-----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, TSc0CphA+Q9PJZa+hSjYr8ZTO/tqJXVoOxtwCb/IQgI0XjRc6AmDQduod1AWIHo4 9BeGvmUWS2ISeZ1cSs1CEg== /in/edgar/work/20000814/0000950150-00-000700/0000950150-00-000700.txt : 20000921 0000950150-00-000700.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950150-00-000700 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWTHORNE FINANCIAL CORP CENTRAL INDEX KEY: 0000046267 STANDARD INDUSTRIAL CLASSIFICATION: [6035 ] IRS NUMBER: 952085671 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-01100 FILM NUMBER: 700097 BUSINESS ADDRESS: STREET 1: 2381 ROSECRANS AVE CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107255000 MAIL ADDRESS: STREET 1: 2381 ROSECRANS AVE CITY: EL SEGUNDO STATE: CA ZIP: 90245 10-Q 1 e10-q.txt FORM 10-Q 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 ------------------------ FORM 10-Q ------------------------ [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER 0-1100 ------------------------ HAWTHORNE FINANCIAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-2085671 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 2381 ROSECRANS AVENUE, EL SEGUNDO, CA 90245 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (310) 725-5000 ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock as of the latest practicable date: The Registrant had 5,286,401 shares of Common Stock, $0.01 par value per share outstanding, as of July 31, 2000. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY FORM 10-Q INDEX FOR THE QUARTER ENDED JUNE 30, 2000
PAGE ---- PART I -- FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Statements of Financial Condition at June 30, 2000 and December 31, 1999.................................. 1 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2000 and 1999......................... 2 Consolidated Statement of Stockholders' Equity for the Six Months Ended June 30, 2000.................................. 3 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999................................ 4 Notes to Consolidated Financial Statements.................. 5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 8 ITEM 3. Quantitative and Qualitative Disclosure About Market Risk... 29 PART II -- OTHER INFORMATION ITEM 1. Legal Proceedings........................................... 31 ITEM 2. Changes in Securities....................................... 31 ITEM 3. Defaults upon Senior Securities............................. 31 ITEM 4. Submission of Matters to a Vote of Security Holders......... 31 ITEM 5. Other Information........................................... 31 ITEM 6. Exhibits and Reports on Form 8-K............................ 31
FORWARD-LOOKING STATEMENTS When used in this Form 10-Q or future filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project", "believe" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers that all forward-looking statements are necessarily speculative and not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various risks and uncertainties, including regional and national economic conditions, changes in levels of market interest rates, credit risks of lending activities, competitive and regulatory factors and the outcome of pending litigation, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. The risks highlighted herein should not be assumed to be the only things that could affect future performance of the Company. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. i 3 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31, 2000 1999 ---------- ------------ (Unaudited) (DOLLARS IN THOUSANDS) Assets: Cash and cash equivalents................................. $ 97,892 $ 86,722 Loans receivable (net of allowance for estimated credit losses of $27,089 in 2000 and $24,285 in 1999)......... 1,531,613 1,444,968 Real estate owned, net.................................... 5,334 5,587 Investment in capital stock of Federal Home Loan Bank, at cost................................................... 20,105 22,236 Accrued interest receivable............................... 10,804 9,250 Office property and equipment at cost, net................ 5,267 5,939 Deferred tax asset, net................................... 3,589 2,203 Other assets.............................................. 3,352 4,248 ---------- ---------- Total assets...................................... $1,677,956 $1,581,153 ========== ========== Liabilities and Stockholders' Equity: Liabilities: Deposits.................................................. $1,167,047 $1,086,635 FHLB advances............................................. 359,000 349,000 Senior notes.............................................. 40,000 40,000 Accounts payable and other liabilities.................... 13,681 13,214 ---------- ---------- Total liabilities................................. 1,579,728 1,488,849 Stockholders' equity: Preferred stock -- $0.01 par value; authorized 10,000,000 shares; no shares outstanding.......................... -- -- Common stock -- $0.01 par value; authorized 20,000,000 shares; issued and outstanding 5,559,301 shares in 2000 and 5,331,301 shares in 1999........................... 55 53 Capital in excess of par value -- common stock............ 42,057 40,981 Retained earnings......................................... 58,294 51,318 ---------- ---------- 100,406 92,352 Less: Treasury stock, at cost -- 272,900 shares in 2000 and 5,400 shares in 1999................................... (2,178) (48) ---------- ---------- Total stockholders' equity........................ 98,228 92,304 ---------- ---------- Total liabilities and stockholders' equity........ $1,677,956 $1,581,153 ========== ==========
See accompanying Notes to Consolidated Financial Statements 1 4 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 2000 1999 2000 1999 ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Interest revenues: Loans............................................. $34,685 $31,238 $67,598 $62,219 Investments....................................... 1,690 1,442 3,213 2,475 ------- ------- ------- ------- Total interest revenues................... 36,375 32,680 70,811 64,694 ------- ------- ------- ------- Interest costs: Deposits.......................................... 15,024 12,628 28,867 25,062 FHLB advances..................................... 4,594 4,437 9,192 8,297 Senior notes...................................... 1,250 1,250 2,500 2,500 ------- ------- ------- ------- Total interest costs...................... 20,868 18,315 40,559 35,859 ------- ------- ------- ------- Net interest income................................. 15,507 14,365 30,252 28,835 Provision for credit losses......................... 1,500 2,500 3,000 5,500 ------- ------- ------- ------- Net interest income after provision for credit losses......................................... 14,007 11,865 27,252 23,335 ------- ------- ------- ------- Noninterest revenues: Loan related fees................................. 2,134 1,925 3,894 3,895 (Loss)/income from real estate operations, net...... (90) (17) (149) 417 Noninterest expenses: General and administrative expenses: Employee....................................... 4,353 3,576 8,405 7,679 Operating...................................... 1,529 1,599 3,042 3,138 Occupancy...................................... 897 986 1,860 1,979 Technology..................................... 484 518 958 1,078 Professional................................... 1,231 860 2,106 1,164 SAIF premiums and OTS assessments.............. 217 313 439 612 ------- ------- ------- ------- Total general and administrative expenses................................ 8,711 7,852 16,810 15,650 Other non-operating expense....................... 196 8 2,024 1,000 ------- ------- ------- ------- Total noninterest expenses................ 8,907 7,860 18,834 16,650 ------- ------- ------- ------- Income before income taxes.......................... 7,144 5,913 12,163 10,997 Income tax provision................................ 3,072 2,487 5,187 4,599 ------- ------- ------- ------- Net income.......................................... $ 4,072 $ 3,426 $ 6,976 $ 6,398 ======= ======= ======= ======= Basic earnings per share (Note 3)................... $ 0.77 $ 0.65 $ 1.30 $ 1.22 ======= ======= ======= ======= Diluted earnings per share (Note 3)................. $ 0.57 $ 0.44 $ 0.95 $ 0.83 ======= ======= ======= ======= Weighted average basic shares outstanding (Note 3)................................................ 5,286 5,290 5,374 5,257 ======= ======= ======= ======= Weighted average diluted shares outstanding (Note 3)................................................ 7,169 7,723 7,336 7,728 ======= ======= ======= =======
See accompanying Notes to Consolidated Financial Statements 2 5 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMPREHENSIVE INCOME BALANCE AT EXERCISED ------------- BALANCE AT DECEMBER 31, STOCK EXERCISED NET TREASURY JUNE 30, 1999 OPTIONS WARRANTS INCOME STOCK 2000 ------------ --------- --------- ------------- -------- ----------- (IN THOUSANDS) (UNAUDITED) Number of common shares......... 5,331 228 -- -- -- 5,559 Treasury stock.................. (5) -- -- -- (268) (273) ------- ------ ------ ------ ------- ------- Total shares outstanding......... 5,326 228 -- -- (268) 5,286 ======= ====== ====== ====== ======= ======= Common stock.................... $ 53 $ 2 $ -- $ -- $ -- $ 55 Capital in excess of par value, common stock.................. 40,981 1,076 -- -- -- 42,057 Retained earnings............... 51,318 -- -- 6,976 -- 58,294 Treasury stock.................. (48) -- -- -- (2,130) (2,178) ------- ------ ------ ------ ------- ------- Total stockholders' equity.............. $92,304 $1,078 $ -- $6,976 $(2,130) $98,228 ======= ====== ====== ====== ======= =======
See accompanying Notes to Consolidated Financial Statements 3 6 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, ---------------------- 2000 1999 --------- --------- (DOLLARS IN THOUSANDS) Cash Flows from Operating Activities: Net income................................................ $ 6,976 $ 6,398 Adjustments: Deferred income tax (benefit) provision................. (1,386) 226 Provision for estimated credit losses on loans.......... 3,000 5,500 (Recovery) provision for estimated losses on real estate owned.................................................. (24) 80 Net gain from sale of real estate owned................. (7) (629) Loan fee and discount accretion......................... (1,311) (3,125) Depreciation and amortization........................... 1,067 912 FHLB dividends.......................................... (851) (417) Increase in accrued interest receivable................. (1,554) (316) Decrease (increase) in other assets..................... 896 (296) Increase in accounts payable and other liabilities...... 467 1,115 --------- --------- Net cash provided by operating activities.......... 7,273 9,448 --------- --------- Cash Flows from Investing Activities: Loans: New loans funded........................................ (244,559) (172,327) Construction disbursements.............................. (129,918) (185,876) Payoffs................................................. 276,726 269,487 Principal payments...................................... 15,726 12,209 Other, net.............................................. (6,542) (753) Real estate owned, net: Sales proceeds.......................................... 688 2,947 Capitalized costs....................................... (26) (43) Purchase of FHLB stock.................................... (630) (5,209) Redemption of FHLB stock.................................. 3,612 -- Office property and equipment: Sale proceeds........................................... 49 48 Additions............................................... (589) (1,213) --------- --------- Net cash used in investing activities.............. (85,463) (80,730) --------- --------- Cash Flows from Financing Activities: Deposit activity, net..................................... $ 80,412 $ 33,914 Net increase in FHLB advances............................. 10,000 115,000 Net proceeds from exercise of stock options and warrants................................................ 1,078 594 Treasury Stock............................................ (2,130) -- --------- --------- Net cash provided by financing activities.......... 89,360 149,508 --------- --------- Net increase in cash and cash equivalents................... 11,170 78,226 Cash and cash equivalents, beginning of period.............. 86,722 45,449 --------- --------- Cash and cash equivalents, end of period.................... $ 97,892 $ 123,675 ========= ========= Supplemental Cash Flow Information: Cash paid during the period for: Interest................................................ $ 39,393 $ 35,590 Income taxes............................................ 3,800 4,231 Non-cash investing and financing activities: Real estate acquired in settlement of loans............. 494 1,143 Loans originated to finance sales of real estate owned.................................................. -- 1,500 Loans originated to refinance existing bank loans....... 19,393 21,024
See accompanying Notes to Consolidated Financial Statements 4 7 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES The consolidated financial statements include the accounts of Hawthorne Financial Corporation and its wholly-owned subsidiary, Hawthorne Savings, F.S.B. ("Bank"), which are collectively referred to herein as the "Company". All significant intercompany transactions and accounts have been eliminated in consolidation. In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting solely of normal recurring accruals) necessary to present fairly the Company's financial position as of June 30, 2000 and December 31, 1999, and the results of its operations and its cash flows for the three and six months ended June 30, 2000 and 1999. Operating results for the three and six months ended June 30, 2000, are not necessarily indicative of the results that may be expected for any other interim period or the full year ending December 31, 2000. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. NEW ACCOUNTING PRONOUNCEMENTS In December 1999, The Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements on Selected Issues, effective December 2000. Management does not believe that there will be a material impact on the financial position or results of operations of the Company from adoption of this bulletin. NOTE 2 -- RECLASSIFICATION Certain amounts in the 1999 consolidated financial statements have been reclassified to conform with classifications in 2000. 5 8 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- BOOK VALUE AND EARNINGS PER SHARE The table below sets forth the Company's earnings per share calculations for the three and six months ended June 30, 2000 and 1999. In the table below, "Warrants" refer to the Warrants issued by the Company in December 1995, which are currently exercisable and which expire December 11, 2005, and "Options" refer to stock options previously granted to employees of the Company and which were outstanding at each measurement date.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 2000 1999 2000 1999 ------- ------- ------ ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Average shares outstanding Basic................................................. 5,286 5,290 5,374 5,257 Warrants.............................................. 2,486 2,503 2,486 2,503 Options(1)............................................ 155 484 197 551 Less Treasury shares(2)............................... (758) (554) (721) (583) ------ ------ ------ ------ Diluted............................................... 7,169 7,723 7,336 7,728 ====== ====== ====== ====== Net income for the period............................... $4,072 $3,426 $6,976 $6,398 ====== ====== ====== ====== Basic earnings per share................................ $ 0.77 $ 0.65 $ 1.30 $ 1.22 ====== ====== ====== ====== Diluted earnings per share.............................. $ 0.57 $ 0.44 $ 0.95 $ 0.83 ====== ====== ====== ======
JUNE 30, ----------------- 2000 1999 ------- ------- Period-end shares outstanding Basic..................................................... 5,286 5,293 Warrants.................................................. 2,486 2,503 Options(3)................................................ 155 498 Less Treasury shares(2)................................... (771) (555) ------- ------- Diluted................................................... 7,156 7,739 ======= ======= Stockholders' equity........................................ $98,228 $88,384 ======= ======= Basic book value per share.................................. $ 18.58 $ 16.70 ======= ======= Diluted book value per share................................ $ 13.73 $ 11.42 ======= =======
