-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MJQE7gWRV+xGU8+BB5r2tMVSXSdYo1EuSxB+1JRNlrwGfDlS8WceQ+EowilLIjhn FTiLBCQcrS1Tv2zH+PsjGg== 0001017062-97-000496.txt : 19970328 0001017062-97-000496.hdr.sgml : 19970328 ACCESSION NUMBER: 0001017062-97-000496 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19970327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIFE FINANCIAL CORP CENTRAL INDEX KEY: 0001028918 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-20497 FILM NUMBER: 97564562 BUSINESS ADDRESS: STREET 1: 4110 TIGRIS WAY CITY: RIVERSIDE STATE: CA ZIP: 92503 BUSINESS PHONE: 9098869751 MAIL ADDRESS: STREET 1: 1598 EAST HIGHLAND AVENUE CITY: SAN BERNADINO STATE: CA ZIP: 92404 S-1/A 1 AMENDMENT NO. 1 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 1997 REGISTRATION NO. 333-20497 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- PRE-EFFECTIVE AMENDMENT NO. 1 TO THE FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 ---------------- LIFE FINANCIAL CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CERTIFICATE OF INCORPORATION) ---------------- DELAWARE 6035 APPLIED FOR (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION (IRS EMPLOYER OF INCORPORATION OR ORGANIZATION) CODE NUMBER) IDENTIFICATION NO.)
4115 TIGRIS WAY RIVERSIDE, CALIFORNIA 92503 (800) 448-2265 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- DANIEL L. PERL PRESIDENT AND CHIEF EXECUTIVE OFFICER LIFE FINANCIAL CORP. 4115 TIGRIS WAY RIVERSIDE, CALIFORNIA 92503 (800) 448-2265 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: JOSEPH G. PASSAIC, JR., ESQUIRE PAUL H. IRVING, ESQUIRE MARY M. SJOQUIST, ESQUIRE ALLEN Z. SUSSMAN, ESQUIRE MANATT, PHELPS & PHILLIPS, LLP GEOFFREY W. RYAN, ESQUIRE MULDOON, MURPHY & FAUCETTE 11355 WEST OLYMPIC BOULEVARD 5101 WISCONSIN AVENUE, N.W. LOS ANGELES, CALIFORNIA 90064 WASHINGTON, D.C. 20016 (310) 312-4000 (202) 362-0840
---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION REGISTERED REGISTERED (1) PER SHARE OFFERING PRICE FEE - ------------------------------------------------------------------------------------ Common Stock $.01 par value................. 6,086,716 Shares $12.00 $73,040,592 $22,134(2)
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Includes 3,211,716 shares to be issued in exchange for the 1,070,572 outstanding shares of Common Stock of Life Savings Bank, Federal Savings Bank ("Life Savings"). In accordance with Rule 457(f) of the Securities Act of 1933, as amended, the registration fee has been calculated on the basis of the estimated market value of the number of shares of common stock of Life Savings to be exchanged for shares of Life Financial Corp. (2) $16,601 of the registration fee was previously paid upon the initial filing of the Form S-1. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED MARCH 27, 1997 5,711,716 SHARES [LOGO of LIFE FINANCIAL CORP.] COMMON STOCK Life Financial Corp. (the "Company" or "Life Financial"), a Delaware corporation, is hereby offering (the "Public Offering") 2,500,000 shares of its common stock, par value $.01 per share (the "Common Stock"). In addition, the Company is hereby offering (the "Exchange Share Offering") 3,211,716 shares of its Common Stock in connection with the reorganization of Life Savings Bank, Federal Savings Bank (the "Bank"), as a result of which (i) each outstanding share of the Bank's common stock will be converted into the right to receive three shares of the Common Stock of the Company and (ii) the Bank is expected to become a wholly-owned subsidiary of Life Financial Corp. (the "Reorganization"). The Public Offering and the Exchange Share Offering are collectively referred to herein as the "Offerings." The Company has received conditional approval to have its Common Stock quoted on the National Market System of the Nasdaq Stock Market, subject to notice of issuance, under the symbol "LFCO." It is currently estimated that the price of the Common Stock to be sold in the Public Offering will be between $10.00 and $12.00 per share. The sale of the Common Stock is subject to the approval of the Reorganization by stockholders of the Bank and the Office of Thrift Supervision ("OTS"). ----------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT PAGES 11 TO 17 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH PROSPECTIVE INVESTOR. ----------- THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT FEDERALLY INSURED OR GUARANTEED. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), THE OTS, OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION, THE OTSOR ANY OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING DISCOUNTS PROCEEDS TO THE PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2) - -------------------------------------------------------------------------------- Per Share............... $ $ $ - -------------------------------------------------------------------------------- Total(3)................ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (2) Before deducting expenses of the Offering payable by the Company estimated to be $660,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to 375,000 additional shares of Common Stock solely to cover overallotments, if any. To the extent that the option is exercised, the Underwriters will offer the additional shares of Common Stock at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $ , $ , and $ , respectively. See "Underwriting." The Common Stock offered by the Underwriters in the Public Offering is subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to their right to withdraw, modify, correct and reject orders in whole or in part. It is expected that delivery of the certificates representing such shares of Common Stock will be made against payment therefor at the offices of Friedman, Billings, Ramsey & Co., Inc. ("FBR"), Arlington, Virginia, in book entry form, or through the facilities of the Depository Trust Company on or about April , 1997. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. THE DATE OF THIS PROSPECTUS IS , 1997 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING BIDS AND PURCHASES, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." THE INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO THE REORGANIZATION OF THE BANK, PURSUANT TO WHICH (I) THE BANK'S STOCKHOLDERS WILL BE ENTITLED TO RECEIVE THREE SHARES OF COMMON STOCK OF THE COMPANY IN EXCHANGE FOR EACH SHARE OF COMMON STOCK OF THE BANK AND (II) THE BANK IS EXPECTED TO BECOME A WHOLLY-OWNED SUBSIDIARY OF THE COMPANY. UNLESS OTHERWISE INDICATED, ALL PER SHARE INFORMATION OF THE BANK HAS BEEN ADJUSTED TO REFLECT 3,211,716 SHARES OUTSTANDING, THE MAXIMUM NUMBER OF SHARES OF COMPANY COMMON STOCK PROPOSED TO BE EXCHANGED FOR SHARES OF BANK COMMON STOCK IN THE EXCHANGE SHARE OFFERING. UNLESS OTHERWISE INDICATED ALL REFERENCES TO THE COMPANY SHALL BE DEEMED TO INCLUDE THE COMPANY AND ITS SUBSIDIARIES. THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH UNDER "RISK FACTORS," WHICH WOULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. The Bank originates, purchases, sells and services non-conventional mortgage loans principally secured by first and second mortgages on one- to four-family residences. The Bank focuses on loans for the purchasing or refinancing of residential real property by borrowers who, because of prior credit problems or the absence of a credit history, are considered "sub-prime borrowers." (Such loans are called "Liberator Series" loans and may sometimes hereinafter be referred to as such.) The Bank also originates debt consolidation loans for up to 125% of the appraised value of such loans for borrowers whose credit history qualifies for Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") loans ("Agency Qualified Borrowers"). (Such loans are called "Portfolio Series" loans and may sometimes hereinafter be referred to as such.) The Bank purchases and originates mortgage loans and other real estate secured loans through a network of approved mortgage brokers and correspondents on a nationwide basis, as well as through the Bank's Retail Lending Division. No mortgage broker or correspondent accounted for more than 4.1% of 1996 volume. Since 1994, loans originated or purchased are generally originated for sale in the secondary mortgage market or in asset securitizations. The Bank generally retains the majority of the servicing rights to the loans sold or securitized and may sell servicing rights at a later date depending on market opportunities. In addition, the Bank purchases and originates for resale in the secondary market smaller commercial real estate and multi-family mortgage loans. Management believes that the Bank's competitive strengths include an extensive network of loan brokers with which the Bank has had prior experience and repeat business, its efficient loan processing operations which provide prompt, responsive service, its underwriting process, and a diversified network of investors to which the Bank can sell loans in the secondary mortgage market. Total loan production, including loans purchased and originated, increased from $72.8 million for the year ended December 31, 1994, to $134.8 million for the year ended December 31, 1995, and was $222.6 million for the year ended December 31, 1996. The Bank plans to continue to increase its lending operations through additional loan office expansion, greater penetration in its existing markets and increased correspondent loan acquisitions. During the fourth quarter of 1996, the Bank securitized $51.9 million of loans (the "Securitization"). This was the first loan securitization completed by the Bank, which recorded a gain on sale of approximately $4.3 million. The Company currently contemplates that a significant component of its business strategy will be to generate revenue and net income through future asset securitizations and intends to conduct securitizations at a rate of one per quarter, although there can be no assurance that it will be able to do so successfully. Management believes that securitizations represent an efficient, timely and profitable means of maximizing returns to the Company from its operations. See "Recent Developments," "Risk Factors--Dependence on Asset Securitizations and Impact on Quarterly Operating Results" and "Business--Lending Activities--Loan Sales and Asset Securitizations." 3 Historically, all operations have been conducted through the Bank. The Company and the Bank, pending applicable licensing and regulatory approvals, intend to conduct their operations through the following operating entities in order to maximize their operating flexibility and efficiency. LIFE FINANCIAL CORP. LIFE SAVINGS BANK, FEDERAL SAVINGS BANK LIFE WAREHOUSE (RETAIL LENDING DIVISION AND BANKING INVESTMENT FINANCING DEPOSITORY DIVISION) HOLDINGS, SUBSIDIARY
LIFE FINANCIAL SERVICES, INC. LIFE INCOME CAPITAL SERVICES, INC. LIFE ASSET MANAGEMENT,INC. . Life Financial Services, Inc. ("Life Financial Services") will continue the nationwide sub-prime one- to four-family loan originations previously conducted by the Bank. The Bank plans to transfer this subsidiary directly to the Company in the future. See "Business--Lending Activities--Underwriting." . Life Income Capital Services, Inc. ("Life Income Capital") will continue the nationwide origination of multi-family and commercial real estate loans in the $50,000 to $750,000 range previously conducted by the Bank. Although there can be no assurances in this regard, management intends to expand the operations of this subsidiary and expects the operations of this subsidiary to create an increased source of revenue for the Company, because of the perceived demand for and higher yield on such loans. . Life Asset Management, Inc. ("Life Asset Management") is being established as a direct subsidiary of the Bank to continue to service loans and real estate owned ("REO") for both the Bank and for purchasers of loans. At December 31, 1996, the Bank's mortgage servicing portfolio totalled $238.0 million, including $169.0 million of loans serviced for others. . The Bank will continue to operate the Retail Lending Division and the Banking Depository Division. In addition, as part of its liquidity and investment portfolios, the Bank will continue to hold investments in U.S. government and agency securities. . Life Investment Holdings, Inc. ("Life Investment") will hold residuals and other related assets resulting from asset securitization activities. Immediately upon the completion of the Offerings, Life Investment will acquire residual assets of approximately $12.3 million and $6.6 million in restricted cash (the "Reserve Account") resulting from the Securitization completed in the fourth quarter of 1996 and a securitization completed during the first quarter of 1997. See "Recent Developments". It is intended that any future residuals and related assets retained by the Company will be held by this subsidiary. . Upon the completion of the Offerings, the Company intends to acquire or establish a subsidiary to provide warehouse lines of credit to meet the cash flow needs of smaller loan originators on a short-term basis, which it expects will in turn create additional sources of loans for the Company to purchase and securitize. 4 The Company was incorporated in Delaware in 1996. The Company has applied to the OTS, and expects to receive the approval of the OTS, to become a savings and loan holding company and to acquire all of the issued and outstanding common stock of the Bank in the Reorganization. Such approval is subject to the affirmative vote of the holders of a majority of the outstanding shares of the Bank's common stock eligible to be cast at the annual meeting of stockholders scheduled to be held on April 18, 1997. The Company's principal executive offices are located at 4110 Tigris Way, Riverside, California 92503 and its telephone number at that location is (909) 280-5100. In addition to its executive offices, the Company conducts its business from the Bank's home office in San Bernardino, California, a mortgage financing office in Riverside, California, a loan center in Jacksonville, Florida and a recently established loan center in the Denver, Colorado metropolitan area. THE OFFERING Common Stock offered in the Exchange Share Offering........ 3,211,716 shares Common Stock offered in the Public Offering(1)(2).......... 2,500,000 shares Common Stock to be outstanding after the Offerings(1)(2)...... 5,711,716 shares Dividend Policy................. The Company intends to retain its earnings to support its future growth strategy and does not anticipate paying cash dividends on the Common Stock in the foreseeable future. See "Dividend Policy." Use of Proceeds................. Net proceeds will be used to (i) acquire residual assets of approximately $12.3 million and $6.6 million in the Reserve Account from the Bank (which, when netted against the net subordinated debt of $9.6 million expected to be transferred to the Company following the Reorganization, would total $9.3 million), see "Recent Developments"; (ii) acquire an interest in or establish a subsidiary for the purpose of providing short term warehouse lines of credit; (iii) downstream proceeds to the Bank if necessary to fund additional purchases of loans; and (iv) fund general business activities, including possible acquisitions of related businesses as opportunities arise. No determination has been made as to the amount of proceeds that will be allocated to each use, with the exception of the acquisition of the residual assets and the Reserve Account. See "Use of Proceeds." Dilution........................ Upon completion of the Offerings, there will be an immediate dilution of the net tangible book value per share of Common Stock of $5.01 per share based on an assumed offering price of $11.00 per share, the midpoint of the range of the proposed Offerings. See "Dilution." Reserved Nasdaq National Market "LFCO" Symbol......................... - -------- (1) Assumes no exercise of the Underwriters' overallotment option of 375,000 shares. See "Underwriting." (2) Does not include 571,172 shares reserved for issuance pursuant to the Bank Option Plan and Company Option Plan. See "The Board of Directors and Management of the Bank--Stock Option Plans." 5 SELECTED FINANCIAL AND OTHER DATA OF THE BANK The selected financial and other data of the Bank, the primary operating subsidiary of the Company from and after the effective date of the Reorganization, at or for the years ended December 31, 1996, 1995, 1994, 1993 and 1992, set forth below is derived in part from, and should be read in conjunction with, the Financial Statements of the Bank and Notes thereto for the years ended December 31, 1996, 1995 and 1994 presented elsewhere in this Prospectus. The Bank did not pay any cash dividends in any of the periods set forth.
AT DECEMBER 31, ------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) SELECTED BALANCE SHEET DATA: Total assets................ $ 104,010 $ 74,136 $ 71,402 $ 78,256 $ 78,788 Securities held-to-maturity and FHLB stock............. 8,837 2,700 2,860 3,883 4,829 Loans held for sale......... 31,018 21,688 17,070 2,348 4,499 Loans held for investment, net........................ 36,895 41,693 47,107 64,381 60,873 Deposit accounts............ 85,711 67,535 65,689 72,008 71,719 FHLB advances............... -- -- 1,250 1,200 2,000 Stockholders' equity........ 9,273 4,268 3,748 4,419 4,326 Book value per share (pro forma)(1).................. $ 2.89 $ 2.29 $ 2.01 $ 2.37 $ 2.55 Shares outstanding (pro forma)(1).................. 3,211,716 1,866,216 1,866,216 1,866,216 1,696,410
FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) SELECTED OPERATING DATA: Interest income............. $ 6,929 $ 5,825 $ 4,824 $ 5,445 $ 6,143 Interest expense............ 3,766 3,448 2,721 3,045 3,687 --------- --------- --------- --------- --------- Net interest income..... 3,163 2,377 2,103 2,400 2,456 Provision for estimated loan losses..................... 963 1,194 1,306 404 129 --------- --------- --------- --------- --------- Net interest income after provision for estimated loan losses.. 2,200 1,183 797 1,996 2,327 Non-interest income......... 9,112 4,020 1,688 1,397 1,732 Non-interest expense: Compensation and benefits................. 5,233 2,544 1,575 1,403 1,426 Net loss on foreclosed real estate.............. 158 53 280 228 78 SAIF special assessment... 448 -- -- -- -- Other expense............. 2,842 1,792 1,601 1,562 2,045 --------- --------- --------- --------- --------- Total non-interest expense................ 8,681 4,389 3,456 3,193 3,549 --------- --------- --------- --------- --------- Income (loss) before income tax provision (benefit).... 2,631 814 (971) 200 510 Income tax provision (benefit).................. 1,126 294 (300) 107 148 --------- --------- --------- --------- --------- Net income (loss)........... $ 1,505 $ 520 $ (671) $ 93 $ 362 ========= ========= ========= ========= ========= Earnings (loss) per share (pro forma)(2)............. $ 0.63 $ 0.28 $ (0.36) $ 0.05 $ 0.22 ========= ========= ========= ========= ========= Weighted average shares out- standing (pro forma)(2)............. 2,370,779 1,866,216 1,866,216 1,823,765 1,644,886 ========= ========= ========= ========= =========
(continued on following page) 6
AT OR FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- ------- ------- ------- (DOLLARS IN THOUSANDS) SELECTED FINANCIAL RATIOS AND OTHER DATA(3): PERFORMANCE RATIOS: Return on average assets..... 1.74% 0.69% (0.89)% 0.12% 0.46% Return on average equity..... 24.99 13.64 (17.01) 2.11 8.92 Average equity to average assets...................... 6.98 5.04 5.22 5.51 5.17 Equity to total assets at end of period................... 8.92 5.76 5.25 5.65 5.49 Average interest rate spread(4)................... 3.76 3.09 2.79 3.02 3.04 Net interest margin(5)....... 3.94 3.25 2.88 3.14 4.29 Average interest-earning assets to average interest- bearing liabilities......... 103.90 103.50 102.27 103.08 103.64 Efficiency Ratio(6).......... 69.43 67.78 83.78 78.09 82.88 LOAN ORIGINATIONS AND PURCHASES..................... $222,553 $134,772 $72,815 $82,015 $90,870 REGULATORY CAPITAL RATIOS(7): Tangible capital............. 8.90% 5.68% 5.25% 5.65% 5.49% Core capital................. 8.90 5.68 5.25 5.65 5.49 Risk-based capital........... 9.43 10.17 10.00 10.87 10.56 ASSET QUALITY RATIOS: Non-performing assets as a percent of total assets(8).. 2.86% 3.00% 3.42% 5.05% 4.15% Allowance for estimated loan losses as a percent of non- performing loans............ 67.26 84.25 44.04 20.02 16.29
- -------- (1) Book value per share (pro forma) is based upon the shares outstanding at the end of each period, adjusted for a 100% stock dividend which occurred during 1996, and then adjusted for the exchange of three shares of Company Common Stock for one share of Bank common stock which is expected to take place in connection with the Reorganization. (2) Earnings per share (pro forma) is based upon the weighted average shares outstanding during the period, adjusted for a 100% stock dividend which occurred during 1996, and then adjusted for the exchange of three shares of Company Common Stock for one share of Bank common stock which is expected to take place in connection with the Reorganization. (3) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios. With the exception of end of period ratios, all ratios are based on average daily or average month-end balances during the indicated periods. (4) The average interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (5) The net interest margin represents net interest income as a percent of average interest-earning assets. (6) The efficiency ratio represents noninterest expense less (gain) loss on foreclosed real estate divided by noninterest income plus net interest income before provision for estimated loan losses. (7) For definitions and further information relating to the Bank's regulatory capital requirements, see "Regulation--Federal Savings Institution Regulation--Capital Requirements." See "Capitalization" for the Company's pro forma capital levels as a result of the Offerings. (8) Non-performing assets consist of non-performing loans and REO. See "Business--Lending Activities--Non-Accrual and Past-Due Loans" and "--REO." 7 QUARTERLY OPERATING AND OTHER DATA OF THE BANK Financial information of the Bank at March 31, June 30, September 30, and December 31, 1996 and for the quarters ended March 31, June 30, September 31 and December 31, 1996 is derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting of only normal recurring adjustments) which are necessary to present fairly the results of such interim periods.
AT OR FOR THE QUARTER ENDED ---------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1996 1996 1996 1996 --------- -------- ------------- ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SELECTED OPERATING DATA: Interest income.................. $ 1,662 $ 1,691 $ 1,569 $ 2,007 Interest expense................. 929 926 844 1,067 ------- ------- ------- ------- Net interest income.......... 733 765 725 940 Provision for estimated loan losses.......................... 68 40 251 604 ------- ------- ------- ------- Net interest income after provision for estimated loan losses...................... 665 725 474 336 Non-interest income.............. 1,040 1,432 1,791 4,849 Non-interest expense: Compensation and benefits...... 814 1,337 1,056 2,026 Net loss (gain) on foreclosed real estate................... 91 9 71 (13) SAIF Special Assessment........ -- -- 448 -- Other expense.................. 616 704 671 851 ------- ------- ------- ------- Total non-interest expense... 1,521 2,050 2,246 2,864 ------- ------- ------- ------- Income before income tax provision....................... 184 107 19 2,321 Income tax provision............. 79 46 17 984 ------- ------- ------- ------- Net income....................... $ 105 $ 61 $ 2 $ 1,337 ======= ======= ======= ======= Earnings per share (pro forma)(1)....................... $ 0.06 $ 0.03 $ 0.00 $ 0.42 ======= ======= ======= ======= SELECTED FINANCIAL RATIOS AND OTHER DATA(2): PERFORMANCE RATIOS: Return on average assets....... 0.48% 0.30% 0.01% 5.56% Return on average equity....... 9.73 5.44 0.12 61.35 Average equity to average assets........................ 4.95 5.56 8.42 8.77 Equity to total assets at end of period..................... 5.04 5.62 9.40 8.92 Average interest rate spread(3)..................... 3.49 3.71 3.93 4.09 Net interest margin(4)......... 3.70 3.85 3.95 4.22 Average interest-earning assets to average interest-bearing liabilities................... 104.49 103.10 103.25 104.64 Efficiency Ratio(5)............ 80.65 92.90 86.45 49.70 LOAN ORIGINATIONS AND PURCHASES.. $50,928 $52,925 $44,536 $74,164 REGULATORY CAPITAL RATIOS(6): Tangible capital............... 4.99% 5.62% 9.40% 8.90% Core capital................... 4.99 5.62 9.40 8.90 Risk-based capital............. 8.91 9.82 16.06 9.43 ASSET QUALITY RATIOS: Non-performing assets as a percent of total assets(7).... 2.49% 3.59% 3.36% 2.86% Allowance for estimated loan losses as a percent of non-performing loans.......... 98.99 66.06 55.66 67.26
(footnotes on following page) 8 - -------- (1) Earnings per share (pro forma) is based on the weighted average shares outstanding during the period, adjusted for a 100% stock dividend which occurred during 1996, and then adjusted for the exchange of three shares of Company Common Stock for one share of Bank common stock which is expected to take place in connection with the Reorganization. (2) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios. With the exception of end of period ratios, all ratios are based on average daily or average month end balances during the indicated periods and are annualized where appropriate. (3) The average interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (4) The net interest margin represents net interest income as a percent of average interest-earning assets. (5) The efficiency ratio represents noninterest expense less (gain) loss on foreclosed real estate divided by noninterest income plus net interest income before provision for estimated loan losses. (6) For definitions and further information relating to the Bank's regulatory capital requirements, see "Regulation--Federal Savings Institution Regulation--Capital Requirements." See "Capitalization" for the Company's pro forma capital levels as a result of the Offerings. (7) Non-performing assets consist of non-performing loans and REO. See "Business--Lending Activities--Non-Accrual and Past-Due Loans" and "--REO." 9 RECENT DEVELOPMENTS On March 14, 1997, the Bank issued subordinated debentures ("Debentures") in the aggregate principal amount of $10.0 million through a private placement and pursuant to a Debenture Purchase Agreement (the "Debenture Offering"). The Debentures will mature on March 15, 2004 and bear interest at the rate of 13 1/2% per annum, payable semi-annually. The Debentures qualify as supplementary capital under regulations of the OTS which capital may be used to satisfy the risk-based capital requirements in an amount up to 100% of the Bank's core capital. See "Regulation--Federal Savings Institution Regulation--Capital Requirements." By enhancing the Bank's capital position the Debentures provide support for the Bank's current operations. The Debentures are direct, unconditional obligations of the Bank ranking with all other existing and future unsecured and subordinated indebtedness of the Bank. They are subordinated on liquidation, as to principal and interest, and premium, if any, to all claims against the Bank having the same priority as savings account holders or any higher priority. The Debentures are redeemable at the option of the Bank, in whole or in part, at any time after September 15, 1998, at the aggregate principal amount thereof, plus accrued and unpaid interest, if any. Following the Reorganization, the Bank may substitute the Company in its place as obligor on the Debentures (the "Substitution"). If such Substitution occurs, holders of the Debentures will have the option, at September 15, 1998 or at such later time as the Substitution occurs, to require the Company to purchase all or part of the holder's outstanding Debentures at a price equal to 100% of the principal amount repurchased plus accrued interest through the repurchase date. If the Substitution occurs, upon a change in control of the Company holders of the Debentures will have the option to require the Company to purchase all or part of the holder's outstanding Debenture at a price equal to 101% of the principal amount repurchased plus accrued interest through the repurchase date. Any such repurchase would have a negative impact on the Company's liquidity after September 15, 1997. See "Risk Factors--Risks Related to Debentures". During the quarter ended March 31, 1997, the Bank participated in a loan securitization whereby mortgage-pass-through certificates in the Life Financial Services Trusts 1997-1A and 1997-1B were issued. The 1997-1A Trust was initially funded with $33.6 million of adjustable-rate Liberator Series Loans sold by the Bank, and the 1997-1B Trust was initially funded with $46.7 million of fixed-rate Liberator Series and Portfolio Series Loans sold by the Bank. An additional $19.7 million of loans will be sold by the Bank as part of this securitization. The certificates issued were guaranteed as to certain payments by insurance policies issued by MBIA Insurance Corporation and were sold through Prudential Securities Incorporated. The certificates issued also have the benefit of Reserve Accounts, initially funded by $3.9 million of the proceeds from the sale of the loans. Such Reserve Accounts will be increased by excess interest received on the loans until the required reserve level, initially 6.0% of the original outstanding balance of the loans funding Trust 1997-1A and 10.1% of the original outstanding balance of the loans funding Trust 1997-1B, is achieved and maintained. Residual amounts in excess of the required reserve amount will be distributed to the Bank. As a result of this securitization, the Bank recognized a gain of $4.0 million. Certain assumptions relating to the value of the residual asset include a 17.0% home equity payment (an estimation of prepayment speed) on the fixed rate loans and a 25.0% constant prepayment rate on the adjustable-rate loans, a 13.5% discount factor and loss factors of 0.5% on the Liberator Series loans and 1.5% on the Portfolio Series loans. The Bank also receives servicing fees of 1.00% as servicer of the fixed rate loans sold and 0.65% as servicer of the adjustable rate loans sold for the first twelve months following the securitization and 1.00% thereafter. The Company intends to continue a program of asset securitization at an approximate rate of one per quarter, either through private placements or public offerings. There can be no assurance, however, that any asset securitizations will be completed by the Company in the future. See "Risk Factors--Dependence on Asset Securitizationsand Impact on Quarterly Operating Results" and "Business--Lending Activities--Loan Sales and Asset Securitizations." The Bank has negotiated a line of credit with a national investment banking firm in the amount of $35.0 million which is expected to close in the first quarter of 1997. The line of credit will be used for the origination of mortgage loans. Upon the completion of the Reorganization, and upon the formation of the warehouse financing subsidiary of the Company, it is expected that the line of credit will become a line of credit of the Company. See "Business--Restructuring". 10 RISK FACTORS The following risk factors, in addition to those discussed elsewhere in this Prospectus, should be considered by investors in deciding whether to purchase the Common Stock offered hereby. ABILITY OF THE COMPANY TO IMPLEMENT ITS BUSINESS STRATEGY The Company's business strategy is dependent upon its ability to increase its loan origination volume through the nationwide growth of its network of correspondents and brokers, while maintaining its existing levels of origination costs, interest rate spreads and underwriting criteria. Implementation of this strategy will depend in large part on the Company's ability to: (i) expand its correspondent network in markets with a sufficient concentration of borrowers meeting the Company's underwriting criteria; (ii) obtain adequate financing on favorable terms to fund its growth strategy; (iii) profitably sell its loans in the secondary market or through asset securitizations on a regular basis; (iv) retain skilled employees; and (v) continue to expand in the face of increasing competition from other mortgage lenders. The Company's failure with respect to any of these factors could impair its ability to successfully implement its business strategy, which would have a material adverse effect on the Company's results of operations and financial condition. See "Business--Lending Activities." RISKS ASSOCIATED WITH MORTGAGE ORIGINATION, PURCHASE AND SALE ACTIVITIES The Bank has been actively involved in the origination, purchase and sale to institutional investors of real estate secured loans and, more recently, in asset securitizations. Generally, the profitability of such mortgage financing operations depends on maintaining a sufficient volume of loans for sale and the availability of purchasers. Changes in the level of interest rates and economic factors may affect the amount of loans originated or available for purchase by the Company, and thus the availability of gains on sale of loans and servicing fee income. Changes in the purchasing policies of institutional investors or increases in defaults after funding could substantially reduce the amount of loans sold to such investors or through asset securitizations. Any such changes could have a material adverse effect on the Company's results of operations and financial condition. While the Bank has recently adopted a hedging policy, the Bank does not currently utilize any specific hedging instruments to minimize exposure to fluctuations in the market price of loans and interest rates with regard to loans held for sale in the secondary mortgage market. Therefore, between the time the Company originates loans and purchase commitments are issued or asset securitizations are completed, the Company is exposed to downward movements in the market price of such loans due to upward movements in interest rates. See "Business--Lending Activities-- Origination and Purchase of Loans" and "--Loan Sales and Asset Securitizations" and "--Sources of Funds." In addition, documents governing the Bank's securitizations and whole loan sales generally require the Bank to commit to repurchase or substitute loans in the event of a breach of a representation or warranty made by the Bank to the loan purchaser, any misrepresentation during the mortgage loan origination process or, in some cases, upon any fraud or first payment default on such mortgage loans. Any claims asserted against the Bank in the future by one or more of its loan purchasers may result in liabilities or legal expenses that could have a material adverse effect on the Company's results of operations and financial condition. DEPENDENCE ON ASSET SECURITIZATIONS AND IMPACT ON QUARTERLY OPERATING RESULTS During the fourth quarter of 1996, the Bank, through its Financial Services Division, completed its first asset securitization, which involved $51.9 million of loans and which generated gains of approximately $4.3 million. A significant component of the Company's business strategy is to generate revenue and net income and provide funding for future originations and purchases of loans through asset securitizations at the rate of one per quarter. There can be no assurance, however, that the Company will be able to successfully implement this approach. Several factors will affect the Company's ability to complete asset securitizations, including conditions in the securities markets generally and in the asset-backed securities markets specifically, the credit quality of the Company's loan portfolio and the Company's ability to obtain credit enhancements. Although the Bank obtained a credit enhancement in its Securitization completed during the fourth quarter of 1996 which facilitated a "AAA" rating for the Securitization interests, there can be no assurance that the Company will be able to obtain 11 future credit enhancements on acceptable terms or that future securitizations will be similarly rated. Any substantial reduction in the ability of the Company to complete asset securitizations could have a material adverse effect on the Company's results of operations and financial condition. The Company's future revenues and net income are expected to fluctuate in large part as a result of the timing and size of its future asset securitizations. A delay in closing a securitization during a particular quarter would postpone recognition of gain on sale of loans. In addition, unanticipated delays in closing a securitization could also increase the Company's exposure to credit risks and interest rate fluctuations by increasing the period during which the Company holds its loans. If the Company were unable to profitably securitize a sufficient number of its loans in a particular reporting period, the Company's revenues for such period would decline and would result in lower net income and possibly a net loss for such period, and could have a material adverse effect on the Company's results of operations, financial condition and capital ratios. The Bank records gains on sales of loans through securitizations based in part on the fair value of the residuals received by the Bank related to such loans, which are classified as trading securities. The fair values of such residuals are in turn based in part on market interest rates and projected loan prepayment and credit loss rates. Increases in interest rates or higher than anticipated rates of loan prepayments or credit losses of these or similar securities may require the Company to write down the value of such residuals and result in a material adverse effect on the Company's results of operations and financial condition. The Company is not aware of an active market for the residuals. No assurance can be given that the residuals could in fact be sold at their carrying value, if at all. See "Business--Lending Activities--Loan Sales and Asset Securitizations." RISKS ASSOCIATED WITH SUB-PRIME LENDING Through its Liberator Series program, the Bank has developed a lending niche for the origination and purchase of mortgage loans to sub-prime borrowers, defined as borrowers who do not qualify for credit under FHLMC, FNMA or Government National Mortgage Association ("GNMA") guidelines. Loans to sub- prime borrowers present a higher level of risk of default than conforming loans because of the increased potential for default by borrowers who may have had previous credit problems or who do not have any credit history. Loans to sub-prime borrowers also involve additional liquidity risks, as these loans generally have a more limited secondary market than conventional loans. The actual rates of delinquencies, foreclosures and losses on loans to sub-prime borrowers could be higher under adverse economic conditions than those currently experienced in the mortgage lending industry in general. While the Bank believes that the underwriting procedures and appraisal processes it employs enable it to somewhat mitigate the higher risks inherent in loans made to these borrowers, no assurance can be given that such procedures or processes will afford adequate protection against such risks. See "Business-- Lending Activities--Origination and Purchase of Loans" and "--Underwriting." HIGH LOAN TO VALUE RATIOS OF PORTFOLIO SERIES LOANS Through its Portfolio Series program, the Bank originates debt consolidation loans for Agency Qualified Borrowers. Portfolio Series loans are primarily home equity lines of credit and second deeds of trust generally up to 125% of the appraised value of the real estate underlying the loans. In the event of a default on a Portfolio Series loan by a borrower, there generally would be insufficient collateral to pay off the balance of such loan and the Bank, as holder of a second position on the property, would likely lose a substantial portion, if not all, of its investment. While the Bank believes that the underwriting procedures it employs enable it to somewhat mitigate the higher risks inherent in such loans, no assurance can be given that such procedures will afford adequate protection against such risks. During the fourth quarter of 1996, the Bank securitized $51.9 million in loans of which $33.7 million consisted of Portfolio Series loans. Servicing was retained by the Bank on all loans securitized. See "Business--Lending Activities--Origination and Purchase of Loans" and "--Underwriting." DEPENDENCE ON KEY PERSONNEL The Company depends to a considerable degree on the contributions of a limited number of key management personnel who have had, and will continue to have, a significant role in the development and 12 management of the Company's mortgage financing operations. The continued development of the Company's business strategy depends to a large extent upon the continued employment of Daniel L. Perl, President and Chief Executive Officer of both the Company and the Bank. Most of the senior management personnel in the mortgage lending area have had working relationships with Mr. Perl prior to joining the Bank. The loss of such personnel or Mr. Perl could materially adversely affect the Company's business. The Bank has entered into an interim employment agreement with Mr. Perl and upon the completion of the Offerings, the Company and the Bank will each enter into a three year employment agreement with Mr. Perl. See "The Board of Directors and Management of the Bank--Letter Agreement" and "--Employment Agreements." RISKS RELATED TO DEBENTURES In March 1997, the Bank issued $10.0 million of the Debentures. In the event that the Company and the Bank elect to substitute the Company as obligor on the Debentures following the Reorganization, the holders of the Debentures will have the option, at September 15, 1998 or at such later time as the Substitution occurs, to require the Company to purchase all or part of their Debentures. See "Recent Developments." In the event that all of the holders of the Debentures opt to require the Company to purchase their Debentures at September 15, 1998, the Company would be required to fund $10.0 million plus accrued interest from the last interest payment date in reimbursements to holders of the Debentures. Such an event would have a material adverse effect on the Company's liquidity. Furthermore, in the event that the Company has insufficient funds available to repurchase the Debentures, the Company may be required to borrow funds at more expensive rates than the interest rate on the Debentures, which would have a material adverse effect on the Company's results of operations. RISKS RELATED TO MORTGAGE SERVICING RIGHTS To determine the fair value of its mortgage servicing rights, the Bank projects net cash flows expected to be received over the life of the underlying loans. Such projections assume certain servicing costs, prepayment rates and delinquencies. As of December 31, 1996, the carrying value of the Bank's mortgage servicing rights totalled $2.6 million, up from $683,000 at December 31, 1995. In addition, the pooling and servicing agreement relating to the Bank's Securitization contains provisions with respect to the maximum permitted loan delinquency rates and loan default rates, which, if exceeded, would allow the termination of the Bank's right to service the related loans. The mortgage servicing rights on the loans securitized during the fourth quarter of 1996 totalled approximately $722,000. There can be no assurance that the Bank's estimates used to determine the fair value of mortgage servicing rights will remain appropriate for the life of the loans sold or the Securitization. If actual loan prepayments or delinquencies exceed the Bank's estimates, the carrying value of the Bank's mortgage servicing rights may have to be written down through a charge against earnings. The Bank cannot write up such assets to reflect slower than expected prepayments, although slower prepayments may increase future earnings as the Bank will receive cash flows in excess of those anticipated. Fluctuations in interest rates may also result in a write-down of the Bank's mortgage servicing rights in subsequent periods. COMPETITION As a purchaser and originator of mortgage loans, the Company faces intense competition, primarily from mortgage banking companies, commercial banks, credit unions, thrift institutions, credit card issuers and finance companies. Many of these competitors in the financial services business are substantially larger and have more capital and other resources than the Company. Furthermore, certain large national finance companies and conforming mortgage originators have announced their intention to adapt their conforming origination programs and allocate resources to the origination of non- conforming loans. In addition, certain of these larger mortgage companies and commercial banks have begun to offer products similar to those offered by the Company, targeting customers similar to those of the Company. The entrance of these competitors into the Company's market could have a material adverse effect on the Company's results of operations and financial condition. The 13 Company depends largely on correspondents and brokers for its purchases and originations of new loans with whom the Company's competitors also seek to establish relationships. The Company's future results may become increasingly sensitive to fluctuations in the volume and cost of its wholesale loans resulting from competition from other purchasers for such loans. In addition, as the Company expands into new geographic markets, it will face competition from lenders with established positions in these locations. There can be no assurance that the Company will be able to continue to compete successfully in the markets it serves. See "Business-- Competition." AVAILABILITY OF FUNDING SOURCES The Bank funds substantially all of the loans which it originates or purchases through deposits, internally generated funds or Federal Home Loan Bank ("FHLB") advances. The Bank competes for deposits primarily on the basis of rates, and as a consequence the Bank could experience difficulties in attracting deposits to fund its operations if it does not continue to offer deposit rates at levels that are competitive with other financial institutions. The Bank also uses the proceeds generated by the Bank in selling loans in the secondary market or pools of loans in asset securitizations to fund subsequent originations or purchases. On an ongoing basis, the Bank explores opportunities to access credit lines as an additional source of funds and, in the future, expects to use the warehouse line of credit and/or the repurchase financing facilities of a national investment banking firm to fund loan originations. To the extent that the Bank is not able to maintain its currently available funding sources or to access new funding sources, it would have to curtail its loan production activities or sell loans earlier than is optimal. Any such event would have a material adverse effect on the Company's results of operations and financial condition. See "Recent Developments" and "Business--Sources of Funds." REAL ESTATE SECURED RISKS As part of its lending strategy, the Bank has targeted borrowers seeking loans secured by multi-family properties or properties used for commercial business purposes such as small office buildings or light industrial or retail facilities. Although such loans are generally originated for sale, the Bank anticipates that its multi-family and commercial real estate portfolios will increase as a percentage of total assets in future periods. Multi-family and commercial real estate loans are generally considered to involve a higher degree of credit risk, be more vulnerable to deteriorating economic conditions and involve higher loan principal amounts than one- to four-family residential mortgage loans. Income producing property values are also subject to greater volatility than owner-occupied residential property values. Economic events and government regulations, which are outside the control of the borrower or lender, could impact the value of the security for such loans or the future cash flows of the affected properties. Further, any material decline in real estate values, such as the declines experienced in southern California in recent years, generally reduces the ability of borrowers to use home equity to support borrowings and increases the loan-to-value ratios of loans previously made, thereby weakening collateral coverage and increasing the possibility of a loss in the event of a borrower default. Because of the Bank's focus on borrowers who are unable to obtain mortgage financing from conventional mortgage sources, the actual rates of delinquencies, foreclosures and losses on its loans could be higher under adverse economic conditions than those currently experienced in the mortgage lending industry in general. In addition to its lending activity in California, the Bank has originated or purchased a significant number of one- to four-family residential mortgage loans on a nationwide basis for sale through its correspondent and wholesale lending activities. Management believes that originating and purchasing loans secured by properties located across the country results in a geographically diversified lending operation which reduces certain risks associated with loan concentrations in a single area. However, there are certain other risks involved in nationwide lending. Some of the properties may be located in states which are experiencing adverse economic conditions, including a general softening in real estate markets and the local economies, which may result in increased loan delinquencies and loan losses. Additionally, regulations and practices regarding the liquidation of properties (e.g., foreclosure) and the rights of mortgagors in default vary greatly from state to state, and these restrictions may limit the Bank's ability to foreclose on a property or seek other recovery. See "Business--Lending Activities." 14 POTENTIAL IMPACT OF CHANGES IN INTEREST RATES The Bank's profitability is dependent to a certain extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and investments, and its interest expense on interest-bearing liabilities, such as deposits and borrowings. Interest rate caps on the Bank's adjustable-rate mortgage ("ARM") loans and the tendency for changes in the Cost of Funds Index ("COFI"), the market index to which many of the Bank's ARM loans are indexed, to lag changes in market interest rates may reduce the Bank's net earnings in a period of rising interest rates. The Bank's ability to originate, purchase and sell loans through its mortgage financing operations is also significantly impacted by changes in interest rates. Increases in interest rates may also reduce the amount of loan and commitment fees received by the Bank. A significant decline in interest rates could also decrease the size of the Bank's servicing portfolio and the related servicing income by increasing the level of loan prepayments. In an effort to control its interest rate risk the Bank has recently been reducing the percentage of loans tied to COFI and been tying more adjustable-rate mortgage loans to current market indices, such as the six-month London Interbank Offered Rate ("LIBOR") or U.S. Treasury Security indices, which reprice more frequently. Additionally, the interest rate adjustments with respect to the Bank's investment securities lag rate adjustments to the Bank's deposit accounts. Accordingly, the yield on the Bank's investment securities may adjust more slowly than the cost of the Bank's interest-bearing liabilities in a rising interest rate environment. Although the Bank has recently adopted a hedging policy, the Bank does not currently utilize any specific hedging instruments to minimize exposure to fluctuations in the market price of loans and interest rates with regard to loans held for sale in the secondary mortgage market or asset securitizations. Therefore, between the time the Bank originates the loans and purchase commitments are issued, the Bank is exposed to downward movements in the market price of such loans due to upward movements in interest rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Management of Interest Rate Risk." ABSENCE OF MARKET FOR COMMON STOCK The Company, as a newly organized company, has never issued common stock. The Company has received conditional approval to have its Common Stock quoted on the National Market System of the Nasdaq Stock Market under the symbol "LFCO" upon completion of the Offerings. However, there can be no assurance that an active and liquid trading market for the Common Stock will develop, or, once developed, will continue, nor can there be any assurances that holders of the Common Stock will be able to sell their shares at or above the price per share in the Public Offering. The absence or discontinuance of a market for the Common Stock may have an adverse effect on both the price and liquidity of the Common Stock. In addition, the stock market has on occasion experienced extreme price and volume fluctuations. These broad market fluctuations may adversely affect the market price for the Company's Common Stock. See "Market for the Common Stock of the Company." CERTAIN ANTI-TAKEOVER PROVISIONS Provisions in the Company's Governing Instruments. Certain provisions of the Company's Certificate of Incorporation and Bylaws, particularly a provision limiting voting rights, as well as certain federal regulations, assist the Company in maintaining its status as an independent publicly owned corporation. These provisions provide for, among other things, supermajority voting on certain matters, staggered elections of the board of directors, non- cumulative voting for directors, limits on the calling of special meetings, limits on voting shares in excess of 10% of the outstanding shares, and certain uniform price provisions for certain business combinations. These provisions in the Company's governing instruments may discourage potential proxy contests and other potential takeover attempts, particularly those which have not been negotiated with the Board of Directors, and thus, generally may serve to perpetuate current management. For a more detailed discussion of these provisions, see "Restrictions on Acquisition of the Company." Voting Control of Officers and Directors. Directors and executive officers of the Company are expected to own approximately 14.2% of the shares of common stock of the Company following the Reorganization, 15 including shares of Company Common Stock exchanged for shares of Bank common stock in the Reorganization and shares purchased by directors and executive officers in the Public Offering. Options for an additional 434,840 shares of Common Stock, or 7.1% of the shares of Common Stock to be issued and outstanding after the Offerings and the exercise of such options, may be attributable to directors and executive officers through the Option Plans. Accordingly, management's potential voting control could, together with additional stockholder support, defeat stockholder proposals requiring 80% approval of stockholders and will continue to have a significant influence over the affairs of the Company and the Bank. Such concentration of ownership may have the effect of delaying, deferring or preventing takeover attempts that certain stockholders deem to be in their best interest and may tend to perpetuate existing management. See "Restrictions on Acquisition of the Company--Restrictions in the Company's Certificate of Incorporation and Bylaws" and "The Board of Directors and Management of the Bank--Stock Option Plans." Employment Agreement. Daniel L. Perl, the President and Chief Executive Officer, is subject to a letter agreement with the Bank from January 1, 1997 until the consummation of the Offerings (the "Letter Agreement"). At such time, the Bank and the Company intend to enter into written employment agreements with Mr. Perl. Such employment agreements provide for benefits and cash payments in the event of a change in control of the Company or the Bank. These provisions may have the effect of increasing the cost of acquiring the Company, thereby discouraging future attempts to take over the Company or the Bank. See "The Board of Directors and Management of the Bank--Employment Agreements." Based on current salary and cash bonus, payments to be paid in the event of a change in control pursuant to the Employment Agreements would be approximately $3.0 million. However, the actual amount to be paid in the event of a change in control of the Company or the Bank cannot be estimated at this time because the actual amount is based on the average salary of the employee and other factors existing at the time of the change in control which cannot be determined at this time. FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION The Company, as a savings and loan holding company, will be, and the Bank, as a federal savings association, is subject to extensive federal law, regulations and supervision. Such law and regulations, which affect operations on a daily basis, may be changed at any time, and the interpretation of the relevant law and regulations is also subject to change by the federal regulatory authorities. Any change in the regulatory structure or the applicable statutes or regulations, whether by the OTS, the Federal Deposit Insurance Corporation ("FDIC") or the Congress, could have a material impact on the Company, the Bank, their respective operations or the Reorganization. See "Regulation." Recently enacted legislation provides that the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF") will merge on January 1, 1999 if there are no more savings associations as of that date. Such legislation also requires that the Department of Treasury submit a report to Congress that makes recommendations regarding a common financial institutions charter, including whether the separate charters for thrifts and banks should be abolished. Various proposals to eliminate the federal thrift charter, create a uniform financial institutions charter and abolish the OTS were introduced in the 104th Congress. Such legislative proposals would also abolish the OTS and transfer its functions to three federal bank regulators and to the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") with respect to the regulation of holding companies. All state savings and loan associations would be regulated as state banks by the FDIC. While such legislation was not acted upon by the past session of Congress, no assurances can be made that similar legislation will not be introduced in the current session of Congress. The Bank is unable to determine the extent to which such legislation, if enacted, would affect its business. Recent federal legislation known as the Riegle Community Development and Regulatory Improvement Act (the "Riegle Act"), imposed additional regulatory requirements on mortgage loans having relatively higher origination fees and interest rates, such as those made by the Bank, and the Bank expects its business to be the focus of additional federal and state legislation, and regulation in the future. 16 DILUTION Upon completion of the Offerings, there will be an immediate dilution to investors in the Public Offering of the net tangible book value per share of Common Stock of $5.01 per share based on the mid-point of the range of offering prices of $11.00 per share. On an as adjusted basis, the offering price is substantially greater than the effective price at which the existing stockholders purchased their shares and the effective exercise price of the outstanding stock options. See "Dilution." NO CASH DIVIDENDS Following the Offerings, the Company intends to retain its earnings, if any, for use in its business and does not anticipate declaring or paying any cash dividends in the foreseeable future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Dividend Policy." RISKS ASSOCIATED WITH DISSENTERS' RIGHTS If the Reorganization is consummated, pursuant to regulations of the OTS, any stockholder of record of Bank common stock who complies with the requirements of the OTS regulations will be entitled to demand and receive payment in an amount equal to the fair or appraised value of the holder's shares of Bank common stock. The Amended Agreement and Plan of Reorganization, dated January 16, 1997 (the "Plan of Reorganization"), states an intent that the Reorganization be treated as a non-taxable transaction under the Internal Revenue Code of 1986, as amended (the "Code"). There is a risk that the number of dissenters who request and receive a cash payment for their Bank common stock could exceed the amount of cash permitted to be received by stockholders under the reorganization provisions of the Code. If that were to occur, it is possible that the transaction would not qualify as a non-taxable transaction under the Code. The Bank believes that the requisite percentage of stockholders will vote in favor of the Reorganization. However, there can be no assurance as to the number of stockholders who will exercise dissenters' rights. In the event that the exercise of dissenters' rights may cause the Reorganization to be a taxable transaction, the Bank may choose to take the steps necessary to withdraw the Offerings. See "The Reorganization--Tax Consequences of Reorganization." ENVIRONMENTAL RISKS In the course of its business, the Bank has acquired, and may acquire in the future, properties securing loans that are in default. There is a risk that hazardous substances or waste, contaminants, pollutants or sources thereof could be discovered on such properties after acquisition by the Bank. In such event, the Bank may be required by law to remove such substances from the affected properties at its sole cost and expense. There can be no assurance that (i) the cost of such removal would not substantially exceed the value of the affected properties or the loans secured by the properties, (ii) the Bank would have adequate remedies against the prior owner or other responsible parties or (iii) the Bank would not find it difficult or impossible to sell the affected properties either prior to or following such removal. 17 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of 2,500,000 shares of Common Stock offered in the Public Offering based on an assumed offering price of $11.00 per share (after deducting estimated expenses and fees to FBR) are estimated to be $24.9 million ($28.8 million, if the Underwriters' overallotment option is exercised in full). Such net proceeds will be used to (i) acquire residual assets of approximately $12.3 million and $6.6 million in the Reserve Account resulting from the Securitization and a securitization completed during the first quarter of 1997 (which, when netted against the net subordinated debt of $9.6 million expected to be transferred to the Company following the Reorganization, would total $9.3 million), see "Recent Developments"; (ii) acquire an interest in or establish a subsidiary for the purpose of providing short term warehouse lines of credit; (iii) downstream proceeds to the Bank if necessary to fund additional purchases of loans; and (iv) fund general business activities, including possible acquisitions of related businesses as opportunities arise. However, the Company has not entered into any arrangement, agreement or understanding with respect to future acquisitions and there can be no assurance that it will do so in the future. No determination has been made as to the amount of proceeds that will be allocated to each use, with the exception of the acquisition of the residual asset and Reserve Account. The Company, upon the Reorganization, will be a unitary savings and loan holding company, which under existing laws would generally not be restricted as to the types of business activities in which it may engage, provided that the Bank continues to be a qualified thrift lender ("QTL"). See "Regulation--Holding Company Regulation" for a description of certain regulations and proposed regulations applicable to the Company. DIVIDEND POLICY The Company presently intends to retain all future earnings, if any, for use in its business and does not anticipate declaring or paying any cash dividends on its Common Stock in the foreseeable future. In the event that the Board of Directors does determine to pay dividends in the future, any such payment will depend upon a number of factors, including investment opportunities available to the Company or the Bank, capital requirements, regulatory limitations, the Company's or the Bank's financial condition and results of operations, tax considerations and general economic conditions. For information concerning federal regulations regarding the Bank's ability to make capital distributions to the Company, see "Regulation--Federal Savings Institution Regulation-- Limitation on Capital Distributions." The Company is subject to the requirements of Delaware law, which generally limit dividends to an amount equal to the excess of the net assets of the Company (the amount by which total assets exceed total liabilities) over its statutory capital, or if there is no such excess, to its net profits for the current and/or immediately preceding fiscal year. For a discussion of certain circumstances under which the Company may become subject to certain provisions of the California Corporation Code, see "Restrictions on Acquisition of the Company--General." MARKET FOR THE COMMON STOCK OF THE COMPANY The Company was recently formed and has never issued capital stock. The Company has received conditional approval to have its Common Stock quoted on the National Market System of the Nasdaq Stock Market under the symbol "LFCO" subject to the completion of the Offerings and compliance with certain conditions including the presence of at least two registered and active market makers. FBR has indicated its intention to make a market in the Company's Common Stock. FBR is not obligated, however, to make a market in the Common Stock and any market making may be discontinued at any time. Upon completion of the Offerings, the Company will have at least two market makers making a market in its Common Stock. Making a market involves maintaining bid and ask quotations and being able, as principal, to effect transactions in reasonable quantities at those quoted prices, subject to various securities laws and other regulatory requirements. There can be no assurance that the Common Stock will be able to meet the applicable listing criteria in order to maintain its quotation on the Nasdaq Stock Market or that an active and liquid trading market will develop or, if developed, will be maintained. A public market having the desirable characteristics of depth, liquidity and 18 orderliness, however, depends upon the presence in the marketplace of both willing buyers and sellers of Common Stock at any given time, which is not within the control of the Company. No assurance can be given that an investor will be able to resell the Common Stock at or above the price to the public of the Common Stock after the Offerings. See "Risk Factors--Absence of Market for Common Stock." MARKET FOR THE COMMON STOCK OF THE BANK There is no established market for the common stock of the Bank. As of February 28, 1997, the Bank's common stock was held by approximately 407 holders of record. The Bank has not paid cash dividends on its common stock. The Board of Directors declared a 100% stock dividend to stockholders of record as of February 28, 1996, payable as of March 31, 1996. For a description of regulatory restrictions on the payment of cash dividends and other capital distributions by the Bank, see "Regulation--Federal Savings Institution Regulation--Limitation on Capital Distributions." DILUTION The net tangible pro forma book value of the Common Stock of the Bank at December 31, 1996, was $2.89 per share. Net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding. After giving effect to the Offerings, assuming an initial public offering price of $11.00 per share, the mid-point of the range of the proposed Offerings and the application of the net proceeds therefrom, the pro forma net tangible book value of the Company at December 31, 1996 would have been $34.2 million, or $5.99 per share of Common Stock. This would represent an immediate increase in net tangible book value per share of $3.10 to the existing stockholders of the Bank and an immediate dilution in net tangible book value per share of $5.01 to new investors at the assumed initial public offering price. The following illustrates this dilution per share: Initial public offering price per share..................... $11.00 Pro forma net tangible book value per share as of December 31, 1996, as adjusted for the Reorganization............. 2.89 Increase in net tangible book value per share attributable to new investors......................................... 3.10 ---- Pro forma net tangible book value after the Public Offering................................................... 5.99 ------ Dilution to new investors................................... $ 5.01 ======
The following table summarizes, on a pro forma basis, as of December 31, 1996, the relative investments of the existing stockholders of the Bank and new investors in the Company, after giving effect to the Offerings at an assumed price of $11.00 per share:
TOTAL SHARES PURCHASED CONSIDERATION --------------------- ------------------- AVERAGE PRICE NUMBER PERCENT NUMBER PERCENT PER SHARE ------------ -------- ---------- -------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Existing stockholders(1)........ 3,211,716 56.2% $ 9,273 25.2% $ 2.89 New investors........... 2,500,000 43.8 27,500 74.8 11.00 ------------ -------- ---------- -------- Total................... 5,711,716 100.0% $ 36,773 100.0% ============ ======== ========== ========
- -------- (1) As adjusted for the three-for-one exchange offer in the Reorganization. The foregoing tables exclude 571,172 shares reserved for issuance pursuant to the Option Plans and assume no exercise of the Underwriters' over-allotment option. If the Underwriters' over-allotment option were exercised in full, the shares purchased from the Company would increase to 2,875,000 shares (47.2% of the shares of Common Stock outstanding after the Offerings) and the total consideration paid to the Company by new investors would increase to $31.6 million (77.3% of the total consideration paid to the Company by all stockholders). 19 CAPITALIZATION The following table sets forth, at December 31, 1996, the actual capitalization of the Bank, the pro forma capitalization of the Bank giving effect to the Debenture Offering, the pro forma capitalization of the Company giving effect to the Debenture Offering and the Reorganization, and the pro forma capitalization of the Company as adjusted to give effect to the Debenture Offering and the Reorganization and the sale by the Company of 2,500,000 shares of Common Stock at the assumed initial public offering price of $11.00 per share (net of underwriting discount and estimated expenses and excluding any exercise by the Underwriters of an over-allotment option) offered hereby. The information below should be read in conjunction with the Financial Statements and the Notes thereto which are included elsewhere herein.
AT DECEMBER 31, 1996 --------------------------------------- PRO FORMA BANK PRO FORMA PRO FORMA COMPANY AS ACTUAL BANK COMPANY ADJUSTED ------- --------- --------- ---------- (DOLLARS IN THOUSANDS) Deposits............................ $85,711 $85,711 $85,711 $85,711 FHLB advances and other borrowed funds.............................. 3,278 3,278 3,278 3,278 Subordinated debt................... -- 10,000 10,000 10,000 ------- ------- ------- ------- Total borrowed funds............ $88,989 $98,989 $98,989 $98,989 ======= ======= ======= ======= Common Stock of the Bank, $8.00 stated value (10,000,000 shares authorized, 1,070,572 shares issued and outstanding)................... 8,565 8,565 -- -- Common stock of the Company, $0.01 par value (25,000,000 shares authorized, 3,211,716 shares issued and outstanding, as adjusted to reflect the Reorganization, and 5,711,716 shares issued and outstanding, as adjusted to reflect the Reorganization and the Public Offering).......................... -- -- 32 57 Additional paid-in capital.......... 825 825 9,358 34,248 Retained earnings (deficit)......... (117) (117) (117) (117) ------- ------- ------- ------- Total stockholders' equity...... $ 9,273 $ 9,273 $ 9,273 $34,188 ======= ======= ======= ======= Bank Regulatory Capital Ratios: Tangible Capital.................. 8.90% 8.12% 8.12% 8.12%(1) Core (leverage) capital........... 8.90 8.12 8.12 8.12(1) Total risk-based capital.......... 9.43 16.32 16.32 16.32(1) Stockholders' equity to total assets............................. 8.92 8.13 8.13 23.33
- -------- (1) Assumes that no proceeds from the Offering are downstreamed to the Bank and the residuals, Reserve Account and subordinated debt have not been transferred to the Company. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The condensed operating data presented below is derived in part from, and should be read in conjunction with, the Financial Statements and related notes of Life Savings Bank, Federal Savings Bank, presented elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 1994 ------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Interest income: Loans................................................ $ 6,542 $ 5,433 $ 4,530 Securities held to maturity.......................... 56 159 138 Other interest-earning assets........................ 331 233 156 ------- ------- ------- Total interest income.............................. 6,929 5,825 4,824 ------- ------- ------- Interest expense: Deposit accounts..................................... 3,514 3,192 2,534 FHLB advances and other borrowings................... 252 256 187 ------- ------- ------- Total interest expense............................. 3,766 3,448 2,721 ------- ------- ------- Net interest income before provision for estimated loan losses........................... 3,163 2,377 2,103 Provision for estimated loan losses.................... 963 1,194 1,306 ------- ------- ------- Net interest income after provision for estimated loan losses..................................... 2,200 1,183 797 ------- ------- ------- Non-interest income: Loan servicing and other fees........................ 496 231 164 Service charges on deposit accounts.................. 128 111 84 Net gains from mortgage financing operations......... 8,352 3,575 1,428 Other income......................................... 136 103 12 ------- ------- ------- Total non-interest income.......................... 9,112 4,020 1,688 ------- ------- ------- Non-interest expense: Compensation and benefits............................ 5,233 2,544 1,575 Premises and occupancy............................... 746 471 418 Data processing...................................... 390 208 167 Net loss on foreclosed real estate................... 158 53 280 FDIC insurance premiums.............................. 174 184 186 SAIF special assessment.............................. 448 -- -- Marketing............................................ 189 65 55 Telephone............................................ 246 143 128 Professional services................................ 218 92 86 Other expense........................................ 879 629 561 ------- ------- ------- Total non-interest expense......................... 8,681 4,389 3,456 ------- ------- ------- Income (loss) before income tax provision (benefit).... 2,631 814 (971) Income tax provision (benefit)......................... 1,126 294 (300) ------- ------- ------- Net income (loss).................................. $ 1,505 $ 520 $ (671) ======= ======= ======= Earnings (loss) per share (pro forma).................. $ 0.63 $ 0.28 $ (0.36) ======= ======= =======
21 AVERAGE BALANCE SHEETS The following tables set forth certain information relating to the Bank at December 31, 1996, and for the years ended December 31, 1996, 1995 and 1994. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Unless otherwise noted, average balances are measured on a daily basis. The yields and costs include fees which are considered adjustments to yields.
