EXHIBIT 99.3
SUPERVISORY AGREEMENT
This Supervisory Agreement (Agreement) is made this 25th of September 2000,
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and shall become effective upon its execution by the Office of Thrift
Supervision (OTS), through its authorized representative whose name appears
below (the date of such execution is the Effective Date), by and between Life
Bank, FSB (the Institution), a federally chartered stock association, having
its principal office located at 10540 Magnolia Avenue, Suite B, Riverside,
California 92505, and the OTS, an office within the U.S. Department of the
Treasury, having its principal offices located at 1700 G Street, N.W.,
Washington, D.C. 20552, acting through its West Regional Director, or his
designee (Regional Director).
WHEREAS, the Institution is: (1) a "savings association" within the meaning
of Section 3 of the Federal Deposit Insurance Act (FDIA), 12 U.S.C.A. (S)
1813(b), and Section 2 of the Home Owners' Loan Act, 12 U.S.C.A. (S) 1462(4)
and, (2) an "insured depository institution," as that term is defined in Section
3(c) of the FDIA, as amended by the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 (FIRREA), 12
U.S.C.A. (S) 1813(c);
WHEREAS, the OTS is the primary federal regulator of the Institution; and
WHEREAS, based on the findings of the current regular examination, the OTS
is of the opinion that the Institution has engaged in acts and practices that
(a) are considered by the OTS to be unsafe and unsound and inconsistent with
prudent operations, and (b) have resulted in violations of certain laws or
regulations to which the Institution is subject, thereby providing grounds for
the initiation of administrative enforcement proceedings against the
Institution; and
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WHEREAS, the OTS is of the opinion that grounds exist for the initiation of
administrative enforcement proceedings against the Institution, but is willing
to forbear at this time from the initiation of such proceedings as long as the
Institution is in compliance with the provisions of this Agreement and all
applicable laws, regulations, and regulatory guidance; and
WHEREAS, the Institution, acting through its duly elected Board of
Directors (Board), wishes to cooperate with the OTS and to evidence its intent
to (i) comply with all applicable laws, regulations, and guidance, (ii) engage
in safe and sound practices, and (iii) avoid the initiation of administrative
enforcement proceedings.
NOW, THEREFORE, in consideration of the foregoing, the mutual undertakings
set forth herein, the parties agree as follows:
I. 1. CORRECTIVE PROVISIONS
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A. POLICIES AND PROCEDURES
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1. Internal Asset Review. Within 45 days of the Effective Date, the Board
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shall approve and submit to the Assistant Regional Director (ARD) for
review and non-objection revised policies and procedures governing Internal
Asset Review (the IAR Policy) that address the concerns identified in the
Report of Examination dated April 3, 2000. At a minimum, the IAR Policy
shall (a) provide guidance to management on timely identification and
classification of troubled, collateral dependent loans under Regulatory
Bulletin 32; and (b) provide for adequate internal controls to ensure that
management timely reviews and classifies assets under the IAR Policy, and
at all times complies with the IAR Policy. To ensure the independence of
the IAR function, the IAR Policy shall require the loan underwriting,
servicing, and purchasing functions to be segregated from
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the credit review function, except for common oversight of all functions by
members of senior management.
2. Allowances for Loan and Lease Losses. Within 45 days of the Effective Date,
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the Board shall approve and submit to the ARD for review and non-objection
revised policies and procedures governing allowance for loan and lease
losses (the ALLL Policy) that address the concerns identified in the Report
of Examination dated April 3, 2000. At a minimum, the ALLL Policy shall
require management to set the ALLL after considering: (a) the historical
losses within each loan portfolio; (b) classification and delinquency
trends; (c) credit risk characteristics (e.g., loan to value ratio,
borrowers' credit history, etc.); (d) economic trends; and (e) regulatory
guidance. The ALLL Policy shall provide for adequate internal controls to
ensure that management and the Institution comply with the policy at all
times.
