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United States Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File Number 0-22193
LIFE FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0743196
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10540 MAGNOLIA AVE., SUITE B, RIVERSIDE, CALIFORNIA 92505
- --------------------------------------------------------------------------------
(909) 637-4000
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(Registrant's telephone number, including area code)
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
requirements for the past 90 days. [_] Yes [X] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 6,546,716 shares of common
stock, par value $0.01 per share, were outstanding as of August 7, 1997.
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LIFE FINANCIAL CORP. AND SUBSIDIARY
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1 Consolidated Statements of Financial Condition:
September 30, 1997 (unaudited) and December 31, 1996............. 1
Consolidated Statements of Operations:
For the Nine months ended September 30, 1997 and 1996 and for the
Three months ended September 30, 1997 and 1996 (unaudited)...... 2
Consolidated Statements of Cash Flows:
For the Nine months ended September 30, 1997 and 1996 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited)........... 4
Item 2 Management's Discussion and Analysis of
Results of Operations and Financial Condition................... 7
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................ 18
Item 2 Changes in Securities............................................ 18
Item 3 Defaults Upon Senior Securities.................................. 18
Item 4 Submission of Matters to a Vote of Security Holders.............. 18
Item 5 Other Information................................................ 18
Item 6 Exhibits and Reports on Form 8-K................................. 19
</TABLE>
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LIFE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------- --------
ASSETS:
<S> <C> <C>
Cash and cash equivalents.......................... $ 12,872 $ 13,265
Restricted cash.................................... 10,856 1,636
Securities held to maturity, estimated fair value
of $7,019 and $7,981 at September 30, 1997
and December 31, 1996......................... 7,015 8,023
Residual assets, at fair value..................... 24,533 5,700
Loans held for sale................................ 191,555 31,018
Loans held for investment - net of allowance for
estimated loan losses of $1,859 and $1,625
at September 30, 1997 and December 31, 1996... 32,133 36,895
Mortgage servicing rights.......................... 5,713 2,645
Accrued interest receivable........................ 1,714 537
Foreclosed real estate - net....................... 975 561
Premises and equipment - net....................... 3,770 1,579
Federal Home Loan Bank stock....................... 1,050 814
Deferred income taxes.............................. 368 397
Other assets....................................... 1,548 940
-------- --------
TOTAL ASSETS.................................. $294,102 $104,010
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposit accounts................................... $159,840 $85,711
Other borrowings................................... 61,523 3,278
Subordinated debentures............................ 10,000
Accounts payable and other liabilities............. 13,262 5,748
-------- --------
Total liabilities............................. 244,625 94,737
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 25,000,000 shares
authorized; 6,546,716 (1997) and 3,211,716 (1996)
shares issued and outstanding...................... 65 32
Additional paid-in capital......................... 41,834 9,358
Retained earnings (deficit), partially restricted.. 7,578 (117)
-------- --------
Total stockholders' equity.................... 49,477 9,273
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $294,102 104,010
======== ========
</TABLE>
See notes to unaudited consolidated financial statements
1
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LIFE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 4,781 $ 1,462 $ 10,001 $ 4,674
Securities held to maturity 115 6 334 55
Other interest-earning assets 801 101 1,817 193
---------- ---------- ---------- ----------
Total interest income 5,697 1,569 12,152 4,922
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposit accounts 2,259 843 5,440 2,507
Federal Home Loan Bank
advances and other borrowings 468 1 888 192
Subordinated Debentures 353 773
---------- ---------- ---------- ----------
Total interest expense 3,080 844 7,101 2,699
---------- ---------- ---------- ----------
NET INTEREST INCOME BEFORE
PROVISION FOR ESTIMATED LOAN
LOSSES 2,617 725 5,051 2,223
PROVISION FOR ESTIMATED LOAN LOSSES 400 251 900 369
NET INTEREST INCOME AFTER
PROVISION FOR ESTIMATED
LOAN LOSSES 2,217 474 4,151 1,864
NONINTEREST INCOME:
Loan servicing and other fees 218 113 413 321
Service charges on deposit accounts 34 28 94 93
Net gains from mortgage
financing operations 8,344 1,599 17,413 3,759
Other income 106 51 265 91
---------- ---------- ---------- ----------
Total noninterest income 8,702 1,791 18,185 4,264
NONINTEREST EXPENSE
Compensation and benefits 2,477 1,056 5,534 3,206
Premises and occupancy 332 183 805 538
Data processing 229 98 524 281
Net loss on foreclosed real estate 25 71 94 171
FDIC insurance premiums 31 495 69 584
Marketing 72 27 195 119
Telephone 222 66 439 159
Professional services 111 64 243 137
Other expense 680 186 1,247 623
