until his or her death, resignation or removal. Any
stockholder entitled to vote at a meeting regarding the election of a director
may nominate a person for election as a director, provided that the stockholder
gives LBFC written notice of the nomination at least 90 days before the meeting
(or, if later, the seventh day after the first public announcement of the date
of such meeting), which notice must contain specified information about the
stockholder and the nominee.

The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "LBFC."

PREFERRED STOCK

Pursuant to LBFC's Certificate of Incorporation, the Board of Directors has
the authority to issue up to 25,000,000 shares of Preferred Stock in one or more
series with such designations, powers, preferences and rights, including voting
rights, as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder approval,
to issue Preferred Stock with dividend, liquidation, conversion, voting or other
rights that adversely affect the voting power or other rights of the holders of
LBFC's Common Stock. In the event of issuance, the Preferred Stock could be
utilized, under certain circumstances, as a way of discouraging, delaying or
preventing an acquisition or change in control of the Company. LBFC currently
has no plans to issue any shares of its Preferred Stock.

59
<PAGE> 60

CERTAIN PROVISIONS OF DELAWARE LAW

LBFC is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
LBFC's outstanding voting stock) from engaging in a "business combination" (as
defined in Section 203) with LBFC for three years following the date that person
became an interested stockholder unless: (i) before that person became an
interested stockholder, the Board of Directors approved the transaction in which
the interested stockholder became an interested stockholder or approved the
business combination; (ii) upon completion of the transaction that resulted in
the interested stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of LBFC outstanding at the
time the transaction commenced (excluding stock held by directors who are also
officers of LBFC and by employee stock plans that do not provide employees with
the right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer); or (iii) on or following the
date on which that person became an interested stockholder, the business
combination is approved by LBFC's Board of Directors and authorized at a meeting
of stockholders by the affirmative vote of the holders of at least 66 2/3% of
the outstanding voting stock of LBFC not owned by the interested stockholder.

Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving LBFC and a
person who was not an interested stockholder during the previous three years or
who became an interested stockholder with the approval of a majority of LBFC's
directors, if that extraordinary transaction is approved or not opposed by a
majority of the directors (but not less than one) who were directors before any
person became an interested stockholder in the previous three years or who were
recommended for election or elected to succeed such directors by a majority of
such directors then in office.

Pursuant to Section 162 of the Delaware General Corporation Law, the Board
of Directors of LBFC can, without stockholder approval, issue shares of capital
stock, which may have the effect of delaying, deferring or preventing a change
of control of LBFC. LBFC has no plan or arrangement for the issuance of any
shares of capital stock other than in the ordinary course pursuant to the 1997
Stock Incentive Plan.

CERTAIN CHARTER AND BYLAW PROVISIONS

LBFC's Certificate of Incorporation provides that no action which has not
been previously approved by the Board of Directors may be taken by the
stockholders except at an annual meeting or a special meeting of the
stockholders.

LBFC's Bylaws require stockholders to provide advance notice of any
stockholder nominations for directors and of any business to be brought before
any meeting of stockholders. Stockholders are not entitled to cumulative voting
in connection with the election of directors. As a result, a person or a group
controlling the majority of shares of Common Stock can elect all of the
directors.

The Certificate of Incorporation of LBFC contains certain provisions
permitted under the Delaware General Corporation Law relating to the liability
of directors. These provisions eliminate the directors' liability for monetary
damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, including the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
a law. LBFC's Certificate of Incorporation also contains provisions to indemnify
its directors and officers to the fullest extent permitted by the Delaware
General Corporation Law.

TRANSFER AGENT

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.

60
<PAGE> 61

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, LBFC will have 25,000,000 shares of
Common Stock outstanding. The 21,750,000 shares of Common Stock sold in this
Offering (25,000,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restriction under the
Securities Act, except for any such shares held at any time by an "affiliate" of
the Company, as such term is defined in Rule 144 promulgated under the
Securities Act ("Rule 144"). If the Underwriters' over-allotment option is not
exercised, Old Long Beach will own 3,250,000 shares of Common Stock which will
be "restricted securities," as that term is defined in Rule 144. The Selling
Stockholder has agreed with the Underwriters that it will not, without the prior
written consent of the Representative, offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, for a period of 180 days after
the date of the completion of the Offering, subject to certain limited
exceptions.

An "affiliate" or holder of restricted securities is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of one percent (1%) of the then outstanding shares of the Common Stock
or the average weekly trading volume of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are subject to certain
manner of sale limitations, notice requirements and the availability of current
public information about the Company.

In addition, LBFC intends to file a registration statement under the
Securities Act shortly after the completion of this Offering (to become
effective as soon thereafter as practicable) to register 3,000,000 shares of
Common Stock reserved for issuance pursuant of the 1997 Stock Incentive Plan.
Shares issued upon exercise of outstanding options under the 1997 Stock
Incentive Plan after the effective date of such registration statement generally
may be sold on the open market.

Prior to this Offering there has been no public market for the Common
Stock. No prediction can be made as to the effect, if any, that future sales of
shares pursuant to a future registration statement or Rule 144 or the
availability of shares for future sale will have on the market price of the
Common Stock prevailing from time to time. Sales of substantial amounts of the
Common Stock in the public market, or the perception that such sales could
occur, could adversely affect prevailing market prices.

61
<PAGE> 62

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representative,
have severally agreed to purchase from the Selling Stockholder the following
respective number of shares of Common Stock at the Offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------------- ----------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc. .................................. 18,250,000
Lehman Brothers Inc. .................................................... 200,000
Prudential Securities Incorporated....................................... 200,000
Salomon Brothers Inc. ................................................... 200,000
Advest, Inc. ............................................................ 100,000
Brean Murray & Co., Inc. ................................................ 100,000
Crowell, Weedon & Co. ................................................... 100,000
Cruttenden Roth Incorporated ............................................ 100,000
Dominick & Dominick, Incorporated ....................................... 100,000
Equitable Securities Corporation ........................................ 100,000
EVEREN Securities, Inc. ................................................. 100,000
Fahnestock & Co. Inc. ................................................... 100,000
Furman Selz LLC ......................................................... 100,000
Gruntal & Co., L.L.C. ................................................... 100,000
Interstate/Johnson Lane Corporation...................................... 100,000
Janney Montgomery Scott Inc. ............................................ 100,000
Legg Mason Wood Walker, Incorporated..................................... 100,000
McDonald & Company Securities, Inc. ..................................... 100,000
Morgan Keegan & Company, Inc. ........................................... 100,000
The Ohio Company......................................................... 100,000
Parker/Hunter Incorporated............................................... 100,000
Pennsylvania Merchant Group Ltd. ........................................ 100,000
Piper Jaffray Inc. ...................................................... 100,000
Prime Charter Ltd. ...................................................... 100,000
Ragen MacKenzie Incorporated............................................. 100,000
Raymond James & Associates, Inc. ........................................ 100,000
Scott & Stringfellow, Inc. .............................................. 100,000
The Seidler Companies Incorporated ...................................... 100,000
Stifel, Nicolaus & Company, Incorporated ................................ 100,000
Sutro & Co. Incorporated................................................. 100,000
Tucker Anthony Incorporated.............................................. 100,000
Wedbush Morgan Securities................................................ 100,000
Wheat, First Securities, Inc. ........................................... 100,000
----------
Total Underwriters............................................. 21,750,000
==========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of the Common Stock offered hereby
if any such shares are purchased.

