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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2001

Commission File No.: 0-22193

LIFE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

10540 Magnolia Avenue, Suite B, Riverside, California 92505
(Address of principal executive offices)

(909) 637-4000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share
(Title of class)

        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 ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. No o

        The aggregate market value of the voting stock held by non-affiliates of the registrant, i.e., persons other than directors and executive officers of the registrant is approximately $3,649,000 and is based upon the last sales price as quoted on The NASDAQ Stock Market for March 15, 2002.

        As of March 15, 2002, the Registrant had 1,333,572 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Proxy Statement for the 2002 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

FORWARD-LOOKING STATEMENTS

        The statements contained herein that are not historical facts are forward-looking statements based on management's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be the same as those anticipated by management. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve risks and uncertainties. These include, but are not limited to, the following risks: (1) Changes in the performance of the financial markets, (2) Changes in the demand for and market acceptance of the Company's products and services, (3) Changes in general economic conditions including interest rates, presence of competitors with greater financial resources, and the impact of competitive projects and pricing, (4) the effect of the Company's policies, (5) the continued availability of adequate funding sources, (6) actual prepayment rates and credit losses as compared to prepayment rates and credit losses assumed by the Company for purposes of its valuation of mortgage derivative securities (the "Participation Contract"), (7) the effect of changes in market interest rates on the spread between the coupon rate and the pass through rate and on the discount rate assumed by the Company in its valuation of its Participation Contract, and (8) various legal, regulatory and litigation risks.

INDEX

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ITEM 1. BUSINESS

General

LIFE Financial Corporation

        LIFE Financial Corporation (the "Corporation"), a Delaware corporation organized in 1997, is a unitary savings and loan holding company that owns 100% of the capital stock of LIFE Bank, F.S.B. (the "Bank"), the Corporation's principal operating subsidiary. Additionally, the Corporation owns 100% of the capital stock of Life Financial Insurance Services (the "Insurance Subsidiary"). The primary business of LIFE Financial Corporation and its subsidiaries (the "Company") is community retail banking and real estate lending.

LIFE Bank

        The Bank was founded in 1983 as a state chartered savings and loan and became a federally chartered stock savings bank in 1991. The Bank is a member of the Federal Home Loan Bank of San Francisco ("FHLB"), which is a member bank of the Federal Home Loan Bank System. The Bank's deposit accounts are insured up to the $100,000 maximum amount currently allowable under federal laws by the Savings Association Insurance Fund ("SAIF"), which is a separate insurance fund administered by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is subject to examination and regulation by the Office of Thrift Supervision ("OTS") its primary federal regulator, and by the FDIC. The Insurance Subsidiary was organized in 1999 and offers non-deposit and non-FDIC insured investment products such as mutual funds, annuities and insurance. These products are offered to both Bank and non-Bank customers. The Insurance Subsidiary has minimal operations.

        The Company is a financial services organization committed to serving consumers and small businesses in Southern California. Throughout 2001, the Bank operated five full-service branches located in our market area of San Bernardino, Riverside, and Orange Counties, California. On March 1, 2002, the Bank notified customers of its Riverside and Redlands depository branches that effective June 7, 2002 and June 21, 2002, respectively, the branches would be closed and the accounts of both branches would be consolidated into the nearby San Bernardino branch. The Bank offers a variety of products and services for consumers and small businesses, which include checking, savings, money market accounts and certificates of deposit. The Bank funds its lending and investment activities primarily with retail deposits obtained through its branches and advances from the FHLB of San Francisco. Beginning in 2002, the Bank's lending activity will be focused on originating multi-family residential real estate loans, commercial real estate loans and residential construction loans principally in Southern California. For further information, see "Lending Activities."

        The Company's principal sources of income are the net spread between interest earned on loans and investments and the interest costs associated with deposits and other borrowings used to finance its loan and investment portfolio. Additionally, the Bank generates fee income from various products and services offered to both depository and loan customers.

Recent Developments

        On January 5, 2001, the Corporation received notice from NASDAQ that it had failed to maintain a minimum bid price of $1.00 over the last 30 consecutive trading days and could be delisted. In addition, on March 20, 2001, NASDAQ notified the Corporation that the Corporation's common stock had failed to maintain a minimum market value of public float of $5,000,000 over the last 30 consecutive trading days and could be delisted. In order to meet NASDAQ minimum market value of public float requirements NASDAQ permitted the Corporation to move from the NASDAQ National Market to the NASDAQ Small Cap Market whose market value of public float requirement the

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Corporation satisfied. On June 7, 2001, the stockholders approved a 1:5 reverse stock split in order to meet NASDAQ minimum bid price requirements.

        On March 16, 2001, the Bank was notified by the FHLB that the Bank's borrowing capacity was limited to overnight advances and new borrowings would require credit committee approval. On January 22, 2002, the Bank was notified that its line of credit had been reinstated and that the Bank may borrow up to 15% of its total assets.