- --------------- (1) Excludes 385,000 options outstanding for the three and six months ended June 30, 2000 for which the exercise price exceeded the average market price of the Company's common stock during the periods. Excludes 325,000 options outstanding for the six months ended June 30, 1999 for which the exercise price exceeded the average market price of the Company's common stock during the period. (2) Under the Diluted Method, it is assumed that the Company will use proceeds from the proforma exercise of the Warrants and Options to acquire actual shares currently outstanding, thus increasing Treasury shares. In this calculation, Treasury shares were assumed to be repurchased at the average closing stock price for the respective period. (3) Excludes 385,000 options outstanding at June 30, 2000 for which the exercise price exceeded the average market price of the Company's common stock at period-end. 6 9 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- COMMITMENTS AND CONTINGENCIES On June 28, 2000, the California Supreme Court denied the Bank's petition for review of the Court of Appeals' decision affirming in part and reversing in part the judgment in the Takaki vs. Hawthorne Savings and Loan Association matter previously disclosed by the Bank. The Bank had previously accrued the full amount of the judgment, including post judgment interest through April 2000, and no material additional accruals were required during the second quarter as a result of the Supreme Court's action and payment of the judgment. The Company is involved in a variety of other litigation matters in the ordinary course of its business, as discussed in the Annual Report on Form 10-K for the year ended December 31, 1999. Management does not presently believe that any of the existing litigative matters are likely to have a material adverse impact on the Company's financial condition or results of operation. 7 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company originates real estate-secured loans throughout Southern California. These loans generally consist of (1) permanent loans collateralized by single family (one to four unit) residential property, (2) permanent and construction loans secured by multi-family residential and commercial real estate, (3) construction loans of single family residential homes and (4) the acquisition and development of land for the construction of such homes. The Company funds its loans predominately with retail deposits and, to a lesser extent, with advances from the Federal Home Loan Bank of San Francisco ("FHLB"). RESULTS OF OPERATIONS Net income for the three and six months ended June 30, 2000 of $4.1 million, or $0.57 per diluted share, and $7.0 million, or $0.95 per diluted share, respectively. This net income resulted in an annualized return on average assets ("ROA") of 1.00% and .86%, respectively, and an annualized return on average equity ("ROE") of 16.93% and 14.67%, respectively, compared with an annualized ROA of .90% and .86%, respectively, and an annualized ROE of 15.97% and 15.21%, respectively, for the three and six months ended June 30, 1999. Pretax income increased 20.82% and 10.60%, for the three and six months ended June 30, 2000, respectively, to $7.1 million and $12.2 million from $5.9 million and $11.0 million generated during the same periods in 1999. The table below identifies the principal components of the Company's pretax income and net income for the three and six months ended June 30, 2000 and 1999.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 2000 1999 2000 1999 ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Net interest income................................. $16,757 $15,615 $32,752 $31,335 Provision for credit losses......................... 1,500 2,500 3,000 5,500 ------- ------- ------- ------- Net interest income after provision for credit losses......................................... 15,257 13,115 29,752 25,835 Noninterest revenues: Loan related fees................................. 2,134 1,925 3,894 3,895 (Loss)/income from real estate operations, net...... (90) (17) (149) 417 Noninterest expenses: General and administrative expenses............... 8,711 7,852 16,810 15,650 Other non-operating expense....................... 196 8 2,024 1,000 Interest on senior notes............................ 1,250 1,250 2,500 2,500 ------- ------- ------- ------- Income before income taxes.......................... 7,144 5,913 12,163 10,997 Income tax provision................................ 3,072 2,487 5,187 4,599 ------- ------- ------- ------- Net income.......................................... $ 4,072 $ 3,426 $ 6,976 $ 6,398 ======= ======= ======= =======
The Company's net interest income before interest on senior notes and provision for credit losses rose 7.31% to $16.8 million and 4.52% to $32.8 million during the three and six months ended June 30, 2000, respectively, compared to $15.6 million and $31.3 million for the three and six months ended June 30, 1999, respectively. The Company's yield on average earning assets was 9.01% and 8.82% for the three and six months ended June 30, 2000, respectively, compared to 8.61% and 8.75% during the same periods in 1999. The average cost of funds for the Company increased to 5.69% and 5.55% during the three and six months ended June 30, 2000, respectively, compared to 5.24% and 5.28% for the three and six months ended June 30, 1999, respectively. The Company's resulting net interest margin for the three and six months ended June 30, 2000, was 3.84% and 3.77%, respectively, compared to 3.78% and 3.90% during the same periods in 1999. On a year-to-date basis, the compression in the net interest margin is the result of increased competitive rate pressures in the market place and an increase in the payment of broker rebates on single family residential loans. 8 11 Provisions for credit losses totaled $3.0 million and $5.5 million for the six months ended June 30, 2000 and 1999, respectively. At June 30, 2000, the ratio of total allowance for estimated credit losses to net loans reached 1.74%, compared to 1.65% at December 31, 1999, and 1.43% at June 30, 1999. Noninterest revenues were $2.0 million and $3.7 million for the three and six months ended June 30, 2000, respectively, compared to noninterest revenues of $1.9 million and $4.3 million earned during the three and six months ended June 30, 1999, respectively. Real estate operations resulted in a net loss of $0.1 million for the three and six months ended June 30, 2000, versus a net gain of $17 thousand and a net gain of $0.4 million for the respective periods in 1999. Sales of real estate owned resulted in higher net recoveries during 1999. Other non-operating expense totaled $2.0 million for the six months ended June 30, 2000, a $1.0 million increase over the $1.0 million of other non-operating expense incurred during the same period of 1999, primarily in connection with $1.7 million for ongoing litigation and/or satisfaction of judgments against the Company. On June 28, 2000, the California Supreme Court denied the Bank's petition for review of the Court of Appeals' decision affirming in part and reversing in part the judgment in the Takaki vs. Hawthorne Savings and Loan Association matter previously disclosed by the Bank. The Bank had previously accrued the full amount of the judgment, including post judgment interest through April 2000, and no material additional accruals were required during the second quarter as a result of the Supreme Court's action and payment of the judgment. Nonaccrual loans totaled $36.0 million at June 30, 2000 (or 2.15% of total assets). By comparison, nonaccrual loans were $44.0 million (or 2.78% of total assets) and $32.6 million (or 2.08% of total assets) at December 31, 1999, and June 30, 1999, respectively. Other classified loans were $32.3 million at June 30, 2000, compared to $25.6 million at December 31, 1999, and $17.4 million at June 30, 1999. Delinquent loans totaled $48.4 million at June 30, 2000, compared to $24.0 million at December 31, 1999, and $30.8 million at June 30, 1999. In July 2000, one income property loan with a balance of $10.6 million, which was over 90 days delinquent at June 30, 2000, is now current. Seven loans totaling $4.5 million that were past due at maturity have subsequently been extended. INCOME TAXES The Company's effective tax rate was 42.65% and 41.82% during the first six months of 2000 and 1999, respectively. PARENT COMPANY ITEMS Beginning with the fourth quarter of 1999, the Company, as needed, will continue to rely upon dividends from the Bank to service the semiannual interest payments of approximately $2.5 million each, due in June and December, on its Senior Notes, issued in December 1997. In July 2000, the Company authorized the repurchase of up to an additional 5% of its common stock, or approximately 264,000 shares. This is in addition to the 5% repurchase authorization announced in March 2000, for approximately 277,000 shares. As of August 11, 2000, the Company has repurchased 282,500 shares at an average price per share of $8.09. 9 12 NET INTEREST INCOME The following table sets forth the Company's average balance sheets, and the related weighted average yields and costs on average interest-earning assets (inclusive of nonaccrual loans) and interest-bearing liabilities, for the three months ended June 30, 2000 and 1999. In the tables, interest revenues are net of interest associated with nonaccrual loans.
THREE MONTHS ENDED ------------------------------------------------------------------------- JUNE 30, 2000 JUNE 30, 1999 ----------------------------------- ----------------------------------- WEIGHTED WEIGHTED AVERAGE REVENUES/ AVERAGE AVERAGE REVENUES/ AVERAGE BALANCE COSTS YIELD/COST BALANCE COSTS YIELD/COST ---------- --------- ---------- ---------- --------- ---------- (DOLLARS IN THOUSANDS) ASSETS: Interest-earning assets: Loans receivable(1)........................... $1,519,760 $34,685 9.13% $1,392,736 $31,238 8.97% Cash and cash equivalents..................... 75,569 1,146 6.07% 108,522 1,222 4.50% Investment in capital stock of Federal Home Loan Bank................................... 19,938 544 10.91% 17,527 220 5.02% ---------- ------- ---------- ------- Total interest-earning assets........... 1,615,267 36,375 9.01% 1,518,785 32,680 8.61% ------- ----- ------- ------ Noninterest-earning assets...................... 10,717 8,414 ---------- ---------- Total assets............................ $1,625,984 $1,527,199 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Deposits...................................... $1,111,946 15,024 5.43% $1,018,203 12,628 4.97% FHLB advances................................. 324,295 4,594 5.60% 344,769 4,437 5.09% Senior notes.................................. 40,000 1,250 12.50% 40,000 1,250 12.50% ---------- ------- ---------- ------- Total interest-bearing liabilities...... 1,476,241 20,868 5.69% 1,402,972 18,315 5.24% ------- ----- ------- ------ Noninterest-bearing checking.................... $ 31,093 $ 23,221 Noninterest-bearing liabilities................. 22,431 15,220 Stockholders' equity............................ 96,219 85,786 ---------- ---------- Total liabilities and stockholders' equity................................ $1,625,984 $1,527,199 ========== ========== Net interest income............................. $15,507 $14,365 ======= ======= Interest rate spread............................ 3.32% 3.37% ===== ====== Net interest margin including senior notes...... 3.84% 3.78% ===== ====== Net interest margin excluding senior notes...... 4.15% 4.11% ===== ======
- --------------- (1) Includes the interest on nonaccrual and non-performing loans only to the extent that it was paid and recognized as interest income. 10 13 The following table sets forth the Company's average balance sheets, and the related weighted average yields and costs on average interest-earning assets (inclusive of nonaccrual loans) and interest-bearing liabilities, for the six months ended June 30, 2000 and 1999. In the tables, interest revenues are net of interest associated with nonaccrual loans.
SIX MONTHS ENDED ------------------------------------------------------------------------- JUNE 30, 2000 JUNE 30, 1999 ----------------------------------- ----------------------------------- WEIGHTED WEIGHTED AVERAGE REVENUES/ AVERAGE AVERAGE REVENUES/ AVERAGE BALANCE COSTS YIELD/COST BALANCE COSTS YIELD/COST ---------- --------- ---------- ---------- --------- ---------- (DOLLARS IN THOUSANDS) ASSETS: Interest-earning assets: Loans receivable(1)........................... $1,504,938 $67,598 8.98% $1,373,666 $62,219 9.06% Cash and cash equivalents..................... 79,168 2,362 5.97% 88,267 2,058 4.66% Investment in capital stock of Federal Home Loan Bank................................... 20,744 851 8.20% 16,397 417 5.09% ---------- ------- ---------- ------- Total interest-earning assets........... 1,604,850 70,811 8.82% 1,478,330 64,694 8.75% ------- ----- ------- ------ Noninterest-earning assets...................... 12,028 12,362 ---------- ---------- Total assets............................ $1,616,878 $1,490,692 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Deposits...................................... $1,095,611 28,867 5.30% $1,006,990 25,062 5.02% FHLB advances................................. 334,422 9,192 5.44% 322,729 8,297 5.11% Senior notes.................................. 40,000 2,500 12.50% 40,000 2,500 12.50% ---------- ------- ---------- ------- Total interest-bearing liabilities...... 1,470,033 40,559 5.55% 1,369,719 35,859 5.28% ------- ----- ------- ------ Noninterest-bearing checking.................... $ 30,351 $ 21,751 Noninterest-bearing liabilities................. 21,392 15,098 Stockholders' equity............................ 95,102 84,124 ---------- ---------- Total liabilities and stockholders' equity................................ $1,616,878 $1,490,692 ========== ========== Net interest income............................. $30,252 $28,835 ======= ======= Interest rate spread............................ 3.27% 3.47% ===== ====== Net interest margin including senior notes...... 3.77% 3.90% ===== ====== Net interest margin excluding senior notes...... 4.08% 4.24% ===== ======
- --------------- (1) Includes the interest on nonaccrual and non-performing loans only to the extent that it was paid and recognized as interest income. The operations of the Company are substantially dependent on its net interest income, which is the difference between the interest income received from its interest-earning assets and the interest expense paid on its interest-bearing liabilities. The Company's net interest margin is its net interest income divided by its average interest-earning assets. Net interest income and net interest margin are affected by several factors, including (1) the level of, and the relationship between, the dollar amount of interest-earning assets and interest-bearing liabilities, (2) the relationship between the repricing or maturity of the Company's adjustable-rate and fixed-rate loans and short-term investment securities and its deposits and borrowings, and (3) the magnitude of the Company's noninterest-earning assets, including nonaccrual loans and real estate owned ("REO"). The Company's net interest income before provision for credit losses rose 7.95% to $15.5 million and 4.91% to $30.3 million during the three and six months ended June 30, 2000, respectively, compared to $14.4 million and $28.8 million for the three and six months ended June 30, 1999, respectively. The Company's resulting net interest margin for the three and six months ended June 30, 2000, was 3.84% and 3.77%, respectively, compared to 3.78% and 3.90% during the same periods in 1999. On a year-to-date basis, the compression in the net interest margin is the result of increased competitive rate pressures in the market place, a change in the portfolio mix as reflected in the loan portfolio table contained herein, and an increase in the payment of broker rebates on single family residential loans. 11 14 The substantial majority of the Company's earning assets (principally loans) are adjustable-rate. The Company's deposits are primarily comprised of term certificate accounts, which carry fixed interest rates and predominantly possess original terms ranging from six-to-twelve months. The Company's borrowings, which are principally derived from the Federal Home Loan Bank of San Francisco (the "FHLB"), are for terms ranging from one-to-ten years (though such terms are subject to certain early call provisions) and carry both variable and fixed interest rates. As of June 30, 2000, 88.44% of the Company's loans were adjustable-rate, with 83.84% of such loans subject to repricing no less frequently than annually. The substantial majority of such loans are priced at a margin over various market-sensitive indices, including the One-year CMT, the One-month CMT, the MTA, LIBOR and the Prime Rate. Based upon the recent rise in the effective yield of these indices, the Company expects that the yield on its loan portfolio will rise moderately over the coming months to fully incorporate the recent rise in market interest rates. At June 30, 2000, 79.70% of the Company's interest-bearing deposits were comprised of certificate accounts, the majority of which have original terms ranging from six-to-twelve months. The remaining, weighted average term to maturity for the Company's certificate accounts approximated six months at June 30, 2000. Generally, the Company's offering rates for certificate accounts move directionally with the general level of interest rates, though typically not by the same magnitude. Accordingly, the Company expects that the cost of its certificate accounts will gradually rise in the coming months, as maturing and newly-acquired accounts are priced at current, higher offering rates. As of June 30, 2000, 65.18% of the Company's borrowings from the FHLB are fixed-rate, with remaining terms ranging from one-to-ten years (though such remaining terms are subject to early call provisions). The remaining 34.82% of the borrowings carry an adjustable interest rate, with 80% of the adjustable borrowings tied to the Prime Rate, maturing in February 2003. The remaining 20% is tied to 1-month LIBOR, and matures in May 2002. Accordingly, the recent rise in market interest rates is expected to result in a gradual rise in the cost of the Company's currently outstanding FHLB borrowings, and the cost of any newly acquired borrowings will reflect current market pricing. 12 15 The following tables set forth the dollar amount of changes in interest revenues and interest costs attributable to changes in the balances of interest-earning assets and interest-bearing liabilities, and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume (i.e., changes in volume multiplied by old rate), (2) changes in rate (i.e., changes in rate multiplied by old volume) and (3) changes attributable to both rate and volume.