The Selling Stockholder has been advised by the Underwriters that the
Underwriters propose to offer the shares of Common Stock to the public at the
Offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $0.26 per share. The
Underwriters may allow,

62
<PAGE> 63

and such dealers may reallow, a concession not in excess of $0.10 per share to
certain other dealers. After this Offering, the offering price and other selling
terms may be changed by the Representative of the Underwriters.

The Underwriters have reserved up to 500,000 shares of Common Stock offered
hereby for sale at the Offering price to directors, officers and employees of
the Company and to certain other persons.

The Selling Stockholder (if the over-allotment option is not exercised in
full) and the Company have each agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, or any security convertible
into or exercisable for shares of Common Stock, for a period of 180 days after
the date of this Prospectus without the prior written consent of the
Representative.

The Selling Stockholder has granted to the Underwriters an option,
exercisable not later than 30 days after the date of this Prospectus, to
purchase up to additional 3,250,000 shares of Common Stock at the Offering price
less the underwriting discounts and commissions set forth on the cover page of
this Prospectus. To the extent that the Underwriters exercise such option, each
of the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to 3,250,000 and the Selling
Stockholder will be obligated, pursuant to the option, to sell such shares to
the Underwriters. The Underwriters may exercise such option in whole or in part
only to cover over-allotments made in connection with the sale of Common Stock
offered hereby. If purchased, the Underwriters will offer such additional shares
on the same terms as those on which the 21,750,000 shares are being offered.

The Representative of the Underwriters has advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.

The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). The Company and the
Selling Stockholder have been advised that in the opinion of the Securities and
Exchange Commission (the "Commission") such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities is asserted
by the Underwriters in connection with the shares of Common Stock offered
hereby, each of the Company and the Selling Stockholder will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of competent jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Selling Stockholder, and in such case
may purchase Common Stock in the open market following completion of the
Offering to cover all or a portion of such short position. The Underwriters may
also cover all or a portion of such short position by exercising the
Underwriters' over-allotment option referred to above. In addition, the
Representative, on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the Offering) for the account of other
Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. The
imposition of a penalty bid might also affect the price of the Common Stock to
the extent that it could discourage resales of the security. Neither the Company
nor any of the Underwriters makes any representation or prediction as to the
direction or magnitude of any effect that the transactions described above may
have on the price of the Common Stock. In addition, neither the Company nor any
of the

63
<PAGE> 64

Underwriters makes any representation that the Representative will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.

Prior to this Offering, there has been no established public trading market
for the Common Stock. The initial public offering price will be determined by
negotiation between the Selling Stockholder and the Underwriters. Among the
factors to be considered in determining the initial public offering price will
be prevailing market and economic conditions, revenues and earnings of the
Company, market valuations of other companies engaged in activities similar to
the Company, estimates of the business potential and prospects of the Company,
the present state of the Company's business operations, the Company's management
and other factors deemed relevant.

The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "LBFC." There can be no assurance, however, that the
Company will be able to maintain the inclusion of the Common Stock in the Nasdaq
National Market or that an active trading market will develop.

LEGAL MATTERS

Certain legal matters will be passed upon for the Company by Gibson, Dunn &
Crutcher LLP, Orange County, California. Certain legal matters will be passed
upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Newport Beach,
California.

EXPERTS

The statement of financial condition of Long Beach Financial Corporation as
of February 14, 1997 included in this Prospectus, has been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein,
and is included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.

The financial statements of Long Beach Mortgage Company Broker-Sourced Loan
Division as of December 31, 1995 and 1996 and for each of the three years in the
period ended December 31, 1996 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.

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 (File No. 333-22013) under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and the Common Stock,
reference is hereby made to such Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or other document are not necessarily complete and, in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. Copies of the Registration Statement, including
all exhibits thereto, can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission located at 500 West
Madison Street, Room 1400, Chicago, Illinois 60606 and at 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission,
including the Company. The address of the Commission's website is
http://www.sec.gov.

The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by the Company's independent auditors as well as quarterly reports for
the first three fiscal quarters of each fiscal year containing unaudited
consolidated condensed financial statements.

64
<PAGE> 65

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
------
<S> <C>
LONG BEACH FINANCIAL CORPORATION:
Independent Auditors' Report......................................................... F-2
Consolidated Statement of Financial Condition as of February 14, 1997................ F-3
Notes to Consolidated Financial Statement............................................ F-4

LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION:
Independent Auditors' Report......................................................... F-6
Statements of Financial Condition as of December 31, 1995 and 1996................... F-7
Statements of Operations for each of the three years in the period ended December 31,
1996............................................................................... F-8
Statements of Divisional Equity (Deficit) for each of the three years in the period
ended December 31, 1996............................................................ F-9
Statements of Cash Flows for each of the three years in the period ended December 31,
1996............................................................................... F-10
Notes to Financial Statements........................................................ F-11
</TABLE>

F-1
<PAGE> 66

INDEPENDENT AUDITORS' REPORT

To the Stockholder of
Long Beach Financial Corporation:

We have audited the accompanying consolidated statement of financial
condition of Long Beach Financial Corporation and subsidiary (the "Company") as
of February 14, 1997. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement 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 statement of financial condition is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of financial condition.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall statement of
financial condition presentation. We believe that our audit of the statement of
financial condition provides a reasonable basis for our opinion.