        On March 23, 2001, the Bank stipulated to the issuance of a Prompt Corrective Action Directive (the "PCA Directive") by the OTS. The PCA Directive required the Bank, among other things, to raise sufficient capital to achieve total risk-based capital of 8.0%; Tier 1 risk-based capital of 4.0%; and a leverage ratio of 4.0% by June 30, 2001 or to be recapitalized by merging or being acquired prior to September 30, 2001. In addition, the PCA Directive provisions included limitations on capital distributions, restrictions on the payment of management fees, asset growth, acquisitions, branching, and new lines of business, senior executive officers' compensation, and on other activities. The Bank was required to restrict the rates the Bank pays on deposits to the prevailing rates of interest on deposits of comparable amounts and maturities in the region where the Bank is located. The Bank was prohibited from entering into any material transaction other than in the normal course of business without the prior consent of the OTS. The PCA Directive was issued due to the Corporation's failure to meet the requirements of an Order to Cease and Desist issued to the Corporation on September 25, 2000 and the Bank's inability to achieve the individual minimum capital ratio levels as required by a Supervisory Agreement issued to the Bank on September 25, 2000. See "REGULATION."

        On October 5, 2001, the Bank was notified that it was "significantly undercapitalized" pursuant to the Prompt Corrective Action regulations. On October 25, 2001 the Bank consented to an OTS request to sign a Marketing Assistance Agreement and Consent to the Appointment of a Conservator or Receiver (the "Marketing Agreement"). The Marketing Agreement, among other things, permitted the OTS to provide confidential information about the Bank to prospective acquirers, merger partners or investors to facilitate the possible acquisition of the Bank or possible merger of the Bank with a qualified merger partner. The Bank was requested to enter into the Marketing Agreement due to its significantly undercapitalized designation, the fact the Bank was in violation of the Supervisory Agreement dated September 25, 2000, and was in violation of the PCA Directive dated March 23, 2001, and that the OTS considered the Bank to be in an unsafe and unsound condition.

        On November 20, 2001, the Corporation entered into an agreement for the private placement of a secured note, together with a warrant to purchase Common Stock of the Corporation, with New Life Holdings, LLC, a California limited liability company (the "Investor") in exchange for which the Corporation would receive $12,000,000. The sale of the note and warrant was made pursuant to a Note and Warrant Purchase Agreement entered into by the Corporation and the Investor. The Corporation issued to the Investor a Senior Secured Note Due 2007 (the "Note") in the initial principal amount of $12,000,000, and bearing interest at an initial rate of 12% (increasing over time to 16%) and a warrant (the "Warrant") to purchase up to 1,166,400 shares of the Corporation's common stock at an exercise price of $.75 per share. The holders of the Note have the right to nominate three of seven directors of the Corporation and the Bank until the later of (i) such time as the Note has been fully retired or (ii) three years after the Closing. The Corporation pledged the stock in its subsidiaries and the Participation Contract as collateral against the Note. The Participation Contract is a contractual right from the purchase of the residual mortgage-backed securities to receive 50% of any cash realized, as defined, from the residual mortgage-backed securities. See—"Investment Activities".

        Upon exercise of the Warrant, which is freely assignable in whole or in part in denominations of not less then 10,000 shares, the Investor or its assignee(s) (the assignees, together with the Investor, the "Warrant Holders" and each a "Warrant Holder") shall have the right to purchase during specified periods a total of up to 1,166,400 shares of Common Stock. Pursuant to the Warrant, on or before the

4

first anniversary of the Closing, the Warrant Holder will be able to purchase 116,640 shares of Common Stock. After the first anniversary of the Closing, but on or before the second anniversary of the Closing, the Warrant Holder will be able to purchase the initial 116,640 shares of Common Stock, plus an additional 116,640 shares of Common Stock. After the second anniversary of the Closing, but on or before the third anniversary of the Closing, the Warrant Holder will be able to purchase the 233,280 shares of Common Stock available during the first two years after Closing, plus an additional 116,640 shares of Common Stock. After the third anniversary of the Closing, but prior to the tenth anniversary of the Closing (the "Expiration"), the Warrant Holder will be able to purchase the 349,920 shares available during the first three years after Closing, plus the remaining 816,480 shares of Common Stock available under the Warrant. Based on 1,333,572 shares outstanding at December 31, 2001, if the entire warrant were exercised, the shares issued upon its exercise would constitute approximately 47% of the Company's outstanding stock.

        On January 10, 2002, the Corporation received stockholder approval of the Note and Warrant Purchase Agreement. The Closing occurred on January 17, 2002 (the "Closing"), wherein the Corporation received the net proceeds from the Note and utilized those proceeds as follows: (i) the Corporation purchased the Participation Contract from the Bank for its book value of $4.4 million; (ii) the Corporation paid $3.2 million to the Bank for taxes due the Bank; (iii) the Corporation made a capital infusion to the Bank of $3.7 million; and (iv) the Corporation paid transaction costs incurred in connection with the Private Placement.