YEAR ENDED DECEMBER 31, AT DECEMBER 31, ---------------------------------------------------------------------------- 1996 1996 1995 1994 --------------- ------------------------ ------------------------ ------------------------ AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST -------- ------ ------- -------- ------- ------- -------- ------- ------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS: Interest-earning assets: Interest-earning deposits and short-term investments.. $ 10,972 4.51% $ 5,618 $ 257 4.57% $ 4,225 $ 203 4.80% $ 3,736 $ 124 3.32% Investment securities(1).......... 8,827 5.56 1,912 100 5.23 3,458 188 5.44 3,763 169 4.49 Loans receivable, net(2)................. 67,913 8.87 72,556 6,542 9.02 65,521 5,433 8.29 65,566 4,530 6.91 Mortgage-backed securities(1).......... 10 6.88 11 1 9.09 12 1 8.33 14 1 7.14 Residual asset.......... 5,700 13.50 199 29 14.57 -- -- -- -- -- -- -------- ------- ------ ------- ------ ------- ------ Total interest-earning assets................. 93,422 8.33 80,296 6,929 8.63 73,216 5,825 7.96 73,079 4,824 6.60 -------- ------- ------ ------- ------ ------- ------ Non-interest-earning assets(3)............... 10,588 6,035 2,465 2,517 -------- ------- ------- ------- Total assets(3)......... $104,010 $86,331 $75,681 $75,596 ======== ======= ======= ======= LIABILITIES AND EQUITY: Interest-bearing liabilities: Passbook accounts....... $ 4,117 2.10 $ 4,401 92 2.09 $ 5,090 127 2.50 $ 7,048 157 2.23 Money market accounts... 3,217 2.99 4,233 118 2.79 5,493 144 2.62 6,512 163 2.50 Checking accounts....... 8,947 2.22 7,048 112 1.59 6,434 92 1.43 6,180 95 1.54 Certificate accounts.... 69,430 5.65 57,333 3,192 5.57 50,608 2,829 5.59 49,851 2,119 4.25 -------- ------- ------ ------- ------ ------- ------ Total deposit accounts............... 85,711 5.02 73,015 3,514 4.81 67,625 3,192 4.72 69,591 2,534 3.64 Borrowings(4)........... 3,278 8.43 4,268 252 5.90 3,112 256 8.23 1,863 187 10.04 -------- ------- ------ ------- ------ ------- ------ Total interest-bearing liabilities............ 88,989 5.15 77,283 3,766 4.87 70,737 3,448 4.87 71,454 2,721 3.81 ------ ------ ------ Non-interest-bearing liabilities(3).......... 5,748 3,026 1,131 197 -------- ------- ------- ------- Total liabilities(3).... 94,737 80,309 71,868 71,651 Equity(3)................ 9,273 6,022 3,813 3,945 -------- ------- ------- ------- Total liabilities and equity(3).............. $104,010 $86,331 $75,681 $75,596 ======== ======= ======= ======= Net interest income before provision for estimated loan losses... $3,163 $2,377 $2,103 ====== ====== ====== Net interest rate spread(5)............... 3.18 3.76 3.09 2.79 Net interest margin(6)... 3.94 3.25 2.88 Ratio of interest-earning assets to interest-bearing liabilities............. 104.98 103.90 103.50 102.27
- ------- (1)Includes unamortized discounts and premiums and certificates of deposit. (2) Amount is net of deferred loan origination fees, unamortized discounts, premiums and allowance for estimated loan losses and includes loans held for sale and non-performing loans. See "Business--Lending Activities." (3) Average balances are measured on a month-end basis. (4) The average yield on borrowings for the years ending December 31, 1995 and 1994 included the effects of $52,000 and $96,000, respectively, in interest expense on swap transactions with a notional principal balance of $2.0 million in 1995 and 1994. Without this added expense, the average yield on borrowings for the years ending December 31, 1995 and 1994 would have been 6.56% and 4.88%, respectively. The yield on total interest- bearing liabilities for the years ending December 31, 1995 and 1994 would have been 4.80% and 3.67%, respectively. The $2.0 million in swap contracts matured on November 7, 1995. (5) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. (6) Net interest margin represents net interest income divided by average interest-earning assets. 22 Rate/Volume Analysis. The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Bank's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
YEAR ENDED YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 COMPARED TO COMPARED TO YEAR ENDED YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, 1994 ------------------- ------------------- INCREASE INCREASE (DECREASE) (DECREASE) DUE TO DUE TO ----------- ----------- VOLUME RATE NET VOLUME RATE NET ------ ---- ------ ------ ---- ------ (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Interest-earning deposits and short-term investments............ $ 64 $(10) $ 54 $ 18 $ 60 $ 78 Investment securities.............. (81) (7) (88) (14) 34 20 Loans receivable, net(1)........... 609 500 1,109 (2) 905 903 Residual asset .................... 29 -- 29 -- -- -- Mortgage-backed securities......... -- -- -- -- -- -- ---- ---- ------ ---- ---- ------ Total interest-earning assets.... 621 483 1,104 2 999 1,001 INTEREST-BEARING LIABILITIES: Money market accounts.............. (35) 9 (26) (27) 8 (19) Passbook accounts.................. (16) (19) (35) (47) 17 (30) Checking accounts.................. 9 11 20 4 (7) (3) Certificate accounts............... 374 (11) 363 33 677 710 Borrowings......................... 80 (84) (4) 108 (39) 69 ---- ---- ------ ---- ---- ------ Total interest-bearing liabilities..................... 412 (94) 318 71 656 727 ---- ---- ------ ---- ---- ------ Change in net interest income........ $209 $577 $ 786 $(69) $343 $ 274 ==== ==== ====== ==== ==== ======
- -------- (1) Includes interest on loans held for sale. SUMMARY The Bank is involved in the origination, purchase, sale and servicing of non-conventional mortgage loans principally secured by first and second mortgage loans on one- to four-family residences. The Bank has focused on Liberator Series loans which are for the purchase or refinance of residential real property by borrowers who, because of prior credit problems or the absence of a credit history, are considered "sub-prime borrowers," or loans which have other non-conforming features. In addition, the Bank has originated a substantial number of Portfolio Series loans which are debt consolidation loans for Agency Qualified Borrowers. The Bank purchases and originates mortgage loans and other real estate secured loans through a network of approved correspondents and mortgage brokers throughout the country. The Bank funds substantially all of the loans which it originates or purchases through deposits, internally generated funds and FHLB advances. In the immediate and foreseeable future, the Bank will also fund loans from proceeds, if any, derived from asset securitizations. Deposit flows and cost of funds are influenced by prevailing market rates of interest primarily on competing investments, account maturities and the levels of savings in the Bank's market area. The Bank's ability to purchase or sell loans is influenced by the general level of product available from its correspondent relationships and the willingness of investors to purchase the loans at an acceptable price to the Bank. Due to substantial activity in the purchase and sale of loans in recent years, the gain on sale of loans has been significant. The Company anticipates utilizing a 23 portion of the net proceeds from the Public Offering to continue to expand its mortgage financing operations. See "Business" and "Use of Proceeds." The Bank's results of operations are also affected by the Bank's provision for loan losses and the level of operating expenses. The Bank's operating expenses primarily consist of employee compensation and benefits, premises and occupancy expenses, and other general expenses. The Bank's results of operations are also affected by prevailing economic conditions, competition, government policies and actions of regulatory agencies. See "Regulation." COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 GENERAL Net income increased by $985,000 from $520,000 for the year ended December 31, 1995 to $1.5 million for the year ended December 31, 1996. Net income for the year ended December 31, 1996 was adversely impacted by a non-recurring expense for compensation and benefits of $354,000 which was incurred during the quarter ended June 30, 1996, and a non-recurring SAIF special assessment of $448,000 which was incurred during the quarter ended September 30, 1996. The non-recurring expense for compensation and benefits is an accrual of the present value of a portion of the future payments due pursuant to a consulting agreement entered into with a former officer of the Bank. See "The Board of Directors and Management of the Bank--Consultation Agreement." Net income for the year ended December 31, 1996 would have been $2.0 million if these charges had not been incurred. Gains from mortgage financing operations for the year ended December 31, 1995 totaled $3.6 million compared to $8.4 million for the year ended December 31, 1996 due to the expansion of the mortgage financing operations and increased marketing effort therefrom, along with the issuance of the Bank's Securitization. The expansion of the mortgage financing operations resulted in an increase in loan originations and purchases from $134.8 million for the year ended December 31, 1995 to $222.6 million for the year ended December 31, 1996. The related sales of loans increased from $126.9 million for the year ended December 31, 1995 to $206.6 million (including $51.9 million sold through the Securitization) for the year ended December 31, 1996. During the quarter ended December 31, 1996, the Bank participated in the Securitization whereby Mortgage-Pass-Through Certificates (the "Certificates") in the Life Financial Services Trust 1996-1 (the "Trust") were issued. The Series 1996-1 Trust was initially funded with $51.9 million of fixed-rate Liberator Series and Portfolio Series Loans sold by the Bank. For a discussion of Liberator Series and Portfolio Series loans, see "Risk Factors--Risks Associated with Sub-Prime Lending," " --High Loan to Value Ratios of Portfolio Series Loans" and "Business--Lending Activities." The Certificates were guaranteed as to certain payments by insurance policies issued by MBIA Insurance Corporation and were sold through Prudential Securities Incorporated. The Certificates also have the benefit of the Reserve Account, initially funded by $1.6 million of the proceeds from the sale of the loans. Such Reserve Account will be increased by excess interest received on the loans until the required reserve level, initially 9.0% of the original outstanding balance of the loans funding the Trust, is achieved and maintained. Residual amounts in excess of the required reserve amount will be distributed to the Bank. As a result of this Securitization, the Bank recognized a gain on sale of $4.3 million. Certain assumptions relating to the value of the residual asset include a 17.0% home equity payment (an estimation of prepayment speed), a 13.5% discount factor and a loss factor of 1.5%. Servicing fees retained as part of the transaction will be 0.50% for the initial six months, after which they will be 1.00% The Company currently intends to conduct asset securitizations at a rate of one per quarter either through private placements or public offerings. There can be no assurance, however, that the Company will be able to successfully implement this strategy. See "Risk Factors--Dependence on Asset Securitizations and Impact on Quarterly Operating Results." In addition, during the quarter ended December 31, 1996, the Bank entered into a lease on a property in the Denver, Colorado metropolitan area out of which it intends to operate a loan center. The Bank also acquired the Riverside, California property it had been leasing by exercising its lease option at a price of $375,000. 24 The expansion in mortgage financing operations included the addition of the Riverside, California mortgage financing center and a corresponding increase in personnel from an average of 50 for the year ended December 31, 1995 to an average of 97 for the year ended December 31, 1996. The additional staff allowed for increased marketing, processing and underwriting efforts and the ability to increase the number of broker and correspondent relationships, but also added to non-interest expense for the period. INTEREST INCOME Interest income increased from $5.8 million for the year ended December 31, 1995 to $6.9 million for the year ended December 31, 1996, due to an increase in the yield on interest-earning assets as well as in the average balances of those assets. The Bank's yield on average interest-earning assets increased from 7.96% for the year ended December 31, 1995 to 8.63% for the year ended December 31, 1996. Total average interest-earning assets increased from $73.2 million for the year ended December 31, 1995 to $80.3 million for the year ended December 31, 1996. The largest single component of interest-earning assets was loans receivable, net, which increased from an average of $65.5 million for the year ended December 31, 1995 to $72.6 million for the year ended December 31, 1996. The increase in average loans receivable, net was due to an increase in loans held for sale from the expansion of the mortgage financing operations. Loans held for sale increased from $21.7 million at December 31, 1995 to $31.0 million at December 31, 1996, while loans held for investment, net decreased from $41.7 million at December 31, 1995 compared to $36.9 million at December 31, 1996. Generally, all loans are originated or purchased for sale in the secondary market or through securitizations. See "Business--Lending Activities." The yield on loans receivable increased from 8.29% for the year ended December 31, 1995 to 9.02% for the year ended December 31, 1996. INTEREST EXPENSE Interest expense increased from $3.4 million for the year ended December 31, 1995 to $3.8 million for the year ended December 31, 1996 due to an increase in average interest-bearing liabilities. Average interest-bearing liabilities increased from $70.7 million for the year ended December 31, 1995 to $77.3 million for the year ended December 31, 1996. Interest expense for the year ended December 31, 1995 was adversely impacted by the effects of an interest rate swap which matured on November 7, 1995 which resulted in an increase in interest expense on borrowings of $52,000 for the year ended December 31, 1995. Without this expense, average yield on borrowings for the year ended December 31, 1995 would have been 6.56%, and the average yield on total interest-bearing liabilities would have been 4.80%. The increase in interest expense also reflects a change in the composition of interest-bearing liabilities. Average certificate accounts increased from $50.6 million for the year ended December 31, 1995 to $57.3 million for the year ended December 31, 1996. Average borrowings increased from $3.1 million for the year ended December 31, 1995 to $4.3 million for the year ended December 31, 1996. NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN LOSSES Net interest income before provision for estimated loan losses for the year ended December 31, 1995 was $2.4 million compared to $3.2 million for the year ended December 31, 1996. This increase was primarily due to the increase in the net interest margin from 3.25% for the year ended December 31, 1995 to 3.94% for the year ended December 31, 1996, and an increase in the ratio of average interest-earning assets to average interest-bearing liabilities from 103.50% for the year ended December 31, 1995 to 103.90% for the year ended December 31, 1996. PROVISION FOR ESTIMATED LOAN LOSSES The provision for estimated loan losses was $963,000 for the year ended December 31, 1996 compared to $1.2 million for the year ended December 31, 1995. The decrease in the provision resulted from the Bank's quarterly analysis of its loan portfolio, the decrease in charge-offs of loans and the increase in recoveries and management's belief that property values in the southern California market had stopped deteriorating. 25 Charge-offs for the year ended December 31, 1995 were $914,000 compared to $734,000 for the year ended December 31, 1996. For the year ended December 31, 1995, the ratio of net charge-offs to average loans outstanding was 1.30% compared to 0.71% for the year ended December 31, 1996. Recoveries increased from $65,000 for the year ended December 31, 1995 to $219,000 for the year ended December 31, 1996. Non-performing assets as a percent of total assets decreased from 3.0% at December 31, 1995 to 2.86% at December 31, 1996. At December 31, 1995 the allowance for estimated loan losses was $1.2 million compared to $1.6 million at December 31, 1996. The allowance for estimated loan losses as a percent of non-performing loans was 84.25% at December 31, 1995 compared to 67.26% at December 31, 1996. While management believes it has adequately provided for losses and does not expect any material loss on its loans in excess of allowances already recorded, no assurance can be given that additional loans will not become delinquent or that the collateral for such loans will be sufficient to prevent losses in the event of foreclosure. Management believes that the allowance for loan losses at December 31, 1996 was adequate to absorb known and inherent risks in the Bank's loan portfolio. No assurance can be given, however, that economic conditions which may adversely affect the Company's or the Bank's service areas or other circumstances will not be reflected in increased losses in the loan portfolio. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance or to take charge-offs (reductions in the allowance) in anticipation of losses. See "Business--Lending Activities--Delinquencies and Classified Assets" and "-- Lending Activities--Allowance for Loan Losses." NON-INTEREST INCOME Gains from mortgage financing operations for the year ended December 31, 1995 were $3.6 million compared to $8.4 million for the year ended December 31, 1996. This increase was attributable to the increase in the level of mortgage financing operations, with loans sold totaling $126.9 million for the year ended December 31, 1995 compared to $206.6 million (including $51.9 million sold through the Securitization) for the year ended December 31, 1996. Loans originated and purchased totalled $134.8 million for the year ended December 31, 1995 compared to $222.6 million for the year ended December 31, 1996, which also resulted in an increase in loan servicing and other fees from $231,000 for the year ended December 31, 1995 to $496,000 for the year ended December 31, 1996. Gains from mortgage financing operations as a percent of loans sold and securitized increased from 2.82% for the year ended December 31, 1995 to 4.04% for the year ended December 31, 1996. This increase is a direct result of the Bank's Securitization during the quarter ended December 31, 1996. As a result of the Securitization, the Bank generated a gain on sale of $4.3 million. Consistent with management's business strategy, it is anticipated that mortgage financing operations will constitute an even greater portion of the Company's business in future periods. The inability of the Company to implement its business strategy would have a material adverse effect on the Company's financial condition and results of operations. See "Risk Factors-- Ability of the Company to Implement its Business Strategy" and "Business-- Background" and "--Restructuring." NON-INTEREST EXPENSE Non-interest expense was $4.4 million for the year ended December 31, 1995 compared to $8.7 million for the year ended December 31, 1996. The increase was due primarily to the expansion of the mortgage financing operations, a non-recurring increase in compensation and benefits and the non-recurring SAIF special assessment. New loans originated and purchased increased from $134.8 million for the year ended December 31, 1995 to $222.6 million for the year ended December 31, 1996, which resulted in increased employee commissions and bonuses. Compensation and benefits increased from $2.5 million for the year ended December 31, 1995 to $5.2 million for the year ended December 31, 1996. These costs are directly related to the expansion of the mortgage financing operations and the corresponding increase in personnel, from an average of 50 for the year ended December 31, 1995 to 97 for the year ended December 31, 1996, combined with a non-recurring expense for compensation and benefits of $354,000 during the quarter ended June 30, 1996. The non-recurring expense for 26 compensation and benefits is an accrual of the present value of a portion of the future payments due pursuant to a consulting agreement entered into with a former officer of the Bank. See "The Board of Directors and Management of the Bank--Consultation Agreement." Premises and occupancy increased from $471,000 for the year ended December 31, 1995 to $746,000 for the year ended December 31, 1996 due to the addition of the Riverside, California mortgage financing office. The financing office is approximately 7,500 square feet, with additional space being utilized for the increase in personnel and the expansion of the mortgage financing operations. With the increase in loans originated and purchased, combined with the increase in personnel, data processing expense increased from $208,000 for the year ended December 31, 1995 to $390,000 for the year ended December 31, 1996. As a result of the expansion of the mortgage financing operations, marketing expense increased from $65,000 for the year ended December 31, 1995 to $189,000 for the year ended December 31, 1996. In addition, telephone expense increased from $143,000 for the year ended December 31, 1995 to $246,000 for the year ended December 31, 1996, and professional services increased from $92,000 for the year ended December 31, 1995 to $218,000 for the year ended December 31, 1996. The Bank incurred a charge of $448,000 due to the non-recurring SAIF special assessment during the year ended December 31, 1996. No similar charge was assessed for the year ended December 31, 1995. In addition, other expenses also increased due to the expansion of the mortgage financing operations, although no single item exceeded 1.0% of gross income. INCOME TAXES The provision for income taxes increased from $294,000 for the year ended December 31, 1995 to $1.1 million for the year ended December 31, 1996. The increase in income taxes is the result of the increase in income before tax, which increased from $814,000 for the year ended December 31, 1995 to $2.6 million for the year ended December 31, 1996. The effective tax rate increased from 36.1% for the year ended December 31, 1995 to 42.8% for the year ended December 31, 1996. The change in effective tax rate is due to a reduction in the deferred tax valuation allowance for state tax purposes in 1995. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995 Total assets increased from $74.1 million as of December 31, 1995 to $104.0 million as of December 31, 1996, which was attributable to an increase in loans held for sale, an increase in cash and cash equivalents, an increase in securities held-to-maturity and FHLB stock and an investment in residuals and restricted cash created as a result of the Securitization. Loans held for sale, net, increased from $21.7 million as of December 31, 1995 to $31.0 million as of December 31, 1996, which was partially offset by a decrease in loans held for investment from $41.7 million as of December 31, 1995 to $36.9 million as of December 31, 1996. During the year ended December 31, 1996, the Bank originated and purchased $222.6 million in loans, which were offset by prepayments, sales and securitizations totaling $206.6 million. Cash and cash equivalents were $3.9 million at December 31, 1995, compared to $13.3 million at December 31, 1996 due to an increase in deposits from $67.5 million at December 31, 1995 to $85.7 million at December 31, 1996. Securities held-to- maturity and FHLB stock increased from $2.7 million at December 31, 1995 to $8.8 million at December 31, 1996. Securities held-to-maturity consist of U.S. Treasury bills and U.S. Treasury notes with staggered maturities ranging from three months to 24 months. During the quarter ended December 31, 1996, the Bank securitized $51.9 million in loans. This was the first loan securitization completed by the Bank, which recorded a gain on sale of $4.3 million. Deposit accounts increased from $67.5 million as of December 31, 1995 to $85.7 million as of December 31, 1996 due to an increased use of wholesale deposits to fund lending activity. While core deposits remained fairly stable, certificates of deposits increased from $51.8 million at December 31, 1995 to $69.4 million at December 31, 1996. 27 Stockholders' equity increased from $4.3 million at December 31, 1995 to $9.3 million at December 31, 1996 due to net income of $1.5 million for the year ended December 31, 1996 and due to proceeds from the issuance of common stock in a private placement offering (the "Private Placement") during the third quarter of 1996 totaling $3.5 million. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994 GENERAL The Bank reported net income of $520,000 for the year ended December 31, 1995, which represented a $1.2 million increase from the net loss of $671,000 for the year ended December 31, 1994. The increase in net income for the year ended December 31, 1995 compared to the year ended December 31, 1994 was attributable to the increase in mortgage financing operations and an increase in net interest income. Loans originated and purchased totalled $134.8 million for the year ended December 31, 1995 compared to $72.8 million for the year ended December 31, 1994. The increase in loans originated and purchased is due to the restructuring and expansion of the mortgage financing operations during 1994 and 1995. During 1994, the Bank hired new management to restructure the mortgage financing operations, changing the lending strategy from traditional mortgage banking and portfolio lending to focusing on sub-prime mortgage financing. During the period of restructuring in the first half of 1994, loan originations and purchases declined as new lending products were being developed and new personnel skilled in originating, processing underwriting and servicing the new products were being hired. Loan originations and purchases increased during the latter half of 1994 and 1995 as a result of the restructuring. Gains from mortgage financing operations were $3.6 million for the year ended December 31, 1995 compared to $1.4 million for the year ended December 31, 1994 due to the expansion of the mortgage financing operations and the increase in sales of loans which were generated as a result of this expansion. Loan sales were $126.9 million for the year ended December 31, 1995 compared to $65.7 million for the year ended December 31, 1994. In addition, based on the change in the loans generated and therefore the change in the market demand for these loans, gains on sale as a percentage of loans sold increased from 2.17% for the year ended December 31, 1994 to 2.82% for the year ended December 31, 1995. In addition, interest income increased due to the types of loans being generated. Net interest income before provision for estimated loan losses for the year ended December 31, 1995 was $2.4 million compared to $2.1 million for the year ended December 31, 1994. The Bank's net interest margin increased to 3.25% for the year ended December 31, 1995 compared to 2.88% for the year ended December 31, 1994. The Bank's yield on loans receivable, the single largest component of interest-earning assets, increased from 6.91% for the year ending December 31, 1994 to 8.29% for the year ending December 31, 1995. As a result of these events, the Bank's return on average assets and return on average equity increased to 0.69% and 13.64%, respectively, for the year ended December 31, 1995, compared to (0.89%) and (17.01%), respectively, for the year ended December 31, 1994. INTEREST INCOME Interest income increased from $4.8 million for the year ended December 31, 1994 to $5.8 million for the year ended December 31, 1995 due to an increase in the yield on interest earning assets as well as the average balances of those assets. The Bank's yield on average interest earning assets increased to 7.96% for the year ended December 31, 1995 compared to 6.60% for the year ended December 31, 1994 due to the increase in loans held for sale from $17.1 million at December 31, 1994 to $21.7 million at December 31, 1995 as compared to loans held for investment which decreased from $47.1 million at December 31, 1994 to $41.7 million at December 31, 1995. The total average interest earning assets increased from $73.1 million for the year ended December 31, 1994 to $73.2 million for the year ended December 31, 1995. The largest single component of 28 interest-earning assets was loans receivable, net. The yield on loans receivable increased from 6.91% for the year ended December 31, 1994 to 8.29% for the year ended December 31, 1995. Except for loans specifically originated to be held for investment, all loans are originated or purchased for sale in the secondary market or through securitizations. INTEREST EXPENSE Interest expense increased from $2.7 million for the year ended December 31, 1994 to $3.4 million for the year ended December 31, 1995. Total average interest-bearing liabilities decreased from $71.5 million with an average yield of 3.81% for the year ended December 31, 1994 to $70.7 million with an average yield of 4.87% for the year ended December 31, 1995. The yield on certificate accounts increased from 4.25% for the year ended December 31, 1994 to 5.59% for the year ended December 31, 1995. The level of certificate accounts averaged $50.6 million for the year ended December 31, 1995 compared to $49.9 million for the year ended December 31, 1994. The interest expense increase also reflects the rise in average borrowings, which were $3.1 million for the year ended December 31, 1995, compared to $1.9 million for the year ended December 31, 1994. The yield on borrowings was adversely affected by interest rate swaps which matured on November 7, 1995. During the years ended December 31, 1995 and December 31, 1994, the interest on swaps totalled $52,000 and $96,000, respectively, which increased the yield on borrowings for the years ended December 31, 1995 and December 31, 1994 to 8.23% and 10.04%, respectively. Without the interest on the swaps, the yield on borrowings would have been 6.56% for the year ended December 31, 1995 and 4.88% for the year ended December 31, 1994. Furthermore, the yield on total interest-bearing liabilities for the years ended December 31, 1995 and December 31, 1994 would have been 4.80% and 3.67% without the interest on the swaps. NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN LOSSES Net interest income before provision for estimated loan losses for the year ended December 31, 1995 was $2.4 million compared to $2.1 million for the year ended December 31, 1994. The Bank's net interest margin increased to 3.25% for the year ended December 31, 1995 compared to 2.88% for the year ended December 31, 1994. Average interest-earning assets to interest-bearing liabilities increased from 102.27% at December 31, 1994 to 103.50% at December 31, 1995. PROVISION FOR ESTIMATED LOAN LOSSES The provision for estimated loan losses was $1.2 million for the year ended December 31, 1995 compared to $1.3 million for the year ended December 31, 1994. The decrease in the provision resulted from the Bank's analysis of its loan portfolio and an increase in the recoveries of the loans previously charged off. Recoveries for the year ended December 31, 1995 were $65,000 compared to $3,000 for the year ended December 31, 1994. Charge-offs for the 1995 and 1994 periods remained relatively constant as management continued to charge-off problem assets and improve its collection procedures pursuant to its strategy which was revised during the year ended December 31, 1994. See "Business--Background--Strategy." Charge-offs net of recoveries, however, totalled $849,000 for the year ended December 31, 1995 exceeding the Bank's allowance for estimated loan losses of $832,000 established at December 31, 1994, which reflected management's loss expectation for the year ended December 31, 1995. Non-performing assets as a percent of total assets declined from 3.42% at December 31, 1994 to 3.00% at December 31, 1995. The Bank's allowance for estimated loan losses increased from $832,000 at December 31, 1994 to $1.2 million at December 31, 1995. The allowance for estimated loan losses as a percent of non-performing loans increased to 84.25% at December 31, 1995 compared to 44.04% at December 31, 1994. 29 NON-INTEREST INCOME Gains from mortgage financing operations for the year ended December 31, 1995 were $3.6 million compared to $1.4 million for the year ended December 31, 1994. This increase was attributable to the increase in the level of mortgage financing operations, with loans sold totaling $126.9 million for the year ended December 31, 1995 compared to $65.7 million for the year ended December 31, 1994. Loans originated and purchased totaled $134.8 million for the year ended December 31, 1995 compared to $72.8 million for the year ended December 31, 1994. During 1994, the Bank hired new management to restructure the mortgage financing operations, changing the lending strategy from a traditional mortgage banking and portfolio lending operation to a strategy of a sub-prime mortgage financing operations. During the period of restructuring in the first six months of 1994, loan originations and purchases declined as new lending products were being developed and new personnel skilled in originating, processing, underwriting and servicing the new products were being hired. Loan originations and purchases increased during the latter half of 1994 and 1995 as a result of the restructuring. Loan servicing and other fees were $231,000 for the year ended December 31, 1995 compared to $164,000 for the year ended December 31, 1994 due to the expansion of the mortgage financing operations and the increase in the loan servicing portfolio. With the adoption of SFAS No. 122 in July of 1995, the Bank retained a greater portion of its servicing, which resulted in an increase in servicing for other investors from $48.2 million as of December 31, 1994 to $189.5 million as of December 31, 1995. See "- Impact of New Accounting Standards." NON-INTEREST EXPENSE Total non-interest expense totalled $4.4 million for the year ended December 31, 1995 compared to $3.5 million for the year ended December 31, 1994. This increase is primarily attributable to the expenses related to compensation and benefits increasing from $1.6 million for the year ended December 31, 1994 to $2.5 million for the year ended December 31, 1995. These costs are directly related to the expansion of the mortgage financing operations and the corresponding increase in personnel. Loans originated and purchased increased from $72.8 million for the year ended December 31, 1994 to $134.8 million for the year ended December 31, 1995, which resulted in increased employee commissions. Premises and occupancy, data processing and other expense increased as a result of the addition of the Riverside loan center in November 1995 and the increased loan activity during the year ended December 31, 1995 compared to the year ended December 31, 1994. INCOME TAXES The provision for income taxes increased from a benefit of $300,000 for the year ended December 31, 1994 to an expense of $294,000 for the year ended December 31, 1995. This increase is a result of income before income taxes of $814,000 for the year ended December 31, 1995 compared to a loss before income taxes of $971,000 for the year ended December 31, 1994 and the resulting increase in the Bank's effective rate from 30.9% to 36.1% for the year ended December 31, 1995. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1995 AND DECEMBER 31, 1994 Total assets increased from $71.4 million as of December 31, 1994 to $74.1 million as of December 31, 1995, which was directly attributable to loans held for sale. Loans held for sale increased to $21.7 million at December 31, 1995 compared to $17.1 million at December 31, 1994, which was offset by a decrease in loans held for investment from $47.1 million at December 31, 1994 to $41.7 million at December 31, 1995. During the year ended December 31, 1995 the Bank originated and purchased $134.8 million in loans, which were offset by sales totalling $126.9 million. Cash and cash equivalents also increased during the year ended December 31, 1995 to $3.9 million from $1.5 million at December 31, 1994 due to the increase in deposits from $65.7 million at December 31, 1994 to $67.5 million at December 31, 1995. The increase in assets were funded by an increase in deposits and other liabilities. Borrowings totalled $1.3 million as of December 31, 1994 compared to zero at December 31, 1995. Deposits slightly increased from $65.7 30 million at December 31, 1994 to $67.5 million at December 31, 1995. Other liabilities increased as a result of an increase in loans serviced for others and the corresponding impounds thereon. With earnings of $520,000 for the year ended December 31, 1995, total stockholders' equity increased from $3.7 million for the year ended December 31, 1994 to $4.3 million for the year ended December 31, 1995. Tangible, core and risk based capital ratios increased from 5.25%, 5.25% and 10.00% as of December 31, 1994, to 5.68%, 5.68% and 10.17% as of December 31, 1995, respectively. During the same period, non-performing loans as a percent of gross loans decreased from 2.90% as of December 31, 1994 to 2.17% as of December 31, 1995. Non-performing assets as a percent of total assets decreased from 3.42% to 3.00% as of December 31, 1994 and December 31, 1995, respectively. See "Business--Lending Activities--Delinquencies and Classified Assets." MANAGEMENT OF INTEREST RATE RISK The principal objective of the Bank's interest rate risk management function is to evaluate the interest rate risk included in certain balance sheet accounts, determine the level of appropriate risk given the Bank's business focus, operating environment, capital and liquidity requirements and performance objectives and manage the risk consistent with Board approved guidelines through the establishment of prudent asset concentration guidelines. Through such management, management of the Bank seeks to reduce the vulnerability of the Bank's operations to changes in interest rates. Management of the Bank monitors its interest rate risk as such risk relates to its operational strategies. The Bank's Board of Directors reviews on a quarterly basis the Bank's asset/liability position, including simulations of the effect on the Bank's capital of various interest rate scenarios. The extent of the movement of interest rates, higher or lower, is an uncertainty that could have a negative impact on the earnings of the Bank. Net Portfolio Value. The Bank's interest rate sensitivity is monitored by management through the use of a model which estimates the change in net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. An NPV Ratio, in any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The sensitivity measure is the decline in the NPV Ratio, in basis points, caused by a 2% increase or decrease in rates, whichever produces a larger decline (the "Sensitivity Measure"). The higher an institution's Sensitivity Measure is, the greater its exposure to interest rate risk is considered to be. The Bank utilizes a market value model prepared by the OTS (the "OTS NPV model"), which is prepared quarterly, based on the Bank's quarterly Thrift Financial Reports filed with the OTS. The OTS NPV model measures the Bank's interest rate risk by approximating the Bank's NPV, which is the net present value of expected cash flows from assets, liabilities and any off-balance sheet contracts, under various market interest rate scenarios which range from a 400 basis point increase to a 400 basis point decrease in market interest rates. The interest rate risk policy of the Bank provides that the maximum permissible change at a 400 basis point increase or decrease in market interest rates is a 45% change in the net portfolio value. The OTS has incorporated an interest rate risk component into its regulatory capital rule. Under the rule, an institution whose sensitivity measure exceeds 2% would be required to deduct an interest rate risk component in calculating its total capital for purpose of the risk-based capital requirement. See "Regulation-- Federal Savings Institution Regulation." As of December 31, 1996, the most recent date for which the relevant data is available, the Bank's sensitivity measure, as measured by the OTS, resulting from a 200 basis point decrease in interest rates was 96 basis points and would result in a $1.0 million reduction in the NPV of the Bank. The NPV Ratio sensitivity measure is below the threshold at which the Bank could be required to hold additional risk- based capital under OTS regulations. The OTS has postponed the date the component will first be deducted from an institution's total capital to provide the OTS with an opportunity to review the interest rate risk approaches taken by the other federal banking agencies. See "Regulation-- Federal Savings Institution Regulation." Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV requires the making of certain assumptions that may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates. First, the models assume that the 31 composition of the Bank's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured. Second, the models assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Third, the model does not take into account the impact of the Bank's business or strategic plans on the structure of interest-earning assets and interest-bearing liabilities. Accordingly, although the NPV measurement provides an indication of the Bank's interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on the Bank's net interest income and will differ from actual results. The results of this modeling are monitored by management and presented to the Board of Directors, quarterly. The following table shows the NPV and projected change in the NPV of the Bank at December 31, 1996 assuming an instantaneous and sustained change in market interest rates of 100, 200, 300 and 400 basis points ("bp"). INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
NPV AS % OF PORTFOLIO NET PORTFOLIO VALUE VALUE OF ASSETS -------------------------- ------------------------ CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO %CHANGE --------------- -------- -------- -------- ----------- ----------- (DOLLARS IN THOUSANDS) +400 bp $12,688 (1,393) (10)% 11.99% -97 bp +300 bp 13,629 (451) (3) 12.73 -23 bp +200 bp 14,282 201 1 13.22 +26 bp +100 bp 14,185 104 1 13.10 +14 bp Static 14,080 12.96 -100 bp 13,613 (468) (3) 12.52 -44 bp -200 bp 13,038 (1,042) (7) 12.00 -96 bp -300 bp 12,282 (1,799) (13) 11.33 -163 bp -400 bp 11,748 (2,332) (17) 10.83 -213 bp
LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds are deposits, FHLB advances, principal and interest payments on loans and mortgage-backed securities, proceeds from the sale of loans, and to a lesser extent, interest payments on investment securities and proceeds from the maturation of investment securities. In the immediate and foreseeable future, the Company also plans to fund loans from the proceeds derived from asset securitizations. See "Risk Factors--Availability of Funding Sources" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. However, the Company has continued to maintain the required minimum levels of liquid assets as defined by OTS regulations. This requirement, which may be varied at the direction of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required ratio is currently 5%. The Bank's average liquidity ratios were 8.5%, 9.4% and 8.9% for the years ended December 31, 1996, 1995 and 1994, respectively. Management currently attempts to maintain a liquidity ratio between 5.0 and 8.0 percent. The Company's cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities and financing activities. Cash flows used in operating activities were $18.7 million, $5.3 million and $6.9 million, for the years ended December 31, 1996, 1995 and 1994, respectively. Such cash flows primarily consisted of loans originated and purchased for sale (net of loan fees) of $227.2 million, $135.6 million and $72.6 million, net of proceeds from the sale and securitization of loans held for sale of $212.2 million, $130.1 million and $66.4 million for the years ended December 31, 1996, 1995 and 1994, respectively. Net cash provided by investing activities consisted primarily of investment purchases offset by principal collections on loans and proceeds from maturation of investment purchases. Proceeds from the maturation of 32 investment securities were $2.0 million, $9.2 million and $2.0 million for the years ended December 31, 1996, 1995 and 1994, respectively. Net cash provided by (used in) financing activities consisted primarily of net activity in deposit accounts and FHLB advances. The net increase (decrease) in deposits and advances was $18.2 million, $596,000 and $(6.3) million for the years ended December 31, 1996, 1995 and 1994, respectively. The Bank also received proceeds from the issuance of common stock in the Private Placement of $3.5 million in August 1996. At December 31, 1996, the Bank exceeded all of its regulatory capital requirements with a tangible capital level of $9.3 million, or 8.9% of total adjusted assets, which is above the required level of $1.6 million, or 1.50%; core capital of $9.3 million, or 8.9% of total adjusted assets, which is above the required level of $3.1 million, or 3.0%, and risk-based capital of $10.4 million, or 9.4% of risk-weighted assets, which is above the required level of $8.9 million, or 8.0%. See "Capitalization" and "Regulation--Federal Savings Institution Regulation--Capital Requirements." The Company's most liquid assets are cash and short-term investments. The levels of these assets are dependent on the Company's operating, financing, lending and investing activities during any given period. At December 31, 1996, cash and short-term investments totalled $13.3 million. The Company has other sources of liquidity if a need for additional funds arises, including the utilization of FHLB advances. At December 31, 1996, the Bank had no advances outstanding from the FHLB. Other sources of liquidity include investment securities maturing within one year. On an on-going basis, the Company explores opportunities to access credit lines as an additional source of funds for its mortgage financing operations and expects to use the warehouse line of credit and/or the repurchase financing facilities of a national investment banking firm to fund loan originations in the near future. See "Risk Factors--Availability of Funding Sources." The Company currently has no material contractual obligations or commitments for capital expenditures. At December 31, 1996 the Bank had outstanding commitments to originate mortgage loans and to purchase mortgage loans of $5.0 million, and $4.2 million, respectively compared to $1.8 million and $8.1 million, respectively at December 31, 1995. The Company anticipates that it will have sufficient funds available to meet its current loan origination commitments. See "Business--Background--General." Certificates of deposit which are scheduled to mature one year or less from December 31, 1996, totalled $59.4 million. The Company expects that a substantial portion of the maturing certificates of deposit will be retained by the Company at maturity. IMPACT OF INFLATION AND CHANGING PRICES The Financial Statements and Notes thereto presented herein have been prepared in accordance with Generally Accepted Accounting Principles ("GAAP"), which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. IMPACT OF NEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires that long lived assets and certain identifiable intangibles be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. However, SFAS No. 121 does not apply to financial instruments, core deposit intangibles, mortgage and other servicing rights or deferred tax assets. The adoption of SFAS No. 121 in 1996 did not have a material effect on the Bank's income from operations or financial condition. 33 Effective July 1, 1995, the Bank adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS No. 122"), which amended SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." SFAS No. 122 requires an institution that purchases or originates mortgage loans and sells or securitizes those loans with servicing rights retained to allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. The impact of adopting SFAS No. 122 was an increase in pretax earnings of $594,000, net income of $438,000 and earnings per share of $0.23, as adjusted for the Reorganization, for the year ended December 31, 1995. In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which encourages companies to account for stock compensation awards based on their fair value at the date the awards are granted. SFAS No. 123 does not require the application of the fair value method and allows for the continuance of current accounting methods, which require accounting for stock compensation awards based on their intrinsic value as of the grant date. However, SFAS No. 123 requires proforma disclosure of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in this Statement had been applied. The accounting and disclosure requirements of this Statement are effective for financial statements for fiscal years beginning after December 15, 1995. The Bank did not adopt the recognition provisions of SFAS No. 123 with respect to the Stock Option Plan. In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"), which was amended by SFAS No. 127. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial- components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Under the financial-components approach, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. The financial-components approach focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the transfer is accounted for as a secured borrowing with pledge of collateral. The Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. Retroactive application of this Statement is not permitted. The Company does not anticipate that the implementation of SFAS No. 125 will have a material impact on its results of operations or financial condition. LIFE FINANCIAL CORP. Life Financial Corp. is a Delaware corporation recently organized by the Bank as a financial services holding company. The Company will own all of the capital stock of the Bank upon completion of the Reorganization. Immediately following the Reorganization, the only significant assets of the Company will be the capital stock of the Bank and the net proceeds of the Offering. Net proceeds received by the Company will be used to (i) acquire approximately $12.3 million of residuals and $6.6 million in the Reserve Account resulting from the Securitization and a securitization completed during the first quarter of 1997 (which, when netted against the net subordinated debt of $9.6 million expected to be transferred to the Company following the Reorganization, would total $9.3 million), see "Recent Developments"; (ii) acquire an interest in or establish a subsidiary for the purpose of providing short term warehouse lines of credit; (iii) downstream proceeds to the Bank if necessary to fund additional purchases and sales of loans; and (iv) fund general business activities including possible acquisitions of related businesses as opportunities arise. However, the Company has not entered into any arrangement, agreement or understanding with respect to future acquisitions and there can be no assurance that it will do so in the future. No determination has been made as to the amount of proceeds that will be allocated to each use, with the exception of the acquisition of the residuals and restricted cash. On an interim basis, the net proceeds are expected to be invested in short to intermediate-term investment securities and mortgage-backed securities. See "Use of Proceeds" and "Business." The Company's principal executive offices are located at 4110 Tigris Way, Riverside, California 92503 and its telephone number at that location is (909) 280-5100. 34 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK The Bank originally was chartered as a stock savings and loan association under the laws of the State of California in 1983 and became a federally chartered stock savings bank in 1991. The Bank conducts its business from its home office in San Bernardino, California, a mortgage financing office in Riverside, California, a loan center in Jacksonville, Florida and a recently established loan center in the Denver, Colorado metropolitan area. At December 31, 1996, the Bank had total assets of $104.0 million, total deposits of $85.7 million and total equity of $9.3 million. The Bank's deposits are insured up to the maximum allowable amount by the SAIF of the FDIC. The Bank's corporate offices are located at 1598 East Highland Avenue, San Bernardino, California 92404 and its telephone number is (909) 886-9751. BUSINESS BACKGROUND General. The Bank originates, purchases, sells and services primarily non- conventional mortgage loans principally secured by first and second mortgages on one- to four-family residences. The Bank has focused on Liberator Series loans which are for the purchase or refinance of residential real property by borrowers who, because of prior credit problems or the absence of a credit history, are considered "sub-prime borrowers." In addition, the Bank has originated a substantial number of Portfolio Series loans which are debt consolidation loans for Agency Qualified Borrowers. The Bank purchases and originates mortgage loans and other real estate secured loans through a network of approved correspondents and mortgage brokers on a nationwide basis. Except for a limited number of loans specifically originated for retention in the Bank's portfolio as loans held for investment, since 1994, loans originated or purchased through the loan operation are generally originated for sale in the secondary mortgage market and, more recently, in asset securitizations. During the fourth quarter of 1996, the Bank securitized $51.9 million of loans in a "AAA" rated securitization. The Bank generally retains the servicing rights on the majority of loans sold and securitized and may sell servicing rights at a later date depending on market opportunities. In addition, the Bank engages in retail lending activities in its primary market area on a limited basis. The Bank funds substantially all of the loans which it purchases or originates through deposits from customers concentrated in the communities surrounding its home office in San Bernardino, internally generated funds, and FHLB advances. In the immediate and foreseeable future, the Company also plans to fund loans from the proceeds derived from asset securitizations. On an on-going basis, the Bank explores opportunities to access credit lines as an additional source of funds and expects to use the warehouse line of credit and/or the repurchase financing facilities of a national investment banking firm to fund loan originations in the future. There can be no assurances, however, that the Company will be able to complete future asset securitizations as planned or that the Company will be able to access lines of credit. See "Recent Developments," "Risk Factors--Dependence on Asset Securitizations and Impact on Quarterly Operating Results" and "-- Availability of Funding Sources." Strategy. During the early 1990s, Southern California experienced reduced employment levels as a result of the downsizing of the defense industry, corporate relocations and the general weakness of the national economy. Additionally, the area experienced a general weakening of real estate values and a reduction in home sales and construction. At the same time, the Bank experienced increased competition both in originating and selling conforming loans, which resulted in nominal growth in the Bank's lending operations during this time. Consequently, the Bank's results of operations were adversely impacted and the Bank began to experience increases in total non- performing loans held for investment. In 1994, the Bank retained new management experienced in the sub-prime business to reorganize its lending operations and revise underwriting policies and procedures. A strategic plan was developed for the Bank pursuant to which (1) the Bank reorganized its lending strategies, changing strategies from a strategy which emphasized traditional mortgage banking operations and traditional portfolio lending to a financial services operation strategy 35 focusing on the origination for sale, while retaining servicing, of (i) Liberator Series loans; (ii) Portfolio Series loans; (iii) commercial real estate loans; and (iv) multi-family real estate loans; (2) the Bank adopted revised underwriting procedures and instituted more aggressive procedures for resolving problem loans and for reducing the level of non-performing assets; and (3) the Bank improved its profitability. As part of the Bank's strategic plan, the Bank developed an internal structure of operating divisions, each with distinct objectives and management focus including (i) the Financial Services Division, with emphasis on wholesale origination of residential mortgage loans; (ii) the Income Capital Services Division which originates and sells commercial and multi-family loans; (iii) the Retail Loan Division which concentrates on offering the Bank's loan products to the public primarily in the Bank's primary market area; (iv) the Asset Management Division which services loans and REO for both the Bank and for purchasers of loans (the "Investors"); and (v) the Banking Division which offers depository services to the public. Within this structure, the Bank began to implement its strategic plan and as a result of this strategy: . The Bank has experienced considerable growth in loan production, as total purchases and originations increased from $72.8 million for the year ended December 31, 1994 to $134.8 million for the year ended December 31, 1995 and were $222.6 million for the year ended December 31, 1996. Similarly, the Bank's loan sales and securitizations increased from $65.7 million for the year ended December 31, 1994 to $126.9 million for the year ended December 31, 1995 and were $206.6 million for the year ended December 31, 1996. Gains from mortgage financing operations increased from $1.4 million for the year ended December 31, 1994 to $3.6 million for the year ended December 31, 1995 and were $8.4 million for the year ended December 31, 1996. Loan servicing and other fees have increased from $164,000 for the year ended December 31, 1994 to $231,000 for the year ended December 31, 1995 and were $496,000 for the year ended December 31, 1996. At December 31, 1996 the Company was servicing $169.0 million of loans for others. . Non-performing assets as a percent of total assets have decreased from 5.05% at December 31, 1993 to 2.86% at December 31, 1996. REO, net decreased from $1.8 million, or 2.26% of total assets, at December 31, 1993 to $561,000, or 0.54% of total assets, at December 31, 1996. Non- performing loans as a percent of gross loans receivable has increased from 3.24% at December 31, 1993 to 3.50% at December 31, 1996 while the allowance for estimated loan losses as a percent of gross loans receivable has increased from 0.65% at December 31, 1993 to 2.36% at December 31, 1996. . Primarily due to the success of the Bank's mortgage financing operations, the Bank's net income increased to $520,000 for the year ended December 31, 1995 and to $1.5 million for the year ended December 31, 1996 despite the costs of resolving problem loans originated in prior periods. The Company had net income of $93,000 for the year ended December 31, 1993 and experienced a net loss of $671,000 for the year ended December 31, 1994. Non-interest income increased from $1.4 million for the year ended December 31, 1993 to $1.7 million for the year ended December 31, 1994 to $4.0 million for the year ended December 31, 1995 and was $9.1 million for the year ended December 31, 1996. Non-interest expense increased from $4.4 million for the year ended December 31, 1995 to $8.7 million for the year ended December 31, 1996. This increase was primarily due to the Bank's $448,000 share of an industry-wide special assessment levied against the March 31, 1995 deposit bases of all savings institutions in the country with deposits insured by the SAIF in order to recapitalize the SAIF and a non-recurring expense for compensation and benefits of $354,000 which was incurred in the year ended December 31, 1996. Net income for the year ended December 31, 1996, would have been $2.0 million if these charges had not been incurred. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RESTRUCTURING General. In 1996, management of the Bank determined that in order to become a full service financial services company it would be necessary (i) to reorganize into the holding company form of organization, (ii) to form separate holding company subsidiaries, (iii) to restructure the Bank by forming separate operating subsidiaries, and (iv) to raise additional capital to fund operations and expansion. 36 The Reorganization. The Boards of Directors of the Company and the Bank unanimously approved and entered into the Plan of Reorganization pursuant to which the Bank will be reorganized into a holding company structure and become a wholly-owned subsidiary of the Company, subject to the approval of the Bank's stockholders. See "The Reorganization." Management believes that the holding company form of organization will provide the Company with more flexibility and a greater ability to compete with other financial services companies in the market place. Formation of Company Subsidiary. At the time of the Reorganization the Company will establish Life Investment Holdings, a bankruptcy remote entity, for the purpose of holding residuals created by its asset securitizations. Immediately upon the completion of the Offerings, the Company will acquire $12.3 million of residuals and $6.6 million in the Reserve Account resulting from the Securitization and a securitization completed during the first quarter of 1997. See "Recent Developments." Due to regulatory restrictions, the Bank is limited in the amount of investment in residuals and related assets that it can retain. It is intended that any future residuals and related assets will be purchased by this subsidiary, as a result of such regulatory limitations. See "--Investment Activities." In addition to the foregoing, upon the completion of the Offerings, the Company may acquire or establish a subsidiary to provide warehouse lines of credit to meet the cash flow needs of smaller loan originators on a short-term basis, which it is expected will in turn create additional sources of loans for the Company to purchase and securitize. See "Use of Proceeds." Formation of Operating Subsidiaries. Applications and notices are in the process of being prepared for filing with the appropriate regulatory agencies to form several operating subsidiaries. . Life Financial Services, which primarily operates out of an owned facility in Riverside, California, will assume the functions of the Life Financial Services Division of the Bank. This subsidiary will continue to focus on Liberator Series loans, which are loans for the purchasing or refinancing of residential real property by borrowers who, because of prior credit problems or the absence of a credit history, are considered "sub-prime borrowers." In addition, this subsidiary will continue to originate Portfolio Series loans, which are debt consolidation loans for Agency Qualified Borrowers. During the fourth quarter of 1996, the Bank securitized $51.9 million of loans through a public offering of "AAA rated," credit enhanced, asset-backed securities. See "--Lending Activities--Loan Sales and Asset Securitizations." Through this subsidiary, the Company intends to conduct asset securitizations at a rate of one per quarter and, in the future, plans to transfer this subsidiary directly to the Company. There can be no assurance, however, that any asset securitizations will be completed in the future. The Bank raised $3.5 million net in the Private Placement during the third quarter of 1996 which provided it with the capital to undertake its first asset securitization. Although there can be no assurances in this regard, management intends to expand the operations of this subsidiary and expects its operations to create a major source of revenue for the Company. . Life Income Capital is being established for the purpose of originating and selling multi-family and commercial real estate loans in the $50,000 to $750,000 range. Prior to the third quarter of 1996, the Bank was substantially limited in its ability to originate such loans by its level of available capital. Although the Bank had the ability to raise the funds to finance such loans prior to the third quarter of 1996, with the level of leveraging needed to do so, it would have been unable to maintain its required capital ratios during the period of origination to sale. Although there can be no assurances in this regard, management intends to expand the operations of this subsidiary and expects the operations of this subsidiary to create an increased source of revenue for the Company because of the perceived demand for and higher yields on such loans. See "Risk Factors--Real Estate Secured Risks" for a discussion of the risks associated with multi-family and commercial real estate lending. . Life Asset Management is being established as a direct subsidiary of the Bank to service loans and REO for both the Bank and for purchasers of loans. The Retail Lending Division and the Banking Depository Division will remain within the Bank. In addition, as part of its liquidity and investment portfolios, the Bank will continue to hold investments in U.S. government 37 and agency securities. As part of its ongoing commitment to the Southern California area and more specifically to the Inland Empire region, which consists of the counties of San Bernardino and Riverside, the Bank will lend to and invest in community development programs. As of January 1997, the Bank had committed to lend or invest $2.5 million in such projects. See "--Lending Activities--One- to Four-Family Mortgage Lending." Capital Raising. In order to fund the acquisition of the residuals and the Reserve Account currently in the Bank's portfolio, to acquire or form a subsidiary to provide warehouse lines of credit and for general corporate purposes, including the origination and purchase of loans to be securitized or sold in the secondary market and to grow and expand operations through the establishment of retail lending and mortgage banking offices, the Company is conducting the Public Offering to raise approximately $24.9 million in Net Proceeds in connection with the Reorganization. COMPETITION As a purchaser and originator of mortgage loans, the Bank faces intense competition, primarily from mortgage banking companies, commercial banks, credit unions, thrift institutions, credit card issuers and finance companies. Many of these competitors in the financial services business are substantially larger and have more capital and other resources than the Bank. Furthermore, certain large national finance companies and conforming mortgage originators have announced their intention to adapt their conforming origination programs and allocate resources to the origination of non-conforming loans. In addition, certain of these larger mortgage companies and commercial banks have begun to offer products similar to those offered by the Bank targeting customers similar to those of the Bank. The entrance of these competitors into the Bank's market could have a material adverse effect on the Bank's results of operations and financial condition. Competition can take many forms, including convenience in obtaining a loan, service, marketing and distribution channels and interest rates. Furthermore, the current level of gains realized by the Bank and its competitors on the sale of the type of loans purchased and originated is attracting additional competitors, including at least one quasi-governmental agency, into this market with the effect of lowering the gains that may be realized by the Bank on future loan sales. Competition may be affected by fluctuations in interest rates and general economic conditions. During periods of rising rates, competitors which have "locked in" low borrowing costs may have a competitive advantage. During periods of declining rates, competitors may solicit the Bank's borrowers to refinance their loans. During economic slowdowns or recessions, the Bank's borrowers may have new financial difficulties and may be receptive to offers by the Bank's competitors. The Bank depends largely on correspondents and brokers for its purchases and originations of new loans. The Bank's competitors also seek to establish relationships with the Bank's correspondents and brokers. The Bank's future results may become more exposed to fluctuations in the volume and cost of its wholesale loans resulting from competition from other purchasers of such loans, market conditions and other factors. In addition, the Bank faces increasing competition for deposits and other financial products from non-bank institutions such as brokerage firms and insurance companies in such areas as short-term money market funds, corporate and government securities funds, mutual funds and annuities. In order to compete with these other institutions with respect to deposits and fee services, the Bank relies principally upon local promotional activities, personal relationships established by officers, directors and employees of the Bank and specialized services tailored to meet the individual needs of the Bank's customers. COMPETITIVE STRENGTHS Management believes that its competitive strengths include prompt, responsive service, its underwriting process, an extensive correspondent network with which the Bank has had previous experience and repeat business and a diversified network of investors to which the Bank sells loans in the secondary mortgage market. As a result of its Securitization of $51.9 million of loans in the fourth quarter of 1996, the Bank has established a relationship with a nationally recognized investment banking firm with whom or through whom it intends to 38 offer future asset securitizations. There can be no assurances, however, that any future asset securitizations will be undertaken or completed. See "Risk Factors--Dependence on Asset Securitizations and Impact on Quarterly Operating Results" and "--Lending Activities--Loan Sales and Asset Securitizations." Management believes that it has the capacity to process more loans than it currently is processing and that it can process such loans at a lower cost than some of its competitors. In most cases, the Bank conditionally approves loans within 48 hours from receipt of an application and funds loans immediately upon receipt of all conditions for approval of the loan. Life Financial Services' ability to process and fund loans is further enhanced by the support and complementary operations of the Bank. Management believes that the Bank's underwriting process is also enhanced by its experienced staff and their utilization of a software program designed to evaluate the borrower's credit history based upon geographic location, demographic information and other credit scoring techniques. LENDING ACTIVITIES Loan Portfolio Composition. At December 31, 1996, the Bank had gross loans outstanding of $69.0 million, of which $30.5 million were held for sale. The Bank's gross loan portfolio consists of $54.3 million or 78.7% of mortgage loans secured by one- to four-family residences. The remainder of the portfolio consists of $9.7 million of commercial real estate and land loans, or 14.0% of total gross loans; $4.8 million of multi-family mortgage loans, or 6.9% of total gross loans; and $309,000 of consumer and other loans, or 0.4% of total gross loans. At December 31, 1996, 85.4% of the Bank's mortgage loans had adjustable interest rates. In recent periods, the Bank has sought to decrease the percentage of adjustable-rate mortgage loans held for investment which are tied to COFI, an index that lags changes in general market rates of interest and increase the percentage tied to LIBOR or U.S. Treasury security indices as these tend to reprice more frequently. It is the current practice of the Company to only invest in loans which are tied to COFI on a case by case basis. Of the Bank adjustable-rate mortgage loans at December 31, 1996, 46.0% were indexed to COFI, 4.8% were indexed to the prime rate and 49.2% were indexed to either the LIBOR or U.S. Treasury security indices. The types of loans that the Company may originate are subject to federal and state law and regulations. Interest rates charged by the Company on loans are affected by the demand for such loans and the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by, among other things, economic conditions, monetary policies of the federal government, including the Federal Reserve Board, and legislative tax policies. 39 The following table sets forth the composition of the Bank's loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated.
AT DECEMBER 31, ------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------------- ---------------- --------------- --------------- --------------- PERCENT PERCENT PERCENT PERCENT PERCENT OF OF OF OF OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Real estate(1): Residential: One- to four-family.... $54,275 78.67% $54,007 84.04% $53,755 82.62% $55,841 83.01% $53,816 81.68% Multi-family........... 4,752 6.89 2,412 3.75 2,685 4.12 2,296 3.41 2,338 3.55 Commercial and land.... 9,659 14.00 7,522 11.71 8,131 12.50 8,389 12.47 8,930 13.55 Other loans: Loans secured by deposit accounts...... 177 0.25 186 0.29 213 0.33 396 0.59 381 0.58 Unsecured commercial loans................. 67 0.10 70 0.11 197 0.30 190 0.28 224 0.34 Unsecured consumer loans................. 65 0.09 63 0.10 84 0.13 162 0.24 200 0.30 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total gross loans..... 68,995 100.00% 64,260 100.00% 65,065 100.00% 67,274 100.00% 65,889 100.00% ====== ====== ====== ====== ====== Less (plus): Deferred loan origination (costs) fees and (premiums) discounts............. (543) (298) 56 109 209 Allowance for estimated loan losses........... 1,625 1,177 832 436 308 ------- ------- ------- ------- ------- Loans receivable, net.................. $67,913 $63,381 $64,177 $66,729 $65,372 ======= ======= ======= ======= =======
- -------- (1) Includes second trust deeds. Loan Maturity. The following table shows the contractual maturity of the Bank's gross loans at December 31, 1996. There were $31.0 million of loans held for sale at December 31, 1996. The table does not reflect prepayment assumptions.
AT DECEMBER 31, 1996 ---------------------------------------------- TOTAL ONE- TO MULTI- COMMERCIAL OTHER LOANS FOUR-FAMILY FAMILY AND LAND LOANS RECEIVABLE ----------- ------ ---------- ----- ---------- (DOLLARS IN THOUSANDS) Amounts due: One year or less.............. $ 1,077 $ -- $ -- $249 $ 1,326 After one year: More than one year to three years...................... 1,130 -- -- 53 1,183 More than three years to five years................. 581 124 3,077 7 3,789 More than five years to 10 years...................... 838 -- 1,792 -- 2,630 More than 10 years to 20 years...................... 7,406 553 1,103 -- 9,062 More than 20 years.......... 43,243 4,075 3,687 -- 51,005 ------- ------ ------ ---- ------- Total amount due.......... 54,275 4,752 9,659 309 68,995 Less (plus): Unamortized discounts (premiums), net............ (601) -- -- -- (601) Deferred loan origination fees (costs)............... (15) 40 33 -- 58 Allowance for estimated loan losses..................... 1,462 20 124 19 1,625 ------- ------ ------ ---- ------- Total loans, net.......... 53,429 4,692 9,502 290 67,913 Loans held for sale......... 26,051 2,588 2,379 -- 31,018 ------- ------ ------ ---- ------- Loans receivable, net....... $27,378 $2,104 $7,123 $290 $36,895 ======= ====== ====== ==== =======
40 The following table sets forth at December 31, 1996, the dollar amount of gross loans receivable contractually due after December 31, 1997, and whether such loans have fixed interest rates or adjustable interest rates.
DUE AFTER DECEMBER 31, 1997 ------------------------------ FIXED ADJUSTABLE TOTAL -------- --------------------- (DOLLARS IN THOUSANDS) Real estate loans: Residential: One- to four-family......................... $ 8,862 $ 44,336 $ 53,198 Multi-family................................ 98 4,654 4,752 Commercial and land........................... 528 9,131 9,659 Other loans................................... 60 -- 60 -------- --------- --------- Total gross loans receivable.............. $ 9,548 $ 58,121 $ 67,669 ======== ========= =========
Origination and Purchase of Loans. The Bank has concentrated its efforts on developing market niches for the origination and purchase of real estate secured loans. In recent years through Life Financial Services, the Bank has focused on Liberator Series loans which are loans for the purchase or refinance of one- to four-family residential real property by borrowers who, because of prior credit problems or the absence of a credit history are considered "sub-prime borrowers," and loans which otherwise do not conform to FHLMC or FNMA guidelines ("conforming loans"). Loans to sub-prime borrowers are perceived by the Company's management as being advantageous to the Company because they generally have higher interest rates and origination and servicing fees and generally lower loan-to-value ratios than conforming loans. In addition, management believes the Company has the resources to adequately resolve loans acquired pursuant to this program which become non-performing after acquisition. The Bank has established specific underwriting policies and procedures, invested in facilities and systems and developed correspondent relationships with various entities and brokers throughout the country which has enabled the Bank to develop its niche as an originator and purchaser of one- to four-family residential loans to sub-prime borrowers. The Bank also engages in the origination of loans in its primary market area. See "Risk Factors--Risks Associated with Sub-Prime Lending." The Bank originates both adjustable-rate and fixed-rate mortgage loans. Although most fixed-rate loans are underwritten to the Bank's published guidelines and to qualify for sale to non-quasi governmental agencies, the Company may originate loans which conform to FHLMC or FNMA guidelines. The Bank's ability to originate loans is dependent upon the relative customer demand for fixed-rate or adjustable-rate mortgage loans, which is affected by the current and expected future level of interest rates. At December 31, 1996, 86.0% of the Bank's mortgage loans held for investment had adjustable rates. The Bank's adjustable-rate mortgage loans require that any payment adjustment resulting from a change in the interest rate be made to both the interest and payment in order to result in full amortization of the loan by the end of the loan term, and thus, do not permit negative amortization. In continuing with its tradition as a niche market lender and as part of its revised lending strategy, the Bank, through Life Income Capital, has recently begun to focus its efforts on the origination and purchase of multi-family and commercial real estate loans. Specifically, the Bank has begun to target the market for borrowers seeking loans in the range of $50,000 to $750,000 which are secured by multi-family properties or properties used for commercial business purposes such as small office buildings, light industrial or retail facilities. To date, the Bank has been limited in its ability to originate such loans by its level of available capital. Although there can be no assurances in this regard, management intends to expand the operations of this subsidiary, thereby adding a source of revenue for the Company as well as providing loans for future securitizations. There can be no assurances, however, that any such securitization will be completed in the future. The Bank has originated a substantial number of Portfolio Series loans, which are debt consolidation loans for Agency Qualified Borrowers, both on a wholesale basis and through its Retail Lending Division. These loans 41 are consumer-oriented loans secured by real estate, primarily home equity lines of credit and second deeds of trust, for up to 125% of the appraised value of the real estate underlying the aggregate loans on the property. It is the Company's intent to open retail store-front operations to expand the operations of the Retail Lending division. See "Risk Factors--High Loan to Value Ratios of Portfolio Series Loans." The Company's mortgage financing and servicing operations are conducted primarily through its mortgage financing office in Riverside, California, a loan center in Jacksonville, Florida and a recently established loan center in the Denver, Colorado metropolitan area. The primary focus of the operations of the Riverside office is mortgage banking. The Company may open additional loan centers in other parts of the country if market opportunities warrant. From its present locations, the Company is able to originate or purchase loans in 47 states. For the year ended December 31, 1996, 34.0% of the property securing the loans funded by the Bank were located in California, 11.9% were located in Utah, 7.6% were located in Colorado, 6.8% were located in Florida and the remainder were dispersed throughout the country. The Bank's mortgage lending originations and purchases through its mortgage financing operation for the year ended December 31, 1996 totalled $222.6 million compared to $134.8 million and $72.8 million for the years ended December 31, 1995 and 1994, respectively. Except for loans specifically originated by the Bank to be held for investment, loans originated or purchased through the mortgage financing operation are originated for sale in the secondary mortgage market or for sale in asset securitizations. With the exception of customary provisions relating to breaches of representations and warranties, loans sold or securitized by the Bank generally are without recourse to the Bank and generally are sold with servicing retained. See "Risk Factors--Risks Associated with Mortgage Origination, Purchase and Sale Activities". All loans originated by the Bank, either through internal sources or through correspondent relationships are underwritten by the Bank pursuant to the Company's policies and procedures. Such correspondent institutions originate loans based on guidelines provided by the Bank and promptly sell the loans to the Bank on a servicing-released basis. Loan Sales and Asset Securitizations. Except for loans specifically originated by the Bank to be held for investment, loans originated or purchased through the mortgage financing operation are originated or purchased for sale in the secondary mortgage market and, more recently, through asset securitizations. Loans are sold pursuant to purchase, sale and servicing agreements negotiated with institutional investors to purchase loans meeting the Bank's underwriting criteria. The agreements do not require the Bank to deliver any specific amount of mortgage loans. The Bank expects to enter into new commitments with these entities and other investors in the ordinary course of business. The Bank retains the servicing rights on the majority of mortgage loans sold. However, the Bank also sells loans on a servicing released basis in which the Bank will temporarily continue to subservice the loans for a period of up to nine months. For the years ended December 31, 1996, 1995 and 1994, the Bank sold and securitized $206.6 million, $126.9 million and $65.7 million in loans, respectively. The Bank completed its first asset securitization of $51.9 million of Portfolio Series and Liberator Series Loans during the fourth quarter of 1996 and generated $4.3 million of gains on sales from the Securitization. Upon completion of the Reorganization and the Offering, the residual assets and the Reserve Account will be purchased by Life Investment Holdings, a bankruptcy remote entity which is currently being organized by the Company, for purposes of holding the residuals and related assets created by the Securitization and any future asset securitizations. Securitizations are expected to allow the Company to increase its loan acquisition and origination volume, reduce the risks associated with interest rate fluctuations and provide access to longer term funding sources. The Company currently intends to conduct asset securitizations at a rate of one per quarter either through private placements or in public offerings. For a discussion of the Bank's first quarter asset securitization, see "Recent Developments." There can be no assurance that the Company will be able to successfully implement this strategy in the future. In a securitization, the Company will generally transfer a pool of loans to a separate entity (a "Special Purpose Entity") with the Company retaining the excess cash flows, known as residuals, from the asset securitization which are the difference between the note rate of the mortgages and the coupon rate of the securities after adjustment for servicing and other costs such as trustee fees and credit enhancement fees, which constitutes the proceeds of the securities issued by the Special Purpose Entity. The cash generally will be used to repay borrowings used to finance the pool of loans that were acquired by the Company. Generally, the holders of the securities from the asset securitization are entitled to receive scheduled principal collected on the pool of 42 securitized loans and interest at the pass-through interest rate on the certificate balance. The residual asset represents the subordinated right to receive cash flows from the pool of securitized loans after payment of the required amounts to the holders of the securities and the costs associated with the securitization. The Company may arrange for credit enhancement for a transaction to achieve an improved credit rating on the securities issued if this improves the level of profitability for such transaction. This credit enhancement may take the form of an insurance and indemnity policy, insuring the holders of the securities of timely payment of the scheduled pass- through interest and principal. In addition, the pooling and servicing agreements that govern the distribution of cash flows from the loan pool included in a transaction typically require over-collateralization as an additional means of credit enhancement. Over-collateralization may in some cases also require an initial deposit, the sale of loans at less than par or retention in the Special Purpose Entity of collections from the pool until a specified over- collateralization amount has been attained. In the case of the Securitization, the over-collateralization was in the form of a cash deposit. The purpose of the over-collateralization is to provide a source of payment in the event of higher than anticipated credit losses. Losses resulting from defaults by borrowers on the payment of principal or interest on the loans in a securitized loan pool will reduce the over-collateralization to the extent that funds are available and may result in a reduction in the value of the residual asset and related assets. See "Risk Factors--Dependence on Asset Securitizations and Impact on Quarterly Operating Results." The Company classifies the residual assets as trading securities which are recorded at fair value with any unrealized gains or losses recorded in the results of operations in the period of the change in fair value. Valuations at origination and at each reporting period will be based on discounted cash flow analyses. The cash flows will be estimated as the excess of the weighted average coupon on a pool of loans sold over the sum of the pass-through interest rate, a servicing fee, a trustee fee, an insurance fee and an estimate of annual future credit losses related to the loans securitized, over the life of the loans. These cash flows are projected over the life of the loans using prepayment, default, loss, and interest rate assumptions that market participants would use for similar financial instruments subject to prepayment, credit and interest rate risk and are discounted using an interest rate that a purchaser unrelated to the seller of such a financial instrument would demand. At origination, the Company utilized a prepayment assumption of 17.0%, an estimated loss factor assumption of 1.5% and a weighted average discount rate of 13.5% for the loans securitized during the fourth quarter of 1996, to value the residual asset. The valuation includes consideration of characteristics of the loans including loan type and size, interest rate, origination date, term and geographic location. The Company also uses other available information such as externally prepared reports on prepayments rates, collateral value, economic forecasts and historical default and prepayment rates of the portfolio under review. To the Company's knowledge, there is no active market for the sale of these residuals and related assets. The range of values attributable to the factors used in determining fair value is broad. Accordingly, the Company's estimate of fair value is subjective. The Company intends to retain the servicing rights to the loans it securitizes. The pooling and servicing agreements related to the fourth quarter Securitization contain provisions with respect to the maximum permitted loan delinquency rates and loan default rates which, if exceeded, would allow the termination of the Bank's right to service the related loans. See "Risk Factors--Risks Related to Mortgage Servicing Rights." Servicing rights with an allocated fair value of $722,000 were retained in the Securitization completed during the fourth quarter of 1996. Use and Qualifications of Originators. The Bank purchases loans from originators throughout the country. Such originators must be approved by the Bank prior to submitting loans to the Bank. Pursuant to the Bank's approval process, each originator is generally required to have a specified minimum level of experience in originating non-conforming loans, and provide representations, warranties, and buy-back provisions to the Bank. The Bank generally classifies the originators with which it does business into four classes with descending priority with regard to the terms and the pricing of the loans the Bank purchases from such originators. Correspondents are those originators that have a minimum net worth of $250,000 and (1) have been in business for at least two years; (2) have demonstrated a capacity to do a substantial business; (3) have a warehouse credit facility available to finance their operations; and (4) have errors and omissions insurance in the amount of $1.0 million. Third party originators and junior correspondents have unaudited net worth of $50,000 and $100,000, 43 respectively, and (1) have been in business for at least two years and (2) in the case of junior correspondents, have a warehouse line of credit and have errors and omissions insurance in the amount of $300,000. Mortgage brokers are those persons who do not meet the specific foregoing criteria but have demonstrated to the Bank, or have a reputation for, the ability to originate real estate secured loans and have acceptable credit and finance industry references. Substantially all loans purchased are purchased on an individual basis from correspondents or brokers with whom the Bank has developed relationships. As of December 31, 1996, the Bank did business with approximately 608 mortgage brokers and third party originators and approximately 104 correspondents and junior correspondents throughout the country. Loan Servicing. The Bank's loan servicing activities include (i) the collection and remittance of mortgage loan payments, (ii) accounting for principal and interest and other collections and expenses, (iii) holding and disbursing escrow or impounding funds for real estate taxes and insurance premiums, (iv) inspecting properties when appropriate, (v) contacting delinquent borrowers, and (vi) acting as fiduciary in foreclosing and disposing of collateral properties. The Bank receives a servicing fee for performing these services for others. For the year ended December 31, 1996, the Bank earned $496,000 in servicing and other fees. At December 31, 1996 there were $31.0 million of mortgage loans categorized as held for sale. The Bank sells loans to a number of different investors with which it does business. As such, Management believes that no one investor relationship constitutes the predominant source of sales for the Bank and the Bank does not rely on any specific entities for sales of its loans. In addition, with the commencement of its asset securitization program, the Bank established an additional outlet for the sale of its loans. However, there can be no assurances that future asset securitizations will be commenced or completed successfully. See "Risk Factors--Dependence on Asset Securitizations and Impact on Quarterly Operating Results." While most of the Bank's servicing portfolio is generated through the Bank's origination and purchase activities, when economically attractive, the Bank has, from time to time, made bulk purchases of mortgage servicing rights from financial institutions. The Bank does not intend to make significant bulk purchases of servicing rights in the near future but may do so depending on market opportunities. The mortgage loans underlying the servicing rights retained by the Bank have been underwritten by the Bank. These servicing rights were either originated by mortgage brokers or purchased through various programs from correspondents or junior correspondents. The costs to acquire servicing are based on the present value of the estimated future servicing revenues, net of the expected servicing expenses, for each acquisition. Major factors impacting the value of servicing rights include contractual service fee rates, projected mortgage prepayment speed, projected delinquencies and foreclosures, projected escrow, agency and fiduciary funds to be held in connection with such servicing and the projected benefit to be realized from such funds. See "Risk Factors--Risks Related to Mortgage Servicing Rights." At December 31, 1996, the Bank serviced $169.0 million of loans for others. Any future growth of the mortgage servicing portfolio will be generated primarily through the retention of servicing rights on mortgage loans originated or purchased by the Bank. 44 The following tables set forth the Bank's loan originations, purchases, sales and principal repayments for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Gross loans(1): Beginning balance........................... $ 64,260 $ 65,065 $ 67,274 Loans originated: One- to four-family(2).................. 100,745 38,259 34,740 Multi-family............................ 2,976 -- 85 Commercial and land..................... 7,172 -- 266 Other loans............................. 126 358 452 ---------- ---------- ---------- Total loans originated................ 111,019 38,617 35,543 Loans purchased........................... 111,534 96,155 37,272 ---------- ---------- ---------- Total................................. 286,813 199,837 140,089 Less: Principal repayments........................ 9,184 6,719 7,440 Sales of loans.............................. 154,620 126,875 65,713 Securitizations of loans.................... 51,944 -- -- Transfer to REO............................. 2,070 1,983 1,871 ---------- ---------- ---------- Total loans........................... 68,995 64,260 65,065 Loans held for sale......................... 30,454 21,397 17,146 ---------- ---------- ---------- Ending balance loans held for investment...... $ 38,541 $ 42,863 $ 47,919 ========== ========== ==========
- -------- (1) Gross loans includes loans held for investment and loans held for sale. (2) Includes second trust deeds. One- to Four-Family Mortgage Lending. The Bank originates and purchases both fixed-rate and adjustable-rate mortgage loans with maturities up to 30 years, secured primarily by first trust deeds on one- to four-family residences. The Bank also originates second trust deeds. During the year ended December 31, 1996, the Bank originated or purchased $65.0 million of second trust deed loans. Except for loans specifically originated to be held for investment, all loans originated or purchased through the mortgage financing operation are originated or purchased for sale in the secondary mortgage market and/or through securitizations. See "--Loan Sales and Asset Securitizations." As part of its strategy, the Company intends to continue to expand the volume of Liberator Series loans which it originates and purchases to market areas throughout the country to sub-prime borrowers who meet its niche lending criteria. Loan originations are obtained from the Bank's loan representatives and their contacts with the local real estate industry, existing or past customers, members of the local communities and wholesale correspondents and brokers on a nationwide basis. The Company intends to continue to originate loans to be held for investment and may originate loans which conform to FNMA or FHLMC guidelines in order to meet this objective. At December 31, 1996, $38.5 million, or 55.9%, of the Bank's gross loan portfolio was held for investment, substantially all of which was secured by properties located in California. As part of the Bank's ongoing commitment to the Southern California area, and more specifically the Inland Empire region, the Bank has committed to lend and invest $2.5 million, designated as investments in Community Development. This investment in the local community may be used for (i) lending for home improvement in low to moderate income areas on one- to four-family residential properties, (ii) providing redevelopment loans to facilitate the rehabilitation of residential properties in the low to moderate income areas, (iii) investing in government bonds which are designated for the purpose of redeveloping low to moderate income areas, or (iv) participating in programs that provide housing in low to moderate income areas, including Savings Association Mortgage Company, Inc. ("SAMCO") type loans. 45 At December 31, 1996, the Bank's gross loans outstanding were $69.0 million, of which $54.3 million or 78.7% were one- to four-family residential mortgage loans. Of this amount, $42.7 million or 78.7% of the one- to four-family mortgage loans at that date were secured by owner-occupied properties. Of the one- to four-family residential mortgage loans outstanding at that date, 82.5% were adjustable-rate loans. Of the Bank's one- to four-family adjustable-rate mortgage loans, 42.8% are indexed to COFI, 4.5% were indexed to the prime rate and 52.7% are indexed to LIBOR or U.S. Treasury indices. The Bank has recently been attempting to reduce the percentage of loans tied to COFI and tie more adjustable-rate mortgage loans to current market indices, such as LIBOR and the U.S. Treasury index, which reprice more frequently. Consequently, the Bank may purchase adjustable-rate mortgage loans indexed to COFI only on a case by case basis. The Bank offers a number of adjustable-rate mortgage loan programs with interest rates which adjust semi-annually or annually. A portion of the Bank's adjustable-rate mortgage loans have introductory rates which are below the fully indexed rate. At the end of the introductory period, which is usually between six and 13 months depending on the original agreement, the interest rate adjusts upward in accordance with the original agreement. The Bank's adjustable-rate mortgage loans generally provide for periodic and overall caps on the increase or decrease in interest rate at any adjustment date and over the life of the loan. The Bank's adjustable-rate mortgage loans require that any payment resulting from a change in the interest rate be made simultaneously to both the interest and principal payment in order to result in full amortization of the loan by the end of the loan term, and thus do not permit any negative amortization. Depending on the credit history of the borrower and the Bank's assessment of the borrower's ability to repay the loan, the Bank's policy is to originate one- to four-family residential mortgage loans secured by first trust deeds in amounts up to 90% of the lower of the appraised value or the selling price of the property securing the loan. The Bank originates consumer-oriented loans secured primarily by home equity lines of credit and by second trust deeds up to 125% of the appraised value of the property securing the loan as part of its Portfolio Series of loans. See "Risk Factors--High Loan to Value Ratios of Portfolio Series Loans." Mortgage loans originated by the Bank generally include due-on-sale clauses which provide the Bank with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property without the Bank's consent. Due-on-sale clauses are an important means of adjusting the rates on the Bank's fixed-rate mortgage loan portfolio and the Bank has generally exercised its rights under these clauses. Commercial Real Estate and Multi-Family Real Estate Lending. The Bank has, in the past, originated commercial real estate and multi-family loans generally secured by properties located in southern California. As part of its revised lending strategy, the Bank began, in February 1996, to emphasize the origination of such loans both in its primary market area and nationwide through its correspondent network on a wholesale basis. The Bank's current policy is to emphasize the origination of commercial real estate loans secured by properties used for business purposes such as small office buildings and light industrial or retail facilities in the $50,000 to $750,000 range subject to the Bank's loans-to-one borrower limit. The Bank makes commercial real estate loans to borrowers seeking this type of loan except for those borrowers who are in bankruptcy, foreclosure, have loans more than 30 days delinquent or other combinations of weaknesses unacceptable to the Bank. The Bank's underwriting procedures provide that commercial real estate loans may be made in amounts up to 70% of the appraised value of the property depending on the borrower's ability to repay the loan. These loans are generally adjustable-rate loans, generally will be indexed to LIBOR and may be made with terms of up to 30 years. The adjustable-rate loans include prepayment penalties if repaid within the first three to five years. When evaluating a commercial real estate loan, the Bank considers the net operating income of the property and the borrower's expertise, credit history and profitability. The Bank has generally required that the properties securing commercial real estate loans have debt service coverage ratios (the ratio of net operating income to debt service) of at least 120%. The largest commercial real estate loan in the Bank's held for sale portfolio at December 31, 1996 was $559,000 and is secured by a nine unit strip shopping center located in southern California. The largest commercial real estate loan in the Bank's held for investment portfolio at December 31, 1996 was $593,000 secured by a hotel located in San Bernardino, California. At December 31, 1996 the Bank's commercial real estate and land loan portfolio was $9.7 million, or 14.0% of total gross loans, $2.4 million of which were held for sale. 46 In reaching its decision on whether to make a multi-family loan, the Bank considers a number of factors including: the credit history of the borrower; the net operating income of the mortgaged premises before debt service and depreciation; the debt service ratio; and the ratio of loan amount to appraised value. Pursuant to the Bank's current underwriting policies, a multi-family adjustable-rate mortgage loan may only be made in an amount up to 75% of the appraised value of the underlying property. In addition, the Bank generally requires a debt service ratio of 120%. Properties securing a loan are appraised by an appraiser and title insurance is required on all loans. Similar to the origination of commercial real estate loans, the Company intends to target the market for multi-family borrowers seeking loans in the range of $50,000 to $750,000. When evaluating a multi-family loan borrower, the Bank considers the borrower's financial resources and income level and the borrower's experience in owning or managing similar property. The Bank's underwriting policies require that the borrower be able to demonstrate the ability to repay the mortgage and the ability to maintain the property from current rental income. In making its assessment of the creditworthiness of the borrower, the Bank generally reviews the financial statements, employment and credit history of the borrower, as well as other related documentation. The Bank's multi-family loan portfolio at December 31, 1996 totalled $4.8 million or 6.9% of total gross loans. At December 31, 1996, 41.7% of the Bank's adjustable-rate multi-family loans were indexed to COFI and 58.3% were indexed to LIBOR. At December 31, 1996, 2.1% of the Bank's multi-family loan portfolio was comprised of fixed-rate loans. The Bank's largest multi-family loan at December 31, 1996, had an outstanding balance of $397,000. Substantially all commercial real estate and multi-family loans originated by the Bank since 1994 are held for sale. To date, the Bank has been substantially restricted in its ability to originate such loans by its level of available capital. Although the Bank has had the ability to raise the funds to finance such loans prior to the third quarter of 1996, with the level of leveraging needed to do so, it would have been unable to maintain its required capital ratios during the period of origination to sale. Repayment of multi-family and commercial real estate loans generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. The Bank attempts to offset the risks associated with multi-family and commercial real estate lending by primarily lending to individuals who will be actively involved in the management of the property and generally to individuals who have proven management experience, and by making such loans with lower loan-to-value ratios than one- to four- family loans. See "Risk Factors--Real Estate Secured Risks." Consumer and Other Lending. The Bank's consumer and other loans generally consist of overdraft lines of credit, commercial business loans and unsecured personal loans. At December 31, 1996, the Bank's consumer and other loan portfolio was $309,000 or 0.4% of total gross loans. Underwriting. The main underwriting and quality control functions are managed through the Bank's loan center in Riverside, California. The Bank believes that its underwriting process begins with the experience of its staff, its correspondent relationships and its loan approval procedures. As an integral part of its lending operation, the Bank ensures that its underwriters assess each loan application and subject property against the Bank's underwriting guidelines. All appraisers are required to assess the valuation of the property pursuant to U.S. Government Property Analysis guidelines and conduct an economic analysis of the geographic region in which the property is located. Personnel in the Bank's loan centers review in the entirety each loan application submitted for approval. The Bank conducts its own underwriting review of each loan, including those loans originated for or purchased by it from its correspondents, other third party originators and brokers. Loan files are reviewed for completeness, accuracy and compliance with the Bank's underwriting criteria and applicable governmental regulations. This underwriting process is intended to assess both the prospective borrower's ability to repay the loan and the adequacy of the real property security as collateral for the loan granted, tailored to the general nature of the 47 Portfolio Series and the Liberator Series loans, respectively. In certain cases deemed appropriate by the Seller, loans may be made outside of the Bank's general guidelines with the prior approval of pre-designated senior officers. Based on the initial review, the personnel in the loan center will inform the correspondents or brokers of additional requirements that must be fulfilled to complete the loan file. The Bank strives to process each loan application received from its network of originators and correspondents as quickly as possible in accordance with the Bank's loan application approval procedures. Accordingly, most loan applications receive decisions within 48 hours of receipt and are funded immediately upon receipt of all conditions for approval of the loan. Each prospective borrower is required to complete a mortgage loan application that may include (depending on the program requirement) information detailing the applicant's liabilities, income, credit history, employment history and personal information. Since most of the loan applications are presented through the Bank's network of correspondents, other third party originators and brokers, the Bank completes an additional credit report on all applications received. Such report typically contains information relating to such matters as credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions or judgments. This credit report is obtained through a sophisticated computer program that accesses the most appropriate credit bureau in a particular zip code and combines that information with a credit risk score. This application and review procedure is used by the Bank to analyze the applicant's creditworthiness (i.e., a determination of the applicant's ability to repay the loan). Creditworthiness is assessed by examination of a number of factors, including calculating a debt-to-income ratio obtained by dividing a borrower's fixed monthly debt by the borrower's gross monthly income. Fixed monthly debt generally includes (i) the monthly payment under any related prior mortgages (which generally includes an escrow for real estate taxes), (ii) the monthly payment on the loan applied for and (iii) other installment debt, including, for revolving debt, the required monthly payment thereon, or, if no such payment is specified, 5% of the balance as of the date of calculation. Fixed monthly debt does not include any debt (other than revolving credit debt) described above that matures within less than 10 months of the date of calculation. Several procedures are used to verify information obtained from an applicant. The applicant's outstanding balance and payment history on any senior mortgage may be verified by calling the senior mortgage lender. If the senior mortgage lender cannot be reached by telephone to verify this information, the Bank or other originator may rely upon information provided by the applicant, such as a recent statement from the senior lender and verification of payment, such as cancelled checks, or upon information provided by national credit bureaus. In order to verify an applicant's employment status, the Bank or other originator may obtain from the applicant recent tax returns or other tax forms (e.g., W-2 forms) or current pay stubs or may telephone the applicant's employer or obtain written verification from the employer. As in the case of the senior mortgage lender verification procedures, if the employer will not verify employment history over the telephone, the Bank or other originator may rely solely on the other information provided by the applicant. However, the Bank does offer certain Liberator Series loans at reduced loan-to-value ratios in lieu of documenting cash flow of the borrower. Debt to income ratios for Portfolio Series mortgage loans generally do not exceed 45%, but in certain instances where deemed appropriate by the Bank, the ratio may go as high as 50%. For Liberator Series mortgage loans, debt to income ratios may vary depending upon a number of other factors used to ascertain the creditworthiness of the related borrower. The Bank has adopted policies that set forth the specific lending requirements of the Bank as they relate to the processing, underwriting, property appraisal, closing, and funding of loans. These policies include an analysis based on five classes of non-conforming loans, designated Ax, A-, B, C and Cx. Class Ax denominated loans generally relate to borrowers who have no or limited adverse incidents in their credit histories (typically conforming loans), whereas Class B, C and Cx loans relate to descending degrees of sub- prime borrowers. Factors which are considered in evaluating a borrower in this regard are the presence or absence of a credit history, prior delinquencies in the payment of mortgage and consumer credit and personal bankruptcies. Class A-denominated loans generally relate to borrowers with overall good credit who have had minimal adverse credit issues with less than 25% of their outstanding credit exhibiting some form of 30-day delinquency in the past 24 48 months. Class B denominated loans generally relate to borrowers who have credit delinquencies in their credit histories, are currently past due on consumer debt payments, have 30-60 day delinquencies related to mortgage payment or have been at their current employment for less than one year or have a history of late payments on consumer debt payments and mortgage payments. Class C borrowers have shown a willingness to pay their obligations in a timely manner with no more than 70% of their previous obligations reporting a derogatory credit history and currently no obligation is more than 60 days past due at application. Class Cx denominated loans generally relate to borrowers who have many adverse incidents in their credit histories and are generally considered to have a bad credit history. Although in limited circumstances the Bank will originate Class Cx loans, the vast majority of loans originated or purchased by the Bank are Class Ax through Class C loans. Appraisal. All mortgaged properties relating to mortgage loans where collateral assessment is an integral part of the evaluation process are appraised by licensed or certified appraisers. All of the appraisals are either performed or reviewed by the Bank's approved appraisers. Once a loan application file is complete, the file will be reviewed to determine whether the property securing the loan should undergo a desk or field review. This determination will be made based on the loan-to-value ratio to the underlying property and the type of loan or loan program. If after the initial desk review, the underwriter requires additional information with regard to the appraised value of the property, a field review may also be conducted. The Bank requires the appraiser to address neighborhood conditions, site and zoning status and the condition and valuation of improvements. Following each appraisal, the appraiser prepares a report which (when appropriate) includes a reproduction cost analysis based on the current cost of constructing a similar building and a market value analysis based on recent sales of comparable homes in the area. Title insurance policies are required on all first mortgage liens, with a limited judgment lien report required on all second lien loans under $100,000. For Liberator Series loans, because of the sub-prime quality of the creditworthiness of the borrowers, the evaluation of the value of the property securing the loans and the ratio of loans secured by such property to its value become of greater importance in the underwriting process. The specific procedures and criteria utilized in the appraisal process range from a desk review, a field review, to a second appraisal, depending on the size of the loan and its loan-to- value ratio. The value of the mortgaged property has lesser importance with respect to the Portfolio Series loans in light of their high mortgaged loan-to-value ratios. As a result, Portfolio Series loans generally have little or no equity in the mortgaged property available to repay the loan if it is in default. For Portfolio Series loans, the Bank accepts the homeowner/mortgagee's "as stated" value on loans to $35,000. On loans in excess of $35,000 to a maximum of $50,000, the Bank requires a current tax assessment, a broker price opinion, a statistical appraisal or a HUD-1 conformed closing statement where purchase of the subject property has occurred within the previous 12 months. For loans in excess of $50,000, a drive-by appraisal including comparable analysis on a FHLMC Form 704 is required. Qualified property inspection firms are also utilized for annual property inspections on all properties 45 days or more delinquent. Property inspections are intended to provide updated information concerning occupancy, maintenance, current rent levels, and changes in market conditions. Loan Approval Procedures and Authority. The Board of Directors establishes the lending policies of the Bank and delegates authority and responsibility for loan approvals to the Loan Committee and specified officers of the Bank. All real estate loans must be approved by a quorum of the designated committee or by the designated individual or individuals. The following committees, groups of officers and individual officers are granted the authority to approve and commit the Bank to the funding of the following categories of loans: mortgage loans to be held for investment in the amount up to $250,000, or adjusted FNMA and FHLMC limits, may be approved by two of the Bank's staff underwriters; mortgage loans to be held for investment in excess of $250,000 and up to $550,000 require loan committee approval; mortgage loans held for investment in excess of $550,000 require loan committee approval and approval of the Board of Directors. Mortgage loans held for sale in the amount up to $550,000, or adjusted FNMA and FHLMC limits, may be approved by two of the Bank's staff underwriters; mortgage loans held for sale in excess of $550,000 require loan committee and board 49 approval. Unsecured loans, loans secured by other than real estate, consumer or commercial, other than savings loans in the amount up to $25,000, may be approved by two of the Bank's staff underwriters; loans in excess of $25,000 and up to $50,000, require loan committee approval; loans in excess of $50,000, require loan committee and approval of the Board of Directors. Savings loans secured by deposits at the Bank may be approved by a staff underwriter of the Bank. The Bank will not make loans-to-one borrower that are in excess of regulatory limits. Pursuant to OTS regulations, loans-to-one borrower cannot exceed 15% of the Bank's unimpaired capital and surplus. At December 31, 1996, the Bank's loans to one borrower limit equalled $1.6 million. See "Regulation--Federal Savings Institution Regulation--Loans-to-One Borrower." Delinquencies and Classified Assets. The Board of Directors generally performs a monthly review of all delinquent loans 90 days or more past due. In addition, Management reviews on an ongoing basis all delinquent loans. The procedures taken by the Bank with respect to delinquencies vary depending on the nature of the loan and period of delinquency. When a borrower fails to make a required payment on a loan, the Bank takes a number of steps to have the borrower cure the delinquency and restore the loan to current status. The Bank generally sends the borrower a written notice of non-payment within ten days after the loan is first past due. In the event payment is not then received, additional letters and phone calls generally are made. If the loan is still not brought current, the Bank generally sends a notice of the intent to foreclose 25 days after the loan is first past due. If the borrower does not cure the delinquency and it becomes necessary for the Bank to take legal action, which typically occurs after a loan is delinquent at least 30 days or more, the Bank will commence foreclosure proceedings against any real property that secures the loan. If a loan remains delinquent on the 45th day, a property inspection will be made to verify occupancy, determine the condition of the property and as an attempt to contact the borrower. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. The Bank's procedures for repossession and sale of consumer collateral are subject to various requirements under state consumer protection laws. Regulation and practices in the United States regarding the liquidation of properties (e.g., foreclosure) and the rights of the mortgagor in default vary greatly from state to state. Loans originated or purchased by the Bank are secured by mortgages, deeds of trust, trust deeds, security deeds or deeds to secure debt, depending upon the prevailing practice in the state in which the property securing the loan is located. Depending on local law, foreclosure is effected by judicial action and/or non-judicial sale, and is subject to various notice and filing requirements. If foreclosure is effected by judicial action, the foreclosure proceedings may take several months. In general, the borrower, or any person having a junior encumbrance on the real estate, may cure a monetary default by paying the entire amount in arrears plus other designated costs and expenses incurred in enforcing the obligation during a statutorily prescribed reinstatement period. Generally, state law controls the amount of foreclosure expenses and costs, including attorneys' fees, which may be recovered by a lender. There are a number of restrictions that may limit the Bank's ability to foreclose on a property. A lender may not foreclose on the property securing a junior mortgage loan unless it forecloses subject to each senior mortgage, in which case the junior lender or purchaser at such a foreclosure sale will take title to the property subject to the lien securing the amount due on the senior mortgage. Moreover, if a borrower has filed for bankruptcy protection, a lender may be stayed from exercising its foreclosure rights. Also, certain states provide a homestead exemption that may restrict the ability of a lender to foreclose on residential property. Federal regulations and the Bank's Classification of Assets Policy require that the Bank utilize an internal asset classification system as a means of reporting problem and potential problem assets. The Bank has incorporated the OTS internal asset classifications as a part of its credit monitoring system. The Bank currently classifies problem and potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "Doubtful" have all of the weaknesses inherent in those classified "Substandard" with the added 50 characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "Loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated "Special Mention." When an insured institution classifies one or more assets, or portions thereof, as Substandard or Doubtful, under current OTS policy the Bank is required to consider establishing a general valuation allowance in an amount deemed prudent by management. The general valuation allowance, which is a regulatory term, represents a loss allowance which has been established to recognize the inherent credit risk associated with lending and investing activities, but which, unlike specific allowances, has not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as "Loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. A savings institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS which can order the establishment of additional general or specific loss allowances. The OTS, in conjunction with the other federal banking agencies, adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation allowances. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management has analyzed all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. As a result of the declines in local and regional real estate market values and the significant losses experienced by many financial institutions, there has been a greater level of scrutiny by regulatory authorities of the loan portfolios of financial institutions undertaken as part of the examination of institutions by the OTS and the FDIC. While the Bank believes that it has established an adequate allowance for estimated loan losses, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request the Bank to materially increase at that time its allowance for estimated loan losses, thereby negatively affecting the Bank's financial condition and earnings at that time. Although management believes that an adequate allowance for estimated loan losses has been established, actual losses are dependent upon future events and, as such, further additions to the level of allowances for estimated loan losses may become necessary. 51 The Bank's Internal Asset Review Committee reviews and classifies the Bank's assets quarterly and reports the results of its review to the Board of Directors. The Bank classifies assets in accordance with the management guidelines described above. REO is classified as Substandard. The following table sets forth information concerning loans, REO and total assets classified as substandard at December 31, 1996. At December 31, 1996, the Bank had $870,000 of assets classified as Special Mention, $4.4 million of assets classified as Substandard, no assets classified as Doubtful and $487,000 of assets classified as Loss. As of December 31, 1996, assets classified as Special Mention include 6 loans totalling $221,000 secured by one- to four- family residential properties. At December 31, 1996, the largest loan classified as Special Mention had a loan balance of $303,000 and is secured by commercial real estate. As set forth below, as of December 31, 1996, assets classified as Substandard, Doubtful and Loss include 44 loans totalling $4.2 million.
AT DECEMBER 31, 1996 -------------------------------------------------------------------------------------- TOTAL SUBSTANDARD, DOUBTFUL LOANS REO AND LOSS ASSETS --------------------------- ----------------------------- ---------------------------- GROSS NET NUMBER GROSS NET NUMBER OF GROSS NET NUMBER BALANCE BALANCE(1) OF LOANS BALANCE BALANCE(1) PROPERTIES BALANCE BALANCE(1) OF ASSETS ------- ---------- -------- ------- ---------- ---------- ------- ---------- --------- (DOLLARS IN THOUSANDS) Residential: One- to four-family.... $4,073 $3,642 42 $626 $561 6 $4,699 $4,203 48 Commercial and land..... 120 109 1 -- -- -- 120 109 1 Other loans............. 10 -- 1 -- -- -- 10 -- 1 ------ ------ --- ---- ---- --- ------ ------ --- Total loans............ $4,203 $3,751 44 $626 $561 6 $4,829 $4,312 50 ====== ====== === ==== ==== === ====== ====== ===
- -------- (1) Net balances are reduced for specific loss allowances established against substandard loans and real estate. 52 Non-Accrual and Past-Due Loans. The following table sets forth information regarding non-accrual loans, troubled-debt restructurings and REO. There was one troubled-debt restructured loan within the meaning of SFAS 15, and six REO properties at December 31, 1996. Until March 31, 1996 it was the policy of the Bank to cease accruing interest on loans at the time of foreclosure, which typically occurs when a loan is 45 days past due or possibly longer depending on the circumstances, which period will not exceed 90 days past due. Subsequent to March 31, 1996, the Bank adopted a policy to cease accruing interest on loans 90 days or more past due. For the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively, the amount of interest income that would have been recognized on nonaccrual loans if such loans had continued to perform in accordance with their contractual terms was $150,000, $66,000, $106,000, $117,000 and $84,000, none of which was recognized. For the same periods, the amount of interest income recognized on troubled debt restructurings was $12,000, $11,000, $10,000, $1,000, and $0.
AT DECEMBER 31, -------------------------------------- 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Non-accrual loans: Residential real estate: One- to four-family............... $2,361 $1,305 $1,766 $1,919 $1,606 Multi-family...................... 45 -- -- -- -- Commercial and land................. -- 82 78 197 283 Other loans........................... 10 10 45 62 2 ------ ------ ------ ------ ------ Total........................... 2,416 1,397 1,889 2,178 1,891 REO, net(1)........................... 561 827 555 1,772 1,377 ------ ------ ------ ------ ------ Total non-performing assets..... $2,977 $2,224 $2,444 $3,950 $3,268 ====== ====== ====== ====== ====== Restructured loans.................... $ 131 $ 131 $ -- $ 15 $ -- Classified assets, gross.............. 4,829 3,929 3,951 4,165 4,827 Allowance for estimated loan losses as a percent of gross loans receivable(2)........................ 2.36% 1.83% 1.28% 0.65% 0.47% Allowance for estimated loan losses as a percent of total non-performing loans(3)............................. 67.26 84.25 44.04 20.02 16.29 Non-performing loans as a percent of gross loans receivable(2)(3)......... 3.50 2.17 2.90 3.24 2.87 Non-performing assets as a percent of total assets(3)...................... 2.86 3.00 3.42 5.05 4.15
- -------- (1) REO balances are shown net of related loss allowances. (2) Gross loans includes loans receivable held for investment and loans receivable held for sale. (3) Non-performing assets consist of non-performing loans and REO. Prior to April 1, 1996, non-performing loans consisted of all loans 45 days or more past due and all other non-accrual loans. Commencing on April 1, 1996, non-performing loans consisted of all loans 90 days or more past due and all other non-accrual loans. 53 The following table sets forth delinquencies in the Bank's loan portfolio as of the dates indicated:
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995 ------------------------------------- ------------------------------------- 60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE ------------------ ------------------ ------------------ ------------------ PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS -------- --------- -------- --------- -------- --------- -------- --------- (DOLLARS IN THOUSANDS) One- to four-family..... 3 $354 21 $2,361 8 $446 13 $1,286 Multi-family............ -- -- 1 45 -- -- -- -- Commercial and land..... -- -- -- -- -- -- -- -- Other loans............. -- -- 1 10 -- -- 1 10 --- ---- --- ------ --- ---- --- ------ Total................. 3 $354 23 $2,416 8 $446 14 $1,296 === ==== === ====== === ==== === ====== Delinquent loans to total gross loans...... 0.51% 3.50% 0.69% 2.01% ==== ====== ==== ====== AT DECEMBER 31, 1994 ------------------------------------- 60-89 DAYS 90 DAYS OR MORE ------------------ ------------------ PRINCIPAL PRINCIPAL NUMBER BALANCE NUMBER BALANCE OF LOANS OF LOANS OF LOANS OF LOANS -------- --------- -------- --------- (DOLLARS IN THOUSANDS) One- to four-family..... 5 $375 8 $1,728 Multi-family............ -- -- -- -- Commercial and land..... -- -- 1 77 Other loans............. -- -- -- -- --- ---- --- ------ Total................. 5 $375 9 $1,805 === ==== === ====== Delinquent loans to total gross loans...... 0.58% 2.78% ==== ======
54 Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in its loan portfolio and the general economy. The allowance for loan losses is maintained at an amount management considers adequate to cover estimated losses in loans receivable which are deemed probable and estimable. The allowance is based upon a number of factors, including current economic conditions, actual loss experience and industry trends. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to make additional provisions for loan losses based upon information available at the time of the review. As of December 31, 1996, the Bank's allowance for loan losses was 2.36% of gross loans compared to 1.83% as of December 31, 1995. The Bank had non-accrual loans of $2.4 million and $1.4 million at December 31, 1996 and December 31, 1995, respectively. The Bank will continue to monitor and modify its allowances for loan losses as conditions dictate. The following table sets forth activity in the Bank's allowance for loan losses for the periods set forth in the table.
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Balance at beginning of period... $ 1,177 $ 832 $ 436 $ 308 $ 299 Provision for loan losses........ 963 1,194 1,306 404 129 Charge-offs: Real Estate: One- to four-family.......... 668 736 771 301 60 Multi-family................. 45 -- -- -- -- Commercial and land.......... 11 111 47 -- -- Other loans.................... 10 67 95 -- 60 ------- ------- ------- ------- ------- Total...................... 734 914 913 301 120 Recoveries....................... 219 65 3 25 -- ------- ------- ------- ------- ------- Balance at end of period......... $ 1,625 $ 1,177 $ 832 $ 436 $ 308 ======= ======= ======= ======= ======= Average net loans outstanding.... $72,556 $65,521 $65,566 $68,511 $62,522 Net charge-offs to average net loans outstanding............... 0.71% 1.30% 1.39% 0.40% 0.19%
55 The following table set forth the amount of the Bank's allowance for loan losses, the percent of allowance for loan losses to total allowance and the percent of gross loans to total gross loans in each of the categories listed at the dates indicated.
AT DECEMBER 31, ------------------------------------------------------------------------------------------ 1996 1995 1994 ----------------------------- ----------------------------- ----------------------------- PERCENT OF PERCENT OF PERCENT OF GROSS LOANS GROSS LOANS GROSS LOANS PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS ------ ---------- ----------- ------ ---------- ----------- ------ ---------- ----------- (DOLLARS IN THOUSANDS) One- to four- family..... $1,462 89.97% 78.67% $1,001 85.05% 84.04% $604 72.60% 82.62% Multi- family..... 20 1.23 6.89 14 1.19 3.75 10 1.20 4.12 Commercial and land... 124 7.63 14.00 143 12.15 11.71 164 19.71 12.50 Other...... 19 1.17 0.44 19 1.61 0.50 54 6.49 0.76 ------ ------ ------ ------ ------ ------ ---- ------ ------ Total allowance for loan losses..... $1,625 100.00% 100.00% $1,177 100.00% 100.00% $832 100.00% 100.00% ====== ====== ====== ====== ====== ====== ==== ====== ======
----------------------------------------------------------- 1993 1992 ----------------------------- ----------------------------- PERCENT OF PERCENT OF GROSS LOANS GROSS LOANS PERCENT OF IN EACH PERCENT OF IN EACH ALLOWANCE CATEGORY ALLOWANCE CATEGORY TO TOTAL TO TOTAL TO TOTAL TO TOTAL AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS ------ ---------- ----------- ------ ---------- ----------- One- to four- family.... $287 65.83% 83.01% $225 73.05% 81.68% Multi- family.... 10 2.29 3.41 6 1.95 3.55 Commercial and land.. 98 22.48 12.47 57 18.51 13.55 Other..... 41 9.40 1.11 20 6.49 1.22 ---- ------ ------ ---- ------ ------ Total allowance for loan losses.... $436 100.00% 100.00% $308 100.00% 100.00% ==== ====== ====== ==== ====== ======
56 REO At December 31, 1996, the Bank had $561,000 of REO, net of allowances. Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at the lower of fair value or the balance of the loan at the date of foreclosure through a charge to the allowance for estimated loan losses. After foreclosure, valuations are periodically performed by management and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its fair value less estimated cost to sell. It is the policy of the Bank to obtain an appraisal on all REO at the time of possession and every six months thereafter. INVESTMENT ACTIVITIES Federally chartered savings institutions, such as the Bank, have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certificates of deposit of insured banks and savings institutions, bankers' acceptances, and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment- grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. Additionally, the Bank must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. See "Regulation--Federal Savings Institution Regulation--Liquidity." Historically, the Bank has maintained liquid assets above the minimum OTS requirements and at a level considered to be adequate to meet its normal daily activities. The investment policy of the Bank as established by the Board of Directors attempts to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complement the Bank's lending activities. Specifically, the Bank's policies generally limit investments to government and federal agency-backed securities and non-government guaranteed securities, including corporate debt obligations, that are investment grade. The Bank's policies provide the authority to invest in marketable equity securities meeting the Bank's guidelines and in mortgage-backed securities guaranteed by the U.S. government and agencies thereof and other financial institutions. At December 31, 1996, the Bank had $10,000 in its mortgage-backed securities portfolio, all of which were insured or guaranteed by the FHLMC and are being held-to-maturity. The Company may increase its investment in mortgage-backed securities in the future depending on its liquidity needs and market opportunities. Investments in mortgage-backed securities involve a risk that actual prepayments will be greater than estimated prepayments over the life of the security which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments thereby reducing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates. During the fourth quarter of 1996, the Bank completed the Securitization which generated a residual asset in the amount of $5.7 million and $1.6 million of the Reserve Account. At December 31, 1996, the residual asset of $5.7 million was classified as a trading security. For regulatory reasons, the residual asset and the Reserve Account will be sold to Life Investment Holdings immediately following the Reorganization and the Offering. Future residuals and related assets generated by asset securitizations will be held by the Bank only until they can be sold to Life Investment Holdings. The residual asset and any future residuals generated by future asset securitizations and held by the Company will be marked to market on a quarterly basis with unrealized gains and losses recorded in operations. See "Risk Factors--Dependence on Asset Securitizations and Impact on Quarterly Operating Results" and "--Lending Activities--Loan Sales and Asset Securitizations." 57 The following table sets forth certain information regarding the carrying and fair values of the Bank's securities at the dates indicated. There were no securities available-for-sale at the dates indicated:
AT DECEMBER 31, ----------------------------------------------- 1996 1995 1994 --------------- --------------- --------------- CARRYING FAIR CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE VALUE VALUE -------- ------ -------- ------ -------- ------ (DOLLARS IN THOUSANDS) Securities: Held-to-maturity: U.S. Treasury and other agency securities......... $8,827 $8,785 $2,689 $2,689 $2,846 $2,838 FHLMC...................... 10 10 11 11 13 13 ------ ------ ------ ------ ------ ------ Total securities held-to- maturity................ $8,837 $8,795 $2,700 $2,700 $2,859 $2,851 ====== ====== ====== ====== ====== ======
The table below sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of the Bank's securities as of December 31, 1996. There were no securities available for sale at December 31, 1996.