In our opinion, such consolidated statement of financial condition presents
fairly, in all material respects, the financial position of Long Beach Financial
Corporation and subsidiary as of February 14, 1997, in conformity with generally
accepted accounting principles.

DELOITTE & TOUCHE LLP

Costa Mesa, California
February 14, 1997

F-2
<PAGE> 67

LONG BEACH FINANCIAL CORPORATION

CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

AS OF FEBRUARY 14, 1997

<TABLE>
<S> <C>
ASSETS
Cash.............................................................................. $520,000
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Stockholder's equity:
Preferred stock, $.001 par value;
25,000,000 shares authorized; no shares outstanding.......................... --
Common stock, $.001 par value; 150,000,000 shares authorized;
one share issued and outstanding............................................. --
Additional paid in capital...................................................... $520,000
---------
Total stockholder's equity.............................................. $520,000
========
</TABLE>

See notes to consolidated financial statement.

F-3
<PAGE> 68

LONG BEACH FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF FEBRUARY 14, 1997

1. GENERAL

Long Beach Financial Corporation ("LBFC") was formed by Long Beach Mortgage
Company ("Old Long Beach") to be a holding company whose assets will
substantially consist of certain of the assets of Old Long Beach's
broker-sourced mortgage lending and loan sales operations. The financial
statements of LBFC include its wholly owned subsidiary Ameriquest Mortgage
Corporation.

Old Long Beach is reorganizing its business operations (the
"Reorganization") by transferring certain assets (including independent broker
lists, office leases, furniture, leasehold improvements and equipment) and
personnel related to the broker-sourced mortgage lending and loan sales
operations of Old Long Beach and approximately $40 million in cash to LBFC, in
exchange for 25,000,000 shares of common stock for the purpose of selling
certain shares of LBFC in an initial public offering (the "Offering"). The
assets being transferred to LBFC include loans in process as of the time of the
Reorganization but do not include loans funded prior to the Reorganization or
servicing rights with respect to loans funded prior to the Reorganization. LBFC
will have no interest in Old Long Beach's direct-sourced mortgage lending or
loan servicing operations, which are being retained by Old Long Beach after the
Reorganization. In the Reorganization, LBFC is acquiring the right to the "Long
Beach Mortgage Company" name and Old Long Beach will no longer use the name in
its business. LBFC will then contribute such assets to its subsidiary,
Ameriquest Mortgage Corporation, which is licensed to perform mortgage banking
activities. As part of the Reorganization, Ameriquest Mortgage Corporation will
change its name to Long Beach Mortgage Company. LBFC is not assuming any of the
liabilities of Old Long Beach that may have arisen out of Old Long Beach's
lending or loan servicing activities prior to the Reorganization other than
certain liabilities relating to the assets or personnel being transferred. A
condition precedent to effecting the Reorganization is the establishment by LBFC
of an independent warehouse financing facility for its broker-sourced
operations.

The acquisition will be accounted for similar to a pooling of interests.
The consolidated financial position and consolidated results of operations of
LBFC will consist substantially of the certain assets of Old Long Beach's
broker-sourced loan division as described above.

As a result of the Offering, the tax basis (for income tax purposes) of the
assets transferred from Old Long Beach to LBFC in the Reorganization will be
increased, in the hands of LBFC, to their fair market value (determined by
reference to the initial public offering price). Such tax basis is generally
expected to produce a tax benefit to LBFC in future tax years through
depreciation or amortization deductions or through decreased gain or (subject to
certain limitations) increased loss on a disposition of any LBFC asset. However,
the "anti-churning" rules under Section 197 of the Internal Revenue Code of
1986, as amended (the "Code"), (generally applicable to the sale or transfer of
certain types of intangible assets between related parties), might apply to
disallow such amortization with respect to certain intangible assets of LBFC.

Pursuant to the requirements of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", LBFC will record a deferred tax
asset (with a corresponding credit to additional paid in capital) for the tax
effect of the excess of the tax basis of LBFC's assets following the Offering
over their net book value. Solely for financial accounting and reporting
purposes, such tax basis will be reduced to take into account management's
assessment of the possible application of the "anti-churning" rules under
Section 197 of the Code. Adjustments of the net deferred tax asset attributable
to the resolution of the uncertainties associated with provisions of the Code
will be charged against or credited to additional paid in capital.

F-4
<PAGE> 69

2. AGREEMENTS WITH RELATED PARTIES

Administrative Services -- In connection with the Reorganization, LBFC and
Old Long Beach are entering into an administrative services agreement under
which Old Long Beach will continue to provide various services to LBFC,
including certain employee benefits administration, finance and accounting
technical support, information services and data processing functions. Any
failure by Old Long Beach to provide such administrative services to LBFC during
the term of the administrative services agreement could have a material adverse
effect on LBFC's results of operations and financial condition.

In addition, LBFC and Old Long Beach are entering into a second
administrative services agreement pursuant to which LBFC will perform all
functions necessary on behalf of Old Long Beach to sell the mortgage loans
originated by Old Long Beach. Once Old Long Beach develops such internal
capability, Old Long Beach will terminate such agreement.

Loan Subservicing -- In connection with the Reorganization, LBFC and Old
Long Beach are entering into a loan sub-servicing agreement (the "Loan
Sub-Servicing Agreement") pursuant to which a division of Old Long Beach will
sub-service mortgage loans originated or purchased by LBFC after the
Reorganization.

Income Taxes -- In connection with the Reorganization, Old Long Beach and
Long Beach Financial Services Company, the sole stockholder of Old Long Beach,
have agreed to indemnify and hold LBFC harmless from any tax liability
attributable to periods ending on or before the consummation of the Offering.
For periods ending after the consummation of the Offering, LBFC will pay its tax
liability directly to the appropriate taxing authorities.

These agreements have been developed in the context of a parent/subsidiary
relationship and therefore are not the result of arm's length negotiations
between independent parties.

F-5
<PAGE> 70

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholder of
Long Beach Mortgage Company:

We have audited the accompanying statements of financial condition of Long
Beach Mortgage Company Broker-Sourced Loan Division (the "Company") as of
December 31, 1995 and 1996, and the related statements of operations, divisional
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Long Beach Mortgage Company Broker-Sourced
Loan Division as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

As more fully described in Notes 1 and 3, the Company is part of Long Beach
Mortgage Company ("Old Long Beach") and had no separate legal status or
existence through December 31, 1996. The Company had various transactions with
Old Long Beach, including various expense allocations and reimbursements, that
are material in amount. The financial statements of the Company have been
prepared from the records of Old Long Beach and may not necessarily be
indicative of the conditions that would have existed if the Company had operated
as an independent entity.