---------- ---------- ---------- ----------
Total noninterest expense 4,179 2,246 9,150 5,818
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX PROVISION 6,740 19 13,186 310
INCOME TAX PROVISION 2,809 17 5,491 142
---------- ---------- ---------- ----------
NET INCOME $ 3,931 $ 2 $ 7,695 $ 168
========== ========== ========== ==========
Earnings per share $ 0.60 $ 0.00 $ 1.78 $ 0.08
========== ========== ========== ==========
Weighted average shares outstanding 6,537,361 2,538,966 4,331,005 2,090,466
========== ========== ========== ==========
</TABLE>
See notes to unaudited consolidated financial statements
2
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LIFE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,695 $ 168
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 358 257
Provision for estimated loan losses 900 359
Accretion of deferred fees (435) (8)
Provision for estimated losses of foreclosed real estate 68 167
Gain on sale of foreclosed real estate, net (46) (21)
Gain on sale and securitization of loans held for sale (16,374) (1,527)
Unrealized gain on residual asset (1,039)
Net accretion of residual asset (1,965)
Valuation allowance on mortgage servicing rights 248
Amortization of mortgage servicing rights 698 177
Purchase and origination of loans held for sale, net of loan fees (435,041) (147,967)
Proceeds from sales and securitization of loans held for sale 287,910 143,420
Increase in restricted cash (8,360)
(Increase) decrease in accrued interest receivable (1,177) 26
Deferred income taxes 29 (132)
Decrease in income taxes receivable (117)
Increase in accounts payable and other liabilities 7,514 803
Federal Home Loan Bank stock dividend (41) (34)
(Increase) in other assets (252) (1,126)
---------- ----------
Net cash used in operating activities (159,310) (5,555)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loans (17,558) 5,846
Proceeds from sale of foreclosed real estate 619 330
Purchase of securities held to maturity (1,000)
Proceeds from maturities of securities held to maturity 2,000 1,975
Additions to premises and equipment, net (2,541) (279)
Purchase of Federal Home Loan Bank stock (195) (147)
Cash received on residual assets 3,065
---------- ----------
Net cash (used in) provided by investing activities (15,610) 7,725
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 74,129 5,792
Proceeds from other borrowings (58,245)
Net proceeds from issuance of common stock 32,509 3,500
Net proceeds from issuance of subordinated debentures 9,644
---------- ----------
Net cash provided by financing activities 174,527 9,292
---------- ----------
</TABLE>
3
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<TABLE>
<CAPTION>
<S> <C> <C>
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (393) 11,462
CASH AND CASH EQUIVALENTS, beginning of period 13,265 3,932
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 12,872 $ 15,394
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 5,446 $ 2,513
========== ==========
Income taxes paid $ 3,524 $ 289
========== ==========
NONCASH INVESTING ACTIVITIES DURING THE PERIOD:
Transfers from loans to foreclosed real estate $ 1,221 $ 1,668
========== ==========
Loans to facilitate sales of foreclosed real estate $ 166 $ 1,720
========== ==========
NONCASH FINANCING ACTIVITIES DURING THE PERIOD
Stock dividends paid $ $ 2,488
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements
LIFE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(UNAUDITED)
1. Basis of Presentation:
----------------------
Life Financial Corp. (the "Company") is a savings and loan holding company
incorporated in the State of Delaware that was initially organized for the
purpose of acquiring all of the capital stock of Life Savings Bank, Federal
Savings Bank, (the "Bank") through the holding company reorganization (the
"Reorganization") of the Bank, which was consummated on June 27, 1997. Pursuant
to the Reorganization, the Company issued 3,211,716 shares of common stock in
exchange for the 1,070,572 shares of the Bank's outstanding common stock. Such
business combination was accounted for at historical cost in a manner similar to
a pooling of interests. On June 30, 1997 the Company completed its sale of
2,900,000 additional shares of its common stock through an initial public
offering (the "IPO"). On July 2, 1997, the Company issued 435,000 shares of
common stock to the public through the exercise of the underwriter's
overallotment option, bringing the total shares outstanding to 6,546,716.
Since the Reorganization and the IPO, the Company has purchased residual
assets and restricted cash from the Bank.
The Bank is a federally chartered stock savings bank whose primary business
is the origination and sale of high loan-to-value second trust deeds, sub-prime
one-to four-family residential mortgage loans and, to a much lesser extent,
multi-family residential and commercial real estate loans. The Bank's revenues
are derived from gains from mortgage financing operations and net interest on
its loans and residual assets. The primary sources of funds for the Bank have
been deposits, Federal Home Loan Bank advances, $250 million in lines of credit
from two major investment banks, as well as from loan sales and securitizations.
As of September 30, 1997, the Bank had one depository branch office in San
Bernardino, California, and three
4
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September 30, 1997, the Bank had one depository branch office in San Bernardino,
California, and three regional loan centers located in Riverside, California,
Jacksonville, Florida and the Denver, Colorado metropolitan area.