3. Interest Rate Risk. Within 45 days of the Effective Date, the Board shall
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approve and submit to the ARD for review and non-objection revised policies
and procedures governing the management of interest rate risk (the IRR
Policy) that address the concerns identified in the Report of Examination
dated April 3, 2000. At a minimum, the IRR Policy should detail the
analysis to be used to supplement the OTS model until an internal modeling
process is fully implemented. The IRR Policy shall require management to
measure, monitor, and model the Institution's net interest income (NII) and
net portfolio value (NPV). Management shall utilize its expertise and
resources to determine the expected impact of proposed transactions on the
Institution's capital levels, NII, and NPV prior to entering into any such
transaction.
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4. Mortgage Banking Operations. Within 45 days of the Effective Date, the
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Board shall approve and submit to the ARD for review and non-objection
revised policies and procedures governing mortgage-banking operations (the
Mortgage Banking Policy) that address the concerns identified in the
Report of Examination dated April 3, 2000. At a minimum, the Mortgage
Banking Policy shall include a strategic plan for Mortgage Banking and
include guidance for (i) calculating quarterly lower of cost or market
(LOCOM) adjustments, (ii) tracking, reviewing and reporting of loan
repurchases, and shall address management-board reports.
5. Liquidity. Within 45 days of the Effective Date, the Board shall approve
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and submit to the ARD for review and non-objection revised policies and
procedures governing liquidity (the Liquidity Policy) that address the
concerns identified in the Report of Examination dated April 3, 2000. At a
minimum, the Liquidity Policy should address minimum liquidity level
targets and include plans to replace maturing brokered certificates of
deposit and to increase core deposits.
6. Separate Corporate Existence. Within 45 days of the Effective Date, the
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Board shall approve and submit to the ARD for review and non-objection
revised policies and procedures governing separate corporate existence (the
Separate Corporate Existence Policy) that address the concerns identified
in the Report of Examination dated April 3, 2000. At a minimum, the
Separate Corporate Existence Policy should ensure that the Institution is
being operated with an adequate degree of separation such that the
Institution is insulated from operations of the holding company.
7. Loans to One Borrower. Within 45 days of the Effective Date, the Board
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shall approve and submit to the ARD for review and non-objection revised
policies and procedures
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ensuring that the Institution complies with the loans-to-one-borrower
(LTOB) regulations (12 C.F.R. (S) 545.93 and 12 C.F.R. Part 32) (the LTOB
Policy). At a minimum, the LTOB Policy should require proper aggregation
and combination of loans to borrowers engaged in a common enterprise, or
where one person is receiving a direct benefit from a loan or extension of
credit (see 12 C.F.R. (S) 32.5). The LTOB Policy should ensure that proper
internal controls are in place to ensure that the Institution complies with
all relevant LTOB regulations.
8. Board Oversight. Within 45 days of the Effective Date, the Board shall
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approve and submit to the ARD for review and non-objection policies and
procedures governing Board of Director oversight of the affairs of
management and operation of the Institution (Board Oversight Policy) and
that addresses the concerns identified in the Report of Examination dated
April 3, 2000. At a minimum, the Board Oversight Policy shall address the
responsibilities outlined in Section 310 of the Thrift Activities
Handbook, and require that the Institution's regulatory reporting and
financial record keeping functions be staffed with experienced, qualified
personnel with sufficient resources to ensure timely and accurate record
keeping and reporting.
B. MANAGEMENT PLAN
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1. Within 45 days of the Effective Date, the Board shall approve and submit to
the ARD a written analysis and assessment of the Institution's management
needs (Management Plan), which include, at a minimum, (a) identify both the
type and number of officer positions needed to manage and supervise
properly the affairs of the Institution; (b) identify and establish the
Institution committees needed to provide guidance and oversight to active
management; (c) evaluate each Institution officer and staff member to
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determine whether these individuals possess the ability, experience, and
other qualifications necessary to perform present and anticipated duties,
including adherence to the Institution's established policies and
procedures, and maintenance of the Institution in a safe and sound
condition; and (d) establish a plan to recruit and hire any additional or
replacement personnel with the requisite ability, experience, or other
qualifications, which the Board determines are necessary to fill officer or
staff positions consistent with the Board's analysis, evaluation and
assessment as provided above. Particular attention should be provided to
Treasury and Accounting, Regulatory Compliance, and Internal Auditing.