As described in Note 2, on January 1, 1995, the Company adopted Statement
of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights."

DELOITTE & TOUCHE LLP

Costa Mesa, California
February 16, 1997

F-6
<PAGE> 71

LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION

STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 1995 AND 1996

ASSETS

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Loans held for sale (Note 5)...................................... $21,342,000 $49,580,000
Receivable from sales of loans (Note 2)........................... 25,103,000
Premises and equipment, net (Notes 4 and 6)....................... 1,826,000 2,033,000
Deferred income taxes (Note 7).................................... 882,000 2,120,000
Prepaid expenses and other assets................................. 728,000 914,000
----------- -----------
Total assets............................................ $24,778,000 $79,750,000
=========== ===========

LIABILITIES AND DIVISIONAL EQUITY
Liabilities:
Warehouse financing facility (Note 5)............................. $20,613,000 $72,829,000
Accounts payable and accrued liabilities (Note 6)................. 2,433,000 5,784,000
----------- -----------
Total liabilities....................................... 23,046,000 78,613,000

Commitments and contingencies (Note 6)

Divisional equity................................................. 1,732,000 1,137,000
----------- -----------
Total liabilities and divisional equity................. $24,778,000 $79,750,000
=========== ===========
</TABLE>

See notes to financial statements.

F-7
<PAGE> 72

LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION

STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Gain on sales of loans.............................. $21,668,000 $31,691,000 $50,699,000
Interest income..................................... 2,510,000 2,494,000 3,275,000
----------- ----------- -----------
Total revenues............................ 24,178,000 34,185,000 53,974,000

EXPENSES:
Compensation and employee benefits.................. 15,496,000 13,564,000 22,299,000
Rent and other occupancy costs (Note 6)............. 2,565,000 3,258,000 4,188,000
Office supplies and courier service................. 712,000 816,000 1,903,000
Depreciation........................................ 281,000 667,000 1,025,000
Legal and professional.............................. 1,443,000 1,082,000 1,828,000
Interest (Notes 3 and 5)............................ 1,814,000 2,312,000 2,814,000
Other (Note 6)...................................... 1,831,000 2,525,000 3,945,000
----------- ----------- -----------
Total expenses............................ 24,142,000 24,224,000 38,002,000
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES............ 36,000 9,961,000 15,972,000
PROVISION FOR INCOME TAXES (Note 7)................. 14,000 4,169,000 6,580,000
----------- ----------- -----------
NET INCOME.......................................... $ 22,000 $ 5,792,000 $ 9,392,000
=========== =========== ===========
</TABLE>

See notes to financial statements.

F-8
<PAGE> 73

LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION

STATEMENTS OF DIVISIONAL EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996

<TABLE>
<S> <C>
BALANCE, January 1, 1994........................................................ $ (127,000)
Net change in divisional deficit arising from intracompany transactions (Note
3)............................................................................ (757,000)
Net income...................................................................... 22,000
-----------
BALANCE, December 31, 1994...................................................... (862,000)
Net change in divisional equity arising from intracompany transactions (Note
3)............................................................................ (3,198,000)
Net income...................................................................... 5,792,000
-----------
BALANCE, December 31, 1995...................................................... 1,732,000
Net change in divisional equity arising from intracompany transactions (Note
3)............................................................................ (9,987,000)
Net income...................................................................... 9,392,000
-----------
BALANCE, December 31, 1996...................................................... $ 1,137,000
===========
</TABLE>

See notes to financial statements.

F-9
<PAGE> 74

LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION

STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 22,000 $ 5,792,000 $ 9,392,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization of premises,
equipment and warehouse financing facility
issuance costs............................... 354,000 900,000 1,270,000
Loans originated and purchased for sale........ (565,547,000) (592,542,000) (1,058,122,000)
Proceeds from sales of loans held for sale..... 562,054,000 580,366,000 1,029,789,000
Noncash gain recognized on capitalization of
mortgage servicing rights.................... -- (4,144,000) (9,225,000)
Proceeds from mortgage servicing rights
transferred to Old Long Beach................ -- 4,144,000 9,225,000
Principal repayments and other changes in loans
held for sale................................ 3,079,000 1,198,000 95,000
Changes in:
Receivable from sales of loans............... -- -- (25,103,000)
Deferred income taxes........................ -- (882,000) (1,238,000)
Prepaid expenses and other assets............ 153,000 (333,000) (186,000)
Accounts payable and accrued liabilities..... 876,000 523,000 3,351,000
------------- ------------- ---------------
Net cash provided by (used in) operating
activities............................ 991,000 (4,978,000) (40,752,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of premises and equipment............... (1,663,000) (721,000) (1,232,000)
------------- ------------- ---------------
Net cash used in investing activities... (1,663,000) (721,000) (1,232,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in warehouse financing facility....... 11,410,000 8,897,000 51,971,000
Net change in warehouse financing from Old Long
Beach.......................................... (9,981,000) -- --
Cash provided to Old Long Beach.................. (757,000) (3,198,000) (9,987,000)
------------- ------------- ---------------
Net cash provided by financing
activities............................ 672,000 5,699,000 41,984,000
------------- ------------- ---------------
NET INCREASE (DECREASE) IN CASH.................. -- -- --
CASH, beginning of year.......................... -- -- --
------------- ------------- ---------------
CASH, end of year................................ $ -- $ -- $ --
============= ============= ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION --
Cash paid during the year for:
Interest on warehouse financing facility..... $ 350,000 $ 1,581,000 $ 2,569,000
============= ============= ===============
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Transfer of loans to real estate acquired
through foreclosure.......................... $ 168,000 $ -- $ --
============= ============= ===============
</TABLE>

F-10
<PAGE> 75

LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Long Beach Mortgage Company Broker-Sourced Loan Division (the "Company") is
engaged in the business of originating, purchasing and selling sub-prime
residential mortgage loans secured by one-to-four family residences. The Company
originates loans primarily through independent mortgage loan brokers. The
Company's core borrower base consists of individuals who do not qualify for
traditional "A" credit because their credit history, income or other factors
cause them not to conform to standard agency lending criteria.