AT DECEMBER 31, 1996 ------------------------------------------------------------------------------------------------------- MORE THAN ONE MORE THAN FIVE MORE THAN ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS TEN YEARS TOTAL ----------------- --------------------- ---------------------- ----------------- ----------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD -------- -------- ---------- --------- ---------- --------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Securities: Held-to-maturity: U.S. Treasury and other agency securities........... $5,000 5.33% $ 3,013 5.71% $ -- -- % $ -- -- % $8,013 5.47% FHLMC................. -- -- -- -- -- -- 10 6.88 10 6.88 ------ ---------- ---------- ----- ------ Total held-to- maturity............ 5,000 5.33 3,013 5.71 -- -- 10 6.88 8,023 5.47 FHLB stock............ 814 -- -- -- -- -- -- -- 814 -- ------ ---------- ---------- ----- ------ Total securities held-to-maturity.... $5,814 $ 3,013 $ -- $ 10 $8,837 ====== ========== ========== ===== ======
SOURCES OF FUNDS General. Deposits, loan repayments and prepayments, proceeds from sales of loans, cash flows generated from operations and borrowings are the primary sources of the Company's funds for use in lending, investing and for other general purposes. On an on-going basis, the Company explores opportunities to access credit lines as a source of funds to enable the Company to further expand its lending activities. Deposits. The Bank offers a variety of deposit accounts with a range of interest rates and terms. The Bank's deposits consist of passbook savings, checking accounts, money market savings accounts and certificates of deposit. For the year ended December 31, 1996, certificates of deposit constituted 78.5% of total average deposits. The term of the fixed-rate certificates of deposit offered by the Bank vary from 90 days to eighteen years and the offering rates are established by the Bank on a weekly basis. Specific terms of an individual account vary according to the type of account, the minimum balance required, the time period funds must remain on deposit and the interest rate, among other factors. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. At December 31, 1996, the Bank had $59.4 million of certificate accounts maturing in one year or less. While the Bank does accept out of area deposits, the Bank's deposits are obtained predominantly from the areas surrounding its home office. The Bank relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions 58 significantly affect the Bank's ability to attract and retain deposits. In order to meet its liquidity needs for the purchase of loans, from time to time the Bank offers above market interest rates on short term certificate accounts and may utilize brokered deposits during periods the Bank maintains a well- capitalized status. The Bank is currently "adequately capitalized" and, without the prior approval of the regulators, may not accept brokered deposits. This is not expected to materially impact the Bank as the Bank has other available sources of funds. At December 31, 1996, the Bank had $2.2 million in brokered deposits. Although the Bank has a significant portion of its deposits in shorter term certificates of deposit, management monitors activity on the Bank's certificate of deposit accounts and, based on historical experience, and the Bank's current pricing strategy, believes that it will retain a large portion of such accounts upon maturity. Further increases in short-term certificate of deposit accounts, which tend to be more sensitive to movements in market interest rates than core deposits, may result in the Bank's deposit base being less stable than if it had a large amount of core deposits which, in turn, may result in further increases in the Bank's cost of deposits. The following table presents the deposit activity of the Bank for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Net deposits (withdrawals)................... $ 15,700 $ (1,329) $ (8,880) Interest credited on deposit accounts........ 2,476 3,175 2,561 ---------- ---------- ---------- Total increase (decrease) in deposit accounts.......................... $ 18,176 $ 1,846 $ (6,319) ========== ========== ==========
At December 31, 1996, the Bank had $20 million in certificate accounts in amounts of $100,000 or more maturing as follows:
WEIGHTED MATURITY PERIOD AMOUNT AVERAGE RATE --------------- ------------ -------------- (DOLLARS IN THOUSANDS) Three months or less................................ $ 8,182 5.47% Over three through 12 months........................ 10,110 5.75 Over 12 months...................................... 1,701 5.72 ------------ Total............................................. $ 19,993 5.63 ============
The following table sets forth the distribution of the Bank's average deposit accounts for the periods indicated and the weighted average interest rates on each category of deposits presented.
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------- 1996 1995 1994 ------------------------- ------------------------- ------------------------- PERCENT PERCENT PERCENT OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE ------- -------- -------- ------- -------- -------- ------- -------- -------- (DOLLARS IN THOUSANDS) Passbook accounts....... $ 4,401 6.03% 2.09% $ 5,090 7.53% 2.50% $ 7,048 10.13% 2.23% Money market accounts... 4,233 5.80 2.79 5,493 8.12 2.62 6,512 9.36 2.50 Checking accounts....... 7,048 9.65 1.59 6,434 9.51 1.43 6,180 8.88 1.54 ------- ------ ------- ------ ------- ------ Total.................. 15,682 21.48 2.05 17,017 25.16 2.13 19,740 28.37 2.10 Certificate accounts: Three months or less... 3,994 5.47 5.66 11,570 17.11 5.09 16,952 24.36 3.60 Four through 12 months................ 36,519 50.01 5.23 20,762 30.71 5.44 21,768 31.28 4.19 13 through 36 months... 10,204 13.98 6.25 11,188 16.54 5.93 7,218 10.37 5.11 37 months or greater... 6,616 9.06 6.36 7,088 10.48 6.32 3,913 5.62 5.86 ------- ------ ------- ------ ------- ------ Total certificate accounts.............. 57,333 78.52 5.57 50,608 74.84 5.59 49,851 71.63 4.25 ------- ------ ------- ------ ------- ------ Total average deposits.. $73,015 100.00% 4.81% $67,625 100.00% 4.72% $69,591 100.00% 3.64% ======= ====== ======= ====== ======= ======
59 The following table presents, by various rate categories, the amount of certificate accounts outstanding at the dates indicated and the periods to maturity of the certificate accounts outstanding at December 31, 1996.
PERIOD TO MATURITY FROM DECEMBER 31, 1996 AT DECEMBER 31, ----------------------------------------------------------- ----------------------- TWO TO LESS THAN ONE TO THREE THREE TO FOUR TO MORE THAN ONE YEAR TWO YEARS YEARS FOUR YEARS FIVE YEARS FIVE YEARS 1996 1995 1994 --------- --------- ------ ---------- ---------- ---------- ------- ------- ------- (DOLLARS IN THOUSANDS) Certificate accounts: 0 to 4.00%............. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 477 $ 9,674 4.01 to 5.00%.......... 2,977 258 200 5 4 60 3,504 5,710 16,098 5.01 to 6.00%.......... 53,983 4,911 495 162 442 152 60,145 32,298 15,282 6.01 to 7.00%.......... 2,020 824 526 416 23 82 3,891 10,676 5,481 7.01 to 8.00%.......... 458 204 479 342 144 263 1,890 2,641 1,487 8.01 to 9.00%.......... -- -- -- -- -- -- -- -- 22 Over 9.01%............. -- -- -- -- -- -- -- -- -- ------- ------ ------ ----- ----- ----- ------- ------- ------- Total.................. $59,438 $6,197 $1,700 $ 925 $ 613 $ 557 $69,430 $51,802 $48,044 ======= ====== ====== ===== ===== ===== ======= ======= =======
Borrowings. From time to time the Bank has obtained advances from the FHLB as an alternative to retail deposit funds and internally generated funds and may do so in the future as part of its operating strategy. FHLB advances may also be used to acquire certain other assets as may be deemed appropriate for investment purposes. These advances are collateralized primarily by certain of the Bank's mortgage loans and mortgage-backed securities and secondarily by the Bank's investment in capital stock of the FHLB. See "Regulation--Federal Home Loan Bank System." Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions, including the Bank, fluctuates from time-to-time in accordance with the policies of the OTS and the FHLB. At December 31, 1996, the Company had no outstanding advances from the FHLB. On an on-going basis the Company explores opportunities to access credit lines to provide additional funds to expand its lending activities and expects to use a warehouse line of credit and/or the repurchase finance facilities of a national investment banking firm to fund loan originations in the future. The following table sets forth certain information regarding the Bank's borrowed funds at or for the periods ended on the dates indicated:
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------- 1996 1995 1994 ------- ------- ------- (DOLLARS IN THOUSANDS) FHLB advances: Average balance outstanding........................ $ 4,259 $ 3,112 $ 1,863 Maximum amount outstanding at any month-end during the period....................................... 13,900 7,600 7,000 Balance outstanding at end of period.............. -- -- 1,250 Weighted average interest rate during the period.. 5.93% 6.55% 4.87%
60 PROPERTIES As of December 31, 1996, the Bank conducted its business through three offices. In December 1996, a lease in the amount of $3,500 per month starting on March 1, 1997 with a term of 36 months was entered into on a property in the Denver, Colorado metropolitan area, out of which the Company intends to operate a loan center commencing in the first quarter of 1997. The Bank entered into a lease, in the amount of $14,000 per year for the first two years, on a property in Riverside, California in March 1997, which is expected to house the Company's executive offices following the Reorganization. The Company expects to open de novo branches or acquire existing branch offices in the Inland Empire of California and other locations in southern California during 1997 and, as it expands its loan origination operations throughout the United States, will open loan origination centers on an as-needed basis. The opening of additional offices is dependent upon the Company's loan originations. There can be no assurance that the Company will be able to expand its loan originations and/or open additional offices.
ORIGINAL NET BOOK VALUE YEAR OF PROPERTY OR LEASED LEASED DATE OF LEASEHOLD OR OR LEASE IMPROVEMENTS AT LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1996 -------- ------ -------- ---------- ----------------- 1598 E. Highland Avenue Leased 1986 2001 $261,000 San Bernardino, CA 4110 Tigris Way Owned 1996 -- $547,000 Riverside, CA 7751 Belfort Parkway Leased 1996 1997 -- Suite 150 Jacksonville, FL 161 McKinley Street Leased 1996 -- (1) -- Corona, CA Parker Place Leased 1997 2000 -- Aurora, CO(2)
- -------- (1) The property in Corona is rented on a month-to-month basis. (2) Leaseheld improvements are to be made on the Colorado office. SUBSIDIARIES As of December 31, 1996, the Bank had no subsidiaries. For a discussion of the Company's restructuring plan and establishment of subsidiaries, see "Prospectus Summary" and "--Restructuring." LEGAL PROCEEDINGS The Company and the Bank are not involved in any pending legal proceedings other than legal proceedings occurring in the ordinary course of business. Management believes that none of these legal proceedings, individually or in the aggregate, will have a material adverse impact on the results of operations or financial condition of the Company and the Bank. PERSONNEL As of December 31, 1996, the Bank had 137 full-time employees and 7 part- time employees. The employees are not represented by a collective bargaining unit and the Bank considers its relationship with its employees to be good. See "Board of Directors and Management of the Bank--Benefits" for a description of certain compensation and benefit programs offered to the Company's employees. 61 FEDERAL AND STATE TAXATION FEDERAL TAXATION General. The Company and the Bank will report their income on a calendar year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company. The statute of limitations has closed for federal tax purposes through the 1992 tax year and for California Franchise Tax Board purposes through the 1991 tax year. Bad Debt Reserve. Historically, savings institutions such as the Bank which met certain definitional tests primarily related to their assets and the nature of their business ("qualifying thrifts") were permitted to establish a reserve for bad debts and to make annual additions thereto, which may have been deducted in arriving at their taxable income. The Bank's deduction with respect to "qualifying real property loans," which are generally loans secured by certain interest in real property, were computed using an amount based on the Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable income, computed with certain modifications and reduced by the amount of any permitted addition to the non-qualifying reserve. In August, 1996, the provisions repealing the current thrift bad debt rules were passed by Congress as part of "The Small Business Job Protection Act of 1996." The new rules eliminate the 8% of taxable income method for deducting additions to the tax bad debt reserves for all thrifts for tax years beginning after December 31, 1995. These rules also require that all thrift institutions recapture all or a portion of their bad debt reserves added since the base year (last taxable year beginning before January 1, 1988). The Bank has previously recorded a deferred tax liability equal to the bad debt recapture and as such, the new rules will have no effect on net income or federal income tax expense. For tax years beginning after December 31, 1995, the Bank is permitted to maintain a tax reserve equal to the greater of the base year reserve of the reserve calculated using the experience method available to small (average assets less than $500 million) commercial banks as of the year of the change. Any excess of the reserve as of the year of the change over the allowable reserves must be recaptured into taxable income evenly over a period of six years beginning in the 1996 taxable year subject to the suspension rule described below. As of December 31, 1996, the Bank has an excess amount subject to recapture equal to $330,000. The experience method allows an institution to maintain a bad debt reserve equal to the ratio of the net charge-offs for the last six years divided by total loans for those years multiplied by the total loans outstanding at the end of the current year. However, this method permits the institution to maintain a minimum reserve balance equal to its reserve balance at the end of its base year, adjusted for declines in the loan portfolio for the base year. Although deductions are allowed for the calculated addition to the bad debt reserve, net recoveries are not taken into taxable income. The Bank is currently using the "6-year moving average" method to calculate its bad debt reserve. The Bank anticipates that it will continue this practice. Distributions. To the extent that the Bank makes "non-dividend distributions" to the Company that are considered as made (i) from the reserve for losses on qualifying real property loans, to the extent the reserve for such losses exceeds the amount that would have been allowed under the experience method, or (ii) from the supplemental reserve for losses on loans ("Excess Distributions"), then an amount based on the amount distributed will be included in the Bank's taxable income. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank's bad debt reserve. Thus, any dividends to the Company that would reduce amounts appropriated to the Bank's bad debt reserve and deducted for federal income tax purposes would create a tax liability for the Bank. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if the 62 Bank makes a "non-dividend distribution," then approximately one and one-half times the amount so used would be includable in gross income for federal income tax purposes, assuming a 34% corporate income tax rate (exclusive of state and local taxes). See "Regulation" and "Dividend Policy" for limits on the payment of dividends of the Bank. The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserve. Corporate Alternative Minimum Tax. The Code imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating loss carryovers of which the Bank currently has none. AMTI is increased by an amount equal to 75% of the amount by which the Bank's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). In addition, for taxable years beginning after December 31, 1986 and before January 1, 1996, an environmental tax of .12% of the excess of AMTI (with certain modifications) over $2.0 million is imposed on corporations, including the Bank, whether or not an Alternative Minimum Tax ("AMT") is paid. The Bank does not expect to be subject to the AMT. Dividends Received Deduction and Other Matters. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank own more than 20% of the stock of a corporation distributing a dividend then 80% of any dividends received may be deducted. STATE AND LOCAL TAXATION State of California. The California franchise tax rate applicable to the Bank equals the franchise tax rate applicable to corporations generally, plus an "in lieu" rate approximately equal to personal property taxes and business license taxes paid by such corporations (but not generally paid by banks or financial corporations such as the Bank); however, the total tax rate cannot exceed 11.3%. Under California regulations, bad debt deductions are available in computing California franchise taxes using a three or six year weighted average loss experience method. The Company, as a savings and loan holding company commercially domiciled in California, will generally be treated as a financial corporation and subject to the general corporate tax rate plus the "in lieu" rate as discussed previously for the Bank. State of Delaware Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. 63 REGULATION GENERAL The Bank is subject to extensive regulation, examination and supervision by the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The Bank is a member of the FHLB System. The Bank's deposit accounts are insured up to applicable limits by the SAIF managed by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OTS and the FDIC to test the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the Bank or their operations. The Company, as a savings and loan holding company, will also be required to file certain reports with, and otherwise comply with the rules and regulations of the OTS and the SEC under the federal securities laws. Any change in the regulatory structure or the applicable statutes or regulations, whether by the OTS, the FDIC or the Congress, could have a material impact on the Company, the Bank, their operations, or the Reorganization. Congress is expected to consider in 1997 the elimination of the federal thrift charter and the abolishment of the OTS. The results of such consideration, including possible enactment of legislation, is uncertain. Therefore, the Bank is unable to determine the extent to which the results of such consideration or possible legislation, if enacted, would affect its business. See "Risk Factors--Financial Institution Regulation and Possible Legislation." Certain of the regulatory requirements applicable to the Bank and to the Company are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings associations set forth in this Prospectus do not purport to be complete descriptions of such statutes and regulations and their effects on the Bank and the Company and is qualified in its entirety by reference to such statutes and regulations. FEDERAL SAVINGS INSTITUTION REGULATION Business Activities. The activities of federal savings institutions are governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations issued by the agencies to implement these statutes. These laws and regulations delineate the nature and extent of the activities in which federal associations may engage. In particular, many types of lending authority for federal associations, e.g., commercial, non-residential real property loans and consumer loans, are limited to a specified percentage of the institutions's capital or assets. Loans-to-One Borrower. Under the HOLA, savings institutions are generally subject to the national bank limit on loans-to-one borrower. Generally, this limit is 15% of the Bank's unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus, if such loan is secured by readily- marketable collateral, which is defined to include certain financial instruments and bullion. At December 31, 1996, the Bank's general limit on loans-to-one borrower was $1.6 million. At December 31, 1996, the Bank's largest aggregate amount of loans-to-one borrower consisted of $710,000. QTL Test. The HOLA requires savings institutions to meet a QTL test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least 9 months out of each 12 month 64 period. A savings association that fails the QTL test must either convert to a bank charter or operate under certain restrictions. As of December 31, 1996, the Bank maintained 97.3% of its portfolio assets in qualified thrift investments and, therefore, met the QTL test. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered as "qualified thrift investments." Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. The rule establishes three tiers of institutions, which are based primarily on an institution's capital level. An institution that exceeds all fully phased-in regulatory capital requirements before and after a proposed capital distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in need of more than normal supervision, could, after prior notice to, but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of: (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year; or (ii) 75% of its net earnings for the previous four quarters. Any additional capital distributions would require prior OTS approval. In the event the Bank's capital fell below its capital requirements or the OTS notified it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. Liquidity. The Bank is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage (currently 5%) of its net withdrawable deposit accounts plus short-term borrowings. OTS regulations also require each savings institution to maintain an average daily balance of short-term liquid assets at a specified percentage (currently 1%) of the total of its net withdrawable deposit accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Bank's average liquidity ratio for the year ended December 31, 1996 was 8.5%, which exceeded the applicable requirements. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Assessments. Savings institutions are required by regulation to pay assessments to the OTS to fund the agency's operations. The general assessment, paid on a semi-annual basis, is based upon the savings institution's total assets, including consolidated subsidiaries, as reported in the Bank's latest quarterly Thrift Financial Report. The assessments paid by the Bank for the year ended December 31, 1996 totalled $27,000. Branching. OTS regulations permit federally chartered savings associations to branch nationwide under certain conditions. Generally, federal savings associations may establish interstate networks and geographically diversify their loan portfolios and lines of business. The OTS authority preempts any state law purporting to regulate branching by federal savings associations. For a discussion of the impact of proposed legislation, see "Risk Factors-- Financial Institution Regulation and Possible Legislation." Transactions with Related Parties. The Bank's authority to engage in transactions with related parties or "affiliates" (i.e., any company that controls or is under common control with an institution, including the Company and any non-savings institution subsidiaries that the Company may establish) is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A restricts the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the savings institution and also limits the aggregate amount of transactions with all affiliates to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates is generally prohibited. Section 23B generally requires that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. 65 Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring action against all "institution-affiliated parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers or directors, receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or $1 million per day in especially egregious cases. Under the FDI Act, the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal and state law also establishes criminal penalties for certain violations. Standards for Safety and Soundness. The FDI Act requires each federal banking agency to prescribe for all insured depository institutions standards relating to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, and compensation, fees and benefits and such other operational and managerial standards as the agency deems appropriate. The federal banking agencies have adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to implement these safety and soundness standards. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The Guidelines address internal controls and information systems; internal audit system; credit underwriting; loan documentation; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDI Act. The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans. Capital Requirements. The OTS capital regulations require savings institutions to meet three capital standards: a 1.5% tangible capital standard, a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core capital is defined as common stockholder's equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus, minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The OTS regulations require that, in meeting the leverage ratio, tangible and risk-based capital standards institutions generally must deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank. In addition, the OTS prompt corrective action regulation provides that a savings institution that has a leverage capital ratio of less than 4% (3% for institutions receiving the highest CAMEL examination rating) will be deemed to be "undercapitalized" and may be subject to certain restrictions. See "--Prompt Corrective Regulatory Action." The risk-based capital standard for savings institutions requires the maintenance of total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS believes are inherent in the type of asset. The components of core capital are equivalent to those discussed earlier under the 3% leverage standard. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and, within specified limits, the allowance for loan and lease losses. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The OTS has incorporated an interest rate risk component into its regulatory capital rule. The final interest rate risk rule also adjusts the risk- weighting for certain mortgage derivative securities. Under the rule, savings associations with "above normal" interest rate risk exposure would be subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. A savings association's interest rate risk is 66 measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) that would result from a hypothetical 200-basis point increase or decrease in market interest rates divided by the estimated economic value of the association's assets, as calculated in accordance with guidelines set forth by the OTS. A savings association whose measured interest rate risk exposure exceeds 2% must deduct an interest rate component in calculating its total capital under the risk- based capital rule. The interest rate risk component is an amount equal to one-half of the difference between the institution's measured interest rate risk and 2%, multiplied by the estimated economic value of the association's assets. That dollar amount is deducted from an association's total capital in calculating compliance with its risk-based capital requirement. Under the rule, there is a two quarter lag between the reporting date of an institution's financial data and the effective date for the new capital requirement based on that data. A savings association with assets of less than $300 million and risk-based capital ratios in excess of 12% is not subject to the interest rate risk component, unless the OTS determines otherwise. The rule also provides that the Director of the OTS may waive or defer an association's interest rate risk component on a case-by-case basis. The OTS has postponed the date that the component will first be deducted from an institution's total capital to provide it with an opportunity to review the interest rate risk approaches taken by the other federal banking agencies. At December 31, 1996, the Bank met each of its capital requirements, in each case on a fully phased-in basis. Due to the fluctuations in the Bank's total assets as a result of its mortgage banking operations, the Bank has been required by the OTS since the Bank's examination completed August 9, 1996 to compute its regulatory capital ratios based upon the higher of (1) the average of total assets based on month-end results; or (2) total assets of the quarter end. Total assets at the end of the quarter ended December 31, 1996 were higher than the month end averages, and therefore the OTS capital averaging requirement did not have an effect on the Bank's regulatory capital ratios. See "Capitalization" for a table which sets forth in terms of dollars and percentages the OTS tangible, leverage and risk-based capital requirements, the Bank's historical amounts and percentages at December 31, 1996 and pro forma capitalization of the Company based upon the issuance of the shares within the Estimated Price Range. PROMPT CORRECTIVE REGULATORY ACTION Under the OTS prompt corrective action regulations, the OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of capitalization. Generally, a savings institution that has a total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0% is considered to be undercapitalized. A savings institution that has a total risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized" and a savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be "critically undercapitalized." Subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is critically undercapitalized. The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date an association receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions may become immediately applicable to the institution depending upon its category, including, but not limited to, increased monitoring by regulators, restrictions on growth, and capital distributions and limitations on expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. INSURANCE OF DEPOSIT ACCOUNTS Deposits of the Bank are presently insured by the SAIF. Both the SAIF and the BIF (the deposit insurance fund that covers most commercial bank deposits) are statutorily required to be recapitalized to a 1.25% of insured reserve deposits ratio. Until recently, members of the SAIF and BIF were paying average deposit insurance 67 premiums of between 24 and 25 basis points. The BIF met the required reserve in 1995, whereas the SAIF was not expected to meet or exceed the required level until 2002 at the earliest. This situation was primarily due to the statutory requirement that SAIF members make payments on bonds issued in the late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF. In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted a new assessment rate schedule of from 0 to 27 basis points under which 92% of BIF members paid an annual premium of only $2,000. With respect to SAIF member institutions, the FDIC adopted a final rule retaining the previously existing assessment rate schedule applicable to SAIF member institutions of 23 to 31 basis points. As long as the premium differential continued, it may have had adverse consequences for SAIF members, including reduced earnings and an impaired ability to raise funds in the capital markets. In addition, SAIF members, such as the Bank could have been placed at a substantial competitive disadvantage to BIF members with respect to pricing of loans and deposits and the ability to achieve lower operating costs. On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special one-time assessment on SAIF member institutions, including the Bank, to recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special assessment of 65.7 basis points on SAIF assessable deposits held as of March 31, 1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF Special Assessment was recognized by the Bank as an expense in the quarter ended September 30, 1996 and is generally tax deductible. The SAIF Special Assessment recorded by the Bank amounted to $448,000 on a pre-tax basis and $256,000 on an after-tax basis. The Funds Act also spreads the obligations for payment of the FICO bonds across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits will be assessed for FICO payment of 1.3 basis points, while SAIF deposits will pay 6.48 basis points. Full pro rata sharing of the FICO payments between BIF and SAIF members will occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999, provided no savings associations remain as of that time. As a result of the Funds Act, the FDIC recently voted to effectively lower SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to that of BIF members. However, SAIF members will continue to make the FICO payments described above. The FDIC also lowered the SAIF assessment schedule for the fourth quarter of 1996 to 18 to 27 basis points. Management cannot predict the level of FDIC insurance assessments on an on-going basis, whether the savings association charter will be eliminated or whether the BIF and SAIF will eventually be merged. The Bank's assessment rate for the year ended December 31, 1996 was 26 basis points and the premium paid for this period was $622,000, including the SAIF Special Assessment. A significant increase in SAIF insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. THRIFT RECHARTERING LEGISLATION The Funds Act provides that the BIF and SAIF will merge on January 1, 1999 if there are no more savings associations as of that date. That legislation also requires that the Department of Treasury to submit a report to Congress by March 31, 1999 that makes recommendations regarding a common financial institutions charter, including whether the separate charters for thrifts and banks should be abolished. Various proposals to eliminate 68 the federal thrift charter, create a uniform financial institutions charter and abolish the OTS were introduced in the 104th Congress. It is likely that legislation will be introduced in the new Congress addressing the elimination of the savings association charter. However, the Bank is unable to predict whether such legislation would be enacted and, if so, the extent to which the legislation would restrict or disrupt its operations. TRUTH IN LENDING The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder requires lenders, such as the Bank, to provide a disclosure statement to borrowers which explains the terms and cost of credit, including, but not limited to, the amount financed, finance charges, other charges and prepayment terms. Regulation Z applies to a wide variety of lending transactions, including mortgage loans and credit cards. The TILA provides borrowers with a three day right to cancel certain credit transactions, including residential mortgage loans and other loans where a customer pledges his or her principal dwelling as security for the loan. Failure to comply with the provisions of the TILA could subject a lender to criminal and civil sanctions. The TILA was amended effective October 1, 1995 to impose new disclosure requirements and substantive limitations on closed-end home equity mortgage loans bearing rates or fees above a certain percentage or amount ("TILA Amendments"). Specifically, the TILA Amendments applies to loans secured by a customer's principal dwelling (other than a residential mortgage loan to acquire or construct a borrower's principal dwelling, a reverse mortgage transaction or home equity lines of credit) with (i) an annual percentage rate which exceeds by more than ten percentage points the yield on U.S. Treasury securities having comparable periods of maturity; or (ii) total loan origination fees and other fees payable by the customer will exceed the greater of 8% of the loan amount or $400 ("Covered Loans"). Additional disclosures are required to be provided to the customer under the TILA Amendments for all Covered Loans not less than three business days prior to the consummation of the transaction. OTHER LENDING LAWS The Bank is also required to comply with the Equal Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors from discriminating against applicants on certain prohibited bases, including race, color, religion, national origin, sex, age or marital status. Regulation B promulgated under ECOA restricts creditors from obtaining certain types of information from loan applicants. Among other things, it also requires certain disclosures by the lender regarding consumer rights and requires lenders to advise applicants of the reasons for any credit denial. In instances where the applicant is denied credit or the rate or charge for loans increases as a result of information obtained from a consumer credit agency, another statute, the Fair Credit Reporting Act of 1970, as amended, requires lenders to supply the applicant with the name and address of the reporting agency. In addition, the Bank is subject to the Fair Housing Act and regulations thereunder, which broadly prohibit certain discriminatory practices in connection with the Bank's business. The Bank is also subject to the Real Estate Settlement Procedures Act of 1974, as amended, and the Home Mortgage Disclosure Act. In addition, the Bank is subject to various other Federal and state laws, rules and regulations governing, among things, the licensing of, and procedures which must be followed by, mortgage lenders and services, and disclosures which must be made to consumer borrowers. Failure to comply with such laws, as well as with the laws described above, may result in civil and criminal liability. FEDERAL HOME LOAN BANK SYSTEM The Bank is a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in the FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. The Bank was in compliance with this 69 requirement with an investment in FHLB stock at December 31, 1996, of $814,000. FHLB advances must be secured by specified types of collateral and all long-term advances may only be obtained for the purpose of providing funds for residential housing finance. At December 31, 1996, the Bank had no outstanding FHLB advances. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. For the years ended December 31, 1996, 1995 and 1994, dividends from the FHLB to the Bank amounted to $34,000, $30,000 and $20,000, respectively. If dividends were reduced, the Bank's net interest income would likely also be reduced. Further, there can be no assurance that the impact of recent or future legislation on the FHLBs will not also cause a decrease in the value of the FHLB stock held by the Bank. FEDERAL RESERVE SYSTEM The Federal Reserve Board regulations require savings institutions to maintain non-interest-earning reserves against their transaction accounts. The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $52.0 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for accounts greater than $52.0 million, the reserve requirement is $1.6 million plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $52.0 million. The first $4.3 million of otherwise reservable balances (subject to adjustment by the Federal Reserve Board) are exempted from the reserve requirements. The Bank is in compliance with the foregoing requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. FHLB System members are also authorized to borrow from the Federal Reserve "discount window," but Federal Reserve Board regulations require institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. HOLDING COMPANY REGULATION The Company will be a non-diversified unitary savings and loan holding company within the meaning of the HOLA. As such, the Company will be required to register with the OTS and will be subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. The Bank must notify the OTS 30 days before declaring any dividend to the Company. As a unitary savings and loan holding company, the Company generally will not be restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to be a QTL. See "-- Federal Savings Institution Regulation--QTL Test" for a discussion of the QTL requirements. Upon any non-supervisory acquisition by the Company of another savings association, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. The HOLA limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company ("BHC") Act, subject to the prior approval of the OTS, and to other activities authorized by OTS regulation. Previously proposed legislation would have treated all savings and loan holding companies as bank holding companies and limit the activities of such companies to those permissible for bank holding companies. See "Risk Factors--Financial Institution Regulation and Possible Legislation." The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of the voting stock of another savings institution, or holding company 70 thereof, without prior written approval of the OTS; and from acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary holding company or savings association. The HOLA also prohibits a savings and loan holding company from acquiring more than 5% of a company engaged in activities other than those authorized for savings and loan holding companies by the HOLA; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, except: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. FEDERAL SECURITIES LAWS The Company has filed with the SEC a registration statement on Form S-1 under the Securities Act for the registration of the Common Stock to be issued in the Offerings. Upon the effectiveness of the registration statement the Company's Common Stock will be registered with the SEC under the Exchange Act. The Company will then be subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. The registration under the Securities Act of shares of the Common Stock to be issued in the Offerings does not cover the resale of such shares. Shares of the Common Stock purchased by persons who are not affiliates of the Company may be resold without registration. Shares purchased by an affiliate of the Company will be subject to the resale restrictions of Rule 144 under the Securities Act. If the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Provision may be made in the future by the Company to permit affiliates to have their shares registered for sale under the Securities Act under certain circumstances. 71 THE BOARD OF DIRECTORS AND MANAGEMENT OF THE COMPANY The following table sets forth certain information regarding executive officers and directors of the Company.
NAME AGE(1) POSITION(S) HELD WITH COMPANY ---- ------ ----------------------------- Daniel L. Perl 47 Director, President and Chief Executive Officer L. Bruce Mills, Jr. 39 Executive Vice President, Chief Financial Officer, Treasurer and Corporate Secretary Ronald G. Skipper 56 Chairman of the Board Richard C. Caldwell 56 Director John D. Goddard 57 Director Milton E. Johnson 59 Director
- -------- (1) As of December 31, 1996. BIOGRAPHICAL INFORMATION Daniel L. Perl joined the Bank in 1994 as the Senior Vice President and Chief Loan Officer. Mr. Perl was recently promoted to the position of President and Chief Executive Officer of the Bank. Mr. Perl has over twenty- two years of continuous experience in real estate finance. Prior to joining the Bank, Mr. Perl served in management positions with various mortgage finance companies and banking institutions. From 1991 to 1993, Mr. Perl was a Senior Vice President with WCP Trading Corporation. L. Bruce Mills, Jr. joined the Bank in 1986. Mr. Mills currently serves as the Executive Vice President and Chief Financial Officer of the Bank. Prior to joining the Bank, Mr. Mills served as an examiner with the Federal Home Loan Bank of San Francisco. Ronald G. Skipper is the Chairman of the Board of the Company and has served as a Director of the Bank since 1983. Mr. Skipper is a self-employed attorney and has been practicing law for 32 years. Richard C. Caldwell is the Chairman of the Board of the Bank. Mr. Caldwell was elected to the Board of Directors of the Bank in 1983 and has served as Chairman of the Board since 1983. Mr. Caldwell has been a partner of Caldwell & Moreland Insurance brokers since January 1995. Since February 1982, Mr. Caldwell has been President and sole owner of Caldwell & Hunt Insurance Brokers. John D. Goddard has served as a Director of the Bank since 1988. Mr. Goddard is a Certified Public Accountant. Mr. Goddard has been President of Goddard Accountancy Corporation since 1962. Milton E. Johnson has served as a Director of the Bank since 1983. Mr. Johnson has been the President of Home Lumber Company, a building materials supplier, since 1960. In addition, Mr. Johnson has been a partner in Control Nevada Hay Company since 1987. In addition to the foregoing, Robert K. Riley has been nominated to become a member of the Board following the Reorganization. Mr. Riley is the co-founder and Chief Executive Officer of Millenium Asset Management, L.L.C., an SEC- registered investment advisory firm, and also serves on the Board of Directors of MBIC, an American subsidiary of a large Belgian bank. From 1992 to 1996, Mr. Riley worked for the Millenium Group, a consulting firm focused on designing asset securitization systems and developing risk management programs for European banks. The Board of Directors of the Company is divided into three classes, each of which contains approximately one-third of the Board. The directors shall be elected by the stockholders of the Company for staggered three year terms, or until their successors are elected and qualified. One class of directors, consisting of Messrs. Richard C. Caldwell and Milton E. Johnson, has a term of office expiring at the first annual meeting of stockholders; a second class, consisting of Messrs. Ronald G. Skipper and Daniel L. Perl, has a term of office expiring at the second annual meeting of stockholders; and a third class, consisting of Mr. John D. Goddard, has a term of office expiring at the third annual meeting of stockholders. 72 The officers of the Company are elected annually and hold office until their respective successors have been elected and qualified or until death, resignation or removal by the Board of Directors. Since the formation of the Company, none of the executive officers or other personnel has received remuneration from the Company. COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMPANY The Company has established an Audit Committee consisting of Messrs. Skipper, Caldwell and Goddard and a Personnel/Compensation Committee consisting of Messrs. Skipper, Goddard, Johnson and Perl. DIRECTORS' COMPENSATION The directors of the Company who are not also employees of the Company will receive a monthly retainer for acting in such capacity following the Reorganization. The monthly retainer for the Chairman of the Board shall be $2,000 while the fee for other non-employee directors will be $1,500. In addition, upon the Reorganization each non-employee director will receive fees for each month preceding the Reorganization starting with February 1997 for services performed on behalf of the Company. 73 THE BOARD OF DIRECTORS AND MANAGEMENT OF THE BANK DIRECTORS The following table sets forth certain information regarding the Board of Directors of the Bank.
DIRECTOR TERM NAME AGE(1) POSITION(S) HELD WITH THE BANK SINCE EXPIRES ---- ------ ------------------------------ -------- ------- Richard C. Caldwell 56 Chairman of the Board 1983 1997 John D. Goddard 57 Director 1988 1999 Milton E. Johnson 59 Director 1983 1997 Edgar C. Keller 75 Director 1983 1999 Daniel L. Perl(2) 47 Director, President and 1996 1997 Chief Executive Officer Ronald G. Skipper 56 Director 1983 1998 Louis E. Yeager 76 Director 1983 1998
- -------- (1) As of December 31, 1996 (2) Mr. Perl was elected by the Board of Directors to fill the vacancy created by the resignation of a director in June 1996. EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS The following table sets forth certain information regarding the executive officers of the Bank who are not also directors.
NAME AGE(1) POSITION(S) HELD WITH THE BANK ---- ------ ------------------------------ L. Bruce Mills, Jr. 39 Executive Vice President, Secretary and Treasurer Joseph R.L. Passerino 42 Senior Vice President Mary E. Darter 36 Senior Vice President
- -------- (1) As of December 31, 1996. BIOGRAPHICAL INFORMATION DIRECTORS AND EXECUTIVE OFFICERS OF THE BANK WHO ARE NOT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Edgar C. Keller has been a Director of the Bank since 1983. Mr. Keller was a partner with the law firm of Keller & Holt from 1963 until 1994. After such time, Mr. Keller was a partner with the law firm of Keller & Keller until his retirement in 1996. Louis E. Yeager has served as a Director of the Bank since 1983. Mr. Yeager was the District Manager for Shell Oil Company prior to his retirement in March 1974. Mr. Yeager currently serves on the Board of the San Bernardino United School District. Joseph R. L. Passerino joined the Bank in February 1994. He was named senior vice president in August 1996 and is responsible for all loans originated by the Bank nationally. Prior to that, from 1988 to 1994, Mr. Passerino was in charge of loan production for St. Thomas Capital Corp. Mary E. Darter joined the Bank in March 1994. She was named senior vice president in August 1996. Ms. Darter is primarily responsible for mortgage financing operations. Prior to joining the Bank, Ms. Darter was employed by Imperial Credit Industries/Southern Pacific Thrift and Loan from 1991 to 1994 in charge of the warehouse line of credit division and bulk acquisitions. 74 COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK The Board of Directors meets on a monthly basis and may have additional special meetings upon the request of the Chairman of the Board. During the year ended December 31, 1996, the Board of Directors had 12 regular meetings and 6 special meetings. No director attended fewer than 75% of the total number of Board meetings held during this period. The Board of Directors of the Bank has established the following Board and management committees: The Audit Committee consists of Messrs. Keller, Goddard and Yeager. The Bank's Internal Auditors report to this committee. The purpose of this committee is to review the audit function and management actions regarding the implementation of audit findings. The committee also maintains a liaison with the outside auditors and reviews the adequacy of internal controls. The committee meets quarterly or as necessary. The Loan Committee consists of Messrs. Skipper, Caldwell, Johnson and Perl. This Committee exercises the authority of the Board pertaining to loan matters and approves or rejects all loans presented by management. This Committee also reviews the workout solutions of problem loans, and approves the classification of assets and the establishment of adequate valuation allowances. The Committee meets monthly. The Executive Committee consists of Messrs. Caldwell, Goddard and Skipper. This committee exercises the authority of the Board of Directors with respect to matters requiring action between meetings of the Board of Directors. Any actions by this committee require subsequent ratification by the Board of Directors at the next regular meeting. The Executive Committee meets as needed. The Investment Committee consists of Messrs. Goddard, Caldwell, Johnson and Mills. The purpose of this committee is to adopt and maintain policies regarding the investment portfolio and to monitor the interest rate and the credit risks of liquidity portfolio investments. This committee meets semi- annually or as needed. The Personnel/Compensation Committee consists of Messrs. Yeager, Keller, Johnson, Caldwell, Goddard and Perl. This Committee is responsible for all matters regarding compensation and benefits, hiring, termination and affirmative action issues. The committee meets semi-annually or as needed. The Asset Classification Committee consists of Messrs. Mills and Perl. The purpose of this committee is to review the Bank's loan portfolio and monitor the classification of assets. This committee meets quarterly. The Bank also maintains a Budget Committee consisting of Messrs. Caldwell, Goddard, Yeager and Mills. DIRECTORS' COMPENSATION Directors' Fees. Directors of the Bank who are not also employees of the Bank receive a retainer of $950 per month for serving on the Bank's Board of Directors except the Chairman of the Board who receives $1200 per month. 75 EXECUTIVE COMPENSATION Summary Compensation Table. The following table shows, for the year ended December 31, 1996, the cash compensation paid by the Bank, as well as certain other compensation paid or accrued for that year, to the chief executive officer and the most highly compensated executive officer of the Bank other than the chief executive officer in fiscal year 1996 ("Named Executive Officers").
LONG-TERM COMPENSATION ------------------------------ COMPENSATION AWARDS PAYOUTS ------------------------------------ --------------------- ------- RESTRICTED SECURITIES OTHER STOCK UNDERLYING LTIP ALL OTHER NAME AND PRINCIPAL COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION POSITIONS(1) YEAR SALARY($) BONUS($) ($)(2) ($) (#) ($) ($) ------------------ ---- --------- ---------- ------------ ---------- ---------- ------- ------------ Daniel L. Perl.......... 1996 $75,000 $1,464,374(3) $ -- $ -- 64,320(4) $ -- $ 2,370(5) President and Chief Executive Officer Nora Vineyard........... 1996 76,083 -- -- -- -- -- 88,300(6) President and Chief Executive Officer Joseph R.L. Passerino... 1996 29,000 217,199 -- -- 4,180(7) -- 2,300(5) Senior Vice President
- ------- (1) Ms. Vineyard retired from the position of President and Chief Executive Officer in July 1996 at which time Mr. Perl was elected to fill these positions. (2) For the fiscal year ending in 1996, there were no (a) perquisites over the lesser of $50,000 or 10% of the individual's total salary and bonus for the year; (b) payments of above-market preferential earnings on deferred compensation; (c) payments of earnings with respect to long-term incentive plans prior to settlement or maturation; (d) tax payment reimbursements; or (e) preferential discounts on stock. (3) Includes $1,079,185 earned by Mr. Perl during 1996 which was paid in 1997. See "--Previous Employment Agreement." (4) 192,960 shares as adjusted for the Reorganization. See "--Stock Option Plan." (5) Represents amount contributed by the Bank pursuant to the Bank's 401(k) Plan. (6) Includes $500 contributed by the Bank pursuant to the Bank's 401(k) Plan. Also includes a cash payment of $60,000 plus title to a 1996 automobile with a market value of $27,800 pursuant to an agreement reached between Mrs. Vineyard and the Bank upon her retirement from her position with the Bank. See "--Consultation Agreement." (7) 12,540 shares as adjusted for the Reorganization. See "--Stock Option Plan." PREVIOUS EMPLOYMENT AGREEMENT The Bank entered into an employment agreement with Mr. Perl (the "Executive") on December 31, 1993. This employment agreement was intended to ensure that the Bank would be able to maintain a stable and competent loan operation. The continued success of the Bank depends to a significant degree on the skills and competence of Mr. Perl. The employment agreement provided for a one year term and could be extended for an additional three year period. The employment agreement provided that the Executive's base salary was $75,000. In addition to the base salary, the employment agreement provided for Mr. Perl to receive certain incentive compensation. The incentive compensation was determined by a specific formula tied to the performance of the Bank's mortgage financing operations. Mr. Perl earned approximately $1.5 million in incentive compensation and $75,000 in base salary during the year ended December 31, 1996. LETTER AGREEMENT In order to ensure continuity of management during the period prior to the Reorganization, the Company and the Bank and Mr. Perl have entered into the Letter Agreement to replace the previous employment agreement, effective January 1, 1997, through the later of the date of the completion of the Public Offering and the Reorganization. The Letter Agreement also sets forth the basic terms of the employment agreements between Mr. Perl and each of the Bank and the Company upon the completion of the Reorganization and the Public Offering. The terms of the proposed agreements are set forth in "--Employment Agreements." The Letter Agreement provides that during the period of its effectiveness, Mr. Perl will serve as President and Chief Executive Officer of the Company and the Bank, and will receive a base salary of $400,000 per year ("Base Salary"), plus a bonus equal to 8.0% of the average after tax net income in excess of 10.0% return on average equity, as defined in the letter agreement ("Bonus"). Such Bonus shall be payable no later than March 15, 1998. Payment of the Base Salary and Bonus are dependent upon the Bank maintaining minimum regulatory capital requirements and there being no OTS supervisory directive in place regarding the Bank and its operations or the services performed by Mr. Perl. 76 The Letter Agreement provides for termination of Mr. Perl's employment by the Bank or the Company for cause as defined in the Letter Agreement at any time. In the event the Bank or the Company chooses to terminate Mr. Perl's employment for reasons other than for cause during the effective period of the Letter Agreement, Mr. Perl, or in the event of death, his beneficiary, would be entitled to receive two times Base Salary plus a Bonus equal to $2.2 million. In the event the Bank is not in compliance with its minimum capital requirements or if such payment would cause the Bank's capital to be reduced below minimum regulatory capital requirements, such payments shall be deferred until such time as the Bank or successor thereto is in capital compliance. Under the Letter Agreement, in the event Mr. Perl voluntarily terminates his employment with the Company or the Bank without the written approval of the Boards of Directors of the Company and the Bank, as the case may be, Mr. Perl has agreed not to compete with the Company or the Bank for a period of one year following termination within the continental United States. Mr. Perl has further agreed, in the event of a breach of the non-compete provision, to pay as liquidated damages an aggregate sum of $500,000 in which event the non- compete provision will expire. EMPLOYMENT AGREEMENTS Upon the consummation of the Reorganization and the Public Offering, the Bank and the Company will enter into employment agreements (collectively, the "Employment Agreements") with Mr. Perl. The Employment Agreements are intended to ensure that the Bank and the Company will be able to maintain a stable and competent management base after the Offerings. The continued success of the Bank and the Company depends to a significant degree on the skills and competence of Mr. Perl. The Employment Agreements provide for three-year terms for Mr. Perl. The Bank Employment Agreement, provides that, commencing on the first anniversary date and continuing each anniversary date thereafter, the Board of Directors may extend the agreement for an additional year so that the remaining term shall be three years, unless written notice of non-renewal is given by the Board of Directors after conducting a performance evaluation of Mr. Perl. The term of the Company Employment Agreement shall be extended on a daily basis unless written notice of non-renewal is given by the Board of the Company. The Bank and Company Employment Agreements provide that Mr. Perl's salary will be reviewed annually. The Bank Employment Agreement provides that Mr. Perl will receive a Base Salary of $150,000 per year while the Company Employment Agreement provides that he will receive a Base Salary of $250,000 per year (together, the "Base Salary"), plus a bonus equal to 8.0% of the average of the after tax net income of the Company in excess of 10% return on average equity, as defined in the Employment Agreements ("Bonus"). Such Base Salary is pro rated between the Bank and the Company depending upon the duties performed for and the obligations to each of the Bank and the Company, respectively, while the Bonus shall be paid by the Company. The Bonus for each year shall be payable by the Company no later than March 15 of the following year. In addition to the Base Salary and Bonus, the Employment Agreements provide for, among other things, participation in stock benefits plans and other fringe benefits substantially equivalent to those in which Mr. Perl was participating or otherwise deriving benefit from immediately prior to the beginning of the terms of the Employment Agreements. The Employment Agreements provide for termination by the Bank or the Company for cause as defined in the Employment Agreements at any time. In the event the Bank or the Company chooses to terminate Mr. Perl's employment for reasons other than for cause, or in the event of Mr. Perl's resignation from the Bank or the Company upon: (i) failure to re-elect Mr. Perl to his current offices; (ii) a material change in Mr. Perl's functions, duties or responsibilities; (iii) a relocation of Mr. Perl's principal place of employment by more than 30 miles; (iv) a material reduction in the benefits or perquisites to Mr. Perl from those being provided at the effective date of the Employment Agreement, unless consented to by Mr. Perl or such reduction is part of a nondiscriminatory reduction applicable to all employees; (v) liquidation or dissolution of the Bank or the Company; or (vi) a breach of the Employment Agreement by the Bank or the Company, Mr. Perl or, in the event of death, his beneficiary would be entitled to receive, pursuant to the Bank Employment Agreement, those payments due to Executive for the remaining term of the Employment Agreement or, pursuant to the Company Employment Agreement, an amount equal to three times his Base Salary under that Employment Agreement for the preceding year plus two 77 times his Bonus for the preceding year; provided, however, that in the event that the Boards of Directors determine that such payment would have a material adverse affect on the Company's financial condition or results of operations, then the Company and the Bank shall pay the Executive two times the previous year's Base Salary under that Employment Agreement, Common Stock of the Company having a fair market value equal to one times the previous year's Base Salary under that Employment Agreement and two times the previous year's Bonus. In the event that Executive is terminated without cause during 1997, the Executive will be entitled to two times Base Salary and a Bonus equal to $2.2 million. The Bank and the Company would also continue and pay for Mr. Perl's life, health, dental and disability coverage for the remaining term of the Employment Agreement. Under certain circumstances, upon any termination of the Executive, the Executive is subject to a non-compete and liquidated damages provision and a confidentiality provision relating to information in his possession regarding the Company or the Bank. In the event that the Executive thereafter breaches the non-compete provision, the Employment Agreements provide that the Executive shall pay the Bank and the Company, in the aggregate, $500,000, as liquidated damages, in which event the non-compete provision will expire. Under the Employment Agreements, if voluntary or involuntary termination follows a change in control of the Bank or the Company, Mr. Perl or, in the event of his death, his beneficiary, would be entitled to a severance payment equal to the greater of: (i) the payments due for the remaining terms of the agreement; or (ii) three times the average of the five preceding taxable years' annual compensation. The Bank and the Company would also continue Mr. Perl's life, health, and disability coverage for thirty-six months. Payments to Mr. Perl under the Bank's Employment Agreement will be guaranteed by the Company in the event that payments or benefits are not paid by the Bank. In the event the Bank is not in compliance with its minimum capital requirements or if any payment under the Bank Employment Agreement would cause the Bank's capital to be reduced below minimum regulatory capital requirements, such payments shall be deferred until such time as the Bank or Successor thereto is in capital compliance. Payment under the Company's Employment Agreement would be made by the Company. All reasonable costs and legal fees paid or incurred by Mr. Perl pursuant to any dispute or question of interpretation relating to the Employment Agreements shall be paid by the Bank or Company, respectively, if Mr. Perl is successful on the merits pursuant to a legal judgment, arbitration or settlement. The Employment Agreements also provide that the Bank and Company shall indemnify Mr. Perl to the fullest extent allowable under federal and Delaware law, respectively. In the event of a change in control of the Bank or the Company during 1997, the total amount of payments due under the Agreements, based on Base Salary to be paid to Mr. Perl and Bonus would be $3.0 million. CONSULTATION AGREEMENT The Bank has entered into a five year consulting agreement with Mrs. Nora L. Vineyard commencing on July 15, 1996 (the "Agreement"). Mrs. Vineyard will receive compensation in the amount of $120,000 for a period of three years and $90,000 for the remaining two years of the Agreement. The Agreement provides Mrs. Vineyard with medical insurance during the term of the Agreement. Pursuant to the terms of the Agreement, Mrs. Vineyard will be available to provide advisory and consulting services and will give the Company and the Bank the benefit of her special knowledge, skills, contacts and business experience. A portion of the future payments due pursuant to this Agreement were accrued and expensed during the year ended December 31, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Comparison of Operating Results for the Year Ended December 31, 1996 and December 31, 1995." BENEFITS Insurance Plans. All full-time employees are covered as a group for comprehensive hospitalization, including major medical, long-term disability, accidental death and dismemberment insurance and group term life insurance. 78 Cash Bonus Plan. The Bank adopted a cash bonus plan (the "Bonus Plan") effective February 1996. All employees except for commissioned employees and employees with employment contracts are eligible to participate. The Bonus Plan paid an aggregate of approximately $100,000 in 1996. For 1997, the Bonus Plan will pay bonuses in the aggregate of 15% of the after tax profits of the Bank in excess of a 15% return on average equity, as defined in the Bonus Plan. 401(k) Plan. The Bank maintains the Life Savings Bank Employee's Savings Plan ("401(k) Plan"), a tax- qualified cash or deferred arrangement (i.e., 401(k) feature), under Section 401(a) of the Code. The 401(k) Plan provides participants with benefits upon retirement, death, disability or termination of employment with the Bank. Employees are eligible to participate in the plan following the completion of 6 months of service with the Bank and the attainment of age 21. Participants may authorize the Bank to contribute to the 401(k) Plan, on their behalf, from 1% to 15% of their compensation, not to exceed certain legally permissible limits, including an overall dollar limit of $9,500 for 1997. The Bank currently matches 25% of the first 8% of the deferral by a Participant under the 401(k) Plan each year. Each plan year, the Bank may also make an additional contribution to the 401(k) Plan (a "profit sharing contribution"). The profit sharing contribution, if made by the Bank, is allocated to each Participant's account based on the Participant's compensation for the year relative to the compensation of all participants for the year. Participants are always 100% vested in their deferral contributions. Participants become 20% vested in the Bank's matching contributions and profit sharing contributions after the completion of two year of service with the Bank. Their vested interest in the matching contributions and profit sharing contributions increases by 20% for each year of service completed, so that after the completion of 6 years of service, the Participant is 100% vested in the Bank's matching contributions and profit sharing contributions. A Participant's vested portion of his or her 401(k) Plan account is distributable from the 401(k) Plan upon termination of the participant's employment, death, disability or retirement. Participants may also receive hardship distributions and loans from the 401(k) Plan. Any distribution made to a Participant prior to the Participant's attainment of age 59 1/2 is subject to a 10% tax penalty. The Board of Directors may at any time discontinue the Bank's contributions to employee accounts. For the years ended December 31, 1996, 1995 and 1994, the Bank's matching contributions to the 401(k) Plan were $21,000, zero and $7,000, respectively. The 401(k) Plan permits Participants to direct the investment of their 401(k) plan account into various investment alternatives. The investment accounts are valued daily and participants are provided with information regarding the market value of the participant's investments and all contributions made on his or her behalf on at least an annual basis. In connection with the Reorganization of the Bank and the Offering, the Bank will amend the 401(k) Plan to permit Participants to invest in an Employer Stock Fund as one of the investment alternatives. The Employer Stock Fund will be invested primarily in shares of Common Stock. Employee Stock Purchase Plan. The Company has adopted, as of January 1997, the Life Financial Employee Stock Purchase Plan ("ESPP"), pursuant to which the Company may make available for sale to employees shares of its Common Stock at a price equal to no less than 85% of the fair market value of the Common Stock on the date of purchase. The ESPP is designed to give eligible employees the opportunity to purchase shares of Company Common Stock through payroll deductions of up to a specified percentage of their total compensation. The ESPP will become effective upon the completion of the Offerings. ESOP. In connection with the Reorganization and Offering, the Company intends to implement an employee stock ownership plan ("ESOP"). The ESOP is a tax- qualified retirement plan under Section 401(a) of the Code designed to invest primarily in the Common Stock. The ESOP will provide eligible employees with the opportunity to receive a Company-funded retirement benefit based on the value of the Common Stock and any other investment held by the plan. Employees of the Company who have completed certain eligibility and minimum service requirements will be eligible to participate in the ESOP. The Company's contributions to the ESOP will be allocated to participants accounts based on the ratio each participant's compensation bears to all 79 participants' compensation. It is expected that a Participant's account under the ESOP will vest at the same rate as employer contributions to the 401(k) Plan vest (i.e. 20% after two years of service with full vesting after six years). It is anticipated that the shares purchased by the ESOP will be funded through contributions from the general funds of the Company on an annual basis and will equal up to two percent (2.0%) of the issued and outstanding shares of the Company at the time of purchase. Any such contributions shall be at the discretion of the Board of Directors of the Company. Borrowed funds will not be used to acquire such shares. STOCK OPTION PLANS The Board of Directors of the Bank adopted the Life Savings Bank, Federal Savings Bank 1996 Stock Option Plan (the "Bank Option Plan"), a stock-based benefit plan which provides for the granting of stock options to eligible officers, employees and directors of the Bank, on November 21, 1996. The Board of Directors of the Bank has reserved 107,200 (321,600 post-Reorganization) shares for issuance under the Bank Option Plan. The Bank Option Plan will be presented to stockholders of the Bank for ratification at an annual meeting to be held on April 18, 1997. Upon completion of the Reorganization and the Public Offering, the Bank Option Plan will, by operation of law and pursuant to the Bank Option Plan, become an option plan of the Company. The Board of Directors of the Company has adopted the Life Financial Corp. 1997 Stock Option Plan (the "Company Option Plan") which will become effective upon the completion of the Reorganization and the Public Offering (The Bank Option Plan and the Company Option Plan will sometimes hereinafter be referred to as the "Option Plans"). The Board of Directors of the Company has reserved shares equal to 10% of the issued and outstanding shares of the Company giving effect to the Reorganization and the Public Offering, including Company options to be exchanged for Bank options pursuant to the Bank Option Plan for issuance under the Option Plans. Stock options with respect to shares of the Bank's Common Stock granted under the Bank Option Plan and outstanding prior to completion of the Reorganization will automatically become options to purchase three shares of the Company's Common Stock upon identical terms and conditions. The Company will assume all of the Bank's obligations with respect to the Bank Option Plan. Following the completion of the Reorganization, the Option Plans will be available to directors, officers and employees of the Company and to directors, officers and employees of its direct or indirect subsidiaries, including the Bank, as selected pursuant to the Option Plans and all references to the Bank's Common Stock under the Bank Option Plan will be deemed references to the Company's Common Stock. The following description of the Option Plans reflects the Option Plans as they will exist upon consummation of the Reorganization. The stock option benefits provided under the Option Plans are designed to attract and retain qualified directors and personnel in key positions, provide directors, officers and key employees with a proprietary interest in the Company, and as an incentive to contribute to the success of the Bank and the Company and reward key employees for outstanding performance. The Option Plans provides for the grant of: (i) options to purchase the Company's Common Stock intended to qualify as incentive stock options under Section 422 of the Code ("Incentive Stock Options"); (ii) options that do not so qualify ("Non- Statutory Stock Options"); and (iii) Limited Rights. Limited Rights are exercisable only upon a change in control of the Bank or the Company. Upon exercise of "Limited Rights" in the event of a change in control, the employee will be entitled to receive a lump sum cash payment equal to the difference between the exercise price of the related option and the fair market value of the shares of common stock subject to the option on the date of exercise of the right in lieu of purchasing the stock underlying the option. Except for options granted to directors, all options granted contemporaneously with adoption of the Option Plans are intended to be Incentive Stock Options to the extent permitted under Section 422 of the Code. The Option Plans will be in effect for a period of ten years from the dates of adoption by the Boards of Directors of the Bank and the Company, respectively. Under the Option Plans, the Personnel/Compensation Committee determines which officers and employees will be granted options and Limited Rights, whether such options are to be incentive or non-statutory stock options, the number of shares subject to each option, the exercise price of each stock option, whether such options may be exercised by delivering other shares of Common Stock and when such options become exercisable. The per share exercise price of a stock option is required to be at least equal to the fair market value of a share of Common Stock on the date the option is granted under the Option Plan. The Bank Committee has granted options to purchase 64,320 (192,960 post-Reorganization), and 4,180 (12,540 post-Reorganization) 80 shares respectively to Messrs. Perl and Passerino and has granted options to purchase an aggregate of 8,360 (25,080 post-Reorganization) shares to two other executive officers as a group at an exercise price of $3.33, on a pro forma basis as of December 31, 1996. An additional 25,000, 15,000 and 30,000 options have been granted to Messrs. Perl and Passerino and two other executive officers as a group, respectively, under the Company Option Plan at the Offering Price effective as of the Reorganization. An optionee will not be deemed to have received taxable income upon grant or exercise of any Incentive Stock Option, provided that such shares received through the exercise of such option are not disposed of by the employee for at least one year after the date the stock is received in connection with the option exercise and two years after the date of grant of the option. No compensation deduction would be able to be taken by the Company as a result of the grant or exercise of Incentive Stock Options, provided such shares are not disposed of before the expiration of the period described above (a "disqualifying disposition"). In the case of a Non-Statutory Stock Option and in the case of a disqualifying disposition of an Incentive Stock Option, an optionee will be deemed to receive ordinary income upon exercise of the stock option in an amount equal to the amount by which the exercise price is exceeded by the fair market value of the Common Stock purchased by exercising the option on the date of exercise. The amount of any ordinary income deemed to be received by an optionee upon the exercise of a Non-Statutory Stock Option or due to a disqualifying disposition of an Incentive Stock Option would be a deductible expense for tax purposes for the Company. In the case of Limited Rights, upon exercise, the option holder would have to include the amount paid to him or her upon exercise in his gross income for federal income tax purposes in the year in which the payment is made and the Company would be entitled to a deduction for federal income tax purposes of the amount paid. Stock options will become vested and exercisable in the manner specified by the Company. The options granted by the Bank in connection with the adoption of the Bank Option Plan will vest at a rate of 33.3% per year, beginning on November 21, 1999. It is anticipated that options granted by the Company in connection with the Reorganization and the Public Offering under the Company Option Plan will vest at a rate of 33.3% per year beginning on the third anniversary of the date of the Reorganization and Public Offering. Incentive Stock Options granted in connection with the Option Plans could be exercisable for three months following the date on which the employee ceases to perform services for the Bank or the Company, except that in the event of death, disability, retirement or termination of an employee's service following change in control of the Bank or the Company, options accelerate and become fully vested and could be exercisable for up to one year thereafter or such longer period as determined by the Company. However, any Incentive Stock Options exercised more than three months following the date the employee ceases to perform services as an employee would be treated as a Non-Statutory Stock Option as described above. In the event of retirement, if the optionee continues to perform services as a director on behalf of the Bank, the Company or an affiliate, unvested options would continue to vest in accordance with their original vesting schedule until the optionee ceases to serve as a director. Non-Statutory Stock Options granted in connection with the Option Plans could be exercisable for one year following the date on which the employee ceases to perform services for the Bank or the Company, except that in the case of death, disability, retirement or termination of the optionee's service following a change in control, options accelerate and become fully vested and could be exercisable for up to one year thereafter or such longer period as determined by the Committee . All Options granted by the Bank to outside directors under the Bank Option Plan would be Non-Statutory Stock Options and will vest and become exercisable commencing three years after the date of adoption of the Bank Option Plan at the rate of 33.3% per year, and would expire upon the earlier of ten years following the date of grant or one year following the date the optionee ceases to be a director or consulting director. The Committee has granted options to purchase 3,060 (9,180 post-Reorganization) shares to each of the outside directors of the Bank at an exercise price of $3.33, on a pro forma basis as of December 31, 1996. It is anticipated that options granted by the Company in connection with the Reorganization and the Public Offering will vest at 81 a rate of 33.3% per year beginning on the third anniversary date of the Reorganization and the Public Offering. The Compensation Committee of the Company has granted options to purchase 17,500 shares to each of the outside directors under the Company Option Plan at an exercise price equal to the Offering Price effective upon the Reorganization. In the event of the death or disability of a participant or termination of a participant's service following a change in control of the Company or the Bank, all previously granted options would immediately vest and become fully exercisable. A change in control is be defined in the Option Plans generally to occur when a person or group of persons acting in concert acquires beneficial ownership of 20% or more of any class of equity security of the Company or the Bank or in the event of a tender or exchange offer, merger or other form of business combination, sale of all or substantially all of the assets of the Company or the Bank or contested election of directors which resulted in the replacement of a majority of the Board of Directors by persons not nominated by the directors in office prior to the contested election. The following table lists all grants of options and stock appreciation rights ("SARs") granted by the Bank Committee under the Bank Option Plan to the Named Executive Officers for fiscal 1996 and contains certain information about the potential value of those options based upon certain assumptions as to the appreciation of the Company's stock over the life of the option. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS --------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF ANNUAL RATES OF SECURITIES % OF TOTAL STOCK PRICE UNDERLYING OPTION/SARS EXERCISE OR APPRECIATION FOR OPTIONS/ GRANTED TO BASE PRICE OPTIONS(1) SARS GRANTED EMPLOYEES IN PER EXPIRATION --------------------- NAME (#)(2)(3)(4)(5) FISCAL YEAR SHARE DATE(6) 5% 10% ---- --------------- ------------ ----------- ---------- --------- ----------- Daniel L. Perl.......... 192,960(7) 60.00% $3.33(7) 11/21/06 $ 404,811 $ 1,021,665 Joseph R.L. Passerino... 12,540(7) 3.90 3.33(7) 11/21/06 26,157 66,014
- -------- (1) The amounts represent certain assumed rates of appreciation. Actual gains, if any, on stock option exercises and Common Stock holdings are dependent on the future performance of the Common Stock and overall stock market conditions. There can be no assurance that the amounts reflected in this table will be realized. (2) Options granted pursuant to the Bank Option Plan become exercisable in equal installments at an annual rate of 33.3% beginning November 21, 1999, unless otherwise accelerated. (3) The purchase price may be paid in cash or in Common Stock. (4) Under limited circumstances, such as death or disability of an employee, the employee (or his beneficiary) may request that the Company, in exchange for the employee's surrender of an option, pay to the employee (or beneficiary), the amount by which the fair market value of the Common Stock exceeds the exercise price of the option on the date of the employee's termination of employment. It is within the Company's discretion to accept or reject such a request. (5) To the extent possible, options will be treated as incentive options. (6) The option term is ten years. (7) As adjusted to reflect the Reorganization. 82 The following table provides certain information with respect to the number of shares of Common Stock represented by outstanding options held by the Named Executive Officers as of December 31, 1996. Also reported are the values for "in-the-money" options which represent the positive spread between the exercise price of any such existing stock options and the year end price of the Common Stock. FISCAL YEAR-END OPTION/SAR VALUES
VALUE OF NUMBER OF SECURITIES UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTION/SARS AT FISCAL YEAR END(#) FISCAL YEAR END($) ---------------------------- ---------------------------- NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2) ---- ---------------------------- ---------------------------- Daniel L. Perl.......... 0/192,960 $0/0 Joseph R.L. Passerino... 0/12,540 0/0
- -------- (1) The options in this table have an exercise price of $3.33, as adjusted to reflect the Reorganization, and become exercisable at an annual rate of 33.3% beginning November 21, 1997. The options will expire ten (10) years from the date of grant. (2) Based on market value of the underlying stock at January 21, 1997, minus the exercise price. The bid and ask prices for the Bank's common stock on January 21, 1997 was $3.00 and $3.67 per share, respectively, as adjusted to reflect the Reorganization. Therefore, using the average of the bid and ask prices, there is no positive spread between the exercise price of the options and the price of the common stock of the Bank. TRANSACTIONS WITH CERTAIN RELATED PERSONS The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") requires that all loans or extensions of credit to executive officers and directors must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with the general public and must not involve more than the normal risk of repayment or present other unfavorable features. In addition, loans made to a director or executive officer in excess of the greater of $25,000 or 5% of the Bank's capital and surplus (up to a maximum of $500,000) must be approved in advance by a majority of the disinterested members of the Board of Directors. The Bank's current policy provides that all loans made by the Bank to its directors and officers are made in the ordinary course of business, are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectibility or present other unfavorable features. During 1996, the law firm of Keller and Keller provided legal representation to the Bank for which it was paid approximately $2,300 for legal fees and related services. Until his retirement in 1996, Mr. Edgar C. Keller, a director of the Bank was a partner with Keller and Keller. In addition, the Bank purchased four policies of insurance from Caldwell & Moreland Insurance Brokers, Inc. for approximately $45,000 which yielded commissions of approximately $5,600. Richard C. Caldwell is a director of the Bank and the Company and a partner of Caldwell & Moreland Insurance Brokers, Inc. 83 SECURITY OWNERSHIP OF MANAGEMENT AND OTHER BENEFICIAL OWNERS At December 31, 1996, the Bank had 1,070,572 shares of common stock outstanding. In connection with the Reorganization each share of common stock will be exchanged for three shares of the Common Stock of the Company. The following table sets forth, as of December 31, 1996, on an historical and on a pro forma basis, giving effect to the Reorganization and the sale of 2,500,000 shares in the Public Offering, certain information as to those persons who were known by management to be beneficial owners of more than 5% of the Company's outstanding shares of Common Stock, each director, each Named Executive Officer and the shares of Common Stock beneficially owned by all directors and executive officers of the Company as a group. This table includes proposed purchases by the below-listed persons in the Public Offering at an assumed price of $11.00 per share.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP BEFORE OFFERINGS AFTER OFFERINGS NAME AND ADDRESS POSITION(S) WITH THE ------------------------- ---------------------- OF BENEFICIAL OWNER BANK SHARES PERCENT SHARES PERCENT ------------------- -------------------- ----------- ---------- ----------- ---------- Richard C. Caldwell Chairman of the Board 60,226(1) 5.6% 185,223 3.2% Ronald G. Skipper Director 52,000(2) 4.9 165,090 2.9 John D. Goddard Director 56,642(3) 5.3 172,199 3.0 Milton E. Johnson Director 37,842(4) 3.5 113,526 2.0 Daniel L. Perl Director, President and 24,974(5) 2.3 88,922 1.6 Chief Executive Officer Edgar C. Keller Director 17,174(6) 1.6 55,158 1.0 Louis E. Yeager Director 8,160(7) 0.8 24,480 0.4 Joseph R.L. Passerino Senior Vice President 1,456 * 5,278 * All Executive Officers and Directors as a Group (10 persons) 258,840(8) 24.2 811,884 14.2
- -------- (1) All shares are held through Mr. Caldwell's employee benefit plan. (2) These shares are held in the Ronald Skipper Pension Sharing Plan. (3) Of these shares, 25,376 are held by Mr. Goddard and his wife as joint tenants and 31,266 are held in the John D. Goddard Corporation Profit Sharing Plan and Trust. (4) Of these shares, 4,668 are held by Mr. Johnson and his wife as joint tenants, 27,882 are held in an IRA account for Mr. Johnson and his wife, 3,138 are held in custodial accounts for minors, 1,538 are held in joint tenancy with other family members and 616 are owned of record by two other family members. (5) Of these shares, 7,502 are held in joint tenancy with Mr. Perl's wife and 17,472 are held in the Navieve Financial Corp. Profit Sharing Trust. (6) Of these shares, 15,374 are held as tenants in common with another party. (7) These shares are held in the Louis E. Yeager & Frances K. Yeager Revocable Living Trust. (8) Does not include 15,374 shares of Common Stock held by Mrs. Nora L. Vineyard who is currently serving as a consultant to the Bank. 84 THE REORGANIZATION GENERAL The Boards of Directors of the Bank and the Company unanimously approved and entered into the Plan of Reorganization pursuant to which the Bank will be reorganized into a holding company structure and become the wholly owned subsidiary of the Company and each share of common stock of the Bank outstanding immediately prior to the Reorganization would be converted into three shares of Company Common Stock. The Plan of Reorganization contemplates that the Reorganization will be a tax-free transaction under the Code. The Plan of Reorganization has been submitted to the OTS for approval. Upon approval, the Plan of Reorganization is then subject to, among other things, the approval of the Reorganization by the affirmative vote of the holders of a majority of the outstanding shares of the Bank's common stock eligible to be cast at the annual meeting of stockholders scheduled to be held on April 18, 1997. As soon as is practicable following approval by the OTS and the stockholders of the Bank, the Reorganization and the Public Offering will be consummated. Until stockholder approval and all regulatory approvals have been obtained, no sales of the Common Stock may be completed. The amount of cash paid to those stockholders who exercise dissenters' rights, which are offered as required by OTS regulations, could impact on whether or not the transaction qualifies as a tax-free transaction. See "Risk Factors--Risks Associated with Dissenters' Rights." TAX CONSEQUENCES OF REORGANIZATION The following discussion of the material federal income tax consequences of the Reorganization is based on the Code, Treasury regulations, Internal Revenue Service rulings, and judicial and administrative decisions in effect as of the date hereof, all of which are subject to change at any time, possibly with retroactive effect. The following discussion does not address all of the federal income tax consequences that may be relevant to Bank stockholders in light of such holders' particular circumstances or to holders subject to special rules, such as foreign persons, financial institutions, tax-exempt organizations or insurance companies. The Bank has received an opinion of Muldoon, Murphy & Faucette, with regard to federal income tax matters, and from Deloitte & Touche LLP, with regard to California state income tax matters to the effect that, assuming the Reorganization is consummated under the Plan of Reorganization, a statutory merger under applicable federal law, and provided that in the transaction the shareholders of the Bank will exchange stock possessing control (defined to be at least 80% of the total vote and value) of all classes of the Bank stock, then, in a manner that results in among other things: (1) no gain or loss will be recognized by the Bank upon the receipt of assets of Interim in exchange for Bank common stock; (2) no gain or loss will be recognized by the stockholders of the Bank upon the transfer of their common stock in the Bank to the Company solely for the Company's Common Stock; (3) the total basis of the Company's Common Stock to be received by the stockholders of the Bank in the Reorganization will, in each instance, be the same as the total basis of such common stock of the Bank, exchanged therefor; (4) the holding period of Company Common Stock received by the stockholders of the Bank in the Reorganization will, in each instance, include the period during which the stockholders held the Bank common stock exchanged therefor, provided, that the Bank's common stock is held as a capital asset on the date of the Reorganization; (5) no gain or loss will be recognized by the Bank as a result of the transaction; and (6) no gain or loss will be recognized by the Company upon its receipt of the Bank's common stock solely in exchange for the issuance of Company Common Stock to Bank stockholders. Accordingly, if the Reorganization transaction satisfies the conditions noted above, the Reorganization will have no adverse federal or state income tax effects on the Company, the Bank, or the stockholders of the Bank. There is some risk that the exercise of dissenters' rights could result in cash payments to shareholders which would interfere with satisfaction of the control requirements noted above. While the Bank anticipates that the control requirements for a tax free reorganization will be met, if the exercise of dissenters' rights prevents the satisfaction of the control requirements, the Bank may take the necessary steps to withdraw the offering. 85 RESTRICTIONS ON ACQUISITION OF THE COMPANY GENERAL Certain provisions in the Company's Certificate of Incorporation and Bylaws and in its management remuneration together with provisions of Delaware corporate law, may have anti-takeover effects. In addition, regulatory restrictions may make it difficult for persons or companies to acquire control of the Company. Notwithstanding the foregoing, under certain circumstances, the Company may be subject to section 2115 of the California Corporation Code (as a foreign corporation) which may have the effect of superseding certain provisions of the Company's Certificate of Incorporation and Bylaws as interpreted by Delaware law, particularly those provisions providing for a staggered board of directors and eliminating cumulative voting. However, if its securities remain listed on the National Market System of the Nasdaq Stock Market and there are at least 800 stockholders, the Company will be exempt from the provisions of Section 2115. RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS A number of provisions of the Company's Certificate of Incorporation and Bylaws deal with matters of corporate governance and certain rights of stockholders. The following discussion is a general summary of the provisions of the Company's Certificate of Incorporation and Bylaws which might be deemed to have a potential "anti-takeover" effect. These provisions may have the effect of discouraging a future takeover attempt which is not approved by the Board of Directors but which individual Company stockholders may deem to be in their best interests or in which stockholders may receive a substantial premium for their shares over then current market prices. As a result, stockholders who might desire to participate in such a transaction may not have an opportunity to do so. Such provisions will also render the removal of the current Board of Directors or management of the Company more difficult. The following description of certain of the provisions of the Certificate of Incorporation and Bylaws of the Company is necessarily general and reference should be made in each case to such Certificate of Incorporation and Bylaws, which are incorporated herein by reference. See "Additional Information" as to how to obtain a copy of these documents. Limitation on Voting Rights. The Certificate of Incorporation of the Company provides that in no event shall any record owner of any outstanding Common Stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the then outstanding shares of Common Stock (the "Limit") be entitled or permitted to any vote in respect of the shares held in excess of the Limit. Beneficial ownership is determined pursuant to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the Exchange Act, and includes shares beneficially owned by such person or any of his affiliates (as defined in the Certificate of Incorporation), shares which such person or his affiliates have the right to acquire upon the exercise of conversion rights or options and shares as to which such person and his affiliates have or share investment or voting power, but shall not include shares beneficially owned by employee benefit plans or directors, officers and employees of the Bank or Company or shares that are subject to a revocable proxy and that are not otherwise beneficially owned, or deemed by the Company to be beneficially owned, by such person and his affiliates. The Certificate of Incorporation also contains provisions authorizing the Board of Directors to construe and apply the Limit and to demand that any person reasonably believed to beneficially own Common Stock in excess of the Limit (or hold of record Common Stock beneficially owned in excess of the Limit) to provide the Company with certain information. No assurance can be given that a court applying Delaware law would enforce such provisions of the Certificate of Incorporation. The Certificate of Incorporation of the Company further provides that this provision limiting voting rights may only be amended upon the vote of 80% of the outstanding shares of voting stock (after giving effect to the limitation on voting rights). Board of Directors. The Board of Directors of the Company is divided into three classes, each of which shall contain approximately one-third of the whole number of members of the Board. Each class shall serve a staggered term, with approximately one-third of the total number of directors being elected each year. The Company's Certificate of Incorporation and Bylaws provide that the size of the Board shall be determined by a majority of the directors. The Certificate of Incorporation and the Bylaws provide that any vacancy occurring in 86 the Board, including a vacancy created by an increase in the number of directors or resulting from death, resignation, retirement, disqualification, removal from office or other cause, may be filled for the remainder of the unexpired term exclusively by a majority vote of the directors then in office. The classified Board is intended to provide for continuity of the Board of Directors and to make it more difficult and time consuming for a stockholder group to fully use its voting power to gain control of the Board of Directors without the consent of the incumbent Board of Directors of the Company. The Certificate of Incorporation of the Company provides that a director may be removed from the Board of Directors prior to the expiration of his term only for cause, upon the vote of 80% of the outstanding shares of voting stock. In the absence of these provisions, the vote of the holders of a majority of the shares could remove the entire Board, with or without cause, and replace it with persons of such holders' choice. Cumulative Voting, Special Meetings and Action by Written Consent. The Certificate of Incorporation does not provide for cumulative voting for any purpose. Moreover, special meetings of stockholders of the Company may be called only by the Board of Directors of the Company. The Certificate of Incorporation also provides that any action required or permitted to be taken by the stockholders of the Company may be taken only at an annual or special meeting and prohibits stockholder action by written consent in lieu of a meeting. Authorized Shares. The Certificate of Incorporation authorizes the issuance of 25,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. The shares of Common Stock and Preferred Stock were authorized in an amount greater than that to be issued in the Reorganization and the Public Offering to provide the Company's Board of Directors with as much flexibility as possible to effect, among other transactions, financings, acquisitions, stock dividends, stock splits and employee stock options. However, these additional authorized shares may also be used by the Board of Directors consistent with its fiduciary duty to deter future attempts to gain control of the Company. The Board of Directors also has sole authority to determine the terms of any one or more series of Preferred Stock, including voting rights, conversion rates, and liquidation preferences. As a result of the ability to fix voting rights for a series of Preferred Stock, the Board has the power, to the extent consistent with its fiduciary duty, to issue a series of Preferred Stock to persons friendly to management in order to attempt to block a post-tender offer merger or other transaction by which a third party seeks control, and thereby assist management to retain its position. The Company's Board of Directors currently has no plans for the issuance of additional shares, other than the issuance of additional shares and upon exercise of stock options to be issued pursuant to the terms of the Incentive Plan. Stockholder Vote Required to Approve Business Combinations with Principal Stockholders. The Certificate of Incorporation requires the approval of the holders of 80% of the Company's outstanding shares of voting stock to approve certain "Business Combinations," as defined therein, and related transactions. Under Delaware law, absent this provision, Business Combinations, including mergers, consolidations and sales of all or substantially all of the assets of a corporation must, subject to certain exceptions, be approved by the vote of the holders of only a majority of the outstanding shares of Common Stock of the Company and any other affected class of stock. Under the Certificate of Incorporation, 80% approval of stockholders is required in connection with any transaction involving an Interested Stockholder (as defined below) except (i) in cases where the proposed transaction has been approved in advance by a majority of those members of the Company's Board of Directors who are unaffiliated with the Interested Stockholder and were directors prior to the time when the Interested Stockholder became an Interested Stockholder or (ii) if the proposed transaction meets certain conditions set forth therein which are designed to afford the stockholders a fair price in consideration for their shares in which case, if a stockholder vote is required, approval of only a majority of the outstanding shares of voting stock would be sufficient. The term "Interested Stockholder" is defined to include any individual, corporation, partnership or other entity (other than the Company or its subsidiary) which owns beneficially or controls, directly or indirectly, 10% or more of the outstanding shares of voting stock of the Company. This provision of the Certificate of Incorporation applies to any "Business Combination," which is defined to include: (i) any merger or consolidation of the Company or any of its subsidiaries with or into any Interested Stockholder or Affiliate (as defined in the Certificate of Incorporation) of an Interested Stockholder; (ii) any sale, lease, exchange, mortgage, transfer, or other disposition to or with any Interested Stockholder or Affiliate of 25% or more of the assets of the Company or combined assets of the Company and its subsidiary; (iii) the issuance or 87 transfer to any Interested Stockholder or its Affiliate by the Company (or any subsidiary) of any securities of the Company in exchange for any assets, cash or securities the value of which equals or exceeds 25% of the fair market value of the Common Stock of the Company; (iv) the adoption of any plan for the liquidation or dissolution of the Company proposed by or on behalf of any Interested Stockholder or Affiliate thereof; and (v) any reclassification of securities, recapitalization, merger or consolidation of the Company which has the effect of increasing the proportionate share of Common Stock or any class of equity or convertible securities of the Company owned directly or indirectly by an Interested Stockholder or Affiliate thereof. Evaluation of Offers. The Certificate of Incorporation of the Company further provides that the Board of Directors of the Company, when evaluating any offer of another "Person" (as defined therein) to: (i) make a tender or exchange offer for any equity security of the Company; (ii) merge or consolidate the Company with another corporation or entity; or (iii) purchase or otherwise acquire all or substantially all of the properties and assets of the Company, may, in connection with the exercise of its judgment in determining what is in the best interest of the Company, the Bank and the stockholders of the Company, give due consideration to all relevant factors, including, without limitation, the social and economic effects of acceptance of such offer on the Company's customers and the Bank's present and future account holders, borrowers and employees; on the communities in which the Company and the Bank operate or are located; and on the ability of the Company to fulfill its corporate objectives as a savings and loan holding company and on the ability of the Bank to fulfill the objectives of a federally chartered stock savings association under applicable statutes and regulations. No assurance can be given that a court applying Delaware law would enforce the foregoing provision of the Certificate of Incorporation. By having these standards in the Certificate of Incorporation of the Company, the Board of Directors may be in a stronger position to oppose such a transaction if the Board concludes that the transaction would not be in the best interest of the Company, even if the price offered is significantly greater than the then market price of any equity security of the Company. Amendment of Certificate of Incorporation and Bylaws. Amendments to the Company's Certificate of Incorporation must be approved by a majority vote of its Board of Directors and also by a majority of the outstanding shares of its voting stock; provided, however, that an affirmative vote of at least 80% of the outstanding voting stock entitled to vote (after giving effect to the provision limiting voting rights) is required to amend or repeal certain provisions of the Certificate of Incorporation, including the provision limiting voting rights, the provisions relating to approval of certain business combinations, calling special meetings, the number and classification of directors, director and officer indemnification by the Company and amendment of the Company's Bylaws and Certificate of Incorporation. The Company's Bylaws may be amended by its Board of Directors, or by a vote of 80% of the total votes eligible to be voted at a duly constituted meeting of stockholders. Certain Bylaw Provisions. The Bylaws of the Company also require a stockholder who intends to nominate a candidate for election to the Board of Directors, or to raise new business at a stockholder meeting to give at least 90 days advance notice to the Secretary of the Company. The notice provision requires a stockholder who desires to raise new business to provide certain information to the Company concerning the nature of the new business, the stockholder and the stockholder's interest in the business matter. Similarly, a stockholder wishing to nominate any person for election as a director must provide the Company with certain information concerning the nominee and the proposing stockholder. ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS AND MANAGEMENT REMUNERATION The provisions described above are intended to reduce the Company's vulnerability to takeover attempts and certain other transactions which have not been negotiated with and approved by members of its Board of Directors. The provisions of the employment agreement with Mr. Perl and the Stock Option Plans may also discourage takeover attempts by increasing the costs to be incurred by the Bank and the Company in the event of a takeover. See "The Board of Directors and Management of the Bank--Employment Agreements" and "-- Stock Option Plans." The Company's Board of Directors believes that the provisions of the Certificate of Incorporation, Bylaws and management remuneration plans to be established are in the best interest of the Company and its 88 stockholders. An unsolicited non-negotiated proposal can seriously disrupt the business and management of a corporation and cause it great expense. Accordingly, the Board of Directors believes it is in the best interests of the Company and its stockholders to encourage potential acquirors to negotiate directly with management and that these provisions will encourage such negotiations and discourage non-negotiated takeover attempts. It is also the Board of Directors' view that these provisions should not discourage persons from proposing a merger or other transaction at a price that reflects the true value of the Company and that otherwise is in the best interest of all stockholders. DELAWARE CORPORATE LAW The State of Delaware has a statute designed to provide Delaware corporations with additional protection against hostile takeovers. The takeover statute, which is codified in Section 203 of the Delaware General Corporate Law ("Section 203"), is intended to discourage certain takeover practices by impeding the ability of a hostile acquiror to engage in certain transactions with the target company. In general, Section 203 provides that a "Person" (as defined therein) who owns 15% or more of the outstanding voting stock of a Delaware corporation (an "Interested Stockholder") may not consummate a merger or other business combination transaction with such corporation at any time during the three- year period following the date such "Person" became an Interested Stockholder. The term "business combination" is defined broadly to cover a wide range of corporate transactions including mergers, sales of assets, issuances of stock, transactions with subsidiaries and the receipt of disproportionate financial benefits. The statute exempts the following transactions from the requirements of Section 203: (i) any business combination if, prior to the date a person became an Interested Stockholder, the Board of Directors approved either the business combination or the transaction which resulted in the stockholder becoming an Interested Stockholder; (ii) any business combination involving a person who acquired at least 85% of the outstanding voting stock in the transaction in which he became an Interested Stockholder, with the number of shares outstanding calculated without regard to those shares owned by the corporation's directors who are also officers and by certain employee stock plans; (iii) any business combination with an Interested Stockholder that is approved by the Board of Directors and by a two-thirds vote of the outstanding voting stock not owned by the Interested Stockholder; and (iv) certain business combinations that are proposed after the corporation had received other acquisition proposals and which are approved or not opposed by a majority of certain continuing members of the Board of Directors. A corporation may exempt itself from the requirements of the statute by adopting an amendment to its Certificate of Incorporation or Bylaws electing not to be governed by Section 203. At the present time, the Board of Directors does not intend to propose any such amendment. Any proposal to acquire 10% of any class of equity security of the Company generally would be subject to approval by the OTS under the Change in Bank Control Act. The OTS requires all persons seeking control of a savings institution, and, therefore, indirectly its holding company, to obtain regulatory approval prior to offering to obtain control. Federal law generally provides that no "person," acting directly or indirectly or through or in concert with one or more other persons, may acquire directly or indirectly "control," as that term is defined in OTS regulations, of a federally-insured savings institution without giving at least 60 days' written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. Such acquisitions of control may be disapproved if it is determined, among other things, that: (i) the acquisition would substantially lessen competition; (ii) the financial condition of the acquiring person might jeopardize the financial stability of the savings institution or prejudice the interests of its depositors; or (iii) the competency, experience or integrity of the acquiring person or the proposed management personnel indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person. Such change in control restrictions on the acquisition of holding company stock are not limited to three years after conversion but will apply for as long as the regulations are in effect. Persons holding revocable or irrevocable proxies may be deemed to be beneficial owners of such securities under OTS regulations and therefore prohibited from voting all or the portion of such proxies in excess of the 10% aggregate beneficial ownership limit. Such regulatory restrictions may prevent or inhibit proxy contests for control of the Company or the Bank which have not received prior regulatory approval. 89 DESCRIPTION OF CAPITAL STOCK OF THE COMPANY GENERAL The Company is authorized to issue 25,000,000 shares of Common Stock having a par value of $.01 per share and 5,000,000 shares of preferred stock having a par value of $.01 per share (the "Preferred Stock"). The Company currently expects to issue 3,211,716 shares of Common Stock and no shares of Preferred Stock in the Exchange Share Offering and 2,500,000 shares in the Public Offering. Except as discussed above in "Restrictions on Acquisition of the Company," each share of the Company's Common Stock will have the same relative rights as, and will be identical in all respects with, each other share of Common Stock. Upon payment of the Purchase Price for the Common Stock, all such stock will be duly authorized, fully paid and non-assessable. THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC. COMMON STOCK Dividends. The Company can pay dividends out of statutory surplus or from certain net profits if, as and when declared by its Board of Directors. The payment of dividends by the Company is subject to limitations which are imposed by law and applicable regulation. See "Dividend Policy" and "Regulation." The holders of Common Stock of the Company will be entitled to receive and share equally in such dividends as may be declared by the Board of Directors of the Company out of funds legally available therefor. If the Company issues Preferred Stock, the holders thereof may have a priority over the holders of the Common Stock with respect to dividends. Voting Rights. The holders of Common Stock of the Company will possess exclusive voting rights in the Company. They will elect the Company's Board of Directors and act on such other matters as are required to be presented to them under Delaware law or the Company's Certificate of Incorporation or as are otherwise presented to them by the Board of Directors. Except as discussed in "Restrictions on Acquisition of the Company," each holder of Common Stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. If the Company issues Preferred Stock, holders of the Preferred Stock may also possess voting rights. Certain matters require an 80% shareholder vote. See "Restrictions on Acquisition of the Company." As a federal savings bank, corporate powers and control of the Bank are vested in its Board of Directors, who elect the officers of the Bank and who fill any vacancies on the Board of Directors. Subsequent to the Reorganization, voting rights will be vested exclusively in the owners of the shares of capital stock of the Bank, which will be the Company, and voted at the direction of the Company's Board of Directors. Consequently, the holders of the Common Stock will not have direct control of the Bank. Liquidation. In the event of any liquidation, dissolution or winding up of the Bank, the Company, as holder of the Bank's capital stock, would be entitled to receive, after payment or provision for payment of all debts and liabilities of the Bank (including all deposit accounts and accrued interest thereon) all assets of the Bank available for distribution. In the event of liquidation, dissolution or winding up of the Company, the holders of its Common Stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of the Company available for distribution. If Preferred Stock is issued, the holders thereof may have a priority over the holders of the Common Stock in the event of liquidation or dissolution. Preemptive Rights. Holders of the Common Stock of the Company will not be entitled to preemptive rights with respect to any shares which may be issued. The Common Stock is not subject to redemption. PREFERRED STOCK None of the shares of the Company's authorized Preferred Stock will be issued in the Reorganization and the Public Offering. Such stock may be issued with such preferences and designations as the Board of Directors may from time to time determine. The Board of Directors can, without stockholder approval, issue preferred stock with voting, dividend, liquidation and conversion rights which could dilute the voting strength of the holders of the Common Stock and may assist management in impeding an unfriendly takeover or attempted change in control. 90 DESCRIPTION OF CAPITAL STOCK OF THE BANK GENERAL The Federal Stock Charter of the Bank authorizes the issuance of capital stock consisting of 10,000,000 shares of common stock, stated value $8.00 per share. Each share of Common Stock of the Bank will have the same relative rights as, and will be identical in all respects with, each other share of common stock. Currently, 1,070,572 shares of Common Stock are issued and outstanding, held of record by approximately 407 stockholders. COMMON STOCK Dividends. The holders of the Bank's common stock will be entitled to receive and to share equally in such dividends as may be declared by the Board of Directors of the Bank out of funds legally available therefor. See "Dividend Policy" for certain restrictions on the payment of dividends. Voting Rights. Holders of the Bank's common stock will possess exclusive voting rights in the Bank. Each holder of Common Stock will be entitled to one vote for each share held of record on each matter submitted to a vote, subject to the right of stockholders to cumulate their votes for the election of directors. Liquidation. In the event of any liquidation, dissolution, or winding up of the Bank, the holders of common stock will be entitled to receive, after payment of all debts and liabilities of the Bank (including all deposit accounts and accrued interest thereon), all assets of the Bank available for distribution in cash or in kind. Holders of Common Stock have no conversion, preemptive or other subscription rights, and there are no redemption or sinking fund provisions with respect to the Common Stock. TRANSFER AGENT AND REGISTRAR Chase Mellon Shareholder Services, Los Angeles, California is the transfer agent and registrar for the Company's Common Stock. SHARES ELIGIBLE FOR FUTURE SALE The Company's Certificate of Incorporation authorizes the issuance of 25,000,000 shares of Common Stock. Upon completion of the Offerings, there will be outstanding 5,711,716 shares of Common Stock (assuming no exercise of the Underwriters' over-allotment option). All shares of Common Stock issued in the Offerings will be available for resale in the public market without restriction or further registration under the Securities Act, except for shares purchased by affiliates of the Company (in general, any person who has a control relationship with the Company) or shares exchanged by affiliates in the Reorganization, which shares will be subject to the resale limitations of Rule 144. After the Offerings, shares of Common Stock held by affiliates will be considered to be "control shares" and 571,172 shares of Common Stock (608,672 shares if the Underwriters' over- allotment option is exercised in full) issuable upon the exercise of options that the Company has granted or agreed to grant will be "restricted securities" within the meaning of Rule 144, and are eligible for sale in the public market in compliance with Rule 144. At the first meeting of stockholders of the Company, the Company intends to file a registration statement on Form S-8 under the Securities Act registering approximately 571,172 shares of Common Stock (608,672 shares if the Underwriters' over- allotment option is exercised in full) issuable upon the exercise of options granted or to be granted pursuant to the Company's Option Plan. Upon effectiveness of the registration statement, shares issued to nonaffiliates upon the exercise of the options generally will be freely tradeable without restriction or further registration under the Securities Act. All officers and directors of the Company have agreed, subject to certain exceptions, that they will not offer, sell or otherwise dispose of any shares of Common Stock owned by them for 91 a period of 90 days after the date of this Prospectus without the prior written consent of the Representatives of the Underwriters. The Company has agreed, subject to certain exceptions, that it will not offer, sell or otherwise dispose of any shares of Common Stock for a period of 90 days after the date of this Prospectus without the prior written consent of the Representative of the Underwriters. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including a person who may be deemed to be an "affiliate" of the Company as that term is defined under the Securities Act, is entitled to sell, within any three-month period, a number of restricted shares as to which at least one year has elapsed from the later of the acquisition of such shares from the Company or an affiliate of the Company in an amount that does not exceed the greater of (i) one percent of the then outstanding shares of Common Stock (57,117 shares based upon 5,711,716 shares to be outstanding immediately after the Offerings), or (ii) if the Common Stock is quoted on the National Market System of the Nasdaq Stock Market or a stock exchange, the average weekly trading volume of the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice, and the availability of current public information about the Company. However, a person who is not deemed to have been an affiliate of the Company during the 90 days preceding a sale by such person and who has beneficially owned shares as to which at least two years has elapsed from the later of the acquisition of such shares from the Company or an affiliate of the Company is entitled to sell them without regard to the volume, manner of sale, or notice requirements of Rule 144. UNDERWRITING Subject to the terms and conditions of the underwriting agreement (the "Underwriting Agreement"), the underwriters named below (the "Underwriters"), for whom FBR is acting as representative (the "Representative"), has severally agreed to purchase from the Company the aggregate number of shares of Common Stock set forth opposite its name below.