C. IMPLEMENTATION AND ADHERENCE TO POLICIES
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1. Within 15 days of receipt of the ARD's notice of objection, if any, to any
aspect of the foregoing Policies, the Institution shall submit a revised
Policy to the ARD addressing any such objections or comments of the ARD.
2. Once the Policy is submitted pursuant to this Agreement and all objections
from the ARD, if any, have been satisfactorily resolved, the Institution
may not amend, suspend, or revoke the Policy without the prior written non-
objection from the ARD.
3. Within 15 days of receiving notice of the ARD's non-objection to the
Policy, the Institution shall implement the Policy and ensure that all
directors, officers, employees and agents adhere to it.
4. Within 45 days following the end of each calendar quarter, the Board shall
approve and submit a report to the ARD detailing its progress in
implementing each of the foregoing Policies.
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D. IMPROVEMENTS TO THE BOARD
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1. The Board of Directors of the Institution shall be expanded by an
additional two (at a minimum) members with specific financial institution
industry experience, and who are independent with respect to the
Institution. For purposes of this Agreement, an individual who is
"independent with respect to the Institution" means any individual (a) who
is not an officer of the Institution or its affiliates and who does not
own, directly or indirectly, more than 5% of the outstanding shares of the
holding company, (b) who is not related by blood, marriage, or common
financial interest to an officer or director of the Institution, or to any
individual owning, directly or indirectly, more than 5% of the holding
company's outstanding shares, and (c) who is not indebted to the
Institution, directly or indirectly (including the indebtedness of any
entity in which the individual has a financial interest).
2. The Board shall meet at least monthly. The Board shall prepare in advance
and shall follow a detailed written agenda at each meeting, which shall
include consideration of actions of any committees. A chronological file of
all written agendas shall be maintained. Notwithstanding the foregoing, the
Board shall not be precluded from considering matters other than those
contained in the agenda. Detailed written minutes of all Board meetings and
Board Committee meetings shall be maintained and recorded on a timely
basis.
E. TRANSACTIONS WITH AFFILIATES
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1. The Institution shall provide the ARD with at least 30 days prior written
notice of any transaction that would constitute a covered transaction
within the meaning of 12 C.F.R.
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(S)(S) 563.41(b)(7) and 563.42(a)(2). Upon written notice of objection by
the ARD during the notice period, the Institution shall not enter into any
of said transactions.
2. The Institution shall comply with all statutory and regulatory requirements
pertaining to transactions with affiliates, as set forth in all applicable
law, regulations, and regulatory guidance. See, e.g., 12 C.F.R. (S)(S)
563.41 and 563.42, Sections 23A and 23B of the Federal Reserve Act, 12
U.S.C. (S)(S) 371c and 371c-1, and Section 11 of the Home Owners' Loan
Act, 12 U.S.C. (S) 1468(a).
3. Within 60 days of the Effective Date, the Institution shall review and
analyze of all existing agreements with affiliates and other activities
falling within the proscriptions of the transactions with affiliates
regulations to confirm that the agreements and activities comply with all
applicable laws, regulations, and regulatory guidance and that the
Institution has formal written agreements with respect to all transactions
with affiliates. The Institution shall summarize in writing its findings
from that review and analysis. The review and analysis shall be recorded in
the minutes of the Board. Further, within 60 days of the Effective Date,
the Institution shall confirm in writing to the ARD that its files contain
current and adequate documentation and analysis to support compliance with
Section E of this Agreement and all applicable law, regulations, and
regulatory guidance.
F. CAPITAL
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1. No later than March 31, 2001, the Institution shall achieve and thereafter
maintain core capital of not less than 6.0 percent, as measured at the end
of each calendar quarter and total risk-based capital of not less than 11.0
percent of modified total risk-weighted assets (as defined herein), as
measured at the end of each calendar quarter. Modified total risk-weighted
assets is defined as the sum of risk-weighted assets prescribed in 12
C.F.R. Part
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567, except that all subprime loans and all high loan-to-value (LTV) loans
in excess of the limit prescribed in Thrift Bulletin 72a, shall require
double the risk-weighting set forth in 12 C.F.R. Part 567. For the sole
purpose of this Agreement, subprime loans shall be defined as any loan to a
borrower with a credit score of 619 and below, or a credit grade of B+ or
below. This capital requirement may be achieved through the infusion by the
Institution's holding company of cash, marketable securities, or other non-
cash capital contribution that is approved in advance by the OTS.