The consolidated financial statements include the accounts of Life
Financial Corp. and its wholly-owned subsidiary, Life Savings Bank, Federal
Savings Bank. All material intercompany balances and transactions have been
eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all necessary adjustments, consisting
only of normal recurring adjustments necessary for a fair presentation, have
been included. The results of operations for the nine-month period ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the entire fiscal year.
These consolidated financial statements and the information under the
heading "Management's Discussion and Analysis of Results of Operations and
Financial Condition" should be read in conjunction with the audited consolidated
financial statements and notes thereto of Life Savings Bank, Federal Savings
Bank for the year ended December 31, 1996 included in the Company's
Registration Statement on Form S-1, filed with the Securities and Exchange
Commission on May 29, 1997, amended and declared effective on June 24, 1997 (SEC
File No. 333-28035)(the "Registration Statement").
2. Earnings Per Share
------------------
Earnings per share for the three months ended and nine months ended
September 30, 1997 and September 30, 1996 are based upon the weighted average
shares outstanding during the period, adjusted for a 100% stock dividend which
occurred during 1996 and then adjusted for the exchange of three shares of
Company Common Stock for one share of Bank common stock in the Reorganization.
3. Accounting Principles
---------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" which is effective for financial statements issued for periods ending
after December 15, 1997. It replaces the presentation of primary earnings per
share with a presentation of basic earnings per share. It also requires the
presentation of diluted earnings per share for entities with complex capital
structures. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock, such as
options, were exercised or converted into common stock. The Company does not
believe that SFAS No. 128 will have a material impact on its financial
statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which is effective for fiscal years beginning after December 31, 1997.
SFAS No. 130 established standards for reporting and display of comprehensive
income and its components. This statement requires that all items that are
required to be recognized under accounting standards as
5
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comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. As SFAS No. 130 is
specifically disclosure related, the Company does not anticipate the adoption of
this statement will have a material impact on its financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which is effective for fiscal years
beginning after December 31, 1997. SFAS No. 131 establishes standards of
reporting by public entities and disclosure of information about operating
segments in annual financial statements and disclosure of selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. As SFAS No. 131 is
specifically disclosure related, the Company does not anticipate the adoption of
this statement will have a material impact on its financial statements.
4. Approved Stock Compensation Plans
---------------------------------
On November 21, 1996, the Board of Directors of the Bank adopted the Life
Savings Bank 1996 Stock Option Plan (the Bank Option Plan) which was approved by
the stockholders of the Bank at the Annual Meeting of Stockholders of the Bank,
held on May 21, 1997. The Bank Option Plan authorizes the granting of options
equal to 321,600 (adjusted for the three for one exchange) shares of common
stock for issuance to executives, key employees, officers and directors. The
Bank Option Plan will be in effect for a period of ten years from the adoption
by the Board of Directors. Options granted under the Bank Option Plan will be
made at an exercise price equal to the fair market value on the date of grant.
Awards granted to officers and employees may include incentive stock options,
non-statutory stock options and limited rights which are exercisable only upon
change in control of the Bank. Awards granted to non-employee directors are
non-statutory options. All 1996 options were granted at an exercise price of
$3.33 per share (adjusted for the three for one exchange). Stock options will
become vested and exercisable in the manner specified by the Bank. The options
granted by the Bank will vest at a rate of 33.3% per year, beginning on November
21, 1999. No options were exercisable at December 31, 1996. At June 30, 1997,
18,360 options held by two retired directors were exercisable.
The Board of Directors of the Company has adopted the Life Financial Corp.
1997 Stock Option Plan (the "Company Option Plan"), which became effective upon
the completion of the Public Offering (the Bank Option Plan and the Company
Option Plan will sometimes hereinafter be referred to as the "Option Plans").
The Board of Directors of the Company has reserved shares equal to 10% of the
issued and outstanding shares of the Company giving effect to the Reorganization
and the Public Offering, including Company options to be exchanged for Bank
options pursuant to the Bank Option Plan for issuance under the Option Plans.
Stock options with respect to shares of the Bank's Common Stock granted under
the Bank Option Plan and outstanding prior to completion of the Reorganization
automatically became options to purchase three shares of the Company's Common
Stock upon identical terms and conditions. The Company assumed all of the
Bank's obligations with respect to the Bank Option Plan. After the
Reorganization, the Option Plans became available to directors, officers and
employees of the Company and to directors, officers and employees of its direct
or indirect subsidiaries, including
6
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the Bank, as selected pursuant to the Option Plans and all references to the
Bank's Common Stock under the Bank Option Plan are now deemed references to the
Company's Common Stock. On June 30, 1997, 190,000 shares of the Company Option
Plan were granted at an exercise price of $11.00 per share. The options granted
by the Bank will vest at a rate of 33.3% per year, beginning on June 30, 2000.
No options were exercisable at September 30, 1997.