UNDERWRITER NUMBER OF SHARES ----------- ---------------- Friedman, Billings, Ramsey & Co., Inc. ........................ --- Total........................................................ ===
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, and that the Underwriters will purchase all of the Common Stock offered hereby if any such Common Stock are purchased. The Company has been advised by the Representative that the Underwriters propose initially to offer the Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealer may re-allow, a discount not in excess of $ per share to certain other dealers. The offering of the Common Stock is made for delivery when, as and if accepted by the Underwriters and is subject to prior sale and to the Underwriters' right to reject any order in whole or in part and to withdraw, cancel, or modify the offer without notice. After the initial public offering of the Common Stock, the offering price and other selling terms may be changed by the Underwriters. The Underwriters have reserved 86,500 shares of Common Stock offered in the Public Offering for sale at the initial public offering price to directors, officers and employees of the Company and the Bank and to certain other persons. The Company has granted the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to an aggregate of 375,000 additional shares of Common Stock at the initial public offering price, less the underwriting discount, set forth on the cover page of this Prospectus. The Underwriters may exercise such option only to cover over- allotments, if any, made in connection with the sale 92 of shares of Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares of Common Stock on the same terms as the 2,500,000 shares of Common Stock are being offered. To the extent that the Underwriters exercise such option, each of the Underwriters will be obligated, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the above table bears to 2,500,000 shares and the Company will be obligated, pursuant to the option, to sell such shares of Common Stock to the Underwriters. The Company has agreed to indemnify the Underwriters against certain liabilities including liabilities under the federal securities laws, or to contribute to payments the Underwriter may be required to make in respect thereof. The Company, its directors and officers have agreed not to offer, sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock of the Company for a period of 90 days after the date of this Prospectus without the prior written consent of the Representative except for: (i) the sale of the shares hereunder, (ii) the issuance by the Company of Common Stock pursuant to the exercise of options under the Company's Option Plans disclosed in the Prospectus; (iii) the granting by the Company of stock options after the date of this Prospectus under the Option Plans; or (iv) as a bona fide gift to a third party or as a distribution to the partners or stockholders of a Company stockholder, provided that the recipient(s) thereof agree in writing to be bound by the terms of the Lock-Up Agreement to which such stockholder is bound. If the Underwriters create a short position in the Common Stock in connection with the Public Offering, (i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus), the Representative may reduce that short position by purchasing Common Stock in the open market. The Representative also may elect to reduce any short position by exercising all or part of the over-allotment option described herein. The Representative also may impose a penalty bid on certain Underwriters and selling group members. This means that if the Representative purchases shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, it may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the Public Offering. In general, purchases of a security for the purpose of stabilization or to reduce a syndicate short position could cause the price of the security to be higher than it might otherwise be in the absence of such purchases. The imposition of a penalty bid may have an effect on the price of a security to the extent that it were to discourage resales of the security by purchasers in the Public Offering. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of, or any effect that the transactions described above may have on, the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representative will engage in such transactions or, once commenced, will not be discontinued without notice. Prior to the Public Offering, there has been no public market for the Common Stock. Consequently, the initial public offering price of the Common Stock was determined by negotiations between the Company and the Representative. Among the factors considered in such negotiations were the history of, and prospects for the Company and the industry in which it competes, an assessment of management, the Company's past and present operations, its past and present earnings and the trend of such earnings, the prospects for future earnings of the Company, the general condition of the securities markets at the time of the Offerings and the market prices of publicly-traded common stocks of comparable companies in recent periods. The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. 93 EXPERTS The financial statements of Life Savings Bank, Federal Savings Bank as of December 31, 1996 and for the year then ended included in this Prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements of Life Savings Bank, Federal Savings Bank as of December 31, 1995 and for the year ended December 31, 1995 included in this Prospectus have been audited by Grant Thornton LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon such report given the authority of such firm as experts in accounting and auditing. The financial statements of Life Savings Bank, Federal Savings Bank for the year ended December 31, 1994 included in this Prospectus, have been audited by Price Waterhouse LLP, independent accountants, as stated in their report appearing herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. LEGAL MATTERS The legality of the Common Stock will be passed upon for the Bank and the Company by Muldoon, Murphy & Faucette, Washington, D.C., special counsel to the Bank and the Company. Muldoon, Murphy & Faucette will rely as to certain matters of Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell. Certain legal matters will be passed upon for FBR by Manatt, Phelps & Phillips, LLP, Los Angeles, California. CHANGES IN ACCOUNTANTS Prior to the year ended December 31, 1996 the Bank's financial statements were audited by Grant Thornton LLP. Grant Thornton LLP was replaced on October 24, 1996 and Deloitte & Touche LLP was engaged and continues as the independent auditors of the Bank. The decision to change auditors was recommended by the Audit Committee and was approved by the Board of Directors. Accordingly, the statement of financial condition as of December 31, 1995 and related statements of operations, stockholders' equity and cash flows for the year ended December 31, 1995, and included in this Prospectus, were audited by Grant Thornton LLP. For the year ended December 31, 1995 and up to the replacement of Grant Thornton LLP, there were no disagreements with Grant Thornton LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of Grant Thornton LLP, would have caused it to make reference to the subject matter of the disagreement in connection with its report. The independent auditors' report on the financial statements for the year ended December 31, 1995 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. Prior to the year ended December 31, 1995 the Bank's financial statements were audited by Price Waterhouse LLP. Price Waterhouse LLP was replaced on October 26, 1995 and Grant Thornton LLP was engaged as independent auditors of the Bank for the year ended December 31, 1995. The decision to change auditors was recommended by the Audit Committee and was approved by the Board of Directors. Accordingly, the Bank's statements of operations, stockholders' equity and cash flows for the year ended December 31, 1994, included in this Prospectus, were audited by Price Waterhouse LLP. For the year ended December 31, 1994 and up to the date of the replacement of Price Waterhouse LLP, there were no disagreements with Price Waterhouse LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of Price Waterhouse LLP, would have caused it to make a reference to the subject matter of the disagreement in 94 connection with its reports. The independent accountants' report on the financial statements for the year ended December 31, 1994 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. ADDITIONAL INFORMATION The Company has filed with the SEC a registration statement under the Securities Act with respect to the Common Stock offered hereby. As permitted by the rules and regulations of the SEC, this Prospectus does not contain all the information set forth in the registration statement. This Prospectus contains a description of the material terms and features of all material contracts, reports or exhibits to the registration statement required to be described; however, the statements contained in this Prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions thereof and are not necessarily complete; each such statement is qualified by reference to such contract or document. Such information and all exhibits to the Registration Statement can be examined without charge at the public reference facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549; and at the Pacific Regional Office of the Commission at 5670 Wilshire Blvd., 11th Floor, Los Angeles, California 90036-3648, and copies of such material can be obtained from the SEC at prescribed rates. In addition, the SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC, including the Company. The Company will register its Common Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such registration, the Company and the holders of its stock will become subject to the proxy solicitation rules, reporting requirements and restrictions on stock purchases and sales by directors, officers and greater than 10% stockholders, the annual and periodic reporting and certain other requirements of the Exchange Act. 95 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK INDEX TO FINANCIAL STATEMENTS Report of Independent Accountants for the year ended December 31, 1994.... F-1 Independent Auditors' Report for the year ended December 31, 1995......... F-2 Independent Auditors' Report for the year ended December 31, 1996......... F-3 Statements of Financial Condition as of December 31, 1996 and 1995........ F-4 Statements of Operations for each of the three years in the period ended December 31, 1996........................................................ F-5 Statements of Stockholders' Equity for each of the three years in the pe- riod ended December 31, 1996............................................. F-6 Statements of Cash Flows for each of the three years in the period ended December 31, 1996........................................................ F-7 Notes to Financial Statements for each of the three years in the period ended December 31, 1996.................................................. F-8
All schedules are omitted because they are not required or applicable, or the required information is shown in the financial statements or notes thereto. The financial statements of Life Financial Corp. have been omitted because Life Financial Corp. has not yet issued any stock, has no assets and no liabilities, and has not conducted any business other than of an organizational nature. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Life Savings Bank, Federal Savings Bank In our opinion, the accompanying statements of operations, of cash flows and of stockholders' equity present fairly, in all material respects the results of operations and cash flows of Life Savings Bank, Federal Savings Bank for the year ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Bank's management; our responsibility is to express an opinion on these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. We have not audited the financial statements of Life Savings Bank, Federal Savings Bank for any period subsequent to December 31, 1994. /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP Los Angeles, California January 31, 1995 F-1 INDEPENDENT AUDITORS' REPORT Board of Directors Life Savings Bank, Federal Savings Bank We have audited the accompanying statement of financial condition of Life Savings Bank, Federal Savings Bank as of December 31, 1995, and the related statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1995 financial statements referred to above present fairly, in all material respects, the financial position of Life Savings Bank, Federal Savings Bank as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 1995 the Bank changed its method of accounting for mortgage servicing rights to conform with Statement of Financial Accounting Standards No. 122. /s/ Grant Thornton LLP Grant Thornton LLP Irvine, California February 8, 1996 (except for the "Earnings Per Share" paragraph of Note 1, as to which the date is March 29, 1996) F-2 INDEPENDENT AUDITORS' REPORT Board of Directors Life Savings Bank, Federal Savings Bank We have audited the accompanying statement of financial condition of Life Savings Bank, Federal Savings Bank as of December 31, 1996, and the related statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such 1996 financial statements present fairly, in all material respects, the financial position of Life Savings Bank, Federal Savings Bank as of December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 1995, the Bank changed its method of accounting for mortgage servicing rights to conform with Statement of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights. /s/ Deloitte & Touche LLP - ----------------------------------- Deloitte & Touche LLP Costa Mesa, California February 7, 1997 (March 14, 1997 as to Note 16) F-3 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK STATEMENTS OF FINANCIAL CONDITION AS OF DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS)
1996 1995 -------- ------- ASSETS Cash and cash equivalents.................................... $ 13,265 $ 3,932 Restricted cash.............................................. 1,636 Securities held to maturity, estimated fair value of $7,981 (1996) and $1,985 (1995).................................... 8,023 1,985 Residual asset, at fair value................................ 5,700 Loans held for sale.......................................... 31,018 21,688 Loans held for investment, net of allowance for estimated loan losses of $1,625 (1996) and $1,177 (1995).............. 36,895 41,693 Mortgage servicing rights.................................... 2,645 683 Accrued interest receivable.................................. 537 507 Foreclosed real estate, net.................................. 561 827 Premises and equipment, net.................................. 1,579 976 Federal Home Loan Bank stock................................. 814 715 Deferred income taxes........................................ 397 138 Other assets................................................. 940 992 -------- ------- TOTAL ASSETS............................................. $104,010 $74,136 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposit accounts........................................... $ 85,711 $67,535 Other borrowings........................................... 3,278 Accounts payable and other liabilities..................... 5,748 2,333 -------- ------- Total liabilities........................................ 94,737 69,868 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $8 stated value; 10,000,000 shares authorized; 1,070,572 (1996) and 311,036 (1995) shares issued and outstanding.................................... 8,565 2,488 Additional paid-in capital................................. 825 914 Retained earnings (deficit), partially restricted.......... (117) 866 -------- ------- Total stockholders' equity............................... 9,273 4,268 -------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $104,010 $74,136 ======== =======
See notes to financial statements. F-4 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
1996 1995 1994 ------- ------- ------- INTEREST INCOME: Loans.............................................. $ 6,542 $ 5,433 $ 4,530 Securities held to maturity........................ 56 159 138 Other interest-earning assets...................... 331 233 156 ------- ------- ------- Total interest income............................ 6,929 5,825 4,824 ------- ------- ------- INTEREST EXPENSE: Deposit accounts................................... 3,514 3,192 2,534 Federal Home Loan Bank advances and other borrowings........................................ 252 256 187 ------- ------- ------- Total interest expense........................... 3,766 3,448 2,721 ------- ------- ------- NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN LOSSES......................................... 3,163 2,377 2,103 PROVISION FOR ESTIMATED LOAN LOSSES.................. 963 1,194 1,306 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOAN LOSSES......................................... 2,200 1,183 797 NONINTEREST INCOME: Loan servicing and other fees...................... 496 231 164 Service charges on deposit accounts................ 128 111 84 Net gains from mortgage financing operations....... 8,352 3,575 1,428 Other income....................................... 136 103 12 ------- ------- ------- Total noninterest income......................... 9,112 4,020 1,688 NONINTEREST EXPENSE: Compensation and benefits.......................... 5,233 2,544 1,575 Premises and occupancy............................. 746 471 418 Data processing.................................... 390 208 167 Net loss on foreclosed real estate................. 158 53 280 FDIC insurance premiums............................ 174 184 186 SAIF special assessment............................ 448 Marketing.......................................... 189 65 55 Telephone.......................................... 246 143 128 Professional services.............................. 218 92 86 Other expense...................................... 879 629 561 ------- ------- ------- Total noninterest expense........................ 8,681 4,389 3,456 ------- ------- ------- INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT).. 2,631 814 (971) INCOME TAX PROVISION (BENEFIT)....................... 1,126 294 (300) ------- ------- ------- NET INCOME (LOSS).................................... $ 1,505 $ 520 $ (671) ======= ======= ======= EARNINGS (LOSS) PER SHARE............................ $ 1.90 $ 0.84 $ (1.08) ======= ======= ======= WEIGHTED AVERAGE SHARES OUTSTANDING.................. 790,260 622,072 622,072 ======= ======= =======
See notes to financial statements. F-5 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED TOTAL ---------------- PAID-IN EARNINGS STOCKHOLDERS' SHARES AMOUNT CAPITAL (DEFICIT) EQUITY --------- ------ ---------- --------- ------------- BALANCE, January 1, 1994.. 311,036 $2,488 $914 $ 1,017 $4,419 Net loss.................. (671) (671) --------- ------ ---- ------- ------ BALANCE, December 31, 1994..................... 311,036 2,488 914 346 3,748 Net income................ 520 520 --------- ------ ---- ------- ------ BALANCE, December 31, 1995..................... 311,036 2,488 914 866 4,268 Stock split effected in the form of a dividend... 311,036 2,488 (2,488) Net proceeds from issuance of common stock.......... 448,500 3,589 (89) 3,500 Net income................ 1,505 1,505 --------- ------ ---- ------- ------ BALANCE, December 31, 1996..................... 1,070,572 $8,565 $825 $ (117) $9,273 ========= ====== ==== ======= ======
See notes to financial statements. F-6 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
1996 1995 1994 --------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).............................. $ 1,505 $ 520 $ (671) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization................. 301 166 179 Provision for estimated loan losses........... 963 1,194 1,306 Accretion of deferred fees.................... (41) (11) (20) Provision for estimated losses on foreclosed real estate.................................. 145 104 187 Gain on sale of foreclosed real estate, net... (41) (137) (39) Gain on sale and securitization of loans held for sale..................................... (7,868) (3,549) (1,014) Gain on bulk sale of mortgage servicing rights....................................... (26) (414) Unrealized gain on residual asset............. (484) Net accretion of residual asset............... (29) Valuation allowance on mortgage servicing rights....................................... (12) 13 Amortization of mortgage servicing rights..... 320 268 20 Purchase and origination of loans held for sale, net of loan fees....................... (227,156) (135,552) (72,613) Proceeds from sales and securitization of loans held for sale.......................... 212,226 130,086 66,408 Increase in restricted cash................... (1,636) Increase in accrued interest receivable....... (30) (76) (2) Deferred income taxes......................... (259) (81) 51 Decrease (increase) in income taxes receivable................................... 479 (64) Increase in accounts payable and other liabilities.................................. 3,415 1,618 86 Federal Home Loan Bank stock dividend......... (34) (30) (20) Decrease (increase) in other assets........... 52 (315) (271) --------- --------- -------- Net cash used in operating activities........ (18,663) (5,329) (6,891) CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in loans.......................... 8,578 6,428 8,133 Proceeds from sale of foreclosed real estate... 1,471 1,097 1,424 Purchase of securities held to maturity........ (8,013) (8,969) (991) Proceeds from maturities of securities held to maturity...................................... 1,975 9,241 2,042 Purchase of mortgage servicing rights.......... (706) (128) Proceeds from bulk sales of servicing rights... 632 522 Additions to premises and equipment, net....... (904) (523) (33) Purchase of Federal Home Loan Bank stock....... (65) (82) (8) --------- --------- -------- Net cash provided by investing activities.... 3,042 7,118 10,961 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposit accounts.... 18,176 1,846 (6,319) (Decrease) increase in Federal Home Loan Bank advances...................................... (1,250) 50 Proceeds from other borrowings................. 3,278 Net proceeds from issuance of common stock..... 3,500 --------- --------- -------- Net cash provided by (used in) financing activities.................................. 24,954 596 (6,269) --------- --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................... 9,333 2,385 (2,199) CASH AND CASH EQUIVALENTS, beginning of year... 3,932 1,547 3,746 --------- --------- -------- CASH AND CASH EQUIVALENTS, end of year......... $ 13,265 $ 3,932 $ 1,547 ========= ========= ======== SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid.................................. $ 3,773 $ 3,418 $ 2,729 ========= ========= ======== Income taxes paid (refunded)................... $ 267 $ 191 $ (290) ========= ========= ======== NONCASH INVESTING ACTIVITIES DURING THE YEAR: Transfers from loans held for sale to loans held for investment........................... $ 856 $ -- $ -- ========= ========= ======== Transfers from loans held for investment to loans held for sale........................... $ -- $ -- $ 10,090 ========= ========= ======== Transfers from loans to foreclosed real estate........................................ $ 2,070 $ 1,983 $ 1,871 ========= ========= ======== Loans to facilitate sales of foreclosed real estate........................................ $ 761 $ 647 $ 1,516 ========= ========= ======== NONCASH FINANCING ACTIVITIES DURING THE YEAR-- Stock dividends paid.......................... $ 2,488 $ -- $ -- ========= ========= ========
See notes to financial statements. F-7 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business--Life Savings Bank, Federal Savings Bank (the Bank) is a federally chartered savings bank which commenced operations in 1983. The Bank has one branch in San Bernardino County and its deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC). The Bank originates, purchases, sells and services nonconventional mortgage loans principally secured by first and second mortgages on one- to four-family residences. The Bank focuses on loans for the purchase or refinance of residential real property by borrowers who, because of prior credit problems or the absence of a credit history, are considered "subprime borrowers." The Bank also originates debt consolidation loans for up to 125% of the loan to value ratio of such loans for borrowers whose credit history qualifies for loans under federal agency programs. The Bank purchases and originates mortgage loans and other real estate secured loans through a network of approved correspondents and mortgage brokers on a nationwide basis, as well as through the Bank's retail lending division. Except for a limited number of loans specifically originated for retention in the Bank's portfolio as loans held for investment, since 1994, loans originated or purchased are generally originated for sale in the secondary mortgage market or in asset securitizations. The Bank generally retains the majority of the servicing rights to the loans sold or securitized and may sell servicing rights at a later date depending on market opportunities. In addition, the Bank purchases and originates for resale in the secondary market, smaller commercial real estate and multi-family loans. The Bank funds substantially all of the loans which it purchases or originates through deposits from customers concentrated in the communities surrounding its home office in San Bernardino County, internally generated funds and advances from the Federal Home Loan Bank. The Bank has recently begun to focus efforts on the origination of multi- family and commercial real estate as well as consumer-oriented loans secured by real estate, primarily home equity lines of credit and second trust deeds. Specifically, the Bank has targeted borrowers seeking loans secured by multi- family properties or properties used for commercial business purposes such as small office buildings or light industrial or retail facilities. Such loans are generally originated for sale. Securities Held to Maturity--Investments in debt securities that management has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Loans--The Bank's real estate loan portfolio consists primarily of long-term loans secured by first trust deeds on single-family residences. The adjustable rate mortgage (ARM) is the Bank's primary loan investment. The Bank originates mortgage loans for both portfolio investment and sale in the secondary market. At origination or purchase, mortgage loans are designated as held for sale or held for investment. Loans held for sale are carried at the lower of cost or estimated market value determined on an aggregate basis by outstanding investor commitments or current investor requirements and include related loan origination costs and fees, as well as premiums or discounts for purchased loans. Net unrealized losses, if any, are recognized in a valuation allowance by charges to operations. Any transfers of loans held for sale to the investment portfolio are recorded at the lower of cost or estimated market value on the transfer date. At December 31, 1996, the principal balance of loans held for sale consist of $25,414,000 in single family residential mortgage loans, $2,628,000 in multi-family residential mortgage loans and $2,412,000 in commercial mortgage loans. At December 31, 1995, all loans held for sale are single family residential mortgage loans. Loans held for investment are carried at amortized cost and net of deferred loan origination fees and costs and allowance for estimated loan losses. Net deferred loan origination fees and costs on loans are amortized or F-8 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 accreted using the interest method over the expected lives of the loans. Amortization of deferred loan fees is discontinued for nonperforming loans. Loans held for investment are not adjusted to the lower of cost or estimated market value because it is management's intention, and the Bank has the ability to, hold these loans to maturity. Interest on loans is credited to income as earned. Interest receivable is accrued only if deemed collectible. Generally, allowances are established for uncollected interest on loans on which payments are more than 90 days past due. On January 1, 1995, the Bank adopted Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-- Income Recognition and Disclosures. SFAS No. 114 generally requires all creditors to account for impaired loans, except those loans that are accounted for at fair value or at the lower of cost or fair value, at the present value of the expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. SFAS No. 114 indicates that a creditor should evaluate the collectibility of both contractual interest and contractual principal when assessing the need for a loss accrual. The adoption of these statements did not have a material impact on the results of operations or the financial position of the Bank, taken as a whole. The Bank considers a loan impaired when it is probable that the Bank will be unable to collect all contractual principal and interest payments under the terms of the original loan agreement. Loans are evaluated for impairment as part of the Bank's normal internal asset review process. However, in determining when a loan is impaired, management also considers the loan documentation, current loan to value ratios, and the borrower's current financial position. Included as impaired loans are all loans delinquent 90 days or more and all loans that have a specific loss allowance applied to adjust the loan to fair value. The accrual of interest on impaired loans is discontinued after a 90-day delinquent period or when, in management's opinion, the borrower may be unable to meet payments as they become due. When the interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Where impairment is considered other than temporary, a charge- off is recorded; where impairment is considered temporary, an allowance is established. Impaired loans which are performing under the contractual terms are reported as performing loans, and cash payments are allocated to principal and interest in accordance with the terms of the loans. The Bank uses the fair value of collateral method for measuring impaired loans. The Bank applies such measurement provision to all loans in its portfolio except for one- to four- family residential mortgage loans and unsecured consumer loans, which are collectively evaluated for impairment. Allowances for Estimated Loan and Real Estate Losses--It is the policy of the Bank to maintain allowances for estimated loan and real estate losses at levels deemed appropriate by management to provide for known or inherent risks in the portfolio. Specific loss allowances are established for loans that are deemed impaired if the fair value of the loan or the collateral is estimated to be less than the gross carrying value of the loan. In estimating losses, management considers the estimated sales price, cost of refurbishment, payment of delinquent taxes, cost of holding the property (if an extended period is anticipated) and cost of disposal. Additionally, general valuation allowances for loan and real estate losses have been established. Management's determination of the adequacy of the loan and real estate loss allowances is based on an evaluation of the composition of the portfolio, actual loss experience, current and prospective economic conditions, industry trends and other relevant factors, such as the recent adverse economic conditions experienced (including declining real estate values) in the area in which the Bank's lending and real estate activities are based, which may affect the borrower's ability to pay and the value of the underlying collateral. In addition, various regulatory agencies, as an integral part of F-9 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. Although management uses the best information available to make these estimates, future adjustments to the allowances may be necessary due to economic, operating, regulatory and other conditions that may be beyond the Bank's control. Mortgage Financing Operations--The Bank sells and securitizes the majority of loans held for sale with servicing retained. Under the servicing agreements, the investor is paid its share of the principal collections together with interest at an agreed-upon rate, which generally differs from the loans' contractual interest rate. Such differences result in a "loan servicing spread." Effective July 1, 1995, the Bank adopted SFAS No. 122, Accounting for Mortgage Servicing Rights, which amended SFAS No. 65, Accounting for Certain Mortgage Banking Activities. SFAS No. 122 requires an institution that purchases or originates mortgage loans and sells or securitizes those loans with servicing rights retained to allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. The impact of adopting SFAS No. 122 was an increase in pretax income of $594,000, net income of $438,000 and earnings per share of $.70 for the year ended December 31, 1995. In addition, SFAS No. 122 requires that all capitalized mortgage servicing rights (MSRs) be evaluated for impairment based on the fair value of those rights. The Bank's periodic evaluation is performed on a disaggregated basis whereby MSRs are stratified based upon type of interest rate (variable or fixed), loan type and original loan term. Impairment is recognized in a valuation allowance for each pool in the period of impairment. The Bank determines fair value based on the present value of estimated net future cash flows related to servicing income. In estimating fair values at December 31, 1996, the Bank utilized a weighted average prepayment assumption of 23% and a weighted average discount rate of 16.5%. The cost allocated to servicing rights is amortized in proportion to and over the period of estimated net future servicing fee income. Prior to adoption of SFAS No. 122, the Bank used the methodology set forth in Emerging Issues Task Force No. 88-11, Allocation of Recorded Investment When a Loan or Part of a Loan is Sold, in accounting for loan sales. Gains on bulk sales of mortgage loan servicing rights are recognized when title and all risks and rewards have irrevocably passed to the buyer and there are no significant unresolved contingencies. Residual Asset--In December 1996, the Bank completed the securitization and sale of approximately $51,900,000 in loans held for sale in the form of mortgage pass-through certificates and recognized a gain of approximately $4,300,000. These certificates are held in a trust independent of the Bank. The Bank will act as servicer for the trust and receive a stated servicing fee. The Bank has also retained a beneficial interest in the form of an interest-only strip which represents the subordinated right to receive cash flows from the pool of securitized loans after payment of the required amounts to the holders of the securities and the costs associated with the securitization. This interest-only strip receivable is classified as a trading security and recorded at fair value with any unrealized gains or losses recorded in the results of operations in the period of the change in fair value. For the year ended December 31, 1996, a net unrealized gain of $484,000 resulting from changes in fair value is included in results of operations. Valuations at origination and at each reporting period are based on discounted cash flow analyses. The cash flows are estimated as the excess of the weighted average coupon on each pool of loans sold over the sum of the F-10 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 pass-through interest rate, a servicing fee, a trustee fee, an insurance fee and an estimate of annual future credit losses related to the prepayment, default, loss, and interest rate assumptions that market participants would use for similar financial instruments subject to prepayment, credit and interest rate risk and are discounted using an interest rate that a purchaser unrelated to the seller of such a financial instrument would demand. At origination, the Bank utilizes a prepayment assumption of 17.0%, an estimated loss factor assumption of 1.5% and a weighted average discount rate of 13.5% to value the residual asset. The valuation includes consideration of characteristics of the loans including loan type and size, interest rate, origination date, term and geographic location. The Bank also uses other available information such as externally prepared reports on prepayment rates, collateral value, economic forecasts and historical default and prepayment rates of the portfolio under review. To the Bank's knowledge, there is no active market for the sale of residual assets. The range of values attributable to the factors used in determining fair value is broad. Accordingly, the Bank's estimate of fair value is subjective. In connection with its securitization transaction, the Bank initially deposited cash in the amount of approximately $1,600,000 with a trustee and will subsequently deposit a portion of the servicing spread collected on the related loans. Such amounts serve as credit enhancement for the related trust. The amount set aside is available for distribution to investors in the event of certain shortfalls in amounts due to investors. These amounts are subject to increase up to a reserve level as specified in the related securitization documents. Cash amounts on deposit are invested in certain instruments as permitted by the related securitization documents. To the extent amounts on deposit exceed specified levels, distributions are made to the Bank; and, at the termination of the related trust, any remaining amounts on deposit are distributed to the Bank. The amount on deposit at December 31, 1996 is classified as restricted cash in the accompanying statement of financial condition. Foreclosed Real Estate--Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at the lower of fair value or the balance of the loan at the date of foreclosure through a charge to the allowance for estimated loan losses. After foreclosure, valuations are periodically performed by management and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its fair value less estimated cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net gain (loss) on foreclosed real estate in the statement of operations. Premises and Equipment--Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using both the straight-line and accelerated methods over the estimated useful lives of the assets, which range from 15 years for leasehold improvements, 7 years for furniture, fixtures and equipment, and 3 years for computer equipment. Income Taxes--The Bank accounts for income taxes under SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Bank's financial statements or tax returns. In estimating future tax consequences, all expected future events other than enactments of changes in the tax law or rates are considered. If necessary, a valuation allowance is established based on management's determination of the likelihood of realization of deferred tax assets. Derivative Financial Instruments--The Bank has entered into various interest rate exchange agreements (swaps) to manage exposure to changes in interest rates. Net interest income (expense) on the swaps resulting from the differential between exchanging floating and fixed rate interest payments is recorded using the accrual method. No interest rate exchange agreements were outstanding as of December 31, 1996 and 1995 (Note 13). In the ordinary course of business, the Bank has entered into other off- balance sheet financial instruments consisting of commitments to extend credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. F-11 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 Earnings Per Share--Earnings per share is based on the weighted average number of shares outstanding adjusted retroactively to reflect the stock split effected in the form of a dividend during 1996. The 1995 and 1994 per share amounts and weighted average shares outstanding included in the accompanying financial statements have been restated to reflect such stock split. Presentation of Cash Flows--For purposes of reporting cash flows, cash and cash equivalents include cash and federal funds sold. Generally, federal funds are sold for one-day periods. At December 31, 1996 and 1995, federal funds sold approximated $10,335,000 and $1,600,000, respectively. Use of Estimates--In preparing the Bank's financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation--In 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 123, Accounting for Stock-Based Compensation, which encourages companies to account for stock compensation awards based on their fair value at the date the awards are granted. SFAS No. 123 does not require the application of the fair value method and allows for the continuance of current accounting methods, which require accounting for stock compensation awards based on their intrinsic value as of the grant date. However, SFAS No. 123 requires pro forma disclosure of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in this Statement had been applied. The accounting and disclosure requirements of this Statement are effective for financial statements for fiscal years beginning after December 15, 1995. The Bank did not adopt the accounting method in SFAS No. 123 with respect to its stock option plan and will account for such plan in accordance with Accounting Principles Board Opinion No. 25. Recent Accounting Developments--In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which was amended by SFAS No. 127. This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Under the financial- components approach, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. The financial-components approach focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the transfer is accounted for as a secured borrowing with pledge of collateral. The statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. Retroactive application of this statement is not permitted. The Company does not anticipate that the implementation of SFAS No. 125 will have a material impact on its results of operations or financial condition. Reclassifications--Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation. F-12 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 2. REGULATORY CAPITAL REQUIREMENTS AND OTHER REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believes, as of December 31, 1996, that the Bank meets all capital adequacy requirements to which it is subject. Qualitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As of December 31, 1996, management believes that the Bank is considered as adequately capitalized under the regulatory framework for prompt corrective action. As of December 31, 1995, the most recent notification from the Office of Thrift Supervision (OTS) categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well- capitalized or adequately capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since December 31, 1996 that management believes have changed the Bank's category. The Bank's actual capital amounts and ratios are also presented in the table.
TO BE ADEQUATELY TO BE WELL CAPITALIZED UNDER CAPITALIZED UNDER PROMPT CORRECTIVE PROMPT CORRECTIVE ACTUAL ACTION PROVISIONS: ACTION PROVISIONS: -------------- -------------------- -------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- ----------- -------- ----------- -------- (DOLLARS IN THOUSANDS) AS OF DECEMBER 31, 1996: Total capital (to risk- weighted assets)....... $ 10,446 9.43% $ 8,865 8.0% $ 11,081 10.0% Tier 1 capital (to risk- weighted assets)....... 9,273 8.37% 4,432 4.0% 6,649 6.0% Tier 1 capital (to average assets)........ 9,273 8.90% 4,169 4.0% 5,211 5.0% TO BE ADEQUATELY TO BE WELL CAPITALIZED UNDER CAPITALIZED UNDER PROMPT CORRECTIVE PROMPT CORRECTIVE ACTUAL ACTION PROVISIONS: ACTION PROVISIONS: -------------- -------------------- -------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- ----------- -------- ----------- -------- (DOLLARS IN THOUSANDS) AS OF DECEMBER 31, 1995: Total capital (to risk- weighted assets)....... $ 4,871 10.17% $ 3,832 8.0% $ 4,789 10.0% Tier 1 capital (to risk- weighted assets)....... 4,268 8.91% 1,916 4.0% 2,874 6.0% Tier 1 capital (to average assets)........ 4,268 5.69% 3,003 4.0% 3,753 5.0%
The Bank has been required by the OTS since the Bank's examination completed August 9, 1996 to compute its regulatory capital ratios based upon the higher of (1) the average of total assets based on month-end results or (2) total assets as of the quarter-end. F-13 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 Under the framework, the Bank's capital levels at December 31, 1996 do not allow the Bank to accept brokered deposits without prior approval from the regulators. The Bank had approximately $2,200,000 of brokered deposits at December 31, 1996. This is not expected to materially impact the Bank as it has other sources of funds. In accordance with the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), the OTS established regulations requiring the Bank to maintain (i) tangible capital equal to 1.5% of adjusted total assets, (ii) core capital equal to 3% of adjusted total assets, and (iii) risk-based capital equal to 8% of risk-weighted assets. The following table summarizes the OTS regulatory capital requirements under FIRREA for the Bank at December 31, 1996. As indicated in the table, the Bank's capital levels exceed all three of the currently applicable minimum capital requirements.
TOTAL RISK- TANGIBLE CAPITAL CORE CAPITAL BASED CAPITAL ----------------- ------------- ------------- AMOUNT % AMOUNT % AMOUNT % ----------------- ------------- ------------- (DOLLARS IN THOUSANDS) Balance at end of year: Equity per Bank financial statements................. $ 9,273 $ 9,273 $ 9,273 Adjustments for regulatory capital purposes--general valuation allowance........ 1,173 --------- ------- ------- ----- ------- ----- Regulatory capital............ 9,273 8.90% 9,273 8.90% 10,446 9.43% Minimum capital requirement... 1,563 1.50 3,127 3.00 8,865 8.00 --------- ------- ------- ----- ------- ----- Excess regulatory capital..... $ 7,710 7.40% $ 6,146 5.90% $ 1,581 1.43% ========= ======= ======= ===== ======= =====
The OTS issued regulations which set forth the methodology for calculating an interest rate risk component that is being incorporated into the OTS regulatory capital rules. Under the new regulations, only savings institutions with above normal interest rate risk exposure are required to maintain additional capital. This additional capital would increase the amount of a savings institution's otherwise required risk-based capital requirement. The final rule became effective January 1, 1994, and implementation will not begin until the Bank has been notified by the OTS. Management believes that, under current regulations, the Bank will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond the control of the Bank, such as changing interest rates or a further downturn in the economy in areas where the Bank has most of its loans, could adversely affect future earnings and, consequently, the ability of the Bank to meet its future minimum capital requirements. At periodic intervals, both the OTS and the FDIC routinely examine the Bank's financial statements as part of their legally prescribed oversight of the savings and loan industry. Based on these examinations, the regulators can direct that the Bank's financial statements be adjusted in accordance with their findings. The OTS concluded an examination of the Bank in June 1996. Examination results have been reflected in the financial statements presented herein. Future examinations by the OTS or FDIC could include a review of certain transactions or other amounts reported in the 1996 financial statements. Adjustments, if any, cannot presently be determined. F-14 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 (the Funds Act), which, among other things, imposes a special one-time assessment on Savings Association Insurance Fund (SAIF) member institutions, including the Bank, to recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special assessment of 65.7 basis points on SAIF-assessable deposits held as of March 31, 1995, payable November 27, 1996. The special assessment was recognized as an expense in the third quarter of 1996 and is tax deductible. The Bank took a pretax charge of $448,000 as a result of the SAIF special assessment. The Funds Act also spreads the obligations for payment of the Financing Corporation (FICO) bonds across all SAIF and Bank Insurance Fund (BIF) members. Beginning on January 1, 1997, BIF deposits will be assessed for FICO payments at a rate of 20% of the rate assessed on SAIF deposits. Based on current estimates by the FDIC, BIF deposits will be assessed a FICO payment of 1.3 basis points, while SAIF deposits will pay an estimated 6.5 basis points on the FICO bonds. Full pro rata sharing of the FICO payments between BIF and SAIF members will occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999 provided no savings associations remain as of that time. As a result of the Funds Act, the FDIC recently proposed to lower SAIF assessments to 0 to 27 basis points effective January 1, 1997, a range comparable to that of BIF members. However, SAIF members will continue to make the higher FICO payments described above. Management cannot predict the level of FDIC insurance assessments on an ongoing basis, whether the savings association charter will be eliminated or whether the BIF and SAIF will eventually be merged. 3. SECURITIES HELD TO MATURITY The amortized cost and estimated fair value of securities held to maturity were as follows at December 31 (in thousands):
1996 ----------------------------------------- GROSS UNREALIZED AMORTIZED ------------------ ESTIMATED COST GAINS LOSSES FAIR VALUE --------- -------- -------- ---------- U.S. Treasury and other agency securities..................... $8,013 $ -- $ (42) $7,971 Mortgage-backed securities...... 10 10 ------ -------- -------- ------ $8,023 $ -- $ (42) $7,981 ====== ======== ======== ====== 1995 ----------------------------------------- GROSS UNREALIZED AMORTIZED ------------------ ESTIMATED COST GAINS LOSSES FAIR VALUE --------- -------- -------- ---------- U.S. Treasury and other agency securities..................... $1,974 $ -- $ -- $1,974 Mortgage-backed securities...... 11 11 ------ -------- -------- ------ $1,985 $ -- $ -- $1,985 ====== ======== ======== ======
F-15 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 The maturity distribution of securities held to maturity at December 31, 1996 is as follows (in thousands):
ESTIMATED AMORTIZED FAIR COST VALUE --------- --------- Due in one year or less.................................. $5,000 $4,976 Due from one to five years............................... 3,013 2,995 Mortgage-backed securities............................... 10 10 ------ ------ $8,023 $7,981 ====== ======
The weighted average yield on securities held to maturity was 5.47% and 5.41% at December 31, 1996 and 1995, respectively. 4. LOANS HELD FOR INVESTMENT Loans held for investment consisted of the following at December 31 (in thousands):
1996 1995 ------- ------- Mortgage loans: Residential: One- to four-family...................................... $28,861 $32,517 Multi-family............................................. 2,124 2,412 Commercial and land....................................... 7,247 7,615 ------- ------- 38,232 42,544 Other loans: Loans secured by deposit accounts......................... 177 186 Unsecured commercial loans................................ 67 70 Unsecured consumer loans.................................. 65 63 ------- ------- 309 319 ------- ------- 38,541 42,863 Less: Deferred loan origination fees (costs).................... 21 (7) Allowance for estimated loan losses....................... 1,625 1,177 ------- ------- 1,646 1,170 ------- ------- $36,895 $41,693 ======= ======= Weighted average interest rate at end of period............ 8.06% 8.91% ======= =======
The Bank grants residential and commercial loans held for investment to customers located primarily in Southern California. Consequently, a borrower's ability to repay may be impacted by economic factors in the region. At December 31, 1996, included in loans held for investment and loans held for sale are adjustable rate loans with principal balances of $58,648,000. Adjustable rate loans are indexed primarily to COFI. F-16 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 The following summarizes activity in the allowance for estimated loan losses for the years ended December 31 (in thousands):
1996 1995 1994 ------ ------ ------ Balance, beginning of year........................... $1,177 $ 832 $ 436 Provision for estimated loan losses.................. 963 1,194 1,306 Recoveries........................................... 219 65 3 Charge offs.......................................... (734) (914) (913) ------ ------ ------ Balance, end of year................................. $1,625 $1,177 $ 832 ====== ====== ======
The Bank had nonaccrual loans at December 31, 1996, 1995 and 1994 of $2,416,000, $1,397,000 and $1,889,000, respectively. If nonaccrual loans had been performing in accordance with their original terms, the Bank would have recorded interest income of $6,692,000, $5,500,000 and $4,637,000, respectively, instead of interest income actually recognized of $6,542,000, $5,434,000 and $4,531,000, respectively, for the years ended December 31, 1996, 1995 and 1994. At December 31, 1996 and 1995, the Bank had impaired loans totaling $2,878,000 and $1,397,000, respectively, with specific reserves of $452,000 and $382,000, respectively. During 1996 and 1995, the average recorded investment in impaired loans was $2,300,000 and $1,980,000, respectively. Total cash collected on impaired loans during 1996 and 1995 was $1,339,000 and $1,079,000, respectively, of which $1,249,000 and $960,000, respectively, was credited to principal. Interest income of $90,000 and $119,000 on impaired loans was recognized for cash payments received in 1996 and 1995, respectively. At December 31, 1996 and 1995, troubled debt restructured loans amounted to $131,000. There were no troubled debt restructurings effected during the year ended December 31, 1996. The Bank is not committed to lend additional funds to debtors whose loans have been modified. The Bank is subject to numerous lending-related regulations. Under FIRREA, the Bank may not make real estate loans to one borrower in excess of 15% of its unimpaired capital and surplus except for loans not to exceed $500,000. This 15% limitation results in a dollar limitation of approximately $1,567,000 at December 31, 1996. During 1996, the Bank originated a loan for $154,500 to an executive officer. Immediately subsequent to origination, the loan was sold servicing released. 5. MORTGAGE FINANCING OPERATIONS Loans serviced for others at December 31, 1996, 1995 and 1994 totaled $168,963,000, $189,451,000 and $48,204,000, respectively. In connection with mortgage servicing activities, the Bank held funds in trust for others totaling approximately $957,000 and $934,000 at December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995, $266,000 and $19,000, respectively, of these funds are included in deposit accounts of the Bank (subject to FDIC insurance limits). For the year ended December 31, 1996, 34.0% of the properties securing loans funded by the Bank were located in California, 11.9% were located in Utah, 7.6% were located in Colorado, 6.8% were located in Florida F-17 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 and the remainder were dispersed throughout the country. At December 31, 1996, 40% of the loan servicing portfolio was collateralized by real estate properties located in California. No other state accounted for more than 10%. In the ordinary course of business, the Bank has liability under representations and warranties made to purchasers and insurers of mortgage loans. Under certain circumstances, the Bank may become liable for the unpaid principal and interest on the defaulted loans or other loans if there has been a breach of representations or warranties. The following is a summary of activity in mortgage servicing rights for the years ended December 31 (in thousands):
1996 1995 1994 ------ ----- ----- Balance, beginning of year............................. $ 683 $ -- $ -- Additions through originations......................... 2,270 864 Additions through purchase of servicing rights......... 706 128 Amortization........................................... (320) (268) (20) Sales.................................................. (606) (108) Change in valuation allowance.......................... 12 (13) ------ ----- ----- Balance, end of year................................... $2,645 $ 683 $ -- ====== ===== =====
The valuation allowance on mortgage servicing rights decreased by $12,000 from $13,000 at December 31, 1995 to $1,000 at December 31, 1996. There were no direct write-downs charged against the allowance for the years ended December 31, 1996 and 1995. Net gains from mortgage financing operations for the years ended December 31 consisted of the following (in thousands):
1996 1995 1994 ------ ------ ------ Gains on sale and securitization of loans held for sale................................................ $7,868 $3,549 $1,014 Unrealized gain on residual asset.................... 484 Gains on bulk sale of mortgage servicing rights...... 26 414 ------ ------ ------ $8,352 $3,575 $1,428 ====== ====== ======
6. PREMISES AND EQUIPMENT Premises and equipment consisted of the following at December 31 (in thousands):
1996 1995 ------- ------- Premises................................................... $ 569 $ -- Leasehold improvements..................................... 530 614 Furniture, fixtures and equipment.......................... 1,787 1,430 ------- ------- 2,886 2,044 Less accumulated depreciation and amortization............. (1,307) (1,068) ------- ------- $ 1,579 $ 976 ======= =======
F-18 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 The adoption of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, did not have a material impact on the results of operations or the financial condition of the Bank. 7. FORECLOSED REAL ESTATE Activity in the allowance for estimated real estate losses is as follows for the years ended December 31 (in thousands):
1996 1995 1994 ----- ------ ----- Balance, beginning of year............................ $ 44 $ 29 $ 94 Provision for estimated real estate losses............ 145 104 187 Recoveries............................................ 2 Charge offs........................................... (126) (89) (252) ----- ------ ----- Balance, end of year.................................. $ 65 $ 44 $ 29 ===== ====== ===== Net loss on foreclosed real estate is summarized as follows for the years ended December 31 (in thousands): 1996 1995 1994 ----- ------ ----- Net gain on sales of foreclosed real estate........... $ (41) $ (137) $ (39) Other expenses, net................................... 54 86 132 Provision for estimated real estate losses............ 145 104 187 ----- ------ ----- Net loss on foreclosed real estate.................... $ 158 $ 53 $ 280 ===== ====== =====
8. DEPOSIT ACCOUNTS Deposit accounts at December 31 are as follows (in thousands):
1996 1995 --------------------- --------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE INTEREST RATE AMOUNT INTEREST RATE AMOUNT ------------- ------- ------------- ------- Checking accounts................ 2.22% $ 8,947 1.37% $ 6,735 Passbook accounts................ 2.10 4,117 2.10 4,842 Money market accounts............ 2.99 3,217 2.76 4,156 Certificate accounts: Under $100,000................. 5.66 49,437 5.70 39,989 $100,000 and over.............. 5.63 19,993 5.80 11,813 ------- ------- 5.02% $85,711 4.84% $67,535 ======= =======
F-19 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 The aggregate annual maturities of certificate accounts at December 31, 1996 are approximately as follows (in thousands): 1997................................................................. $59,438 1998................................................................. 6,197 1999................................................................. 1,700 2000................................................................. 925 2001................................................................. 613 Thereafter........................................................... 557 ------- $69,430 =======
Interest expense for the years ended December 31 is summarized as follows (in thousands):
1996 1995 1994 ------ ------ ------ Checking accounts....................................... $ 112 $ 92 $ 95 Passbook accounts....................................... 92 127 157 Money market accounts................................... 118 144 163 Certificate accounts.................................... 3,192 2,829 2,119 ------ ------ ------ $3,514 $3,192 $2,534 ====== ====== ======
9. ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS As of December 31, 1996, the Bank had an available line of credit with the Federal Home Loan Bank of San Francisco (FHLB) of $17,346,000, which is contingent upon continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. Advances and/or the line of credit are collateralized by pledges of certain real estate loans with an aggregate principal balance of $20,474,000 and $24,426,000 at December 31, 1996 and 1995, respectively. There were no FHLB advances outstanding at December 31, 1996 and 1995. The following summarizes activities in advances from the FHLB for the years ended December 31 (dollars in thousands):
1996 1995 1994 ------- ------ ------ Average balance outstanding....................... $ 4,259 $3,112 $1,863 Maximum amount outstanding at any month-end during the period....................................... 13,900 7,600 7,000 Weighted average interest rate during the period.. 5.93% 6.55% 4.87%
At December 31, 1996, the Bank had a borrowing of $3,278,000 with an interest rate of 8.43% from a financial institution. The borrowing was collateralized by certain real estate loans with an aggregate principal balance of $3,278,000. The borrowing was repaid on January 17, 1997. F-20 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 10. INCOME TAXES Income taxes for the years ended December 31 consisted of the following (in thousands):
1996 1995 1994 ------ ---- ----- Current provision (benefit): Federal............................................... $1,073 $374 $(352) State................................................. 312 1 1 ------ ---- ----- 1,385 375 (351) ------ ---- ----- Deferred (benefit) provision: Federal............................................... (235) (81) 10 State................................................. (24) 41 ------ ---- ----- (259) (81) 51 ------ ---- ----- Total income tax provision (benefit)................. $1,126 $294 $(300) ====== ==== =====
A reconciliation from the statutory federal income tax rate to the Bank's effective income tax rate for the years ended December 31 is as follows:
1996 1995 1994 ---- ---- ----- Statutory federal income tax rate........................ 35.0% 35.0% (35.0)% State taxes, net of federal income tax benefit........... 7.2 3.1 Other.................................................... 0.6 1.1 1.0 ---- ---- ----- 42.8% 36.1% (30.9)% ==== ==== =====
Deferred tax assets (liabilities) were comprised of the following at December 31 (in thousands):
1996 1995 ----- ----- Deferred tax assets: Allowance for loan losses..................................... $ 479 $ 258 Capital loss carryforward..................................... 63 63 Loans held for sale........................................... 115 201 Other......................................................... 301 23 ----- ----- 958 545 ----- ----- Deferred tax liabilities: Depreciation.................................................. (61) (82) Purchased servicing rights.................................... (14) Originated servicing rights................................... (358) (179) Federal Home Loan Bank dividends.............................. (106) (85) ----- ----- (525) (360) ----- ----- 433 185 Less valuation allowance....................................... (36) (47) ----- ----- Net deferred tax asset......................................... $ 397 $ 138 ===== =====
F-21 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 Gross deferred tax assets are expected to be realized during 1997 through 2001. At December 31, 1996, the Bank has approximately $555,000 of net capital loss carryforwards available to offset future capital gains for state tax purposes. If not utilized, the losses would expire in 1998. A valuation allowance has been placed against the portion of this capital loss carryforward for which realization is not assured. The Bank's financial statement equity includes tax bad debt deductions for which no provision for federal income taxes has been made. If distributions to shareholders are made in excess of current or accumulated earnings and profits or if stock of the Bank is partially redeemed, this tax bad debt reserve, which approximates $330,000 at June 30, 1996, will be recaptured into income at the then prevailing federal income tax rate. The related unrecognized deferred tax liability is approximately $116,000. It is not contemplated that the Bank will make any disqualifying distributions that would result in the recapture of these reserves. 11. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK The Bank is involved in various legal proceedings associated with normal operations. In the opinion of management, based on the advice of legal counsel, such litigation and claims are expected to be resolved without material effect on the financial position of the Bank. The Bank leases a portion of its facilities from nonaffiliates under operating leases expiring at various dates through 2001. The following schedule shows the minimum annual lease payments, excluding property taxes and other operating expenses, due under these agreements (in thousands): 1997................................................................. $215 1998................................................................. 185 1999................................................................. 179 2000................................................................. 116 2001................................................................. 82 Thereafter........................................................... ---- $777 ====
Rental expense under all operating leases totaled $232,000, $124,000 and $118,000 in 1996, 1995 and 1994, respectively. The Bank has negotiated an employment agreement with its chief executive officer. This agreement provides for the payment of a base salary, a bonus based upon performance of the Bank and the payment of severance benefits upon termination. Lending Activities--Loans to subprime borrowers present a higher level of risk of default than conforming loans because of the increased potential for default by borrowers who may have had previous credit problems or who do not have any credit history. Loans to subprime borrowers also involve additional liquidity risks, as these loans generally have a more limited secondary market than conventional loans. The actual rates of delinquencies, foreclosures and losses on loans to subprime borrowers could be higher under adverse economic conditions than those currently experienced in the mortgage lending industry in general. While the Bank believes that the underwriting procedures and appraisal processes it employs enable it to somewhat mitigate the higher risks inherent in loans made to these borrowers, no assurance can be given that such procedures or processes will afford adequate protection against such risks. F-22 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 The debt consolidation loans the Bank originates for agency qualified borrowers are primarily home equity lines of credit and second deeds of trust generally up to 125% of the appraised value of the real estate underlying the loans. In the event of a default on such a loan by a borrower, there generally would be insufficient collateral to pay off the balance of such loan and the Bank, as holder of a second position on the property, would likely lose a substantial portion, if not all, of its investment. While the Bank believes that the underwriting procedures it employs enable it to somewhat mitigate the higher risks inherent in such loans, no assurance can be given that such procedures will afford adequate protection against such risks. Approximately 65% of the loans included in the securitization transaction completed in 1996 consisted of this type of loan. The Bank has been actively involved in the origination, purchase and sale to institutional investors of real estate secured loans and, more recently, in asset securitizations. Generally, the profitability of such mortgage financing operations depends on maintaining a sufficient volume of loans for sale and the availability of purchasers. Changes in the level of interest rates and economic factors affect the amount of loans originated or available for purchase by the Bank, and thus the amount of gains on sale of loans and servicing fee income. Changes in the purchasing policies of institutional investors or increases in defaults after funding could substantially reduce the amount of loans sold to such investors or sold through asset securitizations. Any such changes could have a material adverse effect on the Bank's results of operations and financial condition. The Bank's ability to originate, purchase and sell loans through its mortgage financing operations is also significantly impacted by changes in interest rates. Increases in interest rates may also reduce the amount of loan and commitment fees received by the Bank. A significant decline in interest rates could also decrease the size of the Bank's servicing portfolio and the related servicing income by increasing the level of prepayments. The Bank does not currently utilize any specific hedging instruments to minimize exposure to fluctuations in the market price of loans and interest rates with regard to loans held for sale in the secondary mortgage market. Therefore, between the time the Bank originates the loans or purchase commitments are issued or asset securitizations are completed, the Bank is exposed to downward movements in the market price of such loans due to upward movements in interest rates. The Bank depends largely on mortgage brokers and correspondents for its purchases and originations of new loans. The Bank's competitors also seek to establish relationships with the Bank's mortgage brokers and correspondents. The Bank's future results may become increasingly exposed to fluctuations in the volume and cost of its wholesale loans resulting from competition from other purchasers of such loans. Availability of Funding Sources--The Bank funds substantially all of the loans which it originates or purchases through deposits, internally generated funds or FHLB advances. The Bank competes for deposits primarily on the basis of rates, and, as a consequence, the Bank could experience difficulties in attracting deposits to fund its operations if the Bank does not continue to offer deposit rates at levels that are competitive with other financial institutions. The Bank also uses the proceeds generated by the Bank in selling loans in the secondary market or pools of loans in asset securitizations to fund subsequent originations or purchases. On an ongoing basis, the Bank explores opportunities to access credit lines as an additional source of funds. To the extent that the Bank is not able to maintain its currently available funding sources or to access new funding sources, it would have to curtail its loan production activities or sell loans earlier than is optimal. Any such event would have a material adverse effect on the Bank's results of operations and financial condition. Dependence on Securitizations--In December 1996, the Bank completed its first sale of loans through securitization. The Bank derived a significant portion of its income in 1996 by recognizing such gain on sale. The Bank's ability to complete securitizations is affected by several factors, including conditions in the securities F-23 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 markets generally and in the asset-backed securities markets specifically, the credit quality of the Bank's loan portfolio and the Bank's ability to obtain credit enhancements. Although the Bank obtained a credit enhancement in its first securitization which facilitated a "AAA" rating for the securitization interests, there can be no assurance that the Bank will be able to obtain future credit enhancements on acceptable terms or that future securitizations will be similarly rated. Any substantial reduction in the ability of the Bank to complete asset securitizations could have a material adverse effect on the Bank's results of operations and financial condition. 12. BENEFIT PLANS 401(k) Plan--The Bank maintains an Employee Savings Plan (the Plan) which qualifies under section 401(k) of the Internal Revenue Code. Under the Plan, employees may contribute from 1% to 15% of their compensation. The Bank will match, at its discretion, 25% of the amount contributed by the employee up to a maximum of 8% of the employee's salary. The amount of contributions made to the Plan by the Bank were not material for the years ended December 31, 1996, 1995 and 1994. Cash Bonus Plan--The Bank adopted a cash bonus plan (the Bonus Plan) effective February 1996. All employees except for commissioned employees and employees with employment contracts are eligible to participate. Approximately $100,000 was accrued pursuant to the Bonus Plan at December 31, 1996. For 1997, the Bonus Plan will pay bonuses in the aggregate of 15% of the after tax profits of the Bank in excess of a 15% return on average equity, as defined in the Bonus Plan. Stock Option Plan--On November 21, 1996, the Board of Directors of the Bank adopted the Life Savings Bank 1996 Stock Option Plan (the Option Plan). The Option Plan authorizes the granting of options equal to 107,200 shares of common stock for issuance to executives, key employees, officers and directors. The Option Plan will be in effect for a period of ten years from the adoption by the Board of Directors. Options granted under the Option Plan will be made at an exercise price equal to the fair market value on the date of grant. Awards granted to officers and employees may include incentive stock options, nonstatutory stock options and limited rights which are exercisable only upon change in control of the Bank. Awards granted to nonemployee directors are nonstatutory options. All 1996 options were granted at an exercise price of $10.00 per share. Stock options will become vested and exercisable in the manner specified by the Bank. The options granted by the Bank will vest at a rate of 33.3% per year, beginning on November 21, 1999. No options were exercisable at December 31, 1996. The following is a summary of activity in the Option Plan during 1996:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------- ---------------- Options granted 107,180 $10.00 ======= ====== Options outstanding at December 31, 1996 107,180 $10.00 ======= ======
All options granted have a remaining contractual life of 10 years. F-24 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 The estimated fair value of the options granted during 1996 was $4.97 per share. The Bank applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its Option Plan. Accordingly, no compensation cost has been recognized for its Option Plan. Had compensation cost for the Option Plan been determined based on the fair value at the grant date for awards under the plan consistent with the method of SFAS No. 123, Accounting for Stock-Based Compensation, the Bank's net income and earnings per share for the year ended December 31, 1996 would have been reduced to the pro forma amounts indicated below: Net income to common stockholders: As reported $1,505,000 Pro forma $1,489,000 Net income per common share: As reported $1.90 Pro forma $1.88
The fair value of options granted under the Option Plan during 1996 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used: no dividend yield, no volatility, risk-free interest rate of 7% and expected lives of 10 years. 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of originating loans or providing funds under existing lines of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the accompanying statement of financial condition. During 1988 the Bank entered into agreements to pay fixed-rate interest payments in exchange for the receipt of variable market-indexed interest payments (interest rate swaps). The notional principal amount of interest rate swaps outstanding at December 31, 1994 was $2,000,000, all of which matured in 1995. The weighted average fixed payment rate on such swap was 9.23%. At December 31, 1994, the weighted average variable market-indexed interest rate was 5.75%, which is based on LIBOR. The intent of these agreements was to match the maturities of certain liabilities and convert variable rate liabilities into fixed rate. The notional amount of interest rate swaps does not represent exposure to credit loss. No new interest rate swap transactions were entered into during 1996 and 1995. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require payment of a fee. Since many commitments are expected to expire, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The Bank's commitments to extend credit at December 31, 1996 and 1995 totaled $9,217,000 and $9,933,000, respectively. F-25 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 The Bank regularly enters into commitments to sell certain dollar amounts of loans to third parties under specific, negotiated terms. The terms include the minimum maturity of the loans, yield to purchaser, servicing spread to the Bank, and the maximum principal amount of the individual loans. The Bank typically satisfies these commitments from its current production of loans. These commitments have fixed expiration dates and may require a fee. At December 31, 1996 and 1995, the Bank had outstanding commitments to sell loans of $3,072,000 and $250,000, respectively. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosures of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Bank using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Bank could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
1996 ------------------- CARRYING ESTIMATED AMOUNT FAIR VALUE -------- ---------- (IN THOUSANDS) Assets: Cash and cash equivalents............................... $13,265 $13,265 Restricted cash......................................... 1,636 1,636 Securities held to maturity............................. 8,023 7,981 Residual asset.......................................... 5,700 5,700 Loans held for sale..................................... 31,018 31,288 Loans held for investment, net.......................... 36,895 37,475 Mortgage servicing rights............................... 2,645 2,984 FHLB stock.............................................. 814 814 Liabilities: Deposit accounts........................................ 85,711 86,278 Other borrowings........................................ 3,278 3,278
1995 ------------------- CARRYING ESTIMATED AMOUNT FAIR VALUE -------- ---------- (IN THOUSANDS) Assets: Cash and cash equivalents............................... $3,932 $3,932 Securities held to maturity............................. 1,985 1,985 Loans held for sale..................................... 21,688 22,125 Loans held for investment, net.......................... 41,693 41,902 Mortgage servicing rights............................... 683 784 FHLB stock.............................................. 715 715 Liabilities-- Deposits................................................ 67,535 67,688
F-26 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 The Bank utilized the following methods and assumptions to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents--The carrying amount approximates fair value. Restricted Cash--The carrying amount approximates fair value. Securities Held to Maturity--Fair values are based on quoted market prices. Loans Held for Sale--Fair values are based on quoted market prices or dealer quotes. Loans Held for Investment--The fair value of gross loans receivable has been estimated using the present value of cash flow method, discounted using the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same maturities, and giving consideration to estimated prepayment risk and credit loss factors. Residual Asset and Mortgage Servicing Rights--Fair values are estimated using discounted cash flows based on current market values. FHLB Stock--The fair value is based on its redemption value. Deposit Accounts--The fair value of checking, passbook and money market accounts is the amount payable on demand at the reporting date. The fair value of certificate accounts is estimated using the rates currently offered for deposits of similar remaining maturities. Other Borrowings--The carrying amount approximates fair value as the interest rate currently approximates market. Financial Instruments with Off-Balance Sheet Risk--No fair value is ascribed to the Bank's outstanding commitments to fund loans since commitment fees are not significant and predominantly all such commitments are variable-rate loan commitments. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1996 and 1995. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date; and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. F-27 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 15. SEGMENT INFORMATION The Bank's operations within the financial services industry principally focus on banking and mortgage financing activities. Information about these segments as of or for the years ended December 31, 1996 and 1995 are as follows (dollars in thousands):
1996 --------------------------- MORTGAGE BANKING FINANCING TOTAL ------- --------- -------- Revenue for the year............................ $ 3,898 $ 12,143 $ 16,041 Pre-tax operating income (loss) for the year.... (2,325) 4,956 2,631 Assets employed at year-end..................... 59,943 44,067 104,010 Depreciation and amortization for the year...... 120 501 621 Capital expenditures for the year............... 276 628 904 1995 --------------------------- MORTGAGE BANKING FINANCING TOTAL ------- --------- -------- Revenue for the year............................ $ 4,207 $ 5,638 $ 9,845 Pre-tax operating income (loss) for the year.... (1,128) 1,942 814 Assets employed at year-end..................... 49,201 24,935 74,136 Depreciation and amortization for the year...... 92 342 434 Capital expenditures for the year............... 56 467 523
16. SUBSEQUENT EVENTS Life Financial Corporation (LFC), a Delaware corporation, has been formed to become the holding company for the Bank. LFC is contemplating an initial public offering of 2,500,000 shares of its common stock and is also offering 3,211,716 shares of its common stock in connection with the reorganization of the Bank as a result of which (i) the Bank will become a wholly-owned subsidiary of LFC, and (ii) all of the outstanding shares of the Bank's common stock will be converted on the basis of one share of the Bank's common stock for three shares of common stock of LFC (the Reorganization). On March 14, 1997, the Bank issued subordinated debentures (Debentures) in the aggregate principal amount of $10 million through a private placement and pursuant to a Debenture Purchase Agreement. The Debentures will mature on March 15, 2004 and bear interest at the rate of 13.5% per annum, payable semi- annually. The Debentures qualify as supplementary capital under regulations of the OTS which capital may be used to satisfy the risk-based capital requirements in an amount up to 100% of the Bank's core capital. The Debentures are direct, unconditional obligations of the Bank ranking with all other existing and future unsecured and subordinated indebtedness of the Bank. They are subordinated on liquidation, as to principal and interest, and premium, if any, to all claims against the Bank having the same priority as savings account holders or any higher priority. The Debentures are redeemable at the option of the Bank, in whole or in part, at any time after September 15, 1998, at the aggregate principal amount thereof, plus accrued and unpaid interest, if any. Following the Reorganization, the Bank may substitute LFC in its place as obligor on the Debentures (the Substitution). If such Substitution occurs, holders of the Debentures will have the option at September 15, 1998 or at such later time as the Substitution occurs to require LFC to purchase all or part of the holder's outstanding Debentures at a price equal to 100% of the principal amount repurchased plus accrued interest through the repurchase date. If the Substitution occurs, upon a change in control of LFC, holders of the Debentures will have the option to require LFC to purchase all or part of the holder's outstanding Debentures at a price equal to 101% of the principal amount repurchased plus accrued interest through the repurchase date. F-28 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN- FORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PRO- SPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY LIFE FINANCIAL CORP., THE BANK OR FRIEDMAN, BILLINGS, RAM- SEY & CO., INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SO- LICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PER- SON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITA- TION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF LIFE FINANCIAL CORP. OR THE BANK SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF. ----------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 3 The Offering............................................................. 5 Selected Financial and Other Data of the Bank............................ 6 Quarterly Operating and Other Data of the Bank........................... 8 Recent Developments...................................................... 10 Risk Factors............................................................. 11 Use of Proceeds.......................................................... 18 Dividend Policy.......................................................... 18 Market for the Common Stock of the Company............................... 18 Market for the Common Stock of the Bank.................................. 19 Dilution................................................................. 19 Capitalization........................................................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 21 Life Financial Corp. .................................................... 34 Life Savings Bank, Federal Savings Bank.................................. 35 Business................................................................. 35 Federal and State Taxation............................................... 62 Regulation............................................................... 64 The Board of Directors and Management of the Company..................... 72 The Board of Directors and Management of the Bank........................ 74 The Reorganization....................................................... 85 Restrictions on Acquisition of the Company............................... 86 Description of Capital Stock of the Company.............................. 90 Description of Capital Stock of the Bank................................. 91 Transfer Agent and Registrar............................................. 91 Shares Eligible for Future Sale.......................................... 91 Underwriting............................................................. 92 Experts.................................................................. 94 Legal Matters............................................................ 94 Changes in Accountants .................................................. 94 Additional Information................................................... 95 Financial Statements..................................................... F-1
----------- UNTIL , 1997 OR 25 DAYS AFTER COMMENCEMENT OF THE OFFERING, IF ANY, WHICH- EVER IS LATER, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURI- TIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE- LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN- SOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 5,711,716 SHARES [Logo of Life Financial Corp.] COMMON STOCK ----------- PROSPECTUS ----------- FRIEDMAN, BILLINGS, RAMSEY & CO., INC. , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1) The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable by the Company in connection with the shares of Common Stock being registered. SEC registration fee(1)........................................... $ 22,134 NASD filing fee(1)................................................ 5,978 OTS Filing fee(1)................................................. 2,000 Nasdaq Listing Fee(1)............................................. 32,700 Blue Sky qualification fees and expenses.......................... 15,000 Legal fees and expenses........................................... 220,000 Accounting fees and expenses...................................... 175,000 Marketing fees, selling commissions, and underwriter's expenses (including counsel fees)......................................... 35,000 Transfer agent fees and expenses.................................. 10,000 Printing, postage and mailing..................................... 95,000 Certificate printing.............................................. 5,000 Telephone, temporary help and other equipment..................... 10,000 Miscellaneous..................................................... 32,188 -------- Total......................................................... $660,000 ========
- -------- (1) Actual expenses. SEC registration and NASD filing fees are based upon the registration of 6,086,716 shares at $12.00 per share. All other expenses are estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. In accordance with the General Corporation Law of the State of Delaware (being Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of the Registrant's Certificate of Incorporation provide as follows: Tenth: A. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a Director or an Officer of the Corporation or is or was serving at the request of the Corporation as a Director, Officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a Director, Officer, employee or agent or in any other capacity while serving as a Director, Officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. B. The right to indemnification conferred in Section A of this Article TENTH shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the II-1 Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a Director or Officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, services to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections A and B of this Article TENTH shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a Director, Officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators. C. If a claim under Section A or B of this Article TENTH is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expenses of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article TENTH or otherwise shall be on the Corporation. D. The rights to indemnification and to the advancement of expenses conferred in this Article TENTH shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Certificate of Incorporation, Bylaws, agreement, vote of stockholders or Disinterested Directors or otherwise. E. The Corporation may maintain insurance, at its expense, to protect itself and any Director, Officer, employee or agent of the Corporation or subsidiary or Affiliate or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. F. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article TENTH with respect to the indemnification and advancement of expenses of Directors and Officers of the Corporation. II-2 Eleventh: A Director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, except for liability (i) for any breach of the Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the Director derived an improper personal benefit. If the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of Directors, then the liability of a Director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a Director of the Corporation existing at the time of such repeal or modification. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Life Savings Bank, Federal Savings Bank (the "Bank") sold in a private placement completed on August 13, 1996 448,500 shares of common stock, $8.00 stated value (the "Private Placement"). Friedman, Billings, Ramsey & Co., Inc. was the placement agent for the Private Placement. The aggregate offering price was $4,036,000, with aggregate placement fees of $282,520. The securities were offered and sold without registration pursuant to exemptions from the registration requirements set forth in Sections 3(a)(5) and/or 4(2) of the Securities Act, and Rule 506 of Regulation D of the Rules and Regulations promulgated thereunder. In addition, the Private Placement was exempt as a non-public offering from the offering circular delivery requirements set forth in Part 563g of the Rules and Regulations of the Office of Thrift Supervision ("OTS") based on incorporation in such OTS Rules and Regulations of the private offering exemption in Section 4(2) of the Securities Act. The issuer, Life Savings Bank, Federal Savings Bank, is a federally-chartered savings bank. Further, the securities were sold to 21 accredited investors. No securities were sold to non-accredited investors. The Bank sold in a private placement completed March 14, 1997 subordinated debentures (the "Debentures") in the aggregate principal amount of $10 million pursuant to a Debenture Purchase Agreement. The Debentures will mature on March 15, 2004 and bear interest at a rate of 13 1/2% per annum, payable semi- annually. Friedman, Billings, Ramsey & Co., Inc. was the placement agent for the private placement of the Debentures, and received placement fees of $325,000. The Debentures were offered and sold without registration pursuant to exemptions from the registration requirements set forth in Section 3(a)(5) and/or 4(2) of the Securities Act, and Rule 506 of Regulation D of the Rules and Regulations promulgated thereunder. In addition, the private placement of the Debentures is exempt as a non-public offering from the offering circular delivery requirements set forth in Part 563g of the Rules and Regulations of the OTS based on incorporation in such OTS Rules and Regulations of the private offering exemption in Section 4(2) of the Securities Act. The issuer, Life Savings Bank, Federal Savings Bank is a federally-chartered savings bank. Further, the Debentures were sold to 12 accredited investors. No Debentures were sold to non-accredited investors. Ten shares of Common Stock of the Company were sold to the Bank at a cost of $1.00 per share to facilitate the Reorganization of the Bank into a holding company structure. The shares were sold on the condition that such shares will be cancelled upon the effectiveness of the Reorganization and at that time will no longer be deemed to be issued or outstanding for any purpose. II-3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The exhibits and financial statement schedules filed as a part of this Registration Statement are as follows: (a) List of Exhibits (filed herewith unless otherwise noted) 1.1 Engagement letter between Life Financial Corp. and Friedman, Billings, Ramsey & Co., Inc.* 1.2 Form of Underwriting Agreement 2.1 Agreement and Plan of Reorganization* 3.1 Certificate of Incorporation of Life Financial Corp.* 3.2 Bylaws of Life Financial Corp.* 4.0 Specimen Stock Certificate of Life Financial Corp.* 4.1 Life Savings Bank, Federal Savings Bank Debenture Purchase Agreement 5.0 Opinion of Muldoon, Murphy & Faucette regarding legality of the securities to be registered 5.1 Opinion of Morris, Nichols, Arsht & Tunnell regarding certain matters of Delaware law 8.0 Opinion of Muldoon, Murphy & Faucette regarding Federal Tax Matters 8.1 Opinion of Deloitte & Touche regarding State Tax Matters 10.1 Letter Agreement between Life Savings Bank, Federal Savings Bank and Daniel L. Perl* 10.2 Draft Form of Employment Agreement between Life Financial Corp. and Daniel L. Perl* 10.3 Draft Form of Employment Agreement between Life Savings Bank, Federal Savings Bank and Daniel L. Perl* 10.4 Life Savings Bank, Federal Savings Bank 1996 Stock Option Plan 10.5 Draft Life Financial Corp. 1997 Stock Option Plan 10.6 Form of Life Financial Corp. Employee Stock Ownership Plan 10.7 Form of Life Financial Corp. Employee Stock Purchase Plan 16.1 Letter from Grant Thornton LLP regarding change in certifying accountant Letter from Price Waterhouse LLP regarding change in certifying 16.2 accountant 23.1 Consent of Grant Thornton LLP 23.2 Consent of Price Waterhouse LLP 23.3 Consent of Deloitte & Touche, LLP 23.4 Consent of Muldoon, Murphy & Faucette* 23.5 Consent of Morris, Nichols, Arsht & Tunnell* 24.1 Powers of Attorney* 27.0 Financial Data Schedule 99.1 Notice of Annual Meeting of Stockholders and Proxy Statement of Life Savings Bank, Federal Savings Bank
- -------- * Previously filed. (b) Financial Statement Schedules All schedules have been omitted as not applicable or not required under the rules of Regulation S-X. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any Prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the Prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration II-4 Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the Offering. The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Riverside, State of California, on March 26, 1997. LIFE FINANCIAL CORP. By /s/ Daniel L. Perl ------------------------------------------ Daniel L. Perl President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE President, Chief Executive Officer and Director (principal /s/ Daniel L. Perl executive officer) March 26, 1997 - ------------------------------------ Daniel L. Perl Executive Vice President--Chief Financial Officer, Treasurer and Secretary (principal financial and /s/ L. Bruce Mills, Jr. accounting officer) March 26, 1997 - ------------------------------------ L. Bruce Mills, Jr. Chairman of the * Board of Directors - ------------------------------------ Ronald G. Skipper * Director - ------------------------------------ Richard C. Caldwell * Director - ------------------------------------ John D. Goddard * Director - ------------------------------------ Milton E. Johnson - -------- * Pursuant to a Power of Attorney dated January 24, 1997 and filed as Exhibit 24.1 with the Commission on January 27, 1997. /s/ Daniel L. Perl March 26, 1997 - ------------------------------------
Daniel L. Perl II-6 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1 Engagement letter between Life Financial Corp. and Friedman, Billings, Ramsey & Co., Inc.* 1.2 Form of Underwriting Agreement 2.1 Agreement and Plan of Reorganization* 3.1 Certificate of Incorporation of Life Financial Corp.* 3.2 Bylaws of Life Financial Corp.* 4.0 Specimen Stock Certificate of Life Financial Corp.* 4.1 Life Savings Bank, Federal Savings Bank Debenture Purchase Agreement 5.0 Opinion of Muldoon, Murphy & Faucette regarding legality of the securities to be registered 5.1 Opinion of Morris, Nichols, Arsht & Tunnell regarding certain matters of Delaware law 8.0 Opinion of Muldoon, Murphy & Faucette regarding Federal Tax Matters 8.1 Opinion of Deloitte & Touche regarding State Tax Matters 10.1 Letter Agreement between Life Savings Bank, Federal Savings Bank and Daniel L. Perl* 10.2 Draft Form of Employment Agreement between Life Financial Corp. and Daniel L. Perl* 10.3 Draft Form of Employment Agreement between Life Savings Bank, Federal Savings Bank and Daniel L. Perl* 10.4 Life Savings Bank, Federal Savings Bank 1996 Stock Option Plan 10.5 Draft Life Financial Corp. 1997 Stock Option Plan 10.6 Form of Life Financial Corp. Employee Stock Ownership Plan 10.7 Form of Life Financial Corp. Employee Stock Purchase Plan 16.1 Letter from Grant Thornton LLP regarding change in certifying accountant 16.2 Letter from Price Waterhouse LLP regarding change in certifying accountant 23.1 Consent of Grant Thornton LLP 23.2 Consent of Price Waterhouse LLP 23.3 Consent of Deloitte & Touche, LLP 23.4 Consent of Muldoon, Murphy & Faucette* 23.5 Consent of Morris, Nichols, Arsht & Tunnell* 24.1 Powers of Attorney* 27.0 Financial Data Schedule 99.1 Notice of Annual Meeting of Stockholders and Proxy Statement of Life Savings Bank, Federal Savings Bank