The Company follows a strategy of selling substantially all of it loan
originations (while retaining the related servicing rights in most cases) in the
secondary market through loan sales. Prior to originating loans, the Company
generally obtains a purchase commitment with respect to such loans from a loan
purchaser, thereby assuring a buyer for the loans once they are funded.

The Company had no separate legal status or existence through December 31,
1996 and operated as a division of Long Beach Mortgage Company ("Old Long
Beach"). In the normal course of business, the Company had various transactions
with other divisions of Old Long Beach that are material in amount. The
accompanying financial statements of the Company have been prepared from records
maintained by Old Long Beach. These financial statements also reflect key
assumptions regarding the allocation of certain revenue and expense items and
certain balance sheet accounts, many of which could be material (Note 3). The
accompanying historical financial statements of the Company may not necessarily
be indicative of the conditions that would have existed if the Company had
operated as an independent entity.

Prior to 1994, Old Long Beach operated as a federally-insured thrift
institution (then known as Long Beach Bank, F.S.B.). Long Beach Bank, F.S.B.
ceased operations and voluntarily surrendered its federal thrift charter in
October 1994 and transferred its broker-sourced business, along with its
direct-sourced business and loan servicing operations, to Old Long Beach, a then
newly formed entity, which has been operating under the name "Long Beach
Mortgage Company."

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Loans Held for Sale -- Loans held for sale are carried at the lower of
aggregate cost or market value. Loan origination fees and related direct
origination costs are deferred until the related loan is sold. Market value is
determined by outstanding commitments from investors, if any, or current
investor yield requirements on the aggregate basis.

Mortgage Servicing Rights -- Effective January 1, 1995, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for
Mortgage Servicing Rights," which requires that upon sale of servicing retained
mortgages, companies capitalize the cost associated with the right to service
mortgage loans based on their relative fair values. Retroactive implementation
of SFAS No. 122 was not permitted. The impact of adopting SFAS No. 122 was an
increase in pretax income of $4.1 million for the

F-11
<PAGE> 76

LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996

year ended December 31, 1995. The Company capitalized $9.2 million in mortgage
servicing rights during the year ended December 31, 1996. The Company determines
fair value based on the present value of estimated net future cash flows related
to servicing income.

During 1995 and 1996, immediately after sale of the loans, the Company
transferred the servicing rights to an affiliated division of Old Long Beach at
their carrying value. If, in the future, the Company retains the mortgage
servicing rights asset, the cost allocated to the servicing rights will be
amortized in proportion to and over the period of estimated net future servicing
fee income. Such servicing rights will be reviewed periodically for impairment
which would be recognized in a valuation allowance for such pool in the period
of impairment.

Receivable from Sales of Loans -- Receivable from sales of loans represents
proceeds due from certain sales transactions which closed in December 1996. All
amounts due to the Company were collected by January 10, 1997.

Premises and Equipment -- Premises and equipment are stated at cost and
depreciated over the estimated useful lives of the assets using the
straight-line method. Leasehold improvements are amortized on the straight-line
method over the lesser of the useful lives of the assets or the terms of the
related leases. Useful lives generally range from three to five years.

Income Taxes -- The Company accounts for taxes under SFAS No. 109,
"Accounting for Income Taxes," which requires an asset and liability approach to
financial accounting for income taxes. Deferred tax assets arise from temporary
differences on which the Company has paid income taxes or recognized income tax
benefits that will be realized as a reduction of future tax liabilities. The
income tax provision has been computed as if the Company filed "separate
company" federal and state tax returns.

Divisional Equity -- Divisional equity represents cumulative net income
(loss), net of allocations of costs and expenses incurred by the Company and
paid by Old Long Beach, and cash generated by the Company and collected by Old
Long Beach. The net change in divisional equity (deficit) arising from
intracompany transactions as presented in the accompanying Statements of
Divisional Equity (Deficit) represent cash provided to Old Long Beach as
reflected in the accompanying Statements of Cash Flows.

Revenue Recognition -- Gain on sales of loans, representing the difference
between the total sales price received for the loans and the net carrying amount
of the loan, is recognized when mortgage loans are sold and delivered to the
purchasers.

Interest income is recorded as earned. Interest income represents the
interest earned on loans during the warehousing period (the period prior to
their sale).

Use of Estimates in the Preparation of Financial Statements -- The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
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 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 Company will not adopt the accounting method in SFAS No. 123 with
respect to future stock incentive plans and will account for such plans in
accordance with Accounting Principles Board Opinion No. 25.

F-12
<PAGE> 77

LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996

Recent Accounting Developments -- In June 1996 the FASB issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which was amended by SFAS No. 127. This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. Many of these assets and liabilities
are components of financial assets that existed prior to the transfer. If a
transfer does not meet the criteria for a sale, the transfer is accounted for as
a secured borrowing with pledge of collateral. The Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. Retroactive application of this Statement is
not permitted. The Company does not anticipate that the implementation of SFAS
No. 125 will have a material impact on its results of operations or financial
condition.

3. ASSUMPTIONS RELATED TO HISTORICAL FINANCIAL STATEMENTS OF THE COMPANY

The accompanying financial statements reflect the assets, liabilities,
revenues and expenses that were directly related to the continuing operations of
the Company as they were operated by Old Long Beach. Old Long Beach's historical
cost basis of the assets and liabilities has been carried over to the Company.
In cases involving assets, liabilities, revenues and expenses not specifically
identifiable to any particular division of Old Long Beach, certain allocations
were made to reflect the operations of the Company. Allocations have been made
for, among other things, accounting, information services, legal, compliance,
and other executive and administrative services. These allocations were based on
a variety of factors which take into consideration the loan origination volume,
employee head count, and historical ratios of direct expenses incurred by the
divisions to total direct expenses. Management believes these allocations
provide a reliable basis for the accompanying financial statements, which are
also based on the following assumptions:

1. No cash balances are recorded as part of these historical financial
statements as it was the practice of Old Long Beach not to maintain
separate cash balances for the various divisions.

2. The net change in divisional equity (deficit) arising from
intracompany transactions, as reflected in the statements of divisional
equity (deficit) includes, (i) the aggregate intracompany allocations of
costs and expenses incurred by the Company and paid by Old Long Beach, (ii)
cash generated by the Company and collected by Old Long Beach during the
periods presented and (iii) cash advanced by Old Long Beach on behalf of
the Company. The net change in divisional equity (deficit) arising from
intracompany transactions also includes all liabilities of the Company,
such as income taxes payable, that are not separate legal obligations of
the Company but have been charged to the Company.