5. Thrift Rechartering Legislation
-------------------------------
The Deposit Insurance Funds Act of 1996 provides that the Bank Insurance
Fund ("BIF") and Savings Association Insurance Fund ("SAIF") will merge on
January 1, 1999 if there are no more savings associations as of that date.
Various proposals to eliminate the federal thrift charter, create a uniform
financial institutions charter and abolish the Office of Thrift Supervision
("OTS") have been introduced in Congress. The House Banking Committee reported
a bill in July 1997 that would require federal savings institutions to convert
to a national or state bank charter within two years of enactment. The bill
would allow banks resulting from the conversion of a savings association to
continue to engage in activities (and hold assets) in which it was lawfully
engaged on the day before enactment. Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company activities. The OTS would be merged with the Office of the
Comptroller of the Currency, the agency that regulates national banks. The
Company is unable to predict whether such legislation will be enacted, the
extent to which the legislation would restrict or disrupt its operations or
whether BIF and SAIF funds will eventually merge.
Item 2. Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------
Financial Condition
-------------------
This Management's Discussion and Analysis should be read in conjunction
with the Management's Discussion and Analysis contained in the Company's
Registration Statement on Form S-1, which focuses upon relevant matters
occurring during the year ended December 31, 1996. Accordingly, the ensuing
discussion focuses upon the material matters at and for the three months and
nine months ended September 30, 1997.
GENERAL
- -------
The Company is involved in the origination, purchase, sale and servicing of
non-conventional mortgage loans principally secured by first and second mortgage
loans on one- to four-family residences. The Company has focused on Liberator
Series loans which are for the purchase or refinance of residential real
property by borrowers who may have had prior credit problems or who do not have
an adequate credit history, and are considered "sub-prime borrowers," or loans
which have other non-conforming features. In addition, the Company has
originated a substantial number of Portfolio Series loans which are debt
consolidation loans for borrowers whose credit history qualify for Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") loans ("Agency Qualified Borrowers"). The Company
purchases and originates mortgage loans and other real estate secured loans
through a network of approved correspondents and independent mortgage brokers
7
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("Originators") throughout the country. The Company funds substantially all of
the loans which it originates or purchases through deposits, internally
generated funds, FHLB advances, two warehouse lines of credit and cash proceeds
received from securitizations. In the immediate and foreseeable future, the
Company will also fund loans from the cash proceeds, if any, received from
securitizations. Deposit flows and cost of funds are influenced by prevailing
market rates of interest primarily on competing investments, account maturities
and the levels of savings in the Company's market area. The Company's ability to
purchase, sell and securitize loans is influenced by the general level of
product available from its correspondent relationships and the willingness of
investors to purchase the loans at an acceptable price to the Company. Due to
substantial activity in the purchase, sale and securitization of loans in recent
periods, the net gains from mortgage financing operations have been significant.
The Company's results of operations are also affected by the Company's provision
for loan losses and the level of operating expenses. The Company's operating
expenses primarily consist of employee compensation and benefits, premises and
occupancy expenses, and other general expenses. The Company's results of
operations are also affected by prevailing economic conditions, competition,
government policies and actions of regulatory agencies.
RESULTS OF OPERATIONS
- ---------------------
Net income was $3.9 million for the three months ended September 30, 1997
compared to $2,000 for the three months ended September 30, 1996, an increase of
$3,929,000. For the nine months ended September 30, 1997 the Company recorded
net income of $7.7 million compared to $168,000 for the nine months ended
September 30, 1996. For the three months ended September 30, 1997 and September
30, 1996, the net earnings per share were $0.60 and $0.00, respectively. The
net earnings per share for the nine months ended September 30, 1997 were $1.78
compared to $0.08 for the nine months ended September 30, 1996. The increase in
net income was due to the expansion of the mortgage financing operations, the
increase in gains with respect to such operations, increases in net interest
income and the absence of a special SAIF assessment.
Interest Income
- ---------------
Interest income was $5.7 million for the three months ended September 30,
1997 compared to $1.6 million for the three months ended September 30, 1996 due
primarily to an increase in the average balance of interest earning assets
combined with an increase in the yield on those assets. Average interest
earning assets increased to $239.0 million for the three months ended September
30, 1997 compared to $73.2 million for the three months ended September 30,
1996. The yield on interest earning assets increased to 9.53% for the three
months ended September 30, 1997 compared to 8.58% for the three months ended
September 30, 1996. The largest single component of interest earning assets was
average loans receivable, net, which were $195.9 million with a yield of 9.76%
for the three months ended September 30, 1997 compared to $65.0 million with a
yield of 8.99% for the three months ended September 30, 1996. The increase in
average loans receivable, net was due to an increase in loans held for sale.
Loans held for sale were $191.6 million as of September 30, 1997 compared to
$31.0 million as of September 30, 1996.