THREE MONTHS ENDED JUNE 30, 2000 AND 1999 INCREASE (DECREASE) DUE TO CHANGE IN ------------------------------------------- RATE AND NET VOLUME RATE VOLUME(1) CHANGE ------- ------- ---------- ------- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans receivable(2).................................. $2,849 $ 548 $ 50 $3,447 Cash and cash equivalents............................ (371) 424 (129) (76) Investment in capital stock of Federal Home Loan Bank.............................................. 30 258 36 324 ------ ------ ----- ------ 2,508 1,230 (43) 3,695 ------ ------ ----- ------ Interest-bearing liabilities: Deposits............................................. 1,162 1,130 104 2,396 FHLB advances........................................ (263) 446 (26) 157 ------ ------ ----- ------ 899 1,576 78 2,553 ------ ------ ----- ------ Change in net interest income.......................... $1,609 $ (346) $(121) $1,142 ====== ====== ===== ======
- --------------- (1) Calculated by multiplying change in rate by change in volume. (2) Includes the interest on non-performing loans only to the extent that it was paid and recognized as interest income. The Company's interest revenues increased by $3.7 million, or 11.31%, during the three months ended June 30, 2000, as compared to the same period in 1999. This increase was primarily attributable to a 9.12% increase in the average balance of loans outstanding. Interest costs increased by $2.6 million, or 13.94%, during the three months ended June 30, 2000, as compared to the same period during 1999, primarily due to a 5.22% increase in the average balances of the Company's deposits and borrowings, in conjunction with an increase in the weighted average rates paid on the Company's deposits and FHLB advances. The cost of interest-bearing liabilities averaged 5.69% during the three months ended June 30, 2000, as compared with 5.24% during the same quarter of 1999. 13 16 These changes in interest revenues and interest costs produced an increase of $1.1 million, or 7.95%, in the Company's net interest income during the three months ended June 30, 2000, as compared with the same quarter during 1999. Expressed as a percentage of average interest-earning assets, the Company's net interest margin increased to 3.84% during the three months ended June 30, 2000, as compared with the net interest margin of 3.78% produced during the same period during 1999.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999 INCREASE (DECREASE) DUE TO CHANGE IN ---------------------------------------- RATE AND NET VOLUME RATE VOLUME(1) CHANGE ------ ------- --------- ------ (DOLLARS IN THOUSANDS) Interest-earning assets: Loans receivable(2)................................. $5,946 $ (517) $ (50) $5,379 Cash and cash equivalents........................... (212) 575 (59) 304 Investment in capital stock of Federal Home Loan Bank............................................. 110 256 68 434 ------ ------- ----- ------ 5,844 314 (41) 6,117 ------ ------- ----- ------ Interest-bearing liabilities: Deposits............................................ 2,206 1,470 129 3,805 FHLB advances....................................... 300 574 21 895 ------ ------- ----- ------ 2,506 2,044 150 4,700 ------ ------- ----- ------ Change in net interest income......................... $3,338 $(1,730) $(191) $1,417 ====== ======= ===== ======
- --------------- (1) Calculated by multiplying change in rate by change in volume. (2) Includes the interest on non-performing loans only to the extent that it was paid and recognized as interest income. The Company's interest revenues increased by $6.1 million, or 9.46%, during the six months ended June 30, 2000, as compared to the same period in 1999. This increase was primarily attributable to a 9.56% increase in the average balance of loans outstanding, which was partially offset by a decrease in the weighted average yield earned thereon, which averaged 8.98% during 2000, as compared with 9.06% in 1999. The decline in the loan portfolio yield reflected increased competitive rate pressure in the market place, a change in the portfolio mix as reflected in the loan portfolio table contained herein, and an increase in the payment of broker rebates on single family residential loans. Interest costs increased by $4.7 million, or 13.11%, during the six months ended June 30, 2000, as compared to the same period during 1999, primarily due to a 7.32% increase in the average balances of the Company's deposits and borrowings, in conjunction with an increase in the weighted average rates paid on the Company's deposits and FHLB advances. The cost of interest-bearing liabilities averaged 5.55% during the six months ended June 30, 2000, as compared with 5.28% during the same quarter of 1999. These changes in interest revenues and interest costs produced an increase of $1.4 million, or 4.91%, in the Company's net interest income during the six months ended June 30, 2000, as compared with the same period during 1999. Expressed as a percentage of average interest-earning assets, the Company's net interest margin decreased to 3.77% during the six months ended June 30, 2000, as compared with the net interest margin of 3.90% produced during the same period during 1999. PROVISIONS FOR CREDIT LOSSES ON LOANS Provisions for credit losses for the three and six months ended June 30, 2000, were $1.5 million and $3.0 million, respectively, a decrease of 40.0% and 45.5% over provisions of $2.5 million and $5.5 million recorded during the three and six months ended June 30, 1999, respectively. The Company's total allowance for estimated credit losses to loans receivable, net of specific allowances, increased to 1.74% at June 30, 2000, compared with 1.65% at December 31, 1999 and 1.43% at June 30, 1999. The Company's annualized ratio of charge-offs to average loans has improved from 0.60% in the second quarter of 1999 to 0.04% in the second quarter of 2000. Additionally, the ratio of total classified assets to Bank core capital and general allowance for 14 17 estimated credit losses was 46.27% at June 30, 2000, compared to 49.96% at December 31, 1999 and 35.43% at June 30, 1999. Although the Company maintains its allowance for estimated credit losses at a level which it considers to be adequate to provide for potential losses based on presently known conditions, there can be no assurance that such losses will not exceed the estimated amounts, thereby adversely affecting future results of operations. The calculation of the adequacy of the allowance for estimated credit losses, and therefore the requisite amount of provision for credit losses, is based on several factors, including underlying loan collateral values, delinquency trends and historical loan loss experience, all of which can change without notice based on market and economic conditions and other factors. NONINTEREST REVENUES Loan Related Fees Noninterest revenues were $2.1 million and $3.9 million for the three and six months ended June 30, 2000, compared to noninterest revenues of $1.9 million and $3.9 million earned during the three and six months ended June 30, 1999, respectively. Loan related fees primarily consist of fees collected from borrowers (1) for the early repayment of their loans, (2) for the extension of the maturity of loans (predominantly short-term construction loans, with respect to which extension options are often included in the original term of the Company's loan), and (3) in connection with certain loans which contain exit or release fees payable to the Company upon the maturity or repayment of the Company's loan. The increase in loan-related fee revenues during the second quarter of 2000, as compared with the second quarter of 1999, was occasioned by the prepayment of a larger number of loans to which prepayment penalties were attached, and the repayment of a small number of loans requiring exit fees due upon repayment. Real Estate Operations The following table sets forth the costs and revenues attributable to the Company's REO properties for the periods indicated. The compensatory and legal costs directly associated with the Company's property management and disposal operations are included in general and administrative expenses.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE JUNE 30, 30, --------------------- ---------------------- 2000 1999 CHANGE 2000 1999 CHANGE ----- ---- ------ ----- ----- ------ {(DOLLARS IN THOUSANDS) Expenses associated with real estate operations: Repairs, maintenance and renovation............ $(106) $(71) $(35) $(191) $(151) $ (40) Insurance and property taxes................... (7) -- (7) (9) -- (9) ----- ---- ---- ----- ----- ----- (113) (71) (42) (200) (151) (49) Net recoveries from sale of REO.................. 29 80 (51) 7 638 (631) Property operations, net......................... (6) 9 (15) 20 10 10 ----- ---- ---- ----- ----- ----- Total.................................. 23 89 (66) 27 648 (621) ----- ---- ---- ----- ----- ----- (Provision)/recovery for estimated losses on real estate owned................................... -- (35) 35 24 (80) 104 ----- ---- ---- ----- ----- ----- (Loss)/income from real estate operations, net... $ (90) $(17) $(73) $(149) $ 417 $(566) ===== ==== ==== ===== ===== =====
Net (loss)/recoveries from sales of REO properties represent the difference between the proceeds received from property disposal and the carrying value of such properties upon disposal. Property operations principally include the net operating income (collected rental revenues less operating expenses and certain renovation costs) from foreclosed income-producing properties or receipt, following foreclosure, of similar funds held by receivers during the period the original loan was in default. During the six months ended June 30, 2000, the Company sold seven properties generating net cash proceeds of $0.7 million and a net recovery of $7 thousand, as compared to sales of eleven properties generating net cash proceeds of $2.9 million and a net recovery of $0.6 million during the six months ended June 30, 1999. As of June 30, 2000, the Company holds seven properties. 15 18 NONINTEREST EXPENSES General and Administrative Expenses The table below details the Company's general and administrative expenses for the periods indicated.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------- ---------------------------- 2000 1999 CHANGE 2000 1999 CHANGE ------- ------- ------- ------- ------- ------ (DOLLARS IN THOUSANDS) General and administrative expenses: Employee.......................... $4,353 $3,576 $777 $ 8,405 $ 7,679 $ 726 Operating......................... 1,529 1,599 (70) 3,042 3,138 (96) Occupancy......................... 897 986 (89) 1,860 1,979 (119) Technology........................ 484 518 (34) 958 1,078 (120) Professional...................... 1,231 860 371 2,106 1,164 942 SAIF premiums and OTS assessments.................... 217 313 (96) 439 612 (173) ------ ------ ---- ------- ------- ------ Total general and administrative expenses................ $8,711 $7,852 $859 $16,810 $15,650 $1,160 ====== ====== ==== ======= ======= ======
Total general and administrative expenses ("G&A") were $8.7 million and $16.8 million for the three and six months ended June 30, 2000, respectively, a 10.94% and 7.41% increase over the $7.9 million and $15.7 million of G&A incurred during the same periods in 1999. The increase in G&A for the first half of 2000 was primarily in professional fees comprised of outside consultants working on operational projects and legal fees attributable to loan documentation and restructurings and ongoing litigation matters previously disclosed. The increase in G&A and the decrease in noninterest revenues discussed previously had a negative impact on the Company's efficiency ratio (defined as total general and administrative expenses divided by net interest income before provision and noninterest revenues, excluding REO, net). The efficiency ratio for the six months ended June 30, 2000, increased to 49.23% compared to 47.82% for the six months ended June 30, 1999. Other Non-operating Expense Other non-operating expense totaled $2.0 million for the six months ended June 30, 2000, a $1.0 million increase over the $1.0 million of other non-operating expense incurred during the same period of 1999, primarily in connection with $1.7 million for ongoing litigation and/or satisfaction of judgments against the Company as previously discussed (see page 7). 16 19 FINANCIAL CONDITION, CAPITAL RESOURCES & LIQUIDITY AND ASSET QUALITY ASSETS LOANS RECEIVABLE GENERAL The Company's loan portfolio consists almost exclusively of loans secured by real estate located in Southern California. The table below sets forth the composition of the Company's loan portfolio as of the dates indicated.
JUNE 30, 2000 DECEMBER 31, 1999 --------------------- --------------------- BALANCE PERCENT BALANCE PERCENT ---------- ------- ---------- ------- {(DOLLARS IN THOUSANDS) Single family residential........................ $ 796,620 46.4% $ 683,250 41.0% Income property: Multi-family(1)................................ 235,484 13.7% 222,616 13.4% Commercial(1).................................. 201,716 11.8% 208,859 12.5% Development(2)................................. 157,630 9.2% 148,092 8.9% Land(3).......................................... 52,395 3.1% 59,095 3.5% Single family construction: Single family residence(4)..................... 219,703 12.8% 274,697 16.5% Tract.......................................... 10,751 0.6% 24,056 1.4% Other............................................ 41,769 2.4% 46,132 2.8% ---------- ----- ---------- ----- Gross loans receivable(5)........................ 1,716,068 100.0% 1,666,797 100.0% ===== ===== Less: Undisbursed funds.............................. (158,358) (196,249) Deferred fees and credits, net................. 992 (1,295) Allowance for estimated losses................. (27,089) (24,285) ---------- ---------- Net loans receivable............................. $1,531,613 $1,444,968 ========== ==========
- --------------- (1) Predominantly term loans secured by improved properties, with respect to which the properties' cash flows are sufficient to service the Company's loan. (2) Predominantly loans to finance the construction of income-producing improvements. Also includes loans to finance the renovation of existing improvements. (3) The Company expects that a majority of these loans will be converted into construction loans, and the land-secured loans repaid with the proceeds of these construction loans, within 12 months. (4) Predominantly loans for the construction of individual and custom homes. (5) Includes the funded principal balance under recorded loan commitments, plus outstanding but unfunded loan commitments, predominantly in connection with construction loans. 17 20 The table below sets forth the Company's loan portfolio diversification by loan size.