        On January 17, 2002, simultaneously with the closing of the transaction and disbursement of the funds by the Corporation to the Bank, the OTS notified the Corpration that it had terminated the Order to Cease and Desist issued on September 25, 2000. Furthermore, the OTS notified the Bank that it had terminated the Marketing Assistance Agreement and Consent to the Appointment of a Conservator or Receiver dated October 25, 2001, that it had terminated the Prompt Corrective Action Directive issued on March 22, 2001, it had terminated the Supervisory Agreement issued on September 25, 2000 and that the Bank was no longer deemed to be in a troubled condition or a problem association.

        On March 1, 2002, the Bank notified customers of its Riverside and Redlands depository branches that effective June 7, 2002 and June 21, 2002, respectively, the two branches would be closed and the accounts consolidated into the San Bernardino branch.

Lending Activities

        Historically, the Bank's principal business was originating and purchasing sub-prime loans secured by first liens on one-to-four family homes and high loan-to-value debt consolidation or home improvement loans secured by junior liens on one-to-four family homes. Sub-prime loans are loans to borrowers who generally do not satisfy the credit or underwriting standards prescribed by conventional mortgage lenders and loan buyers, such as Fannie Mae and Freddie Mac. The Bank's primary determinate in identifying sub-prime loans from "A" or prime credit quality loans is the borrower's credit rating based on a Fair, Isaac & Company ("FICO") credit score. All loans to borrowers who possess a FICO credit score of 619 or less are considered sub-prime. High loan-to-value loans are secured by junior liens, wherein the Bank is not the holder of the senior or first lien, generally to borrowers with good credit histories and for the purpose of either debt consolidation or home improvement. Loans originated and purchased were then sold through whole loan sales or loan securitization. Loans were originated and purchased through offices located in the states of California, Colorado, Florida and Massachusetts, which were closed in late 1999 and early 2000. In late 1998, the Bank ceased originating high loan-to-value loans due to a change in the regulatory treatment of such loans, together with a change in the secondary market for such loans. On September 31, 2000 the Bank ceased originating and purchasing sub-prime loan products due to concerns over the costs of

5

originating, servicing and owning such loans as well as the overall higher delinquency and default rates of these loans.

        During 2001, the Bank originated and purchased "A" or prime quality one-to-four family first lien residential loans. Additionally, the Bank continued to originate and service residential construction loans. Loans funded during 2001 were held in the Bank's portfolio. At December 31, 2001, the Company's gross loans outstanding totaled $195.1 million.

        Beginning in 2002 and corresponding with the Company's recapitalization, management implemented a new lending strategy to augment its residential construction lending activities. The new strategy is focused on originating loans secured by multi-family and commercial real estate properties ("income property") in Southern California. Concurrently with the implementation of this new lending direction, the Bank ceased originating one-to-four family residential loans. Management believes that the origination of income property loans provides higher risk-adjusted rates of return than the lower yielding one-to-four family lending previously engaged in by the Bank.

        Management will hire account managers who rely on a network of loan brokers operating throughout California for sources of loan applications. The account managers will operate primarily in the Bank's corporate offices. Management believes that this loan origination strategy is a more cost-effective method of originating loans and will afford the Bank greater access to potential loan transactions and a consistent source of loan funding volume. Management believes that the Bank's highly focused lending strategy, timely decision making process, competitive pricing and flexibility in structuring transactions provide an incentive for brokers to do business with the Bank.

        The interest rates charged on income property and residential construction loans generally vary based on a number of factors, including the degree of credit risk, size, maturity of the loan, borrower/property management expertise, whether the loan has a fixed or a variable rate, and prevailing market rates for similar types of loans. Depending on market conditions at the time the loan is originated, certain income property loan agreements will include prepayment penalties. Most loans secured by multi-family, commercial or residential construction properties are subject to an adjustment of their interest rate based on one of several interest rate indices. Most adjustable rate loans have minimum interest rates ("floor rates") at which the rate charged may not be reduced further regardless of further reductions in the underlying interest rate index.

        The majority of multi-family, commercial real estate and residential construction borrowers are business owners, individual investors, investment partnerships or limited liability corporations. The lending that the Bank does engage in typically involves larger loans to a single borrower and is generally viewed as exposing the Bank to a greater risk of loss than one-to-four family residential lending. Income producing property values and homes that are under construction are also generally subject to greater volatility than existing residential property values. The liquidation values of income producing properties may be adversely affected by risks generally incidental to interests in real property, such as:

•

Changes or continued weakness in general or local economic conditions;



•

Changes or continued weakness in specific industry segments;



•

Declines in real estate values;



•

Declines in rental, room or occupancy rates in hotels, apartment complexes or commercial properties;



•

Increases in other operating expenses (including energy costs);



•

The availability of refinancing at lower interest rates or better loan terms;

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•

Changes in governmental rules, regulations and fiscal policies, including rent control ordinances, environmental legislation and taxation;



•

Increases in interest rates, real estate and personal property tax rates; and



•

Other factors beyond the control of the borrower or the lender.