2. If the Institution's capital falls below the levels required hereunder as a
result of any OTS determination that adversely affects the Institution's
financial condition (other than a determination generally applicable to the
thrift industry), the Institution shall have 45 days from the date of such
determination to infuse sufficient capital to meet the capital level
required hereunder. The Institution shall provide satisfactory evidence of
such infusion to the ARD within five (5) days after the infusion is
complete.
3. Within 45 days following the end of each calendar quarter, the Board shall
certify in writing to the ARD that the quarterly supplemental capital
calculations supplied to the OTS are true and correct.
4. Upon the Effective Date of this Agreement, the Institution shall no longer
be required to calculate and submit the special average quarterly capital
calculation as established in the Report of Examination dated April 29,
1996.
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G. DIVIDENDS
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1. Without the prior written approval of the ARD, the Institution shall not pay
or commit to pay a dividend to any class of stock or make any capital
distribution as that term is defined at 12 C.F.R. (S) 563.141. This
restriction shall not prevent the Institution from paying interest on deposit
accounts according to their terms.
II. MISCELLANEOUS
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A. DIRECTOR RESPONSIBILITY
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1. Notwithstanding the requirements herein that the Institution submit various
matters to the Assistant Regional Director for purpose of review, such
regulatory oversight does not derogate or supplant each individual director's
continuing fiduciary duty. The Board shall have the ultimate responsibility
for overseeing the safe and sound operation of the Institution at all times,
including compliance with any and all directives of the OTS.
B. COMPLIANCE WITH AGREEMENT
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1. The Board, and senior management of the Institution, shall cause the
Institution to comply with the terms of this Agreement and shall take all
actions necessary or appropriate thereafter to cause the Institution to
continue to carry out the provisions of this Agreement.
2. The Board, on a quarterly basis, shall adopt a Board Resolution ("the
Compliance Resolution") formally resolving that, following a diligent review
of relevant information (including reports of management and consultants, if
any), to the best of its knowledge and belief, during the immediately
preceding calendar quarter, the Institution has complied with each provision
of this Agreement, except as otherwise stated. The Compliance Resolution
shall specify in detail how, if at all, full compliance was found
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not to exist. The Compliance Resolution is in addition to, and not in lieu
of, any other requirements of this Agreement for reporting compliance with
certain provisions hereof.
3. The minutes of the meeting of the Board shall set forth the following
information with respect to the adoption of each Compliance Resolution: (i)
the identity of each director voting in favor of its adoption; and (ii) the
identity of each director voting in opposition to its adoption or abstaining
from voting thereon, setting forth each director's reasoning for such
opposition or abstention.
4. Within 60 days of the end of each calendar quarter, beginning with the end of
the first calendar quarter following the Effective Date, the Institution
shall provide to the ARD a certified true copy of the Compliance Resolution.
The Board, by virtue of the Institution's submission of a certified copy of
each such Compliance Resolution to the ARD, shall be deemed to have certified
to the accuracy of the statements set forth in the Compliance Resolution,
except as provided below. In the event that one or more directors does not
agree with the representations set forth in a Compliance Resolution, such
disagreement shall be noted in the minutes of the Institution.
C. DEFINITIONS
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1. All technical words or terms used in this Agreement, for which meanings are
not defined or otherwise provided, shall insofar as applicable, have the
meaning set forth in Chapter V of Title 12 of the Code of Federal Regulations
(CFR). Any such technical words or terms used herein and undefined in said
CFR shall have the meanings that accord with the best custom and usage in the
thrift industry.