JUNE 30, 2000 DECEMBER 31, 1999 ------------------- ------------------- NO. OF GROSS NO. OF GROSS LOANS COMMITMENT LOANS COMMITMENT ------ ---------- ------ ---------- (DOLLARS IN THOUSANDS) Loans in excess of $10.0 million: Single family residential............. 1 $ 13,000 1 $ 13,000 Income property: Multi-family....................... -- -- -- -- Commercial......................... 5 56,484 3 32,622 Development........................ 2 24,750 3 33,900 Land.................................. -- -- -- -- Other................................. -- -- 1 16,000 -- ---------- -- ---------- 8 94,234 8 95,522 -- ---------- -- ---------- Percentage of total gross loans....... 5.5% 5.7% Loans between $5.0 and $10.0 million: Single family residential............. 4 24,400 7 39,364 Income property: Multi-family....................... -- -- 1 6,655 Commercial......................... 9 68,023 9 65,998 Development........................ 12 81,763 11 71,049 Land.................................. 1 6,501 1 6,501 Single family construction: Single family residence............ 3 19,562 4 24,812 Tract.............................. 1 6,743 2 11,040 Other................................. 2 18,190 3 27,466 -- ---------- -- ---------- 32 225,182 38 252,885 -- ---------- -------- Percentage of total gross loans....... 13.1% 15.2% Loans less than $5 million.............. 1,396,652 1,318,390 ---------- ---------- Gross loans receivable........... $1,716,068 $1,666,797 ========== ==========
- ---------- (1) Based on current credit review, management determined that a bulk sale value would be a more conservative valuation for calculating the LTV ratio. 18 21 The table below sets forth the Company's net loan portfolio composition, excluding net deferred fees and credits, as of the dates indicated.
JUNE 30, 2000 DECEMBER 31, 1999 --------------------- --------------------- BALANCE PERCENT BALANCE PERCENT ---------- ------- ---------- ------- {(DOLLARS IN THOUSANDS) SFR -- Permanent................................. $ 788,711 50.6% $ 674,917 45.9% SFR -- Construction.............................. 157,485 10.1% 198,066 13.5% Land............................................. 49,690 3.2% 50,161 3.4% Income Property -- Permanent..................... 441,915 28.4% 434,242 29.5% Income Property -- Construction.................. 105,031 6.7% 99,296 6.8% Other............................................ 14,878 1.0% 13,866 0.9% ---------- ----- ---------- ----- Total.................................. $1,557,710 100.0% $1,470,548 100.0% ========== ===== ========== =====
The following table sets forth the approximate composition of the Company's gross new loan commitments, net of internal refinances, for the period indicated, in dollars and as a percentage of total loans originated.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2000 JUNE 30, 2000 ------------------- ----------------- AMOUNT % AMOUNT % --------- ------ -------- ----- {(DOLLARS IN THOUSANDS) Single family residential(1).......................... $103,694 46.0% $180,280 49.7% Income property: Multi-family........................................ 18,756 8.3% 31,791 8.8% Commercial(2)....................................... 12,227 5.4% 32,464 8.9% Development(3)...................................... 46,545 20.6% 46,545 12.8% Land(4)............................................... 8,894 3.9% 15,385 4.2% Single family construction: Single family residence(5).......................... 35,463 15.7% 56,545 15.6% Other................................................. 16 -- 24 -- -------- ----- -------- ----- Total....................................... $225,595 100.0% $363,034 100.0% ======== ===== ======== =====
- --------------- (1) Includes unfunded commitments of $0.1 million as of June 30, 2000. (2) Includes unfunded commitments of $0.4 million as of June 30, 2000. (3) Includes unfunded commitments of $29.4 million as of June 30, 2000. (4) Includes unfunded commitments of $0.1 million as of June 30, 2000. (5) Includes unfunded commitments of $26.6 million as of June 30, 2000. 19 22 ASSET QUALITY Classified Assets The table below sets forth information concerning the Company's classified assets as of the dates indicated. Classified assets include REO, nonaccrual loans and performing loans which have been adversely classified pursuant to OTS regulations and guidelines ("Performing/Classified" loans).
JUNE 30, DECEMBER 31, 2000 1999 ---------- ------------ {(DOLLARS IN THOUSANDS) Risk elements: Nonaccrual loans(1)....................................... $ 36,047 $ 44,031 Real estate owned, net.................................... 5,334 5,587 ---------- ---------- 41,381 49,618 Performing loans classified substandard or lower.......... 32,284 25,646 ---------- ---------- Total classified assets................................... $ 73,665 $ 75,264 ========== ========== Total classified loans.................................... $ 68,331 $ 69,677 ========== ========== Average LTV on classified loans........................... 74% 69% ========== ========== Loans restructured and paying in accordance with modified terms(2).................................................. $ 15,553 $ 15,394 ========== ========== Gross loans before allowance for estimated credit losses.... $1,558,702 $1,469,253 ========== ========== Loans receivable net of specific reserves and deferred fees...................................................... $1,556,465 $1,468,445 ========== ========== Delinquent Loans 30 - 89 days.............................................. $ 17,968 $ 9,063 90+ days.................................................. 30,441 14,916 ---------- ---------- Total delinquent loans............................ $ 48,409 $ 23,979 ========== ========== Allowance for estimated credit losses: General................................................... $ 24,852 $ 23,476 Specific.................................................. 2,237 809 ---------- ---------- Total allowance for estimated credit losses....... $ 27,089 $ 24,285 ========== ========== Net loan charge-offs: Net charge-offs for the quarter ended..................... $ 142 $ 1,409 Percent to net loans (annualized)......................... 0.04% 0.38% Percent to beginning of period allowance for credit losses (annualized)........................................... 2.21% 24.83% Selected asset quality ratios at period end: Total nonaccrual loans to total assets.................... 2.15% 2.78% Total allowance for estimated credit losses to loans receivable, net of specific reserves and deferred fees................................................... 1.74% 1.65% Total general allowance for estimated credit losses to loans receivable, net of specific reserves and deferred fees................................................... 1.60% 1.60% Total reserves to nonaccrual loans........................ 75.15% 55.15% Total classified assets to Bank core capital and general loan loss reserves..................................... 46.27% 49.96%
- --------------- (1) Total troubled debt restructured loans ("TDRs") were $24.9 million and $34.9 million at June 30, 2000 and December 31, 1999, respectively. Nonaccrual loans include TDRs of $9.3 million and $18.7 million at June 30, 2000 and December 31, 1999, respectively. (2) TDRs not classified and not on nonaccrual. 20 23 The table below sets forth information concerning the Company's gross classified loans, by category, as of June 30, 2000. See page 9 for further discussion.
DELINQUENT LOANS --------------------------- OTHER 90+ NONACCRUAL PERFORMING DAYS(1) 30-89 DAYS(2) LOANS(3) LOANS TOTAL ----------- ------------- ---------- ---------- ------- {(DOLLARS IN THOUSANDS) Single family residential................ $17,054 $3,682 $ 131 $ 7,285 $28,152 Income property: Multi-family........................... 348 -- -- -- 348 Commercial............................. 10,622 -- 8,538 6,462 25,622 Land..................................... 2,075 3,971 -- 2,878 8,924 Single family construction: Single family residence................ -- 434 879 350 1,663 Tract.................................. 70 -- 3,527 -- 3,597 Other.................................... 22 -- -- 3 25 ------- ------ ------- ------- ------- Total.......................... $30,191 $8,087 $13,075 $16,978 $68,331 ======= ====== ======= ======= =======
- --------------- (1) Includes $12.7 million in classified loans 90 days past due and still accruing interest. (2) Includes $2.6 million in loans 30-89 days past due and still accruing interest. (3) Loans classified as substandard for which interest payment reserves were established from loan funds rather than borrower funds. ALLOWANCE FOR ESTIMATED CREDIT LOSSES Management establishes specific allowances for estimated credit losses on individual loans when it has determined that recovery of the Company's gross investment is not probable and when the amount of loss can be reasonably determined. In making this determination, management considers (1) the status of the asset, (2) the probable future status of the asset, (3) the value of the asset or underlying collateral and (4) management's intent with respect to the asset. In quantifying the loss, if any, associated with individual loans, management utilizes external sources of information (i.e., appraisals, price opinions from real estate professionals, comparable sales data and internal estimates). In establishing specific allowances, management estimates the revenues expected to be generated from disposal of the Company's collateral or owned property, less construction and renovation costs (if any), holding costs and transaction costs. For tract construction and land development, the resulting projected cash flows are discounted utilizing a market rate of return to determine their value. The Company maintains an allowance for estimated credit losses which is not tied to individual loans or properties ("general allowances"). General allowances are maintained for each of the Company's principal loan segments, and supplemented by periodic additions through provisions for credit losses. In measuring the adequacy of the Company's general allowances, management considers (1) the Company's historical loss experience for each loan portfolio segment and in total, (2) the historical migration of loans within each portfolio segment and in total (i.e., from performing to nonperforming, from nonperforming to REO), (3) observable trends in the performance of each loan portfolio segment, (4) observable trends in the region's economy and in its real property markets and (5) guidelines published by the OTS for maintaining General Allowances. In addition to the amount of allowance determined by applying individual loss factors to the portfolio, the general allowance may also include an unallocated amount. The unallocated allowance recognizes the model and estimation risk associated with the allowance formula and specific allowances. In addition, the unallocated allowance is based upon management's evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the unallocated 21 24 allowance include (1) general economic and business conditions affecting our key lending areas, (2) credit quality trends (including trends in nonperforming loans expected to result from existing conditions), (3) collateral values, (4) loan volumes and concentrations, (5) seasoning of the loan portfolio, (6) specific industry conditions within portfolio segments (7) recent loss experience in particular segments of the portfolio, (8) duration of the current business cycle, (9) bank regulatory examination results and (10) findings of our internal credit examiners. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss has been incurred. The table below sets forth the general and specific allowance for estimated credit losses for the Company's loan portfolio as of June 30, 2000.
LOANS ------------------------ PERFORMING DELINQUENT TOTAL ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Specific allowances............................. $ 1,181 $ 1,056 $ 2,237 General allowances.............................. 19,521 5,331 24,852 ---------- ------- ---------- Total................................. $ 20,702 $ 6,387 $ 27,089 ========== ======= ========== Percentages: Total allowance for estimated credit losses to loans receivable before allowance for credit losses.............................. 1.37% 13.19% 1.74% Total general allowances for estimated credit losses to loans receivable, net of specific reserves................................... 1.29% 11.26% 1.60% Loans receivable before allowance for credit losses........................................ $1,510,293 $48,409 $1,558,702 Loans receivable net of specific reserves....... 1,509,112 47,353 1,556,465
22 25 The table below summarizes the activity of the Company's allowance for estimated credit losses for the periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Average loans outstanding................. $1,519,760 $1,392,736 $1,504,938 $1,373,666 ========== ========== ========== ========== Total allowance for estimated credit losses at beginning of period........... $ 25,731 $ 19,958 $ 24,285 $ 17,111 Provision for estimated credit losses..... 1,500 2,500 3,000 5,500 Charge-offs: Single family........................... (51) (1,623) (158) (1,776) Income property: Commercial.............................. -- (512) -- (512) Single family construction: Tract................................... (147) -- (147) -- Other..................................... (15) -- (15) -- Recoveries: Other................................... 71 -- 124 -- ---------- ---------- ---------- ---------- Net charge-offs........................... (142) (2,135) (196) (2,288) ---------- ---------- ---------- ---------- Total allowance for estimated credit losses at end of period........................ $ 27,089 $ 20,323 $ 27,089 $ 20,323 ========== ========== ========== ========== Annualized ratio of charge-offs to average loans outstanding during the period..... 0.04% 0.61% 0.03% 0.33% Real estate owned: Total allowance for estimated losses at beginning of period........................ $ 4 $ 90 $ 29 $ 45 Provision for estimated losses............ -- 35 -- 80 Charge-offs............................... (4) (87) (29) (87) ---------- ---------- ---------- ---------- Total allowance for estimated losses at end of period....... $ -- $ 38 $ -- $ 38 ========== ========== ========== ==========
23 26 The table below summarizes the allocation of the Company's allowance for estimated credit losses for each principal loan portfolio segment.
JUNE 30, 2000 DECEMBER 31, 1999 ------------------------- ------------------------- PERCENT OF PERCENT OF RESERVES TO RESERVES TO TOTAL LOANS(1) TOTAL LOANS(1) BALANCE BY CATEGORY BALANCE BY CATEGORY ------- -------------- ------- -------------- (DOLLARS IN THOUSANDS) Single family residential.................. $ 6,432 0.81% $ 7,095 1.04% Income property: Multi-family............................. 743 0.32% 646 0.29% Commercial............................... 5,437 2.70% 6,738 3.23% Development.............................. 4,615 2.93% 2,067 1.40% Land....................................... 2,384 4.55% 1,470 2.49% Single family construction: Single family residence.................. 2,226 1.01% 3,946 1.44% Tract.................................... 983 9.14% 855 3.55% Other...................................... 873 2.09% 480 1.04% Unallocated................................ 3,396 n/a 988 n/a ------- ------- $27,089 1.58% $24,285 1.46% ======= =======
- --------------- (1) Percent of allowance for estimated credit losses to gross loan commitments, which exclude the undisbursed portion of such commitments. The change in the percentage of reserves to total loans by category is a result of different levels of classified assets within each category. Unallocated reserves are established based on management's judgment in order to appropriately reflect the presence of indicators of inherent losses that are not fully reflected in the historical loss information and analysis used in the development of allocated reserves. The factors considered in establishing the unallocated reserve include: nonperforming, charge-off, delinquency and portfolio growth and concentration trends and the likely impact of known changes in the economy or other events that may affect loss performance. The unallocated reserves are reviewed periodically to determine whether they are at a level that management believes are adequate. Based on the $24.4 million increase in delinquent loans, from $24.0 million at December 31, 1999 to $48.4 million at June 30, 2000, and other factors discussed elsewhere herein, management believes that the unallocated reserve of $3.4 million as of June 30, 2000 is appropriate. REAL ESTATE OWNED Real estate acquired in satisfaction of loans is transferred from loans to properties at the lower of the carrying values or the estimated fair values, less any estimated disposal costs. The difference between the fair value of the real estate collateral and the loan balance at the time of transfer is recorded as a loan charge-off. Any subsequent declines in the fair value of the properties after the date of transfer are recorded through a write-down of the asset. The table below summarizes the composition of the Company's real estate owned properties for the dates indicated.
JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ (DOLLARS IN THOUSANDS) Single family(1)....................................... $ 946 $1,218 Income property: Commercial(2)........................................ 4,388 4,398 ------ ------ Gross investment(3).................................... 5,334 5,616 Less allowance for estimated losses.................... -- 29 ------ ------ Real estate owned, net................................. $5,334 $5,587 ====== ======
- --------------- (1) As of June 30, 2000, the Company holds six properties. (2) In December 1999, the Bank acquired 18 lots of a tract development in La Quinta, California with a carrying value of $4.4 million. (3) Fair value of collateral at foreclosure, plus post-foreclosure capitalized costs. 24 27 LIABILITIES SOURCES OF FUNDS GENERAL The Company's principal sources of funds in recent years have been deposits obtained on a retail basis through its branch offices and, to a lesser extent, advances from the FHLB. In addition, funds have been obtained from maturities and repayments of loans and securities, and sales of loans, securities and other assets, including real estate owned. DEPOSITS The table below summarizes the Company's deposit portfolio by original term, weighted average interest rates ("WAIR") and weighted average remaining maturities in months ("WARM") as of the dates indicated.
JUNE 30, 2000 DECEMBER 31, 1999 -------------------------- -------------------------- BALANCE WAIR WARM BALANCE WAIR WARM ---------- ---- ---- ---------- ---- ---- (DOLLARS IN THOUSANDS) Noninterest-bearing checking.... $ 30,877 -- -- $ 28,838 -- -- Checking/NOW.................... 41,487 2.16% -- 40,563 2.17% -- Passbook........................ 24,250 1.65% -- 23,568 1.41% -- Money market.................... 164,887 4.85% -- 155,537 4.45% -- Certificates of deposit: 7 day maturities.............. 27,207 4.06% -- 30,631 4.08% -- Less than 6 months............ 20,991 4.86% 1 42,082 4.78% 2 6 months to 1 year............ 149,035 5.97% 3 147,407 5.24% 3 1 year to 2 years............. 679,478 6.04% 7 584,488 5.46% 8 Greater than 2 years.......... 28,835 5.32% 10 33,521 5.31% 12 ---------- ---------- $1,167,047 5.39% 5 $1,086,635 4.86% 5 ========== ==========
FHLB ADVANCES The Company has a credit line with the FHLB with a maximum advance of up to 35% of total assets based on qualifying collateral. The FHLB system functions as a source of credit to savings institutions which are members. Advances are secured by the Company's mortgage loans and the capital stock of the FHLB owned by the Company. Subject to the FHLB's advance policies and requirements, these advances can be requested for any business purpose in which the Company is authorized to engage. In granting advances, the FHLB considers a member's creditworthiness and other relevant factors. The table below sets forth certain information regarding the Company's FHLB advances.
JUNE 30, 2000 DECEMBER 31, 1999 ----------------- ----------------- ORIGINAL TERM PRINCIPAL RATE PRINCIPAL RATE ------------- --------- ---- --------- ---- (DOLLARS IN THOUSANDS) 24 Months............................................. $ 25,000 6.59% $ -- -- 36 Months............................................. 100,000 6.73% -- -- 60 Months............................................. 135,000 5.92% 300,000 5.30% 120 Months............................................ 99,000 5.19% 49,000 4.36% -------- -------- $359,000 5.99%(1) $349,000 5.16%(1) ======== ========
- --------------- (1) Weighted average interest rate. The weighted average remaining term of the Company's FHLB advances was 4 years and 11 months and 4 years and 6 months as of June 30, 2000 and December 31, 1999, respectively. All of the Company's FHLB advances outstanding at June 30, 2000, with the exception of one, contain options which allow the FHLB to 25 28 call the advances prior to maturity, subject to an initial non-callable period of one-to-three years from origination. SENIOR NOTES On December 31, 1997, the Company issued $40.0 million of Senior Notes due 2004 ("1997 Senior Notes") in a private placement, which included registration rights. The 1997 Senior Notes bear interest payable semiannually at a rate of 12.5%, and are callable after December 31, 2002. Interest is required to be paid semiannually at the stated interest rate. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL The Company's capital consists of common stockholders' equity, which at June 30, 2000 amounted to $98.2 million and which equaled 5.85% of the Company's total assets. As indicated in the table below, the Bank's capital levels exceeded minimum regulatory capital requirements.
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL ------------------ ----------------- ------------------- BALANCE % BALANCE % BALANCE % ---------- ---- ---------- ---- ---------- ----- (DOLLARS IN THOUSANDS) Stockholders' equity............. $ 134,350 $ 134,350 $ 134,350 Adjustments: General reserves............... -- -- 15,121 Other(1)....................... -- -- (5,565) ---------- ---- ---------- ---- ---------- ----- Regulatory capital............... 134,350 8.01% 134,350 8.01% 143,906 11.99% Required minimum................. 25,145 1.50 67,054 4.00 96,001 8.00 ---------- ---- ---------- ---- ---------- ----- Excess capital................... $ 109,205 6.51% $ 67,296 4.01% $ 47,905 3.99% ========== ==== ========== ==== ========== ===== Adjusted assets(2)............... $1,676,356 $1,676,356 $1,200,012 ========== ========== ==========
- --------------- (1) Includes the portion of non-residential construction loans and land loans which exceed a loan-to-value ratio of 80%. (2) The term "adjusted assets" refers to the term "adjusted total assets", as defined in 12 C.F.R. Section 567.1(a), for purposes of tangible and core capital requirements, and for purposes of risk-based capital requirements, refers to the term "risk-weighted assets", as defined in 12 C.F.R. Section 567.1(d). 26 29 As of June 30, 2000, the Bank is categorized as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events subsequent to June 30, 2000 that management believes have changed the Bank's category. The Bank's actual capital amounts and ratios and the capital amounts and ratios required in order for an institution to be "well capitalized" and "adequately" capitalized are presented in the table below.
MINIMUM TO BE WELL CAPITALIZED UNDER MINIMUM PROMPT CAPITAL CORRECTIVE ACTION ACTUAL REQUIREMENT PROVISIONS ----------------- ---------------- ------------------ AMOUNT RATIOS AMOUNT RATIOS AMOUNT RATIOS -------- ------ ------- ------ -------- ------ (DOLLARS IN THOUSANDS) As of June 30, 2000 Total Capital (to Risk Weighted Assets)......... $143,906 11.99% $96,001 8.00% $120,001 10.00% Core Capital (to Adjusted Tangible Assets)...... 134,350 8.01% 67,054 4.00% 83,818 5.00% Tangible Capital (to Adjusted Tangible Assets)....................................... 134,350 8.01% 25,145 1.50% N/A N/A Tier 1 Capital (to Risk Weighted Assets)........ 134,350 11.20% N/A N/A 72,001 6.00% As of December 31, 1999 Total Capital (to Risk Weighted Assets)......... $139,815 12.50% $89,468 8.00% $111,835 10.00% Core Capital (to Adjusted Tangible Assets)...... 127,160 8.05% 63,174 4.00% 78,967 5.00% Tangible Capital (to Adjusted Tangible Assets)....................................... 127,160 8.05% 23,690 1.50% N/A N/A Tier 1 Capital (to Risk Weighted Assets)........ 127,160 11.37% N/A N/A 67,101 6.00%
The OTS has authority, after an opportunity for a hearing, to downgrade an institution from "well capitalized" to "adequately capitalized" or to subject an "adequately capitalized" or "undercapitalized" institution to the supervisory actions applicable to the next lower category, if the OTS deems such action to be appropriate as a result of supervisory concerns. CAPITAL RESOURCES AND LIQUIDITY Hawthorne Financial Corporation maintained cash and cash equivalents of $2.9 million at June 30, 2000. Hawthorne Financial Corporation has no other significant assets beyond its investment in the Bank. From time-to-time, the Company is dependent upon the Bank for dividends in order to make future semiannual interest payments. The ability of the Bank to provide dividends to Hawthorne Financial Corporation is governed by applicable regulations of the OTS. The Company made its June 2000 semiannual interest payment on its 1997 Senior Notes. Based upon these regulations, the Bank's supervisory rating, and the Bank's current and projected earnings rate, management fully expects the Bank to maintain the ability to provide dividends to Hawthorne Financial Corporation, as necessary, for the payment of interest on the Company's 1997 Senior Notes. In April 2000, Hawthorne Financial Corporation received a dividend of $1.5 million to fund the stock repurchase as disclosed previously herein. In July 2000, the Company authorized the repurchase of up to an additional 5% of its common stock, or approximately 264,000 shares. This is in addition to the 5% repurchase authorization announced in March 2000, for approximately 277,000 shares. As of August 11, 2000, the Company has repurchased 282,500 shares at an average price per share of $8.09. The Company's liquidity position refers to the extent to which the Company's funding sources are sufficient to meet its current and long-term cash requirements. Federal regulations currently require a savings association to maintain a monthly average daily balance of liquid assets (including cash, certain time deposits, bankers' acceptances, and specified United States Government, state or federal agency obligations) equal to 4.0% of the average daily balance of its net withdrawable accounts and short-term borrowings during the preceding calendar quarter. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4.00% to 10.00% of such accounts and borrowings depending upon economic conditions and the deposit flows of member associations. Monetary penalties may be imposed for failure to meet this liquidity ratio requirement. The Company's liquidity for the calculation period ended June 30, 2000 was 6.54%, which exceeded the applicable minimum requirements. The Company's current primary funding resources are deposits, principal payments on loans, FHLB advances and cash flows from operations. Other possible sources of liquidity available to the Company include whole loan sales, commercial bank lines of credit, and direct access, under certain conditions, to borrowings 27 30 from the Federal Reserve System. The cash needs of the Company are principally for the payment of interest on, and withdrawals of, deposit accounts, the funding of loans and operating costs and expenses. INTEREST RATE RISK MANAGEMENT The objective of interest rate risk management is to stabilize the Company's net interest income ("NII") while limiting the change in its Net Portfolio Value ("NPV") from interest rate fluctuations. The Company seeks to achieve this objective by matching its interest sensitive assets and liabilities, and maintaining the maturity and repricing of these assets and liabilities at appropriate levels given the interest rate environment. When the amount of rate-sensitive liabilities exceeds rate-sensitive assets within specified periods, the NII generally will be negatively impacted by increasing interest rates and positively impacted by decreasing interest rates during such periods. Conversely, when the amount of rate-sensitive assets exceeds the amount of rate-sensitive liabilities within specified periods, net interest income generally will be positively impacted by increasing interest rates and negatively impacted by decreasing interest rates during such periods. The speed and velocity of the repricing of assets and liabilities will also contribute to the effects on NII. The Company utilizes two methods for measuring interest rate risk, namely, gap analysis and interest rate simulations. Gap analysis focuses on measuring absolute dollar amounts subject to repricing within certain periods of time, particularly the one-year maturity horizon. Interest rate simulations provide the Company with an estimate of both the dollar amount and percentage change in NII under various interest rate scenarios. All assets and liabilities are subjected to tests of up to 300 basis points in increases and decreases in interest rates. Under each interest rate scenario, the Company projects its net interest income and the NPV of its current balance sheet. From these results, the Company can then develop alternatives to dealing with the tolerance thresholds. The Company's interest rate risk strategy emphasizes the management of asset and liability balances within repricing categories in order to limit the Bank's exposure to earnings variations as well as variations in the value of assets and liabilities due to changes in interest rates over time. The Company does not currently utilize off balance sheet hedging instruments in order to hedge its interest rate exposure. Instead, the Company utilizes interest rate floors, prepayment penalties, and exit fees on its new loans to mitigate the risk of interest margin compression. Additionally, the Company hedges such exposure internally by extending the duration of interest-bearing liabilities through the use of FHLB advances, to better match the repricing sensitivity of the interest-earning assets. 28 31 The table below sets forth information concerning repricing opportunities for the Company's interest-earning assets and interest-bearing liabilities as of June 30, 2000. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual maturities, except that adjustable-rate products are included in the period in which they are first scheduled to adjust and not in the period in which they mature. Such assets and liabilities are classified by the earlier of maturity or repricing date.