        Underwriting and Approval Authority.    The Board of Directors establishes the basic lending policies of the Bank. Each loan must meet minimum underwriting criteria established in the Bank's lending policies and must fit within the Bank's overall strategies for yield and portfolio concentrations. The underwriting and quality control functions are managed through the Bank's corporate offices. The underwriting standards for loans secured by income producing real estate properties consider the borrower's financial resources, credit worthiness, and ability to repay the requested loan amount, the level, quality and stability of cash flow from the underlying collateral, property management experience of similar properties and the loan-to-value ratio.

        Upon receipt of a completed loan application from a prospective borrower, a credit report is ordered and, if necessary, additional financial information is requested. An independent appraisal conducted by a Bank approved appraiser is required on every property securing a loan and additionally, an internal review appraisal is conducted on every loan by the Bank's appraisal department. The Board of Directors of the Bank reviews and approves annually the independent appraisers used by the Bank and the Bank's appraisal policy. Our underwriter's credit memorandum includes a description of the prospective borrower and any guarantors, the collateral, and the proposed uses of loan proceeds, as well as an analysis of the borrower financial statements and the property operating history. Each application is evaluated from a number of underwriting perspectives, including property appraised value, level of debt service coverage, use and condition, as well as borrower liquidity, net worth, credit history and operating experience. Our loans are originated on both a nonrecourse and full recourse basis and we generally seek to obtain personal guarantees from the principals of borrowers, which are single asset or limited liability entities (such as partnerships, limited liability companies, corporations or trusts).

        Variable rate loans over $1.0 million must generally satisfy an interest rate sensitivity test in order for the loan origination or purchase to be approved; that is, the current stabilized income of the property securing the loan must be adequate to achieve a minimum debt service coverage ratio (the ratio of net earnings on a property to debt service) if the interest rate on the loan was to increase by 100 or 200 basis points above the fully indexed rate. Following loan approval and prior to funding, the Bank's underwriting and processing departments assure that all loan approval terms have been satisfied, that they conform with lending policies (or are properly authorized exceptions), and that all required documentation is present and in proper form.

        On all multi-family residential and commercial real estate loans, the responsible account manager or underwriter inspects the property and, if the transaction involves a loan over $1.0 million, the property is inspected by either the President, the Chief Credit Officer or the Chief Appraiser of the Bank. Management believes that, in recent years, the California economy has stabilized in some respects. However, a worsening of economic conditions in the state and surrounding regions could have an adverse effect on our real estate lending business, including reducing the demand for new loans, limiting the ability of borrowers to pay financed amounts, and impairing the value of our real estate collateral.

        Subject to the above standards, the Board of Directors of the Bank delegates authority and responsibility for loan approvals to management up to $1.0 million. Loan amounts up to $1.0 million require the approval of at least two members of the Management Loan Committee consisting of the President, Chief Credit Officer and Director of Retail Branch Banking. All loans in excess of

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$1.0 million, including total aggregate borrowings in excess of $1.0 million, require the approval of the Board's Credit Committee, which is comprised of at least two outside directors and the President.

        Multi-family Residential Lending.    The Bank originates and purchases loans secured by multi-family residential properties (five units and greater). Pursuant to the Bank's underwriting policies, multi-family residential loans may be made in an amount up to the lesser of 75% of the appraised value or the purchase price of the underlying property, whichever is less. In addition, the Bank requires a stabilized minimum debt service coverage ratio of 1.20, based on the fully indexed loan rate. In certain instances, the Bank may fund purchase money multi-family loans at a loan-to-value ratio up to 80% with a debt service coverage ratio of 1.15 based on the fully indexed rate. Loans are generally made for terms up to 30 years with amortization periods up to 30 years. As of December 31, 2001, the Bank had $7.5 million of multi-family real estate secured loans.

        Commercial Real Estate Lending.    The Bank originates and purchases loans secured by commercial real estate, such as retail centers, small office and light industrial buildings and other mixed-use commercial properties. The Bank will also, from time to time, make a loan secured by a special purpose property such as an auto wash center or motel. Pursuant to the Bank's underwriting policies, commercial real estate loans may be made in amounts up to the lesser of 75% of the appraised value or the purchase price of the underlying property, whichever is less. The Bank considers the net operating income of the property and requires a debt service coverage ratio of at least 1.25, based on a fully indexed rate. Loans are generally made for terms up to ten years with amortization periods up to 25 years. As of December 31, 2001, the Bank had $6.5 million of commercial real estate secured loans.

        Construction And Rehabilitation Lending.    The Bank originates construction and rehabilitation loans for one-to-four single-family homes and small single family tracts of homes, generally consisting of in-fill projects of 10 homes or fewer. Those projects built on a speculative basis are conducted by small, local builders who have demonstrated by past performance the ability to construct and effectively market the completed product within the approved budget and where management is comfortable with the underlying collateral and economic conditions. These loans are generally adjustable rate with maturities of 18 months or less. The Bank's policies provide that construction loans may be made in amounts up to 75% of the appraised value of the completed property. All construction loans are priced on a variable rate, which is adjusted daily with a spread over Wall Street Journal Prime. The Company generally requires that the borrower maintain a minimum 15% cash equity position in the project. Presently, the Bank lends construction funds only in Southern California. As of December 31, 2001, the Bank had $14.2 million of construction loans (less undisbursed loan funds of $4.0 million).