3. Prior to October 1994, when Long Beach Bank, F.S.B. ceased
operations and Old Long Beach commenced operations as a mortgage banking
company with the concurrent establishment of the warehouse financing
facility (see Note 5), interest expense was recorded as if Old Long Beach
provided warehouse financing bearing interest at a rate equal to its
internal cost of funds.

The cash generated by the Company and collected by Old Long Beach consisted
primarily of proceeds from the sales of loans of $562.1 million, $580.4 million
and $1.0 billion for the years ended December 31, 1994, 1995, and 1996,
respectively. Advances by Old Long Beach on behalf of the Company consisted
primarily of the cash used to pay operating expenses and fund loans. Also, Old
Long Beach allocated a portion of the net borrowings under its warehouse
financing facility to the Company. Cash used to fund loans was $565.5 million,
$592.5 million and $1.1 billion for the years ended December 31, 1994, 1995 and
1996, respectively.

F-13
<PAGE> 78

LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996

Total costs allocated to the Company by Old Long Beach for the years ended
December 31, 1994, 1995 and 1996 were $9.7 million, $7.0 million and $8.9
million, respectively. While the Company believes that the expenses reflected in
the accompanying statements of operations would not have been materially
affected if it had operated as a stand alone entity, no assurance can be given
that such expenses are indicative of expenses to be incurred in the future.

4. PREMISES AND EQUIPMENT

Premises and equipment at December 31 consists of the following:

<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Furniture and equipment............................ $2,789,000 $ 2,947,000
Leasehold improvements............................. -- 149,000
---------- -----------
2,789,000 3,096,000
Less accumulated depreciation and amortization..... (963,000) (1,063,000)
---------- -----------
$1,826,000 $ 2,033,000
========== ===========
</TABLE>

5. WAREHOUSE FINANCING FACILITY

The Company shares the use of an Old Long Beach warehouse financing
facility funded by a national banking association and a syndicate of lenders.
This facility commenced in October 1994 when Old Long Beach voluntarily
surrendered its thrift charter. The facility which the Company utilizes, along
with other divisions of Old Long Beach, provides for a borrowing capacity of
$300 million. The facility expires on May 31, 1997 and is collateralized by
loans held for sale and advances to investors. The facility bears interest at a
fixed rate, a rate based on the London Interbank Offered Rate ("LIBOR") for U.S.
dollar deposits, or a combination of the two, at the option of Old Long Beach.

The following table presents data on the warehouse financing facility of
Old Long Beach for the years ended December 31:

<TABLE>
<CAPTION>
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Weighted average interest rate for the
period.................................. 7.49% 7.77% 7.28%
Weighted average interest rate at the end
of the period........................... 7.90% 7.51% 7.25%
Weighted average amount outstanding for
the period.............................. $53,223,000 $ 78,588,000 $ 97,714,000
Maximum amount outstanding at any
month-end............................... $78,747,000 $108,735,000 $170,102,000
</TABLE>

Because this facility will not be available to the Company after the
Reorganization and Offering, the Company is in negotiations to establish an
independent line of credit for the exclusive use of Company operations. The
Company believes that it will establish this new facility with adequate
borrowing capacity and terms similar to those of the existing facility described
above. The establishment of such a facility is a condition precedent to
effecting the Reorganization.

The Company was allocated capitalized warehouse financing issuance costs of
$352,000, $34,000 and $165,000 for the years ended December 31, 1994, 1995 and
1996, respectively. The Company recorded interest expense related to the
amortization of warehouse financing issuance costs of $73,000, $233,000 and
$245,000 for the years ended December 31, 1994, 1995 and 1996, respectively. At
December 31, 1995, the unamortized warehouse financing issuance cost was
$80,000. There were no unamortized warehouse financing issuance costs at
December 31, 1996.

F-14
<PAGE> 79

LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996

6. COMMITMENTS, CONTINGENCIES, CONCENTRATIONS OF RISK AND RELATED PARTY
TRANSACTIONS

COMMITMENTS

The Company's operations are conducted from leased facilities located in
various areas of the United States. These leases have clauses which provide for
increases in rent based on increases in the cost of living index and options for
renewal. Rental expense for the years ended December 31, 1994, 1995 and 1996 was
$840,000, $1,290,000 and $1,394,000, respectively. The future minimum lease
payments are as follows:

<TABLE>
<S> <C>
Year ending December 31:
1997......................................................... $ 897,000
1998......................................................... 682,000
1999......................................................... 577,000
2000......................................................... 509,000
2001......................................................... 223,000
Thereafter................................................... --
----------
$2,888,000
==========
</TABLE>

The following table sets forth the minimum lease payments related to the
Company's capital lease obligations of certain furniture and equipment as of
December 31, 1996:

<TABLE>
<S> <C>
Year ending December 31:
1997.......................................................... $120,500
1998.......................................................... 120,500
1999.......................................................... 120,500
2000.......................................................... 120,500
2001.......................................................... 65,000
--------
547,000
Less amounts representing interest.............................. (92,000)
--------
Capital lease obligations as of December 31, 1996............... $455,000
========
</TABLE>

The capital lease obligations are included in accrued liabilities in the
accompanying statement of financial condition. As of December 31, 1996, the net
book value of furniture and equipment under capital lease was $447,000. The
Company did not have any capital lease obligations as of December 31, 1995.

In the ordinary course of business, the Company has liability under
representations and warranties made to purchasers and insurers of mortgage
loans. Under certain circumstances, the Company may become liable for the unpaid
principal and interest on defaulted loans or other loans if there has been a
breach of representation or warranties.

The Company is 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 primarily represent commitments to fund and sell
loans. These instruments involve, to varying degrees, elements of interest rate
risk and credit risk in excess of the amount recognized in the statement of
financial condition. The credit risk is mitigated by the Company's evaluation of
the creditworthiness of potential borrowers on a case-by-case basis.

F-15
<PAGE> 80

LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996

Commitments to fund and sell loans generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Also, external
market forces impact the probability of commitments being exercised; therefore,
total commitments outstanding do not necessarily represent future cash
requirements.