JUNE 30, 2000 ------------------------------------------------------------------------ OVER THREE OVER SIX OVER ONE THREE THROUGH THROUGH YEAR OVER MONTHS SIX TWELVE THROUGH FIVE OR LESS MONTHS MONTHS FIVE YEARS YEARS TOTAL ---------- ---------- --------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) Interest-earning assets: Cash and cash equivalents(1)........... $ 83,025 $ -- $ -- $ -- $ -- $ 83,025 Investments and FHLB stock.................... 20,105 -- -- -- -- 20,105 Loans(2).................... 981,006 393,524 34,370 28,496 120,314 1,557,710 ---------- -------- --------- --------- -------- ---------- Total interest-earning assets............ $1,084,136 $393,524 $ 34,370 $ 28,496 $120,314 $1,660,840 ========== ======== ========= ========= ======== ========== Interest-bearing liabilities: Deposits: Non-certificates of deposit................ $ 230,624 $ -- $ -- $ -- $ -- $ 230,624 Certificates of deposit................ 215,188 239,213 350,243 100,902 -- 905,546 FHLB advances............... -- 30,000 125,000 204,000 -- 359,000 Senior notes................ -- -- -- 40,000 -- 40,000 ---------- -------- --------- --------- -------- ---------- Total interest-bearing liabilities....... $ 445,812 $269,213 $ 475,243 $ 344,902 $ -- $1,535,170 ========== ======== ========= ========= ======== ========== Interest rate sensitivity gap...................... $ 638,324 $124,311 $(440,873) $(316,406) $120,314 $ 125,670 Cumulative interest rate sensitivity gap.......... 638,324 762,635 321,762 5,356 125,670 125,670 Cumulative interest rate sensitivity gap as a percentage of total interest-earning assets................... 38.4% 45.9% 19.4% 0.3% 7.6% 7.6%
- --------------- (1) Excludes noninterest earning cash balances. (2) Loans include $36.0 million of nonaccrual loans, and are exclusive of deferred fees and loan loss reserves. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company realizes income principally from the differential or spread between the interest earned on loans, investments, other interest-earning assets and the interest paid on deposits and borrowings. The Company, like other financial institutions, is subject to interest rate risk ("IRR") to the degree that its interest-earning assets reprice differently than its interest-bearing liabilities. The Company's primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company's net interest income and capital, while structuring the Company's asset-liability mix to obtain the maximum yield-cost spread on that structure. A sudden and substantial increase in interest rates may adversely impact the Company's income to the extent that the interest rates borne by the assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company has adopted formal policies and practices to monitor its interest rate risk exposure. As a part of this effort, the Company uses the Net Portfolio Value ("NPV") methodology to gauge interest rate risk exposure. 29 32 Using an internally generated model, the Company monitors interest rate sensitivity by estimating the change in NPV over a range of interest rate scenarios. NPV is the discounted present value of the difference between incoming cashflows on interest-earning assets and other assets, and the outgoing cashflows on interest-bearing liabilities and other liabilities. The NPV ratio is defined as the NPV for a given rate scenario divided by the market value of the assets in the same scenario. The Sensitivity Measure is the decline in the NPV ratio, in basis points, caused by a 200 basis point increase or decrease in interest rates, whichever produces the largest decline. The higher an institution's Sensitivity Measure, the greater its exposure to IRR. The OTS also produces a similar analysis using its own model, based upon data submitted on the Bank's quarterly Thrift Financial Report ("TFR"). At June 30, 2000, based on the Company's internally generated model, it was estimated that the Company's NPV ratio was 7.95% in the event of a 200 basis point increase in rates, a decrease of 13.59% from basecase of 9.20%. If rates were to decrease by 200 basis points, the Company's NPV ratio was estimated at 10.10%, an increase of 9.78% from basecase. Presented below, as of June 30, 2000, is an analysis of the Company's IRR as measured in the NPV for instantaneous and sustained parallel shifts of 100, 200, and 300 basis point increments in market interest rates.
NET PORTFOLIO VALUE ------------------------- CHANGE $ CHANGE FROM NPV CHANGE FROM IN RATES $ AMOUNT BASECASE RATIO BASECASE -------- -------- ------------- ----- ----------- (DOLLARS IN THOUSANDS) +300 bp................................ $110,024 (46,096) 6.75% -245 bp +200 bp................................ 131,755 (24,365) 7.95% -125 bp +100 bp................................ 146,263 (9,857) 8.71% -49 bp basecase............................... 156,120 9.20% - -100 bp................................ 162,566 6,446 9.48% +28 bp - -200 bp................................ 176,368 20,248 10.10% +90 bp - -300 bp................................ 192,539 36,419 10.80% +160 bp
Management believes that the NPV methodology overcomes three shortcomings of the typical maturity gap methodology. First, it does not use arbitrary repricing intervals and accounts for all expected cash flows, weighing each by its appropriate discount factor. Second, because the NPV method projects cash flows of each financial instrument under different rate environments, it can incorporate the effect of embedded options on an association's IRR exposure. Third, it allows interest rates on different instruments to change by varying amounts in response to a change in market interest rates, resulting in more accurate estimates of cash flows. On a quarterly basis, the results of the internally generated model are reconciled to the results of the OTS model. Historically the OTS has valued the NPV higher, but the changes in NPV as a result of the rate increases and decreases are directionally consistent between the two models. The difference between the two models resides in the prepayment assumptions, the ability of the Company to analyze each individual rate index in a changing environment, and the ability of the Company's model to include caps and floors on loans in the rate shock analyses. 30 33 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On June 28, 2000, the California Supreme Court denied the Bank's petition for review of the Court of Appeals' decision affirming in part and reversing in part the judgment in the Takaki vs. Hawthorne Savings and Loan Association matter previously disclosed by the Bank. The Bank had previously accrued the full amount of the judgment, including post judgment interest through April 2000, and no material additional accruals were required during the second quarter as a result of the Supreme Court's action and payment of the judgment. The Company is involved in a variety of other litigation matters in the ordinary course of its business, as discussed in the Annual Report on Form 10-K for the year ended December 31, 1999. Management does not presently believe that any of the existing litigative matters are likely to have a material adverse impact on the Company's financial condition or results of operation. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Company was held on May 20, 2000. At the Annual Meeting the following seven nominees were elected until the 2001 Annual Meeting of Stockholders and their successors have been duly elected and qualified as directors.
NUMBER OF SHARES --------------------- DIRECTOR FOR WITHHELD -------- --------- -------- Marilyn Garton Amato................................... 4,630,614 194,748 Gary W. Brummett....................................... 4,645,076 180,286 Timothy R. Chrisman.................................... 4,642,787 182,575 Simone Lagomarsino..................................... 4,639,755 185,607 Anthony W. Liberati.................................... 4,643,476 181,886 Harry F. Radcliffe..................................... 4,643,576 181,786 Howard E. Ritt......................................... 4,642,927 182,435
ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 1. Reports on Form 8-K No current reports on Form 8-K were filed for the six months ended June 30, 2000 2. Other required exhibits: Exhibit 10.1 -- Deferred Compensation Loan Agreement between Company and Karen Abajian* Exhibit 10.2 -- Form of Change in Control Employment Agreement* Exhibit 10.3 -- Form of Change in Control Employment Agreement between Company and Simone Lagomarsino* Exhibit 27.1 -- Financial Data Schedule * Denotes management compensation agreement. 31 34 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HAWTHORNE FINANCIAL CORPORATION Dated August 14, 2000 /s/ SIMONE LAGOMARSINO -------------------------------------- Simone Lagomarsino President and Chief Executive Officer Dated August 14, 2000 /s/ KAREN C. ABAJIAN -------------------------------------- Karen C. Abajian Executive Vice President and Chief Financial Officer 32 EX-10.1 2 ex10-1.txt EXHIBIT 10.1 1 EXHIBIT 10.1 DEFERRED COMPENSATION LOAN AGREEMENT This Agreement is entered into between Hawthorne Financial Corporation (the "Company") and Karen Abajian ("Executive) as of July 12, 2000. RECITALS A. Executive is currently employed as the Company's Executive Vice President and Chief Financial Officer. B. Prior to her employment with the Company, Executive was a participant in a deferred compensation plan at Imperial Bank ("Imperial"). C. As a result of Executive's resignation from Imperial, Executive (1) was required to recognize $417,705.64 in deferred compensation and (2) lost the opportunity to receive a corporate matching contribution of $40,832.65 from Imperial. D. As a material inducement to Executive to become employed by the Company, the Company agreed to reimburse Executive for additional income and employment tax liabilities she would recognize as a result of the accelerated deferred compensation and to pay Executive the amount of the matching contribution which she did not receive, provided that Executive continues to be employed by the Company. E. The Company proposes to loan Executive the amount necessary to cover the lost matching contribution and Executive's state and federal income tax liabilities with respect to the early recognition of deferred compensation and the matching contribution. F. Executive, together with her spouse, is a resident of the state of California and is currently subject to taxation at the top marginal rates for California and federal income tax purposes. NOW, THEREFORE, the parties agree as follows: 1. Loan for for Lost Matching Contribution and Tax Liabilities. The Company shall make a loan (the "Loan") to Executive in the principal amount of $227,627.43, with interest at the "applicable Federal rate" (as defined in Section 1274(d) of the Internal Revenue Code) compounded semiannually, to cover Executive's lost matching contribution from Imperial and Executive's state and federal tax liabilities with respect to the early recognition of deferred compensation and the matching contribution, on the terms and conditions set forth in this Agreement. 2. Maturity of Loan. The remaining balance of the Loan, principal and interest, shall become immediately due and payable on the earliest of (a) the date Executive resigns her employment with the Company, (b) the date Executive's employment is terminated for "cause" as defined herein, or (c) the third anniversary of the date hereof. The Company shall be deemed to have terminated the employment of Executive "for cause" if, but only if, such termination (x) shall result from (i) Executive's continued and 1 2 willful failure or refusal to substantially perform her duties in accordance with the terms of the Agreement, (ii) any act or omission by Executive constituting gross negligence or willful misconduct that is materially injurious to the Company, or (iii) Executive's commission of a felony or a serious misdemeanor or any act or omission involving dishonesty, disloyalty or fraud with respect to the Company, its customers or suppliers and (y) shall have been approved by 66.66% of the Board of Directors of the Company. No termination shall be considered to result from Executive's continued and willful failure or refusal to substantially perform her duties in accordance with the terms of the Agreement, unless Executive first shall have received written notice from the Company specifying the acts or omissions alleged to constitute such failure or refusal and such failure or refusal continues after Executive shall have had reasonable opportunity to correct the same. 3. Loan Forgiveness a. One-third (1/3) of the original principal amount of the Loan and all interest then accrued on the Loan shall be forgiven and cancelled, automatically and without action on the part of the Company or its Board of Directors, on each of April 3, 2001, April 3, 2002 and April 3, 2003, provided that Executive remains employed by the Company through that date. b. The full remaining balance of the Loan, principal and interest, shall, automatically and without action on the part of the Company or its Board of Directors, be forgiven and cancelled upon the occurrence of any of the following events: i. Company's termination of Executive for any reason other than for "cause" as defined herein, or ii. Executive's death or disability. The term "disability" shall mean a medically determinable physical or mental incapacity of Executive rendering her incapable of reporting to work or unable to perform the essential functions of her job for a period expected to continue for at least twelve (12) consecutive months or result in death, as established to the reasonable satisfaction of the Company's Board of Directors. 4. Tax Gross-Up Payment. a. For each year that all or a portion of the Loan is forgiven or an additional payment is made under this subsection 4a, the Company shall pay to Executive an additional payment (a "Gross-Up Payment") in an amount equal to the federal and state income and employment taxes due as a result of such forgiveness and cancellation. Each Gross-Up Payment shall be made in two installments. The first installment shall be in the amount of federal and state income and employment taxes required to be withheld from Executive at the time of the Loan forgiveness and/or Gross-Up Payment, and shall be paid to the applicable withholding tax collection agencies within the time periods prescribed by law. The second installment shall be paid to Executive on or before the later of (i) April 1 of the calendar year following the calendar year in which the applicable forgiveness or payment occurs or (ii) thirty (30) days following the date 2 3 on which the tax return information for such calendar year is provided to the Company as set forth in subsection c below. The second installment for the last year in which a Gross-Up Payment is made with respect to Loan forgiveness shall be adjusted to take into account the future tax effects of such Gross-Up Payment, and no Gross-Up Payment shall be made for any subsequent year. b. The Company shall have the right to deduct or otherwise effect withholding from the Gross-Up Payment, or from any other compensation payable to Executive, of any income or employment tax or other amount required by federal or state tax laws to be withheld with respect to forgiveness of the Loan or the making of the Gross-Up Payment. c. The amount of the state and federal income taxes to be included in the Gross-Up Payment shall be calculated by Executive's tax return preparer for each of the years in question, subject to review and approval by the Company. The Company shall provide to Executive and her tax return preparer a pro forma Form W-2 for each such year indicating what executive's income and withholding amounts would have been if no Loan forgiveness income or Gross-Up Payment income had been reported on Form W-2 for such year. Executive shall provide the Company a copy of each income tax return on which any Loan forgiveness income, Gross-Up Payment income and/or state income tax deduction attributable to Loan forgiveness or Gross-Up Payment is reflected. Additionally, Executive shall provide the Company her tax return preparer's written calculation of what her tax liability would be on each such income tax return if no Loan forgiveness income, Gross-Up Payment income or state income tax deduction attributable to Loan forgiveness or Gross-Up Payment were reflected. For each year, the income tax portion of the Gross-Up Payment shall be the difference between the amounts calculated under the two preceding sentences. The amount of employment taxes included in the Gross-Up Payment shall be calculated as the Medicare tax rate (currently 1.45%) multiplied by the amount of any Loan forgiveness income and Gross-Up Payment income. If, as a result of Executive being audited or filing an amended tax return, Executive's state or federal income tax liability for any year covered by this provision is altered, Executive shall notify the Company of the same and shall have her tax return preparer recalculate the Gross-Up Payment for such year. If any such calculation indicates that the Company previously made an excess Gross-Up Payment, Executive shall promptly repay to the Company the amount of such excess, together with interest at the rate then applicable to refunds from such taxing authority. 5. At Will Employment. Nothing herein shall be deemed to waive the Company's policy that Executive's employment is AT WILL and can be terminated at the option of either the Company or Executive in their sole and absolute discretion, for any or no reason whatsoever, with or without cause, and no representations, warranties or assurances have been made concerning the length of such employment by the Company. 3 4 6. General. a. Assignment. i. This Agreement is personal to Executive and without the prior written consent of the Company shall not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive's legal representatives. ii. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. iii. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. b. Headings. The subject headings of the paragraphs and subparagraphs of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. c. Severability. It is agreed that if any term, covenant, provision, paragraph or condition of this Agreement shall be invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not invalidate the whole Agreement, but it shall be construed as if it did not contain the invalid, illegal or unenforceable part, and the rights and obligations of the parties shall be construed and enforced accordingly. d. Entire Agreement. The parties hereto agree that this Agreement supersedes all existing agreements between the Company and Executive relating to the subject matter hereof, whether oral, written, expressed or implied, and contains the entire understanding and agreement between the parties on such subject. e. Amendment and Waiver. This Agreement may be amended, modified or supplemented only by a writing executed by each of the parties. Either party may in writing waive any provision of this Agreement to the extent such provision is for the benefit of the waiving party. No waiver by either party of a breach of any provision of this Agreement shall be construed as a waiver of any subsequent or different breach, and no forbearance by a party to seek a remedy for noncompliance or breach by the other party shall be construed as a waiver of any right or remedy with respect to such noncompliance or breach. f. Choice of Law. This Agreement and the performance hereunder shall be construed in accordance with and under and pursuant to the internal substantive laws of the State of California applicable to agreements fully executed and performed entirely in such state. 4 5 g. Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) three (3) days after having been sent by first class mail, return receipt requested, postage prepaid, (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written or oral verification of receipt, or (e) upon confirmed delivery by electronic mail. Until changed upon giving notice as provided herein, notices shall be sent to: If to the Company: Hawthorne Savings, F.S.B. 2381 Rosecrans Avenue El Segundo, CA 90245 Attention: Simone Lagomarsino, Chief Executive Officer Fax: (310) 725-5831 Email: simonel@hawthornesavings.com If to Executive: Karen Abajian 7717 Agnew Avenue Los Angeles, CA 90045 h. Attorneys' Fees. In the event of any dispute regarding the enforcement or interpretation of this Agreement, the party prevailing in such dispute shall be entitled to recover from the other party hereto all costs of such dispute, including reasonable attorneys' fees. IN WITNESS WHEREOF, Executive and, pursuant to the authorization from its Board of Directors, the Company have executed this Agreement as of the day and year first above written. EXECUTIVE HAWTHORNE FINANCIAL CORPORATION /s/ KAREN ABAJIAN By: /s/ SIMONE LAGOMARSINO - --------------------------------- --------------------------------- KAREN ABAJIAN Name and Title: 5 EX-10.2 3 ex10-2.txt EXHIBIT 10.2 1 EXHIBIT 10.2 CHANGE IN CONTROL EMPLOYMENT AGREEMENT This Agreement by and between Hawthorne Financial Corporation (the "Company"), and [EXECUTIVE OFFICER] (the "Executive"), is dated as of July __, 2000. RECITALS The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1) Certain Definitions. a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. If a Change of Control occurs and if the Executive's employment with the Company is terminated by the Company prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. b) The "Change of Control Period" shall mean the period commencing on the date of this Agreement and ending on the third anniversary of the date THEREAFTER. c) "Renewal Date" - Commencing on the first anniversary date of this Agreement and on each anniversary date thereafter, this Agreement shall be automatically extended for another three year Change of Control period. The Company may, however, terminate the 1 2 automatic extension by providing the Executive with written notice at least 60 days prior to the Renewal Date that the Change of Control period shall not be so extended. d) "Company" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. e) "Affiliated Companies" shall mean any company controlled by, controlling or under common control with the Company. f) "Disability" shall mean the Executive's long-term disability for purposes of any reasonable occupation as determined under the Company's disability plan that is applicable to the Executive. g) "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined in Section 1(h)) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). h) "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 2) Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: a) The acquisition by any individual, entity or group (a "Person") within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 24.9% of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"). For purposes of this subsection (a), a Change of Control may not occur due to the exercise of warrants. Therefore, the exercise of outstanding warrants is specifically excluded from the determination of whether or not a Change of Control has occurred. 2 3 In addition, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or b) Directors who, as of the date of this Agreement, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date of this Agreement whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or c) Consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets or stock of another corporation (a "Business Combination"). This Section 2(c) shall not apply if, following such Business Combination: (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (ii) A Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation, so long as such ownership existed prior to the Business Combination; and (iii) at least a majority of the members of the board of directors of the corporation 3 4 resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3) Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third [second] anniversary of such date (the "Employment Period"). 4) Terms of Employment. a) Position and Duties. i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned to the Executive at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 25 miles from such location. ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period, the Executive may not compete with the Company. The Executive recognizes his/her continuing fiduciary duty to at all times act in the Company's best interest. Any outside employment must be cleared for conflicts and receive the express written permission of the Board. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall 4 5 not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. b) Compensation. i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase, and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. ii) Incentives. In addition to Annual Base Salary, the Executive shall be awarded the following bonuses. For each fiscal year ending during the Employment Period, the Executive shall be awarded an annual bonus in cash at least equal to the average of the Executive's bonuses under the Company's Annual Incentive Program, or any comparable bonus under any predecessor or successor plan(s), for the last three full fiscal years prior to the Effective Date. This bonus shall be known at the "Annual Bonus." In the event an Executive has completed at least one year, but not three full years of employment with the Company prior to the Effective Date, any bonuses received under the Company's Annual Incentive Program, or any comparable bonus under any predecessor or successor plan(s), will be averaged to constitute the Annual Bonus. If an Executive has been employed for less than one year prior to the Effective Date, the then existing President and Chief Executive Officer will review the Executive's performance relative to established performance goals. A pro rata bonus will then be recommended to the Compensation Committee of the Board of Directors, which if approved, will be annualized to constitute the Annual Bonus. Each such Annual Bonus shall be paid no later than the fifteenth day of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. In addition, during the Employment Period, the Executive shall be entitled to participate in all long-term and other incentive plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is 5 6 applicable) less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. iii) Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. Without limiting the generality of the foregoing, the Company and its affiliated companies shall continue to honor any individual agreements between any of them and the Executive regarding the provision of supplemental retirement benefits such as (but not limited to) post-retirement income and/or welfare benefits (each of which is hereafter referred to as an "Individual SERP"). iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 6 7 vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, the fringe benefits identified on Exhibit "A" attached hereto in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5) Termination of Employment. a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period, it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board which specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or 7 8 ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive, and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. c) Good Reason. The Executive may terminate Executive's employment during the Employment Period for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose isolated, insubstantial and inadvertent actionS not taken in bad faith and which are remedied by the Company promptly after receipt of notice thereof given by the Executive; ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than isolated, insubstantial and inadvertent failureS not occurring in bad faith and which are remedied by the Company promptly after receipt of notice thereof given by the Executive; iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or 8 9 v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. For purposes of this Section 5(c), the Executive's cessation of employment shall not be deemed for "Good Reason" unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive, and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive has Good Reason as described in subparagraph (i) - (v) above, and specifying the particulars thereof in detail. d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. 6) Obligations of the Company upon Termination. a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of: (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid; plus (2) the product of: (x) the higher of (I) the Annual Bonus and (II) any bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the "Highest Annual Bonus") and; (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365, plus (3) any accrued vacation pay, in each case to the extent not theretofore paid (the 9 10 sum of the amounts described in clauses (1), (2) and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) two years and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; and C. an amount equal to the difference between (1) the aggregate benefit under any qualified defined benefit retirement plans of the Company and its affiliated companies in which the Executive participates (collectively, the "Retirement Plan") and any "top hat," excess or supplemental defined benefit retirement plans of the Company and its affiliated companies in which the Executive participates, and any Individual SERP (collectively, the "SERP") which the Executive would have accrued (whether or not vested) if the Executive's employment had continued for two years after the Date of Termination and (2) the actual vested benefit, if any, of the Executive under the Retirement Plan and the SERP, determined as of the Date of Termination (with the foregoing amounts to be computed on an actuarial present value basis, based on the assumption that the Executive's compensation during such period of deemed continued employment after the Date of Termination was that required by Section 4(b)(i) and Section 4(b)(ii), and using actuarial assumptions no less favorable to the Executive than the most favorable of those in effect for purposes of computing benefit entitlements under the Retirement Plan and the SERP at any time from the day before the Effective Date through the Date of Termination); ii) the Company shall continue benefits to the Executive and/or the Executive's family, for two years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families; provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility; and for purposes of determining the eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of a number of years after the Date of Termination equal to the Multiplier and to have retired on the last day of such period; iii) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in the Executive's sole discretion; and iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or 10 11 provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) the Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued 11 12 Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7) Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. Notwithstanding the foregoing, from and after the Effective Date, the compensation and benefits provided for pursuant to Sections 5, 8 and 9 hereof shall be in lieu of any severance or separation pay or benefits to which the Executive might otherwise be entitled under any plan, program, policy or arrangement of the Company and its affiliates. 8) Full Settlement; Legal Fees. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and except as specifically provided in Section 6(a)(ii), such amounts shall not be reduced whether or not the Executive obtains other employment. All legal fees and expenses reasonably incurred as a result of any contest to the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (whether such contest is between the Company and the Executive or between either of them and any third party, and including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), shall be awarded to the prevailing party. In addition, if the Executive prevails with respect to a dispute over delayed payments, the Executive will be entitled to the delayed payment plus interest at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9) Certain Additional Payments by the Company. a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with 12 13 any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized certified public accounting firm designated by the Company (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: 13 14 i) give the Company any information reasonably requested by the Company relating to such claim, ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, iii) cooperate with the Company in good faith in order effectively to contest such claim, and iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, 14 15 then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10) Confidential Information. As used herein, "Confidential Information" means all technical and business information of the Company and its affiliated companies, whether patentable or not, which is of a confidential, trade secret and/or proprietary character and which is either developed by the Executive (alone or with others) or to which the Executive has had access during the Executive's employment. Such Confidential Information includes, but is not limited to customer lists, products, procedures, operations, investments, financing, costs, employees, accounting, marketing, salaries, pricing, profits and plans for future development, the identity, requirements, preferences, practices and methods of doing business of specific parties with whom the Company transacts business, and all other information which is related to any product or service or business of the Company, other than information which is generally known in the financial services industry or is acquired from public sources. a) The Executive shall use the Executive's best efforts and diligence both during and after employment by the Company to protect the confidential, trade secret and/or proprietary character of all Confidential Information. The Executive shall not, directly or indirectly, use (for the Executive or another) or disclose any Confidential Information, for so long as it shall remain proprietary or protectible as confidential or trade secret information, except as may be necessary for the performance of the Executive's duties with the Company. b) The Executive shall deliver promptly to the Company, at the termination of the Executive's employment, or at any other time at the Company's request, without retaining any copies, all documents and other material in the Executive's possession relating, directly or indirectly, to any Confidential Information. c) Each of the Executive's obligations in this Section 10 shall also apply to the confidential, trade secret and proprietary information learned or acquired by the Executive during the Executive's employment from others with whom the Company or any affiliated company has a business relationship. d) The Executive understands that the Executive is not to disclose to the Company or any affiliated company, or use for its benefit, any of the confidential, trade secret or proprietary information of others, including any of the Executive's former employers. 11) Successors. a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. 15 16 c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 12) Miscellaneous. a) This Agreement shall be governed by and construed in accordance with the laws of the State of California, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. b) All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) three (3) days after having been sent by first class mail, return receipt requested, postage prepaid, (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written or oral verification of receipt, or (e) upon confirmed delivery by electronic mail. Until changed upon giving notice as provided herein, notices shall be sent to: If to the Company: Hawthorne Savings, F.S.B. 2381 Rosecrans Avenue El Segundo, CA 90245 Attention: Simone Lagomarsino, Chief Executive Officer Fax: (310) 725-5831 Email: simonel@hawthornesavings.com If to the Executive: -------------- -------------- -------------- or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or other taxes as shall be required to be withheld pursuant to any applicable law or regulation. 16 17 e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section l(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. This Agreement shall have no effect on the Executive's rights under any plan, program, policy or practice provided by the Company or any of its affiliated companies except as specifically provided in Section 7 above. 13) Non-Solicitation. During the Employment Period and for a period of one year thereafter, the Executive shall not 1) induce or attempt to induce any employee of the Company to leave the employ of the Company or in any way interfere with the relationship between the Company and its employees, (2) hire any person who was employed by the Company during the Employment Period, or (3) induce or attempt to induce any client of the Company to cease doing business with the Company or in any way interfere with the relationship between the Company and its clients 14) Waiver & Release. In exchange for the benefits as outlined in this Agreement, the Executive agrees to waive and release any and all claims, actions or costs arising out of his employment with the Company. The Waiver & Release includes all claims whether arising in tort or contract and whether arising under statute or common law. Such claims may include, but are not limited to, wrongful termination, retaliation, harassment, or any statutory claims under Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Fair Employment and Housing Act, the Americans with Disabilities Act, or similar Federal or state statutes. The Executive understands and acknowledges that accepting benefits under this Agreement specifically constitutes a voluntary waiver of any and all rights and claims against the Company including, without limitation, rights or claims arising under the Age Discrimination in Employment Act of 1967, 29 U.S.C. Section 621, et. seq.. This Waiver & Release applies even to such damages or losses about which the Executive does not know, or which do not now exist, but which might arise in the future. The Executive waives all rights under California Civil Code Section 1542. Section 1542 provides as follows: "A general release does not extend to claims, which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." 