        In addition to the lending risks discussed above with respect to multi-family residential and commercial real estate loans, construction financing is generally considered to involve a higher degree of credit risk than the financing of improved, owner-occupied real estate. Construction loans also present risks associated with the accuracy of the initial estimate of the property's value at completion of construction compared to the estimated cost (including financing) of construction. These risks can be affected by a variety of factors, including the project management, costs for labor and materials, the availability of materials, city or state laws, regulations and/or ordinances and the weather. If the estimate of value proves to be inaccurate, the Bank may be confronted with a project, when completed, having a value which is insufficient to assure full repayment.

        The Bank mitigates these risks by performing a thorough analysis of the cost estimates and actively monitoring the project during each phase of construction. Additional underwriting factors considered when assessing residential construction loans are the builders, developers, previous experience of timely building, marketing and selling similar properties as that proposed in the potential loan transaction. The Bank utilizes third party experts to review and report on the reasonableness and completeness of the builder's/developer's budget, specifications and plans in assessing each residential construction loan

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request. The Bank also utilizes third party experts to inspect, monitor and provide written estimates of percentage completion and materials delivered to the property. Bank personnel review the reports in determining the amount and level of disbursement of construction loan proceeds to ensure the amount of disbursed proceeds is consistent with the project progress. The policies also emphasize geographic and product diversification within Southern California.

        The Bank will not make loans-to-one borrower that are in excess of regulatory limits. Pursuant to OTS regulations, loans-to-one borrower cannot exceed 15% of the Bank's unimpaired capital and surplus. At December 31, 2001, the Bank's loans-to-one borrower limit equaled $2.3 million. See "—Regulation—Federal Savings Institution Regulation—Loans-to-One Borrower."

        Loan Servicing.    Loan servicing is centralized at the Bank's corporate headquarters. The Bank's loan servicing operations are intended to provide prompt customer service and accurate and timely information for account follow-up, financial reporting and management review. Following the funding of an approved loan, the data is entered into the Bank's data processing system, which provides monthly billing statements, tracks payment performance, and affects agreed upon interest rate adjustments. The loan servicing activities include (i) the collection and remittance of mortgage loan payments, (ii) accounting for principal and interest and other collections and expenses, (iii) holding and disbursing escrow or impounding funds for real estate taxes and insurance premiums, (iv) inspecting properties when appropriate, (v) contacting delinquent borrowers, and (vi) acting as fiduciary in foreclosing and disposing of collateral properties. When payments are not received by their contractual due date, collection efforts begin on the fifteenth day of delinquency with a telephone contact, and proceed to written notices that begin with reminders of the borrower's payment obligation and progress to notification that a notice of default may be forthcoming. Accounts delinquent more than 30 days are reviewed by the collectors who, with management approval, implement a collection or restructure plan or a foreclosure or note sale strategy, and evaluate any potential loss exposure on the asset. The Bank generally sends a notice of intention to foreclose within 30 days of delinquency. In addition to servicing loans owned by the Bank, the Bank is servicing $19.8 million of loans it sold to other investors. The Bank receives a servicing fee for performing these services for others. On January 31, 2001, the Bank sold $452 million of its loans serviced for others. The Bank does not expect to increase the level of loans serviced for others in the foreseeable future.

        Loan Portfolio Composition.    In 1994, the Bank shifted its lending strategy away from originating traditional one-to-four family home loans. The Bank focused on mortgage banking nationwide, consisting of originating, purchasing and selling residential mortgage loans to borrowers with sub-prime credit and high loan-to-value consumer loans. Sub-prime loans are loans to borrowers who generally do not satisfy the credit or underwriting standards prescribed by conventional mortgage lenders and loan buyers, such as Fannie Mae and Freddie Mac. The Bank's primary determinate in identifying sub-prime loans from "A" or prime credit quality loans is the borrower's credit rating based on a FICO credit score. All loans to borrowers who possess a FICO credit score of 619 or less are considered sub-prime. High loan-to-value loans are secured by junior liens, wherein the Bank is not the holder of the senior or first lien, and are generally made to borrowers with good credit histories and for the purpose of either debt consolidation or home improvement. In late 1998, the Bank ceased originating high loan-to-value loans due to a change in the regulatory treatment of such loans, together with a change in the secondary markets for such loans. On September 31, 2000, the Bank ceased originating and purchasing sub-prime loan products due to concerns over the costs of originating, servicing and owning such loans as well as the overall higher delinquency and default rates of these loans.

        At December 31, 2001, the Bank's gross loans outstanding held for investment totaled $189.7 million and loans held for sale totaled $5.4 million. From time to time, the Bank may sell or buy one-to-four family residential loans in order to achieve its asset/liability objectives and to maximize its interest income. The types of loans that the Bank may originate are subject to federal law, state law, and regulations. Interest rates charged by the Bank on loans are affected by the demand for such loans

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and the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by, among other things, economic conditions, monetary policies of the federal government, including the Federal Reserve Board, and legislative tax policies.