The Company had commitments to fund loans of $107.7 million and $165.4
million at December 31, 1995 and 1996, respectively. The Company had no loan
purchase commitments outstanding at December 31, 1995. The Company's loan
purchase commitments totaled $7.0 million at December 31, 1996. Old Long Beach
had loan sale commitments of $293.0 million at December 31, 1995. Old Long Beach
has entered into forward loan sale contracts under which it has committed to
deliver $720.0 million loans that will be originated prior to April 1, 1997. The
Company will sell any such loans to Old Long Beach at the same price that Old
Long Beach has committed to sell such loans to its loan purchaser in order to
enable Old Long Beach to fulfill this commitment. The Company expects that loans
originated by the Company on or after April 1, 1997 will be sold by it pursuant
to loan sales contracts entered into directly with the purchasers.

CONTINGENCIES

In September 1996, Old Long Beach entered into a settlement agreement with
the U.S. Department of Justice ("DOJ") arising out of a DOJ investigation and
complaint which alleged that Long Beach Bank, F.S.B. during the period from
January 1991 through June 1994 charged certain African-American, Hispanic,
female and older borrowers more than younger, white male borrowers in violation
of fair lending laws. Old Long Beach denied all allegations in the complaint and
all claims of discrimination. Old Long Beach also disputed the validity of the
statistical analysis relied upon by the DOJ as the principal basis for its
claims and further maintained that the DOJ theories of liability regarding
broker-sourced lending were legally unsupportable. Nonetheless, to avoid costly,
protracted litigation, Old Long Beach agreed to establish a $3 million fund to
reimburse up to 1,200 borrowers identified by the DOJ as the maximum number of
individuals who may have been affected by the alleged fair lending violations.
Old Long Beach asserted that the better solution to the issued raised by the DOJ
was an intensive national effort in consumer education and industry-wide
initiatives directed at employee and broker education and training. For this
reason, Old Long Beach also agreed to contribute an additional $1 million
(payable over 3 years) to fund consumer education programs in conjunction with
civil rights groups. Old Long Beach has established all funds required by the
settlement agreement.

The DOJ settlement, which is binding upon the Company as a successor to Old
Long Beach, provides that the Company will (i) document any price exceptions
from the Company's rate sheet on broker-sourced loans, (ii) periodically review
the results of its broker-sourced lending operations for its compliance with
fair lending laws but in no event shall the Company be required to disclose any
documents or information therewith, including the identities of any brokers with
whom it does business, (iii) retain all loan application files submitted for
mortgage loans and all loan-rider documents and notices relevant to any pricing
decisions until September 1999 and report to the DOJ semi-annually on compliance
with the settlement agreement and (iv) provide to brokers information about the
Company's fair-lending and pricing procedures and an opportunity to participate
in fair-lending training.

While the Company believes it is in compliance with the broker-sourced
provisions of the settlement agreement, there can be no assurance that the DOJ
will not take a contrary position in the future and seek to compel compliance by
the Company. The Company was allocated $267,000 and $1,065,000 in 1995 and 1996,
respectively, of the settlement costs on the basis of the portion of the
settlement pertaining to broker-sourced loans, as stipulated in the settlement
agreement, which is included in other expenses in the accompanying statement of
operations.

When the Company operated as a division of Old Long Beach, it was involved
in various lawsuits incidental to its business, none of which had a material
adverse effect on the Company. However, in the

F-16
<PAGE> 81

LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996

Reorganization, the Company is not assuming any liabilities that may arise out
of any lending activities of Old Long Beach prior to the Reorganization, other
than certain liabilities relating to the assets or personnel being transferred,
including liabilities related to the broker-sourced mortgage loan operations,
nor is the Company indemnifying Old Long Beach against any such liabilities. As
such, the Company is not involved currently in any litigation.

CONCENTRATIONS OF RISK

The Company funds substantially all of the loans which it originates or
purchases through borrowings under the warehouse financing facility (see Note
5). These borrowings are in turn repaid with the proceeds received by the
Company from selling such loans. Because this facility will not be available to
the Company after the Reorganization and Offering, any failure to obtain
adequate funding under new borrowing facilities or any substantial reduction in
the size of or pricing in the markets for the Company's loans, could have a
material adverse effect on the Company's results of operations and financial
condition. To the extent that the Company is not successful in replacing
existing financing, it would have to curtail its loan production activities,
thereby having a material adverse effect on the Company's results of operations
and financial condition.

The Company began originating sub-prime mortgage loans in southern
California in 1988 and started to expand its business outside California on a
limited basis in 1992. In 1994, the Company began to focus its attention on more
aggressive expansion outside California. For the year ended December 31, 1996,
approximately 37.1% of the dollar volume of loans originated or purchased by the
Company were secured by properties located in California. No other state
contained properties securing more than 10% of the dollar volume of loans
originated or purchased by the Company during the year ended December 31, 1996.
Although the Company has a nationwide independent broker network and regional
processing center network, the Company is likely to continue to have a
significant amount of its loan originations and purchases in California for the
foreseeable future, primarily because California represents a significant
portion of the national mortgage marketplace. Consequently, the Company's
results of operations and financial condition are dependent upon the general
trends in the California economy and its residential real estate market.
Residential real estate market declines may adversely affect the values of
properties securing loans such that the principal balances of such loans will
equal or exceed the value of the mortgaged properties. Reduced collateral value
will adversely affect the volume of the Company's loans as well as the pricing
of the Company's loans and the Company's ability to sell its loans.

The Company focuses its marketing efforts on borrowers who may be unable to
obtain mortgage financing from conventional mortgage sources. Loans made to such
borrowers may entail a higher risk of delinquency and higher losses than loans
made to borrowers who utilize conventional mortgage sources. Accordingly, the
actual rates of delinquencies, foreclosures and losses on such loans could be
higher under adverse economic conditions than those currently experienced by the
mortgage lending industry in general. Any sustained period of increased
delinquencies, foreclosures or losses after the loans are sold could adversely
affect the pricing of the Company's loan sales and the ability of the Company to
sell its loans.

F-17
<PAGE> 82

LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996

The Company has historically sold substantially all of its loan
originations in the secondary market to a limited number of institutional
purchasers. There can be no assurance that such purchasers of the Company's
loans will continue to purchase loans or be willing to purchase loans under
terms which such purchasers have historically purchased the Company's loans. To
the extent that the Company could not successfully replace such loan purchasers
or negotiate favorable terms for such loan purchasers, the Company's results of
operations and financial condition could be materially adversely affected.