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D. SUCCESSOR STATUTES, REGULATIONS, GUIDANCE, AMENDMENTS
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1. Reference in this Agreement to provisions of statutes and regulations shall
be deemed to include references to all amendments to such provisions as have
been made as of the Effective Date and references to successor provisions as
they become applicable.
E. NOTICES
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1. Except as otherwise provided herein, any request, demand, authorization,
direction, notice, consent, waiver, or other document provided for or
permitted by the Agreement to be made upon, given or furnished to, delivered
to or filed with the OTS or the Institution shall be in writing and delivered
via first class mail, overnight courier, facsimile, or hand-delivered, and
addressed as follows:
OTS: OTS-West Region Institution: Life Bank, FSB
Attn: Michael Buting, ARD Attn: Chief Executive Officer
1551 N. Tustin Ave., Suite 1050 10540 Magnolia Avenue, Suite B
Santa Ana, CA 92705-8635 Riverside, CA 92505-1814
Any notice shall be deemed duly given when received by the addressee thereof.
Any party to this Agreement may from time to time change its address for
receiving Notices to the other party in the manner set forth above.
F. DURATION, TERMINATION OR SUSPENSION OF AGREEMENT
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1. This Agreement shall remain in effect until terminated, modified or suspended
in writing by the OTS, acting through its Director or the Regional Director
(including any authorized designee thereof).
2. The Regional Director, or his designee, in his or her sole discretion, may,
by written notice, suspend or waive (temporarily or permanently) any or all
provisions of this Agreement.
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G. TIME LIMITS
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1. Time limits for compliance with the terms of this Agreement run from the
Effective Date, unless otherwise noted.
H. EFFECT OF HEADINGS
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1. The section headings herein are for convenience only and shall not affect the
construction of this Agreement.
I. SEPARABILITY CLAUSE
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1. In any case in which any provision of this Agreement is ruled to be invalid,
illegal or unenforceable by the decision of any court of competent
jurisdiction, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby, unless the
Regional Director, or his designee, in his or her sole discretion determines
otherwise.
J. NO VIOLATIONS OF LAW, RULE, REGULATION OR POLICY STATEMENT AUTHORIZED
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1. Nothing contained herein shall be construed as (a) allowing or requiring the
Institution to violate any law, rule, regulation, or policy statement to
which it is subject, or (b) restricting or estopping the OTS from taking any
action(s) it deems appropriate in fulfilling its lawful responsibilities.
K. SUCCESSORS IN INTEREST/BENEFIT
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1. The terms and provisions of this Agreement shall be binding upon and inure to
the benefit of, the parties hereto and their successors in interest. Nothing
in this Agreement, express or implied, shall give to any person or entity,
other than the parties hereto, the Federal
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Deposit Insurance Corporation, and their successors, any benefit or any legal
or equitable right, remedy or claim under this Agreement.
L. SIGNATURE OF DIRECTORS
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1. Each director signing this Agreement attests, by such act, that he or she
voted in favor of the resolution, in the form attached to this Agreement,
authorizing the execution of this Agreement by the Institution.
M. ENFORCEABILITY OF AGREEMENT
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1. The Institution represents and warrants that this Agreement has been duly
authorized, executed and delivered, and constitutes, in accordance with its
terms, a valid and binding obligation of the Institution. The Institution
acknowledges that this Agreement is a "written agreement" entered into with
the OTS within the meaning of Section 8 of the Federal Deposit Insurance Act,
as amended, 12 U.S.C. (S) 1818.
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IN WITNESS WHEREOF, the OTS, acting by and through the Regional Director, or
his designee, and the Institution, in accordance with a duly adopted resolution
of its Board (copy attached hereto), hereby executes this Agreement on this the
25th day of September, 2000 (the Effective Date).
OFFICE OF THRIFT SUPERVISION LIFE BANK FSB
By: By: /s/ Steven R. Gardner
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Michael W. Buting Chief Executive Officer
Assistant Regional Director
DIRECTORS OF THE INSTITUTION
/s/ Robert K. Riley /s/ Ronald G. Skipper
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Director Director
/s/ Milton E. Johnson /s/ John D. Goddard
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Director Director
/s/ Edgar C. Keller
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Director Director
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Director Director
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