        A portion of the Bank's one-to-four family loan portfolio consists of loans secured by first liens on real estate to sub-prime credit borrowers. At December 31, 2001, $19.1 million of one-to-four family loans are considered to be sub-prime.

        A portion of the Bank's one-to-four family loan portfolio consists of loans secured by junior liens on real estate and are considered high loan-to-value loans. At December 31, 2001, $70,000 of one-to-four family, junior lien loans possess loan-to-values greater than 125% of the appraised value of the property, $13.1 million of one-to-four family, junior lien loans possess loan-to-values between 100% and 125% of the appraised value of the property and $2.2 million of one-to-four family, junior lien loans possess loan-to-values between 90% and 100% of the appraised value of the property.

        The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated (dollars in thousands):

(1)

Includes second trust deeds.

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        Loan Maturity.    The following table shows the contractual maturity of the Bank's gross loans at December 31, 2001. The table does not reflect prepayment assumptions.

        The following table sets forth at December 31, 2001, the dollar amount of gross loans receivable contractually due after December 31, 2002, and whether such loans have fixed interest rates or adjustable interest rates.

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        The following table sets forth the Bank's loan originations, purchases, sales, and principal repayments for the periods indicated:

(1)

Gross loans includes loans held for investment and loans held for sale.

(2)

Includes second trust deeds.

        Delinquencies and Classified Assets.    Federal regulations require that the Bank utilize an internal asset classification system as a means of reporting problem and potential problem assets. The Bank has established an Internal Asset Review Committee ("IAR"), which operates pursuant to the Board-approved Internal Asset Review policy. The policy incorporates the regulatory requirements of monitoring and classifying all assets of the Bank. The Bank currently classifies problem and potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the Bank will sustain "some loss" if the deficiencies are not corrected. Assets classified as "Doubtful" have all of the weaknesses inherent in those classified "Substandard" with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "Loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated "Special Mention."

        When the Bank classifies one or more assets, or portions thereof, as Substandard or Doubtful, under current OTS policy, the Bank is required to consider establishing a general valuation allowance

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in an amount deemed prudent by management. The general valuation allowance, which is a regulatory term, represents a loss allowance which has been established to recognize the inherent credit risk associated with lending and investing activities, but which, unlike specific allowances, has not been allocated to particular problem assets. When the Bank classifies one or more assets, or portions thereof, as "Loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount.

        The Bank's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which can order the establishment of additional general or specific loss allowances or a change in a classification. The OTS, in conjunction with the other federal banking agencies, adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation allowances. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management has analyzed all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. While the Bank believes that it has established an adequate allowance for estimated loan losses, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request the Bank to materially increase at that time its allowance for estimated loan losses, thereby negatively affecting the Bank's financial condition and earnings at that time. Although management believes that an adequate allowance for estimated loan losses has been established, actual losses are dependent upon future events and, as such, further additions to the level of allowances for estimated loan losses may become necessary.

        The Bank's Internal Asset Review Committee reviews and classifies the Bank's assets quarterly and reports the results of its review to the Board of Directors. The Bank classifies assets and establishes both a general allowance and specific allowance in accordance with the Board-approved Internal Asset Review policy. REO is classified as Substandard. The following table sets forth information concerning substandard assets, REO and total classified assets at December 31, 2001:

        At December 31, 2001 the Bank had $6.5 million of Special Mention assets, $17.1 million Substandard assets, $1.4 million assets classified as Loss that are offset by a specific allowance of the same amount, and no assets classified as Doubtful. The difference between the specific allowance in the above table and the total specific allowance is the specific allowance on accounts that were Substandard at one time and are currently classified either as Special Mention or Pass. As of December 31, 2001, Special Mention assets include two construction loans totaling $2.2 million with the largest loan balance of $1.1 million and one residential one-to-four family loan with a loan balance of $1.8 million.

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        Impaired Assets.    The following table sets forth information regarding impaired assets, troubled-debt restructurings and REO in the Bank's loan portfolio. Included in impaired assets are $866,000 and $4.5 million of foreclosures in process less than 90 days past due at December 31, 2001 and 2000, respectively. At December 31, 2001, there were no troubled-debt restructured loans within the meaning of Statement of Financial Accounting Standards ("SFAS") 15, and 87 REO properties for $4.2 million. The Bank's current policy is to cease accruing interest on loans 90 days or more past due. For the years ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively, the amount of interest income that would have been recognized on nonaccrual loans if such loans had continued to perform in accordance with their contractual terms was $955,000, $1,300,000, $384,000, $789,000, and $424,000, none of which was recognized. For the same periods, there was no interest income recognized on troubled debt restructurings.

(1)

REO balances are shown net of related loss allowances.

(2)

Gross loans include loans receivable held for investment and held for sale.

(3)

Impaired assets consist of impaired loans and REO.