8
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Interest income for the nine months ended September 30, 1997 was $12.2
million, compared to $4.9 million for the nine months ended September 30, 1996,
due to an increase in the average balance of interest earning assets, combined
with an increase in the yield on those assets. Average interest earning assets
increased to $176.1 million for the nine months ended September 30, 1997
compared to $78.0 million for the nine months ended September 30, 1996. The
yield on interest earning assets increased to 9.20% for the nine months ended
September 30, 1997 compared to 8.41% for the nine months ended September 30,
1996. The largest single component of interest earning assets was average loans
receivable, net, which were $140.9 million with a yield of 9.46% for the nine
months ended September 30, 1997, compared to $71.2 million with a yield of 8.75%
for the nine months ended September 30, 1996.
Interest Expense
- ----------------
Interest expense increased to $3.1 million for the three months ended
September 30, 1997 compared to $844,000 for the three months ended September 30,
1996 due to an increase in the average interest bearing liabilities combined
with an increase in the cost of those liabilities. At the end of the quarter
ended March 31, 1997, the Company issued $10 million in subordinated debentures
which bear interest at a rate of 13.5% per annum, payable semi-annually. This
issuance of debentures, combined with an increased reliance on certificate
accounts and other borrowings, resulted in an increase in the average cost of
interest bearing liabilities to 6.15% for the quarter ended September 30, 1997
compared to 4.75% for the quarter ended September 30, 1996. Average interest
bearing liabilities were $200.4 million for the quarter ended September 30, 1997
compared to $71.1 million for the quarter ended September 30, 1996. The largest
component of average interest bearing liabilities was certificate accounts,
which averaged $142.5 million with an average cost of 6.02% for the three months
ended September 30, 1997, compared to $55.4 million with an average cost of
5.52% for the three months ended September 30, 1996.
The second largest component of average interest bearing liabilities is
borrowings, which increased to an average balance of $39.7 million with an
average cost of 8.28% for the three months ended September 30, 1997 compared to
$89,000 with an average cost of 4.49% for the three months ended September 30,
1997. In addition to the subordinated debentures, the Company began utilizing
its warehouse lines of credit during the quarter ended September 30, 1997. The
Company did not have any subordinated debentures or warehouse lines outstanding
during the quarter ended September 30, 1996.
For the nine months ended September 30, 1997, interest expense was $7.1
million compared to $2.7 million for the nine months ended September 30, 1996
due to an increase in the average interest bearing liabilities combined with an
increase in the cost of those liabilities. At the end of the quarter ended
March 31, 1997, the Company issued subordinated debentures with an interest rate
of 13.5%. This issuance of debentures, combined with an increased use of
borrowed funds as well as a heavier reliance on certificate accounts, resulted
in an increase in the average cost of interest bearing liabilities to 5.88% for
the nine months ended September 30, 1997 compared to 4.82% for the nine months
ended September 30, 1996. Average interest bearing liabilities were $161.0
million for the nine months ended September 30, 1997 compared to $74.6 million
for the nine months ended September 30, 1996.
9
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The largest component of average interest bearing liabilities was
certificate accounts, which averaged $116.0 million with an average cost of
5.87% for the nine months ended September 30, 1997 compared to $54.8 million
with an average cost of 5.53% for the nine months ended September 30, 1996. The
second largest component of average interest bearing liabilities is borrowings,
which increased to an average balance of $27.3 million with an average cost of
8.11% for the nine months ended September 30, 1997 compared to $4.3 million with
an average cost of 5.93% for the nine months ended September 30, 1997.
Net Interest Income Before Provision for Estimated Loan Losses
- --------------------------------------------------------------
Net interest income before provision for estimated loan losses for the
three months ended September 30, 1997 was $2.6 million compared to $725,000 for
the three months ended September 30, 1996. This increase is the net effect of an
increase in average interest earning assets and average interest bearing
liabilities as well as an increase in the net interest margin, and an increase
in the ratio of interest earning assets to interest bearing liabilities. Average
interest earning assets increased to $239.0 million with a yield of 9.53% for
the three months ended September 30, 1997 compared to $73.2 million with a yield
of 8.58% for the three months ended September 30, 1996. Average interest bearing
liabilities increased to $200.4 million with an average cost of 6.15% for the
three months ended September 30, 1997 compared to $71.1 million with an average
cost of 4.75% for the three months ended September 30, 1996. The net interest
margin increased to 4.38% for the three months ended September 30, 1997 compared
to 3.96% for the three months ended September 30, 1996. The ratio of interest
earning assets to interest bearing liabilities was 119.29% for the quarter ended
September 30, 1997 compared to 102.96% for the quarter ended September 30, 1996.