- -------- * Previously filed. EX-1.2 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.2 2,500,000 Shares (subject to increase of up to additional 375,000 shares in the event of an oversubscription) LIFE FINANCIAL CORP. (A DELAWARE CORPORATION) Common Stock ($0.01 par value per share) UNDERWRITING AGREEMENT _______________, 1997 Friedman, Billings, Ramsey & Co., Inc. Lakeshore Towers 18101 Von Karman Avenue Suite 1260 Irvine, California 92612 Dear Sirs: Life Financial Corp., a Delaware corporation (the "Company"), confirms its agreement with you whereby the Company proposes to issue and sell to you an aggregate of 2,500,000 shares (the "Firm Common Shares") of its authorized but unissued common stock, $0.01 par value per share (the "Common Stock"). In addition, the Company agrees to grant to you an option to purchase up to an aggregate of 375,000 additional shares of Common Stock (the "Optional Common Shares") as provided in Section 1 hereof. The Firm Common Shares and, to the extent such option is exercised, the Optional Common Shares are hereinafter collectively referred to as the "Common Shares." You have advised the Company that you propose to make a public offering of the Common Shares on the effective date of the Registration Statement (as hereinafter defined) or as soon thereafter as in your judgment is advisable (the "Offering"). The Company hereby confirms its agreement with you as follows: 1 1. Purchase, Sale and Delivery of Common Shares. On the basis of the -------------------------------------------- representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, (i) the Company agrees to issue and sell to you an aggregate of 2,500,000 of the Firm Common Shares and (ii) you agree to purchase from the Company such Firm Common Shares. The purchase price per share to be paid by you to the Company shall be $____ per share. The closing of the transactions contemplated by this Agreement shall be held at 9:00 a.m. at the offices of Muldoon, Murphy & Faucette, Washington, D.C., (or such other place as may be agreed upon by the Company and the Representative) on the third (or, if the purchase set forth in the above paragraph is determined after 4:30 p.m., Washington, D.C. time, the fourth) business day following the first date that any of the Common Shares are released by you for sale to the public (the "First Closing Date"); provided, however, that if the Prospectus (as hereinafter defined) is at any time prior to the First Closing Date recirculated to the public, the First Closing Date shall occur upon the later of the third (or, if the purchase set forth in the above paragraph is determined after 4:30 p.m., Washington, D.C. time, the fourth) business day following the first date that any of the Common Shares are released by you for sale to the public or the date that is 48 hours after the date that the Prospectus has been so recirculated. Delivery of certificates for the Firm Common Shares shall be made by or on behalf of the Company to you, for your account, against payment by you for your account of the purchase price therefor by wire transfer or certified or official bank check payable in next day funds to the order of the Company. The certificates for the Firm Common Shares shall be registered in such names and denominations as you shall have requested at least two full business days prior to the First Closing Date, and shall be made available for checking and packaging on the business day preceding the First Closing Date at any office of U.S. Stock Transfer Corporation designated by you. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to your obligation. In addition, on the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants to you an option to purchase any amount up to an aggregate of 375,000 Optional Common Shares at the purchase price per share to be paid for the Firm Common Shares, for use solely in covering any over-allotments made for your account in the sale and distribution of the Firm Common Shares. The option granted hereunder may be exercised at any time (but not more than once) within 30 days after the first date that any of the Common Shares are released by you for sale to the public, upon notice by you to the Company setting forth the aggregate number of Optional Common Shares as to which you are exercising the option, the names and denominations in which the certificates for such shares are to be registered and the time and place at which such certificates will be delivered. Such time of delivery (which may not be earlier than the First Closing Date), being herein referred to as the "Second Closing Date," shall be determined by you, but if at any time other than the First Closing Date shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. Certificates for the Optional Common Shares will be made available for checking and packaging on the business day preceding the Second Closing Date at any office of Wells Fargo Bank, 2 N.A. (Transfer Agent Department) designated by you. The manner of payment for and delivery of the Optional Common Shares shall be the same as for the Firm Common Shares purchased from the Company as specified in the two preceding paragraphs. At any time before lapse of the option, you may cancel such option by giving written notice of such cancellation to the Company. Subject to the terms and conditions hereof, you agree to make a public offering of the Common Shares as soon after the effective date of the Registration Statement (as hereafter defined) as in your judgment is advisable and at the public offering price set forth on the cover page of, and on the terms set forth in, the Prospectus. 2. Representations and Warranties of the Company. The Company represents --------------------------------------------- and warrants to you as of the date hereof as follows: (a) A registration statement on Form S-1 (File No. 333-______) with respect to the Common Shares has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations of the Securities and Exchange Commission (the "Commission") promulgated thereunder (the "Rules and Regulations"), and has been filed with the Commission. The Company has prepared and has filed or proposes to file prior to the effective date of such registration statement an amendment or amendments to such registration statement, which amendment or amendments have been or will be similarly prepared. There has been delivered to you one signed copy of such registration statement and amendments, together with two copies of each exhibit filed therewith. Conformed copies of such registration statement and amendments (but without exhibits) and of the related Preliminary Prospectus (as defined below) have been delivered to you in such reasonable quantities as you have requested. The Company will also file with the Commission one of the following: (i) prior to effectiveness of such registration statement, a further amendment thereto, including the form of final prospectus, or (ii) a final prospectus in accordance with Rules 430A and 424(b) of the Rules and Regulations. As filed, such amendment and form of final prospectus, or such final prospectus, shall include all Rule 430A Information (as defined below) and, except to the extent that you shall agree to a modification, shall be in all substantive respects in the form furnished to you prior to the date and time that this Agreement was executed and delivered by the parties hereto or, to the extent not completed at such date and time, shall contain only such specific additional information and other changes (beyond that contained in the latest Preliminary Prospectus) as the Company shall have previously advised you in writing would be included or made therein. The term "Registration Statement" as used in this Agreement shall mean such registration statement at the time such registration statement becomes effective and, in the event any post-effective amendment thereto becomes effective prior to the First Closing Date, shall also mean such registration statement as so amended; provided, however, that such term shall also include all Rule 430A Information deemed to be included in such registration statement at the time such registration statement becomes effective as provided by Rule 430A of the Rules and Regulations. The term "Preliminary Prospectus" shall mean any preliminary prospectus referred to in the preceding paragraph and any preliminary prospectus included in the Registration Statement at the 3 time it becomes effective that omits Rule 430A Information. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Common Shares in the form in which it is first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no filing pursuant to Rule 424(b) of the Rules and Regulations is required, shall mean the form of final prospectus included in the Registration Statement at the time such registration statement becomes effective. The term "Rule 430A Information" means information with respect to the Common Shares and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective, pursuant to Rule 430A of the Rules and Regulations. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus, and the most recent Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and at the time the Registration Statement becomes effective, and at all times subsequent thereto up to and including each Closing Date hereinafter mentioned, the Registration Statement and the Prospectus, and any amendments or supplements thereto, will contain all material statements and information required to be included therein by the Act and the Rules and Regulations and will conform to the requirements of the Act and the Rules and Regulations, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, will include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, no representation or warranty contained in this subsection 2(b) shall be applicable to information contained in or omitted from any Preliminary Prospectus, the Registration Statement, the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by or on behalf of you or any Underwriter specifically for use in the preparation thereof. (c) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware with corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in the State of California and in all other jurisdictions in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not have a material adverse effect on the financial condition, results of operations or business of the Company, the Bank (as defined below) and the other Subsidiaries (as defined below), taken as a whole. (d) The only subsidiaries of the Company are Life Savings Bank, Federal Savings Bank (the "Bank"), ___________________ and ___________________ (individually, a "Subsidiary" and collectively, the "Subsidiaries"). 4 (e) The Bank has been duly organized and is validly existing as a federal savings bank in good standing under the laws of the United States, and each of the other Subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its respective incorporation. All of the issued and outstanding capital stock of each of the Subsidiaries has been duly authorized and validly issued, is fully paid and nonassessable, and is owned by the Company in each case free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity, except for ______________. (f) Each of the Subsidiaries has full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; each of the Subsidiaries is in possession of and is operating in compliance in all material respects with all authorizations, licenses, permits, consents, certificates, orders and other governmental authorizations material to or required for the conduct of its business, all of which are valid and in full force and effect, and has received no notice of any proceeding or action relating to the revocation or modification of any such authorization, license, permit, consent, certificate, order or other governmental authorization; each of the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the ownership or leasing of properties or the conduct of its business requires such qualification, except for jurisdictions in which the failure to so qualify would not have a material adverse effect on the financial condition, results of operations or business of the Company and the Subsidiaries, taken as a whole; and neither the Company nor any of the Subsidiaries has received notice of any proceeding in any such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. (g) The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC") up to legally applicable limits, and no proceedings for the termination or revocation of such insurance are pending or, to the best knowledge of the Company, threatened, and no approvals by or filings with the Office of Thrift Supervision ("OTS"), FDIC or Board of Governors of the Federal Reserve System ("Federal Reserve Board") are necessary to consummate the Offering, except such as have already been obtained and are in effect. (h) The Company has, and upon consummation of the Offering will have, an authorized capitalization as set forth under the heading "Description of Capital Stock" in the Prospectus. All of the issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. Except as described in the Prospectus, no Common Stock is issued and outstanding and no stockholder of the Company or other person has any right, option or warrant to acquire any Common Stock. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company and the related notes thereto included in the Prospectus, the Company does not have outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights to be 5 granted and exercised thereunder set forth in the Prospectus, accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (i) The Common Shares to be sold by the Company hereunder have been duly authorized and, when issued, delivered and paid for in the manner set forth in this Agreement, will be validly issued, fully paid and nonassessable, and will conform to the description thereof contained in the Prospectus. No preemptive rights or other rights to subscribe for or purchase exist with respect to sale of the Common Shares by the Company pursuant to this Agreement. The certificates used to evidence shares of Common Stock are in due and proper form. (j) No approval, consent or authority of the stockholders of the Company or the Board of Directors of the Company or any governmental agency or any other third party will be required for the issuance and sale of the Common Shares to be sold by the Company as contemplated herein or the entering into of this Agreement, except such as have already been obtained. (k) The Company has full legal right, power and authority to enter into this Agreement and to perform the transactions contemplated hereby. This Agreement has been duly and validly authorized by the Company and upon due execution and delivery by the Company and the other parties thereto will constitute the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to limitations imposed by general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity) and subject to any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other laws, now or hereafter in effect, relating to or limiting creditors' rights generally. The making and performance of this Agreement by the Company and the consummation of the transactions herein contemplated will not violate any provisions of the Certificate of Incorporation or Bylaws, or other organizational document of the Company or any of the Subsidiaries, and will not conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which the Company or any of the Subsidiaries is a party or by which the Company, any of the Subsidiaries or any of their respective properties may be bound or affected, any statute or any authorization, judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental body applicable to the Company, any of the Subsidiaries or any of their respective properties, except where any violation, conflict, breach or default, whether individually or in the aggregate, would not have a material adverse effect on the condition (financial or otherwise), business, properties, result of operations, management or prospects of the Company or the Subsidiaries, taken as a whole (hereinafter, a "Material Adverse Effect"). No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for compliance with the Act, the Blue Sky laws applicable to the public offering of the Common Shares by the Underwriter and the clearance of such offering with the National Association of Securities Dealers, Inc. (the "NASD"). 6 (l) The accountants, Grant Thornton, LLP, Deloitte & Touche, LLP and Price Waterhouse LLP, each of whom certified portions of the financial statements and supporting schedules included in the Registration Statement, are each independent public accountants within the meaning of the Code of Ethics of the American Institute of Certified Public Accountants; and such accountants are, with respect to the Company and each of the Subsidiaries, independent certified public accountants as required by the Act and the Rules and Regulations. (m) The financial statements and schedules of the Company, and the related notes thereto, included in the Registration Statement and the Prospectus present fairly the consolidated financial position of the Company as of the respective dates of such financial statements and schedules, and the consolidated results of operations and changes in financial position of the Company for the respective periods covered thereby. Such statements, schedules and related notes have been prepared in accordance with generally accepted accounting principles applied on a consistent basis as certified by the independent accountants named in subsection 2(l). No other financial statements or schedules are required to be included in the Registration Statement. The other financial, statistical and pro forma information and related notes included in the Registration Statement and the Prospectus (i) present fairly the information shown therein on a basis consistent (except as otherwise noted therein) with the audited financial statements of the Company included therein and (ii) are in compliance in all material respects with the requirements of the Act. (n) Neither the Company nor any of the Subsidiaries are (i) in violation or default of any provision of their respective Certificate of Incorporation, Charter or Articles of Incorporation, as the case may be, or Bylaws or other organizational documents or (ii) except as disclosed in the Prospectus and except as to defaults which individually or in the aggregate would not have a Material Adverse Effect, in breach of or default with respect to any provision of any agreement, judgment, decree, order, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which it is a party or by which it or any of its properties are bound and, except as to defaults which individually or in the aggregate would not have a Material Adverse Effect, there does not exist any state of facts which constitutes an event of default on the part of the Company as defined in such documents or which, with notice or lapse of time or both, would constitute such an event of default. (o) There are no contracts or other documents required to be described in the Registration Statement or to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been described or filed as required. The contracts so described in the Prospectus are in full force and effect on the date hereof; the descriptions thereof or references thereto are correct in all material respects; and except as to defaults that individually or in the aggregate would not be material to the Company, neither the Company, any of the Subsidiaries, nor, to the knowledge of the Company, any other party is in material breach of or default under any of such contracts. (p) Except as disclosed in the Prospectus, there are no legal or governmental actions, suits or proceedings pending or, to the knowledge of the Company, threatened to which the Company or 7 any of the Subsidiaries is or may be a party or of which property owned or leased by the Company or any of the Subsidiaries is or may be the subject, which actions, suits or proceedings might, individually or in the aggregate, prevent or adversely affect the transactions contemplated by this Agreement or are likely to result in a Material Adverse Effect, and no labor disturbance by any employee of the Company or any of the Subsidiaries exists or is imminent which might be expected to affect adversely the Company's condition, properties, business, results of operations or prospects. Except as disclosed in the Prospectus, no enforcement proceeding, whether formal or informal, has been commenced against the Company or any of the Subsidiaries by the OTS, the FDIC or, to the Company's knowledge, any other governmental authority, nor have any such proceedings been instituted, threatened or recommended. Except as disclosed in the Prospectus, neither the Company, any of the Subsidiaries, nor any of their respective officers or directors is a party or subject to the provisions of any regulatory action, injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body affecting the business of the Company or any of the Subsidiaries. (q) Except as disclosed in the Prospectus, the Company and each of the Subsidiaries have good and marketable title to all of their respective properties and assets, free and clear of all liens, charges, encumbrances or restrictions, except such as would not materially adversely affect the value of such properties and assets and would not interfere with the use made or proposed to be made of such properties and assets by the Company or a Subsidiary; all of the leases and subleases material to the business of the Company or any of the Subsidiaries or under which the Company or any of the Subsidiaries holds properties described in the Prospectus are in full force and effect; and the Company and the Subsidiaries have no notice of any material claim of any sort which has been asserted by anyone adverse to the rights of the Company or a Subsidiary as owner or as lessee or sublessee under any of the leases or subleases mentioned above, or materially affecting or questioning the rights of the Company or a Subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease. Except as disclosed in the Prospectus and other than such leases and properties as are immaterial in the aggregate, the Company and the Subsidiaries own or lease all properties as are necessary to their respective operations as now conducted or as proposed to be conducted. (r) Since the respective dates as of which information is given in the Registration Statement and Prospectus, and except as described in or specifically contemplated by the Prospectus: (i) neither the Company nor any of the Subsidiaries has incurred any material liabilities or obligations, indirect, direct or contingent, or entered into any material verbal or written agreement or other transaction whether or not arising in the ordinary course of business or which could result in a material reduction in the future earnings of the Company; (ii) there has not been any material increase in the consolidated long- term debt of the Company or in the aggregate dollar or principal amount of the assets held by the Company or the Bank which are classified as substandard, doubtful or loss or loans which are 90 days or more past due or real estate acquired by foreclosure; (iii) there has not been any material adverse change in the condition (financial or otherwise), business, properties, results of operations or prospects of the Company or any of the Subsidiaries, other than changes resulting from changes in the economy generally; (iv) there has not been any material 8 adverse change in the aggregate dollar amount of the deposits or consolidated net worth or spread of the Company or the Bank; (v) there has been no material adverse change in the relationship between the Company or any of its Subsidiaries and their respective insurance carriers, including, without limitation, cancellation or other termination of a fidelity bond or any other type of insurance coverage; (vi) there has been no material change in the management of the Company or any of the Subsidiaries compared to the information disclosed in the Prospectus; (vii) neither the Company nor any of the Subsidiaries have sustained any material loss or interference with their respective businesses or properties from fire, flood, windstorm, earthquake, accident or other calamity, whether or not covered by insurance; (viii) the Company has not paid or declared any dividends or other distributions with respect to its capital stock and the Company is not in default in the payment of principal or interest on any outstanding debt obligations; and (ix) there has not been any change in the capital stock of the Company (other than upon the sale of the Common Shares hereunder and pursuant to the Reorganization, as described in the Prospectus). (s) Except as disclosed in or specifically contemplated by the Prospectus, the Company and the Subsidiaries have sufficient trademarks, trade names, patent rights, copyrights, licenses, approvals and governmental authorizations to conduct their respective businesses as now conducted; the expiration of any trademarks, trade names, patent rights, copyrights, licenses, approvals or governmental authorizations would not have a Material Adverse Effect; and the Company has no knowledge of any material infringement by it of trademark, trade name rights, patent rights, copyrights, licenses, trade secret or other similar rights of others, and, to the Company's knowledge, there is no claim being made against the Company or any of the Subsidiaries regarding trademark, trade name, patent, copyright, license, trade secret or other infringement which could have a Material Adverse Effect. (t) Neither the Company nor any of the Subsidiaries have been advised or have any reason to believe that the Company or any of the Subsidiaries is not conducting business in compliance with all applicable laws, rules and regulations; except as disclosed in the Prospectus or where failure to be so in compliance would not have a Material Adverse Effect or where it is already in the process of complying. (u) Except as disclosed in the Prospectus, neither the Company nor any of the Subsidiaries is in violation of any directive from the FDIC, the OTS or any other governmental authority, including _______________________________, and the Company and the Subsidiaries are in compliance with all federal and state laws and regulations that regulate or relate to its business, including, without limitation, the Financial Institutions Recovery, Reform and Enforcement Act of 1989 ("FIRREA"), the Federal Deposit Insurance Act (the "FDIA"), the National Housing Act (the "NHA"), the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and all other applicable laws and regulations where the failure to comply would have a Material Adverse Effect. (v) The Company and the Subsidiaries have filed or caused to be filed all material federal, state and foreign income and franchise tax returns and have paid all taxes shown as due 9 thereon; and the Company has no knowledge of any tax deficiency which has been asserted or threatened in writing against the Company or any of the Subsidiaries which would have a Material Adverse Effect on the Company or any of the Subsidiaries. (w) Neither the Company nor any of the Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"). (x) The Company has not distributed any offering material in connection with the offering and sale of the Common Shares other than the Preliminary Prospectus, the Prospectus, the Registration Statement and the other materials permitted by the Act. (y) The Company and the Subsidiaries maintain insurance of the types and in the amounts generally deemed adequate for their businesses, including, but not limited to, insurance covering real and personal property owned or leased by the Company or the Subsidiaries against theft, forgery, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. (z) Neither the Company nor any of the Subsidiaries has at any time during the last five years (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof, the effect of which would have a Material Adverse Effect. (aa) All material transactions between the Company or the Subsidiaries and their respective officers and directors and their affiliates have been accurately disclosed in the Prospectus; and the terms of such transactions are fair to the Company or the Subsidiaries, as the case may be. (bb) Except as disclosed in the Prospectus or Registration Statement, the Company has not: (i) placed any securities within the last 18 months; (ii) had any material dealings with any member of the NASD or any person related to or associated with such member, other than discussions and meetings relating to the proposed Offering and routine purchases and sales of U.S. Government and agency securities and other assets; (iii) entered into a financial or management consulting agreement except as contemplated hereunder and except for the engagement letter with the Representative, dated ________________; or (iv) engaged any intermediary between the Representative and the Company in connection with the Offering, and no person is being compensated in any manner for such service. (cc) The Company has not taken, directly or indirectly, any action designed to cause or result in, or which has constituted or which reasonably might be expected to constitute, the stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Stock. 10 (dd) The Company has not relied upon you or your legal counsel for any legal, tax or accounting advice in connection with the Offering (except with respect to the qualification of the Shares for offering and sale under the securities laws of certain states). (ee) To their respective knowledge, none of the Company or any of the Subsidiaries is in violation of any Federal, state, local or foreign law or regulation relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata), including, without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum and petroleum products ("Materials of Environmental Concern"), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern (collectively, "Environmental Laws"), which violation includes, but is not limited to, noncompliance with any permits or other governmental authorizations required for the operation, as now conducted or proposed to be conducted (as described in the Prospectus), of the business of the Company or any of the Subsidiaries under applicable Environmental Laws, or noncompliance with the terms and conditions thereof, and none of the Company or any of the Subsidiaries has received any communication (written or oral), whether from a governmental authority, citizens group, employee or otherwise, that alleges that the Company or any of the Subsidiaries is in violation of any such Environmental Laws, and there are no circumstances known to the Company that are reasonably likely to lead to such violation in the future. In addition, except as set forth in the Prospectus, there is no claim, action, cause of action, investigation or notice (written or oral) by any person or entity alleging potential liability for investigatory costs, cleanup costs, governmental responses costs, natural resources damages, property damages, personal injuries, attorney's fees or penalties arising out of, based on or resulting from (a) the presence or release into the environment of any Material of Environmental Concern at any location owned, controlled, leased, subject to an option to lease or purchased or operated by the Company or any of the Subsidiaries, now or in the past, or (b) circumstances forming the basis of any violation or alleged violation of any Environmental Law (collectively, "Environmental Claims"), pending or threatened against the Company or any of the Subsidiaries or, to the best knowledge of the Company, against any person or entity whose liability for any Environmental Claim the Company or any of the Subsidiaries has retained or assumed either contractually or by operation of law, except as set forth in the Prospectus or as would not result in a Material Adverse Effect. There are no actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge, presence or disposal of any Material of Environmental Concern, that could result in a violation of any Environmental Law or form the basis of any potential Environmental Claim against the Company or any of the Subsidiaries or against any person or entity whose liability for any Environmental Claim the Company or any of the Subsidiaries has retained or assumed either contractually or by operation of law. (ff) None of the Company or any of the Subsidiaries has violated any Federal, state or local law relating to discrimination in the hiring, promotion or pay of employees, any applicable wage or hour laws, or any provisions of the Employee Retirement Income Security Act of 1974 11 ("ERISA"), or the rules and regulations promulgated thereunder. There is (i) no significant unfair labor practice complaint pending against the Company or any of the Subsidiaries or, to the best knowledge of the Company, threatened against any of them, before the National Labor Relations Board or any state or local labor relations board, and no significant grievance or significant arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Company or any of the Subsidiaries and, to the best knowledge of the Company, threatened against any of them, (ii) no labor dispute in which the Company or any of the Subsidiaries is involved nor, to the best knowledge of the Company, is any labor dispute imminent, other than routine disciplinary and grievance matters; the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal customers or vendors and (iii) no union representation question existing with respect to the employees of the Company or any of the Subsidiaries and, to the best knowledge of the Company, no union organizing activities are taking place, except (with respect to any matter specified in clause (i), (ii) or (iii) above, singly or in the aggregate) such as would not have a Material Adverse Effect. Any certificate signed by any officer of the Company and delivered to you or to your counsel shall be deemed a representation and warranty by the Company to you as to the matters covered thereby. Any certificate delivered by the Company to its counsel for purposes of enabling such counsel to render the opinions referred to in Section 6(c) will also be furnished to the Underwriter and its counsel and shall be deemed to be additional representations and warranties by the Company to the Underwriter as to the matters covered thereby and the Underwriter and its counsel are entitled to rely thereon. 3. Representations and Warranties of the Underwriter. You represent and ------------------------------------------------- warrant to the Company as of the date hereof that the information set forth in the Prospectus (i) on the cover page of the Prospectus with respect to price, underwriting discounts and commissions and terms of the Offering, (ii) on the inside cover page with respect to stabilization and (iii) under the caption "Underwriting of Public Offering" in the Prospectus was furnished to the Company by you and on your behalf for use in connection with the preparation of the Registration Statement and the Prospectus and is complete and correct in all material respects. 4. Covenants of the Company. The Company covenants and agrees that: ------------------------ (a) The Company will use its best efforts to cause the Registration Statement and any amendment thereto, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective. If the Registration Statement has become or becomes effective pursuant to Rule 430A of the Rules and Regulations, or the filing of the Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations, the Company will file the Prospectus, properly completed, pursuant to the applicable paragraph of Rule 424(b) of the Rules and Regulations within the time period prescribed and will provide evidence satisfactory to you of such timely filing. The Company will promptly advise you in writing (i) of the receipt of any comments of the Commission, (ii) of any request of the Commission for amendment of or supplement to the Registration Statement (either before or after it becomes effective), any 12 Preliminary Prospectus or the Prospectus or for additional information, (iii) when the Registration Statement shall have become effective and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose. If the Commission shall enter any such stop order at any time, the Company will use its best efforts to obtain the lifting of such order at the earliest possible moment. The Company will not file any amendment or supplement to the Registration Statement (either before or after it becomes effective), any Preliminary Prospectus or the Prospectus of which you have not first been furnished with a copy a reasonable time prior to such filing or to which you reasonably object or which is not in compliance with the Act or the Rules and Regulations. (b) The Company will prepare and file with the Commission, promptly upon your request, any amendments or supplements to the Registration Statement or the Prospectus which in your reasonable judgment may be necessary or advisable to enable you to continue the distribution of the Common Shares and will use its best efforts to cause the same to become effective as promptly as possible. The Company will fully and completely comply with the provisions of Rule 430A of the Rules and Regulations with respect to information omitted from the Registration Statement in reliance upon such Rule. (c) The Company will, if requested by you, prepare a Term Sheet that complies with the requirements of Rule 434 under the Rules and Regulations, and the Company will provide you with copies of such Term Sheet and the form of Prospectus used in reliance on Rule 434, in such number as you may reasonably request. The Company will timely file the Term Sheet, if any, with the Commission pursuant to and in accordance with subparagraph (7) of Rule 424(b). The Company will advise you promptly of any such filing pursuant to Rule 424(b) and shall provide evidence satisfactory to you of such timely filing. (d) If, at any time during the nine-month period referred to in Section 10(a)(3) of the Act during which a prospectus relating to the Common Shares is required to be delivered under the Act, any event occurs, as a result of which the Prospectus, including any amendments or supplements, would include an untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances then existing, not misleading, or if it is necessary at any time to amend the Prospectus, including any amendments or supplements, to comply with the Act or the Rules and Regulations, the Company will promptly advise you thereof and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or an amendment or supplement which will effect such compliance and will use its best efforts to cause the same to become effective as soon as possible; and, in case you are required to deliver a Prospectus after such nine- month period, the Company upon request, but at your expense, will promptly prepare such amendment or amendments to the Registration Statement and such Prospectus or Prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act. 13 (e) As soon as practicable, but not later than 45 days after the end of the first quarter ending after one year following the "effective date of the Registration Statement" (as defined in Rule 158(c) of the Rules and Regulations), the Company will make generally available to its security holders an earnings statement (which need not be audited) covering a period of 12 consecutive months beginning after the effective date of the Registration Statement which will satisfy the provisions of the last paragraph of Section 11(a) of the Act. (f) During such period as a Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, the Company, at its expense, but only for the nine-month period referred to in Section 10(a)(3) of the Act, will furnish to you or mail to your order copies of the Registration Statement, the Prospectus, the Preliminary Prospectus and all amendments and supplements to any such documents in each case as soon as available and in such reasonable quantities as you may request, for the purposes contemplated by the Act. (g) The Company shall cooperate with you and your counsel to qualify or register the Common Shares for sale under (or obtain exemptions from the application of) the Blue Sky laws of such jurisdictions as you designate, will comply with such laws and will continue such qualifications, registrations and exemptions in effect so long as reasonably required for the distribution of the Common Shares. The Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. The Company will advise you promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Common Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company, with your cooperation, will use its best efforts to obtain the withdrawal thereof. (h) The Company shall promptly prepare and file with the Commission, from time to time, such reports as may be required to be filed by the Act and the Exchange Act including, without limitation, reports with respect to the sale of the Common Shares and the application of the proceeds thereof as may be required in accordance with Rule 463 under the Act. (i) During the period of five years after the date of this Agreement, the Company will furnish to you: (i) at the same time as such are furnished to its stockholders, copies of the Annual Report of the Company containing the consolidated balance sheet of the Company and Subsidiaries as of the close of such fiscal year and consolidated statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the NASD or any securities exchange; (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its Common Stock; (iv) as soon as practicable after the filing thereof, of each non-confidential report or other statement or document filed by the Company with the Commission, 14 or with any national securities exchange or quotation system on which any securities of the Company may be listed or quoted; and (v) from time to time, such other non-confidential information concerning the Company as the Underwriter may reasonably request. (j) During the period of 180 days after the first date that any of the Common Shares are released by you for sale to the public, the Company will not, without your prior written consent (which consent may be withheld at your sole discretion), issue, offer, sell, grant options to purchase or otherwise dispose of any of the Company's equity securities or any other securities convertible into or exchangeable with its Common Stock or other equity security, other than options or other awards granted under the Company's ______ Stock Option Plan, Employee Savings Plan or ___________. (k) The Company will apply the net proceeds of the sale of the Common Shares sold by it substantially in accordance with its statements under the caption "Use of Proceeds" in the Prospectus. (l) To the extent required by law, or applicable rules and regulations, the Company will promptly take all steps necessary to register its Common Stock under Section 12(g) of the Exchange Act. (m) The Company will use its best efforts to list, subject to notice of issuance, the Common Shares as a National Market System security on the Nasdaq Stock Market. (n) The Company will use its best efforts to ensure that the Bank will maintain a system of internal accounting controls as required under applicable law and the rules and regulations of the OTS and FDIC. (o) The Company will not, directly or indirectly, distribute prior to the First Closing Date any offering material in connection with the offering and sale of the Common Shares other than the Preliminary Prospectus, the Prospectus, the Registration Statement and the other materials permitted by the Act. (p) The Company will not take, directly or indirectly, any action designed to cause or result in, or which will or might be expected to constitute, the stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Shares. (q) The Company will not rely upon you or your legal counsel for any legal, tax or accounting advice in connection with the Offering, except with respect to the qualification of the Common Shares for offering and sale under the securities laws of certain states. You may, in your sole discretion, waive in writing the performance by the Company of any one or more of the foregoing covenants or extend the time for their performance. 15 5. Payment of Expenses ------------------- (a) Whether or not the transactions contemplated hereunder are consummated or this Agreement remains effective or is terminated, the Company agrees to pay all costs, fees and expenses incurred in connection with the performance of its obligations hereunder and in connection with the transactions contemplated hereby, including without limiting the generality of the foregoing, (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Common Shares, (iv) all fees and expenses of the Company's counsel and the Company's independent accountants, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement, each Preliminary Prospectus and the Prospectus (including all exhibits and financial statements) and all amendments and supplements provided for herein, (vi) where applicable, all filing fees, attorney's fees and expenses incurred by the Company or the Underwriter in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Common Shares for offer and sale under the Blue Sky laws (vii) the filing fee of the National Association of Securities Dealers, Inc., (viii) all the costs and expenses incurred by the Company in making road show presentations with respect to the Offering, (ix) all costs of preparing, printing and distributing bound volumes of the transaction documents for the Underwriter and its counsel, and (x) all other fees, costs and expenses referred to in Item 13 of the Registration Statement. Except as provided in this Section 5, and Section 8 hereof, the Underwriter shall pay all of its own expenses, including the fees and disbursements of its own counsel (excluding those relating to qualification, registration or exemption under the Blue Sky laws and the Blue Sky memorandum referred to above). (b) Whether or not the transactions contemplated hereunder are consummated or this Agreement remains effective or is terminated, in addition to payment of the expenses set forth in Section 5(a), the Company agrees to reimburse you for your reasonable out-of pocket expenses in connection with the performance of your activities under this Agreement, including, but not limited to, costs relating to printing, facsimile, courier service, direct computer expenses, accommodations, travel, reasonable fees and expenses of your outside legal counsel and any other advisors, accountants, appraisers, or the like, blue sky fees and expenses, including reasonable fees and disbursements of counsel, and your road show related costs and expenses. Such reimbursed expenses shall not exceed $_______ without the prior written permission of the Company. You shall submit a detailed statement of your actual expenses to the Company at the First Closing Date or from time-to-time before or within 30 days after the First Closing Date, and the Company shall reimburse you therefor in full within 14 days of receipt of such statement or statements. For purposes of this Section 5, you shall be deemed to have incurred expenses when they are billed, regardless of whether such expenses have been paid. Nothing contained in this Section 5 shall affect or limit your right to receive all expenses (including counsel fees and expenses) pursuant to the indemnification provisions of this Agreement. 16 6. Conditions to the Obligations of the Underwriter. Your obligations to ------------------------------------------------ purchase and pay for the Firm Common Shares on the First Closing Date and the Optional Common Shares on the Second Closing Date shall be subject to the accuracy in all material respects of the representations and warranties on the part of the Company herein set forth as of the date hereof and as of the First Closing Date or the Second Closing Date, as the case may be, to the accuracy in all material respects of the statements of Company officers made pursuant to the provisions hereof, to the performance in all material respects by the Company of its obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:00 p.m., Washington, D.C. Time, on the date of this Agreement, or at such later time as shall have been consented to by you; if the filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of the Rules and Regulations, the Prospectus shall have been filed in the manner and within the time period required by Rule 424(b) of the Rules and Regulations; and prior to such closing date, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or, to the knowledge of the Company or you, shall be contemplated by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement, or otherwise, shall have been complied with to your reasonable satisfaction. (b) You shall be reasonably satisfied that since the respective dates as of which information is given in the Registration Statement and Prospectus, (i) there shall not have been any change in the capital stock of the Company, except as contemplated in the Prospectus for the Reorganization, or any material change in the consolidated indebtedness (other than as disclosed in the Prospectus) of the Company, (ii) except as set forth or contemplated by the Registration Statement or the Prospectus, no material verbal or written agreement or other transaction shall have been entered into by the Company, which is not in the ordinary course of business and which could result in a material reduction in the future earnings of the Company, (iii) no loss or damage (whether or not insured) to the property of the Company shall have been sustained which materially and adversely affects the condition (financial or otherwise), business, results of operations or prospects of the Company, (iv) no legal or governmental action, suit or proceeding affecting the Company which is material to the Company or which affects or may affect the transactions contemplated by this Agreement shall have been instituted or threatened, (v) no enforcement proceeding, whether formal or informal, shall have been commenced against the Company or any of the Subsidiaries by the FDIC, the OTS or any other governmental agency, nor shall any such proceeding have been instituted, threatened or recommended, except for _____________ as disclosed in the Prospectus, and (vi) there shall not have been any material change in the condition (financial or otherwise), business, management, results of operations or prospects of the Company which makes it impractical or inadvisable in the judgment of the Underwriter to proceed with the public offering or purchase the Common Shares as contemplated hereby. (c) There shall have been furnished to you, in form and substance satisfactory to you except as otherwise expressly provided below: 17 (i) The favorable opinion of Muldoon, Murphy & Faucette, counsel for the Company, addressed to the Underwriter and dated as of the First Closing Date or the Second Closing Date, as the case may be, and in form and substance satisfactory to counsel for the Underwriter, to the effect that: (1) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware. (2) The Company and each of the Subsidiaries have full corporate power and authority to own their respective properties and to conduct their businesses as described in the Registration Statement and Prospectus, and the Company has full corporate power and authority to enter into and perform its obligations under this Agreement. (3) The Company is duly qualified as a foreign corporation to transact business and is in good standing in the State of California and in each jurisdiction in which the failure to so qualify would have a material adverse effect upon the financial condition, results of operations or business of the Company and the Subsidiaries, taken as a whole. (4) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under "Capitalization." (5) The Common Shares have been duly and validly authorized for issuance and sale and, when issued and delivered by the Company against payment, will be duly and validly issued, fully paid and nonassessable. (6) The issuance of the Common Shares is not subject to preemptive or other similar rights arising by operation of law or, to the best of such counsel's knowledge, otherwise. (7) (A) The Bank has been duly chartered, and at all times since the date hereof and at the First Closing Date or Second Closing Date, as the case may be, validly existing and in good standing under the laws of the United States of America as a federal savings bank with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus; and (B) each of the other Subsidiaries has been duly incorporated and at all times since the date hereof and at the First Closing Date or Second Closing Date, as the case may be, validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation or organization, as applicable, with full corporate power and authority to own, lease and operate its 18 properties and to conduct its business as described in the Registration Statement and the Prospectus. (8) Each of the Subsidiaries is duly qualified as a foreign corporation to transact business in each jurisdiction in which the failure to so qualify would have a material adverse effect upon its financial condition, results of operations or business. (9) The deposit accounts of the Bank are insured by the FDIC up to the applicable limits. (10) The activities of the Bank are permissible activities of federal savings banks under federal law and the rules, regulations, resolutions and practices of the OTS. (11) All of the issued and outstanding shares of capital stock of each of the Subsidiaries is duly authorized, validly issued, fully paid and nonassessable, and upon completion of the Reorganization, all such capital stock will be owned of record and beneficially by the Company free and clear of any security interest, mortgage, pledge, lien, encumbrance, or legal or equitable claim, except for _____________. (12) The execution and delivery of this Agreement, the issuance of the Common Shares by the Company and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action of the Company; the consummation of the transactions described in the Prospectus as constituting the "Reorganization" have been duly and validly authorized by all necessary actions of the Company and the Bank; the Bank and the Company have received all approvals, authorizations, consents or other orders of governmental bodies (including the OTS where applicable) necessary to consummate the Reorganization; this Agreement constitutes the legal, valid and binding agreement of the Company, enforceable in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited under applicable law (it being understood that such counsel may avail itself of customary exceptions concerning the effect of bankruptcy, insolvency or similar laws and the availability of equitable remedies); and, to the best of such counsel's knowledge, the execution and delivery of this Agreement, the incurrence of the obligations herein set forth and the consummation of the transactions contemplated herein will not conflict with or constitute a breach of, or default under, and no event has occurred which, with notice or lapse of time or both, would constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance that, individually or in the 19 aggregate, would have a material adverse effect upon the financial condition, results of operations or business of the Company pursuant to any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which it may be bound, or to which any of the property or assets of the Company or any of the Subsidiaries is subject, nor will such execution or delivery result in any violation of the provisions of the Certificate of Incorporation, Articles of Incorporation, Bylaws or other organizational document, as the case may be, of the Company or any of the Subsidiaries. (13) The Registration Statement is effective under the Act and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued under the Act or proceedings therefor initiated or threatened by the Commission. (14) No further approval, authorization, consent or other order of any federal or state board or body is required in connection with the execution and delivery of this Agreement or the issuance of the Common Shares, except as may be required under the securities or Blue Sky laws of various jurisdictions, as to which no opinion need be rendered. (15) At the time the Registration Statement became effective, the Registration Statement (other than the financial statements and statistical and financial data included therein, as to which no opinion need be rendered) complied as to form in all material respects with the requirements of the Act and the Rules and Regulations. (16) The Common Stock conforms to the description thereof contained in the Prospectus, and the form of certificate used to evidence the Common Stock is in due and proper form and complies with all applicable statutory requirements. (17) To the best of such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against or affecting the Company or any of the Subsidiaries which are required, individually or in the aggregate, to be disclosed in the Registration Statement or Prospectus, other than those disclosed therein. (18) The information contained in the Prospectus under "Risk Factors," "Supervision and Regulation," "Description of Capital Stock," "______ Stock Option Plan," "____________," "____________" and "____________," to the extent that such information constitutes matters of 20 law, summaries of legal matters, documents or proceedings, or legal conclusions, has been reviewed by such counsel and is correct in all material respects. (19) To the best of such counsel's knowledge, there are no contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or Prospectus or to be filed as exhibits thereto, other than those described or referred to therein or filed as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects. (20) To the best of such counsel's knowledge, the Company and each of the Subsidiaries hold all licenses, permits and other governmental authorizations currently required for the conduct of their respective businesses under the federal laws of the United States, the laws of the State of California and the Delaware General Corporation Law, as described in the Registration Statement and Prospectus, except for such licenses, approvals or authorizations the failure of which to hold would not result in a material adverse change in the financial condition, results of operations or the business of the Company and the Subsidiaries, taken as a whole; all such licenses, permits and other governmental authorizations are in full force and effect, and the Company and the Subsidiaries operate their respective businesses in all material respects in compliance therewith. (ii) Such opinion of Manatt, Phelps & Phillips, LLP, counsel for the Underwriter, dated the First Closing Date or the Second Closing Date, as the case may be, with respect to the incorporation of the Company, the sufficiency of all corporate proceedings and other legal matters relating to this Agreement, the validity of the Common Shares, the Registration Statement and the Prospectus and other related matters as you may reasonably require, and such counsel shall have received such documents and shall have exhibited to them such papers and records as they may reasonably request for the purpose of enabling them to pass upon such matters. In connection with such opinion, such counsel may also rely as to certain matters on the opinion of Muldoon, Murphy & Faucette and on representations or certificates of officers of the Company and governmental officials. (iii) A certificate of the Company executed by the Chairman of the Board or President and the Chief Financial or Accounting Officer, dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) The representations and warranties of the Company set forth in Section 2 of this Agreement are true and correct in all material respects and the Company has complied in all material respects with all the agreements and satisfied all the conditions on its part to be performed 21 or satisfied on or prior to such Closing Date. (2) The Commission has not issued any order preventing or suspending the use of the Prospectus or any Preliminary Prospectus filed as a part of the Registration Statement or any amendment thereto; no stop order suspending the effectiveness of the Registration Statement has been issued; and to the best of the knowledge of the respective signers, no proceedings for that purpose have been instituted or are pending or contemplated under the Act. (3) Neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto includes any untrue statement of a material fact or omits to state any material fact required to be stated therein, or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (4) Since the initial date on which the Registration Statement was filed with the Commission, no agreement, written or oral, transaction or event has occurred which should have been set forth in an amendment to the Registration Statement or in a supplement to or amendment of any prospectus, which has not been disclosed in such a supplement or amendment. (5) Since the respective dates as of which information is given in the Registration Statement and the Prospectus and except as disclosed in or contemplated by the Prospectus, the Company has not sustained a material loss or damage by strike, fire, flood, windstorm, earthquake, accident or other calamity (whether or not insured). (iv) At the time of the execution of this Agreement, a letter dated as of the date hereof from Grant Thornton, LLP, Deloitte & Touche, LLP and Price Waterhouse LLP, independent accountants, in form and substance satisfactory to you, to the effect that (1) they are independent certified public accountants with respect to the Company within the meaning of the Act and the Rules and Regulations; (2) it is their opinion that the consolidated financial statements and supporting schedules included in the Registration Statement and covered by their opinions therein comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations; (3) based upon limited procedures as agreed upon by you and them and set forth in detail in such letter, nothing has come to their attention which causes them to believe that (A) the unaudited financial statements and supporting schedules of the Company (or its predecessor) and the Subsidiaries included in the Registration Statement, if any, do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations or are not presented in conformity with generally accepted accounting principles 22 applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement and the Prospectus, (B) at a specified date not more than five days prior to the date of this Agreement, there has been any increase in the consolidated long-term or short-term debt, or any decrease in consolidated total assets, allowance for loan losses, total deposits or net worth of the Company and the Subsidiaries, in each case as compared with the amounts shown in the financial statements included in the Registration Statement or, (C) during the period from December 31, 1996 to a date not more than five days prior to the date of this Agreement, there were any decreases, as compared with the corresponding period in the preceding year, in net interest income, net interest income after provision for loan losses, or net income of the Bank, except in all instances for increases or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur; and (4) in addition to the examination referred to in their opinions and the limited procedures referred to in clause (3) above, they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information which are included in the Registration Statement and Prospectus and which are specified by you, and have found such amounts, percentages and financial information to be in agreement with the relevant accounting, financial and other records of the Company and the Subsidiaries identified in such letter. (v) On the First Closing Date and the Second Closing Date (in the event of a second closing), a letter addressed to you, from Grant Thornton, LLP, Deloitte & Touche, LLP and Price Waterhouse LLP, independent accountants, the first one to be dated the First Closing Date and the second one (in the event of a second closing) to be dated the Second Closing Date, to the effect that they reaffirm their statements made in the letter furnished to you pursuant to Section 6(c)(iv) of this Agreement. (vi) On or before the First Closing Date, letters from each director and executive officer of the Company, in form and substance satisfactory to you, confirming that for a period of one hundred and eighty (180) days after the first date that any of the Common Shares are released by you for sale to the public, such person will not directly or indirectly sell, offer to sell, contract to sell or otherwise dispose of any shares of Common Stock or any right to acquire such shares without the prior written consent of the Representative, which consent may be withheld at the sole discretion of the Representative. (d) As of the First Closing Date and the Second Closing Date, as the case may be, the Common Stock shall have been approved for quotation on the Nasdaq National Market upon notice of issuance. (e) As of the First Closing Date and the Second Closing Date, as the case may be, (i) there shall not have occurred any material adverse change in the financial markets in the United States or elsewhere or any outbreak of hostilities or escalation thereof or other calamity or crisis the effects of which, in the judgment of the Representative, are so material and adverse as to make it impracticable to market the Common Shares or to enforce contracts, including subscriptions or 23 orders, for the sale of the Common Shares, and (ii) trading generally on either the American Stock Exchange or the New York Stock Exchange shall not have been suspended, and minimum or maximum prices for trading shall not have been fixed, or maximum ranges for prices for securities have been required, by either of said Exchanges or by order of the Commission or any other governmental authority, and a banking moratorium shall not have been declared by either Federal or New York State authorities. All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are reasonably satisfactory to you and to Manatt, Phelps & Phillips, LLP, counsel for the Representative. The Company shall furnish you with such manually signed or conformed copies of such opinions, certificates, letters and documents as you reasonably request. If any condition to the Underwriter's obligations hereunder to be satisfied prior to or at the First Closing Date is not so satisfied, this Agreement at your election will terminate upon written notification by you as Representative to the Company without liability on the part of any Underwriter or the Company, except for the expenses to be paid or reimbursed by the Company pursuant to Section 5 hereof and except to the extent provided in Section 8 hereof. 7. Effectiveness of Registration Statement. Each party to this Agreement --------------------------------------- will use its best efforts to cause the Registration Statement to become effective, to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement and, if such stop order be issued, to obtain as soon as possible the lifting thereof. 8. Indemnification. --------------- (a) The Company agrees to indemnify and hold harmless the Underwriter and each person, if any, who controls the Underwriter, as the case may be, within the meaning of the Act against any losses, claims, damages, liabilities or expenses, joint or several, to which the Underwriter or such controlling person may become subject, under the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or other federal or state law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or based upon written information supplied by the Company filed in any state or jurisdiction to register or qualify any or all of the Common Shares or to claim an exemption therefrom, or provided to any state or jurisdiction to exempt the Company as a broker-dealer or its officers, directors and employees as broker-dealers or agents under the securities laws thereof (collectively, the "Blue Sky Application"), or arise out of or are based upon the omission or alleged omission to state in any of them a material fact required to be stated therein or necessary to make the statements in any of them not misleading, or arise from any theory of liability whatsoever relating to or arising from or based upon the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or 24 supplement thereto, or arise out of or are based in whole or in part upon any inaccuracy in the representations and warranties of the Company contained herein or any failure of the Company to perform its obligations hereunder or under law; and will reimburse the Underwriter and each such controlling person for any legal and other expenses as such expenses are reasonably incurred by the Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with the information furnished to the Company pursuant to Section 3 hereof; provided, further, that the foregoing indemnity with respect to any Preliminary Prospectus shall not inure to the benefit of the Underwriter from whom the person asserting any such loss, claim, damage or liability purchased the Common Shares that are the subject thereof if such person did not receive a copy of the Prospectus (or the Prospectus as supplemented) at or prior to the confirmation of the sale to such person in any case where such delivery is required by the Act and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as supplemented). In addition to its other obligations under this Section 8(a), the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, or any inaccuracy in the representations and warranties of the Company herein or failure to perform its obligations hereunder, all as described in this Section 8(a), it will reimburse the Underwriter (and, to the extent applicable, each controlling person) on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriter (and, to the extent applicable each controlling person) for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriter (and, to the extent applicable each controlling person) shall promptly return it to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Bank of America NT&SA, San Francisco, California (the "Prime Rate"). Any such interim reimbursement payments which are not made to the Underwriter within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) You will indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages, liabilities or expenses to which the Company or any such director, officer, or controlling person may become subject, under the Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or 25 otherwise (including in settlement of any litigation, if such settlement is effected with your written consent), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each such case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with the information furnished to the Company pursuant to Section 3 hereof; and will reimburse the Company or any such director, officer, or controlling person for any legal and other expense reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. In addition to the other obligations under this Section 8(b), you agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 8(b) which relates to information furnished to the Company pursuant to Section 3 hereof, it will reimburse the Company (and, to the extent applicable, each officer, director, controlling person) on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of your obligation to reimburse the Company (and, to the extent applicable, each officer, director, controlling person) for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company (and, to the extent applicable, each officer, director or controlling person) shall promptly return it to you together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company within 30 days of a request for reimbursement, shall bear interest at the Prime Rate from the date of such request. This indemnity agreement will be in addition to any liability which you may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for indemnity, contribution or otherwise except to the extent the indemnifying party is prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with all other indemnifying parties similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party 26 and the indemnifying party and the indemnified party shall have reasonably concluded that there may be a conflict between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso to the next preceding sentence or (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel representing the indemnified parties who are parties to such action; provided, however, if an indemnified party in any such action shall have concluded that there may be legal defenses or rights available to it which are different from, in actual or potential conflict with, or additional to those available to other indemnified parties, such party shall have the right to select an additional law firm to act as its separate counsel). (d) If the indemnification provided for in this Section 8 is required by its terms but is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party under subsections (a), (b) or (c) of this Section 8 in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each applicable indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of any losses, claims, damages, liabilities or expenses referred to herein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and you from the offering of the Common Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and you in connection with the statements or omissions or inaccuracies in the representations and warranties herein which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and you, on the other hand, shall be deemed to be in the same respective proportions as the total proceeds (net of underwriting commissions, but before deducting expenses) from the offering of the Common Stock received by the Company and the total underwriting commissions received by you to the aggregate public offering price of the Common Stock. The relative fault of the Company and you shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact or the inaccurate or the alleged inaccurate representation and/or warranty relates to information supplied by the Company or you and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or 27 omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in subsection (c) of this Section 8, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in subsection (c) of this Section 8 with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this subsection (d); provided, however, that no additional notice shall be required with respect to any action for which notice has been given under subsection (c) for purposes of indemnification. The Company and you agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined solely by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this paragraph. Notwithstanding the provisions of this Section 8, you shall not be required to contribute any amount in excess of the amount of the total underwriting discounts and commissions received by you in connection with the Common Shares underwritten by you and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of fraudulent misrepresentation. (e) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 8(a) and 8(b) hereof, including the amounts of any requested reimbursement payments and the method of determining such amounts, shall be settled by arbitration conducted pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Such an arbitration would be limited to the operation of the interim reimbursement provisions contained in Sections 8(a) and 8(b) hereof and would not resolve the ultimate propriety or enforceability of the obligation to reimburse expenses which is created by the provisions of such Sections 8(a) and 8(b) hereof. 9. Effective Date. This Agreement shall become effective immediately as -------------- to Sections 5, 8, 10 and 11 and, as to all other provisions, (i) if at the time of execution of this Agreement the Registration Statement has not become effective, at 4:30 p.m., California Time, on the first full business day following the effectiveness of the Registration Statement, or (ii) if at the time of execution of this Agreement the Registration Statement has been declared effective, at 4:30 p.m., California Time, on the first full business day following the date of execution of this Agreement; but this Agreement shall nevertheless become effective at such earlier time after the Registration Statement becomes effective as you may determine as indicated by notice to the Company or by release of any of the Common Shares for sale to the public. For the purposes of this Section 9, the Common Shares shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Common Shares or upon the release by you of telegrams offering the Common Shares for sale to securities dealers, whichever may occur first. 28 10. Termination. Without limiting the right to terminate this Agreement ----------- pursuant to any other provision hereof: (a) This Agreement may be terminated by the Company by notice to you, or by you by notice to the Company, at any time prior to the time this Agreement shall become effective as to all of its provisions, and any such termination shall be without liability on the part of the Company to you (except for the expenses to be paid or reimbursed by the Company pursuant to Section 5 hereof and except to the extent provided in Section 8 hereof) or of you to the Company (except to the extent provided in Section 8 hereof). (b) This Agreement may also be terminated by you prior to the First Closing Date by notice to the Company (i) if trading in the Company's Common Stock or other securities shall have been suspended by the Commission or any securities exchange or market or additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over-the-counter market by the NASD, or trading in securities generally shall have been suspended on either such exchange or market, or a general banking moratorium shall have been established by federal, New York or California authorities, (ii) if an outbreak of major hostilities or other national or international calamity or any substantial change in political, financial or economic conditions shall have occurred or shall have accelerated or escalated to such an extent, as, in your judgment, to affect materially and adversely the marketability of the Common Shares, (iii) if any adverse event shall have occurred or shall exist which makes untrue or incorrect in any material respect any statement or information contained in the Registration Statement or Prospectus or which is not reflected in the Registration Statement or Prospectus but should be reflected therein in order to make the statements or information contained therein in light of the circumstances under which they were made, not misleading in any material respect, or (iv) if there shall be any action, suit or proceeding pending or threatened, or there shall have been any development or prospective development involving particularly the business or properties or securities of the Company or the transactions contemplated therein which, in your reasonable judgment, is reasonably likely to materially and adversely affect the Company's business or earnings and makes it impracticable or inadvisable to offer or sell the Common Shares. Any termination pursuant to this subsection (b) shall be without liability on your part to the Company or on the part of the Company to you, except for expenses to be paid or reimbursed by the Company pursuant to Section 5 hereof (which shall not be required to be paid upon termination pursuant to clause (i) or (ii) above) and except to the extent provided in Section 8 hereof. 11. Representations and Indemnities to Survive Delivery. The respective --------------------------------------------------- indemnities, agreements, representations, warranties and other statements of the parties hereto and of their respective officers set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on your behalf, the Company or any of your or their respective partners, officers or directors or any controlling person, as the case may be, and will 29 survive delivery of and payment for the Common Shares sold hereunder and any termination of this Agreement. 12. Notices. All communications hereunder shall be in writing and, if ------- sent to you shall be mailed, delivered or telegraphed and confirmed to you at Friedman, Billings, Ramsey & Co., Inc., Lakeshore Towers, 18101 Von Karman Avenue, Suite 1260, Irvine, California 92612 Attention: James C. Neuhauser, with a copy to Manatt, Phelps & Phillips, LLP, 11355 West Olympic Boulevard, Los Angeles, California 90064, Attention: Allen Z. Sussman, Esq.; and if sent to the Company shall be mailed, delivered or telegraphed and confirmed to the Company at _____________________________ Attention: ____________, President, with a copy to Muldoon, Murphy & Faucette, _________________________, Attention: Mary Sjoquist, Esq. The Company or you may change the address for receipt of communications hereunder by giving notice to the other. 13. Successors. This Agreement will inure to the benefit of and be binding ---------- upon the parties hereto, and to the benefit of the officers and directors and controlling persons referred to in Section 8, and in each case their respective successors, personal representatives and assigns, and no other person will have any right or obligation hereunder. Notwithstanding the foregoing, this Agreement shall not be assignable by the parties. The term "successors" shall not include any purchaser of the Common Shares from you as such, merely by reason of such purchase. 14. Partial Unenforceability. The invalidity or unenforceability of any ------------------------ section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other section, paragraph or provision hereof. If any section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make the remainder of this Agreement valid and enforceable. 15. Applicable Law. This Agreement shall be governed by and construed in -------------- accordance with the internal laws (and not the laws pertaining to conflicts of laws) of the State of California. 16. General. This Agreement constitutes the entire agreement of the ------- parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in several counterparts, each one of which shall be an original, and all of which shall constitute one and the same document. In this Agreement, the masculine, feminine and neuter genders and the singular and the plural include one another. The section headings in this Agreement are for the convenience of the parties only and will not affect the construction or interpretation of this Agreement. This Agreement may be amended or modified, and the observance of any term of this Agreement may be waived, only by a writing signed by the Company and you. 30 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed copies hereof, whereupon it will become a binding agreement between the Company and you, all in accordance with its terms. Very truly yours, LIFE FINANCIAL CORP. By:_____________________________________ Name: Daniel L. Perl Title: President and Chief Executive Officer The foregoing Underwriting Agreement is hereby confirmed and accepted by us in Irvine, California as of the date first above written. FRIEDMAN, BILLING, RAMSEY & CO., INC. By:_____________________________ Name: James C. Neuhauser Title: Executive Vice President 31 EX-4.1 3 DEBENTURE PURCHASE AGREEMENT EXHIBIT 4.1 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK (the "Company") 13 1/2% SUBORDINATED DEBENTURES DUE March 15, 2004 DEBENTURE PURCHASE AGREEMENT Dated as of March 12, 1997 TABLE OF CONTENTS (Not Part of Agreement)
Page ---- 1. AUTHORIZATION OF ISSUE OF DEBENTURES............ 1 2. PURCHASE AND SALE OF DEBENTURES................. 1 3. CONDITIONS OF CLOSING........................... 1 4. PREPAYMENTS..................................... 2 5. COVENANTS....................................... 2 6. EVENTS OF DEFAULT............................... 5 7. REPRESENTATIONS, COVENANTS AND WARRANTIES....... 7 8. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS 9 9. SUBSEQUENT OFFERS AND RESALES OF THE SECURITIES. 10 10. DEFINITIONS..................................... 11 11. MISCELLANEOUS................................... 14
PURCHASER SCHEDULE EXHIBIT A -- FORM OF DEBENTURE TO THE PURCHASERS SET FORTH IN SCHEDULE HERETO Gentlemen: The undersigned, Life Savings Bank, Federal Savings Bank (herein called the "Bank"), hereby agrees with you as follows: 1. AUTHORIZATION OF ISSUE OF DEBENTURES. The Bank will authorize the issue of its Subordinated Debentures (herein called the "Debentures") to be issued in global form, in the aggregate principal amount of $10,000,000, to be dated the date of issue thereof, to mature March 15, 2004, to bear interest on the unpaid balance thereof from the date thereof until the principal thereof shall have become due and payable at the rate of 13 1/2% per annum, which interest shall be payable semi-annually, and to be substantially in the form of Exhibit A attached hereto (the "Global Debenture"). The term "Debentures" as used herein shall include the Global Debenture delivered pursuant to any provision of this Agreement each Debenture delivered in substitution or exchange for any such Debenture pursuant to any such provision and, to the extent the context hereof requires, each Beneficial Interest in a Global Debenture held by a Beneficial Holder thereof. 2. PURCHASE AND SALE OF DEBENTURES. Subject to the terms and conditions herein set forth, the Bank hereby agrees to sell to you and you agree to purchase from the Bank the aggregate principal amount of Debentures set forth opposite your name in the Purchaser Schedule attached hereto at 100% of such aggregate principal amount. Each purchaser identified in the Purchaser Schedule is referred to herein as a "Purchaser". Payment of the purchase price for and delivery of the Debentures to be purchased by the Purchasers shall be made at the offices of Friedman, Billings, Ramsey & Co., Inc., Arlington, Virginia or at the option of the Bank through the systems of the Depository Trust Company or any successor entity (the "Depository"), with delivery of the Debentures to the Depository for the respective accounts of the Purchasers to be made against payment for the Debentures in same day funds, or in such other manner as shall be agreed upon by the Purchasers and the Bank, at 10:00 A.M. on March 14, 1997 (such time and date being referred to herein, respectively, as the "Closing Time" and the "Closing Date"). 3. CONDITIONS OF CLOSING. Your obligation to purchase and pay for the Debentures to be purchased by you hereunder is subject to the satisfaction, on or before the Closing Date, of the following conditions: 3A. Opinion of Company's Counsel. You shall have received from Muldoon, Murphy & Faucette, special counsel for the Bank, a favorable opinion reasonably satisfactory to you and substantially in the form of Exhibit B attached hereto. 3B. Representations and Warranties; No Default. The representations and warranties contained in Section 7 shall be true on and as of the Closing Date, except to the extent of changes caused by the transactions herein contemplated; there shall exist on the Closing Date no Event of Default or Default; and the Bank shall have delivered to you an Officer's Certificate, dated the Closing Date, as to both such effects. 3C. Proceedings. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in substance and form to you, and you shall have received all such counterpart originals or certified or other copies of such documents as you may reasonably request. 4. PREPAYMENTS. 4A. Company Prepayments. Except for prepayments made pursuant to Sections 4B, 5J and 6A hereof, for a period of 18 months following the Closing Date the Bank shall not, and shall not permit any of its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or in part prior to their stated final maturity (other than upon acceleration of such final maturity pursuant to paragraph 6A), any Debentures held by any Holder; provided, that, nothing herein shall be deemed to limit the ability of the Bank, any Subsidiary or Affiliate to repurchase Debentures at any time on such terms as the Bank, any Subsidiary or Affiliate, as the case may be, and the Holder or Holders of Debentures may agree. Notwithstanding the foregoing sentence, in the event that the Bank is not then in compliance with any of the covenants contained in Sections 5(A), (B), (C) or (G), the Bank shall not, and shall not permit any of its Subsidiaries or Affiliates to, purchase any Debenture other than through a pro- rata offer to purchase such aggregate principal amount of Debentures which has been made to all Holders of Debentures. Voluntary prepayments by the Bank after the initial 18 month period may be made in accordance with the procedure described in the Debenture. 4B. Purchase Option. This paragraph 4B shall apply only if, pursuant to paragraph 11D of this Purchase Agreement, the Company is substituted for the Bank as a party to this Purchase Agreement and as obligor on the Debentures. Any Holder may require the Company to prepay the Debenture early by giving notice to the Company not more than 30 days before September 15, 1998 or if the substitution of the Company for the Bank has not occurred by that date, not more than 30 days after such substitution. If such notice is given, the Company shall prepay the principal of the Debenture with respect to which such notice is given within 90 days of September 15, 1998 or the date of the notice if it is given after that date along with interest as provided in paragraph 1 of this Purchase Agreement for the period prior to the prepayment date, provided that no premium will be payable. 5. COVENANTS. 5A. Limitation on Funded Indebtedness and Indebtedness. The Bank will not, and will not cause or permit any Subsidiary to create, assume, guarantee, incur or in any manner become, directly or indirectly liable in respect of any indebtedness unless, after giving effect thereto, Indebtedness shall not exceed 200% of consolidated net tangible equity capital. 5B. Consolidated Tangible Equity Capital. The Bank will not at any time permit Consolidated Tangible Equity to be less than $9 million plus the cumulative amount equal to fifty percent (50%) of the consolidated net income (but not loss) for each fiscal quarter commencing March 31, 1997 plus the net proceeds of the Offerings. 5C. Restrictions as to Dividends and Certain Other Payments. So long as the Debentures are outstanding, the Bank will not, and will not permit any Subsidiary to, declare or pay any dividend or make any other distribution on its capital stock (other than on account of capital stock of a Subsidiary owned legally and beneficially by the Bank or a Subsidiary) or to its respective stockholders (other than dividends or distributions payable in its capital stock) or purchase, redeem or otherwise acquire for value (except pursuant to a bona fide pledge or employee benefit plan) any of its capital stock (other than on account of capital stock of a Subsidiary owned legally and beneficially by the Bank or a Subsidiary) (each, a "Restricted Payment") unless: (i) immediately before, and after giving effect to such Restricted Payment, the obligation under paragraph 5B would be met; (ii) at the time of and immediately before, such declaration is made and after giving effect to, such Restricted Payment, no Default or Event of Default exists or would exist as a result of such Restricted Payment; and (iii) no Default or Event of Default shall have occurred within 365 days of the declaration of such Restricted Payment. 2 5D. Merger, Consolidation or Sale of Assets; Successor Corporations. The Bank will not merge or consolidate with, or sell all or substantially all of its assets to, any person, firm or corporation unless it is the successor corporation in such transaction and, immediately thereafter, it is not in default under this Agreement or, if it is not the successor corporation, the successor corporation expressly assumes the Bank's obligations under this Agreement and immediately after such transaction, it is not in default under this Agreement. Any successor corporation shall succeed to and be substituted for the Bank as if such successor corporation had been named as the Bank in this Agreement. 5E. Modification of the Debentures or this Agreement. With the consent of the Beneficial Holders of not less than 51% in principal amount of the Debentures, any term, covenant, agreement, or condition of the Debentures or this Agreement may be amended or compliance therewith may be waived, provided that no amendment or waiver shall, without the consent of the Beneficial Holders of all the Debentures affected thereby: (i) change the principal amount of any Debenture or the maturity of the principal of any Debenture or (ii) reduce the rate or extend the time of payment of interest on any Debenture or (iii) reduce the percentage of Holders of Debentures required to consent to any such amendment or waiver. 5F. Line of Business. So long as the Debentures are outstanding, the Bank will remain principally engaged in the financial services business. 5G. Capital Adequacy. The Bank shall be classified as "well capitalized" or "adequately capitalized" as defined in 12 C.F.R. Sec. 565.4 (or its equivalent as such regulation may be amended from time to time). 5H. FDIC Membership. The Bank shall not at any time fail to have its deposits insured by the FDIC. 5I. Limitation on Incurrence of Indebtedness by Subsidiaries. Any Indebtedness incurred by any Subsidiary subsequent to the issuance of the Debentures shall not include any covenant which would restrict the payment of dividends to the Bank. 5J. Change of Control. This paragraph 5J shall apply only if, pursuant to paragraph 11D of this Purchase Agreement, the Company is substituted for the Bank as a party to this Purchase Agreement and as obligor on the Debentures. (i) The Company shall maintain liquid assets in an amount equal to interest on the aggregate outstanding Debentures for one year. (ii) Notwithstanding anything in Section 4 of the contrary, the Company shall, within 45 days following the date of the consummation of a transaction resulting in a Change of control, notify the Holders in writing of such Change of Control. To the extent that the Debentures are in the form of a Global Debenture held by the Depository for the benefit of the respective accounts of the Beneficial Holders, in accordance with the procedures of the Depository at that time, such notice shall contain all necessary provisions to provide for the Beneficial Holders to receive notification of such Change in Control through the Depository. Upon receipt of such notification, each Beneficial Holder shall have the option, through and in accordance with the procedures of the Depository, to notify the Company that such Beneficial Holder requires that the Company purchase all or a portion of such Beneficial Holder's Beneficial Interest in the Global Debenture at a price equal to 101% of the principal amount of such Beneficial Interest plus accrued interest to the purchase date. The Company will purchase the Beneficial Interests in the Debentures on a date specified in the notification of Change of Control, which date will not be later than 60 days after the consummation of the transaction resulting in a Change of Control. 3 A "Change of Control" will be deemed to have occurred in the event that, after the date of this Agreement, either (a) any person (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provision thereto) directly or indirectly, shall beneficially own (as defined in Rule 13d-3 under the Exchange Act, or any successor provision thereto) at least 50% of the aggregate voting power of all classes of capital stock of the Company entitled to vote generally in the election of directors or (b) any Person, directly or indirectly, shall succeed in having a sufficient number of its nominees elected to the Board of Directors of the Company such that such nominees, when added to any existing director remaining on the Board of Directors of the Company after such election who is an affiliate or related person of such Group, will constitute a majority of the Board of Directors of the Company; provided however that, for purposes of this Section 5J, in the case of (a) a Change in Control shall not be deemed to have occurred, if at the time the Person becomes the beneficial owner of such aggregate voting power, the Person has outstanding securities which have received a rating from a nationally recognized statistical rating organization (as that term is defined in Rule 15c3-1(c)(2)(vi)(F) under the Exchange Act) which rating is in one of such rating organization's generic rating categories which signifies "investment grade". 5K. Financial and Business Information. The Bank for periods for which it or a parent holding company makes periodic filings with the OTS or the Securities and Exchange Commission, in accordance with procedures of the Depository, shall deliver or cause to be delivered to each Beneficial Holder of the Debentures: (i) as soon as practicable after the end of each quarterly fiscal period in each fiscal year of the Bank (other than the last quarterly fiscal period of each such fiscal year), and in any event within 45 days thereafter: (a) a consolidated statement of financial condition of the Bank and its consolidated subsidiaries, as at the end of such quarter, and (b) consolidated statements of operations, cash flows and shareholders' equity of the Bank and its consolidated subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case, in comparative form, the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with generally accepted accounting principles, but in such detail as is customarily applied to quarterly financial statements, and certified as complete and correct, subject to changes resulting from year-end adjustments, by a Senior Financial Officer, and accompanied by the certificate required by Section 5M; provided, that delivery of copies of the Bank's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (and any successor agency) (the "Commission") within the time period specified above shall be deemed to satisfy the requirements of this Section 5K(i) so long as such quarterly report contains or is accompanied by the information and certificates specified in this Section 5K(i). (ii) as soon as practicable after the end of each fiscal year of the Bank, and in any event within 90 days thereafter (a) consolidated statements of financial condition of the Bank and its consolidated subsidiaries, as at the end of such year, and (b) consolidated and consolidating statements of operations, cash flows and shareholders' equity of the Bank and its consolidated subsidiaries, for such year, setting forth in the case of each consolidated financial statement, in comparative form, the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with generally accepted accounting principles; and (iii) promptly upon their becoming available, (a) each financial statement, report, notice or proxy statement sent by the Bank or any Subsidiary to stockholders generally, (b) each regular or periodic report (including, without limitation, each Form 10-K, Form 10-Q and Form 8-K), any registration statement which shall have become effective, and each final prospectus and all amendments thereto filed by the Bank or any Subsidiary with the Commission, and (c) each regular 4 or periodic report (including, without limitation, each call report) filed by the Bank or any Subsidiary with the FDIC, or the OTS (and any similar agency or successor agency). 5L. Officer's Certificates. Each set of financial statements delivered to each Beneficial Holder of the Debentures pursuant to Section 5K(i) or Section 5K(ii) shall be accompanied by a certificate of a Senior Financial Officer, setting forth: (i) the information (including detailed calculations) required in order to establish whether the Bank was in compliance with the requirements of Section 5A through Section 5C, inclusive, as of the end of the period covered by the financial statements then being furnished (including with respect to each such section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such sections, and the calculation of the amount, ratio or percentage then in existence); and (ii) a statement that the signer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Bank and its consolidated subsidiaries from the beginning of the accounting period covered by the income statements being delivered therewith to the date of the certificate and that such review has not disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Bank has taken or proposes to take with respect thereto. 6. EVENTS OF DEFAULT. 6A. Acceleration. If any of the following events shall occur and be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise): (i) default in the payment of the principal of or premium, if any, on any Debenture when the same becomes due and payable at maturity, upon redemption or otherwise; (ii) default in the payment of interest on the Debentures when the same becomes due and payable and the continuance of such default for a period of 30 days; (iii) failure to comply with any agreement or covenant of the Bank in, or provisions of, the Debentures or this Agreement and the continuance of such default for a period of 30 days after the date the Bank has knowledge thereof; (iv) an event of default occurs under any mortgage, bond, indenture, loan agreement or other evidence of indebtedness under which there may be issued or by which there may be secured or evidenced any Indebtedness (other than non-recourse Indebtedness) for money borrowed by the Bank or any Subsidiary thereof (or the payment of which is guaranteed by the company or any Subsidiary), whether such Indebtedness or guarantee now exists or shall be created hereafter; provided, however, that no such event of default shall constitute an -------- ------- Event of Default unless the effect of such Event of Default is to cause the acceleration of such Indebtedness prior to its stated maturity, which, together with the principal amount of any other such Indebtedness so caused to be accelerated, aggregates $2 million or more at any time; 5 (v) a final judgment or final judgments for the payment of money are entered by a court or courts of competent jurisdiction against the Bank or any Subsidiary thereof which remains or remain undischarged for a period of 60 days, provided that the aggregate of all such judgments is $2 million or more at any time; (vi) any representation or warranty made by the Bank in this Agreement, or made by the Bank in any written statement or certificate furnished by the Bank in connection with the issuance and sale of the Debentures or furnished by the Bank pursuant to this Agreement proves false in any material respect as of the date of the issuance or making thereof and, if susceptible of cure, is not cured within 60 days of notice thereof; (vii) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Bank bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Bank under the Federal Bankruptcy Code or any other applicable Federal or State law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar officials) of the Bank or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days or the appointment of the FDIC or the OTS or any successor agency thereto as conservator or receiver for the Bank and the continuance of such conservatorship or receivership unstayed and in effect for a period of 30 consecutive days; or (viii) the Bank or any material Subsidiary thereof shall institute proceedings to be adjudicated insolvent, or shall consent to the filing of an insolvency proceeding against it, or shall file a petition or answer or consent seeking reorganization, readjustment, arrangement, composition, appointment of a receiver or similar relief under the federal insolvency laws, or any other similar applicable law of any governmental unit, domestic or foreign, or shall consent to the appointment of a receiver, conservator, liquidator, trustee or assignee in insolvency of it or of a substantial part of its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due, or if the Bank shall voluntarily suspend transaction of its business, or if corporate action shall be taken by the Bank or any Subsidiary thereof in furtherance of any of the aforesaid purposes; then in the cases of clauses (i), (ii), (iv), (v), (vi), (vii) and (viii) above, unless the principal of the Debentures shall have already become due and payable, Beneficial Holders of no less than 51% in aggregate principal amount of the Debentures then outstanding may declare the principal of the Debentures to be immediately due and payable, anything in this Agreement or in the Debentures to the contrary notwithstanding, except the limitations applicable with respect to the FDIC as receiver described in the Debentures. In the case of clause (iii) above, unless the principal of the Debentures shall have already become due and payable, Beneficial holders of no less than 51% in aggregate principal amount of the Debentures then outstanding may declare the principal of the Debentures to be due and payable, along with all accumulated interest, 10 days after the Bank has been in default under clause (iii) above. Overdue principal and overdue interest in respect of the Debentures shall bear interest at a rate of 13 1/2% per annum, subject to applicable law. A Holder, by written notice to the Bank, may waive all defaults and rescind such acceleration and its consequences as to the Debentures held by such Debenture Holder; but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent upon any subsequent default. The Bank shall deliver to the Holders, within 15 days after it becomes aware of the occurrence thereof, written notice of any event which with the giving of notice or the lapse of time or both would become an Event of Default under (iv) or (v) above, its status and what action the Bank is taking or proposes to take with respect thereto. 6 In the event Holders shall have proceeded to enforce any right under this Agreement and such proceeding shall have been discontinued or abandoned or shall have been determined adversely to the Holders, then in every such case the Bank and the Holders shall be restored, respectively, to their former positions under the Debentures and this Agreement, and all other rights, remedies and powers of the Bank and the Holders, respectively, under the Debentures and this Agreement shall continue as though no such proceedings had been undertaken. 6B. Other Remedies. If any Event of Default or Default shall occur and be continuing, a Holder of any Debenture may proceed to protect and enforce its rights under this Agreement and such Debenture by exercising such remedies as are available to such Holder in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or other agreement contained in this Agreement or in aid of the exercise of any power granted in this Agreement. No remedy conferred in this Agreement upon the Holder of any Debenture is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise. 7. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Bank represents, covenants and warrants: 7A. Organization. The Bank has been duly organized and is validly existing as a federal savings bank under the laws of the United States, each material Subsidiary is duly organized and existing in good standing under the laws of the jurisdiction in which it is incorporated, and the Bank and each material Subsidiary has the corporate power to own its respective property and to carry on its respective business as now being conducted. 7B. Financial Statements. The audited consolidated financial statements of the Bank and its subsidiaries and other financial information included in the Private Placement Memorandum, dated March 12, 1997 (the "Private Placement Memorandum") present fairly the consolidated financial position of the Bank and its Subsidiaries as of and at the dates indicated and the consolidated results of their operations for the periods specified therein and said consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a basis consistent in all material respects during the periods involved and the independent certified public accountants who certified the audited financial statements included in the Private Placement Memorandum are independent public accountants as required by the Securities Act and the rules and regulations thereunder. 7C. Material Adverse Change. At the Closing Time, there shall not have been, since the latest date as of which financial or statistical information is presented in the Private Placement Memorandum, any change in the business operations, profits, financial condition or Properties of the Bank or its Subsidiaries except changes that in the aggregate, would not be reasonably likely to have a Material Adverse Effect. 7D. Actions Pending. There is no action, suit, investigation or proceeding pending or, to the knowledge of the Bank, threatened against the Bank or any of its Subsidiaries, or any properties or rights of the Bank or any of its Subsidiaries, by or before any court, arbitrator or administrative or governmental body which has not been previously disclosed to the Purchasers and which would be reasonably likely to have a Material Adverse Effect. 7E. Outstanding Debt. Neither the Bank nor any of its Subsidiaries has outstanding any debt with a term in excess of one year except as disclosed in the Private Placement Memorandum. There exists no default under the provisions of any instrument evidencing such debt or of any agreement relating thereto. 7F. Title to Properties. The Bank has and each of its Subsidiaries has good and indefeasible title to its respective real properties (other than properties which it leases) and good title to all of its other respective properties and assets, subject to no Lien of any kind, except for Liens for taxes not yet due and payable and any other Liens, encumbrances or defects in title which are not material to the Bank and its Subsidiaries, taken as a whole. All leases necessary in any material respect for the conduct of the respective businesses of the Bank and its Subsidiaries are valid and subsisting and are in full force and effect. 7 7G. Taxes. The Bank has and each of its Subsidiaries has filed all Federal, State and other income tax returns which, to the best knowledge of the officers of the Bank, are required to be filed, and each has paid all taxes as shown on such returns and on all assessments received but it to the extent that such taxes have become due, except such taxes as are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles. 7H. Environmental Compliance. (i) After reasonable inquiry, to the best of the Bank's knowledge, neither the Bank nor any Subsidiary is in violation of any applicable Environmental Protection Law except for such violations that, in the aggregate for all such violations, would not be reasonably likely to have a Material Adverse Effect. (ii) After reasonable inquiry, to the best of the Bank's knowledge, neither the Bank nor any Subsidiary is subject to any liability under any Environmental Protection Law that, in the aggregate for all such liabilities, would be reasonably likely to have a Material Adverse Effect. 7I. Conflicting Agreements and Other Matters. Neither the Bank nor any of its Subsidiaries is a party to any contract or agreement which materially and adversely affects its business, property or assets, or financial condition. Neither the execution nor delivery of this Agreement or the Debentures, nor the offering, issuance and sale of the Debentures, nor fulfillment of nor compliance with the terms and provisions hereof and of the Debentures will conflict with, or result in a material breach of the terms, conditions or provisions of the charter or by-laws of the Bank or any of its Subsidiaries, or constitute a material default under, or result in any material violation of, or result in the creation of any material Lien upon, any of the material properties or assets of the Bank or any of its Subsidiaries pursuant to any award of any arbitrator or any agreement (including any agreement with stockholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the Bank or any of its Subsidiaries is subject. Neither the Bank nor any of its Subsidiaries is a party to, or otherwise subject to any provision contained in, any instrument evidencing indebtedness of the Bank or such Subsidiary, any agreement relating thereto or any other contract or agreement (including its charter) which limits the amount of, or otherwise imposes restrictions on the incurring of, debt of the Bank of the type to be evidenced by the Debentures. 7J. Offering of Debentures. Neither the Bank nor, to the Bank's knowledge, any agent acting on its behalf, has taken or will take any action which would subject the issuance or sale of the Debentures to the provisions of section 5 of the Securities Act, or to the provisions of any securities or blue sky law of any applicable jurisdiction. 7K. Governmental Consent. Neither the nature of the Bank or of any Subsidiary, nor any of their respective businesses or properties, nor any relationship between the Bank or any Subsidiary and any other Person, nor any circumstance in connection with the offering, issuance, sale or delivery of the Debentures is such as to require any authorization, consent, approval, exemption or other action by or notice to or filing with any court or administrative or governmental body which have not already been obtained as of the date of this Agreement (other than routine filings after the date of closing with the Securities and Exchange Commission and/or any state securities commissions) in connection with the execution and delivery of this Agreement, the offering, issuance, sale or delivery of the Debentures or fulfillment of or compliance with the terms and provisions hereof or of the Debentures. 7L. Disclosure. Neither this Agreement nor any other document, certificate or statement furnished to you by the Bank or on behalf of the Bank with the Bank's approval in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. 8 7M. Debentures Not Listed or Quoted. The Debentures will not be, at the Closing Time, of the same class as securities listed on a national securities exchange registered under Section 6 of the Exchange Act, or quoted in a U.S. automated interdealer quotation system. 7N. No General Solicitation. None of the Bank, its affiliates (as defined in Rule 501(b) under the Securities Act) or any person (other than the Purchasers, as to whom the Bank makes no representation) acting on its behalf has engaged, in connection with the offering of the Debentures, in any form of general solicitation or general advertising within the meaning of Rule 502(c) under the 1933 Act. 7O. No Sales or Offers of Similar Securities. The Bank has not, directly or indirectly, sold or offered to sell the Debentures or any securities having terms substantially similar to the Debentures in any one or more public or private offerings during the last twelve months or otherwise approached or negotiated with any potential purchaser for the purchase of any such securities during such twelve-month period. 8. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. 8A. Each Purchaser hereby represents and warrants to, and agrees with, the Bank that it (i) is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and or an "accredited investor" within the meaning of Regulation D under the Securities Act; (ii) has not and will not solicit offers for, or offer or sell, Debentures by means of any general solicitation or general advertising within the meaning of Rule 502(c) under Regulation D under the Securities Act; (iii) will otherwise act in accordance with the terms and conditions set forth in this Agreement, including Section 9 hereof, in connection with the placement of the Debentures contemplated hereby; (iv) has received and read the Bank's Private Placement Memorandum dated March 12, 1997 (the "Memorandum"); (v) has had the opportunity to ask questions and receive answers concerning the Bank, the terms and conditions of the offering contemplated by the Memorandum, this Agreement, the Debentures, and the terms and conditions thereof and to obtain any additional information which the Bank possesses or can acquire without unreasonable effort or expense that is necessary to verify the accuracy of the information contained in the Memorandum or to evaluate the business and financial risk of investing in the Debentures; (vi) relied only on, in purchasing the Debentures, information delivered or made available by the Bank, Friedman, Billings, Ramsey and Co., Inc. and its Affiliates; (vii) is acquiring the Debentures for its own account or an account with respect to which it exercises sole investment discretion and that it or such account has assets of at least $20 million and is an "Accredited Investor" as defined in Regulation D under the Securities Act or "qualified institutional buyer", as defined in Rule 144A (a "QIB"), acquiring the Debentures for investment purposes and not with a view to offer for sale in connection with any distribution of the Debentures; (viii) understands and agrees that such Debentures are being offered only in a transaction not involving any public offering and will constitute "restricted securities" within the meaning of the Securities Act and the rules thereunder, and that: (A) such Debentures may be resold, pledged or transferred only (1) to the Bank, (2) so long as such Debentures are eligible for resale pursuant to rule 144A, to a person whom the seller reasonably believes is a QIB that purchases for its own account or for the account of a QIB to whom notice is given that the resale, pledge or other transfer is being made in reliance on Rule 144A, (3) to a person whom the seller reasonably believes is a QIB that purchases for its own account or for the account of a QIB pursuant to another available exemption from the registration requirements under the Securities Act, or (4) to a person whom the seller reasonably believes is a QIB that purchases for its own account or for the account of a QIB pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States; (B) the purchaser will, and each subsequent holder is required to, notify any purchaser of Debentures from such holder of the resale restrictions referred to in (A) above if then applicable; (C) with respect to any transfer of Debentures pursuant to clause A above, the Bank will require written confirmation from the transferee (or a U.S. registered broker/dealer on the transferee's behalf) that the transfer is being made in compliance with the applicable restrictions on transfer and the requirements of the exemption from registration relied upon by the transferor (which exemption shall be specified in the confirmation), together with, in the case of a transfer under clause (3) above, such certificates, legal opinions, or other information as the Bank may reasonably require to confirm that such transfer is being made pursuant to an 9 exemption from or in a transaction not subject to, the registration requirements of the Securities Act; and (ix) understands that the notification requirements referred to in (viii) above will be satisfied (except with respect to sales to QIBs holding through DTC) by virtue of the fact that the legends on the Form of Debenture attached hereto as Exhibit A will be placed on the Debentures unless otherwise agreed by the Bank. 9. SUBSEQUENT OFFERS AND RESALES OF THE SECURITIES. Each of the Purchasers and the Bank hereby establish and agree to observe the following procedures in connection with the offer and sale by the Purchasers of the Debentures. 9A. Offers and Sales Only to Qualified Institutional Buyers. Offers and sales of the Debentures will be made by the Purchasers only (i) to the Bank, (ii) so long as such Debentures are eligible for resale pursuant to Rule 144A, to a person whom the seller reasonably believes is a QIB that purchases for its own account or for the account of a QIB to whom notice is given that the resale, pledge or other transfer is being made in reliance on Rule 144A, (iii) to a person whom the seller reasonably believes is a QIB that purchases for its own account or for the account of a QIB pursuant to another available exemption from the registration requirements under the Securities Act, or (iv) to a person whom the seller reasonably believes is a QIB that purchases for its own account or for the account of a QIB pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States. 9B. No General Solicitation. If a Purchaser elects to resell any Debentures, such Debentures will be offered by the Purchaser only by approaching prospective purchasers on an individual basis. No general solicitation or general advertising (as such terms are used in Regulation D under the Securities Act) will be used in connection with offering any of the Debentures for resale. 9C. Purchasers by Non-Bank Fiduciaries. In the case of a non-bank purchaser of a Debenture acting as a fiduciary for one or more third parties, in connection with an offer and sale to such purchaser pursuant to Section 9A, each third party shall, in the judgment of the applicable Purchaser, be a QIB. 9D. Minimum Principal Amount. No sale of the Debentures to any one purchaser will be for less than U.S. $100,000 principal amount and no Debenture will be issued in a smaller principal amount. If the purchaser is a non-bank fiduciary acting on behalf of others, each person for whom it is acting must purchase at least U.S. $100,000 principal amount of the Debentures. 9E. Restrictions on Transfer. The transfer restrictions and the other provisions set forth in the Debentures shall apply to the Debentures except as otherwise agreed by the Bank and the Purchasers. Following the sale of the Debentures by the Purchasers to subsequent purchasers pursuant to the terms hereof, no Purchaser shall be liable or responsible to the Bank for any losses, damages or liabilities suffered or incurred by the Bank, including any losses, damages or liabilities under the Securities Act, arising from or relating to any resale or transfer of any Debenture by such subsequent purchaser. So long as the Debentures qualify for inclusion in the depository system operated by the Depository, the Debentures will be in global form held by the Depository as securities custodian. Accordingly, transfers of Beneficial Interests in the Debentures will be made in accordance with the procedures for such transfers specified by the Depository. The Global Debenture may not be transferred except (i) by the Depository to a nominee of the Depository; (ii) by a nominee of the Depository to the Depository or another nominee of the Depository; or (iii) by the Depository or any such nominee to a successor Depository or nominee of a successor Depository. 9F. Company to Provide Certain Information. The Bank will make available, upon request, to any seller of the Debentures the information specified in Rule 144A(d)(1) under the Securities Act. 10 10. DEFINITIONS. For the purpose of this Agreement the following terms shall have the meanings specified with respect thereto below: "Affiliate" means any Person (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Bank, (ii) which beneficially owns or holds 5% or more of any class of the voting stock of the Bank or (iii) which beneficially owns or holds 5% or more of the voting stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of the Bank or a Subsidiary thereof. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Beneficial Holder" shall mean, from time to time, any Person which holds at such time a Beneficial Interest, provided that if such Person is a participant or member of the Depository who is acting as agent for another Person, then that other Person shall be the "Beneficial Holder" for purposes hereof. "Beneficial Interest" shall mean, from time to time, a beneficial ownership interest in the Global Debenture, as reflected by the Securities Position List of the Depository for the Global Debenture for such time. "Business Day" means a day other than a Saturday, a Sunday or a day on which commercial banks in California are required by law (other than a general banking moratorium or holiday for a period exceeding four consecutive days) to be closed. "Capitalized Lease" shall mean any rental obligation which, under generally accepted accounting principles, is or will be required to be capitalized on the books of the Bank or any Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expense) in accordance with such principles. "Company" shall mean Life Financial Corp., a company organized to be the Bank's parent holding company. "Consolidated Net Worth" shall mean Stockholders' Equity plus General Valuation Allowance for Loan Losses. "Consolidated Tangible Equity Capital" shall mean Consolidated Net Worth minus Goodwill. "Environmental Protection Law" shall mean any law, statute or regulation enacted by any jurisdiction in connection with or relating to the protection or regulation of the environment, including, without limitation, those laws, statutes and regulations regulating the disposal, removal, production, storing, refining, handling, transferring, processing or transporting of hazardous or toxic substances, and any orders, decrees or judgments issued by any court of competent jurisdiction in connection with any of the foregoing. "Event of Default" shall mean any of the events specified in Section 6A, provided that there has been satisfied any requirement in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act, and "Default" shall mean any of such events, whether or not any such requirement has been satisfied. "FDIC" shall mean the Federal Deposit Insurance Corporation and any Person succeeding to the functions thereof. "Funded Indebtedness" shall mean all indebtedness that matures more than one year from the date of creation thereof, or that is extendible or renewable at the option of any party thereto to a date more than one year from the date of creation thereof (whether or not renewed or extended). "Goodwill" shall mean unidentified intangibles which have been created in connection with an acquisition transaction. 11 "Holder" shall mean, at any time, the registered holder of a Debenture. "Indebtedness" shall mean all indebtedness, liabilities and other obligations, direct or contingent (other than deferred income taxes and other credits, outside minority interests and items of Stockholders' Equity) which would, in accordance with generally accepted accounting principles, be classified upon the consolidated balance sheet of the Bank as liabilities, but in any event including without limitation: (1) all guarantees, other than guarantees on secured indebtedness; (2) all indebtedness, liabilities and other obligations arising under any conditional sale or other title retention agreement, whether or not the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property; provided, however, that the terms "Funded -------- ------- Indebtedness" and "Indebtedness" shall not include any obligation of the Bank or of any Subsidiary incurred in the ordinary course of its business, with respect to: (a) any deposits with it or funds collected by it; (b) any banker's acceptance or letter of credit issued by it; (c) any check, note, certificate of deposit, money order, traveler's check, draft or bill of exchange issued, accepted or endorsed by it; (d) any discount with, borrowing from, or other obligation to any Federal Reserve Bank, the FDIC or any Federal Home Loan Bank (or successor organization) which discount or borrowing is in the ordinary course of its banking business and not incurred in connection with any unusual or extraordinary "rescue loan" by such Federal Reserve Bank, the FDIC or the Federal Home Loan Bank (or successor organization) to the Bank in connection with a business to be acquired by the Bank or any Subsidiary; (e) any agreement, made by it in the ordinary course of its banking business, to purchase or repurchase securities, loans or federal funds, or to participate in any such purchase or repurchase; (f) any transaction made by it in the ordinary course of its banking business in the nature of any extension of credit, whether in the form of a commitment, guarantee or otherwise, undertaken by it for the account of a third party with the application by it of the same banking considerations and legal lending limits that would be applicable if the transaction were a loan to such party; (g) any transaction in which it acts solely in a fiduciary or agency capacity; (h) other obligations incurred by it in the ordinary course of its banking, mortgage banking or trust business to its customers solely in their capacities as such; (i) any other liability or obligation of any Subsidiary incurred in the ordinary course of its banking business not involving any obligation for borrowed money; (j) Capitalized Leases; (k) any borrowing under mortgage warehousing lines of credit, including, without limitation, commercial paper and medium term note programs for the purpose of funding or carrying mortgage loans; 12 (l) any borrowings under any revolving line of credit with a maturity date of less than one year up to an aggregate amount at any time outstanding equal to 30% of Consolidated Net Worth; (m) drafts outstanding or official bank checks outstanding used to fund mortgage loan volume; (n) indebtedness ranking junior to the Debentures in right of payment or on liquidation; provided, however, that notwithstanding the foregoing, -------- ------- Indebtedness shall not be deemed to include the guaranty by the Bank of any secured Indebtedness of any Subsidiary which is permitted to be incurred pursuant to subsection 2(d) of this definition of Indebtedness. "IRC" shall mean the Internal Revenue Code of 1986, together with all rules and regulations promulgated pursuant thereto, as amended from time to time. "Lien" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property (for purposes of this definition, the "Owner"), whether such interest is based on the common law, statute or contract, and includes but is not limited to (a) the security interest arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes, and the filing of any financing statement under the Uniform Commercial Code of any jurisdiction, or an agreement to give any of the foregoing, (b) reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting real property, (c) stockholder agreements, voting trust agreements, buy-back agreements and all similar arrangements affecting the Owner's rights in stock owned by the Owner, and (d) any interest in any Property held by the Owner evidenced by a conditional sale agreement, Capitalized Lease or other arrangement pursuant to which title to such Property has been retained by or vested in some other Person for security purposes. "Material Adverse Effect" shall mean a material adverse effect on (i) the business operations, profits, financial condition or Properties of the Bank and the Subsidiaries, taken as a whole, (ii) the ability of the Bank to perform its obligations set forth herein and in the Debentures, or (iii) the validity or enforceability of this Agreement or the Debentures. "Offerings" shall mean the exchange of each share of common stock of the Bank for three shares of the Company's common stock and the offering and selling to the public of 2,500,000 additional shares of common stock at a proposed offering price of $7.00 to $9.00 per share. "OTS" shall mean the federal Office of Thrift Supervision and any Person succeeding to the functions thereof. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "Private Placement Memorandum" shall mean the offering document pursuant to which the Debentures are being offered. 13 "Properties" shall mean any interest in any kind of property or asset, whether real, personal or mixed, and whether tangible or intangible. "Securities Position List" shall mean the securities position list of the Depository listing the Persons that have a Beneficial Interest in the Global Debenture and the amount of such Beneficial Interest. "Senior Financial Officer" shall mean any one of the chief financial officer and the principal accounting officer of the Bank. "Stockholders' Equity", "General Valuation Allowance for Loan Losses", "Consolidated Assets", "Net Income" and "Consolidated Net Loss" shall be defined according to generally accepted accounting principles applicable to the Bank and in effect on the date the Debentures are issued. "Subsidiary" shall mean: any entity (i) that is organized under the laws of the United States of America or any state thereof or the District of Columbia and (ii) of which at least 50% (by number of votes) of the voting stock of such entity and all outstanding shares of preferred stock, all outstanding securities convertible into or exchangeable for shares of capital stock and all outstanding warrants, rights or options to purchase shares of capital stock of such entity are owned directly by the Bank or by another Subsidiary. 11. MISCELLANEOUS 11A. Paying Agent. The Bank shall appoint a Person with an office or agency located in the continental United States (the "Paying Agent") where Debentures may be presented for payment. The Bank appoints, as of the Closing Date, Chemical Trust Company of California, as Paying Agent, with an office at 101 California Street, Suite 2725, San Francisco, CA 94111, and may thereafter appoint successor Paying Agents or co-Paying Agents, from time to time, all of which will for purposes hereof be deemed to be Paying Agents. The Bank shall enter into appropriate written agreements with each Paying Agent (other than the Bank) reflecting the relevant terms of the relationship with each Paying Agent. All fees and expenses of the Paying Agent shall be paid by the Bank. On or before 9:00 a.m. (local time of the Paying Agent) on each due date of principal or interest on any Debenture and each due date, if any, of any other amount payable in respect of the Debentures, the Bank shall deposit by federal funds wire transfer in immediately available funds (or its equivalent) with the Paying Agent, a sum sufficient to pay the amounts then due. The Bank shall require each Paying Agent (other than the Bank) to agree in writing that the Paying Agent will hold in trust for the ratable benefit of the Holders all moneys held by the Paying Agent for the payment of principal or interest (and any other amount that may be due) on the Debentures. So long as the Bank acts as Paying Agent, it shall segregate and hold as a separate trust fund all amounts held by it as Paying Agent. The Paying Agent shall promptly notify each of the Holders of any failure by the Bank to deposit any moneys at the times and dates, and in the amounts, required hereby. 11B. Debenture Payments. (i) Manner of Payment. The Bank shall pay, or cause the Paying Agent to pay, all amounts payable to the Purchasers in accordance with their instructions or with respect to the Global Debenture in accordance with the instructions of the Depository. In the absence of written directions, all amounts payable with respect to any Debenture shall be paid by check mailed and addressed to the Holder of the Debenture at the address shown in the records of Holders maintained by the Bank or the Paying Agent, as the case may be. (ii) Payments Due on Holidays. If any payment due on, or with respect to, any Debenture shall fall due on a day other than a Business Day, then such payment shall be made, in the same amount without adjustment, on the first Business Day following the day on which such payment shall have so fallen due, with the same force and effect as if made on the day the payment became due, and, if so paid, no interest shall accrue for the period after such payment date. 14 11C. Survival of Representations and Warranties; Entire Agreement. All representations and warranties contained herein or made in writing by or on behalf of the Bank in connection herewith shall survive the execution and delivery of this Agreement and the Debentures, the transfer by you of any Debenture or portion thereof or interest therein and the payment of any Debenture, and may be relied upon by any subsequent purchaser, regardless of any investigation made at any time by or on behalf of you or any subsequent purchaser. Subject to the preceding sentence, this Agreement and the Debentures embody the entire agreement and understanding between you and the Bank and supersede all prior agreements and understandings relating to the subject matter hereof. 11D. Exchange of Debentures for Debentures of Holding Company. At any time prior to maturity of the Debentures as defined therein the Bank may substitute in its place as obligor on the Debentures and as a party to this Purchase Agreement a holding company ("Holding Company") that owns substantially all of the issued and outstanding common stock of the Bank, as follows: (i) No less than ten days prior to such substitution, the Bank shall provide notice to you in accordance with Section 11F hereof that it intends to substitute the Holding Company for the Bank and the date of such substitution ("Substitution Date"). The notice shall (i) include the name and address of the Holding Company, (ii) be executed by the Chief Executive Officers of the Bank and the Holding Company, (iii) affirm on behalf of the Holding Company the provisions of paragraph 7 of this Purchase Agreement and (iv) enclose an opinion of the Holding Company's counsel with respect to the Holding Company substantially in the Form of Exhibit B attached hereto. (ii) On the Substitution Date without further action the Holding Company shall become the issuer of the Debentures and a party to the Purchase Agreement in place of the Bank. All obligations of and references to the Bank in and with respect to the Debentures and this Purchase Agreement shall become obligations of and references to the Holding Company, provided that the last reference to Bank in paragraph 6A(vii) shall continue to be a reference to the Bank. 11E. Successors and Assigns. All covenants and other agreements in this Agreement contained by or on behalf of either of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, any Beneficial Holder) whether so expressed or not. 11F. Notices. All written communications provided for hereunder shall be sent by first class mail or nationwide overnight delivery service (with charges prepaid) and (i) if to you, addressed to you at the address specified for such communications in the Purchaser Schedule attached hereto, or at such other address as you shall have specified to the Bank in writing, (ii) if to any other Holder of any Debenture, addressed to such other Holders at such address as such other Holders shall have specified to the Bank in writing or, if any such other Holders shall not have so specified an address to the Bank, then addressed to such other Holder in care of the last Holder of such Debenture which shall have so specified an address to the Bank, and (iii) if to the Bank, addressed to it at Life Savings Bank, Federal Savings Bank, 4110 Tigris Way, Riverside, California 92503, Attention: Daniel L. Perl, Chief Executive Officer or at such other address as the Bank shall have specified to the Holder of each Debenture in writing. 11G. Descriptive Headings. The descriptive headings of the several Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 11H. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of Delaware. 11I. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original. 15 If you are in agreement with the foregoing, please sign the form of acceptance on the enclosed counterpart of this letter and return the same to the Bank, whereupon this letter shall become a binding agreement between you and the Bank. Very truly yours, By: /s/ Daniel L. Perl ------------------------------------------ Title: President and Chief Executive Officer Accepted: - ----------------------------------- 16 DEBENTURE THIS DEBENTURE IS A GLOBAL DEBENTURE WITHIN THE MEANING OF THE DEBENTURE PURCHASE AGREEMENT HEREIN AFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), OR A NOMINEE THEREOF. THIS GLOBAL DEBENTURE MAY NOT BE EXCHANGED, IN WHOLE OR IN PART, FOR A DEBENTURE REGISTERED IN THE NAME OF ANY PERSON OTHER THAN DTC OR A NOMINEE THEREOF, AND MAY NOT BE TRANSFERRED, IN WHOLE OR IN PART, EXCEPT IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE DEBENTURE PURCHASE AGREEMENT. UNLESS THIS DEBENTURE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC TO LIFE SAVINGS BANK, FEDERAL SAVINGS BANK (THE "COMPANY") OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IN EXCHANGE FOR THIS DEBENTURE IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUIRED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OR DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THIS DEBENTURE IS NOT A SAVINGS ACCOUNT OR A DEPOSIT AND IT IS NOT INSURED BY THE UNITED STATES, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY OR FUND OF THE UNITED STATES. ABSENT PRIOR WRITTEN APPROVAL BY THE OFFICE OF THRIFT SUPERVISION ("OTS"), THIS SECURITY IS NOT ELIGIBLE FOR PURCHASE BY ANY SAVINGS ASSOCIATION OR A CORPORATE AFFILIATE THEREOF, EXCEPT THAT THIS SECURITY MAY BE PURCHASED BY A CORPORATE AFFILIATE OF THE ISSUER OR BY ANY DIVERSIFIED SAVINGS AND LOAN HOLDING COMPANY AND ANY NON-SAVINGS ASSOCIATION SUBSIDIARY THEREOF. THIS DEBENTURE AS A SECURITY OF THE BANK HAS NOT BEEN OFFERED BY AN OFFERING CIRCULAR FILED WITH AND DECLARED EFFECTIVE BY, THE OTS AND DUE CARE SHOULD BE TAKEN TO ENSURE THAT THE SELLER OF THE SECURITY IS NOT AN UNDERWRITER WITHIN THE MEANING OF 12 C.F.R. (S)563G.1(A)(14). THIS DEBENTURE IF IT BECOMES A SECURITY OF A HOLDING COMPANY FOR THE BANK THE FOLLOWING SHALL APPLY. THE SECURITIES WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). (A) THE HOLDER HEREOF, BY PURCHASING THIS DEBENTURE ACKNOWLEDGES THAT THE DEBENTURES CONSTITUTE "RESTRICTED SECURITIES" AND AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS DEBENTURE MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (1) TO THE ISSUER, (2) SO LONG AS SUCH DEBENTURES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER", AS DEFINED IN RULE 144A (A "QIB"), THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (3) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, OR (4) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES; (B) THE PURCHASER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF DEBENTURES FROM SUCH HOLDER OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE IF THEN APPLICABLE; (C) WITH RESPECT TO ANY TRANSFER OF DEBENTURES PURSUANT TO CLAUSE (A) ABOVE, THE ISSUER WILL REQUIRE WRITTEN CONFIRMATION FROM THE TRANSFEREE (OR A U.S. REGISTERED BROKER/DEALER ON THE TRANSFEREE'S BEHALF) THAT THE TRANSFER IS BEING MADE IN COMPLIANCE WITH THE APPLICABLE RESTRICTIONS ON TRANSFER AND THE REQUIREMENTS OF THE EXEMPTION FROM REGISTRATION RELIED UPON BY THE TRANSFEROR (WHICH EXEMPTION SHALL BE SPECIFIED IN THE CONFIRMATION), TOGETHER WITH, IN THE CASE OF A TRANSFER UNDER CLAUSE (3) ABOVE, SUCH CERTIFICATES, LEGAL OPINIONS, OR OTHER INFORMATION AS THE BANK MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. BY PURCHASING THIS DEBENTURE THE HOLDER HEREOF AGREES AND REPRESENTS FOR THE BENEFIT OF THE BANK THAT THE HOLDER WILL NOTIFY ANY PURCHASER OF THIS DEBENTURE FROM THE HOLDER OF THE RESALE RESTRICTIONS REFERRED TO ABOVE. LIFE SAVINGS BANK, FEDERAL SAVINGS BANK 13 1/2% SUBORDINATED DEBENTURE DUE March 15, 2004 $10,000,000 CUSIP NUMBER: 53216PAA1 FOR VALUE RECEIVED, the undersigned, LIFE SAVINGS BANK, FEDERAL SAVINGS BANK (herein called the "Bank"), a federally chartered savings bank hereby promises to pay to Cede & Co., as nominee for the Depository Trust Company, or registered assigns the principal sum of $10,000,000 on March 15, 2004 ("Maturity") (unless earlier paid upon acceleration), with interest (computed on the basis of a 360-day year comprised of 12 30-day months) on the unpaid balance thereof at the rate of 13 1/2% per annum from the date hereof, payable semiannually on the 15th day of March and September in each year (each, an "Interest Payment Date"), commencing with the September 15 next succeeding the date hereof, until the principal hereof shall have become due and payable. In any case where the applicable Interest Payment Date or Maturity with respect hereto, as the case may be, does not fall on a Business Day, payment of principal or interest otherwise payable on such day need not be made on such day, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date or at Maturity and no interest shall accrue with respect to such payment for the period from and after the Interest Payment Date or such Maturity, as the case may be, to the date of payment. This Global Debenture is issued pursuant to a Debenture Purchase Agreement, dated as of March 12, 1997 (the "Debenture Purchase Agreement") between the Bank and the respective original purchasers of the Debentures named in the Purchasers Schedule attached thereto and is entitled to the benefits thereof. All provisions, including without limitation paragraphs 4, 5, 6, 9, 11(a) and 11(d), of the Debenture Purchase Agreement and obligations of the Bank thereunder are incorporated herein by this reference. To the extent not defined in this Debenture, all capitalized terms shall have the meaning set forth in the Debenture Purchase Agreement. The Debentures (including all of the obligations of the Bank hereunder) are direct, unconditional obligations of the Bank and rank without preference or priority among themselves and at least pari passu with all other existing and ---- ----- future unsecured and subordinated indebtedness of the Bank. The Debentures are subordinated on liquidation, as to principal, interest, and premium, if any, to all claims (including post-default interest) against the Bank having the same priority as savings account holders or any higher priority, are unsecured by the assets of the Bank, or any of its affiliates, and are not eligible as collateral for any loan by the Bank. The Debentures will not be subject to any sinking fund and will not be redeemable or repayable prior to September 15, 1998. Thereafter, upon notification of redemption by the Bank, the Debenture to be redeemed shall 2 be surrendered for payment within 30 days of such notification and such Debenture shall continue to earn interest through the date of such surrender but not after the expiration of such 30 day period. Payments of principal, premium, if any, and interest are to be made in lawful money of the United States of America in the manner provided for in the Debenture Purchase Agreement. No voluntary prepayment of principal shall be made and no payment of principal shall be accelerated without the approval of the OTS if the Bank is failing to meet its regulatory capital requirements under Part 567 of the OTS regulations or if after giving effect to such payment the Bank would fail to meet such regulatory requirements. In case an Event of Default, as defined in the Debenture Purchase Agreement, shall occur and be continuing, the principal of this Debenture may be declared or otherwise become due and payable in the manner and with the effect provided in the Debenture Purchase Agreement. The Debenture Purchase Agreement permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Bank and the rights of Holders of the Debentures to be affected thereby by the Bank with the consent of the Bank and the Beneficial Holders of 51% of the aggregate principal amount of Debentures at the time outstanding. The Debenture Purchase Agreement also contains provisions permitting the Beneficial Holders of 51% in principal amount of the outstanding Debentures to waive compliance by the Bank with certain provisions of the Debenture Purchase Agreement. Any such consent or waiver by or on behalf of the Holder of this Debenture shall be conclusive and binding upon Debenture issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Debenture. Neither the Bank nor any Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Debenture or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. No provision of this Debenture or of the Debenture Purchase Agreement shall alter or impair the obligations of the Bank, which are absolute and unconditional, to pay the principal of and interest on this Debenture at the time, place, and rate herein prescribed, provided, that at any time prior to maturity of the Debentures the Bank may in accordance with Section 11D of the Purchase Agreement substitute in its place as obligor on the Debentures and as a party to the Purchase Agreement a holding company that owns substantially all of the issued and outstanding common stock of the Bank. No recourse shall be had for the payment of the principal of or interest on this Note, or for any claim based hereon, or otherwise in respect hereof, against any incorporator, stockholder, officer or director, as such, past, present, or future, of the Bank or of any successor at law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. Under 12 U.S.C. 1828(b) the Bank shall not pay interest on its capital notes or debentures (if such interest is required to be paid only out of profits) or distribute any of its capital assets while it remains in default in the payment of any assessment due the Federal Deposit Insurance Corporation. Notwithstanding anything to the contrary in this certificate (or in any related document); (A) if the FDIC shall be appointed receiver for the issuer of this certificate (the "issuer"), and in its capacity as such shall cause the issuer to merge with or into another financial institution, or in such capacity shall sell or otherwise convey part or all of the assets of the issuer to another financial institution or shall arrange for the assumption of less than all of the liabilities of the issuer by one or more other financial institutions, the FDIC shall not have any obligation, either in its capacity as receiver or in its corporate capacity, to contract for or to otherwise arrange for the assumption of 3 the obligation represented by this certificate in whole or in part by any financial institution or institutions which results from any such merger or which has purchased or otherwise acquired from the FDIC as receiver for the issuer, any of the assets of the issuer, or which, pursuant to any arrangement with the FDIC, has assumed less than all of the liabilities of the issuer. To the extent that obligations represented by this certificate have not been assumed in full by a financial institution with or into which the issuer may have been merged, as described in this subparagraph (A), and/or by one or more financial institutions which have succeeded to all or a portion of the assets of the issuer, or which have assumed a portion but not all of the liabilities of the issuer as a result of one or more transactions entered into by the FDIC as receiver for the issuer, then the holder of this certificate shall be entitled to payments on this obligation in accordance with the procedures and priorities set forth in any applicable receivership regulations or in orders of the FDIC relating to such receivership. (B) In the event that the obligation represented by this certificate is assumed in full by another financial institution, which shall succeed by merger or otherwise to substantially all of the assets and the business of the issuer, or which shall be arrangement with the FDIC assume all or portion of the liabilities of the issuer, and payment or provision for payment shall have been made in respect of all matured installments of interest upon the certificates together with all matured installments of principal on such certificates which shall have become due otherwise than by acceleration, then any default caused by the appointment of a receiver for the issuer shall be deemed to have been cured, and any declaration consequent upon such default declaring the principal and interest on the certificate to be immediately due and payable shall be deemed to have been rescinded. (C) This security is not eligible to be purchased or held by any savings association or corporate affiliate thereof except that this security may be purchased or held by a corporate affiliate of the issuer or by a diversified savings and loan holding company and its non-savings association subsidiaries. The issuer of this security may not recognize on its transfer books any transfer made to a savings association or any corporate affiliate thereof (except as provided in the preceding sentence) and will not be obligated to make any payments of principal or interest on this security if the owner of this security is a savings association or any corporate affiliate thereof (except as provided in the preceding sentence). This Debenture shall be construed and enforced in accordance with the law of the State of Delaware. By: ------------------------------------- President and Chief Executive Officer 4 EX-5.0 4 OPINION OF MULDOON, MURPHY & FAUCETTE RE LEGALITY EXHIBIT 5.0 [Muldoon, Murphy & Faucette letterhead] March 26, 1997 The Board of Directors Life Financial Corp. 4115 Tigris Way Riverside, California 92503 Re: The offering of up to 6,086,716 shares of Life Financial Corp. Common Stock Gentlemen: You have requested our opinion concerning certain matters of Delaware law in connection with the offering (the "Public Offering") by Life Financial Corp., a Delaware corporation (the "Company"), of up to 2,500,000 shares of its common stock, par value $.01 per share ("Common Stock") (2,875,000 shares in the event that the underwriters' overallotment option is exercised), in an initial public offering, and in connection with the issuance (the "Exchange Share Offering") of 3,211,716 shares of the Company's Common Stock in conjunction with the reorganization of Life Savings Bank, Federal Savings Bank (the "Bank") as a result of which (i) the Bank will become a wholly-owned subsidiary of the Company and (ii) each outstanding share of the Bank's common stock will be converted into the right to receive three shares of Common Stock of the Company (the "Reorganization"). In connection with your request for our opinion, you have provided us and we have reviewed the Company's certificate of incorporation filed with the Delaware Secretary of State on December 6, 1996 and amended on January 21, 1997 (the "Certificate of Incorporation"); the Company's Bylaws; the Company's Registration Statement on Form S-1, as filed with the Securities and Exchange Commission initially on January 27, 1997 (the "Registration Statement"); resolutions of the Board of Directors of the Company (the "Board") concerning the organization of the Company, the Public Offering and the Exchange Share Offering (the "Offerings"), the issuance of shares in the Offerings and designation of the Pricing Committee, the Amended Agreement and Plan of Reorganization dated as of January 16, 1997 (the "Plan of Reorganization") between the Company, the Bank and Life Interim Savings Bank, an interim federal savings bank ("Interim"), a consent of the Company as the sole stockholder of Interim approving the Reorganization, and the form of stock certificate approved by the Board to represent shares of common stock to be issued in the Offerings. We have also been furnished a certificate of the Delaware Secretary of State certifying the Company's good standing as a Delaware corporation. Capitalized terms used but not defined herein shall have the meaning given them in the Certificate of Incorporation. In rendering this opinion, we have relied upon the opinion of Morris, Nichols, Arsht & Tunnell as to matters of Delaware law, upon which opinion we believe you are justified in relying. We have examined the opinion of Morris, Nichols, Arsht & Tunnell, which opinion is in form satisfactory to us. Based upon and subject to the foregoing, and limited in all respects to matters of Delaware law, it is our opinion that: 1. The Company has been duly organized and is validly existing in good standing as a corporation under the laws of the State of Delaware. 2. Upon the due adoption by the Pricing Committee or Board of Directors of a resolution fixing the number of shares of Common Stock to be sold in the Public Offering which number is in accordance with the terms set forth in the Prospectus, the Common Stock to be issued in the Public Offering will be duly authorized and, when such shares are sold and paid for in accordance with the terms set forth in the Prospectus and such resolution of the Pricing Committee or Board of Directors, and certificates representing such shares in the form provided to us are duly and properly issued, will be validly issued, fully paid and nonassessable. 3. Upon the completion of the actions provided for in Article V of the plan of Reorganization, the common stock to be issued in the Exchange Share Offering will be duly authorized and, when such shares are issued in accordance with the Plan of Reorganization, and certificates representing such shares in the form provided to us are duly and properly issued, will be validly issued, fully paid and nonassessable. The following provisions of the Certificate of Incorporation may not be given effect by a court applying Delaware law, but in our opinion the failure to give effect to such provisions will not affect the duly authorized, validly issued, fully paid and nonassessable status of the Common Stock: 1. (a) Subsections C.3 and C.6 of Article FOURTH and Section D of Article EIGHTH, which grant the Board the authority to construe and apply the provisions of those Articles, subsection C.4 of Article FOURTH, to the extent that subsection obligates any person to provide to the Board the information such subsection authorizes the Board to demand, and the provision of Subsection C.7 of Article EIGHTH empowering the Board to determine the Fair Market Value of property offered or paid for the Company's stock by an Interested Stockholder, in each case to the extent, if any, that a court applying Delaware law were to impose equitable limitations upon the authority of the directors of the Company under such provisions; and (b) Article NINTH of the Certificate of Incorporation, which authorizes the Board to consider the effect of any offer to acquire the Company on constituencies other than stockholders in evaluating any such offer. We consent to the filing of this opinion as an exhibit to the Registration Statement on Form S-1 and to the use of the name of our firm where it appears in the Registration Statement and in the Prospectus. Very truly yours, /s/ MULDOON, MURPHY & FAUCETTE ------------------------------ MULDOON, MURPHY & FAUCETTE EX-5.1 5 OPINION OF MORRIS, NICHOLS RE LEGALITY EXHIBIT 5.1 [Morris, Nichols, Arsht & Tunnell Letterhead] MARCH 26, 1997 Muldoon, Murphy & Faucette 5101 Wisconsin Avenue, N.W. Washington, DC 20016 Ladies and Gentlemen: You have requested our opinion concerning certain matters of Delaware law in connection with the offering (the "Public Offering") by Life Financial ------ -------- Corp., a Delaware corporation (the "Company"), of up to 2,500,000 shares of its common stock, par value $.01 per share ("Common Stock"), (2,875,000 shares in ------ ----- the event that the underwriters' over-allotment option is exercised) in an initial public offering, and in connection with the issuance (the "Exchange -------- Share Offering") of 3,211,716 shares of Common Stock in conjunction with the - -------------- reorganization of Life Savings Bank, Federal Savings Bank (the "Bank") as a ---- result of which (i) the Bank will become a wholly-owned subsidiary of the Company (ii) each outstanding share of the Bank's common stock will be converted into the right to receive three shares of Common Stock (the "Reorganization"). -------------- The Public Offering and the Exchange Share Offering are herein referred to as the "Offerings". --------- Muldoon, Murphy & Faucette MARCH 26, 1997 Page 2 In connection with your request for our opinion, you have provided to us, and we have reviewed, the Company's certificate of incorporation, as amended (the "Certificate of Incorporation"), its by-laws, the Registration Statement ---------------------------- filed with the Securities and Exchange Commission in connection with the Offerings (the "Registration Statement"), including the prospectus constituting ---------------------- a part thereof (the "Prospectus"), a consent of the sole incorporator of the ---------- Company, resolutions of the Board of Directors of the Company (the "Board") ----- concerning, inter alia, the organization of the Company, the Public Offering, ----- ---- the Exchange Share Offering and the issuance of shares of Common Stock in the Offerings and the designation of a Pricing Committee of the Board (the "Pricing ------- Committee"), the Amended Agreement and Plan of Reorganization dated as of - --------- January 16, 1997 (the "Plan of Reorganization") between the Company, the Bank ---------------------- and Life Interim Savings Bank, an interim federal savings bank ("Interim"), ------- a consent of the Company as the sole stockholder of Interim approving the Reorganization and the form of stock certificate approved by the Board to represent shares of Common Stock. We have also obtained a certificate of the Delaware Secretary of State as to the Company's good standing as a Delaware corporation. Capitalized terms used but not defined herein shall have the meanings given them in the Certificate of Incorporation. We have assumed for purposes of this opinion the approval of the Reorganization by the board of directors and stockholders of Muldoon, Murphy & Faucette March 26, 1997 Page 3 the Bank and that all actions necessary to effect the Reorganization under applicable federal law have been taken. We call your attention to the fact that the opinions expressed herein are limited in all respects to matters of Delaware corporate law. We express no opinion concerning the requirements of any other law, rule or regulation, state or federal, applicable to the Bank, the Company, the Offerings, or the Reorganization, including, without limitation, those applicable to federally chartered savings banks or their holding companies. Based upon and subject to the foregoing, it is our opinion that: 1. The Company has been duly organized and is validly existing in good standing as a corporation under the laws of the State of Delaware, with the corporate power and authority to own its property and conduct its business as now conducted as described in the Prospectus. 2. Upon the due adoption by the Pricing Committee or the Board of a resolution fixing the number of shares of Common Stock to be sold in the Public Offering, the Common Stock to be issued in the Public Offering will be duly authorized and, when such shares are sold and paid for in accordance with the terms set forth in the Prospectus and such resolution of the Pricing Committee or the Board, and certificates representing such shares in the form provided to us are duly and properly issued, will be validly Muldoon, Murphy & Faucette March 26, 1997 Page 4 issued, fully paid and nonassessable, with no personal liability for the payment of the Company's debts arising solely by virtue of the ownership thereof; such issuance and sale will not be in violation of or subject to any preemptive rights provided for by Delaware law or by the Certificate of Incorporation. 3. Upon the completion of the actions provided for in Article V of the Plan of Reorganization, the Common Stock to be issued in the Exchange Share Offering will be duly authorized and, when such shares are issued in accordance with the Plan of Reorganization, and certificates representing such shares in the form provided to us are duly and properly issued, will be validly issued, fully paid and nonassessable, with no personal liability for the payment of the Company's debts arising solely by virtue of the ownership thereof; such issuance and sale will not be in violation of or subject to any preemptive rights provided for by Delaware law or by the Certificate of Incorporation. The following provisions of the Certificate of Incorporation may not be given effect by a court applying Delaware law, but in our opinion the failure to give effect to such provisions will not affect the duly authorized, validly issued, fully paid and nonassessable status of the Common Stock: (a) Subsections C.3 and C.6 of Article FOURTH and Section D of Article EIGHTH, which grant the Board the authority to construe and apply the provisions of those Articles, subsection C.4 Muldoon, Murphy & Faucette March 26, 1997 Page 5 of Article FOURTH, to the extent that provision obligates any person to provide to the Board the information such subsection authorizes the Board to demand, and the provision of Section C.7 of Article EIGHTH empowering the Board to determine the Fair Market Value of property offered or paid for the Company's stock by an Interested Stockholder, to the extent, if any, that a court applying Delaware law were to impose equitable limitations upon the authority of the directors of the Company under such provisions. (b) Article NINTH of the Certificate of Incorporation, which purports to permit the Board to consider the effect of any offer to acquire the Company on constituencies other than stockholders in evaluating any such offer. Very truly yours, /s/ MORRIS, NICHOLS, ARSHT & TUNNELL EX-8.0 6 OPINION OF MULDOON, MURPHY RE FEDERAL TAX MATTERS EXHIBIT 8.0 March 18, 1997 Board of Directors Life Savings Bank, Federal Savings Bank 1598 East Highland Avenue San Bernardino, California 92404 Board of Directors Life Financial Corp. 4110 Tigris Way Riverside, California 92503 Re: Federal Tax Consequences of Reorganization of Life Savings Bank, Federal Savings Bank into a Holding Company Form of Ownership To the Members of the Board of Directors: You have requested an opinion regarding certain federal income tax consequences of a proposed transaction involving the reorganization of Life Savings Bank, Federal Savings Bank ("Life Savings" or the "Bank") into a holding company form of ownership. This transaction will be completed pursuant to the Amended Agreement and Plan of Reorganization dated as of December 12, 1996 and amended on January 16, 1997 (the "Plan"), between Life Savings, a federal stock savings bank, Life Financial Corp., a Delaware corporation ("Life Financial Corp." or the "Holding Company"), and Life Interim Federal Savings Bank, an interim federal stock savings bank ("Interim"). Under the terms of the Plan, the Bank has caused Life Financial Corp. to be organized under Delaware law as a wholly-owned subsidiary for the purpose of becoming the holding company of the Bank. The Reorganization will be accomplished by causing Life Financial Corp. to become the sole stockholder of the newly formed Interim, and then merging Interim into the Bank, so that as part of the merger each of the outstanding shares of common stock of the Bank will automatically be converted into three shares of common stock of Life Financial Corp., which would then become the sole stockholder of the Bank ("Reorganization"). Board of Directors March 18, 1997 Page 2 The proposed transaction will be described in the section of this letter entitled "STATEMENT OF FACTS," and the federal income tax consequences of the proposed transaction will be set forth in the section of this letter entitled "OPINION." STATEMENT OF FACTS Life Financial Corp. is a recently organized Delaware corporation formed by the Bank as a financial services holding company to facilitate the Reorganization. Life Financial Corp. has no prior operating history. Pursuant to the Plan of Reorganization, Life Financial Corp. will become a savings and loan holding company subject to the Home Owners' Loan Act. The Reorganization will be accomplished by means of the steps set forth in the Plan. Life Financial Corp. intends to organize as its wholly-owned subsidiary an interim federal stock savings bank, with the name, Life Interim Federal Savings Bank ("Interim"), in order to effect the Reorganization. If the Reorganization is approved by the shareholders of the Bank, and subject to satisfaction of all other conditions set forth in the Plan of Reorganization, on the Effective Date, Interim will be merged with and into the Bank ("Merger"), with Life Savings as the Resulting Institution. Upon the Effective Date of the Reorganization, all shares of common stock of Life Financial Corp. held by Life Savings shall be cancelled and shall no longer be deemed to be issued or outstanding for any purpose. On the Effective Date, each share of common stock, $8.00 stated value, of Life Savings (the "Bank Common Stock") issued and outstanding immediately prior to the Effective Date shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into and become three (3) shares of fully paid and non- assessable common stock, par value $.01 per share, of Life Financial Corp. (the "Company Common Stock"). From and after the Effective Date, each certificate which, prior to the Effective Date, represented shares of the Bank, shall evidence ownership of Life Financial Corp. on the basis set forth in the Plan. Following the Merger, the existence of Life Savings shall continue unaffected and unimpaired by the Merger, with all the rights, privileges, immunities and powers, and subject to all the duties and liabilities, of a stock savings bank organized under federal law, with a charter and bylaws in the form approved by the Office of Thrift Supervision; and the Charter and Bylaws of Life Savings, as in effect on the Effective Date, shall continue in full force and effect and shall not be changed in any manner whatsoever by the Merger. From and after the Effective Date, and subject to the actions of the Board of Directors of Life Savings, the business presently conducted by the Bank will continue to be conducted Board of Directors March 18, 1997 Page 3 by the Resulting Institution. It is the parties' intention that the continuity of operation of Life Savings' business will be maintained as a wholly-owned subsidiary of the Company. The Plan of Reorganization sets forth several conditions which must be satisfied before the Reorganization will be consummated. We have assumed that the Reorganization will be completed as set out in the Plan and that all conditions will be satisfied prior to the Reorganization. * * * You have also provided the following representations concerning the above described transaction: (a) The fair market value of the Holding Company stock received by each Bank shareholder is approximately equal to the fair market value of the Bank stock surrendered in the exchange. (b) There is no plan or intention by the shareholders of the Bank who own five percent or more of the Bank stock, and to the best of the knowledge of the management of the Bank, there is no plan or intention on the part of the remaining shareholders of the Bank to sell, exchange, or otherwise dispose of a number of shares of Holding Company stock received in the transaction that would reduce the Bank shareholders' ownership of Holding Company stock to a number of shares having a value, as of the date of the transaction, of less than 50 percent of the value of all of the formerly outstanding stock of the Bank as of the same date. Shares of Bank stock and shares of Holding Company stock held by Bank shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to the transaction will be considered in making this representation. (c) Following the transaction, the Bank will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets and at least 90 percent of the fair market value of Interim's net assets and at least 70 percent of the fair market value of Interim's gross assets held immediately prior to the transaction. For purposes of this representation, amounts used by the Bank or Interim to pay reorganization expenses, and all redemptions and distributions (except for regular, normal dividends) will be included as assets of the Bank or Interim, respectively, immediately prior to the transaction. Board of Directors March 18, 1997 Page 4 (d) Prior to the transaction, the Holding Company was in control of Interim within the meaning of section 368(c) of the Code (i.e., owned at least 80% in vote and value of all classes of stock). (e) The Bank has no plan or intention to issue additional shares of its stock that would result in the Holding Company losing control of the Bank within the meaning of section 368(c) of the Code. (f) The Holding Company has no plan or intention to reacquire any of its stock issued in the transaction. (g) The Holding Company has no plan or intention to liquidate the Bank; to merge the Bank with or into another corporation; to sell or otherwise dispose of the stock of the Bank except for transfers of stock to corporations controlled by the Holding Company; or to cause the Bank to sell or otherwise dispose of any of its assets or of any of the assets acquired from Interim, except for dispositions made in the ordinary course of business or transfers of assets to a corporation controlled by the Bank. (h) Interim had no liabilities assumed by the Bank, and did not transfer to the Bank any assets subject to liabilities, in the transaction. (i) Following the transaction, the Bank will continue its historic business or use a significant portion of its historic business assets in a business. (j) Interim, the Holding Company, the Bank and Bank shareholders will pay their respective expenses, if any, incurred in connection with the transaction. (k) There is no intercorporate indebtedness existing between/among any of the parties to the transaction that was issued, acquired, or will be settled at a discount. (l) In the transaction, shares of Bank stock representing control of the Bank, as defined in section 368(c) of the Code, will be exchanged solely for voting stock of the Holding Company. For purposes of this representation, shares of Bank stock exchanged for cash or other property originating with Holding Company will be treated as outstanding Bank stock on the date of the transaction. (m) At the time of the transaction, the Bank did not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in the Bank that, if exercised or converted, would Board of Directors March 18, 1997 Page 5 affect the Holding Company's acquisition or retention of control of the Bank, as defined in section 368(c) of the Code. (n) At the time of the transaction, the Holding Company did not own, nor had it owned during the five years preceding the transaction, any shares of stock of the Bank. (o) None of the parties to the transaction is an investment company as defined in sections 368(a)(2)(F)(iii) and (iv) of the Code. (p) On the date of the transaction, the fair market value of the assets of the Bank exceeded the sum of its liabilities, plus the amount of liabilities, if any, to which the assets were subject. (q) At the time of the transaction, the Bank was not under the jurisdiction of a bankruptcy court in a Title 11 or similar case within the meaning of section 368(a)(3)(A) of the Code. (r) Immediately after the assumption of the Stock Option Plan by the Holding Company, the spread between the aggregate fair market value of the shares subject to the options over the aggregate option price of such shares was not (or will not be) greater than such spread immediately before the assumption. (s) The ratio of the option price to the fair market value of the stock subject to the options immediately after the assumption of the Stock Option Plan by the Holding Company is not more favorable to the holders than the ratio of the option price to the fair market value of the stock subject to the options immediately before such assumption. (t) The options under the Stock Option Plan were not traded on an established securities market prior to the transaction, and will not be traded on an established securities market after the transaction. (u) None of the compensation received by any shareholder-employees of the Bank is separate consideration for, or allocable to, any of their shares of Bank stock; none of the shares of Holding Company stock received by any shareholder-employees is separate consideration for, or allocable to, any employment agreement; and the compensation paid to any shareholder-employees is for services actually rendered and is commensurate with amounts paid to third parties bargaining at arm's length for similar services. Board of Directors March 18, 1997 Page 6 (v) The Bank has been entitled to take a deduction for additions to its reserve for bad debts under section 593 of the Code. LIMITATIONS ON OPINION Our opinions expressed herein are based solely upon current provisions of the Internal Revenue Code of 1986, as amended (the "Code"), including applicable regulations thereunder and current judicial and administrative authority. Any future amendments to the Code or applicable regulations, or new judicial decisions or administrative interpretations, any of which could be retroactive in effect, could cause us to modify our opinion. This opinion is based on the assumption that the transaction will be consummated in accordance with the Plan of Reorganization as well as all the information and representations referred to herein. Any change in the transaction could cause us to modify our opinion. No opinion is expressed herein with regard to the federal, state, or local tax consequences of the proposed transactions under any section of the Code (or under state or local tax law) except if and to the extent specifically addressed. OPINION Based solely upon the foregoing representations and information and assuming the transaction occurs in accordance with the Plan of Reorganization, and taking into consideration the limitations outlined in this opinion, it is our opinion that under current federal income tax law: 1. Provided that the proposed merger of Interim into the Bank qualifies as a statutory merger under applicable federal law, and provided that the Bank will hold substantially all of its assets and substantially all of the assets of Interim, and in the transaction the shareholders of the Bank will exchange an amount of stock constituting control of the Bank (within the meaning of section 368(c) of the Code) solely for Holding Company Common Stock, the proposed merger will constitute a reorganization within the meaning of section 368(a)(1)(A) of the Code. The reorganization will not be disqualified by reason of the fact that the voting stock of the Holding Company is used in the merger (section 368(a)(2)(E)). The Bank, Holding Company and Interim will each be "a party to a reorganization" within the meaning of section 368(b). 2. No gain or loss will be recognized by the stockholders of the Bank upon the transfer of their Common Stock in the Bank to Bank solely in exchange for the Holding Company's Common Stock. Section 354(a)(1) of the Code. Board of Directors March 18, 1997 Page 7 3. The basis of Life Financial Corp.'s Common Stock to be received by the stockholders of the Bank in the transaction will, in each instance, be the same as the basis of such Common Stock of the Bank exchanged therefor. Section 358(a)(1) of the Code. 4. The holding period of Life Financial Corp. Common Stock received by the stockholders of the Bank in the transaction will, in each instance, include the period during which the stockholders held the Bank Common Stock exchanged therefor, provided that the Bank's Common Stock is held as a capital asset on the date of the transaction. Section 1223(1) of the Code. 5. No gain or loss will be recognized by Interim as a result of the reorganization. Section 361 of the Code. 6. No gain or loss will be recognized by Bank upon the receipt of the assets of Interim in exchange for Bank Common Stock. Section 1032(a) of the Code. 7. No gain or loss will be recognized by the Holding Company upon its receipt of the Bank's common stock in exchange for the surrender of its Interim Common Stock solely for Bank Common Stock. Section 354(a)(1) of the Code. Accordingly, the transaction will have no adverse federal income tax effects on Life Financial Corp., the Bank, or the stockholders of the Bank. However, as we have previously advised, each Bank stockholder should consult his or her tax counsel as to the specific federal, state and local tax consequences of the transaction, if any, applicable to such stockholder. Sincerely, /s/ MULDOON, MURPHY & FAUCETTE ------------------------------ MULDOON, MURPHY & FAUCETTE EX-8.1 7 OPINION OF DELOITTE & TOUCHE RE STATE TAX MATTERS EXHIBIT 8.1 [LETTERHEAD OF DELOITTE & TOUCHE LLP APPEARS HERE] March 19, 1997 Board of Directors Life Savings Bank, Federal Savings Bank 1598 East Highland Avenue San Bernardino, California 92404 Board of Directors Life Financial Corp. 4110 Tigris Way Riverside, California 92503 Re: California Franchise Tax Consequences of Reorganization of Life Savings Bank, Federal Savings Bank into a Holding Company Form of Ownership Dear Members of The Board of Directors: You have requested our opinion regarding certain California Franchise Tax consequences of a proposed transaction involving the reorganization of Life Savings Bank ("Life Savings" or the "Bank") into a holding company form of ownership. This transaction will be completed pursuant to the Amended Agreement and Plan of Reorganization dated as of December 12, 1996, and amended on January 16, 1997, (the "Plan") between Life Savings, a federal stock savings bank, Life Financial Corp., a Delaware corporation ("Life Financial Corp." or "Holding Company"), and Life Interim Federal Savings Bank, an interim federal stock savings bank ("Interim"). Under the terms of the Plan, the Bank has caused Life Financial Corp. to be organized under Delaware law as a wholly-owned subsidiary for the purpose of becoming the holding company of the Bank. The Reorganization will be accomplished by causing Life Financial Corp. to become the sole stockholder of the newly formed Interim, and then merging Interim into the Bank, so that as part of the merger each of the outstanding shares of common stock of the Bank will automatically be converted into three shares of common stock of Life Financial Corp., which would then become the sole stockholder of the Bank ("Reorganization"). March 19, 1997 Board of Directors Page 2 STATEMENT OF FACTS The statement of facts and the representations set forth in the opinion rendered by the law firm of Muldoon, Murphy & Faucette, dated March 18,1997, addressing the federal tax consequences of this transaction, are fully incorporated by reference into our opinion. PROVISIONS OF CALIFORNIA INCOME TAX LAW INCORPORATING RELEVANT PROVISIONS OF FEDERAL INCOME TAX LAW 1. The California Bank and Corporation Tax Law ("BCTL") incorporates the reorganization provisions of the Internal Revenue Code as enacted on January 1, 1993. BCTL Sections 24451 and 23051.5(a). The California Personal Income Tax Law ("PITL") Sections 17321 and 17024.5(a) also incorporates such reorganization provisions as of January 1, 1993. This includes Internal Revenue Code ("IRC") Sections 354, 358, 361 and 368. BCTL Section 24990 incorporates Subchapter P of the IRC, which includes IRC Section 1223. PITL Section 18151 also incorporates Subchapter P. BCTL Section 24942 incorporates IRC Section 1032. 2. The California Supreme court has held that, where state legislation is patterned after federal legislation which has been judicially construed by federal courts, there is a very strong presumption of intent to adopt the federal construction. This principle has been applied to the BCTL and PITL. Union Oil Associates v. Johnson, 2 Cal. 2d 727 (1935); Fullerton Oil Co. v. - ------------------------------- -------------------- Johnson, 2 Cal. 2d 162 (1935); and Holmes v. McColgan, 17 Cal. 2d 426 (1941). - ------- ------------------ Furthermore, it has been held that federal cases decided after California's adoption of the federal provision are accorded great weight in interpreting similar California statutes. Meanley v. McColgan, 49 Cal. App. 2d 203 (1942). ------------------- 3. BCTL Section 23051.5(d) and PITL Section 17024.5(d) provide for California conformity to Treasury regulations that reflect underlying IRC provisions as enacted on January 1, 1993. 4. The California Franchise Tax Board, in FTB Notice 89-277, Paragraph H, May 10, 1989, has stated that where the provisions of the BCTL and the PITL are in substantial conformity with the Internal Revenue Code, it will follow IRS rulings and procedures. March 19, 1997 Board of Directors Page 3 LIMITATIONS ON OPINION Our opinion is based solely upon the current provisions of the California Bank and Corporation Tax Law ("BCTL"), the California Personal Income Tax Law ("PITL"), and those portions of the federal tax law (Internal Revenue Code, federal judicial precedent, Treasury regulations and Internal Revenue Service administrative positions) that are currently incorporated into the BCTL and PITL. Future amendments to the California law, the federal law, or the rules governing the incorporation of the latter into the BCTL or PITL, could have retroactive effect and cause us to modify our opinion. This opinion is based upon the facts and representations as incorporated above, and the assumption that the transaction will be consummated in accordance with the Plan of Reorganization. No opinion is expressed herein with regard to tax consequences under the BCTL and PITL except as and to the extent specifically addressed. No opinion is expressed with respect to any local taxes or other state taxes outside of the BCTL and PITL. OPINION Based solely upon the incorporated statement of facts and representations and assuming the transaction occurs in accordance with the Plan of Reorganization, and taking into consideration any limitations set forth in this opinion, it is our opinion that under current BCTL and PITL (Where appropriate and necessary where federal provisions are incorporated into the BCTL and/or the PITL ("as incorporated"), it is so noted parenthetically): 1. Provided that the proposed merger of Interim into the Bank qualifies as a statutory merger under applicable law, and provided that the Bank will hold substantially all of its assets and substantially all of the assets of Interim, and in the transaction the shareholders of the Bank will exchange an amount of stock constituting control of the Bank (within the meaning of Section 368(c) of the IRC, as incorporated) solely for Holding Company Common stock, the proposed merger will constitute a reorganization (within the meaning of Section 368(a)(1)(A) of the IRC, as incorporated). The reorganization will not be disqualified by reason of the fact that the voting stock of the Holding Company is used in the merger (IRC Section 368(a)(2)(E), as incorporated). The Bank, Holding Company and Interim will each be a "party to a reorganization" (within the meaning of IRC Section 368(b), as incorporated). 2. No gain or loss will be recognized by the stockholders of the Bank upon the transfer of their Common Stock in the Bank to the Bank solely in exchange for the Holding Company's Common Stock (IRC Section 354(a)(1), as incorporated). March 19, 1997 Board of Directors Page 4 3. The basis of Life Financial Corp.'s Common Stock to be received by the stockholders of the Bank in the transaction will, in each instance, be the same as the basis of such Common Stock of the Bank exchanged therefore (IRC section 358(a)(1), as incorporated). 4. The holding period of Life Financial Corp. Common Stock received by the stockholders of the Bank in the transaction will, in each instance, include the period during which the stockholders held the Bank Common Stock exchanged therefor, provided that the Bank's Common Stock is held as a capital asset on the date of the transaction (IRC Section 1223(1), as incorporated). 5. No gain or loss will be recognized by Interim as a result of the reorganization (IRC Section 361, as incorporated). 6. No gain or loss will be recognized by Bank upon the receipt of the assets of Interim in exchange for Bank Common Stock (IRC Section 1032, as incorporated). 7. No gain or loss will be recognized by the Holding Company upon its receipt of the Bank's common stock in exchange for its surrender of its Interim Stock solely for Bank Common Stock (IRC Section 354(a)(1), as incorporated). The foregoing opinions are based upon federal statutory, judicial and administrative rules that are all incorporated into the BCTL and PITL in accordance with the authorities referenced in the section entitled "Provisions Of California Income Tax Law Incorporating Relevant Provisions Of Federal Income Tax Law." Accordingly, the transaction will have no adverse California income tax effects on Life Financial Corp., the Bank, or the stockholders of the Bank. However, it is imperative that each Bank stockholder should consult his or her tax counsel as to the specific federal, state and local tax consequences of the transaction, if any, applicable to such stockholder. Sincerely, /s/ Deloitte & Touche LLP Deloitte & Touche LLP EX-10.4 8 1996 STOCK OPTION PLAN EXHIBIT 10.4 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK 1996 STOCK OPTION PLAN 1. DEFINITIONS. ----------- (a) "Affiliate" means (i) a member of a controlled group of corporations of which the Bank is a member or (ii) an unincorporated trade or business which is under common control with the Bank as determined in accordance with Section 414(c) of the Internal Revenue Code of 1986, as amended, (the "Code") and the regulations issued thereunder. For purposes hereof, a "controlled group of corporations" shall mean a controlled group of corporations as defined in Section 1563(a) of the Code determined without regard to Section 1563(a)(4) and (e)(3)(C). (b) "Award" means a grant of one or some combination of one or more Non-statutory Stock Options, Incentive Stock Options and Option related rights under the provisions of this Plan. (c) "Bank" means Life Savings Bank, Federal Savings Bank. (d) "Board of Directors" or "Board" means the board of directors of the Bank. (e) "Change in Control" means a change in control of the Bank of a nature that; (i) would be required to be reported in response to Item 1 of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); or (ii) results in a Change in Control within the meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA") and the Rules and Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the date hereof (provided, that in applying the definition of change in control as set forth under such rules and regulations the Board shall substitute its judgment for that of the OTS); or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank, or a holding company to be formed by the Bank, representing 20% or more of the Bank's or its holding company's outstanding securities except for any securities of the Bank purchased by a holding company formed by the Bank for that purpose in connection with the reorganization of the Bank and any securities purchased by any tax qualified employee benefit plan of the Bank; or (B) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Bank's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or similar transaction occurs in which the Bank is not the resulting entity; or (D) a solicitation of shareholders of the Bank, by someone other than the current management of the Bank, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Bank or similar transaction with one or more corporations, as a result of which the outstanding shares of the class of securities then subject to the plan are exchanged for or converted into cash or property or securities not issued by the Bank or (E) a tender offer is made for 20% or more of the voting securities of the Bank. (f) "Code" means the Internal Revenue Code of 1986, as amended. (g) "Committee" means a committee consisting of the entire Board of Directors or consisting solely of two or more members of the Board of Directors who are non-employee directors as such term is defined under Rule 16b-3(b)(3)(i) under the Exchange Act as promulgated by the Securities and Exchange Commission. (h) "Common Stock" means the Common Stock of the Bank, stated value, $8.00 per share or any stock exchanged for shares of Common Stock pursuant to Section 14 hereof. (i) "Date of Grant" means the effective date of an Award. (j) "Disability" means the permanent and total inability by reason of mental or physical infirmity, or both, of a Participant to perform the work customarily assigned to him, or in the case of a Director, to serve on the Board. Additionally, a medical doctor selected or approved by the Board of Directors must advise the Committee that it is either not possible to determine when such Disability will terminate or that it appears probable that such Disability will be permanent during the remainder of said Participant's lifetime. (k) "Effective Date" means November 21, 1996, the effective date of the Plan. (l) "Employee" means any person who is currently employed by the Bank or an Affiliate, including officers, but such term shall not include Outside Directors. (m) "Employee Participant" means an Employee who holds an outstanding Award under the terms of the Plan. (n) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (o) "Exercise Price" means the purchase price per share of Common Stock deliverable upon the exercise of each Option in order for the option to be exchanged for shares of Common Stock. 2 (p) "Fair Market Value" means, when used in connection with the Common Stock on a certain date, the average of the high and low bid prices of the Common Stock as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), the New York Stock Exchange ("NYSE") or the American Stock Exchange ("AMEX") (as published by the Wall Street Journal, if published) on such date or if the Common Stock was not traded on such date, on the next preceding day on which the Common Stock was traded thereon or the last previous date on which a sale is reported. If the Common Stock is not reported on the NASDAQ, AMEX or the NYSE, the Fair Market Value of the Common Stock is the value so determined by the Board in good faith. (q) "Incentive Stock Option" means an Option granted by the Committee to a Participant, which Option is designated by the Committee as an Incentive Stock Option pursuant to Section 7 hereof and is intended to be such under Section 422 of the Code. (r) "Limited Right" means the right to receive an amount of cash based upon the terms set forth in Section 8 hereof. (s) "Non-statutory Stock Option" means an Option granted by the Committee to a Participant pursuant to Section 6 hereof, which is not designated by the Committee as an Incentive Stock Option or which is redesignated by the Committee under Section 7 as a Non-Statutory Stock Option. (t) "Option" means the right to buy a fixed amount of Common Stock at the Exercise Price within a limited period of time designated as the term of the option as granted under Section 6 or 7 hereof. (u) "Outside Director" means a member of the Board of Directors of the Bank or its Affiliates, who is not also an Employee. (v) "Outside Director Participant" means an Outside Director who holds an outstanding Award under the terms of the Plan. (w) "Participant" means any Employee or Outside Director who holds an outstanding Award under the terms of the Plan. (x) "Retirement" with respect to an Employee Participant means termination of employment which constitutes retirement under any tax qualified plan maintained by the Bank. However, "Retirement" will not be deemed to have occurred for purposes of this Plan if a Participant continues to serve on the Board of Directors of the Bank or its Affiliates even if such Participant is receiving retirement benefits under any retirement plan of the Bank or its Affiliates. With respect to an Outside Director Participant "Retirement" means the termination of service from the Board of Directors of the Bank or its Affiliates following written notice to the Board as a whole of such Outside Director's intention to retire or retirement as determined by the Bank (or Affiliate's) bylaws, or by reaching age 65, except that an Outside Director shall not be 3 deemed to have retired for purposes of the Plan in the event he continues to serve as a consultant to the Board or as an advisory director. (y) "Termination for Cause" shall mean, in the case of an Outside Director, removal from the Board of Directors, or, in the case of an Employee, termination of employment, in both such cases as determined by the Board of Directors, because of a material loss to the Bank or one of its Affiliates caused by the Participant's intentional failure to perform stated duties, personal dishonesty, willful violation of any law, rule, regulation, (other than traffic violations or similar offenses) or final cease and desist order. No act, or the failure to act, on Participant's part shall be "willful" unless done, or omitted to be done, not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank or one of its Affiliates. 2. ADMINISTRATION. -------------- (a) The Plan as regards Awards to employees of the Bank or its Affiliates, shall be granted and administered by the Committee. The Committee is authorized, subject to the provisions of the Plan, to grant awards to Employees and Outside Directors and to establish such rules and regulations as it deems necessary for the proper administration of the Plan and to make whatever determinations and interpretations in connection with the Plan it deems necessary or advisable. All determinations and interpretations made by the Committee shall be binding and conclusive on all Participants in the Plan and on their legal representatives and beneficiaries. (b) Awards to Outside Directors shall be granted and administered by the Committee, pursuant to the terms of this Plan. 3. TYPES OF AWARDS AND RELATED RIGHTS. ---------------------------------- The following Awards and related rights as described in Sections 6 through 11 hereof may be granted under the Plan: (a) Non-statutory Stock Options; (b) Incentive Stock Options; (c) Limited Rights 4. STOCK SUBJECT TO THE PLAN. ------------------------- Subject to adjustment as provided in Section 14, the maximum number of shares reserved for Awards under the Plan is 107,200 shares of the Common Stock. These shares of Common Stock may be either authorized but unissued shares or authorized shares previously issued and reacquired by the Bank. To the extent that Awards are granted under the Plan, the shares underlying such Awards will be unavailable for any other use including future grants under the Plan except that, to the extent that Awards terminate, expire, are forfeited or are cancelled without having been exercised (in the case of Limited Rights, exercised for cash), new Awards may be made with respect to these shares. 4 5. ELIGIBILITY. ----------- Subject to the terms herein all Employees and Outside Directors shall be eligible to receive Awards under the Plan. 6. NON-STATUTORY STOCK OPTIONS. --------------------------- The Committee may, subject to the limitations of the Plan and the availability of shares reserved but unawarded in the Plan, from time to time, grant Non-statutory Stock Options to Employees and Outside Directors and, upon such terms and conditions as the Committee may determine, grant Non-statutory Stock Options in exchange for and upon surrender of previously granted Awards under this Plan. Non-statutory Stock Options granted under this Plan are subject to the following terms and conditions: (a) Exercise Price. The Exercise Price of each Non-statutory Stock Option -------------- shall be determined by the Committee on the date the option is granted. Such Exercise Price shall not be less than 100% of the Fair Market Value of the Common Stock on the Date of Grant. Shares may be purchased only upon full payment of the Exercise Price or upon operation of an Alternate Option Payment Mechanism set out in Section 9 hereof. (b) Terms of Options. The term during which each Non-statutory Stock ---------------- Option may be exercised shall be determined by the Committee, but in no event shall a Non-statutory Stock Option be exercisable in whole or in part more than 10 years from the Date of Grant. The Committee shall determine the date on which each Non-statutory Stock Option shall become exercisable. The shares comprising each installment may be purchased in whole or in part at any time during the term of such Option after such installment becomes exercisable. The Committee may, in its sole discretion, accelerate the time at which any Non-statutory Stock Option may be exercised in whole or in part. The acceleration of any Non-statutory Stock Option under the authority of this paragraph creates no right, expectation or reliance on the part of any other Participant or that certain Participant regarding any other unaccelerated Non-statutory Stock Options. (c) Termination of Employment or Service. Unless otherwise determined by ------------------------------------ the Committee, upon the termination of a Participant's employment or service for any reason other than Disability, death or Termination for Cause, a Non-statutory Stock Option shall be exercisable only as to those shares that were immediately exercisable by the Participant at the date of termination and only for a period of one year following termination. Notwithstanding any provisions set forth herein or contained in any Agreement relating to an award of an Option, in the event of termination for Disability, death, Retirement or a Change in Control, all Options shall immediately vest and be exercisable for one year after such termination, and in the event of Termination for Cause all rights under the Participant's Non-Statutory Stock Options shall expire immediately upon termination. 5 (d) Change in Control. Unless otherwise determined by the Committee, in ----------------- the event of the termination of the Participant's employment or service following a Change in Control, all Non-statutory Stock Options held by the Participant, whether or not exercisable at such time, shall become exercisable by the Participant or his legal representatives or beneficiaries and remain exercisable for one year or such longer period as determined by the Committee following the date of the termination of employment or service, provided that in no event shall the period extend beyond the expiration of the term of the Non-statutory Stock Option. 7. INCENTIVE STOCK OPTIONS. ----------------------- The Committee may, subject to the limitations of the Plan and the availability of shares reserved but unawarded in the Plan, from time to time, grant Incentive Stock Options to Employees. Incentive Stock Options granted pursuant to the Plan shall be subject to the following terms and conditions: (a) Exercise Price. The Exercise Price of each Incentive Stock Option -------------- shall be not less than 100% of the Fair Market Value of the Common Stock on the Date of Grant. However, if at the time an Incentive Stock Option is granted to a Participant, the Participant owns Common Stock representing more than 10% of the total combined voting securities of the Bank (or, under Section 424(d) of the Code, is deemed to own Common Stock representing more than 10% of the total combined voting power of all classes of stock of the Bank, by reason of the ownership of such classes of stock, directly or indirectly, by or for any brother, sister, spouse, ancestor or lineal descendent of such Participant, or by or for any corporation, partnership, estate or trust of which such Participant is a shareholder, partner or beneficiary), ("10% Owner"), the Exercise Price per share of Common Stock deliverable upon the exercise of each Incentive Stock Option shall not be less than 110% of the Fair Market Value of the Common Stock on the Date of Grant. Shares may be purchased only upon payment of the full Exercise Price or upon operation of an Alternate Option Payment Mechanism set out in Section 9 hereof. (b) Amounts of Options. Incentive Stock Options may be granted to any ------------------ Employee in such amounts as determined by the Committee; provided that the amount granted is consistent with the terms of Section 422 of the Code. In the case of an option intended to qualify as an Incentive Stock Option, the aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which Incentive Stock Options granted are exercisable for the first time by the Participant during any calendar year (under all plans of the Participant's employer corporation and its parent and subsidiary corporations) shall not exceed $100,000. The provisions of this Section 7(b) shall be construed and applied in accordance with Section 422(d) of the Code and the regulations, if any, promulgated thereunder. To the extent an award under this Section 7 exceeds this $100,000 limit, the portion of the Options in excess of such limit shall be deemed a Non-statutory Stock Option. The Committee shall have discretion to redesignate Options granted as Incentive Stock Options as Non-Statutory Stock Options. Such redesignation shall not be deemed to be a new grant or a regrant of such Options. Such Non-statutory Stock Options shall be subject to Section 6 hereof. 6 (c) Terms of Options. The term during which each Incentive Stock Option ---------------- may be exercised shall be determined by the Committee, but in no event shall an Incentive Stock Option be exercisable in whole or in part more than 10 years from the Date of Grant. If at the time an Incentive Stock Option is granted to a Participant who is a 10% Owner, the Incentive Stock Option granted to such Employee Participant shall not be exercisable after the expiration of five years from the Date of Grant. No Incentive Stock Option granted under this Plan is transferable except by will or the laws of descent and distribution and is exercisable in his lifetime only by the Employee Participant to whom it is granted. The Committee shall determine the date on which each Incentive Stock Option shall become exercisable. The shares comprising each installment may be purchased in whole or in part at any time during the term of such option after such installment becomes exercisable. The Committee may, in its sole discretion, accelerate the time at which any Incentive Stock Option may be exercised in whole or in part. The acceleration of any Incentive Stock Option under the authority of this paragraph creates no right, expectation or reliance on the part of any other Participant or that certain Participant regarding any other unaccelerated Incentive Stock Options. (d) Termination of Employment. Unless otherwise determined by the ------------------------- Committee, upon the termination of an Employee Participant's service for any reason other than Disability, Retirement, death, Change in Control or Termination for Cause, the Employee Participant's Incentive Stock Options shall be exercisable only as to those shares that were immediately exercisable by the Employee Participant at the date of termination and only for a period of three months following termination. Notwithstanding any provisions set forth herein or contained in any Agreement relating to an award of an Option, in the event of termination for Disability, Retirement or death, all Options shall immediately vest and be exercisable for one year after such termination, (however, in the event of Retirement, exercising after three months will result in loss of incentive stock option treatment under the Code) and in the event of Termination for Cause all rights under the Employee Participant's Incentive Stock Options shall expire immediately upon termination. (e) Change in Control. Unless otherwise determined by the Committee, in ----------------- the event of the termination of the Employee Participant's employment following a Change in Control, all Incentive Stock Options held by the Participant, whether or not exercisable at such time, shall become exercisable by the Participant or his legal representatives or beneficiaries and remain exercisable for one year or such longer period as determined by the Committee following the date of termination of the Employee Participant's employment, provided however, that such option shall not be eligible for treatment as an Incentive Stock Option in the event such option is exercised more than three months following the date of termination of employment, and provided further, that in no event shall the period extend beyond the expiration of the term of the Incentive Stock Option. (f) Compliance with Code. The Options granted under this Section are -------------------- intended to qualify as incentive stock options within the meaning of Section 422 of the Code, but the Bank makes no warranty as to the qualification of any option as an incentive stock option within the 7 meaning of Section 422 of the Code. All Options that do not so quality shall be treated as Non-statutory Stock Options. 8. LIMITED RIGHTS. -------------- Simultaneously with the grant of any Option to an Employee, the Committee may grant a Limited Right with respect to all or some of the shares covered by such Option. Limited Rights granted under this Plan are subject to the following terms and conditions: (a) Terms of Rights. In no event shall a Limited Right be exercisable in --------------- whole or in part before the expiration of six months from the Date of Grant of the Limited Right. A Limited Right may be exercised only in the event of a Change in Control. The Limited Right may be exercised only when the underlying Option is eligible to be exercised, and only when the Fair Market Value of the underlying shares on the day of exercise is greater than the Exercise Price of the underlying Option. Upon exercise of a Limited Right, the underlying Option shall cease to be exercisable. Upon exercise or termination of an Option, any related Limited Rights shall terminate. The Limited Rights may be for no more than 100% of the difference between the purchase price and the Fair Market Value of the Common Stock subject to the underlying option. The Limited Right is transferable only when the underlying option is transferable and under the same conditions. (b) Payment. Upon exercise of a Limited Right, the holder shall promptly ------- receive from the Bank an amount of cash or some other payment option found in Section 12, equal to the difference between the Exercise Price of the underlying option and the Fair Market Value of the Common Stock subject to the underlying Option on the date the Limited Right is exercised, multiplied by the number of shares with respect to which such Limited Right is being exercised. Payments shall be less an applicable tax withholding as set forth in Section 15. 9. ALTERNATE OPTION PAYMENT MECHANISM ---------------------------------- The Committee has sole discretion to determine what form of payment it will accept for the exercise of an Option. The Committee may indicate acceptable forms in the Award Agreement covering such Options or may reserve its decision to the time of exercise. No Option is to be considered exercised until payment in full is accepted by the Committee or its agent. (a) Cash Payment. The exercise price may be paid in cash or by certified ------------ check. (b) Borrowed Funds. To the extent permitted by law, the Committee may -------------- permit all or a portion of the exercise price of an Option to be paid through borrowed funds. 8 (c) Exchange of Common Stock. ------------------------ (i) The Committee may permit payment by the tendering of previously acquired shares of Common Stock. This includes the use of "pyramiding transactions" whereby some number of Options are exercised. The shares gained through the exercise are then tendered back to the Bank as payment for some other number of Options. This transaction may be repeated as needed to exercise all of the Options available. (ii) Any shares of Common Stock tendered in payment of the exercise price of an Option shall be valued at the Fair Market Value of the Common Stock on the date prior to the date of exercise. 10. RIGHTS OF A SHAREHOLDER ----------------------- No Participant shall have any rights as a shareholder with respect to any shares covered by an Option until the date of issuance of a stock certificate for such shares. Nothing in this Plan or in any Award granted confers on any person any right to continue in the employ or service of the Bank or its Affiliates or interferes in any way with the right of the Bank or its Affiliates to terminate a Participant's services as an officer or other employee at any time. 11. NON-TRANSFERABILITY ------------------- Except to the extent permitted or restricted by the Code, the rules promulgated under Section 16(b) of the Exchange Act or any successor statutes or rules: (i) The recipient of an Award shall not sell, transfer, assign, pledge, or otherwise encumber shares subject to the Award until full vesting of such shares has occurred. For purposes of this section, the separation of beneficial ownership and legal title through the use of any "swap" transaction is deemed to be a prohibited encumbrance. (ii) Unless determined otherwise by the Committee and except in the event of the Participant's death or pursuant to a domestic relations order, an Award is not transferable and may be earned in his lifetime only by the Participant to whom it is granted. Upon the death of a Participant, an Award is transferable by will or the laws of intestate succession. The designation of a beneficiary does not constitute a transfer. (iii) If a recipient of an Award is subject to the provisions of Section 16 of the Exchange Act, shares of Common Stock subject to such Award may not, without the written consent of the Committee (which consent may be given in the Stock Award Agreement), be sold or otherwise disposed of within six months following the date of grant of the Award. 9 12. AGREEMENT WITH GRANTEES. ----------------------- Each Award will be evidenced by a written agreement, executed by the Participant and the Bank or its Affiliates that describes the conditions for receiving the Awards including the date of Award, the Exercise Price, the terms or other applicable periods, and other terms and conditions as may be required or imposed by the Plan, the Committee, the Board of Directors, tax law considerations or applicable securities law considerations. 13. DESIGNATION OF BENEFICIARY. -------------------------- A Participant may, with the consent of the Committee, designate a person or persons to receive, in the event of death, any Award to which the Participant would then be entitled. Such designation will be made upon forms supplied by and delivered to the Bank and may be revoked in writing. If a Participant fails effectively to designate a beneficiary, then the Participant's estate will be deemed to be the beneficiary. 14. DILUTION AND OTHER ADJUSTMENTS. ------------------------------ In the event of any change in the outstanding shares of Common Stock by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, reorganization, combination or exchange of shares, or other similar corporate change, or other increase or decrease in such shares without receipt or payment of consideration by the Bank, the Committee will make such adjustments to previously granted Awards, to prevent dilution or enlargement of the rights of the Participant including any or all of the following: (a) adjustments in the aggregate number or kind of shares of Common Stock that may underlie future Awards under the Plan; (b) adjustments in the aggregate number or kind of shares of Common Stock underlying Awards already made under the Plan; (c) adjustments in the purchase price of outstanding Incentive and/or Non-statutory Stock Options, or any Limited Rights attached to such Options. No such adjustments may, however, materially change the value of benefits available to a Participant under a previously granted Award. All awards under this Plan shall be binding upon any successors or assigns of the Bank. 15. TAX WITHHOLDING. --------------- Awards under this Plan shall be subject to tax withholding to the extent required by any governmental authority. Any withholding shall comply with Rule 16b-3, if applicable, or any amendment or successor rule. Shares of Common Stock withheld to pay for tax withholding 10 amounts shall be valued at their Fair Market Value on the date the Award is deemed taxable to the Participant. 16. AMENDMENT OF THE PLAN. --------------------- The Board of Directors may at any time, and from time to time, modify or amend the Plan in any respect, prospectively or retroactively; provided however, that provisions governing grants of Incentive Stock Options, unless permitted by the rules and regulations or staff pronouncements promulgated under the Code, shall be submitted for shareholder approval to the extent required by such law, regulation or interpretation. Failure to ratify or approve amendments or modifications by shareholders shall be effective only as to the specific amendment or modification requiring such ratification. Other provisions, sections, and subsections of this Plan will remain in full force and effect. No such termination, modification or amendment may affect the rights of a Participant under an outstanding Award without the written permission of such Participant. 17. EFFECTIVE DATE OF PLAN. ---------------------- The Effective Date of the Plan shall be the date of its adoption by the Board of Directors. 18. TERMINATION OF THE PLAN. ----------------------- The right to grant Awards under the Plan will terminate upon the earlier of ten (10) years after the Effective Date of the Plan or the exercise of Options, or related Limited Rights equivalent to the maximum number of shares reserved under the Plan as set forth in Section 4. The Board of Directors has the right to suspend or terminate the Plan at any time, provided that no such action will, without the consent of a Participant or Outside Director Participant, adversely affect his vested rights under a previously granted Award. 19. APPLICABLE LAW. -------------- The Plan will be administered in accordance with the laws of the State of California to the extent not superceded by federal law. 20. SUCCESSORS AND ASSIGNS. ---------------------- All awards under this Plan shall be binding upon any successors or assigns of the Bank including any holding company that may be formed by the Bank. Upon the formation of a holding company, this Plan shall be amended to become the plan of such holding company. 11 21. DELEGATION OF AUTHORITY. ----------------------- The Committee may delegate all authority for: the determination of forms of payment to be made by or received by the Plan; the execution of Award Agreements; the determination of Fair Market Value; the determination of all other aspects of administration of the Plan to the executive officer(s) of the Bank. The Committee may rely on the descriptions, representations, reports and estimates provided to it by the management of the Bank for determinations to be made pursuant to the Plan. IN WITNESS WHEREOF, the Bank has established this Plan, as amended to be executed by its duly authorized executive officer and the corporate seal to be affixed and duly attested, effective as of the 21st day of November, 1996. [CORPORATE SEAL] LIFE SAVINGS BANK, FEDERAL SAVINGS BANK November 21, 1996 By: /s/ Daniel L. Perl - ----------------- ----------------------------- Date Daniel L. Perl Chief Executive Officer ADOPTED BY THE BOARD OF DIRECTORS: November 21, 1996 By: /s/ L. Bruce Mills, Jr. - ----------------- ----------------------------- Date L. Bruce Mills, Jr. Secretary APPROVED BY STOCKHOLDERS: By: - -------------------------------------- ----------------------------- Date Secretary 12 EX-10.5 9 DRAFT OF 1997 STOCK OPTION PLAN EXHIBIT 10.5 DRAFT FORM OF LIFE FINANCIAL CORP. 1997 STOCK OPTION PLAN 1. DEFINITIONS. ----------- (a) "Affiliate" means (i) a member of a controlled group of corporations of which the Company is a member or (ii) an unincorporated trade or business which is under common control with the Company as determined in accordance with Section 414(c) of the Internal Revenue Code of 1986, as amended, (the "Code") and the regulations issued thereunder. For purposes hereof, a "controlled group of corporations" shall mean a controlled group of corporations as defined in Section 1563(a) of the Code determined without regard to Section 1563(a)(4) and (e)(3)(C). (b) "Alternate Option Payment Mechanism" refers to one of several methods available to a Participant to fund the exercise of a stock option set out in Section 13 hereof. These mechanisms include: broker assisted cashless exercise and stock for stock exchange. (c) "Award" means a grant of one or some combination of one or more Non- statutory Stock Options, Incentive Stock Options and Option related rights under the provisions of this Plan. (d) "Bank" means Life Savings Bank, Federal Savings Bank. (e) "Board of Directors" or "Board" means the board of directors of the Company. (f) "Change in Control" means a change in control of the Bank or the Company of a nature that; (i) would be required to be reported in response to Item 1 of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); or (ii) results in a Change in Control within the meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA") and the Rules and Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the date hereof (provided, that in applying the definition of change in control as set forth under such rules and regulations the Board shall substitute its judgment for that of the OTS); or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank or the Company, representing 20% or more of the Bank's or Company's outstanding securities except for any securities of the Bank purchased by the Company formed by the Bank for that purpose in connection with the reorganization of the Bank and any securities purchased by any tax qualified employee benefit plan of the Bank or Company; or (B) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or Company or similar transaction occurs in which the Bank or Company is not the resulting entity; or (D) a solicitation of shareholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Bank or Company or similar transaction with one or more corporations, as a result of which the outstanding shares of the class of securities then subject to the plan are exchanged for or converted into cash or property or securities not issued by the Bank or Company; or (E) a tender offer is made for 20% or more of the voting securities of the Bank or Company. (g) "Code" means the Internal Revenue Code of 1986, as amended. (h) "Committee" means a committee consisting of the entire Board of Directors or consisting solely of two or more members of the Board of Directors who are non-employee directors as such term is defined under Rule 16b-3(b)(3)(i) under the Exchange Act as promulgated by the Securities and Exchange Commission. (i) "Common Stock" means the Common Stock of the Company, par value, $.01 per share or any stock exchanged for shares of Common Stock pursuant to Section 14 hereof. (j) "Company" means Life Financial Corp. (k) "Date of Grant" means the effective date of an Award. (l) "Disability" means the permanent and total inability by reason of mental or physical infirmity, or both, of a Participant to perform the work customarily assigned to him, or in the case of a Director, to serve on the Board. Additionally, a medical doctor selected or approved by the Board of Directors must advise the Committee that it is either not possible to determine when such Disability will terminate or that it appears probable that such Disability will be permanent during the remainder of said Participant's lifetime. (m) "Effective Date" means ___________ __, 1997, the effective date of the Plan. (n) "Employee" means any person who is currently employed by the Company or an 2 Affiliate, including officers, but such term shall not include Outside Directors. (o) "Employee Participant" means an Employee who holds an outstanding Award under the terms of the Plan. (p) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (q) "Exercise Price" means the purchase price per share of Common Stock deliverable upon the exercise of each Option in order for the option to be exchanged for shares of Common Stock. (r) "Fair Market Value" means, when used in connection with the Common Stock on a certain date, the average of the high and low bid prices of the Common Stock as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), the New York Stock Exchange ("NYSE") or the American Stock Exchange ("AMEX") (as published by the Wall Street Journal, if published) on such date or if the Common Stock was not traded on such date, on the next preceding day on which the Common Stock was traded thereon or the last previous date on which a sale is reported. If the Common Stock is not reported on the NASDAQ, AMEX or the NYSE, the Fair Market Value of the Common Stock is the value so determined by the Board in good faith. (s) "Incentive Stock Option" means an Option granted by the Committee to a Participant, which Option is designated by the Committee as an Incentive Stock Option pursuant to Section 7 hereof and is intended to be such under Section 422 of the Code. (t) "Initial Public Offering" means the offering of shares of the Company's Common Stock concurrently with the Bank's Reorganization. (u) "Limited Right" means the right to receive an amount of cash based upon the terms set forth in Section 8 hereof. (v) "Non-statutory Stock Option" means an Option granted by the Committee to a Participant pursuant to Section 6 hereof, which is not designated by the Committee as an Incentive Stock Option or which is redesignated by the Committee under Section 7 as a Non-Statutory Stock Option. (w) "Option" means the right to buy a fixed amount of Common Stock at the Exercise Price within a limited period of time designated as the term of the option as granted under Section 6 or 7 hereof. (x) "Outside Director" means a member of the Board of Directors of the Company or its Affiliates, who is not also an Employee. 