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        The following table sets forth delinquencies in the Bank's loan portfolio as of the dates indicated (dollars in thousands):

        Allowance for Loan Losses.    The Bank maintains an allowance for loan losses to absorb losses inherent primarily in the loans held for investment portfolio. Loans held for sale are carried at the lower of cost or estimated market value. Net unrealized losses, if any, are recognized in a lower of cost or market valuation allowance by charges to operations. The allowance is based on ongoing, quarterly assessments of probable estimated losses inherent in the loan portfolios. The Bank's methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowance for identified non-homogeneous problem loans and the unallocated allowance. In addition, the allowance incorporates the results of measuring impaired loans as provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of Loan-Income Recognition and Disclosures." These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans.

        The formula allowance is calculated by applying loss factors to all loans held for investment. The loss factors are applied according to loan program type and loan classification. The loss factors for each program type and loan classification are established based primarily upon the Bank's historical loss experience and are evaluated on a quarterly basis.

        Specific allowances are established for certain loans where management has identified significant conditions or circumstances related to a credit that management believes indicates the probability that

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a loss has been incurred in excess of the amount determined by the application of the formula allowance. Furthermore, on all one-to-four family loans secured by first and second deeds of trust that are 180 days or more past due, a market evaluation is completed and a specific allowance is determined. A specific allowance is calculated by subtracting the current market value less estimated selling and holding costs from the loan balance.

        The Board of Directors has established an Internal Asset Review ("IAR") Committee which meets monthly to review and monitor conditions in the portfolio and to determine the appropriate allowance for loan losses. To the extent that any of these conditions are evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, the IAR Committee's estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, the IAR Committee's evaluation of the probable loss related to such condition is reflected in the unallocated allowance. By assessing the probable estimated losses inherent in the loan portfolios on a quarterly basis, the Bank is able to adjust specific and inherent loss estimates based upon more recent information that has become available.

        As of December 31, 2001, the Bank's allowance for loan losses, that includes both general and specific reserves, was $4.4 million or 2.24% of total gross loans, and 31.07% of impaired loans compared to an allowance for loan losses of $5.4 million at December 31, 2000 or 1.61% of gross loans and 19.89% of impaired loans. The following table sets forth activity in the Bank's allowance for loan losses for the periods set forth in the table (dollars in thousands):

        The following table sets forth the amount of the Bank's allowance for loan losses, the percent of allowance for loan losses to total allowance and the percent of gross loans to total gross loans in each of the categories listed at the dates indicated (dollars in thousands):

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        The following table sets forth the allowance for loan losses amounts calculated by the categories listed for the periods set forth in the table (dollars in thousands):

        Real Estate Owned.    At December 31, 2001, the Bank had 87 REO properties with a book value of $4.2 million. Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at the lower of fair value less cost to sell or the balance of the loan at the date of foreclosure through a charge to the allowance for loan losses. It is the policy of the Bank to obtain an appraisal and/or a market evaluation on all REO at the time of possession. After foreclosure, valuations are periodically performed by management as needed due to changing market conditions or factors specifically attributable to the properties' condition. If the carrying value of a property exceeds its fair value less estimated cost to sell, a charge to operations is recorded.

Investment Activities

        Federally chartered savings institutions, such as the Bank, have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certificates of deposit of insured banks and savings institutions, bankers' acceptances, and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment-grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. Additionally, the Bank must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. See "—Regulation—Federal Savings Institution Regulation—Liquidity." Historically, the Bank has maintained liquid assets above the minimum OTS requirements and at a level considered to be adequate to meet its normal daily liquidity needs.

        The investment policy of the Bank as established by the Board of Directors attempts to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complement the Bank's lending activities. Specifically, the Bank's policies limit investments to government and federal agency-backed securities and non-government guaranteed securities, including corporate debt obligations, which are investment grade.

        At December 31, 2001, the Bank had $8.6 million in its mortgage-backed securities portfolio, all of which were insured or guaranteed by the FHLMC and are available for sale. In addition, the Bank owned $7.2 million of AMF ARM Fund and $15.8 million of AMF Intermediate Fund. The ARM Fund invests in Agency adjustable rate mortgages ("Arms"), fixed and floating rate collateralized mortgage obligations ("CMO's") and investment grade Arms. The Intermediate Fund invests in mortgage-backed securities, U.S. Government Notes and Agency Debentures. The Bank may increase or decrease its investment in mortgage-backed securities and mutual funds in the future depending on its liquidity needs and market opportunities. Investments in mortgage-backed securities and mutual funds which hold mortgage-backed securities involve a risk that actual prepayments will be greater than estimated prepayments over the life of the security which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby reducing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates.

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        The following table sets forth certain information regarding the carrying and fair values of the Bank's securities at the dates indicated:

(1)

During 2001, the Bank did not recognize any accretion or interest from the Participation Contract, as this asset was treated as a non-accrual and non-performing asset. Had the Participation Contract been considered to be a performing asset, the Bank estimates the accreted value at December 31, 2001 would have been greater then its carrying value. However, the Bank continued to record the asset at $4.4 million until management believes there is a sufficient cash flow history to warrant changing this treatment.