17 18 15) Binding Arbitration. Any controversy or claim arising out of or related to this Agreement, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules. The arbitration will be conducted before an arbitrator who is a member of the National Academy of Arbitrators and selected by the parties from the American Arbitration Association's Labor Panel. The arbitrator will have jurisdiction to determine the arbitrability of any claim. The arbitrator will not have the right to add to, subtract from or modify any of the terms of this Agreement, nor the power to reverse or modify any decision reserved to the Company's discretion. The arbitrator shall have the authority to grant all monetary or equitable relief (including, without limitation, ancillary costs and fees) available under state and federal law. Judgment on any award rendered by the arbitrator may be entered and enforced by any court having jurisdiction thereof. Discovery shall be in accordance with the California Arbitration Act. The parties agree that the parties shall share responsibility for the Arbitrator's fee. 16) Integration Clause. The terms of this Agreement are final. The Executive and the Company represent that in executing this Agreement, they have not relied upon any representations other than those specifically stated in this written Agreement. The Agreement contains all promises that have been made by either party. There are no hidden terms, and everything that is important to this Agreement is specified in writing here. This Agreement shall be construed as though both parties have participated equally in its drafting, and it shall be interpreted, wherever possible, to make it valid and effective. IN WITNESS WHEREOF, the Executive and, pursuant to the authorization from its Board of Directors, the Company have executed this Agreement as of the day and year first above written. EXECUTIVE HAWTHORNE FINANCIAL CORPORATION By: - --------------------------------- --------------------------------- [Executive Officer] Simone Lagomarsino, President & CEO 18 EX-10.3 4 ex10-3.txt EXIBIT 10.3 1 EXHIBIT 10.3 CHANGE IN CONTROL EMPLOYMENT AGREEMENT This Agreement by and between Hawthorne Financial Corporation (the "Company"), and SIMONE LAGOMARSINO (the "Executive"), is dated as of July __, 2000. RECITALS The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1) Certain Definitions. a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section l(b)) on which a Change of Control (as defined in Section 2) occurs. If a Change of Control occurs and if the Executive's employment with the Company is terminated by the Company prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. b) The "Change of Control Period" shall mean the period commencing on the date of this Agreement and ending on the third anniversary of the date thereafter. c) "Renewal Date" - Commencing on the first anniversary date of this Agreement and on each anniversary date thereafter, this Agreement shall be automatically extended for another three year Change of Control period. The Company may, however, terminate the 1 2 automatic extension by providing the Executive with written notice at least 60 days prior to the Renewal Date that the Change of Control period shall not be so extended. d) "Company" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. e) "Affiliated Companies" shall mean any company controlled by, controlling or under common control with the Company. f) "Disability" shall mean the Executive's long-term disability for purposes of any reasonable occupation as determined under the Company's disability plan that is applicable to the Executive. g) "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined in Section 1(h)) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). h) "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 2) Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: a) The acquisition by any individual, entity or group (a "Person") within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 24.9% of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"). For purposes of this subsection (a), a Change of Control may not occur due to the exercise of warrants. Therefore, the exercise of outstanding warrants is specifically excluded from the determination of whether or not a Change of Control has occurred. 2 3 In addition, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or b) Directors who, as of the date of this Agreement, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date of this Agreement whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or c) Consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets or stock of another corporation (a "Business Combination"). This Section 2(c) shall not apply if, following such Business Combination: (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (ii) A Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation, so long as such ownership existed prior to the Business Combination; and (iii) at least a majority of the members of the board of directors of the corporation 3 4 resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3) Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of such date (the "Employment Period"). 4) Terms of Employment. a) Position and Duties. i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned to the Executive at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 25 miles from such location. ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period, the Executive may not compete with the Company. The Executive recognizes his/her continuing fiduciary duty to at all times act in the Company's best interest. Any outside employment must be cleared for conflicts and receive the express written permission of the Board. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall 4 5 not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. b) Compensation. i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase, and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. ii) Incentives. In addition to Annual Base Salary, the Executive shall be awarded the following bonuses. For each fiscal year ending during the Employment Period, the Executive shall be awarded an annual bonus in cash at least equal to the average of the Executive's bonuses under the Company's Annual Incentive Program, or any comparable bonus under any predecessor or successor plan(s), for the last three full fiscal years prior to the Effective Date. This bonus shall be known at the "Annual Bonus." In the event an Executive has completed at least one year, but not three full years of employment with the Company prior to the Effective Date, any bonuses received under the Company's Annual Incentive Program, or any comparable bonus under any predecessor or successor plan(s), will be averaged to constitute the Annual Bonus. If an Executive has been employed for less than one year prior to the Effective Date, the then existing President and Chief Executive Officer will review the Executive's performance relative to established performance goals. A pro rata bonus will then be recommended to the Compensation Committee of the Board of Directors, which if approved, will be annualized to constitute the Annual Bonus. Each such Annual Bonus shall be paid no later than the fifteenth day of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. In addition, during the Employment Period, the Executive shall be entitled to participate in all long-term and other incentive plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is 5 6 applicable) less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. iii) Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. Without limiting the generality of the foregoing, the Company and its affiliated companies shall continue to honor any individual agreements between any of them and the Executive regarding the provision of supplemental retirement benefits such as (but not limited to) post-retirement income and/or welfare benefits (each of which is hereafter referred to as an "Individual SERP"). iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 6 7 vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, the fringe benefits identified on Exhibit "A" attached hereto in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5) Termination of Employment. a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period, it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board which specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or 7 8 ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive, and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. c) Good Reason. The Executive may terminate Executive's employment during the Employment Period for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose isolated, insubstantial and inadvertent actionS not taken in bad faith and which are remedied by the Company promptly after receipt of notice thereof given by the Executive; ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than isolated, insubstantial and inadvertent failureS not occurring in bad faith and which are remedied by the Company promptly after receipt of notice thereof given by the Executive; iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or 8 9 v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. For purposes of this Section 5(c), the Executive's cessation of employment shall not be deemed for "Good Reason" unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive, and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive has Good Reason as described in subparagraph (i) - (v) above, and specifying the particulars thereof in detail. d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. 6) Obligations of the Company upon Termination. a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of: (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid; plus (2) the product of: (x) the higher of (I) the Annual Bonus and (II) any bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any and; (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365, plus (3) any accrued vacation pay, in each case to the extent not theretofore paid (the 9 10 sum of the amounts described in clauses (1), (2) and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) three years and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Annual Bonus; and C. an amount equal to the difference between (1) the aggregate benefit under any qualified defined benefit retirement plans of the Company and its affiliated companies in which the Executive participates (collectively, the "Retirement Plan") and any "top hat," excess or supplemental defined benefit retirement plans of the Company and its affiliated companies in which the Executive participates, and any Individual SERP (collectively, the "SERP') which the Executive would have accrued (whether or not vested) if the Executive's employment had continued for three years after the Date of Termination and (2) the actual vested benefit, if any, of the Executive under the Retirement Plan and the SERP, determined as of the Date of Termination (with the foregoing amounts to be computed on an actuarial present value basis, based on the assumption that the Executive's compensation during such period of deemed continued employment after the Date of Termination was that required by Section 4(b)(i) and Section 4(b)(ii), and using actuarial assumptions no less favorable to the Executive than the most favorable of those in effect for purposes of computing benefit entitlements under the Retirement Plan and the SERP at any time from the day before the Effective Date through the Date of Termination); ii) the Company shall continue benefits to the Executive and/or the Executive's family, for three years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families; provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility; and for purposes of determining the eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of a number of years after the Date of Termination equal to the Multiplier and to have retired on the last day of such period; iii) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in the Executive's sole discretion; and iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or 10 11 provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) the Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued 11 12 Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7) Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. Notwithstanding the foregoing, from and after the Effective Date, the compensation and benefits provided for pursuant to Sections 5, 8 and 9 hereof shall be in lieu of any severance or separation pay or benefits to which the Executive might otherwise be entitled under any plan, program, policy or arrangement of the Company and its affiliates. 8) Full Settlement; Legal Fees. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and except as specifically provided in Section 6(a)(ii), such amounts shall not be reduced whether or not the Executive obtains other employment. All legal fees and expenses reasonably incurred as a result of any contest to the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (whether such contest is between the Company and the Executive or between either of them and any third party, and including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), shall be awarded to the prevailing party. In addition, if the Executive prevails with respect to a dispute over delayed payments, the Executive will be entitled to the delayed payment plus interest at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9) Certain Additional Payments by the Company. a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with 12 13 any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized certified public accounting firm designated by the Company (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: 13 14 i) give the Company any information reasonably requested by the Company relating to such claim, ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, iii) cooperate with the Company in good faith in order effectively to contest such claim, and iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, 14 15 then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10) Confidential Information. As used herein, "Confidential Information" means all technical and business information of the Company and its affiliated companies, whether patentable or not, which is of a confidential, trade secret and/or proprietary character and which is either developed by the Executive (alone or with others) or to which the Executive has had access during the Executive's employment. Such Confidential Information includes, but is not limited to customer lists, products, procedures, operations, investments, financing, costs, employees, accounting, marketing, salaries, pricing, profits and plans for future development, the identity, requirements, preferences, practices and methods of doing business of specific parties with whom the Company transacts business, and all other information which is related to any product or service or business of the Company, other than information which is generally known in the financial services industry or is acquired from public sources. a) The Executive shall use the Executive's best efforts and diligence both during and after employment by the Company to protect the confidential, trade secret and/or proprietary character of all Confidential Information. The Executive shall not, directly or indirectly, use (for the Executive or another) or disclose any Confidential Information, for so long as it shall remain proprietary or protectible as confidential or trade secret information, except as may be necessary for the performance of the Executive's duties with the Company. b) The Executive shall deliver promptly to the Company, at the termination of the Executive's employment, or at any other time at the Company's request, without retaining any copies, all documents and other material in the Executive's possession relating, directly or indirectly, to any Confidential Information. c) Each of the Executive's obligations in this Section 10 shall also apply to the confidential, trade secret and proprietary information learned or acquired by the Executive during the Executive's employment from others with whom the Company or any affiliated company has a business relationship. d) The Executive understands that the Executive is not to disclose to the Company or any affiliated company, or use for its benefit, any of the confidential, trade secret or proprietary information of others, including any of the Executive's former employers. 11) Successors. a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. 15 16 c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 12) Miscellaneous. a) This Agreement shall be governed by and construed in accordance with the laws of the State of California, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. b) All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) three (3) days after having been sent by first class mail, return receipt requested, postage prepaid, (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written or oral verification of receipt, or (e) upon confirmed delivery by electronic mail. Until changed upon giving notice as provided herein, notices shall be sent to: If to the Company: Hawthorne Savings, F.S.B. 2381 Rosecrans Avenue El Segundo, CA 90245 Attention: Timothy R. Chrisman, Chairman of the Board Fax: (310) 725-5831 If to the Executive: Simone Lagomarsino 14540 Bledsoe Street Sylmar, CA 91342 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. 16 17 c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or other taxes as shall be required to be withheld pursuant to any applicable law or regulation. e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section l(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. This Agreement shall have no effect on the Executive's rights under any plan, program, policy or practice provided by the Company or any of its affiliated companies except as specifically provided in Section 7 above. 13) Non-Solicitation. During the Employment Period and for a period of one year thereafter, the Executive shall not 1) induce or attempt to induce any employee of the Company to leave the employ of the Company or in any way interfere with the relationship between the Company and its employees, (2) hire any person who was employed by the Company during the Employment Period, or (3) induce or attempt to induce any client of the Company to cease doing business with the Company or in any way interfere with the relationship between the Company and its clients 14) Waiver & Release. In exchange for the benefits as outlined in this Agreement, the Executive agrees to waive and release any and all claims, actions or costs arising out of his employment with the Company. The Waiver & Release includes all claims whether arising in tort or contract and whether arising under statute or common law. Such claims may include, but are not limited to, wrongful termination, retaliation, harassment, or any statutory claims under Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Fair Employment and Housing Act, the Americans with Disabilities Act, or similar Federal or state statutes. The Executive understands and acknowledges that accepting benefits under this Agreement specifically constitutes a voluntary waiver of any and all rights and claims against the Company including, without limitation, rights or claims arising under the Age Discrimination in Employment Act of 1967, 29 U.S.C. Section 621, et. seq.. This Waiver & Release applies even to such damages or losses about which the Executive does not know, or which do not now exist, but which might arise in the future. The 17 18 Executive waives all rights under California Civil Code Section 1542. Section 1542 provides as follows: "A general release does not extend to claims, which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." 15) Binding Arbitration. Any controversy or claim arising out of or related to this Agreement, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules. The arbitration will be conducted before an arbitrator who is a member of the National Academy of Arbitrators and selected by the parties from the American Arbitration Association's Labor Panel. The arbitrator will have jurisdiction to determine the arbitrability of any claim. The arbitrator will not have the right to add to, subtract from or modify any of the terms of this Agreement, nor the power to reverse or modify any decision reserved to the Company's discretion. The arbitrator shall have the authority to grant all monetary or equitable relief (including, without limitation, ancillary costs and fees) available under state and federal law. Judgment on any award rendered by the arbitrator may be entered and enforced by any court having jurisdiction thereof. Discovery shall be in accordance with the California Arbitration Act. The parties agree that the parties shall share responsibility for the Arbitrator's fee. 16) Integration Clause. The terms of this Agreement are final. The Executive and the Company represent that in executing this Agreement, they have not relied upon any representations other than those specifically stated in this written Agreement. The Agreement contains all promises that have been made by either party. There are no hidden terms, and everything that is important to this Agreement is specified in writing here. This Agreement shall be construed as though both parties have participated equally in its drafting, and it shall be interpreted, wherever possible, to make it valid and effective. IN WITNESS WHEREOF, the Executive and, pursuant to the authorization from its Board of Directors, the Company have executed this Agreement as of the day and year first above written. EXECUTIVE HAWTHORNE FINANCIAL CORPORATION By: - --------------------------------- --------------------------------- Simone Lagomarsino Timothy R. Chrisman, Chairman 18 19 Exhibit "A" - -------------------------------------------------------------------------------- Membership in Manhattan Country Club Use of personal trainer 19 EX-27 5 ex27.txt FINANCIAL DATA SCHEDULE
9 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 16,692 83,025 81,200 0 0 0 0 1,558,702 27,089 1,677,956 1,167,047 155,000 13,681 244,000 0 0 55 98,173 1,677,956 67,598 3,213 0 70,811 28,867 40,559 30,252 3,000 0 18,983 12,163 12,163 0 0 6,976 1.30 0.95 8.82 36,047 0 24,905 32,284 24,285 320 124 27,089 27,089 0 0
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