3 (y) "Outside Director Participant" means an Outside Director who holds an outstanding Award under the terms of the Plan. (z) "Participant" means any Employee or Outside Director who holds an outstanding Award under the terms of the Plan. (aa) "Reorganization" means the formation by the Bank of the Company and the subsequent reorganization pursuant to which the Bank will be a wholly-owned subsidiary of the Company. (bb) "Retirement" with respect to an Employee Participant means termination of employment which constitutes retirement under any tax qualified plan maintained by the Bank or the Company. However, "Retirement" will not be deemed to have occurred for purposes of this Plan if a Participant continues to serve on the Board of Directors of the Company or its Affiliates even if such Participant is receiving retirement benefits under any retirement plan of the Bank or the Company. With respect to an Outside Director Participant "Retirement" means the termination of service from the Board of Directors of the Company or its Affiliates following written notice to the Board as a whole of such Outside Director's intention to retire or retirement as determined by the Bank (or the Company's) bylaws, or by reaching age 65, except that an Outside Director shall not be deemed to have retired for purposes of the Plan in the event he continues to serve as a consultant to the Board or as an advisory director. (cc) "Termination for Cause" shall mean, in the case of an Outside Director, removal from the Board of Directors, or, in the case of an Employee, termination of employment, in both such cases as determined by the Board of Directors, because of a material loss to the Company or one of its Affiliates caused by the Participant's intentional failure to perform stated duties, personal dishonesty, willful violation of any law, rule, regulation, (other than traffic violations or similar offenses) or final cease and desist order. No act, or the failure to act, on Participant's part shall be "willful" unless done, or omitted to be done, not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank or one of its Affiliates. 2. ADMINISTRATION. -------------- (a) The Plan as regards Awards to employees of the Company or its Affiliates, shall be granted and administered by the Committee. The Committee is authorized, subject to the provisions of the Plan, to grant awards to Employees and Outside Directors and to establish such rules and regulations as it deems necessary for the proper administration of the Plan and to make whatever determinations and interpretations in connection with the Plan it deems necessary or advisable. All determinations and interpretations made by the Committee shall be binding and conclusive on all Participants in the Plan and on their legal representatives and beneficiaries. (b) Awards to Outside Directors shall be granted and administered by the Committee, pursuant to the terms of this Plan. 4 3. TYPES OF AWARDS AND RELATED RIGHTS. ---------------------------------- The following Awards and related rights as described in Sections 6 through 11 hereof may be granted under the Plan: (a) Non-statutory Stock Options; (b) Incentive Stock Options; (c) Limited Rights 4. STOCK SUBJECT TO THE PLAN. ------------------------- Subject to adjustment as provided in Section 14, the maximum number of shares reserved for Awards under the Plan is 250,000 shares of the Common Stock or, 287,500 shares, in the event of an exercise of an over-allotment option by the underwriters in the Initial Public Offering. These shares of Common Stock may be either authorized but unissued shares or authorized shares previously issued and reacquired by the Company. To the extent that Awards are granted under the Plan, the shares underlying such Awards will be unavailable for any other use including future grants under the Plan except that, to the extent that Awards terminate, expire, are forfeited or are cancelled without having been exercised (in the case of Limited Rights, exercised for cash), new Awards may be made with respect to these shares. 5. ELIGIBILITY. ----------- Subject to the terms herein all Employees and Outside Directors shall be eligible to receive Awards under the Plan. 6. NON-STATUTORY STOCK OPTIONS. --------------------------- The Committee may, subject to the limitations of the Plan and the availability of shares reserved but unawarded in the Plan, from time to time, grant Non-statutory Stock Options to Employees and Outside Directors and, upon such terms and conditions as the Committee may determine, grant Non-statutory Stock Options in exchange for and upon surrender of previously granted Awards under this Plan. Non-statutory Stock Options granted under this Plan are subject to the following terms and conditions: (a) Exercise Price. The Exercise Price of each Non-statutory Stock Option -------------- shall be determined by the Committee on the date the option is granted. Such Exercise Price shall not be less than 100% of the Fair Market Value of the Common Stock on the Date of Grant. Shares may be purchased only upon full payment of the Exercise Price or upon operation of an Alternate Option Payment Mechanism set out in Section 9 hereof. (b) Terms of Options. The term during which each Non-statutory Stock ---------------- Option may be exercised shall be determined by the Committee, but in no event shall a Non-statutory Stock 5 Option be exercisable in whole or in part more than 10 years from the Date of Grant. The Committee shall determine the date on which each Non-statutory Stock Option shall become exercisable. The shares comprising each installment may be purchased in whole or in part at any time during the term of such Option after such installment becomes exercisable. The Committee may, in its sole discretion, accelerate the time at which any Non-statutory Stock Option may be exercised in whole or in part. The acceleration of any Non-statutory Stock Option under the authority of this paragraph creates no right, expectation or reliance on the part of any other Participant or that certain Participant regarding any other unaccelerated Non-statutory Stock Options. (c) Termination of Employment or Service. Unless otherwise determined by ------------------------------------ the Committee, upon the termination of a Participant's employment or service for any reason other than Disability, death or Termination for Cause, a Non- statutory Stock Option shall be exercisable only as to those shares that were immediately exercisable by the Participant at the date of termination and only for a period of one year following termination. Notwithstanding any provisions set forth herein or contained in any Agreement relating to an award of an Option, in the event of termination for Disability, death, Retirement or a Change in Control, all Options shall immediately vest and be exercisable for one year after such termination, and in the event of Termination for Cause all rights under the Participant's Non-Statutory Stock Options shall expire immediately upon termination. (d) Change in Control. Unless otherwise determined by the Committee, in the ----------------- event of the termination of the Participant's employment or service following a Change in Control, all Non-statutory Stock Options held by the Participant, whether or not exercisable at such time, shall become exercisable by the Participant or his legal representatives or beneficiaries and remain exercisable for one year or such longer period as determined by the Committee following the date of the termination of employment or service, provided that in no event shall the period extend beyond the expiration of the term of the Non-statutory Stock Option. 7. INCENTIVE STOCK OPTIONS. ----------------------- The Committee may, subject to the limitations of the Plan and the availability of shares reserved but unawarded in the Plan, from time to time, grant Incentive Stock Options to Employees. Incentive Stock Options granted pursuant to the Plan shall be subject to the following terms and conditions: (a) Exercise Price. The Exercise Price of each Incentive Stock Option -------------- shall be not less than 100% of the Fair Market Value of the Common Stock on the Date of Grant. However, if at the time an Incentive Stock Option is granted to a Participant, the Participant owns Common Stock representing more than 10% of the total combined voting securities of the Bank (or, under Section 424(d) of the Code, is deemed to own Common Stock representing more than 10% of the total combined voting power of all classes of stock of the Bank, by reason of the ownership of such classes of stock, directly or indirectly, by or for any brother, sister, spouse, ancestor or lineal descendent of such Participant, or by or for any corporation, partnership, estate or trust of 6 which such Participant is a shareholder, partner or beneficiary), ("10% Owner"), the Exercise Price per share of Common Stock deliverable upon the exercise of each Incentive Stock Option shall not be less than 110% of the Fair Market Value of the Common Stock on the Date of Grant. Shares may be purchased only upon payment of the full Exercise Price or upon operation of an Alternate Option Payment Mechanism set out in Section 9 hereof. (b) Amounts of Options. Incentive Stock Options may be granted to any ------------------ Employee in such amounts as determined by the Committee; provided that the amount granted is consistent with the terms of Section 422 of the Code. In the case of an option intended to qualify as an Incentive Stock Option, the aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which Incentive Stock Options granted are exercisable for the first time by the Participant during any calendar year (under all plans of the Participant's employer corporation and its parent and subsidiary corporations) shall not exceed $100,000. The provisions of this Section 7(b) shall be construed and applied in accordance with Section 422(d) of the Code and the regulations, if any, promulgated thereunder. To the extent an award under this Section 7 exceeds this $100,000 limit, the portion of the Options in excess of such limit shall be deemed a Non-statutory Stock Option. The Committee shall have discretion to redesignate Options granted as Incentive Stock Options as Non-Statutory Stock Options. Such redesignation shall not be deemed to be a new grant or a regrant of such Options. Such Non-statutory Stock Options shall be subject to Section 6 hereof. (c) Terms of Options. The term during which each Incentive Stock Option ---------------- may be exercised shall be determined by the Committee, but in no event shall an Incentive Stock Option be exercisable in whole or in part more than 10 years from the Date of Grant. If at the time an Incentive Stock Option is granted to a Participant who is a 10% Owner, the Incentive Stock Option granted to such Employee Participant shall not be exercisable after the expiration of five years from the Date of Grant. No Incentive Stock Option granted under this Plan is transferable except by will or the laws of descent and distribution and is exercisable in his lifetime only by the Employee Participant to whom it is granted. The Committee shall determine the date on which each Incentive Stock Option shall become exercisable. The shares comprising each installment may be purchased in whole or in part at any time during the term of such option after such installment becomes exercisable. The Committee may, in its sole discretion, accelerate the time at which any Incentive Stock Option may be exercised in whole or in part. The acceleration of any Incentive Stock Option under the authority of this paragraph creates no right, expectation or reliance on the part of any other Participant or that certain Participant regarding any other unaccelerated Incentive Stock Options. (d) Termination of Employment. Unless otherwise determined by the ------------------------- Committee, upon the termination of an Employee Participant's service for any reason other than Disability, Retirement, death, Change in Control or Termination for Cause, the Employee Participant's Incentive Stock Options shall be exercisable only as to those shares that were immediately exercisable by the Employee Participant at the date of termination and only for a period of three months following termination. Notwithstanding any provisions set forth herein or contained in 7 any Agreement relating to an award of an Option, in the event of termination for Disability, Retirement or death, all Options shall immediately vest and be exercisable for one year after such termination, (however, in the event of Retirement, exercising after three months will result in loss of incentive stock option treatment under the Code) and in the event of Termination for Cause all rights under the Employee Participant's Incentive Stock Options shall expire immediately upon termination. (e) Change in Control. Unless otherwise determined by the Committee, in ----------------- the event of the termination of the Employee Participant's employment following a Change in Control, all Incentive Stock Options held by the Participant, whether or not exercisable at such time, shall become exercisable by the Participant or his legal representatives or beneficiaries and remain exercisable for one year or such longer period as determined by the Committee following the date of termination of the Employee Participant's employment, provided however, that such option shall not be eligible for treatment as an Incentive Stock Option in the event such option is exercised more than three months following the date of termination of employment, and provided further, that in no event shall the period extend beyond the expiration of the term of the Incentive Stock Option. (f) Compliance with Code. The Options granted under this Section are -------------------- intended to qualify as incentive stock options within the meaning of Section 422 of the Code, but the Company makes no warranty as to the qualification of any option as an incentive stock option within the meaning of Section 422 of the Code. All Options that do not so quality shall be treated as Non-statutory Stock Options. 8. LIMITED RIGHTS. -------------- Simultaneously with the grant of any Option to an Employee, the Committee may grant a Limited Right with respect to all or some of the shares covered by such Option. Limited Rights granted under this Plan are subject to the following terms and conditions: (a) Terms of Rights. In no event shall a Limited Right be exercisable in --------------- whole or in part before the expiration of six months from the Date of Grant of the Limited Right. A Limited Right may be exercised only in the event of a Change in Control. The Limited Right may be exercised only when the underlying Option is eligible to be exercised, and only when the Fair Market Value of the underlying shares on the day of exercise is greater than the Exercise Price of the underlying Option. Upon exercise of a Limited Right, the underlying Option shall cease to be exercisable. Upon exercise or termination of an Option, any related Limited Rights shall terminate. The Limited Rights may be for no more than 100% of the difference between the purchase price and the Fair Market Value of the Common Stock subject to the underlying option. The Limited Right is transferable only when the underlying option is transferable and under the same conditions. 8 (b) Payment. Upon exercise of a Limited Right, the holder shall promptly ------- receive from the Company an amount of cash or some other payment option found in Section 12, equal to the difference between the Exercise Price of the underlying option and the Fair Market Value of the Common Stock subject to the underlying Option on the date the Limited Right is exercised, multiplied by the number of shares with respect to which such Limited Right is being exercised. Payments shall be less an applicable tax withholding as set forth in Section 15. 9. ALTERNATE OPTION PAYMENT MECHANISM ---------------------------------- The Committee has sole discretion to determine what form of payment it will accept for the exercise of an Option. The Committee may indicate acceptable forms in the Award Agreement covering such Options or may reserve its decision to the time of exercise. No Option is to be considered exercised until payment in full is accepted by the Committee or its agent. (a) Cash Payment. The exercise price may be paid in cash or by certified ------------ check. (b) Borrowed Funds. To the extent permitted by law, the Committee may -------------- permit all or a portion of the exercise price of an Option to be paid through borrowed funds. (c) Exchange of Common Stock. ------------------------ (i) The Committee may permit payment by the tendering of previously acquired shares of Common Stock. This includes the use of "pyramiding transactions" whereby some number of Options are exercised. The shares gained through the exercise are then tendered back to the Bank as payment for some other number of Options. This transaction may be repeated as needed to exercise all of the Options available. (ii) Any shares of Common Stock tendered in payment of the exercise price of an Option shall be valued at the Fair Market Value of the Common Stock on the date prior to the date of exercise. 10. RIGHTS OF A SHAREHOLDER ----------------------- No Participant shall have any rights as a shareholder with respect to any shares covered by an Option until the date of issuance of a stock certificate for such shares. Nothing in this Plan or in any Award granted confers on any person any right to continue in the employ or service of the Company or its Affiliates or interferes in any way with the right of the Company or its Affiliates to terminate a Participant's services as an officer or other employee at any time. 11. NON-TRANSFERABILITY ------------------- Except to the extent permitted or restricted by the Code, the rules promulgated under Section 16(b) of the Exchange Act or any successor statutes or rules: 9 (i) The recipient of an Award shall not sell, transfer, assign, pledge, or otherwise encumber shares subject to the Award until full vesting of such shares has occurred. For purposes of this section, the separation of beneficial ownership and legal title through the use of any "swap" transaction is deemed to be a prohibited encumbrance. (ii) Unless determined otherwise by the Committee and except in the event of the Participant's death or pursuant to a domestic relations order, an Award is not transferable and may be earned in his lifetime only by the Participant to whom it is granted. Upon the death of a Participant, an Award is transferable by will or the laws of intestate succession. The designation of a beneficiary does not constitute a transfer. (iii) If a recipient of an Award is subject to the provisions of Section 16 of the Exchange Act, shares of Common Stock subject to such Award may not, without the written consent of the Committee (which consent may be given in the Stock Award Agreement), be sold or otherwise disposed of within six months following the date of grant of the Award. 12. AGREEMENT WITH GRANTEES. ----------------------- Each Award will be evidenced by a written agreement, executed by the Participant and the Company or its Affiliates that describes the conditions for receiving the Awards including the date of Award, the Exercise Price, the terms or other applicable periods, and other terms and conditions as may be required or imposed by the Plan, the Committee, the Board of Directors, tax law considerations or applicable securities law considerations. 13. DESIGNATION OF BENEFICIARY. -------------------------- A Participant may, with the consent of the Committee, designate a person or persons to receive, in the event of death, any Award to which the Participant would then be entitled. Such designation will be made upon forms supplied by and delivered to the Company and may be revoked in writing. If a Participant fails effectively to designate a beneficiary, then the Participant's estate will be deemed to be the beneficiary. 14. DILUTION AND OTHER ADJUSTMENTS. ------------------------------ In the event of any change in the outstanding shares of Common Stock by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, reorganization, combination or exchange of shares, or other similar corporate change, or other increase or decrease in such shares without receipt or payment of consideration by the Company, the Committee will make such adjustments to previously granted Awards, to prevent dilution or enlargement of the rights of the Participant including any or all of the following: (a) adjustments in the aggregate number or kind of shares of Common Stock that may underlie future Awards under the Plan; 10 (b) adjustments in the aggregate number or kind of shares of Common Stock underlying Awards already made under the Plan; (c) adjustments in the purchase price of outstanding Incentive and/or Non- statutory Stock Options, or any Limited Rights attached to such Options. No such adjustments may, however, materially change the value of benefits available to a Participant under a previously granted Award. All awards under this Plan shall be binding upon any successors or assigns of the Company. 15. TAX WITHHOLDING. --------------- Awards under this Plan shall be subject to tax withholding to the extent required by any governmental authority. Any withholding shall comply with Rule 16b-3, if applicable, or any amendment or successor rule. Shares of Common Stock withheld to pay for tax withholding amounts shall be valued at their Fair Market Value on the date the Award is deemed taxable to the Participant. 16. AMENDMENT OF THE PLAN. --------------------- The Board of Directors may at any time, and from time to time, modify or amend the Plan in any respect, prospectively or retroactively; provided however, that provisions governing grants of Incentive Stock Options, unless permitted by the rules and regulations or staff pronouncements promulgated under the Code, shall be submitted for shareholder approval to the extent required by such law, regulation or interpretation. Failure to ratify or approve amendments or modifications by shareholders shall be effective only as to the specific amendment or modification requiring such ratification. Other provisions, sections, and subsections of this Plan will remain in full force and effect. No such termination, modification or amendment may affect the rights of a Participant under an outstanding Award without the written permission of such Participant. 17. EFFECTIVE DATE OF PLAN. ---------------------- The Effective Date of the Plan shall be the date of its adoption by the Board of Directors. 18. TERMINATION OF THE PLAN. ----------------------- The right to grant Awards under the Plan will terminate upon the earlier of ten (10) years after the Effective Date of the Plan or the exercise of Options, or related Limited Rights equivalent to the maximum number of shares reserved under the Plan as set forth in Section 4. The Board of Directors has the right to suspend or terminate the Plan at any time, provided that no such action will, without the consent of a Participant or Outside Director Participant, adversely 11 affect his vested rights under a previously granted Award. 19. APPLICABLE LAW. -------------- The Plan will be administered in accordance with the laws of the State of California to the extent not superseded by federal law. 20. SUCCESSORS AND ASSIGNS. ---------------------- All awards under this Plan shall be binding upon any successors or assigns of the Company including any holding company that may be formed by the Company. 12 21. DELEGATION OF AUTHORITY. ----------------------- The Committee may delegate all authority for: the determination of forms of payment to be made by or received by the Plan; the execution of Award Agreements; the determination of Fair Market Value; the determination of all other aspects of administration of the Plan to the executive officer(s) of the Company. The Committee may rely on the descriptions, representations, reports and estimates provided to it by the management of the Company for determinations to be made pursuant to the Plan. IN WITNESS WHEREOF, the Company has established this Plan, to be executed by its duly authorized executive officer and the corporate seal to be affixed and duly attested, effective as of the __________day of ________________ , 1997. [CORPORATE SEAL] LIFE FINANCIAL CORP. By: - --------------------------- ------------------------------- Date President and Chief Executive Officer ADOPTED BY THE BOARD OF DIRECTORS: By: - --------------------------- ------------------------------- Date Secretary 13 EX-10.6 10 FORM OF EMPLOYEE STOCK OWNERSHIP PLAN EXHIBIT 10.6 FORM OF LIFE FINANCIAL CORP. EMPLOYEE STOCK OWNERSHIP PLAN Effective __________, 199__ LIFE FINANCIAL CORP. EMPLOYEE STOCK OWNERSHIP PLAN CERTIFICATION I, Daniel L. Perl, President and Chief Executive Officer of Life Financial Corp. (the "Company"), hereby certify that the attached Life Financial Corp. Employee Stock Ownership Plan was adopted at a duly held meeting of the Board of Directors of the Company on _____________, 199__. The Company adopted the Life Financial Corp. Employee Stock Ownership Plan setting forth the terms and conditions pertaining to contributions, and the payment of benefits to participants and beneficiaries, effective _____________, 199__. ATTEST: LIFE FINANCIAL CORP. By: - ----------------------------- ------------------------------------------- Secretary Daniel L. Perl President and Chief Executive Officer C O N T E N T S
Section 1. Plan Identity....................................... 1 ------------- 1.1 Name.................................... 1 ---- 1.2 Purpose................................. 1 ------- 1.3 Effective Date.......................... 1 -------------- 1.4 Fiscal Period........................... 1 ------------- 1.5 Single Plan for All Employers........... 1 ----------------------------- 1.6 Interpretation of Provisions............ 1 ---------------------------- Section 2. Definitions......................................... 1 ----------- Section 3. Eligibility for Participation....................... 8 ----------------------------- 3.1 Initial Eligibility..................... 8 ------------------- 3.2 Terminated Employees.................... 9 -------------------- 3.3 Certain Employees Ineligible............ 9 ---------------------------- 3.4 Participation and Reparticipation....... 9 --------------------------------- Section 4. Employer Contributions and Credits.................. 9 ---------------------------------- 4.1 Discretionary Contributions............. 9 --------------------------- 4.2 Contributions for Stock Obligations..... 9 ----------------------------------- 4.3 Definitions Related to Contributions.... 10 ------------------------------------ 4.4 Conditions as to Contributions.......... 11 ------------------------------ Section 5. Limitations on Contributions and Allocations........ 11 -------------------------------------------- 5.1 Limitation on Annual Additions.......... 11 ------------------------------ 5.2 Coordinated Limitation With Other Plans. 12 --------------------------------------- 5.3 Effect of Limitations................... 13 --------------------- 5.4 Reserve................................. 13 ------- 5.5 Limitations as to Certain Participants.. 13 -------------------------------------- Section 6. Trust Fund and Its Investment....................... 14 ----------------------------- 6.1 Creation of Trust Fund.................. 14 ---------------------- 6.2 Stock Fund and Investment Fund.......... 14 ------------------------------ 6.3 Acquisition of Stock.................... 14 -------------------- 6.4 Participants' Option to Diversify....... 15 --------------------------------- Section 7. Voting Rights and Dividends on Stock................ 15 ------------------------------------ 7.1 Voting and Tendering of Stock........... 15 ----------------------------- 7.2 Dividends on Stock...................... 16 ------------------
Section 8. Adjustments to Accounts............................................................. 16 ----------------------- 8.1 Adjustments for Transactions............................................ 16 ---------------------------- 8.2 Valuation of Investment Fund............................................ 17 ---------------------------- 8.3 Adjustments for Investment Experience................................... 17 ------------------------------------- 8.4 Adjustments for Capital Changes......................................... 17 ------------------------------- Section 9. Vesting of Participants' Interests.................................................. 17 ---------------------------------- 9.1 Deferred Vesting in Accounts............................................ 17 ---------------------------- 9.2 Computation of Vesting Years............................................ 18 ---------------------------- 9.3 Full Vesting Upon Certain Events........................................ 18 -------------------------------- 9.4 Full Vesting Upon Plan Termination...................................... 18 ---------------------------------- 9.5 Forfeiture, Repayment, and Restoral..................................... 18 ----------------------------------- 9.6 Accounting for Forfeitures.............................................. 19 -------------------------- 9.7 Vesting and Nonforfeitability........................................... 19 ----------------------------- Section 10. Payment of Benefits................................................................. 19 ------------------- 10.1 Benefits for Participants............................................... 19 ------------------------- 10.2 Benefits on a Participant's Death....................................... 20 --------------------------------- 10.3 Marital Status.......................................................... 20 -------------- 10.4 Delay in Benefit Determination.......................................... 21 ------------------------------ 10.5 Accounting for Benefit Payments......................................... 21 ------------------------------- 10.6 Options to Receive and Sell Stock....................................... 21 --------------------------------- 10.7 Restrictions on Disposition of Stock.................................... 22 ------------------------------------ 10.8 Direct Transfer of Eligible Plan Distributions.......................... 22 ---------------------------------------------- Section 11. Rules Governing Benefit Claims and Review of Appeals................................ 23 ---------------------------------------------------- 11.1 Claim for Benefits...................................................... 23 ------------------ 11.2 Notification by Committee............................................... 23 ------------------------- 11.3 Claims Review Procedure................................................. 24 ----------------------- Section 12. The Committee and Its Functions..................................................... 24 ------------------------------- 12.1 Authority of Committee.................................................. 24 ---------------------- 12.2 Identity of Committee................................................... 24 --------------------- 12.3 Duties of Committee..................................................... 24 ------------------- 12.4 Valuation of Stock...................................................... 25 ------------------ 12.5 Compliance with ERISA................................................... 25 --------------------- 12.6 Action by Committee..................................................... 25 ------------------- 12.7 Execution of Documents.................................................. 25 ---------------------- 12.8 Adoption of Rules....................................................... 25 ----------------- 12.9 Responsibilities to Participants........................................ 26 -------------------------------- 12.10 Alternative Payees in Event of Incapacity............................... 26 ----------------------------------------- 12.11 Indemnification by Employers............................................ 26 ---------------------------- 12.12 Nonparticipation by Interested Member................................... 26 -------------------------------------
Section 13. Adoption, Amendment, or Termination of the Plan........ 26 ----------------------------------------------- 13.1 Adoption of Plan by Other Employers........ 26 ----------------------------------- 13.2 Adoption of Plan by Successor.............. 27 ----------------------------- 13.3 Plan Adoption Subject to Qualification..... 27 -------------------------------------- 13.4 Right to Amend or Terminate................ 27 --------------------------- Section 14. Miscellaneous Provisions............................... 28 ------------------------ 14.1 Plan Creates No Employment Rights.......... 28 --------------------------------- 14.2 Nonassignability of Benefits............... 28 ---------------------------- 14.3 Limit of Employer Liability................ 28 --------------------------- 14.4 Treatment of Expenses...................... 28 --------------------- 14.5 Number and Gender.......................... 28 ----------------- 14.6 Nondiversion of Assets..................... 29 ---------------------- 14.7 Separability of Provisions................. 29 -------------------------- 14.8 Service of Process......................... 29 ------------------ 14.9 Governing State Law........................ 29 ------------------- Section 15. Top-Heavy Provisions................................... 29 -------------------- 15.1 Determination of Top-Heavy Status.......... 29 --------------------------------- 15.2 Minimum Contributions...................... 31 --------------------- 15.3 Minimum Vesting............................ 31 ---------------
LIFE FINANCIAL CORP. EMPLOYEE STOCK OWNERSHIP PLAN Section 1. Plan Identity. -------------- 1.1 Name. The name of this Plan is "Life Financial Corp. Employee ---- Stock Ownership Plan." 1.2 Purpose. The purpose of this Plan is to describe the terms and -------- conditions under which contributions made pursuant to the Plan will be credited and paid to the Participants and their Beneficiaries. 1.3 Effective Date. The Effective Date of this Plan is --------------- __________________, 199__. 1.4 Fiscal Period. This Plan shall be operated on the basis of a -------------- ___________ -______________ fiscal year for the purposes of keeping the Plan's books and records and distributing or filing any reports or returns required by law. 1.5 Single Plan for All Employers. This Plan shall be treated as a ------------------------------ single plan with respect to all participating Employers for the purpose of crediting contributions and forfeitures and distributing benefits, determining whether there has been any termination of Service, and applying the limitations set forth in Section 5. 1.6 Interpretation of Provisions. The Employers intend this Plan and ----------------------------- the Trust to be a qualified stock bonus plan under Section 401(a) of the Code and an employee stock ownership plan within the meaning of Section 407(d)(6) of ERISA and Section 4975(e)(7) of the Code. The Plan is intended to have its assets invested primarily in qualifying employer securities of one or more Employers within the meaning of Section 407(d)(5) of ERISA and Section 4975(e)(8) of the Code, and to satisfy any requirement under ERISA or the Code applicable to such a plan. Accordingly, the Plan and Trust Agreement shall be interpreted and applied in a manner consistent with this intent and shall be administered at all times and in all respects in a nondiscriminatory manner. Section 2. Definitions. The following capitalized words and phrases shall ------------ have the meanings specified when used in this Plan and in the Trust Agreement, unless the context clearly indicates otherwise: "Account" means a Participant's interest in the assets accumulated under this Plan, as expressed in terms of a separate account balance which is periodically adjusted to reflect his Employer's contributions, the Plan's investment experience, and distributions and forfeitures. "Active Participant" means any Employee who has satisfied the eligibility requirements of Section 3 and who qualifies as an Active Participant for a particular Plan Year under Section 4.3. "Bank" means Life Savings Bank, Federal Savings Bank, and any entity which succeeds to the business of the Bank. "Beneficiary" means the person or persons who are designated by a Participant to receive benefits payable under the Plan on the Participant's death. In the absence of any designation, or if all the designated Beneficiaries shall die before the Participant dies or shall die before all benefits have been paid, the Participant's Beneficiary shall be his surviving Spouse, if any, or his estate if he is not survived by a Spouse. The Committee may rely upon the advice of the Participant's executor or administrator as to the identity of the Participant's Spouse. "Break in Service" means any five or more consecutive 12-month periods beginning ____________________ in which an Employee has 500 or fewer Hours of Service per period. Solely for this purpose, an Employee shall be considered employed for his normal hours of paid employment during a Recognized Absence, unless he does not resume his Service at the end of the Recognized Absence. Further, if an Employee is absent for any period (i) by reason of the Employee's pregnancy, (ii) by reason of the birth of the Employee's child, (iii) by reason of the placement of a child with the Employee in connection with the Employee's adoption of the child, or (iv) for purposes of caring for such child for a period beginning immediately after such birth or placement, the Employee shall be credited with the Hours of Service which would normally have been credited but for such absence, up to a maximum of 501 Hours of Service, in the first 12- month period which would otherwise be counted toward a Break in Service. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means the committee responsible for the administration of this Plan in accordance with Section 12. "Company" means Life Financial Corp., and any entity which succeeds to the business of the Company and adopts this Plan as its own pursuant to Section 13.2. "Disability" means a condition which renders the Participant totally and permanently disabled due to sickness or injury, such disability is likely to be continuous and permanent, and such disability renders the Participant unable to continue a like gainful occupation. In any event, the Committee's good faith decision as to whether a Participant's Service has been terminated by Disability shall be final and conclusive. "Effective Date" means _________________, 199__. "Employee" means any individual who is or has been employed by the Company. "Employee" also means an individual employed by a leasing organization who, pursuant to an agreement between an Employer and the leasing organization, has performed services for the Employer and any related persons (within the meaning of Section 414(n)(6) of the Code) on a substantially full-time basis for more than one year, if such services are of a type historically performed by employees in the Employer's business field. However, such a "leased employee" 2 shall not be considered an Employee if (i) he participates in a money purchase pension plan sponsored by the leasing organization which provides for immediate participation, immediate full vesting, and an annual contribution of at least 10 percent of the individual's Total Compensation, and (ii) leased employees do not constitute more than 20 percent of the Employer's total work force (including leased employees, but excluding Highly Compensated Employees and any other Employees who have not performed services for the Employer on a substantially full-time basis for at least one year). "Employer" means the Company or any affiliate within the purview of Sections 414(b), (c) or (m) and 415(h) of the Code, any other corporation, partnership, or proprietorship which adopts this Plan with the Company's consent pursuant to Section 13.1, and any entity which succeeds to the business of any Employer and adopts the Plan pursuant to Section 13.2. "Entry Date" means the Effective Date of the Plan and the first day of each __________ and ____________ thereafter. "ERISA" means the Employee Retirement Income Security Act of 1974 (P.L. 93- 406), as amended. "Highly Compensated Employee" for any Plan Year beginning after December 31, 1996, means an Employee who: (A) owned more than five percent of the outstanding equity interest or the outstanding voting interest in any Employer during the year or the preceding year, or (B) for the year or the preceding year (i) had Total Compensation exceeding $80,000 (as adjusted pursuant to section 415(d) of the Code), and, (ii) if the Employer elects with respect to a preceding year, was among the most highly paid one-fifth of all Employees for such preceding year. For this purpose: (a) "Total Compensation" shall include any amount which is excludable from the Employee's gross income for tax purposes pursuant to Sections 125, 402(e)(3), 402(h)(1)(B), or 403(b) of the Code. (b) The number of Employees in "the most highly compensated one-fifth of all Employees" shall be determined by taking into account all individuals working for all related employer entities described in the definition of "Service", but excluding any individual who has not completed six months of Service, who normally works fewer than 17-1/2 hours per week or in fewer than six months per year, who has not reached age 21, whose employment is covered by a collective bargaining agreement, or who is a nonresident alien who receives no earned income from United States sources. (c) A former Employee shall be treated as a Highly Compensated Employee if such Employee was a Highly Compensated Employee when such Employee separated from Service, or if such Employee was a Highly Compensated Employee at any time after attaining age 55. 3 (d) The determination of who is a Highly Compensated Employee, including the determinations of the number and identity of Employees in the top-paid group and the compensation that is considered, will be made in accordance with Section 414(q) of the Code and the regulations thereunder. "Hours of Service" means hours to be credited to an Employee under the following rules: (a) Each hour for which an Employee is paid or is entitled to be paid for services to an Employer is an Hour of Service. (b) Each hour for which an Employee is directly or indirectly paid or is entitled to be paid for a period of vacation, holidays, illness, Disability, lay-off, jury duty, temporary military duty, or leave of absence is an Hour of Service. However, except as otherwise specifically provided, no more than 501 Hours of Service shall be credited for any single continuous period in which an Employee performs no duties. Further, no Hours of Service shall be credited on account of payments made solely under a plan maintained to comply with worker's compensation, unemployment compensation, or disability insurance laws, or to reimburse an Employee for medical expenses. (c) Each hour for which back pay (ignoring any mitigation of damages) is either awarded or agreed to by an Employer is an Hour of Service. However, no more than 501 Hours of Service shall be credited for any single continuous period during which an Employee would not have performed any duties. (d) Hours of Service shall be credited in any one period only under one of the foregoing paragraphs (a), (b) and (c); an Employee may not receive double credit for the same period. (e) If an Employer finds it impractical to count the actual Hours of Service for any class or group of non-hourly Employees, each Employee in that class or group shall be credited with 45 Hours of Service for each weekly pay period in which he has at least one Hour of Service. However, an Employee shall be credited only for his normal working hours during a paid absence. (f) Hours of Service to be credited on account of a payment to an Employee (including back pay) shall be recorded in the period of Service for which the payment was made. If the period overlaps two or more Plan Years, the Hours of Service credit shall be allocated in proportion to the respective portions of the period included in the several Plan Years. However, in the case of periods of 31 days or less, the Administrator may apply a uniform policy of crediting the Hours of Service to either the first Plan Year or the second. 4 (g) In all respects an Employee's Hours of Service shall be counted as required by Section 2530.200b-2(b) and (c) of the Department of Labor's regulations under Title I of ERISA. "Investment Fund" means that portion of the Trust Fund consisting of assets other than Stock. "Normal Retirement Age" means a the later of the Participant's 65th birthday or the fifth anniversary of the Participant's participation in the Plan. "Normal Retirement Date" means the first day of the month coincident with or next following attainment of Normal Retirement Age. "Participant" means any Employee who is participating in the Plan, or who has previously participated in the Plan and still has a balance credited to his Account. "Plan Year" means the 12 consecutive month period commencing _________________ and ending ________________ of each year. "Plan" means the Life Financial Corp. Employee Stock Ownership Plan, as set forth herein, and as amended from time to time. "Recognized Absence" means a period for which -- (a) an Employer grants an Employee a leave of absence for a limited period, but only if an Employer grants such leaves on a nondiscriminatory basis; or (b) an Employee is temporarily laid off by an Employer because of a change in business conditions; or (c) an Employee is on active military duty, but only to the extent that his employment rights are protected by the Military Selective Service Act of 1967 (38 U.S.C. sec. 2021). "Service" means an Employee's period(s) of employment or self-employment with an Employer, excluding for initial eligibility purposes any period in which the individual was a nonresident alien and did not receive from an Employer any earned income which constituted income from sources within the United States. An Employee's Service shall include any service which constitutes service with a predecessor employer within the meaning of Section 414(a) of the Code. An Employee's Service shall also include any service with an entity which is not an Employer, but only either (i) for a period after 1975 in which the other entity is a member of a controlled group of corporations or is under common control with other trades and businesses within the meaning of Sections 414(b) or 414(c) of the Code, and a member of the controlled group or one of the trades and businesses is an Employer, or (ii) for a period after 1979 in which 5 the other entity is a member of an affiliated service group within the meaning of Section 414(m) of the Code, and a member of the affiliated service group is an Employer. "Spouse" means the individual, if any, to whom a Participant is lawfully married on the date benefit payments to the Participant are to begin, or on the date of the Participant's death, if earlier. "Stock" means shares of the voting common stock or preferred stock meeting the requirements of Section 409(e)(3) of the Code issued by an Employer. "Stock Fund" means that portion of the Trust Fund consisting of Stock. "Stock Obligation" means an indebtedness arising from any extension of credit to the Plan or the Trust which was obtained for the purpose of buying Stock and which satisfies the requirements set forth in Section 6.3. "Total Compensation" means a Participant's wages, salary, overtime, bonuses, commissions, and any other amounts received for personal services rendered while in Service from any Employer or an affiliate (within the purview of Section 414(b), (c), and (m) of the Code), plus his earned income from any such entity as defined in Section 401(c)(2) of the Code if he is self-employed. "Total Compensation" shall include (i) severance payments and amounts paid as a result of termination, (ii) amounts excludable from gross income under Section 911 of the Code, (iii) amounts described in Sections 104(a)(3), 105(a), and 105(h) of the Code to the extent includable in gross income, (iv) amounts received from an Employer for moving expenses which are not deductible under Section 217 of the Code, (v) amounts includable in gross income in the year of, and on account of, the grant of a nonqualified stock option, (vi) amounts includable in gross income pursuant to Section 83(b) of the Code, and (vii) amounts includable in gross income under an unfunded nonqualified plan of deferred compensation, but shall exclude (viii) Employer contributions to or amounts received from a funded or qualified plan of deferred compensation, (ix) Employer contributions to a simplified employee pension account to the extent deductible under Section 219 of the Code, (x) Employer contributions to a Section 403(b) annuity contract, and (xi) amounts includable in gross income pursuant to Section 83(a) of the Code, (xii) amounts includable in gross income upon the exercise of nonqualified stock option or upon the disposition of stock acquired under any stock option, and (xiii) any other amounts expended by the Employer on the Participant's behalf which are excludable from his income or which receive special tax benefits. A Participant's Total Compensation shall exclude any compensation in any limitation year in excess of the limit currently in effect under Section 401(a)(17) of the Code. "Trust" or "Trust Fund" means the trust fund created under this Plan. "Trust Agreement" means the agreement between the Bank and the Trustee concerning the Trust Fund. If any assets of the Trust Fund are held in a co- mingled Trust Fund with assets of other qualified retirement plans, "Trust Agreement" shall be deemed to include the trust agreement governing that co- mingled Trust Fund. With respect to the allocation of investment 6 responsibility for the assets of the Trust Fund, the provisions of Section 2 of the Trust Agreement are incorporated herein by reference. "Trustee" means one or more corporate persons and individuals selected from time to time by the Bank to serve as trustee or co-trustees of the Trust Fund. "Unallocated Stock Fund" means that portion of the Stock Fund consisting of the Plan's holding of Stock which has been acquired in exchange for one or more Stock Obligations and which has not yet been allocated to the Participant's Accounts in accordance with Section 4.2. "Valuation Date" means the last day of the Plan Year and each other date as of which the Committee shall determine the investment experience of the Investment Fund and adjust the Participants' Accounts accordingly. "Valuation Period" means the period following a Valuation Date and ending with the next Valuation Date. "Vesting Year" means a unit of Service credited to a Participant pursuant to Section 9.2 for purposes of determining his vested interest in his Account. Section 3. Eligibility for Participation. ------------------------------ 3.1 Initial Eligibility. An Employee shall enter the Plan as of the -------------------- Entry Date coinciding with or on the next date an Employee completes an eligibility computation period with the Employer, during which the Employee completes at least 1,000 Hours of Service for the Employer and attains age 21. However, if an Employee is not in active Service with an Employer on the date he would otherwise first enter the Plan, his entry shall be deferred until the next day he is in Service. For purposes of this Plan, a Participant's initial eligibility computation period shall be the twelve consecutive month period beginning with the day a Participant first completes an Hour of Service. A Participant's subsequent eligibility computation periods shall be the Plan Year, commencing with the Plan Year which includes the first anniversary of the day the Participant first completed an Hour of Service. 3.2 Terminated Employees. No Employee shall have any interest or --------------------- rights under this Plan if he is never in active Service with an Employer on or after the Effective Date. 3.3 Certain Employees Ineligible. No Employee shall be eligible to ----------------------------- participate in the Plan while he is employed by a division or subsidiary of the Company, other than the Bank, unless such division or subsidiary has, with the approval of the Company, adopted the Plan for its Employees. Additionally, no Employee shall participate in the Plan while his Service is covered by a collective bargaining agreement between an Employer and the Employee's collective 7 bargaining representative if (i) retirement benefits have been the subject of good faith bargaining between the Employer and the representative and (ii) the collective bargaining agreement does not provide for the Employee's participation in the Plan. No Employee shall participate in the Plan while he is actually employed by a leasing organization rather than an Employer. 3.4 Participation and Reparticipation. Subject to the satisfaction of ---------------------------------- the foregoing requirements, an Employee shall participate in the Plan during each period of his Service from the date on which he first becomes eligible until his termination. For this purpose, an Employee returning within five years of his or her termination who previously satisfied the initial eligibility requirements shall re-enter the Plan as of the date of his return to Service with an Employer. Section 4. Employer Contributions and Credits. ----------------------------------- 4.1 Discretionary Contributions. Each Employer shall from time to time ---------------------------- contribute, with respect to a Plan Year, such amounts as it may determine from time to time. An Employer shall have no obligation to contribute any amount under this Plan except as so determined in its sole discretion. The Employers' contributions and available forfeitures for a Plan Year shall be credited as of the last day of the year to the Accounts of the Active Participants in proportion to their amounts of Cash Compensation (as defined below) while a Participant. 4.2 Contributions for Stock Obligations. If the Trustee, upon ------------------------------------ instructions from the Committee, incurs any Stock Obligation upon the purchase of Stock, the Employer shall, subject to any regulatory prohibitions, contribute for each Plan Year an amount sufficient to cover all payments of principal and interest as they come due under the terms of the Stock Obligation. If there is more than one Stock Obligation, the Employers shall designate the one to which any contribution is to be applied. The Employer's obligation to make contributions under this Section 4.2 shall be reduced to the extent of any investment earnings realized on such contributions and any dividends paid by the Employers on Stock held in the Unallocated Stock Account, which earnings and dividends shall be applied to the Stock Obligation related to that Stock. In each Plan Year in which Employer contributions, earnings on contributions, or dividends on unallocated Stock are used as payments under a Stock Obligation, a certain number of shares of the Stock acquired with that Stock Obligation which is then held in the Unallocated Stock Fund shall be released for allocation among the Participants. The number of shares released shall bear the same ratio to the total number of those shares then held in the Unallocated Stock Fund (prior to the release) as (i) the principal and interest payments made on the Stock Obligation in the current Plan Year bears to (ii) the sum of (i) above, and the remaining principal and interest payments required (or projected to be required on the basis of the interest rate in effect at the end of the Plan Year) to satisfy the Stock Obligation. At the direction of the Committee, the current and projected payments of interest under a Stock Obligation may be ignored in calculating the number of shares to be released in each year if (i) the Stock Obligation provides for annual payments of principal and interest at a cumulative 8 rate that is not less rapid at any time than level annual payments of such amounts for 10 years, (ii) the interest included in any payment is ignored only to the extent that it would be determined to be interest under standard loan amortization tables, and (iii) the term of the Stock Obligation, by reason of renewal, extension, or refinancing, has not exceeded 10 years from the original acquisition of the Stock. For these purposes, each Stock Obligation, the Stock purchased with it, and any dividends on such Stock, shall be considered separately. The Stock released from the Unallocated Stock Fund in any Plan Year shall be credited as of the last day of the year to the Accounts of the Active Participants in proportion to their amounts of Cash Compensation (as defined below) while a Participant. 4.3 Definitions Related to Contributions. For the purposes of this ------------------------------------- Plan, the following terms have the meanings specified: "Active Participant" means a Participant who has satisfied the eligibility requirements under Section 3. However, a Participant shall not qualify as an Active Participant unless (i) he is in active Service with an Employer as of the last day of the Plan Year, or (ii) he is on a Recognized Absence as of that date, or (iii) his Service terminated during the Plan Year by reason of Normal Retirement, Disability or death. "Cash Compensation" means the Participant's base compensation reportable on Form W-2. A Participant's Cash Compensation shall exclude any compensation in excess of the limit currently in effect under Section 401(a)(17) of the Code. In addition to other applicable limitations set forth in the Plan, and notwithstanding any provision of the Plan to the contrary, the annual compensation of each employee taken in to account under the Plan shall not exceed the Omnibus Budget Reconciliation Act of 1993 ("OBRA 1993") annual compensation limit. The OBRA 1993 annual compensation limit is $150,000, as adjusted by the Commissioner of the Internal Revenue Service for increases in the cost-of-living in accordance with Section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which compensation is determined (the "Determination Period") beginning in such calendar year. If a Determination Period consists of fewer than 12 months, the OBRA 1993 annual compensation limitation will be multiplied by a fraction, the numerator of which is the number of months in the Determination Period, and the denominator of which is 12. For Plan Years commencing prior to December 31, 1996, for purposes of applying the limitations of Section 401(a)(17) of the Code, the rules relating to the family members of a Highly Paid Employee will apply, except that the only the employee's spouse and lineal descendants who have not attained age 19 will be included in as family members. Notwithstanding the preceding, for Plan Years beginning after December 31, 1996, the aggregation rules relating to the family members of a Highly Compensated Employee will not apply. 4.4 Conditions as to Contributions. Employers' contributions shall in ------------------------------- any event be subject to the limitations set forth in Section 5. Contributions may be made in the form of 9 cash, or securities and other property to the extent permissible under ERISA, including Stock, and shall be held by the Trustee in accordance with the Trust Agreement. In addition to the provisions of Section 13.3 for the return of an Employer's contributions in connection with a failure of the Plan to qualify initially under the Code, any amount contributed by an Employer due to a good faith mistake of fact, or based upon a good faith but erroneous determination of its deductibility under Section 404 of the Code, shall be returned to the Employer within one year after the date on which the contribution was originally made, or within one year after its nondeductibility has been finally determined. However, the amount to be returned shall be reduced to take account of any adverse investment experience within the Trust Fund in order that the balance credited to each Participant's Account is not less that it would have been if the contribution had never been made. Section 5. Limitations on Contributions and Allocations. --------------------------------------------- 5.1 Limitation on Annual Additions. Notwithstanding the provisions of ------------------------------- Section 4, the annual addition to a Participant's Accounts under this and any other defined contribution plans maintained by the Employers or an affiliate (within the purview of Sections 414(b), (c), and (m) and Section 415(h) of the Code, which affiliate shall be deemed an Employer for this purpose) shall not exceed for any limitation year an amount equal to the lesser of -- 5.1-1 $30,000, or the one-fourth of the dollar limitation currently in effect under Section 415(b)(1)(A) of the Code; or 5.1-2 25 percent of the Participant's Total Compensation for such limitation year. For purposes of this Section 5.1 and the following Section 5.2, "annual addition" means the sum for any year of (a) Employer contributions and forfeitures allocable to a Participant under all plans (or portions thereof) maintained by an Employer subject to Section 415(c) of the Code, (b) the Participant's Employee contributions under all such plans (or portions thereof), and (c) amounts described in Section 419A(d)(2) of the Code (relating to post- retirement medical benefits of key Employees) or allocated to a pension plan individual medical account described in Section 415(1) of the Code, to the extent includible for purposes of Section 415(c)(2) of the Code. A Participant's Employee contributions described in (a) above shall be determined without regard to (i) any rollover contributions, (ii) any repayments of loans, or (iii) any prior distributions repaid upon the exercise of buy-backs rights. The $___________ and Code Section 415(b)(1)(A) limitations referred to shall, for each limitation year, be automatically adjusted to the new dollar limitations determined by the Commissioner of Internal Revenue for the calendar year beginning in that limitation year. Notwithstanding the foregoing, if the special limitations on annual additions described in Section 415(c)(6) of the Code applies, the limitations described in this section shall be adjusted accordingly. A "limitation year" means each 12 consecutive month period beginning February 1. 5.2 Coordinated Limitation With Other Plans. For Plan Years commencing ---------------------------------------- prior to December 31, 1999, aside from the limitation prescribed by Section 5.1 with respect to the 10 annual addition to a Participant's Accounts for any single limitation year, if a Participant has ever participated in one or more defined benefit plans maintained by an Employer or an affiliate, then the benefits provided under the defined benefit plan on his account shall be limited on a cumulative basis so that the sum of his defined contribution plan fraction and his defined benefit plan fraction does not exceed one. For this purpose: 5.2-1 A Participant's defined contribution plan fraction with respect to a Plan Year shall be a fraction, (i) the numerator of which is the sum of the annual additions to his accounts under all defined contribution plans (whether or not terminated) maintained by the Employer for the current year and all prior limitation years (including annual additions of the Participant's nondeductible employee contributions to all defined benefit plans, whether or not terminated, maintained by an Employer, and the annual additions attributable to all welfare benefit plans, individual medical accounts, and simplified employee pensions maintained by the Employer), and (ii) the denominator of which is the sum of the lesser of the following amounts -A- and -B- determined for the current limitation year and each prior limitation year of Service with an Employer: -A- is 1.25 times the dollar limitation determined under Section 415(c)(1)(A) of the Code, or 1.0 times such dollar limitation if the Plan is top-heavy, and -B- is 35 percent of the Participant's Total Compensation for such year. If the Employee was a Participant as of the end of the first limitation year beginning after ___________, 19__ in one or more defined contribution plans maintained by an Employer which plan(s) were in existence on May 6, 1986, and if the sum of this fraction and the defined benefit fraction (described below) would otherwise exceed 1.0 under the terms of this Plan, the numerator of this fraction will be adjusted. To affect this adjustment, an amount equal to the product of the excess of the sum of the fractions over 1.0, multiplied by the denominator of this fraction shall be permanently subtracted from the numerator of this fraction. This adjustment shall be calculated using the fractions as they would be computed as of the end of the last limitation year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the Plan made after May 5, 1986, but using the limitation applicable under Section 415 of the Code for the first limitation year beginning on or after January 1, 1987. 5.2-2 A Participant's defined benefit plan fraction with respect to a limitation year shall be a fraction, (i) the numerator of which is his projected annual benefit payable at normal retirement under the Employers' defined benefit plans, and (ii) the denominator of which is the lesser of (a) 1.25 times $90,000, or 1.0 times such dollar limitation if the Plan is top-heavy, and (b) 1.4 times the Participant's average Total Compensation during his highest-paid three consecutive limitation years. 5.2-3. This subsection applies if, in addition to this Plan, a Participant is covered under another qualified defined contribution plan or a welfare benefit fund, as defined in Section 419(e) of the Code, maintained by the Employer, or an individual medical account, as defined in Section 415(l)(2) of the Code, maintained by the Employer which provides a annual addition during any limitation year. The annual additions which may be credited to a Participant's account under this Plan for any such limitation year will 11 not exceed the maximum permissible amount (as determined under Section 5.1) reduced by the annual additions credited to a Participant's account under the other plans and welfare benefit funds for the same limitation year. If the allocations to a Participant's Account otherwise required under this Plan for any Plan Year would cause the limitations of Section 5.1 to be exceeded for that Plan Year, contributions otherwise required with respect to such Participant under this Plan, shall be reduced to the extent necessary to comply with the limitations of Section 5.1; provided, however, that in the event that the limitations of Section 5.1 shall be exceeded by reason of the combined amounts contributed under all of the Employer's defined contribution plans, it is intended that contributions made under the Employer's other defined contribution plans be reduced first. Notwithstanding the preceding, for Plan Years commencing after December 31, 1999, subsections 5.2-1 and 5.2-2 shall no longer be applicable. 5.3 Effect of Limitations. The Committee shall take whatever action ---------------------- may be necessary from time to time to assure compliance with the limitations set forth in Sections 5.1 and 5.2. Specifically, the Committee shall see that each Employer restrict its contributions for any Plan Year to an amount which, taking into account the amount of available forfeitures, may be completely allocated to the Participants consistent with those limitations. Where the limitations would otherwise be exceeded by any Participant, further allocations to the Participant shall be curtailed to the extent necessary to satisfy the limitations. Where an excessive amount is contributed on account of a mistake as to one or more Participants' compensation, or there is an amount of forfeitures which may not be credited in the Plan Year in which it becomes available, the amount shall be held in a suspense account to be allocated in lieu of any Employer contributions in future years until it is eliminated, and to be returned to the Employer if it cannot be credited consistent with these limitations before the termination of the Plan. 5.4 Reserve 5.5 Limitations as to Certain Participants. Aside from the limitations --------------------------------------- set forth in Section 5.1 and 5.2, in no event shall more than one-third of the Employer contributions to the Plan be allocated to the Accounts of Highly Compensated Employees. The Committee shall take whatever action may be necessary from time to time to assure compliance with the limitations set forth in this Section 5.5. Specifically, the Committee shall, beginning with the Participants whose Cash Compensation (as defined in Section 4.3) amounts are in excess of the limit under Section 401(a)(17) of the Code, reduce the amount of Cash Compensation of such Highly Compensated Employees on a pro-rata basis per individual that would otherwise be taken into account for purposes of allocating benefits under Section 4.2 of this Plan. If, in order to satisfy this Section 5.5, such Participants' Cash Compensation amount per individual must be reduced to an amount that is lower than the Cash Compensation amount of the next most Highly Compensated Employee (the "breakpoint amount"), then, for purposes of allocating benefits under Section 4.2 of the Plan, the Cash Compensation amounts of all Participants shall be reduced to an amount not to exceed such breakpoint amount. 12 Section 6. Trust Fund and Its Investment. ------------------------------ 6.1 Creation of Trust Fund. All amounts received under the Plan from ----------------------- an Employer and investments shall be held as the Trust Fund pursuant to the terms of this Plan and of the Trust Agreement between the Bank and the Trustee. The benefits described in this Plan shall be payable only from the assets of the Trust Fund, and none of the Bank, any other Employer, its board of directors or trustees, its stockholders, its officers, its Employees, the Committee, and the Trustee shall be liable for payment of any benefit under this Plan except from the Trust Fund. 6.2 Stock Fund and Investment Fund. The Trust Fund held by the Trustee ------------------------------- shall be divided into the Stock Fund, consisting entirely of Stock, and the Investment Fund, consisting of all assets of the Trust other than Stock. The Trustee shall have no investment responsibility for the Stock Fund, but shall accept any Employer contributions made in the form of Stock, and shall acquire, sell, exchange, distribute, and otherwise deal with and dispose of Stock in accordance with the instructions of the Committee. 6.3 Acquisition of Stock. From time to time the Committee may, in its --------------------- sole discretion, direct the Trustee to acquire Stock from the issuing Employer or from shareholders, including shareholders who are or have been Employees, Participants, or fiduciaries with respect to the Plan. The Trustee shall pay for such Stock no more than its fair market value, which shall be determined conclusively by the Committee pursuant to Section 12.4. The Committee may direct the Trustee to finance the acquisition of Stock by incurring or assuming indebtedness to the seller or another party which indebtedness shall be called a "Stock Obligation". Any Stock Obligation shall be subject to the following conditions and limitations: 6.3-1 A Stock Obligation shall be for a specific term, shall not be payable on demand except in the event of default, and shall bear a reasonable rate of interest. 6.3-2 A Stock Obligation may, but need not, be secured by a collateral pledge of either the Stock acquired in exchange for the Stock Obligation, or the Stock previously pledged in connection with a prior Stock Obligation which is being repaid with the proceeds of the current Stock Obligation. No other assets of the Plan and Trust may be used as collateral for a Stock Obligation, and no creditor under a Stock Obligation shall have any right or recourse to any Plan and Trust assets other than Stock remaining subject to a collateral pledge. 6.3-3 Any pledge of Stock to secure a Stock Obligation must provide for the release of pledged Stock in connection with payments on the Stock Obligations in the ratio prescribed in Section 4.2. 6.3-4 Repayments of principal and interest on any Stock Obligation generally shall be made by the Trustee from cash contributions designated for such payments, from 13 earnings on such contributions, and from cash dividends received on Stock held in the Unallocated Stock Fund. 6.4 Participants' Option to Diversify. The Committee shall provide for ---------------------------------- a procedure under which each Participant may, during the first five years of a certain six-year period, elect to have up to 25 percent of the value of his Account committed to alternative investment options within the Investment Fund. For the sixth year in this period, the Participant may elect to have up to 50 percent of the value of his Account committed to other investments. The six- year period shall begin with the Plan Year following the first Plan Year in which the Participant has both reached aged 55 and completed 10 years of participation in the Plan; a Participant's election to diversify his Account must be made within the 90-day period immediately following the last day of each of the six Plan Years. The Committee shall see that the Investment Fund includes a sufficient number of investment options to comply with Section 401(a)(28)(B) of the Code. The Trustee shall comply with any investment directions received from Participants in accordance with the procedures adopted from time to time by the Committee under this Section 6.4. Section 7. Voting Rights and Dividends on Stock. ------------------------------------- 7.1 Voting and Tendering of Stock. The Trustee generally shall vote ------------------------------ all shares of Stock held under the Plan. However, if any Employer has registration-type class of securities within the meaning of Section 409(e)(4) of the Code, or if a matter submitted to the holders of the Stock involves a merger, consolidation, recapitalization, reclassification, liquidation, dissolution, or sale of substantially all assets of an entity, then (i) the shares of Stock which have been allocated to Participants' Accounts shall be voted by the Trustee in accordance with the Participants' written instructions, and (ii) the Trustee shall vote any shares of Stock which have been allocated to Participants' Accounts but for which no written instructions have been received and any unallocated Stock in a manner calculated to most accurately reflect the instructions it has received from Participants regarding the allocated Stock. In the event no shares of Stock have been allocated to Participants' Accounts at the time Stock is to be voted, each Participant shall be deemed to have one share of Stock allocated to his or her Account for the sole purpose of providing the Trustee with voting instructions. Notwithstanding any provision hereunder to the contrary, all shares of Stock which have been allocated to Participants' Accounts and for which the Trustee has received no written instructions and all unallocated shares of Stock must be voted by the Trustee in a manner determined by the Trustee to be solely in the interest of the Participants and Beneficiaries. Whenever such voting rights are to be exercised, the Employers, the Committee, and the Trustee shall see that all Participants and Beneficiaries are provided with the same notices and other materials as are provided to other holders of the Stock, and are provided with adequate opportunity to deliver their instructions to the Trustee regarding the voting of Stock allocated to their Accounts. The instructions of the Participants with respect to the voting of allocated shares hereunder shall be confidential. 7.1-1 In the event of a tender offer, Stock shall be tendered by the Trustee in the same manner as set forth above with respect to the voting of Stock. Notwithstanding 14 any provision hereunder to the contrary, Stock must be tendered by the Trustee in a manner determined by the Trustee to be solely in the interest of the Participants and Beneficiaries. 7.2 Dividends on Stock. Dividends on Stock which are received by the ------------------- Trustee in the form of additional Stock shall be retained in the Stock Fund, and shall be allocated among the Participant's Accounts and the Unallocated Stock Fund in accordance with their holdings of the Stock on which the dividends have been paid. Dividends on Stock credited to Participants' Accounts which are received by the Trustee in the form of cash shall, at the direction of the Company paying the dividends, either (i) be credited to the Accounts in accordance with Section 8.3 and invested as part of the Investment Fund, (ii) be distributed immediately to the Participants in proportion with the Participants' Account balance; (iii) be distributed to the Participants within 90 days of the close of the Plan Year in which paid in proportion with the Participants' Account balance; or (iv) be used to repay principal and interest on the Stock Obligation used to acquire Stock on which the dividends were paid. Dividends on Stock held in the Unallocated Stock Fund which are received by the Trustee in the form of cash shall be applied as soon as practicable to payments of principal and interest under the Stock Obligation incurred with the purchase of the Stock. Section 8. Adjustments to Accounts. ------------------------ 8.1 Adjustments for Transactions. An Employer contribution pursuant to ----------------------------- Section 4.1 shall be credited to the Participants' Accounts as of the last day of the Plan Year for which it is contributed. Stock released from the Unallocated Stock Fund upon the Trust's repayment of a Stock Obligation pursuant to Section 4.2 shall be credited to the Participants' Accounts as of the last day of the Plan Year in which the repayment occurred. Any excess amounts remaining from the use of, or the use of the proceeds of, a sale of Stock from the Unallocated Stock Fund to repay a Stock Obligation shall be allocated as of the last day of the Plan Year in which the repayment occurred among the Participants' Accounts as earnings, in proportion to the opening balance in each Account and shall not be deemed annual additions within the meaning of Section 415(c)(2) of the Code. Any benefit which is paid to a Participant or Beneficiary pursuant to Section 10 shall be charged to the Participant's Account as of the first day of the Valuation Period in which it is paid. Any forfeiture or restoral shall be charged or credited to the Participant's Account as of the first day of the Valuation Period in which the forfeiture or restoral occurs pursuant to Section 9.6. 8.2 Valuation of Investment Fund. As of each Valuation Date, the ----------------------------- Trustee shall prepare a balance sheet of the Investment Fund, recording each asset (including any contribution receivable from an Employer) and liability at its fair market value. Any liability with respect to short positions or options and any item of accrued income or expense and unrealized appreciation or depreciation shall be included; provided, however, that such an item may be estimated or excluded if it is not readily ascertainable unless estimating or excluding it would result in a material distortion. The Committee shall then determine the net gain or loss of the Investment Fund since the preceding Valuation Date, which shall mean the entire income of the Investment Fund, including realized and unrealized capital gains and losses, net of any expenses to be 15 charged to the general Investment Fund and excluding any contributions by the Employer. The determination of gain or loss shall be consistent with the balance sheets of the Investment Fund for the current and preceding Valuation Dates. 8.3 Adjustments for Investment Experience. Any net gain or loss of the -------------------------------------- Investment Fund during a Valuation Period, as determined pursuant to Section 8.2, shall be allocated as of the last day of the Valuation Period among the Participants' Accounts in proportion to the opening balance in each Account, as adjusted for benefit payments and forfeitures during the Valuation Period, without regard to whatever Stock may be credited to an Account. 8.4 Adjustments for Capital Changes. In the event of any change in the ------------------------------- outstanding shares of Stock by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, reorganization, combination or exchange of shares, or other similar corporate change, or other increase or decrease in such shares effected without receipt or payment of consideration by the bank issuing the Stock, the Committee shall adjust the number of shares of Stock allocated to the Participants' Accounts to prevent dilution or enlargement of such Accounts. Section 9. Vesting of Participants' Interests. ----------------------------------- 9.1 Deferred Vesting in Accounts. A Participant's vested interest in ----------------------------- his Account shall be based on his Vesting Years in accordance with the following table, subject to the balance of this Section 9:
Vesting Years Percentage of Interest Vested -------------- ----------------------------- fewer than 1 0% 1 20% 2 40% 3 60% 4 80% five or more 100%
9.2 Computation of Vesting Years. For purposes of this Plan, a ----------------------------- "Vesting Year" means a twelve (12) consecutive month period beginning with the day the Employee first completes an Hour of Service. A Participant's subsequent Vesting Years shall be the twelve (12) consecutive month periods coinciding with the Plan Year commencing with the Plan Year which includes the first anniversary of the date the Participant first completed an Hour of Service with the Employer. However, a Participant's Vesting Years shall be computed subject to the following conditions and qualifications: (a) A Participant's vested interest in his Account accumulated before a Break in Service shall be determined without regard to any Service after the break. Notwithstanding the foregoing, in the event a Participant has an eligibility computation period (as defined in Section 3.1 of the Plan) during which he performs 500 or fewer Hours 16 of Service (a "one year Break in Service"), and then returns to Service prior to having a Break in Service, his Service performed both before and after his break in employment shall be taken into account in determining his Vesting Years. Generally, if a Participant has a Break in Service before his interest in his Account has become vested to some extent, he shall lose credit for any Vesting Year before the Break in Service. However, if a Participant separates from Service before his interest in his Account has become vested to some extent, and returns to Service after a Break in Service, the Participant's Vesting Years both prior to and after the Break in Service will count as Vesting Years for his Account accumulated after the Break in Service if the number of the Participant's consecutive one year Breaks in Service is less than the number of years of Service prior to the Break in Service. (b) Unless otherwise specifically excluded, a Participant's Vesting Years shall include any period of active military duty to the extent required by the Military Selective Service Act of 1967 (38 U.S.C. Section 2021). 9.3 Full Vesting Upon Certain Events. Notwithstanding Section 9.1, a --------------------------------- Participant's interest in his Account shall fully vest on the Participant's Normal Retirement Date, provided the Participant is in Service on or after that date. The Participant's interest shall also fully vest in the event that his Service is terminated by Disability or by death. 9.4 Full Vesting Upon Plan Termination. Notwithstanding Section 9.1, a ----------------------------------- Participant's interest in his Account shall fully vest if he is in active Service upon termination of this Plan or upon the permanent and complete discontinuance of contributions to this Plan by his Employer. In the event of a partial termination, the interest of each Participant who is in Service shall fully vest with respect to that part of the Plan which is terminated. 9.5 Forfeiture, Repayment, and Restoral. If a Participant's Service ------------------------------------ terminates before his interest in his Account is fully vested, that portion which has not vested shall be forfeited if he either (i) receives a distribution of his entire vested benefit, or (ii) has a Break in Service. If a Participant who has received his entire vested interest returns to Service before he has a Break in Service, he may repay to the Trustee an amount equal to the distribution. The Participant may repay such amount at any time within five years after he has returned to Service. The amount shall be credited to his Account as of the last day of the Plan Year in which it is repaid; an additional amount equal to the portion of his Account which was previously forfeited shall be restored to his Account at the same time from other Employees' forfeitures and, if such forfeitures are insufficient, from a special contribution by his Employer for that year. In the case of a terminated Participant who does not receive a distribution of his entire vested interest and whose Service resumes after a Break in Service, any undistributed balance from his prior participation which was not forfeited shall be maintained as a fully vested subaccount with his Account. If a portion of a Participant's Account is forfeited, assets other that Stock must be forfeited before any Stock may be forfeited. In the case of a Participant who has incurred a Break in Service and then returns to Service, all years of Service after the Break in Service will be disregarded for the purpose of vesting his Account accrued before the Break in Service, but 17 both pre-Break and post-Break Service will count for the purpose of vesting the Participant's Account that accrues after the Break in Service. If a Participant's Service terminates prior to his Account having become vested, such Participant shall be deemed to have received a distribution of his entire vested interest as of the Valuation Date next following his termination of Service. 9.6 Accounting for Forfeitures. A forfeiture shall be charged to the --------------------------- Participant's Account as of the first day of the first Valuation Period in which the forfeiture becomes certain pursuant to Section 9.5. Except as otherwise provided in that Section, a forfeiture shall be added to the contributions of the terminated Participant's Employer which are to be credited to other Participants pursuant to Section 4.1 as of the last day of the Plan Year in which the forfeiture becomes certain. 9.7 Vesting and Nonforfeitability. A Participant's interest in his ------------------------------ Account which has become vested shall be nonforfeitable for any reason. Section 10. Payment of Benefits. -------------------- 10.1 Benefits for Participants. A Participant whose Service ends for -------------------------- any reason shall receive the vested portion of his Account in a single payment on a date selected by the Committee. That date shall be on or before the 60th day after the end of the Plan Year in which his Service ends. Notwithstanding the foregoing, if the balance credited to his Account exceeds, or at the time of any prior distribution exceeded, $3,500, his benefit shall not be paid before the latest of his 65th birthday or the tenth anniversary in which he commenced participation in the Plan, unless he elects an early payment date in a written election filed with the Committee. A Participant may modify such an election at any time, provided any new benefit payment date is at least 30 days after a modified election is delivered to the Committee. Such an election is not valid unless it is made after the Participant has received the required notice under Section 1.411(a)-11(c) of the Income Tax Regulations that provides a general description of the material features of a lump sum distribution and the Participant's right to defer receipt of his benefit. The Notice shall be provided no less than 30 days and no more than 90 days before the first day on which all events have occurred which entitle the Participant to such benefit. Written consent of the Participant to the distribution generally may not be made within 30 days of the date the Participant receives the notice and shall not be made more than 90 days from the date the Participant receives the notice. However, a distribution may be made less than 30 days after the notice provided under Section 1.411(a)-11(c) of the Income Tax Regulations is given, if: (a) the Committee clearly informs the Participant that he has a right to period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and if applicable, a particular distribution option), and (b) the Participant, after receiving the notice, affirmatively elects a distribution. In all events, a Participant's benefits shall be paid by April 1st of the calendar year following the calendar year in which he reaches age 70-1/2. A Participant's benefits from that portion of his 18 Account committed to the Investment Fund shall be calculated on the basis of the most recent Valuation Date before the day of payment. For Plan Years beginning after December 31, 1996, with respect to all Participants other than those who are 5% owners within the meaning of Section 416 of the Code, such Participant's benefits shall be paid by April 1st of the later of (i) the calendar year following the calendar year in which he reaches age 70-1/2, or (ii) the calendar year in which he retires. With respect to all Participants who are 5% owners within the meaning of Section 416 of the Code, such Participants benefits shall be paid by April 1st of the calendar year following the calendar year in which he reaches age 70-1/2. 10.2 Benefits on a Participant's Death. If a Participant dies before ---------------------------------- his benefits are paid pursuant to Section 10.1, the balance credited to his Account shall be paid to his Beneficiary in a single distribution on or before the 60th day after the end of the Plan Year in which he died. The benefits from that portion of the Account committed to the Investment Fund shall be calculated on the basis of the most recent Valuation Date before the date of payment. If a married Participant dies before his benefit payments begin, then unless he has specifically elected otherwise the Committee shall cause the balance in his Account to be paid to his Spouse. No election by a married Participant of a different Beneficiary shall be valid unless the election is accompanied by the Spouse's written consent, which (i) must acknowledge the effect of the election, (ii) must explicitly provide either that the designated Beneficiary may not subsequently be changed by the Participant without the Spouse's further consent, or that it may be changed without such consent, and (iii) must be witnessed by the Committee, its representative, or a notary public. This requirement shall not apply if the Participant establishes to the Committee's satisfaction that the Spouse may not be located. 10.3 Marital Status. The Committee shall from time to time take --------------- whatever steps it deems appropriate to keep informed of each Participant's marital status. Each Employer shall provide the Committee with the most reliable information in the Employer's possession regarding its Participants' marital status, and the Committee may, in its discretion, require a notarized affidavit from any Participant as to his marital status. The Committee, the Plan, the Trustee, and the Employers shall be fully protected and discharged from any liability to the extent of any benefit payments made as a result of the Committee's good faith and reasonable reliance upon information obtained from a Participant and his Employer as to his marital status. 10.4 Delay in Benefit Determination. If the Committee is unable to ------------------------------- determine the benefits payable to a Participant or Beneficiary on or before the latest date prescribed for payment pursuant to Section 10.1 or 10.2, the benefits shall in any event be paid within 60 days after they can first be determined, with whatever makeup payments may be appropriate in view of the delay. 19 10.5 Accounting for Benefit Payments. Any benefit payment shall be -------------------------------- charged to the Participant's Account as of the first day of the Valuation Period in which the payment is made. 10.6 Options to Receive and Sell Stock. Unless ownership of virtually ---------------------------------- all Stock is restricted to active Employees and qualified retirement plans for the benefit of Employees pursuant to the certificates of incorporation or by- laws of the Employers issuing Stock, a terminated Participant or the Beneficiary of a deceased Participant may instruct the Committee to distribute the Participant's entire vested interest in his Account in the form of Stock. In that event, the Committee shall apply the Participant's vested interest in the Investment Fund to purchase sufficient Stock from the Stock Fund or from any owner of stock to make the required distribution. In all other cases, the Participant's vested interest in the Stock Fund shall be distributed in shares of Stock, and his vested interest in the Investment Fund shall be distributed in cash. Any Participant who receives Stock pursuant to Section 10.1, and any person who has received Stock from the Plan or from such a Participant by reason of the Participant's death or incompetency, by reason of divorce or separation from the Participant, or by reason of a rollover contribution described in Section 402(c) of the Code, shall have the right to require the Employer which issued the Stock to purchase the Stock for its current fair market value (hereinafter referred to as the "put right"). The put right shall be exercisable by written notice to the Committee during the first 60 days after the Stock is distributed by the Plan, and, if not exercised in that period, during the first 60 days in the following Plan Year after the Committee has communicated to the Participant its determination as to the Stock's current fair market value. However, the put right shall not apply to the extent that the Stock, at the time the put right would otherwise be exercisable, may be sold on an established market in accordance with federal and state securities laws and regulations. If the put right is exercised, the Trustee may, if so directed by the Committee in its sole discretion, assume the Employer's rights and obligations with respect to purchasing the Stock. The Employer or the Trustee, as the case may be, may elect to pay for the Stock in equal periodic installments, not less frequently than annually, over a period not longer than five years from the 30th day after the put right is exercised, with adequate security and interest at a reasonable rate on the unpaid balance, all such terms to be set forth in a promissory note delivered to the seller with normal terms as to acceleration upon any uncured default. Nothing contained herein shall be deemed to obligate any Employer to register any Stock under any federal or state securities law or to create or maintain a public market to facilitate the transfer or disposition of any Stock. The put right described herein may only be exercised by a person described in the second preceding paragraph, and may not be transferred with any Stock to any other person. As to all Stock purchased by the Plan in exchange for any Stock Obligation, the put right be nonterminable. The put right for Stock acquired through a Stock Obligation shall continue with respect to such Stock after the Stock Obligation is repaid or the Plan ceases to be an employee stock ownership plan. Except as provided above, in accordance with the provisions 20 of Sections 54.4975-7(b)(4) of the Treasury Regulations, no Stock acquired with the proceeds of a Stock Obligation may be subject to any put, call or other option or buy-sell or similar arrangement while held by and when distributed from the Plan, whether the Plan is then an employee stock ownership plan. 10.7 Restrictions on Disposition of Stock. Except in the case of Stock ------------------------------------- which is traded on an established market, a Participant who receives Stock pursuant to Section 10.1, and any person who has received Stock from the Plan or from such a Participant by reason of the Participant's death or incompetency, by reason of divorce or separation from the Participant, or by reason of a rollover contribution described in Section 402(c) of the Code, shall, prior to any sale or other transfer of the Stock to any other person, first offer the Stock to the issuing Employer and to the Plan at its current fair market value. This restriction shall apply to any transfer, whether voluntary, involuntary, or by operation of law, and whether for consideration or gratuitous. Either the Employer or the Trustee may accept the offer within 14 days after it is delivered. Any Stock distributed by the Plan shall bear a conspicuous legend describing the right of first refusal under this Section 10.7, as well as any other restrictions upon the transfer of the Stock imposed by federal and state securities laws and regulations. 10.8 Direct Transfer of Eligible Plan Distributions. A Participant or ---------------------------------------------- Beneficiary may direct that an "eligible rollover distribution" (as defined below) included in such payment be paid directly to an "eligible retirement plan" (as defined below). To effect such a direct transfer, the Participant or Beneficiary must notify the Committee that a direct transfer is desired and provide to the Committee the eligible retirement plan to which the payment is to be made. Such notice shall be made in such form and at such time as the Committee may prescribe. Upon receipt of such notice, the Committee shall direct the Trustee to make a trustee-to-trustee transfer of the eligible rollover distribution to the eligible retirement plan so specified. For purposes of this Section 10.8, an "eligible rollover distribution" shall have the meaning set forth in Section 402(c)(4) of the Code and any regulations promulgated thereunder. To the extent such meaning is not inconsistent with the above references, an eligible rollover distribution shall mean any distribution of all or any portion of the Participant's Account, except that such term shall not include any distribution which is one of a series of substantially equal periodic payments (not less frequently than annually) made (i) for the life (or life expectancy) of the Participant or the joint lives (or joint life expectancies) of the Participant and a designated Beneficiary, or (ii) for a period of ten years or more. Further, the term "eligible rollover distribution shall not include any distribution required to be made under Section 401(a)(9) of the Code. For purposes of this Section 10.8, an "eligible retirement plan" shall have the meaning set forth in Section 402(c)(8) of the Code and any regulations promulgated thereunder. To the extent such meaning is not inconsistent with the above references, an eligible retirement plan shall mean: (i) an individual retirement account described in Section 408(a) of the Code; (ii) an individual 21 retirement annuity described in Section 408(b) of the Code (other than an endowment contract), (iii) a qualified trust described in Section 401(a) of the Code and exempt under Section 501(a) of the Code, and (iv) an annuity plan described in Section 403(a) of the Code. Section 11. Rules Governing Benefit Claims and Review of Appeals. ----------------------------------------------------- 11.1 Claim for Benefits. Any Participant or Beneficiary who qualifies ------------------- for the payment of benefits shall file a claim for his benefits with the Committee on a form provided by the Committee. The claim, including any election of an alternative benefit form available under the Plan, if any, shall be filed at least 30 days before the date on which the benefits are to begin. If a Participant or Beneficiary fails to file a claim by the 30th day before the date on which benefits become payable, he shall be presumed to have filed a claim for payment for the Participant's benefits in the standard form prescribed by Sections 10.1 or 10.2 11.2 Notification by Committee. Within 90 days after receiving a claim -------------------------- for benefits (or within 180 days, if special circumstances require an extension of time and written notice of the extension is given to the Participant or Beneficiary within 90 days after receiving the claim for benefits), the Committee shall notify the Participant or Beneficiary whether the claim has been approved or denied. If the Committee denies a claim in any respect, the Committee shall set forth in a written notice to the Participant or Beneficiary: (i) each specific reason for the denial; (ii) specific references to the pertinent Plan provisions on which the denial is based; (iii) a description of any additional material or information which could be submitted by the Participant or Beneficiary to support his claim, with an explanation of the relevance of such information; and (iv) an explanation of the claims review procedures set forth in Section 11.3. 11.3 Claims Review Procedure. Within 60 days after a Participant or ----------------------- Beneficiary receives notice from the Committee that his claim for benefits has been denied in any respect, he may file with the Committee a written notice of appeal setting forth his reasons for disputing the Committee's determination. In connection with his appeal the Participant or Beneficiary or his representative may inspect or purchase copies of pertinent documents and records to the extent not inconsistent with other Participants' and Beneficiaries' rights of privacy. Within 60 days after receiving a notice of appeal from a prior determination (or within 120 days, if special circumstances require an extension of time and written notice of the extension is given to the Participant or Beneficiary and his representative within 60 days after receiving the notice of appeal), the Committee shall furnish to the Participant or Beneficiary and his representative, if any, a written statement of the Committee's final decision with respect to his claim, including the reasons for such decision and the particular Plan provisions upon which it is based. 22 Section 12. The Committee and Its Functions. -------------------------------- 12.1 Authority of Committee. The Committee shall be the "plan ----------------------- administrator" within the meaning of ERISA and shall have exclusive responsibility and authority to control and manage the operation and administration of the Plan, including the interpretation and application of its provisions, except to the extent such responsibility and authority are otherwise specifically (i) allocated to the Company, the Employers, or the Trustee under the Plan and Trust Agreement, (ii) delegated in writing to other persons by the Company, the Employers, the Committee, or the Trustee, or (iii) allocated to other parties by operation of law. The Committee shall have exclusive responsibility regarding decisions concerning the payment of benefits under the Plan. The Committee shall have full investment responsibility with respect to the Investment Fund except to the extent, if any, specifically provided in the Trust Agreement. In the discharge of its duties, the Committee may employ accountants, actuaries, legal counsel, and other agents (who also may be employed by an Employer or the Trustee in the same or some other capacity) and may pay their reasonable expenses and compensation. 12.2 Identity of Committee. The Committee shall consist of three or ---------------------- more individuals selected by the Company. Any individual, including a director, trustee, shareholder, officer, or Employee of an Employer, shall be eligible to serve as a member of the Committee. The Bank shall have the power to remove any individual serving on the Committee at any time without cause upon 10 days written notice, and any individual may resign from the Committee at any time upon 10 days written notice to the Company. The Company shall notify the Trustee of any change in membership of the Committee. 12.3 Duties of Committee. The Committee shall keep whatever records may -------------------- be necessary to implement the Plan and shall furnish whatever reports may be required from time to time by the Company. The Committee shall furnish to the Trustee whatever information may be necessary to properly administer the Trust. The Committee shall see to the filing with the appropriate government agencies of all reports and returns required of the plan Committee under ERISA and other laws. Further, the Committee shall have exclusive responsibility and authority with respect to the Plan's holdings of Stock and shall direct the Trustee in all respects regarding the purchase, retention, sale, exchange, and pledge of Stock and the creation and satisfaction of Stock Obligations. The Committee shall at all times act consistently with the Company's long-term intention that the Plan, as an employee stock ownership plan, be invested primarily in Stock. Subject to the direction of the Committee with respect to Stock Obligations pursuant to the provision of Section 4.2, and subject to the provisions of Sections 6.4 and 10.6 as to Participants' rights under certain circumstances to have their Accounts invested in Stock or in assets other than Stock, the Committee shall determine in its sole discretion the extent to which assets of the Trust shall be used to repay Stock Obligations, to purchase Stock, or to invest in other assets to be selected by the Committee or an investment manager. No provision of the Plan relating to the allocation or vesting of any interests in the Stock Fund or the Investment Fund shall restrict the Committee from changing any holdings of the Trust, whether the changes involve an increase or 23 a decrease in the Stock or other assets credited to Participants' Accounts. In determining the proper extent of the Trust's investment in Stock, the Committee shall be authorized to employ investment counsel, legal counsel, appraisers, and other agents to pay their reasonable expenses and compensation. 