        On December 31, 1999, the Corporation sold its residual mortgage-backed securities retained from securitization and related mortgage servicing rights for $19.4 million in cash and other consideration and realized a pretax loss of $29.1 million. The $29.1 million loss is the net of the balance of the residual assets sold of $36.7 million plus the mortgage servicing rights of $7.5 million less a $4.3 million reserve for the estimated loss to be incurred on the $14.6 million of subperforming loans acquired less cash and other considerations totaling $19.4 million. The $19.4 million was comprised of $5.1 million in cash for the residual assets, $9.3 million value assigned to the Participation Contract, $3.0 million cash for the credit guaranty and $2.0 million cash for the mortgage servicing rights sold.

        The Participation Contract is a contractual right from the purchase of the residual mortgage-backed securities to receive 50% of any cash realized, as defined, from the residual mortgage-backed securities (the "Participation Contract"). The Company valued the contractual right at its estimated fair value of $9.3 million at December 31, 1999. The right to receive cash flows under the contract begins after the purchaser recaptures its initial cash investment of $5.1 million, $3.0 million of the credit guarantee, $200,000 in servicing fees, and a 15% internal rate of return, (the "Hurdle Amount") from the transaction.

        The Company entered into a credit guaranty related to a $14.6 million pool of sub-performing loans in the 1998-1A and 1B securitization whereby the Company guaranteed the difference between the December 1, 1999, unpaid principal balance and the realized value of those loans at final disposition. At December 31, 1999, the Company estimated the obligation under the credit guaranty at $4.3 million and it was included in other liabilities. During 2000, the $14.6 million of sub-performing loans were sold to a third party for a net loss of $3.9 million, $2.6 million of which was paid to the purchaser under the credit guaranty and applied to reduce the Hurdle Amount to $5.7 million for cash distributions on the Participation Contract. The remaining balance of the credit guaranty of $356,000 was recognized as income during the year 2000.

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        The Participation Contract is recorded on the Bank's financial statements at December 31, 2001 at $4.4 million after write-downs totaling $4.9 million. Most of the $4.9 million write-down of the Participation Contract resulted from an increase in the discount rate from 15% to 40% and a change in the composite prepayment speeds from 21.6% in 1999 to 24.6% in 2000 in the Bank's valuation model. The Bank does not believe there is an active market for this type of asset and has determined the estimated fair value utilizing a cash flow model which determines the present value of the estimated expected cash flows from this contract using a discount rate the Bank believes is commensurate with the risks involved. Beginning in June 2001, the residual assets underlying the Participation Contract began to generate cash flow to the lead participants in the contract. The Company expects to begin receiving cash from the Participation Contract during the second quarter of 2002. Based on the Company's analysis of the expected performance of the underlying loans, the total cash to the Company is expected to be approximately $19 million dollars over 5 years. The Company will commence accreting the discount and the expected yield differential (the difference between the fair market value and the book value) on the Participation Contract during 2002 over the expected remaining life of the contract using a level yield methodology. The accretion will be adjusted for any changes in the expected performance of the Participation Contract. The Participation Contract has been pledged as collateral for the Note issued in January 2002.

        The table below sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of the Company's securities and Participation Contract as of December 31, 2001.

Sources of Funds

        General.    Deposits, lines of credit, loan repayments and prepayments, and cash flows generated from operations and borrowings are the primary sources of the Bank's funds for use in lending, investing and for other general purposes.

        Deposits.    The Bank offers a variety of deposit accounts with a range of interest rates and terms. The Bank's deposits consist of passbook savings, checking accounts, money market savings accounts and certificates of deposit. For the year ended December 31, 2001, certificates of deposit constituted 90.3% of total average deposits. The terms of the fixed-rate certificates of deposit offered by the Bank vary from 6 months to 5 years. Specific terms of an individual account vary according to the type of account, the minimum balance required, the time period funds must remain on deposit and the interest rate, among other factors. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. At December 31, 2001, the Bank had $165.8 million of certificate accounts maturing in one year or less.

        The Bank relies primarily on customer service and long-standing relationships with customers to attract and retain local deposits. However, market interest rates and rates offered by competing financial institutions significantly affect the Bank's ability to attract and retain deposits.

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        Although the Bank has a significant portion of its deposits in shorter term certificates of deposit, management monitors activity on the Bank's certificate of deposit accounts and, based on historical experience and the Bank's current pricing strategy, believes that it will retain a large portion of such accounts upon maturity. Further increases in short-term certificate of deposit accounts, which tend to be more sensitive to movements in market interest rates than core deposits, may result in the Bank's deposit base being less stable than if it had a large amount of core deposits which, in turn, may result in further increases in the Bank's cost of deposits. Notwithstanding the foregoing, the Bank believes that it will continue to have access to sufficient amounts of certificate of deposit accounts which, together with other funding sources, will provide it with the necessary level of liquidity to continue to implement its business strategies.

        The following table presents the deposit activity of the Bank for the years ended December 31 (dollars in thousands):

        The reduction is attributable to the decrease in wholesale and brokered deposits and is consistent with the decrease in the loan portfolio. At December 31, 2001, the Bank had $45.9 million in certificate accounts in amounts of $100,000 or more maturing as follows (dollars in thousands):