Net interest income before provision for estimated loan losses for the nine
months ended September 30, 1997 was $5.1 million compared to $2.2 million for
the nine months ended September 30, 1996. This increase is the net effect of an
increase in average interest earning assets and average interest bearing
liabilities, as well as an increase in the net interest margin and the ratio of
interest earning assets to interest bearing liabilities. Average interest
earning assets increased to $176.1 million for the nine months ended September
30, 1997 compared to $78.0 million for the nine months ended September 30, 1996.
Average interest bearing liabilities increased to $161.0 million with an average
cost of 5.88% for the nine months ended September 30, 1997 compared to $74.6
million with an average cost of 4.82% for the nine months ended September 30,
1996. The net interest margin was 3.83% for the nine months ended September 30,
1997 compared to 3.80% for the nine months ended September 30, 1996. The ratio
of interest earning assets to interest bearing liabilities was 109.33% for the
nine months ended September 30, 1997 compared to 104.59% for the nine months
ended September 30, 1996.
10
<PAGE>
The following table sets forth average interest rates on the Company's interest-
earning assets and interest-bearing liabilities for the three month and nine
month periods ended September 30, 1997 and September 30, 1996. The yields and
costs are derived by dividing income or expense by the average balance of assets
or liabilities, respectively, for the periods shown. Unless otherwise noted,
average balances are measured on a daily basis. The yields and costs include
fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 1997 September 30, 1996
------------------------------ ----------------------------
Average Average Average Average
Balance Interest Yield/Cst Balance Interest Yield/Cst
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits and
short-term investments $ 19,469 $ 290 5.96% $ 6,820 $ 86 5.04%
Investment Securities 9,043 131 5.79 1,285 21 6.54
Loans receivable, net(1) 195,860 4,781 9.76 65,038 1,462 8.99
Mortgage-backed securities, net 9 11
Residual assets 14,644 495 13.52
-------- ------ ------- ------
Total interest-earning assets 239,025 5,697 9.53 73,154 1,569 8.58
Non-interest-earning assets(2) 51,606 8,086
-------- -------
Total assets(2) $290,631 $81,240
======== =======
Liabilities and Equity:
Interest-bearing liabilities:
Passbook accounts $ 4,031 21 2.08 $ 4,322 23 2.13
Money market accounts 2,959 22 2.97 4,299 31 2.88
Checking accounts 11,212 70 2.50 6,934 25 1.44
Certificate accounts 142,517 2,146 6.02 55,408 764 5.52
-------- ------ ------- ------
Total Deposit accounts 160,719 2,259 5.62 70,963 843 4.75
Borrowings 39,661 821 8.28 89 1 4.49
-------- ------ ------- ------
Total interest-bearing
liabilities 200,380 3,080 6.15 71,052 844 4.75
------ ------
Non-interest-bearing
liabilities(2) 43,058 3,344
-------- -------
Total liabilities(2) 243,438 74,396
Equity(2) 47,193 6,844
-------- -------
Total liabilities and
equity(2) $290,631 $81,240
======== =======
Net interest income before provision
for estimated loan losses $2,617 $ 725
====== ======
Net interest rate spread(3) 3.39 3.83
Net interest margin(4) 4.38 3.96
Ratio of interest-earning assets to
interest bearing liabilities 119.29 102.96
<CAPTION>
Nine months ended Nine months ended
September 30, 1997 September 30, 1996
------------------------------ ----------------------------
Average Average Average Average
Balance Interest Yield/Cst Balance Interest Yield/Cst
Assets:
Interest-earning assets:
Interest-earning deposits and
short-term investments $ 15,387 $ 719 6.23% $ 4,568 $ 162 4.73%
Investment Securities 8,901 376 5.63 2,227 85 5.09
Loans receivable, net(1) 140,916 10,001 9.46 71,240 4,674 8.75
Mortgage-backed securities, net 9 11 1 12.12
Residual assets 10,854 1,056 12.97
-------- ------- -------
Total interest-earning assets 176,067 12,152 9.20 78,046 4,922 8.41
------- ------- ------
Non-interest-earning assets(2) 26,298 4,173
-------- -------
Total assets(2) $202,365 $82,219
======== =======
Liabilities and Equity:
Interest-bearing liabilities:
Passbook accounts $ 4,027 63 2.09 $ 4,479 78 2.32
Money market accounts 2,978 67 3.00 4,343 90 2.76
Checking accounts 10,691 201 2.51 6,672 66 1.32
Certificate accounts 116,035 5,109 5.87 54,811 2,273 5.53
-------- ------- ------- ------
Total Deposit accounts 133,731 5,440 5.42 70,305 2,507 4.75
Borrowings 27,308 1,661 8.11 4,318 192 5.93
-------- ------- ------- ------
Total interest-bearing
liabilities 161,039 7,101 5.88 74,623 2,699 4.82
------- -------
Non-interest-bearing
liabilities(2) 18,139 1,802
-------- -------
Total liabilities(2) 179,178 76,425
Equity(2) 23,187 5,794
-------- -------
Total liabilities and
equity(2) $202,365 $82,219
======== =======
Net interest income before provision
for estimated loan losses $ 5,051 $2,223
======= ======
Net interest rate spread(3) 3.32 3.59
Net interest margin(4) 3.83 3.80
Ratio of interest-earning assets to
interest bearing liabilities 109.33 104.59
</TABLE>
(1) Amount is net of deferred loan origination fees, unamortized discounts,
premiums and allowance for estimated loan losses and includes loans held
for sale.