12.4 Valuation of Stock. If the valuation of any Stock is not ------------------- established by reported trading on a generally recognized public market, the Committee shall have the exclusive authority and responsibility to determine its value for all purposes under the Plan. Such value shall be determined as of each Valuation Date, and on any other date as of which the Plan purchases or sells such Stock. The Committee shall use generally accepted methods of valuing stock of similar corporations for purposes of arm's length business and investment transactions, and in this connection the Committee shall obtain, and shall be protected in relying upon, the valuation of such Stock as determined by an independent appraiser experienced in preparing valuations of similar businesses. 12.5 Compliance with ERISA. The Committee shall perform all acts ---------------------- necessary to comply with ERISA. Each individual member or employee of the Committee shall discharge his duties in good faith and in accordance with the applicable requirements of ERISA. 12.6 Action by Committee. All actions of the Committee shall be -------------------- governed by the affirmative vote of a number of members which is a majority of the total number of members currently appointed, including vacancies. The members of the Committee may meet informally and may take any action without meeting as a group. 12.7 Execution of Documents. Any instrument executed by the Committee ----------------------- shall be signed by any member or employee of the Committee. 12.8 Adoption of Rules. The Committee shall adopt such rules and ------------------ regulations of uniform applicability as it deems necessary or appropriate for the proper administration and interpretation of the Plan. 12.9 Responsibilities to Participants. The Committee shall determine --------------------------------- which Employees qualify to enter the Plan. The Committee shall furnish to each eligible Employee whatever summary plan descriptions, summary annual reports, and other notices and information may be required under ERISA. The Committee also shall determine when a Participant or his Beneficiary qualifies for the payment of benefits under the Plan. The Committee shall furnish to each such Participant or Beneficiary whatever information is required under ERISA (or is otherwise appropriate) to enable the Participant or Beneficiary to make whatever elections may be available pursuant to the provisions of Sections 6 and 10, and the Committee shall provide for the payment of benefits in the proper form and amount from the assets of the Trust Fund. The Committee may decide in its sole discretion to permit modifications of elections and to defer or accelerate benefits to the extent consistent with applicable law and the best interests of the individuals concerned. 24 12.10 Alternative Payees in Event of Incapacity. If the Committee finds ------------------------------------------ at any time that an individual qualifying for benefits under this Plan is a minor or is incompetent, the Committee may direct the benefits to be paid, in the case of a minor, to his parents, his legal guardian, a custodian for him under the Uniform Transfers to Minors Act, or the person having actual custody of him, or, in the case of an incompetent, to his Spouse, his legal guardian, or the person having actual custody of him, the payments to be used for the individual's benefit. The Committee and the Trustee shall not be obligated to inquire as to the actual use of the funds by the person receiving them under this Section 12.10, and any such payment shall completely discharge the obligations of the Plan, the Trustee, the Committee, and the Employers to the extent of the payment. 12.11 Indemnification by Employers. Except as separately agreed in ----------------------------- writing, the Committee, and any member or employee of the Committee, shall be indemnified and held harmless by the Employers, jointly and severally, to the fullest extent permitted by law against any and all costs, damages, expenses, and liabilities reasonably incurred by or imposed upon it or him in connection with any claim made against it or him or in which it or he may be involved by reason of its or his being, or having been, the Committee, or a member or employee of the Committee, to the extent such amounts are not paid by insurance. 12.12 Nonparticipation by Interested Member. Any member of the Committee -------------------------------------- who also is a Participant in the Plan shall take no part in any determination specifically relating to his own participation or benefits, unless his abstention would leave the Committee incapable of acting on the matter. Section 13. Adoption, Amendment, or Termination of the Plan. ------------------------------------------------ 13.1 Adoption of Plan by Other Employers. With the consent of the ------------------------------------ Company, any entity may become a participating Employer under the Plan by (i) taking such action as shall be necessary to adopt the Plan, (ii) becoming a party to the Trust Agreement establishing the Trust Fund, and (iii) executing and delivering such instruments and taking such other action as may be necessary or desirable to put the Plan into effect with respect to the entity's Employees. 13.2 Adoption of Plan by Successor. In the event that any Employer ------------------------------ shall be reorganized by way of merger, consolidation, transfer of assets or otherwise, so that an entity other than an Employer shall succeed to all or substantially all of the Employer's business, the successor entity may be substituted for the Employer under the Plan by adopting the Plan and becoming a party to the Trust Agreement. Contributions by the Employer shall be automatically suspended from the effective date of any such reorganization until the date upon which the substitution of the successor entity for the Employer under the Plan becomes effective. If, within 90 days following the effective date of any such reorganization, the successor entity shall not have elected to become a party to the Plan, or if the Employer shall adopt a plan of complete liquidation other than in connection with a reorganization, the Plan shall be automatically terminated with respect to Employees of the Employer as of the close of business on the 90th day 25 following the effective date of the reorganization, or as of the close of business on the date of adoption of a plan of complete liquidation, as the case may be. 13.3 Plan Adoption Subject to Qualification. Notwithstanding any other --------------------------------------- provision of the Plan, the adoption of the Plan and the execution of the Trust Agreement are conditioned upon their being determined initially by the Internal Revenue Service to meet the qualification requirements of Section 401(a) of the Code, so that the Employers may deduct currently for federal income tax purposes their contributions to the Trust and so that the Participants may exclude the contributions from their gross income and recognize income only when they receive benefits. In the event that this Plan is held by the Internal Revenue Service not to qualify initially under Section 401(a) of the Code, the Plan may be amended retroactively to the earliest date permitted by U.S. Treasury Regulations in order to secure qualification under Section 401(a) of the Code. If this Plan is held by the Internal Revenue Service not to qualify initially under Section 401(a) of the Code, either as originally adopted or as amended, each Employer's contributions to the Trust under this Plan (including any earnings thereon) shall be returned to it and this Plan shall be terminated. In the event that this Plan is amended after its initial qualification and the Plan as amended is held by the Internal Revenue Service not to qualify under Section 401(a) of the Code, the amendment may be modified retroactively to the earliest date permitted by U.S. Treasury Regulations in order to secure approval of the amendment under Section 401(a) of the Code. 13.4 Right to Amend or Terminate. The Company intends to continue this ---------------------------- Plan as a permanent program. However, each participating Employer separately reserves the right to suspend, supersede, or terminate the Plan at any time and for any reason, as it applies to that Employer's Employees, and the Company reserves the right to amend, suspend, supersede, merge, consolidate, or terminate the Plan at any time and for any reason, as it applies to the Employees of all Employers. No amendment, suspension, supersession, merger, consolidation, or termination of the Plan shall reduce any Participant's or Beneficiary's proportionate interest in the Trust Fund, or shall divert any portion of the Trust Fund to purposes other than the exclusive benefit of the Participants and their Beneficiaries prior to the satisfaction of all liabilities under the Plan. Except as is required for purposes of compliance with the Code or ERISA, each as amended from time to time, neither the provisions of Section 4.1 and 4.2 relating to the crediting of contributions, forfeitures and shares of Stock released from the Unallocated Stock Fund, nor any other provision of the Plan relating to the allocation of benefits to Participants, may be amended more frequently than once every six months. Moreover, there shall not be any transfer of assets to a successor plan or merger or consolidation with another plan unless, in the event of the termination of the successor plan or the surviving plan immediately following such transfer, merger, or consolidation, each participant or beneficiary would be entitled to a benefit equal to or greater than the benefit he would have been entitled to if the plan in which he was previously a participant or beneficiary had terminated immediately prior to such transfer, merger, or consolidation. Following a termination of this Plan by the Bank, the Trustee shall continue to administer the Trust and pay benefits in accordance with the Plan as amended from time to time and the Committee's instructions. 26 Section 14. Miscellaneous Provisions. ------------------------- 14.1 Plan Creates No Employment Rights. Nothing in this Plan shall be ---------------------------------- interpreted as giving any Employee the right to be retained as an Employee by an Employer, or as limiting or affecting the rights of an Employer to control its Employees or to terminate the Service of any Employee at any time and for any reason, subject to any applicable employment or collective bargaining agreements. 14.2 Nonassignability of Benefits. No assignment, pledge, or other ----------------------------- anticipation of benefits from the Plan will be permitted or recognized by the Employers, the Committee, or the Trustee. Moreover, benefits from the Plan shall not be subject to attachment, garnishment, or other legal process for debts or liabilities of any Participant or Beneficiary, to the extent permitted by law. This prohibition on assignment or alienation shall apply to any judgment, decree, or order (including approval of a property settlement agreement) which relates to the provision of child support, alimony, or property rights to a present or former Spouse, child or other dependent of a Participant pursuant to a State domestic relations or community property law, unless the judgment, decree, or order is determined by the Committee to be a qualified domestic relations order within the meaning of Section 414(p) of the Code. 14.3 Limit of Employer Liability. The liability of the Employers with ---------------------------- respect to Participants under this Plan shall be limited to making contributions to the Trust from time to time, in accordance with Section 4. 14.4 Treatment of Expenses. All expenses incurred by the Committee and ---------------------- the Trustee in connection with administering this Plan and Trust Fund shall be paid by the Trustee from the Trust Fund to the extent the expenses have not been paid or assumed by the Employers or by the Trustee. 14.5 Number and Gender. Any use of the singular shall be interpreted to ------------------ include the plural, and the plural the singular. Any use of the masculine, feminine, or neuter shall be interpreted to include the masculine, feminine, or neuter, as the context shall require. 14.6 Nondiversion of Assets. Except as provided in Sections 5.3 and ----------------------- 13.3, under no circumstances shall any portion of the Trust Fund be diverted to or used for any purpose other than the exclusive benefit of the Participants and their Beneficiaries prior to the satisfaction of all liabilities under the Plan. 14.7 Separability of Provisions. If any provision of this Plan is held --------------------------- to be invalid or unenforceable, the other provisions of the Plan shall not be affected but shall be applied as if the invalid or unenforceable provision had not been included in the Plan. 14.8 Service of Process. The agent for the service of process upon the ------------------- Plan shall be the president of the Company, or such other person as may be designated from time to time by the Company. 27 14.9 Governing State Law. This Plan shall be interpreted in accordance -------------------- with the laws of California to the extent those laws are applicable under the provisions of ERISA. Section 15. Top-Heavy Provisions. --------------------- 15.1 Determination of Top-Heavy Status. The Committee shall determine ---------------------------------- on a regular basis whether each Plan Year is or is not a "Top-Heavy Year" for purposes of implementing the provisions of Sections 15.2, and 15.3, which apply only to the extent the Plan is top-heavy or super top-heavy within the meaning of Section 416 of the Code and the Treasury Regulations promulgated thereunder. In making this determination, the Committee shall use the following definitions and principles: 15.1-1 The "Employer" includes all business entities which are considered commonly controlled or affiliated within the meaning of Sections 414(b), 414(c), and 414(m) of the Code. 15.1-2 The "plan aggregation group" includes each qualified retirement plan maintained by the Employer (i) in which a Key Employee is a Participant during the Plan Year, (ii) which enables any plan described in clause (i) to satisfy the requirements of Section 401(a)(4) or 410 of the Code, or (iii) which provides contributions or benefits comparable to those of the plans described in clauses (i) and (ii) and which is designated by the Committee as part of the plan aggregation group. 15.1-3 The "determination date," with respect to the first Plan Year of any plan, means the last day of that Plan Year, and with respect to each subsequent Plan Year, means the last day of the preceding Plan Year. If any other plan has a determination date which differs from this Plan's determination date, the top-heaviness of this Plan shall be determined on the basis of the other plan's determination date falling within the same calendar years as this Plan's determination date. 15.1-4 A "Key Employee," with respect to a Plan Year, means an Employee who at any time during the five years ending on the top-heavy determination date for the Plan Year has received compensation from an Employer and has been (i) an officer of the Employer having Total Compensation greater than 50 percent of the limit then in effect under Section 415(b)(1)(A) of the Code, (ii) one of the 10 Employees owning the largest interests in the Employer having Total Compensation greater than the limit then in effect under Section 415(c)(1)(A) of the Code, (iii) an owner of more than five percent of the outstanding equity interest or the outstanding voting interest in any Employer, or (iv) an owner of more than one percent of the outstanding equity interest or the outstanding voting interest in an Employer whose Total Compensation exceeds $150,000. In determining which individuals are Key Employees, the rules of Section 416(i) of the Code and Treasury Regulations promulgated thereunder shall apply. The Beneficiary of a Key Employee shall also be considered a Key Employee. 28 15.1-5 A "Non-key Employee" means an Employee who at any time during the five years ending on the top-heavy determination date for the Plan Year has received compensation from an Employer and who has never been a Key Employee, and the Beneficiary of any such Employee. 15.1-6 The "aggregated benefits" for any Plan Year means (i) the adjusted account balances in defined contribution plans on the determination date, plus (ii) the adjusted value of accrued benefits in defined benefit plans, calculated as of the annual valuation date coinciding with or next preceding the determination date, with respect to Key Employees and Non-key Employees under all plans within the plan aggregation group which includes this Plan. For this purpose, the "adjusted account balance" for and the "adjusted value of accrued benefit" for any Employee shall be increased by all Plan distributions made with respect to the Employee during the five years ending on the determination date. Further, the adjusted account balance under a plan shall not include any amount attributable to a rollover contribution or similar transfer to the plan initiated by an Employee and made after 1983, unless both plans involved are maintained by the Employer, in which event the transferred amount shall be counted in the transferee plan and ignored for all purposes in the transferor plan. Finally, the adjusted value of accrued benefits under any defined benefit plan shall be determined by assuming whichever actuarial assumptions were applied by the Pension Benefit Guaranty Corporation to determine the sufficiency of plan assets for plans terminating on the valuation date. 15.1-7 This Plan shall be "top-heavy" for any Plan Year in which the aggregated benefits of the Key Employees exceed 60 percent of the total aggregated benefits for both Key Employees and Non-key Employees. 15.1-8 This Plan shall be "super top-heavy" for any Plan Year in which the aggregated benefits of the Key Employees exceed 90 percent of the total aggregated benefits for both Key Employees and Non-key Employees. 15.1-9 A "Top-Heavy Year" means a Plan Year in which the Plan is top-heavy. 15.2 Minimum Contributions. For any Top-Heavy Year, each Employer shall ---------------------- make a special contribution on behalf of each Participant to the extent that the total allocations to his Account pursuant to the provisions of Section 4 is less than the lesser of (i) four percent of his Total Compensation for that year, or (ii) the highest ratio of such allocation to Total Compensation received by any Key Employee for that year. For purposes of the special contribution of this Section 15.2, a Key Employee's Total Compensation shall include amounts the Key Employee elected to defer under a qualified 401(k) arrangement. Such a special contribution shall be made on behalf of each Participant who is employed by an Employer on the last day of the Plan Year, regardless of the number of his Hours of Service, and shall be allocated to his Account. 29 For any Plan Year when (1) the Plan is top-heavy and (2) a Non-key Employee is a Participant in both this Plan and a defined benefit plan included in the plan aggregation group which is top heavy, the sum of the Employer contributions and forfeitures allocated to the Account of each such Non-key Employee shall be equal to at least five percent (5%) of such Non-key Employee's Total Compensation for that year. 15.3 Minimum Vesting. For any Plan Year in which this Plan is top-heavy, --------------- as determined under this Section 15, the Vesting Schedule in Section 9.1 will be followed, as such schedule already satisfies the requirements of Section 416 of the Code. 30 EX-10.7 11 FORM OF EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.7 FORM OF LIFE FINANCIAL EMPLOYEE STOCK PURCHASE PLAN 1. General ------- The Life Financial Employee Stock Purchase Plan (the "Plan") offers a convenient and economical way for eligible employees of Life Financial Corp. (the "Company") to commence or increase their ownership of shares of the Company's Common Stock. Once an employee is enrolled as a participant of the Plan, his payroll deductions will be used to purchase new issue Common Stock under the terms of the Plan. The participant pays no brokerage commissions or service charges for purchases made under the Plan. The Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974. 2. Administration -------------- The Company's Board of Directors has appointed a committee ("Committee") composed of ____________ to administer the Plan and make purchases of Common Stock as agent for the participants. The Board of Directors has the authority to make changes in the Committee, or to appoint itself to administer the Plan, at any time. Until changed by further notice, any notices or communications to the Committee should be directed to ______________________. If an eligible employee decides to participate in the Plan, the Committee will keep a continuous record of his participation and send him a statement of his account under the Plan for each month in which a purchase of Common Stock for him takes place. The Committee will also hold and act as custodian of shares purchased under the Plan. This will relieve participants of the responsibility for safekeeping of multiple certificates for shares purchased and protect against loss, theft or destruction of stock certificates. Normally, certificates for shares purchased under the Plan will not be issued to participants. The number of shares credited to a participant's account under the Plan will be shown on his statement of account. However, certificates for any number of whole shares credited to a participant's account under the Plan will be issued to him upon his written request to the Committee, delivered to the Company's address. In addition, any time that more than 50 shares are credited to a participant's account, a certificate for 50 shares will be issued to the participant. In either case, any remaining shares will continue to be credited to the participant's account. Certificates for fractional share interests will not be issued. The Committee reserves the right to interpret and regulate the Plan. The Committee may establish such procedures and make such other provisions for the administration and operation of the Plan as it deems appropriate to give effect to its purpose. 3. Eligibility ----------- As of Jan 1, 1997, the effective date of the Plan, all regular, full- time employees of the Company and of any corporation ("Subsidiary") that, along with the Company, is a member of a controlled group of corporations (as defined in Section 1563 of the Internal Revenue Code) who have been so employed for at least 12 months, are eligible to participate in the Plan. Thereafter, each employee of the Company or subsidiary will become eligible as of the last day of the pay period in which he completes 12 months of employment. For these purposes, an employee will receive credit for a month of employment if he works at least 20 days in a calendar month, counting vacations and authorized leaves of absence, and will receive credit for a year of employment after he completes 12 months of employment, whether or not those months of employment were consecutive. 4. Election to Participate ----------------------- An eligible employee may join the Plan by completing the Authorization Card provided by the Company and returning it to the Committee. Authorization Cards will be furnished to eligible employees at any time upon request to the Company. An eligible employee may join the Plan at any time. 5. Payroll Deductions ------------------ The Authorization Card directs the Company to pay to the Committee the amount withheld from the participant's paycheck. The Authorization Card also directs the Committee to use these payments to purchase new issue shares of Common Stock. After an Authorization Card has been received by the Committee and the authority for the payroll deductions has been noted on the Company's payroll records, the Company will withhold from a participant's paycheck the amount authorized by the participant. The withholding will be made each month from the paycheck for the first pay period ending in that month. The amounts withheld from all participants' paychecks will be pooled and forwarded to the Committee to buy new issue shares of Common Stock for the accounts of all participants under the Plan on the next "Investment Date" (the first day on which the National Market System of the Nasdaq Stock Market is open for trading in each month). The payroll deduction authorizations are effective for an indefinite period of time, until the termination of the Plan. The employee will specify on the Authorization Card the monthly amount to be withheld from his pay. Deductions may be authorized in even multiples of $5.00 from a minimum of $10.00 to a maximum of $50.00. No interest will be paid on payroll deduction amounts. 2 The amount of a participant's payroll deductions can be revised, changed, or terminated by the participant at any time by written notice to the Committee. An Authorization Card should be used for these purposes. Commencement, revision or termination of deductions will become effective as soon as practicable after an employee's request is received by the Committee. 6. Purchase Price -------------- The price of the shares bought with the participant's payroll deductions will be _______% of the average of the high and low prices for the Company's Common Stock on the Composite Tape as properly reported in the _______ Edition of The Wall Street Journal for the Investment Date on which the shares are purchased. If no trading occurs in the Company's Common Stock on the Investment Date, the purchase price will be the average of the high and low prices on the next preceding day on which sales of Common Stock occur on the National Market System of the Nasdaq Stock Market or such other exchange on which the Common Stock is listed. Any fraction of a cent will be rounded up. 7. Number of Shares Purchased -------------------------- On each Investment Date, accumulated payroll deductions from all participants will be pooled and used to purchase new issue shares of Common Stock for the accounts of the participants. The maximum number of whole shares will be purchased. Any payroll deductions remaining after purchase of such maximum number of whole shares will be retained and applied to the purchase of shares on the next Investment Date. Each participant's account will be credited with his pro rata share (computed to four decimal places) of the shares purchased and any additional payroll deductions which have been accumulated. The number of shares credited to each participant's account will depend on the amount of the participant's payroll deductions and the price of the shares determined as provided under the heading "Purchase Price." 8. Fees and Expenses ----------------- Participants will incur no brokerage commissions or service charges for purchases made under the Plan. Certain charges as described under the heading "Withdrawal" may be incurred upon a participant's withdrawal from the plan or upon termination of the Plan. 9. Withdrawal ---------- A participant may withdraw from the Plan at any time. To withdraw from the Plan, a participant must notify the Committee in writing of his withdrawal. In the event a participant withdraws, or in the event of the termination of the Plan, certificates for whole shares credited to the account of the withdrawing participant, or all participants in the case of a termination of the Plan, will be delivered by the Committee and a cash payment will be made for the sale price (less brokerage commission and transfer taxes, if any) of any fractional share interest and any additional payroll deductions credited to the account 3 of the withdrawing participant, or all participants in the case of a termination of the Plan. The Committee may establish such equitable arrangements for the sale of fractional share interests as it shall deem appropriate. As an alternative to receiving certificates for whole shares, a participant may request the Committee to sell all of the shares held in his account under the Plan. The proceeds from the sale, less any brokerage commissions and any transfer taxes, will be remitted to him. Sale requests may be accumulated and sales transactions, if necessary, will occur at least every twenty-five business days. If a request to withdraw is received by the Committee at least five business days prior to any Investment Date, the amount of the participant's payroll deductions which would otherwise have been invested on such Investment Date will be repaid to him as soon as practicable. If a request to withdraw is received by the Committee within five business days prior to any Investment Date, the amount of the payroll deductions scheduled to be invested on such Investment Date will be so invested. In either event, no subsequent payroll deductions will be made from the paychecks of the employee, unless he completes a new Authorization Card providing for such deductions. 10. Voting and Tendering of Shares ------------------------------ Each participant will have authority to direct the Committee in the manner of voting the number of whole shares held in his account. The aggregate number of remaining shares representing fractional share interest under all participants' accounts shall be voted by the Committee in its sole discretion. In the event that a tender offer occurs with respect to shares held under the Plan, the Committee shall give each participant the opportunity to direct, on a confidential basis, whether the whole shares held in his account shall be tendered. The Committee shall tender fractional shares as nearly as possible in the same proportion as whole shares. Whole shares as to which no direction is received from participants will not be voted or tendered as the case may be. 11. Cash Dividends -------------- Cash dividends paid on shares credited to a participant's account will be paid to the participant as soon as practicable following the dividend payment date. Dividend amounts payable to participants will be rounded to the nearest whole cent in the case of fractional share interests. 12. Stock Dividends, Stock Splits, or Rights Offering ------------------------------------------------- Any shares distributed by the Company as a stock dividend on shares credited to a participant's account under the Plan, or upon any split of such shares, will be credited to his account. 4 13. Authorized Shares ----------------- The Company has reserved _______ shares of Common Stock for issuance under the Plan. Unless terminated earlier by the Company, the Plan will terminate when all such shares have been purchased by participants. If, on any Investment Date, there are insufficient shares remaining to fill all purchases then to be made, such shares as are available shall be allocated on a pro rata basis among purchasing participants. 14. Amendments and Termination -------------------------- Although the Company intends to continue the Plan as long as Common Stock reserved for issuance under it remains, the Company reserves the right to suspend, modify or terminate the Plan at any time. Any such suspension, modification, or termination shall not affect a participant's right to shares of Common Stock already purchased for him (except that the Company may take any action necessary to comply with applicable law). Upon the termination of the Plan, the Company shall return to participants their accumulated payroll deductions as soon as practicable. 15. Reports ------- Each participant will receive a statement of his account for each month in which a purchase of Common Stock for his account takes place. Participants will also receive the Annual Report for the Plan, and communications sent to other stockholders, including the Annual Report of the Company, and its Notice of Annual Meeting and Proxy Statement. Participants will receive information necessary for reporting income realized by them under the Plan. 16. Withholding ----------- All taxes subject to withholding payable with respect to the amount of each participant's payroll deductions under the Plan will be deducted from the participant's salary and will not reduce the amounts to be paid to the Committee. 5 EX-16.1 12 LETTER FROM GRANT THORNTON RE CHANGE IN ACCOUNTANT EXHIBIT 16.1 [LETTERHEAD OF GRANT THORNTON LLP APPEARS HERE] March 26, 1997 Securities and Exchange Commission Division of Corporate Finance Washington D.C. 20549 Re: Life Financial Corp., Amendment No. 1 to the Form S-1 File No. 333-20497 Dear Sir or Madam: We have read the first two paragraphs under the caption "Changes in Accountants" in the Prospectus accompanying the Amendment No. 1 to the Form S-1 filed by Life Financial Corp. (File No. 333-20497) relating to the change of independent auditors made on October 24, 1996. With respect to the comments made in such paragraphs, we agree with the statements contained therein. Very truly yours, /s/ GRANT THORNTON LLP - ---------------------- GRANT THORNTON LLP EX-16.2 13 LETTER FROM PRICE WATERHOUSE RE CHANGE IN ACCOUNTANT EXHIBIT 16.2 March 26, 1997 Securities and Exchange Commission 450 Fifth Street, N.W. Washington D.C. 20549 Ladies and Gentlemen: We have read the section titled "Change in Accountants" set forth in the Prospectus which is a part of Amendment No. 1 to the Registration Statement on Form S-1 of Life Financial Corporation dated March 26, 1997, and are in agreement with the statements contained in paragraphs 3 and 4 therein. Yours very truly, /s/ Price Waterhouse LLP - ------------------------ Price Waterhouse LLP EX-23.1 14 CONSENT OF GRANT THORNTON LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We have issued our report dated February 8, 1996, (except for the "Earnings per Share" paragraph of Note 1, as to which the date is March 29, 1996) accompanying the financial statements of Life Savings Bank, Federal Savings Bank contained in the Pre-effective Amendment No. 1 to the Registration Statement on Form S-1 and Prospectus included therein. We consent to the use of the aforementioned report in the Amendment No. 1 to Registration Statement on Form S-1 and Prospectus included therein, and to the use of our name as it appears under the captions "Experts" and "Changes in Accountants." /s/ Grant Thornton LLP GRANT THORNTON LLP Irvine, California March 26, 1997 EX-23.2 15 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Amendment No. 1 to the Registration Statement on Form S-1 of our report dated January 31, 1995 relating to the financial statements of Life Savings Bank, Federal Savings Bank for the year ended December 31, 1994, which appears in such Prospectus. We also consent to the references to us under the headings "Experts" and "Changes in Accountants" in such Prospectus. /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP Los Angeles, California March 26, 1997 EX-23.3 16 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Pre-effective Amendment No. 1 to Registration Statement No. 333-20497 of Life Financial Corp. on Form S-1 of our report dated February 7, 1997 (March 14, 1997 as to Note 16) on the financial statements of Life Savings Bank, Federal Savings Bank, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the headings "The Reorganization" and "Experts" in such Prospectus. /s/ Deloitte & Touche LLP Costa Mesa, California March 25, 1997 EX-27.1 17 FINANCIAL DATA SCHEDULE - ARTICLE 9
9 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 DEC-31-1996 2,882 33 10,350 0 0 8,023 7,981 69,538 1,625 104,010 85,711 3,278 5,748 0 0 0 8,565 708 104,010 6,542 101 286 6,929 3,514 3,766 3,163 963 26 8,681 2,631 2,631 0 0 1,505 1.90 1.90 8.33 2,416 0 0 354 1,177 734 219 1,625 1,625 0 0
EX-99.1 18 NOTICE OF SPECIAL MEETING EXHIBIT 99.1 [LOGO OF LIFE SAVINGS] LIFE SAVINGS BANK, FEDERAL SAVINGS BANK 1598 EAST HIGHLAND AVENUE SAN BERNARDINO, CALIFORNIA 92404 March 28, 1997 Fellow Stockholders: You are cordially invited to attend the annual meeting of stockholders (the "Annual Meeting") of Life Savings Bank, Federal Savings Bank (the "Bank" or "Life Savings"), which will be held on April 18, 1997, at 10:00 a.m., Pacific Time, at the Arrowhead Country Club, at 3433 Parkside Drive, San Bernardino, California 92404. The Notice of Annual Meeting of Stockholders and Proxy Statement and Prospectus appear on the following pages and describe certain details of the formal business to be transacted at the meeting. We urge you to read carefully the description of the Proposals. Directors and Officers of the Bank will be present at the Annual Meeting to respond to any questions that our stockholders may have regarding the business to be transacted. The Board of Directors of the Bank has determined that the matters to be considered at the Annual Meeting, including the holding company structure which will provide greater flexibility to meet the future competitive and financial needs of the Bank, are in the best interest of the Bank and our Stockholders. FOR THE REASONS SET FORTH IN THE PROXY STATEMENT AND THE PROSPECTUS, THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" EACH MATTER TO BE CONSIDERED. YOUR VOTE IS IMPORTANT. PLEASE SIGN AND RETURN THE ENCLOSED PROXY CARD PROMPTLY. YOUR COOPERATION IS APPRECIATED SINCE A MAJORITY OF THE COMMON STOCK OUTSTANDING MUST BE REPRESENTED, EITHER IN PERSON OR BY PROXY, TO CONSTITUTE A QUORUM FOR THE CONDUCT OF BUSINESS. On behalf of the Board of Directors and all the employees of the Bank, I wish to thank you for your continued support. We appreciate your interest. Sincerely yours, /s/ Daniel L. Perl Daniel L. Perl President, Chief Executive Officer and Director LIFE SAVINGS BANK, FEDERAL SAVINGS BANK 1598 EAST HIGHLAND AVENUE SAN BERNARDINO, CALIFORNIA 92404 (909) 886-9751 ---------------- NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 18, 1997 ---------------- NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders ("Annual Meeting") of Life Savings Bank, Federal Savings Bank (the "Bank") will be held on April 18, 1997, at 10:00 a.m., Pacific Time, at the Arrowhead Country Club, 3433 Parkside Drive, San Bernardino, California 92404. The Annual Meeting is for the purpose of considering and voting upon the following matters: I. The approval of an Agreement and Plan of Reorganization (the "Plan of Reorganization") pursuant to which (i) the Bank will be reorganized into a holding company structure and become a wholly- owned subsidiary of Life Financial Corp. and (ii) each outstanding share of the Bank's common stock will be converted into three shares of common stock of Life Financial Corp. The transaction is hereinafter referred to as the "Reorganization"; II. The ratification of the Life Savings Bank, Federal Savings Bank 1996 Stock Option Plan; III. The election of three directors for terms of three years each or until their successors are elected and qualified; IV. The ratification of the appointment of Deloitte & Touche LLP as independent auditors of the Bank for the fiscal year ending December 31, 1997; V. Approval of the Board of Directors to vote the proxy in favor of adjourning the Annual Meeting for up to 30 days, if necessary, in order to solicit further proxies if a majority of the votes eligible to be cast at the Annual Meeting does not submit proxies voting in favor of any of the Proposals; and VI. Such other business as may properly come before the meeting or any adjournments thereof. Note: The Board of Directors is not aware of any other business to come before the Annual Meeting. Pursuant to the Bylaws of the Bank, the Board of Directors has fixed February 28, 1997 as the record date for the determination of stockholders entitled to notice of and to vote at the Annual Meeting, or any adjournments thereof. Only record holders of common stock of the Bank as of the close of business on such record date will be entitled to vote at the Annual Meeting or any adjournments thereof. By Order of the Board of Directors /s/ L. Bruce Mills L. Bruce Mills Corporate Secretary San Bernardino, California March 28, 1997 LIFE SAVINGS BANK, FEDERAL SAVINGS BANK ANNUAL MEETING OF STOCKHOLDERS PURPOSE OF THE ANNUAL MEETING This Proxy Statement, together with the Prospectus of Life Financial Corp. (sometimes referred to hereinafter as the "Company") attached hereto, constitutes the Proxy Statement for, and is being furnished to the stockholders of Life Savings Bank, Federal Savings Bank, a federally chartered savings bank ("Life Savings" or the "Bank"), in connection with the solicitation by the Board of Directors of the Bank of proxies to be used at the annual meeting of stockholders ("Annual Meeting") to be held on April 18, 1997 and at any adjournments thereof. The Proxy Statement and Prospectus are first being mailed to record holders on March 28, 1997. At the Annual Meeting, holders of shares of the Bank's common stock will be asked to vote upon a proposal to approve and authorize the Board of Directors of the Bank to effectuate an Amended Agreement and Plan of Organization dated as of January 16, 1997 ("Plan of Reorganization") and any amendments to such Plan of Reorganization that may be adopted by the Board of Directors of the Bank, as a result of which (i) the Bank will become a wholly owned subsidiary of the Company, a Delaware corporation and (ii) each of the outstanding shares of the Bank's common stock will be converted into three outstanding shares of the common stock of Life Financial Corp. ("Common Stock"). This transaction is hereinafter referred to as the "Reorganization." Voting in favor of or against the Plan of Reorganization includes a vote for or against the adoption of the Certificate of Incorporation and Bylaws of the Company, copies of which are attached hereto. The holders of common stock will also be asked to (i) ratify the adoption of the Life Savings Bank, Federal Savings Bank 1996 Stock Option Plan; (ii) elect three directors for a term of three years each; (iii) ratify the appointment of independent auditors for the year ending December 31, 1997; and (iv) vote upon a proposal to approve and authorize the Board of Directors to vote the proxy in favor of adjourning the Annual Meeting for up to 30 days, if necessary, in order to solicit further proxies if a majority of the votes eligible to be cast at the Annual Meeting does not submit proxies voting in favor of any of the proposals. The approximate date of mailing of this Prospectus and Proxy Statement is March 28, 1997. SOLICITATION AND VOTING OF PROXIES Regardless of the number of shares of Bank common stock owned, it is important that record holders of a majority of the shares of common stock of the Bank be represented in person or by proxy at the Annual Meeting. Stockholders are requested to vote by completing the enclosed proxy card and returning it signed and dated in the enclosed postage-paid envelope. Stockholders are urged to indicate their vote in the spaces provided on the proxy card. PROXIES SOLICITED BY THE BOARD OF DIRECTORS OF THE BANK WILL BE VOTED IN ACCORDANCE WITH THE DIRECTIONS GIVEN THEREIN. WHERE NO INSTRUCTIONS ARE INDICATED, SIGNED PROXY CARDS WILL BE VOTED FOR EACH OF THE PROPOSALS. Other than the matters set forth in the attached Notice of Annual Meeting of Stockholders, the Board of Directors knows of no additional matters that will be presented for consideration at the Annual Meeting. Execution of a proxy, however, confers on the designated proxy holders discretionary authority to vote the shares in accordance with their best judgment on such other business, if any, that may properly come before the Annual Meeting and at any adjournments thereof. A proxy may be revoked at any time prior to its exercise by filing with the Secretary of the Bank a written notice of revocation, by delivering to the Bank a duly executed proxy bearing a later date, or by attending the Annual Meeting and voting in person. However, if you are a stockholder whose shares are not registered in your own name, you will need additional documentation from your record holder to vote personally at the meeting. The cost of soliciting the proxies on behalf of management will be borne by the Bank. In addition to the solicitation of proxies by mail, proxies may be solicited by Directors, officers or regular employees of the Bank 1 in person or by telephone without additional compensation therefor. The Bank will also retain Chase Mellon Shareholder Services to aid in the solicitation for an estimated cost of $3,500 plus out-of-pocket expenses. The Bank will also request persons, firms and corporations holding shares in their names, or in the names of their nominees, which are beneficially owned by others, to send proxy material to and obtain proxies from such beneficial owners and will reimburse such holders for their reasonable expenses in so doing. VOTING SECURITIES The securities which may be voted at the Annual Meeting consist of shares of common stock of the Bank, with each share entitling its owner to one vote on all matters to be voted on at the Annual Meeting. The close of business on February 28, 1997 has been fixed by the Board of Directors as the record date ("Record Date") for the determination of stockholders entitled to notice of and to vote at the Annual Meeting and any adjournment thereof. The total number of shares of the Bank's common stock outstanding on the record date was 1,070,572 shares. The presence, in person or by proxy, of at least a majority of the total number of outstanding shares of common stock entitled to vote is necessary to constitute a quorum at the Annual Meeting. In the event there are not sufficient votes for a quorum or to approve any Proposal at the time of the Annual Meeting, the Annual Meeting may be adjourned in order to permit further solicitation of proxies. PROPOSAL I HOLDING COMPANY REORGANIZATION PLAN OF REORGANIZATION The Board of Directors of the Bank has unanimously approved the Plan of Reorganization and recommends that stockholders vote "FOR" the Plan of Reorganization. The Plan of Reorganization would result in Life Savings becoming a wholly-owned subsidiary of the Company and each share of the Bank's common stock being exchanged for three shares of Life Financial Corp. Common Stock. A copy of the Plan of Reorganization, including the Certificate of Incorporation and Bylaws of Life Financial Corp. is attached hereto as Exhibit A and the following discussion is qualified in its entirety by reference to the Plan of Reorganization. Life Financial Corp. is a newly organized Delaware corporation formed as an indirect subsidiary of Life Savings solely to effect the Reorganization; therefore, Life Financial Corp. has no prior operating history. Pursuant to the Plan of Reorganization, Life Financial Corp. will become a non-diversified unitary savings and loan holding company pursuant to the Home Owners Loan Act of 1933, as amended (the "HOLA"). Life Financial Corp. intends to organize as its wholly-owned subsidiary, an interim federal savings bank, Interim Federal Savings Bank ("Interim"), in order to effect the Reorganization. If the Reorganization is approved by the stockholders of the Bank, and subject to satisfaction of all other conditions set forth in the Plan of Reorganization, including receipt of approval of the Office of Thrift Supervision ("OTS") of the Reorganization, Interim will be merged with and into the Bank, with the Bank as the surviving savings bank. Upon the Effective Date of the Reorganization, each share of the Bank's common stock outstanding immediately prior to the Reorganization will be converted, automatically, by operation of law, into three shares of Life Financial Corp.'s Common Stock with the result that stockholders of Life Savings will become stockholders of the Company and will no longer be stockholders of Life Savings. Shares of common stock of Interim outstanding prior to the merger will be converted in the merger on a one-for-one basis into shares of Life Savings common stock, with the result that all the outstanding Life Savings common stock will be owned by the Company. After the Reorganization, the Bank will continue its existing business and operations as a wholly-owned subsidiary of Life Financial Corp. and the consolidated capitalization, assets, liabilities, income and financial statements, and management of Life Financial Corp. immediately following the Reorganization will be 2 substantially the same as those of the Bank immediately prior to consummation of the Reorganization. Deloitte & Touche LLP, the current independent public accountants of the Bank, will serve as Life Financial Corp.'s independent public accountants. The Federal Charter and the Bylaws of the Bank will continue in effect, and will not be affected in any manner by the Reorganization. The corporate existence of the Bank will continue unaffected and unimpaired by the Reorganization except that all of its outstanding stock will be owned by Life Financial Corp. The deposits in Life Savings will continue to be insured by the Savings Association Insurance Fund ("SAIF") and Life Savings will continue to be a member of the Federal Home Loan Bank of San Francisco, and will be regulated by the OTS. Life Financial Corp. will be required to register with the OTS and will be subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. See "Regulation" in the Prospectus. REASONS FOR REORGANIZATION AND RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors of the Bank believes that the Reorganization will provide greater operating flexibility than is currently enjoyed by the Bank, will facilitate the acquisition of related businesses as opportunities arise and its ability to engage in various corporate and investment activities and, by means of its ability to diversify through the Company's structure, will enhance its ability to remain competitive in the future with other companies in the financial services industry organized in the holding company structure. Although no specific plans have been made, after the Reorganization, Life Financial Corp. also may be in a position to take advantage of acquisition opportunities not otherwise available to the Bank. Concurrently with the Reorganization, the Company is offering 2,500,000 shares of its Common Stock to the public in a firm commitment underwritten public offering (or 2,875,000 shares, in the event that the underwriters exercise their overallotment option) (the "Public Offering"). The net proceeds from the Public Offering, which are expected to be $24.9 million at an assumed price of $11.00 per share (or $28.8 million, in the event that the underwriters exercise their overallotment option) will provide the initial capitalization for the Company and will facilitate the Company's future business activities as described above. The Board of Directors believes that the Reorganization is in the best interest of the Bank and its stockholders and unanimously recommends a vote FOR approval of the Plan of Reorganization. Approval of the Plan of Reorganization will constitute approval of Life Financial Corp.'s Certificate of Incorporation and By-Laws, which are attached hereto as Exhibit A. There are certain provisions in the Company's Certificate of Incorporation and Bylaws authorized under Delaware law that may have the additional effect of preventing or discouraging a hostile takeover and which may make the removal of management more difficult. There are also provisions in the Company's Certificate of Incorporation regarding limitations on personal liability and indemnification rights for directors and officers. In addition, the Delaware General Corporation Law contains provisions that protect Delaware corporations from abusive takeover practices. Accordingly, to the extent that management may be deemed to benefit from these provisions, management may be viewed as having a conflict of interest in recommending the approval of the Plan of Reorganization. The affirmative vote of the holders of a majority of the shares of the Bank's common stock outstanding is required to obtain approval for the Reorganization. THE BOARD OF DIRECTORS OF LIFE SAVINGS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PLAN OF REORGANIZATION. DESCRIPTION OF REORGANIZATION The Reorganization will be accomplished through the following steps: (1) Life Financial Corp. has been incorporated under the laws of the State of Delaware and has become a wholly-owned subsidiary of the Bank; (2) Life Financial Corp. will organize Interim as a wholly-owned subsidiary; (3) Interim will be merged with and into Life Savings, which will be the surviving institution; (4) at the effective time of the merger, each 3 outstanding share of the Bank's common stock will be converted automatically, by operation of law, into three shares of Life Financial Corp.'s Common Stock, with the result that the stockholders of the Bank will become the stockholders of Life Financial Corp.; and (5) the one outstanding share of common stock of Interim, owned by Life Financial Corp., will be converted into one share of the Bank's common stock, with the result that all the outstanding common stock of the Bank will be owned by Life Financial Corp. CONDITIONS TO REORGANIZATION The Plan of Reorganization sets forth several conditions which must be satisfied before the Reorganization will be consummated, including the following conditions which have not yet been satisfied: (i) approval of the Reorganization by the affirmative vote of the holders of a majority of outstanding shares of the Bank's common stock eligible to be cast at the Special Meeting; (ii) approval of the Reorganization by the OTS; and (iii) the receipt of all approvals, reviews, and consents from any other governmental agencies or other third parties which may be required for the lawful consummation of the Reorganization (although no such governmental or third- party approvals are currently anticipated to be required). There cannot be any assurance that the regulatory approvals referred to above will be obtained. It is anticipated that all such approvals will be obtained after the vote by the Bank's common stockholders on the Plan of Reorganization. If conditions are imposed by the OTS on its approval of the Reorganization which would have a material impact on operations of Life Financial Corp. and the Bank, a resolicitation of stockholders may be required. The imposition or nature of such material conditions cannot be anticipated by the Bank. Stockholder approval of the Plan of Reorganization, if obtained, will remain valid until the Reorganization is approved, or disapproved, by the OTS, or until a resolicitation of stockholders is conducted because of the imposition of any unanticipated, material conditions by the OTS. If stockholder or regulatory approval is not obtained, the Reorganization will not be consummated. EFFECTIVE DATE The "Effective Date" of the Reorganization will be the date upon which all conditions of the Reorganization are satisfied and the Articles of Combination pertaining to the Reorganization are filed with, and endorsed by, the OTS, or such date thereafter as is acceptable to the OTS, Life Savings and the Company. TREATMENT OF STOCK CERTIFICATES After the Effective Date, each certificate previously representing shares of the Bank's common stock will automatically represent three shares of the Company's Common Stock. After the Effective Date, stockholders will be entitled, but not required, to exchange their stock certificates for new certificates evidencing three shares of the Company's stock. Chase Mellon Shareholder Services is the transfer agent and registrar for the Bank's common stock and will act in the same capacity for the Common Stock of the Company. DISSENTERS' RIGHTS If the Reorganization is consummated, pursuant to regulations of the OTS, any stockholder of record of Bank common stock who (i) objects to the Reorganization, (ii) does not vote any of such holder's shares in favor of the Reorganization, and (iii) fully complies with all of the provisions of 12 C.F.R. Section 552.14 will be entitled to demand and receive payment in an amount equal to the fair or appraised value of such holder's shares of Bank common stock. For the purpose of determining the amount to be received in connection with the exercise of dissenters' rights pursuant to regulations of the OTS, the fair value of a dissenting stockholder's Bank common stock equals the fair market value of the shares as of the Effective Time. Any Bank stockholder desiring to receive payment of the fair value of such holder's Bank common stock in accordance with the requirements of 12 C.F.R. Section 552.14 must (i) deliver to the Bank, prior to voting on the Reorganization, a writing identifying such holder and stating such holder's intention to demand appraisal of and payment for such holder's shares of Bank common stock and (ii) not vote in favor of the Reorganization. 4 Any written notice of intent to demand appraisal of and payment for shares of Bank common stock should be sent to: Daniel L. Perl, President and Chief Executive Officer, Life Savings Bank, Federal Savings Bank, 4110 Tigris Way, Riverside, California 92503 prior to April 18, 1997, the date of the Annual Meeting. A vote against the Reorganization will not satisfy the requirements for the separate written notice of intent to demand appraisal of and payment for shares of Bank common stock referred to in condition (i) above. Rather, such demand must be made prior and in addition to and separate from any proxy or vote against the Reorganization by the dissenting stockholder. Within ten days of the Effective Time, the Bank must (i) give written notice of the Effective Time by mail to any stockholder who complied with the provisions above and did not vote in favor of the Reorganization and (ii) make a written offer to each such stockholder to pay for such holder's shares at a price estimated to be the fair value of the shares. Such notice and offer must be accompanied by the Bank's balance sheet and statement of income for a fiscal year ending not more than 16 months before the date of notice and offer, together with the latest available interim financial statements and a statement of the procedures that must be followed if the stockholder elects under 12 C.F.R. Section 552.14(c)(5) and (6) to demand appraisal and payment of a different amount than that offered by the Bank. If within 60 days of the Effective Time the stockholder accepts the Bank's offer of the fair value for such holder's shares, or the fair value is otherwise agreed upon between the Bank and the dissenting stockholder, the Bank must make payment for the dissenting stockholder's shares within 90 days of the Effective Time. At any time within 60 days of the Effective Time, a dissenting stockholder may withdraw a demand for appraisal and accept the terms of the Reorganization, and such shares of Bank common stock will become shares of Company Common Stock in accordance with the terms of the Plan of Reorganization. If the dissenting stockholder and the Bank do not agree as to the fair value of the dissenting stockholder's shares within 60 days of the Effective Time, the dissenting stockholder must file a petition with the OTS, with a copy by registered or certified mail to the Bank, demanding a determination of the fair market value of the shares. Each stockholder demanding appraisal of and payment for such holder's shares of Bank common stock in compliance with 12 C.F.R. Section 552.14 must deliver such holder's shares of Bank common stock to the Transfer Agent for notation thereon that an appraisal proceeding is pending. If a dissenting stockholder fails to file a petition with the OTS demanding a determination of fair value within 60 days of the Effective Time or fails to deliver such holder's shares of Bank common stock to the Transfer Agent, such dissenting stockholder will be deemed to have accepted the terms of the Plan of Reorganization, and such stockholder's shares of Bank common stock will become shares of the Company Common Stock in accordance with the terms of the Plan of Reorganization. The director of the OTS (the "Director") may appoint either appropriate OTS staff or one or more independent persons to appraise the shares of a dissenting stockholder who has complied fully with 12 C.F.R. Section 552.14. Appraisals prepared by independent persons will be subject to review by OTS staff. If the Director concurs in the final valuation of the shares, the Director will instruct the Bank to pay the appraised fair market value, together with accrued interest, upon the surrender of the dissenting stockholder's Bank common stock. The Director, at his or her discretion, may apportion or assess the cost of the appraisal proceeding against some or all of the parties to the proceeding. The foregoing does not purport to be a complete statement of the provisions of the OTS regulations relating to dissenter and appraisal rights and is qualified in its entirety by reference to the dissenter and appraisal rights provisions of 12 C.F.R. Section 552.14, which section is reproduced in Exhibit B to this Proxy Statement and which hereby is incorporated by reference herein. AMENDMENT OR TERMINATION The Boards of Directors of the Bank and Life Financial Corp. and the organizers of Interim may amend or terminate the Plan of Reorganization if they determine for any reason that such amendment or termination would 5 be advisable. Such amendment may occur at any time prior to the completion of the Reorganization, whether before or after stockholder approval of the Plan of Reorganization, except that, after stockholder approval, the Plan of Reorganization may not be amended in any respect deemed to be material by any of such Boards of Directors or organizers. Such termination may occur at any time prior to the completion of the Reorganization. COMPARISON OF STOCKHOLDER RIGHTS AND CERTAIN ANTITAKEOVER CONSIDERATIONS As a result of the Reorganization, holders of the common stock of the Bank, whose rights are presently governed by federal law and the Charter and Bylaws of the Bank, will become stockholders of Life Financial Corp., a Delaware corporation. Accordingly, their rights will be governed by the Delaware General Corporation Law and the Certificate of Incorporation and Bylaws of Life Financial Corp. rather than the charter and bylaws of Life Savings. There are differences between the provisions of the Certificate of Incorporation and Bylaws of Life Financial Corp. and those of the current Charter and Bylaws of the Bank. See "Regulation" and "Restrictions on Acquisition of the Company" in the Prospectus. Those differences should be noted by stockholders in connection with their consideration of the proposed Reorganization. The Certificate of Incorporation and Bylaws of Life Financial Corp. are attached hereto as Exhibit A, are incorporated herein by reference, and should be read carefully. Currently, stockholders of Life Savings have all of the voting rights in Life Savings. Upon completion of the Reorganization, exclusive voting rights will be vested in the Company as the sole holder of the outstanding capital stock of Life Savings. Voting rights of the Company will be vested in the holders of the Company Common Stock. Current stockholders of Life Savings will no longer have any voting rights directly in Life Savings. As stockholders of the Company upon the conversion of their shares of common stock of Life Savings into shares of Company Common Stock or through the purchase of Common Stock in the Company, they will have only indirect voting rights in Life Savings. Not only will such voting rights be indirect but, unless current stockholders of Life Savings purchase a sufficient amount of Common Stock in the Company's Offering, such voting rights will be diluted. Capital Stock. Life Savings is authorized to issue 10,000,000 shares of common stock of which 1,070,572 shares are currently outstanding, and no shares of preferred stock. The Company is authorized to issue 25,000,000 shares of Common Stock and 5,000,000 shares of preferred stock. Upon the issuance of the Company's Common Stock in the Reorganization, the Company will have 3,211,716 shares of common stock outstanding and upon the issuance of additional Common Stock in the Offering will have a total of 5,711,716 shares of common stock outstanding assuming 2,500,000 shares of Company Common Stock are issued in the Offering (or 6,086,716 shares in the event that the underwriters exercise their overallotment option). The Company will initially have no preferred stock outstanding. See "Description of Capital Stock of the Company" in the Prospectus. Payment of Dividends. Subject to applicable law, the Bylaws of the Bank and those of Life Financial Corp. each provide for the payment of dividends. The ability of the Bank to pay dividends on the Bank common stock is restricted by OTS regulations and by tax considerations relating to depository institutions. See "Dividend Policy" and "Description of Capital Stock of the Bank" in the Prospectus. Unlike the Bank, the Company is not subject to OTS regulatory restrictions on the payment of dividends to its stockholders. The Company is subject, however, to the requirements of Delaware law, which generally limit dividends to an amount equal to the excess of the net assets of the Company (the amount by which total assets exceed total liabilities) over its statutory capital, or if there is no such excess, to its net profits for the current and/or immediately preceding fiscal year. For a discussion of certain circumstances under which the Company may become subject to certain provisions of the California Corporation Code, see "Restrictions on Acquisition of the Company" in the Prospectus. Since the Company initially will have no significant source of income other than dividends from the Bank and earnings from the net proceeds retained by the Company, the payment of dividends by the Company may be dependent, in part, upon dividends from the Bank, which is subject to various tax and regulatory restrictions on the payment of dividends. Life Savings will be able to pay dividends to the Company only in compliance with the restrictions described above. In addition, the Company would be required to give advance 6 notice to the OTS prior to any dividend by Life Savings, and the OTS could object to any such dividend. See "Dividend Policy," "Description of Capital Stock of the Company" and "Regulation" in the Prospectus. Board of Directors. The Boards of Directors of Life Savings and Life Financial Corp. are divided into three classes, each of which shall contain approximately one-third of the whole number of members of the Board. Each class serves staggered terms of three years, with approximately one-third of the total number of Directors being elected each year. The Certificate of Incorporation of the Company provides that a director may be removed from the Board of Directors prior to the expiration of his term only for cause, upon the vote of 80% of the outstanding shares of voting stock. In the absence of these provisions, the vote of the holders of a majority of the shares could remove the entire Board, with or without cause. In contrast, under the Life Savings Bylaws, stockholders may remove directors for cause upon the vote of a majority of the shares then entitled to vote at an election of directors. If less than the entire board is to be removed, no one of the directors may be removed if the votes cast against the removal would be sufficient to elect a director if then cumulatively voted at an election of the class of directors of which such director is a part. Cumulative Voting. The Bank's Charter provides that at each election for directors, every stockholder entitled to vote shall have the right to vote, in person or by proxy, the number of shares owned by him for as many persons as there are directors to be elected and for whose election he has a right to vote or to cumulate his votes. Life Financial Corp.'s Certificate of Incorporation does not provide for cumulative voting for any purpose. Cumulative voting entitles a stockholder to cast a total number of votes equal to the number of directors to be elected multiplied by the number of his or her shares and to distribute that number of votes among any number of the nominees. The absence of cumulative voting for directors limits the ability of minority stockholder to elect directors. Because the holder of less than a majority of the Company Common Stock cannot be assured of representation on the Board of Directors, the absence of cumulative voting may discourage accumulation of Life Financial Corp. Common Stock or proxy contests that could result in changes in Life Financial Corp.'s management. Cumulative voting was not provided for in Life Financial Corp.'s Certificate of Incorporation because management believes that each director should represent and act in the interest of all stockholders and not any special group of stockholders. The Board of Directors also believes that the absence of cumulative voting will help to assure continuity and stability of management and policies by making it more difficult for the holders of less than a majority of Life Financial Corp. Common Stock to elect their designees to the Board of Directors. Special Meetings of Stockholders and Action by Written Consent. Under the Bank's Bylaws, special meetings of the stockholders may be called at any time by the Chairman of the Board, the President, or a majority of the Board of Directors and shall be called by the Chairman of the Board, the President, or the Secretary upon the written request of the holders of not less than one- tenth of all the outstanding capital stock of the Bank entitled to vote at the meeting. The Bank's Bylaws also provide that any action required to be taken at a meeting of stockholders may be taken without a meeting if consent in writing, setting forth the action so taken, is given by all the stockholders entitled to vote with respect to the subject matter of such action. Life Financial Corp.'s Certificate of Incorporation provides that a special meeting of stockholders may only be called by the Company's Board of Directors. The Certificate of Incorporation also provides that any action required or permitted to be taken by the stockholders of the Company may be taken only at an annual or special meeting and prohibits stockholder action by written consent in lieu of a meeting. See "Restrictions on Acquisition of Control of the Company" in the Prospectus. Limitation on Voting Rights. The Certificate of Incorporation of the Company contains limitations on the ability of a record owner of any outstanding Common Stock beneficially owned directly or indirectly by a person in excess of 10% of the then outstanding shares of Common Stock (the "Limit") to vote the shares held in excess of the Limit. See "Restrictions on Acquisition of the Company-- Restrictions in the Company's Certificate of Incorporation" in the Prospectus. 7 New Business. Under the Bank's Bylaws, any new business to be taken up at the annual meeting shall be stated in writing and filed with the Secretary of the Bank at least five days before the date of the annual meeting, and all business so stated, proposed and filed shall be considered at the annual meeting, but no other proposal shall be acted upon at the annual meeting. The Bylaws of Life Financial Corp. require a stockholder who intends to raise new business at a stockholder meeting to give at least 90 days advance notice to the Secretary of Life Financial Corp.; provided, however, that in the event that less than 100 days notice or prior disclosure of the meeting is given by Life Financial Corp., notice of new business to be proposed by a stockholder to be timely must be received by the Secretary within ten days of the date of such notice or disclosure of the date of the meeting by Life Financial Corp. Nomination of Directors. The Bank's Bylaws provide that stockholder nominations for directors must be stated in writing and delivered to the Secretary of the Bank at least five days before the annual meeting of stockholders in order to be voted on at the meeting. The Bylaws also provide that the Board of Directors shall act as the nominating committee. Life Financial Corp.'s Bylaws provide that nominations for the election of directors may be made by a majority of the Board of Directors or by stockholders. Stockholders intending to nominate candidates for election as directors must deliver written notice to Life Financial Corp. not less than 90 days prior to the date of the scheduled annual meeting; provided, however, that in the event that less than 100 days notice or prior disclosure of the meeting is given by Life Financial Corp., notice of a nomination proposed by a stockholder to be timely must be received by the Secretary within ten days of the date of such notice or disclosure of the meeting by Life Financial Corp. The Bylaws further provide that the stockholder's notice shall set forth certain information concerning each nominee. In addition, the stockholder giving the notice is required to state the name and address of such stockholder and the identity of other stockholders known by such stockholder to be supporting such nominees and the extent of such persons' beneficial ownership of Life Financial Corp.'s stock. A majority of the Board of Directors may reject a nomination by a stockholder not timely made in accordance with the requirements of the Bylaws. Limitations on Director Liability. In accordance with the Delaware General Corporation Law, the Certificate of Incorporation of Life Financial Corp. provides that a director of Life Financial Corp. will not have any personal liability to Life Financial Corp. or its stockholders for monetary damages for breaches of fiduciary duty as a director for actions taken in good faith performance of their duties as directors. This provision does not limit personal liability of Life Financial Corp.'s Directors for monetary damages for breaches of their duty of loyalty, acts or omissions not in good faith or involving intentional misconduct or knowing violations of the law, unlawful purchases or redemptions of stock, payments of unlawful dividends or the receipt or payment of improper personal benefits. This provision applies to actions taken by a director only in that capacity; it does not apply to actions taken in any other capacity, including that of an officer. In addition, this provision does not limit the liability of directors arising in causes of action brought under the federal securities laws. The Certificate of Incorporation also provides that any repeal or modification of this provision by stockholders of Life Financial Corp. will not adversely affect any right or protection of a director of Life Financial Corp. existing at the time of the repeal or modification and that if the Delaware General Corporation Law is amended after approval of the Certificate of Incorporation to further limit the personal liability of directors, the liability of a director of Life Financial Corp. will be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law as amended. While the Certificate of Incorporation provides directors with protection from awards of monetary damages for breaches of their duty of care, it does not eliminate their duty of care. Equitable remedies, such as an injunction or recision, continue to exist to enforce this duty of care. Moreover, the limitation on liability does not preclude or limit recovery of damages by third parties. The Certificate of Incorporation also allows a recovery of damages for the unlawful payment of dividends and in certain other circumstances. This provision of the Certificate of Incorporation is designed to ensure that the ability of Life Financial Corp.'s Directors to exercise their business judgment in managing Life Financial Corp.'s affairs, subject to their continuing fiduciary duties of loyalty to Life Financial Corp. and its stockholders, is not unreasonably impeded by exposure to the potentially high personal costs or other uncertainties of litigation. 8 The nature of the tasks and responsibilities undertaken by directors of publicly-held corporations such as Life Financial Corp. often require such persons to make difficult judgments of great importance which can expose such persons to personal liability, but from which they will acquire no personal benefit. In recent years, litigation against publicly-held corporations and their directors and officers, challenging good faith business judgments and involving no allegations of personal wrongdoing, has become common. Such litigation regularly involves damage claims in huge amounts which bear no relationship to the amount of compensation received by the directors or officers, particularly in the case of directors who are not officers of the corporation. The expense of such litigation, well-founded or not, can be enormous. Individual directors and officers can seldom bear either the legal defense costs involved or the risk of a large judgment. In order to attract and retain competent and conscientious directors and officers in the face of these potentially serious risks, corporations have historically provided for corporate indemnification in their bylaws and have obtained liability insurance protecting the company and its directors and officers against the costs of litigation and related expenses. Recent changes in the market for directors' liability insurance, including difficulty in obtaining adequate policies which are not prohibitively expensive, may result in individuals being unwilling, in many instances, to serve as directors without at least a partial substitute for the protection which such insurance has historically provided. This concern is particularly a factor with respect to outside directors (directors who are not employees of a corporation), who are especially valuable in providing unbiased advice to a corporation. The provisions of the Certificate of Incorporation relating to director liability and the Delaware law authorizing such provisions are intended to reduce, in appropriate cases, the risk incident to serving as a director. The Bank is not presently aware of any pending or threatened litigation which, if instituted against Life Financial Corp., would be affected by this provision. Life Savings' Charter does not provide for limitations of liability for Life Savings' directors nor are such limitations provided under OTS regulations. Indemnification of Officers and Directors. Under the Delaware General Corporation Law, directors and officers, as well as other employees and individuals, may be indemnified against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with specified actions, suits or proceedings, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation--a "derivative action"), if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the stockholders, and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard of care is applicable in the case of derivative actions, except that indemnification extends only to expenses (including attorneys' fees) incurred in connection with defense or settlement of such an action. Delaware law permits a corporation to advance expenses to directors or officers upon the corporation's receipt of an undertaking by such person to repay the advance in the event of a specific determination that such person was not entitled to indemnification. Delaware law requires court approval before there may be any indemnification where the person seeking indemnification has been found liable to the corporation in a derivative action by reason of the fact that he is or was a director, officer, employee or agent of the corporation. Delaware law, however, provides that the termination of any proceeding (other than an action by or in the right of the corporation) by judgment, order, settlement, conviction or upon a plea of nolo contendere does not create a presumption adverse to the director, officer or other person. The Bank's Board of Directors believes that it is in the best interests of its stockholders to provide mandatory indemnification for Life Financial Corp.'s directors and officers to the fullest extent permitted by Delaware law. Accordingly, the Certificate of Incorporation provides that each person who is involved in any litigation or other proceeding because he or she is or was a director or officer of Life Financial Corp. or, among other things, of another related entity shall be indemnified by Life Financial Corp. to the fullest extent authorized by Delaware law (but, in the case of any future amendment to Delaware law, the right to indemnification shall be adjusted only to the extent that such amendment permits Life Financial Corp. to provide broader indemnification rights than prior to such amendment), against all expense, liability or loss reasonably incurred by such person in connection therewith. The Certificate of Incorporation also provides that indemnification to 9 directors or officers is a contract right and such right includes the right to be paid the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if Delaware law requires, the advancement of such expenses will be made only after the person delivers an undertaking to Life Financial Corp. to repay any amounts advanced if it is ultimately determined that he or she is not entitled to indemnification. The purpose of providing that the right of indemnification is a contract right is to provide an indemnified party with an enforceable claim that may not be unilaterally affected by actions taken by Life Financial Corp. (e.g., there would be a claim under contract law to indemnification as to conduct which occurred while this provision of the Certificate of Incorporation was in effect, regardless of subsequent changes thereto). If Life Financial Corp. does not pay a proper claim for indemnification in full within 30 days after a written claim for such indemnification is received by Life Financial Corp., the Certificate of Incorporation authorizes the claimant to bring a suit against Life Financial Corp. and prescribes what does and does not constitute a defense to such action. Such right to indemnification and advancement of expenses also may be conferred upon any employee or agent of Life Financial Corp. if, and to the extent, authorized by Life Financial Corp.'s Bylaws or its Board of Directors. Life Financial Corp.'s Bylaws provide that indemnification may be available to employees and agents. In any action by a person seeking indemnification, it is a defense that such person has not met any applicable standard for indemnification as set forth in Delaware General Corporation Law. However, neither the failure of Life Financial Corp. to have made a determination that the applicable standard has been satisfied, or an actual determination by Life Financial Corp. that such person has not satisfied the applicable standard, shall create a presumption that such standard was not satisfied, or be a defense to such action. The burden of proving that the applicable standard of conduct has not been satisfied, and that such person is not entitled to indemnification, shall be on Life Financial Corp. The Certificate of Incorporation further states that the right to indemnification and the advancement of expenses conferred by the Certificate of Incorporation is not exclusive of any other right which any person may have or hereinafter acquire under any statute, provision of the Certificate of Incorporation or Bylaws of Life Financial Corp., vote of stockholders or disinterested directors, or otherwise. In addition, the Certificate of Incorporation authorizes Life Financial Corp. to maintain insurance, at its expense, to protect itself and certain individuals, including officers and directors of Life Financial Corp., against any expense, liability, or loss, whether or not Life Financial Corp. would have the power to indemnify the person under Delaware law. Although the indemnification provisions contained in the Certificate of Incorporation are not specifically intended to provide indemnification of officers and directors for violations of the Securities Act, it is conceivable that such a claim for indemnification could be asserted thereunder. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling Life Financial Corp. pursuant to the foregoing provisions, Life Financial Corp. has been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. These provisions have been included in Life Financial Corp.'s Certificate of Incorporation in recognition of the need to protect directors and officers of Life Financial Corp. so as to attract and retain the best personnel available. In light of the complexities and pressures placed on directors of publicly held corporations, and especially companies involved in the complex and fast- changing financial services industry, the Board of Directors believes that the time, efforts and talent of officers and directors of Life Financial Corp. and its subsidiaries should be directed toward managing Life Financial Corp.'s business, rather than being forced to act defensively out of concern over costly personal litigation. By including these indemnification provisions in Life Financial Corp.'s Certificate of Incorporation, directors and officers of Life Financial Corp. will have the assurance that they will be indemnified for actions taken in good faith and in a manner believed to be in the best interest of the stockholders. The Bank's Charter and Bylaws do not address indemnification of its officers and directors. The OTS regulations do provide indemnification for officers and directors of savings banks. These provisions are more limited, however, than the related provisions of Life Financial Corp.'s Certificate of Incorporation and Bylaws. 10 DIVIDEND INFORMATION AND PRICE OF COMMON STOCK There is no established market for the common stock of the Bank. As of February 28, 1997, the Bank's common stock was held by approximately 407 holders of record. The Bank has not paid cash dividends on its common stock. The Board of Directors declared a 100% stock dividend to stockholders of record as of February 28, 1996, payable as of March 31, 1996. PROPOSAL II RATIFICATION OF THE LIFE SAVINGS BANK, FEDERAL SAVINGS BANK1996 STOCK OPTION PLAN The Board of Directors of the Bank adopted the Life Savings Bank, Federal Savings Bank 1996 Stock Option Plan (the "Bank Option Plan"), a stock-based benefit plan which provides for the granting of stock options to eligible officers, employees and directors of the Bank, on November 21, 1996 (a copy of which is attached hereto as Exhibit C). The Board of Directors of the Bank has reserved 107,200 (321,600 post-Reorganization) shares for issuance under the Bank Option Plan. The stock option benefits provided under the Bank Option Plan are designed to attract and retain qualified directors and personnel in key positions, provide directors, officers and key employees with a proprietary interest in the Company, and as an incentive to contribute to the success of the Bank and the Company and reward key employees for outstanding performance. The Bank Option Plan provides for the grant of: (i) options to purchase the Company's Common Stock intended to qualify as incentive stock options under Section 422 of the Code ("Incentive Stock Options"); (ii) options that do not so qualify ("Non- Statutory Stock Options"); and (iii) Limited Rights. Limited Rights are exercisable only upon a change in control of the Bank or the Company. Upon exercise of "Limited Rights" in the event of a change in control, the employee will be entitled to receive a lump sum cash payment equal to the difference between the exercise price of the related option and the fair market value of the shares of common stock subject to the option on the date of exercise of the right in lieu of purchasing the stock underlying the option. Except for options granted to directors, all options granted contemporaneously with adoption of the Bank Option Plan are intended to be Incentive Stock Options to the extent permitted under Section 422 of the Code. The Bank Option Plan will be in effect for a period of ten years from the adoption by the Board of Directors; provided, however, that in the event that the Bank's stockholders do not ratify the Bank Option Plan at the Annual Meeting, all options granted pursuant to the Bank Option Plan shall be Non-Statutory Stock Options. Under the Bank Option Plan, the Personnel/Compensation Committee determines which officers and employees will be granted options and Limited Rights, whether such options are to be incentive or non-statutory stock options, the number of shares subject to each option, the exercise price of each stock option, whether such options may be exercised by delivering other shares of Common Stock and when such options become exercisable. The per share exercise price of a stock option is required to be at least equal to the fair market value of a share of Common Stock on the date the option is granted under the Bank Option Plan. In November 1996, the Committee granted options to purchase 64,320 (192,960 post-Reorganization) and 4,180 (12,540 post-Reorganization) shares respectively to Messrs. Perl and Passerino and granted options to purchase an aggregate of 8,360 (25,080 post-Reorganization) shares to two other executive officers as a group at an exercise price of $3.33, on a pro forma basis as of December 31, 1996. An additional 25,000, 15,000 and 30,000 options have been granted to Messrs. Perl and Passerino and two other executive officers, as a group, respectively, at the Offering Price effective as of the Reorganization pursuant to an option plan adopted by the Board of Directors of the Company (the "Company Option Plan"). For additional information regarding grants under the Company Option Plan see "The Board of Directors and Management of the Bank--Stock Option Plans" in the Prospectus. An optionee will not be deemed to have received taxable income upon grant or exercise of any Incentive Stock Option, provided that such shares received through the exercise of such option are not disposed of by the employee for at least one year after the date the stock is received in connection with the option exercise and two 11 years after the date of grant of the option. No compensation deduction would be able to be taken by the Bank as a result of the grant or exercise of Incentive Stock Options, provided such shares are not disposed of before the expiration of the period described above (a "disqualifying disposition"). In the case of a Non-Statutory Stock Option and in the case of a disqualifying disposition of an Incentive Stock Option, an optionee will be deemed to receive ordinary income upon exercise of the stock option in an amount equal to the amount by which the exercise price is exceeded by the fair market value of the Common Stock purchased by exercising the option on the date of exercise. The amount of any ordinary income deemed to be received by an optionee upon the exercise of a Non-Statutory Stock Option or due to a disqualifying disposition of an Incentive Stock Option would be a deductible expense for tax purposes for the Company. In the case of Limited Rights, upon exercise, the option holder would have to include the amount paid to him or her upon exercise in his gross income for federal income tax purposes in the year in which the payment is made and the Bank would be entitled to a deduction for federal income tax purposes of the amount paid. Stock options will become vested and exercisable in the manner specified by the Committee. The options granted by the Committee in connection with the adoption of the Bank Option Plan will vest at a rate of 33.3% per year, beginning on the third anniversary date of the grant, November 21, 1999. Incentive Stock Options granted in connection with the Bank Option Plan could be exercisable for three months following the date on which the employee ceases to perform services for the Bank or the Company, except that in the event of death, disability, retirement or termination of an employee's service following change in control of the Bank or the Company, options accelerate and become fully vested and could be exercisable for up to one year thereafter or such longer period as determined by the Bank or the Company. However, any Incentive Stock Options exercised more than three months following the date the employee ceases to perform services as an employee would be treated as a Non-Statutory Stock Option as described above. In the event of retirement, if the optionee continues to perform services as a director on behalf of the Bank, the Company or an affiliate, unvested options would continue to vest in accordance with their original vesting schedule until the optionee ceases to serve as a director. Non-Statutory Stock Options granted in connection with the Bank Option Plan could be exercisable for one year following the date on which the employee ceases to perform services for the Bank or the Company, except that in the case of death, disability, retirement or termination of the optionee's service following a change in control, options accelerate and become fully vested and could be exercisable for up to one year thereafter or such longer period as determined by the Bank or the Company. All Options granted by the Committee to outside directors under the Bank Option Plan would be Non-Statutory Stock Options and will vest and become exercisable commencing three years after the date of adoption of the Bank Option Plan at the rate of 33.3% per year, and would expire upon the earlier of ten years following the date of grant or one year following the date the optionee ceases to be a director or consulting director. The Committee has granted options to purchase 3,060 (9,180 post-Reorganization) shares to each of the outside directors of the Bank at an exercise price of $3.33, on a pro forma basis as of December 31, 1996. In the event of the death or disability of a participant or termination of a participant's service following a change in control of the Company or the Bank, all previously granted options would immediately vest and become fully exercisable. A change in control is defined in the Bank Option Plan generally to occur when a person or group of persons acting in concert acquires beneficial ownership of 20% or more of any class of equity security of the Company or the Bank or in the event of a tender or exchange offer, merger or other form of business combination, sale of all or substantially all of the assets of the Company or the Bank or contested election of directors which resulted in the replacement of a majority of the Board of Directors by persons not nominated by the directors in office prior to the contested election. Upon completion of the Reorganization and the Public Offering, the Bank Option Plan will, by operation of law and pursuant to the Bank Option Plan, become an option plan of the Company. Stock options with respect to shares of the Bank's common stock granted under the Bank Option Plan and outstanding prior to completion of the Reorganization will automatically become options to purchase three shares of the Company's Common Stock upon identical terms and conditions. The Company will assume all of the Bank's obligations with respect 12 to the Bank Option Plan. For information on the Company Option Plan adopted by the Company's Board of Directors, see "The Board of Directors and Management of the Bank--Stock Option Plans" in the Prospectus. UNLESS MARKED TO THE CONTRARY, THE SHARES REPRESENTED BY THE ENCLOSED PROXY CARD, IF EXECUTED AND RETURNED, WILL BE VOTED "FOR" THE RATIFICATION OF THE LIFE SAVINGS BANK, FEDERAL SAVINGS BANK 1996 STOCK OPTION PLAN. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE RATIFICATION OF THE LIFE SAVINGS BANK, FEDERAL SAVINGS BANK 1996 STOCK OPTION PLAN. PROPOSAL III ELECTION OF DIRECTORS Pursuant to its bylaws, the number of directors of the Bank is set at seven. Three directors will be elected at the Annual Meeting, all of whom will be elected for a three-year term expiring at the annual meeting of the Bank in the year 2000 or until their successors are elected and qualified. The three nominees nominated for election for three-year terms are Messrs. Caldwell, Johnson and Perl. UNLESS DIRECTIONS ARE GIVEN TO THE CONTRARY, IT IS INTENDED THAT THE PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE VOTED "FOR" THE ELECTION OF SAID NOMINEES. If any nominee is unable to serve, the shares represented by all valid proxies will be voted for the election of such substitute as the Board of Directors may recommend. At this time, all nominees have agreed to serve and the Board of Directors knows of no reasons why any nominee might be unable or unwilling to serve. No person nominated as a director is being proposed for election pursuant to any agreement or understanding between any person and the Bank. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH NOMINEE. INFORMATION WITH RESPECT TO THE NOMINEES AND CONTINUING DIRECTORS
DIRECTOR EXPIRATION NAME SINCE OF TERM ---- -------- ---------- BOARD NOMINEES Richard C. Caldwell 1983 2000 Milton E. Johnson 1983 2000 Daniel L. Perl 1996 2000 CONTINUING DIRECTORS John D. Goddard 1988 1999 Edgar C. Keller 1983 1999 Ronald G. Skipper 1983 1998 Louis E. Yeager 1983 1998
Information concerning the nominees, continuing directors and executive officers, their ages, principal occupation or employment for the past five years and position with the Bank, and the amount of common stock of the Bank and the percent thereof beneficially owned by each and all directors and executive officers as a group is set forth under "The Board Of Directors And Management Of The Bank" in the Prospectus. In addition, information concerning the Committees and meetings of the Board of Directors of the Bank and compensation of the directors and executive officers of the Bank is set forth under "The Board of Directors and Management of the Bank" in the Prospectus. 13 At each election of directors, every stockholder entitled to vote has the right to vote, in person or by proxy, the number of shares held of record by him for as many persons as there are directors to be elected to a particular class, or to cumulate his votes by giving one candidate as many votes as the number of such directors to be elected multiplied by the number of shares held by such stockholder, or by distributing such votes on the same principal among any number of candidates. A stockholder may also withhold authority from the Board of Directors to vote as proxy for the election of any or all of the nominees for director. Directors will be elected by a plurality of shares voted for the directors, without regard to either (i) proxies as to which authority to vote for one or more of the nominees being proposed is withheld; or (ii) broker non-votes, if applicable. Directors will be elected by a plurality of shares voted for directors. PROPOSAL IV RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS The Bank's independent auditors for the year ended December 31, 1996 were Deloitte & Touche LLP. The Board of Directors has reappointed Deloitte & Touche LLP to continue as independent auditors for the Bank for the year ending December 31, 1997, subject to ratification of such appointment by stockholders. A representative of Deloitte & Touche LLP is expected to be present at the Annual Meeting to respond to stockholders' questions and will have the opportunity to make a statement if he or she so desires. Prior to the year ended December 31, 1996, the Bank's financial statements were audited by Grant Thornton, LLP and prior to the year ended December 31, 1995, the Bank's financial statements were audited by Price Waterhouse LLP. Information concerning the changes in accountants is set forth under "Changes in Accountants" in the Prospectus. The ratification of independent accountants shall be determined by a majority of the votes cast as to the matter. UNLESS MARKED TO THE CONTRARY, THE SHARES REPRESENTED BY THE ENCLOSED PROXY CARD WILL BE VOTED "FOR" RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE INDEPENDENT AUDITORS OF THE BANK. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE INDEPENDENT AUDITORS OF THE BANK. PROPOSAL V APPROVAL TO ADJOURN THE MEETINGTO SOLICIT ADDITIONAL PROXIES In the event there are an insufficient number of shares present in person or by proxy at the Annual Meeting to approve Proposals I, II, III or IV, the Board of Directors may adjourn the Annual Meeting to a later date. The place and date to which the Annual Meeting would be adjourned would be announced at the Annual Meeting, but would in no event be more than 30 days after the date of the Annual Meeting. While such an adjournment would not invalidate any proxies previously filed, including those filed by stockholders voting against the subject proposals, it would give the Bank the opportunity to solicit additional proxies in favor of Proposals I, II, III and IV and would be advantageous to those in favor of such proposals and disadvantageous to those opposing them. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE ADJOURNMENT UNDER THE CIRCUMSTANCES DESCRIBED HEREIN. Approval of the adjournment requires the affirmative vote of the holders of a majority of the shares of Bank common stock present in person or by proxy at the Annual Meeting. 14 OTHER MATTERS Management of Life Savings knows of no other business to be presented at the Annual Meeting. If other matters are presented at the Annual Meeting, or any adjournments thereof, which are proper subjects for action by stockholders, it is the intention of those named in the accompanying proxy to vote such proxy in accordance with their best judgment on such matters. By Order of the Board of Directors LOGO L. Bruce Mills Corporate Secretary San Bernardino, California March 28, 1997 15 AVAILABLE INFORMATION The Proxy Statement and the Prospectus constitute part of the Registration Statement filed with the Securities and Exchange Commission ("SEC" or "Commission") under the Securities Act of 1933, as amended (the "Securities Act"), in connection with the Reorganization described herein. The summaries or description of documents or statutes in the Proxy Statement and the Prospectus do not purport to be complete; reference is made to the copies of such documents attached hereto or otherwise filed as a part of the Registration Statement and to such statutes for a full and complete statement of their provisions, and such summaries and descriptions are qualified in their entirety by such reference. The Proxy Statement and the Prospectus do not contain all of the information set forth in the Registration Statement and all exhibits relating thereto, certain portions of which have been omitted pursuant to the rules and regulations of the SEC. The Registration Statement, including exhibits, may be inspected without charge at the offices of the Commission. Copies may be obtained at prescribed rates at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Life Financial Corp. is currently a wholly-owned subsidiary of the Bank and was formed solely for the purpose of effecting the Reorganization. As a wholly- owned subsidiary, Life Financial Corp. has not previously been subject to the requirements of the Exchange Act and there is currently no public market for its stock. If the Reorganization is consummated, Life Financial Corp. will become subject to the reporting and proxy statement requirements of the Exchange Act and, in accordance therewith, file reports, proxy statements and other information with the SEC. In addition, in connection with the annual meeting of stockholders of Life Financial Corp., proxy statements, accompanied or preceded by annual reports to stockholders, will be furnished to stockholders of Life Financial Corp. Such reports will contain financial information that has been examined and reported upon, with an opinion expressed thereon, by an independent certified public accountant. Life Financial Corp. has received conditional approval to have its Common Stock quoted on the National Market System of the Nasdaq Stock Market as of the Effective Date. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THE PROXY STATEMENT AND THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THE PROXY STATEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL A SECURITY, OR A SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THE PROXY STATEMENT AND THE PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES MADE UNDER THE PROXY STATEMENT AND THE PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE BANK OR OF LIFE FINANCIAL CORP. SINCE THE DATE OF THE PROXY STATEMENT AND THE PROSPECTUS. 16 REVOCABLE PROXY-LIFE SAVINGS BANK, FEDERAL SAVINGS BANK ANNUAL MEETING OF STOCKHOLDERS APRIL 18, 1997 10:00 A.M. The undersigned hereby appoints the Board of Directors of Life Savings Bank, Federal Savings Bank, with full power of substitution, to act as attorneys and proxies for the undersigned, and to vote all shares of common stock of Life Savings Bank, Federal Savings Bank, which the undersigned is entitled to vote only at the Annual Meeting of Stockholders, to be held at the Arrowhead Country Club, at 3433 Parkside Drive, San Bernadino, California, April 18, 1997, at 10:00 a.m., and at any and all adjournments thereof, as indicated on the reverse side. THIS PROXY IS REVOCABLE AND WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS SIGNED PROXY WILL BE VOTED "FOR" THE PROPOSALS LIST. IF ANY OTHER BUSINESS IS PRESENTED AT THE ANNUAL MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE ANNUAL MEETING. THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS - -------------------------------------------------------------------------------- FOLD AND DETACH HERE THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED PROPOSALS. Please mark your notes as indicated in this example [X] 1. The approval of the Agreement and Plan of Reorganization, pursuant to which (i) the Bank will be reorganized into a holding company structure and become a wholly-owned subsidiary of Life Financial Corp. and (ii) each outstanding share of the Bank's common stock will be converted into three shares of Common Stock of Life Financial Corp. FOR [_] AGAINST [_] ABSTAIN [_] 2. The ratification of the Life Savings Bank, Federal Savings Bank 1996 Stock Option Plan. FOR [_] AGAINST [_] ABSTAIN [_] 3. The election of all listed nominees for terms of three years each or until their successors are elected and qualified (except as marked to the contrary). VOTE FOR [_] WITHHELD [_] Messrs. Richard C. Caldwell, Milton E. Johnson and Daniel L. Perl INSTRUCTION: To withhold your vote for any individual nominee, strike through that nominee's name on the line above. You are allowed to cumulate voting for the nominees. In voting for directors, a stockholder is entitled to three votes for each share of common stock held, one for each of the three nominees. A stockholder may cast his/her votes evenly for all nominees or may cumulate such votes and cast all for one nominee or distribute them among the three nominees. To cumulate votes for any nominee, write the nominee's name and the number of votes cast in his favor on the line below. - -------------------------------------------------------------------------------- 4. The ratification of the appointment of Deloitte & Touche LLP as independent auditors for Life Savings Bank, Federal Savings Bank, for the fiscal year ending December 31, 1997. FOR [_] AGAINST [_] ABSTAIN [_] 5. The approval of the adjournment of the Annual Meeting for up to 30 days, if necessary, in order to solicit proxies if a majority of the votes eligible to be cast at the Annual Meeting does not submit proxies voting in favor of any of the Proposals. FOR [_] AGAINST [_] ABSTAIN [_] PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. The undersigned acknowledges receipt from Life Savings Bank, Federal Savings Bank, prior to the execution of this proxy of a Notice of Annual Meeting and of a Prospectus/Proxy Statement dated March 28, 1997. Dated: -------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Signature of Shareholder - -------------------------------------------------------------------------------- Signature of Shareholder Please sign exactly as your name appears on this card. When signing as attorney, executor, administrator, trustee or guardian, please give your full title. If shares are held jointly, each holder may sign but only one signature is required. ["PLEASE MARK INSIDE BLUE BOXES SO THAT DATA PROCESSING EQUIPMENT WILL RECORD YOUR VOTES"] - -------------------------------------------------------------------------------- FOLD AND DETACH HERE -----END PRIVACY-ENHANCED MESSAGE-----