The Company depends largely on independent mortgage brokers, and to a
lesser extent, smaller mortgage companies and commercial banks for its
originations and purchases of loans. The Company's competitors also seek to
establish relationships with such independent mortgage brokers, mortgage
companies and commercial banks, none of whom is obligated by contract or
otherwise to continue to do business with the Company. The Company's future
operating and financial results may be more susceptible to fluctuations in the
volume and costs of its broker-sourced loans resulting from, among other things,
competition from other purchasers of such loans.

The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on a substantial portion of its operations. These rules and
regulations, among other things, impose licensing obligations on the Company,
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
recission 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.

Lawsuits have been filed against several mortgage lenders, including Old
Long Beach, alleging that 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 Company's broker compensation
programs permit such payments. Although the Company 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 Company to
change its broker compensation practices. Such a change may have a material
adverse effect on the Company and the entire mortgage lending industry.

RELATED PARTY TRANSACTIONS

Administrative Services -- In connection with the Reorganization, the
Company and Old Long Beach are entering into an administrative services
agreement under which Old Long Beach will continue to provide various services
to the Company, including certain employee benefits administration, finance and
accounting technical support, information services and data processing
functions. Any failure by Old Long Beach to

F-18
<PAGE> 83

LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996

provide such administrative services to the Company during the term of the
administrative services agreement could have a material adverse effect on the
Company's results of operations and financial condition.

In addition, the Company and Old Long Beach are entering into a second
administrative services agreement pursuant to which the Company will perform all
functions necessary on behalf of Old Long Beach to sell the mortgage loans
originated by Old Long Beach. Once Old Long Beach develops such internal
capability, Old Long Beach will terminate such agreement.

Loan Sub-Servicing -- In connection with the Reorganization, the Company
and Old Long Beach are entering into a loan sub-servicing agreement pursuant to
which a division of Old Long Beach will sub-service mortgage loans originated or
purchased by the Company after the Reorganization.

Income Taxes -- In connection with the Reorganization, Old Long Beach and
Long Beach Financial Services Company, the sole stockholder of Old Long Beach,
have agreed to indemnify and hold the Company harmless from any tax liability
attributable to periods ending on or before the consummation of the Offering.
For periods ending after the consummation of the Offering, the Company will pay
its tax liability directly to the appropriate taxing authorities.

The above-described agreements have been developed in the context of a
parent/subsidiary relationship and therefore are not the result of arm's length
negotiations between independent parties.

7. INCOME TAXES

The income tax provision (benefit) consists of the following:

<TABLE>
<CAPTION>
1994 1995 1996
--------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal..................................... $ 189,000 $3,606,000 $ 5,895,000
State....................................... 1,000 1,125,000 1,923,000
--------- ----------- -----------
190,000 4,731,000 7,818,000
--------- ----------- -----------
Deferred:
Federal..................................... (195,000) (562,000) (1,135,000)
State....................................... 19,000 (103,000)
--------- ----------- -----------
(176,000) (562,000) (1,238,000)
--------- ----------- -----------
$ 14,000 $4,169,000 $ 6,580,000
========= =========== ===========
</TABLE>

Actual income tax rates differed from statutory rates as follows:

<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Federal income taxes at statutory rates................. 35.0% 35.0% 35.0%
California franchise tax, net of federal tax benefit.... 4.0 7.4 7.4

Other................................................... (.1) (0.5) (1.2)
---- ---- ----
38.9% 41.9% 41.2%
==== ==== ====
</TABLE>

F-19
<PAGE> 84

LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996

The components of the net deferred tax assets (liabilities) are as follows:

<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Deferred tax liabilities:

Depreciation.............................................. $(110,000) $ (158,000)
--------- ----------
Deferred tax assets:
Bad debt reserves......................................... -- 164,000
Mark to market adjustment................................. 426,000 998,000
Legal reserves............................................ 183,000 482,000
State taxes............................................... 383,000 634,000
--------- ----------
992,000 2,278,000
--------- ----------
Net deferred tax asset...................................... $ 882,000 $2,120,000
========= ==========
</TABLE>

8. FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES

The following disclosures of the estimated fair value of the financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosure About Fair Value of Financial Instruments." The estimated fair value
amounts have been determined by the Company 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 Company 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 at
December 31:

<TABLE>
<CAPTION>
1995 1996
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Loans held for sale............ $21,342,000 $22,459,000 $49,580,000 $52,122,000

Liabilities:
Warehouse financing facility... $20,613,000 $20,613,000 $72,829,000 $72,829,000
Off-balance-sheet unrealized gains
(losses):
Loan origination commitments... $ -- $ -- $ -- $ --
</TABLE>

The estimated fair value of loans is based upon quoted market prices.

Warehouse financing facility is valued at par as management believes that
the terms of the warehouse financing facility represent current market rates.

The fair value of loan origination commitments is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties.

The fair value estimates are based on pertinent information available to
management as of December 31, 1995 and 1996. 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-20
<PAGE> 85

LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996

9. EMPLOYEE BENEFIT PLAN

Old Long Beach has a 401(k) defined contribution plan available to
substantially all employees. Employees may generally contribute up to 15% of
qualifying contribution each year; and Old Long Beach, at its discretion, may
match up to the first 6% of qualifying compensation. Employees become vested in
Old Long Beach's contribution at a rate of 25% per year after the second year of
service, with complete vesting after five years. The Company's allocated share
of contribution expense was $144,000, $84,000 and $149,000 in the years ended
December 31, 1994, 1995 and 1996, respectively, based on estimated contribution
levels. The Company determined that it would not contribute for the 1994 plan
year in 1995, and the expense was reversed and recorded as income in that
period.

F-21
<PAGE> 86

======================================================

NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary................................... 3
Risk Factors.............................. 8
Reorganization............................ 16
Dividends................................. 19
Dilution.................................. 19
Capitalization............................ 20
Selected Consolidated Financial Data...... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 22
Business.................................. 29
Unaudited Pro Forma Consolidated Financial
Data.................................... 46
Management................................ 48
Certain Relationships and Related
Transactions............................ 55
Beneficial Ownership of Securities and
Selling Stockholder..................... 58
Description of Capital Stock.............. 59
Shares Eligible for Future Sale........... 61
Underwriting.............................. 62
Legal Matters............................. 64
Experts................................... 64
Available Information..................... 64
Index to Financial Statements............. F-1
</TABLE>

UNTIL MAY 23, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

======================================================

21,750,000 SHARES

LONG BEACH FINANCIAL
CORPORATION
COMMON STOCK
-----------------
PROSPECTUS
-----------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
APRIL 28, 1997
======================================================