(2) Average balances are measured on a month-end basis.
(3) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
11
<PAGE>
Provision for Estimated Loan Losses
- -----------------------------------
Provisions for estimated loan losses were $400,000 for the three months
ended September 30, 1997 compared to $251,000 for the three months ended
September 30, 1996. The increase in provisions is due to management's analysis
of its loans held for investment and loans held for sale portfolios. With the
additional provision, the level of allowances for estimated loan losses as a
percent of non-performing loans was 60.62% as of September 30, 1997 compared to
55.66% as of September 30, 1996. The ratio of non-performing assets as a
percentage of total assets declined to 1.78% as of September 30, 1997 compared
to 3.36% as of September 30, 1996. Allowances for estimated loan losses as a
percent of loans held for investment were 5.79% as of September 30, 1997
compared to 2.74% as of September 30, 1996.
Provisions for loan losses were $900,000 for the nine months ended
September 30, 1997 compared to $369,000 for the nine months ended September 30,
1996. The increase in provisions was based on a re-evaluation of the composition
of the Company's loan portfolio. Charge-offs for the nine months ended September
30, 1997 were $675,000, with recoveries for the same period of $9,000, leaving
the Company with net charge offs of $666,000 for the period. Charge-offs for the
nine months ended September 30, 1996 were $700,000. (See "Financial Condition")
Non-Interest Income
- -------------------
Net gains from mortgage financing operations for the three months ended
September 30, 1997 totaled $8.3 million, compared to $1.6 million for the
quarter ended September 30, 1996. This gain is net of a mark to market write
down in residual assets of $787,000 which was the result of an increase in
anticipated prepayment speeds on the 1997-1A securitization. The increase in
gains from mortgage financing operations was attributable to the increase in the
level of mortgage financing operations, with loans securitized totaling $100.9
million during the quarter ended September 30, 1997, compared to loans sold
totaling $46.4 million for the quarter ended September 30, 1996. There were no
loans securitized during the quarter ended September 30, 1996. Net gains from
mortgage financing operations as a percent of loans sold or securitized was
8.27% for the quarter ended September 30, 1997, as compared to 3.44% for the
quarter ended September 30, 1996. This increase in percentage reflected the
effects of the securitization of loans compared to whole loan sales. Loans
originated and purchased totaled $194.4 million for the quarter ended September
30, 1997, compared to $44.5 million for the quarter ended September 30, 1996.
For the nine months ended September 30, 1997, net gains from mortgage
financing operations totaled $17.4 million compared to $3.8 million for the nine
months ended September 30, 1996. This increase was attributable to the increase
in the level of mortgage financing operations, with loans sold or securitized
totaling $277.3 million (including $73.3 million in whole loans sales) during
the nine months ended September 30, 1997, compared to loans sold totaling $141.1
million for the nine months ended September 30, 1996. There were no loans
securitized during the nine months ended September 30, 1996. Net gains from
mortgage
12
<PAGE>
financing operations as a percent of loans sold and securitized was 6.28% for
the nine months ended September 30, 1997 compared to 2.66% for the nine months
ended September 30, 1996. This increase in percentage reflected the effects of
the securitization of loans compared to whole loan sales. Loans originated and
purchased totaled $437.5 million for the nine months ended September 30, 1997
compared to $148.4 million for the nine months ended September 30, 1996.
Non-Interest Expense
- --------------------
Non-interest expense was $4.2 million for the three months ended September
30, 1997 compared to $2.2 million for the three months ended September 30, 1996.
For the nine months ended September 30, 1997, non-interest expense was $9.2
million compared to $5.8 million for the nine months ended September 30, 1996.
The increase was due primarily to an increase in compensation and benefits and
other operating expenses resulting from the expansion of the mortgage financing
operations. New loans originated and purchased increased to $194.4 million for
the quarter ended September 30, 1997, compared to $44.5 million for the quarter
ended September 30, 1996, and were $437.5 million for the nine months ended
September 30, 1997 compared to $148.4 million for the nine months ended
September 30, 1996.
Compensation and benefits increased to $2.5 million for the quarter ended
September 30, 1997 from $1.1 million for the quarter ended September 30, 1996.
For the nine months ended September 30, 1997, compensation and benefits were
$5.5 million compared to $3.2 million for the nine months ended September 30,
1996. These costs are directly related to the expansion of the mortgage
financing operations and the corresponding increase in personnel, to an average
of 180 employees for the quarter ended September 30, 1997 compared to 94 for the
quarter ended September 30, 1996. Average employees for the nine months ended
September 30, 1997 were 163 compared to 87 for the nine months ended September
30, 1997.
Premises and occupancy expenses increased to $332,000 for the quarter ended
September 30, 1997 compared to $183,000 for the quarter ended September 30,
1996, and were $805,000 for the nine months ended September 30, 1997 compared to
$538,000 for the nine months ended September 30, 1996 due to the expansion of
the mortgage financing operation and the addition of the regional operating
center in the Denver, Colorado metropolitan operating area, as well as the
opening of the new Corporate Headquarters in Riverside, CA. As a result of
leasing office space for the Company's and the Bank's executive offices and the
western regional office of Life Financial Services, combined with the relocation
of the Florida regional office, and the Anticipated addition of 12 new retail
lending offices in California during the quarter end December 31, 1997, premises
and occupancy expenses are expected to increase to approximately $594,000 per
quarter.
As a result of the expansion of the mortgage financing operations, other
operating expenses increased as well. Data processing increased to $229,000 for
the three months ended September 30, 1997 compared to $98,000 for the three
months ended September 30, 1996, and was $524,000 for the nine months ended
September 30, 1997 compared to $281,000 for the nine months ended September 30,
1996. The increase in non-interest expense was partially offset by a reduction
in FDIC insurance premiums in the 1997 period. FDIC insurance premiums were
$31,000 for the quarter ended September 30, 1997 compared to $495,000 for the
quarter ended September 30, 1996. During the quarter ended September 30, 1996,
the Bank paid a one time assessment to the FDIC
13
<PAGE>
of $448,000 for the recapitalization of the Savings Association Insurance Fund.
Telephone, professional services and other expense increased to $222,000,
$111,000 and $680,000, respectively, for the quarter ended September 30, 1997
compared to $66,000, $64,000 and $186,000 for the quarter ended September 30,
1996 and were $439,000, $243,000 and $1,247,000 for the nine months ended
September 30, 1997 compared to $159,000, $137,000 and $623,000 for the nine
months ended September 30, 1996.
Income Taxes
- ------------
The provision for income taxes increased to $2.8 million for the quarter
ended September 30, 1997 compared to $17,000 for the quarter ended September 30,
1996 due to an increase in income before income tax provision. Income before
income tax provision increased to $6.7 million for the quarter ended September
30, 1997 from $19,000 for the quarter ended September 30, 1996. The effective
tax rate decreased to 41.7% for the quarter ended September 30, 1997 from 89.5%
for the quarter ended September 30, 1996. The unusual percentage for the quarter
ended September 30, 1996 was the result of a minor change in the estimated taxes
combined with the relatively small pre-tax earnings for the quarter, resulted in
an abnormal effective income tax rate.
The provision for income taxes increased to $5.5 million for the nine
months ended September 30, 1997 compared to $142,000 for the nine months ended
September 30, 1996. Income before income tax provision increased to $13.2
million for the nine months ended September 30, 1997 compared to $310,000 for
the nine months ended September 30, 1996. The effective tax rate decreased to
41.6% for the nine months ended September 30, 1997 compared to 45.8% for the
nine months ended September 30, 1997.
COMPARISON OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
- --------------------------------------------------------------------------------
Total assets increased to $294.1 million as of September 30, 1997 compared
to $104.0 million as of December 31, 1996 due to the expansion of the mortgage
financing operations. Loans held for sale totaled $191.6 million as of September
30, 1997 compared to $31.0 million as of December 31, 1996. This increase was
partially offset by a decrease in loans held for investment to $32.1 million as
of September 30, 1997 compared to $36.9 million as of December 31, 1996. During
the nine months ended September 30, 1997, the Company originated or purchased
$437.5 million of loans. During the same nine month period, the Company sold or
securized $277.3 million of loans(including $73.3 million in whole loan sales).
The increase in loans held for sale also resulted in an increase in accrued
interest receivable to $1.7 million as of September 30, 1997 compared to
$537,000 as of December 31, 1996.
As a result of the Company's loan securitization activities, residual
assets and restricted cash increased to $24.7 million and $10.9 million,
respectively, as of September 30, 1997 compared to $5.7 million and $1.6 million
as of December 31, 1996. Mortgage servicing rights also increased as a result of
the securitization of loans with servicing retained to $5.6 million as of
September 30, 1997 compared to $2.6 million as of December 31, 1996.
Cash and cash equivalents were $12.9 million as of September 30, 1997
compared to
14
<PAGE>
$13.3 million as of December 31, 1996. During the nine months ended September
30, 1997, the Company began leasehold improvements on the new corporate
headquarters as well as adding the Denver, Colorado regional loan center,
increasing premises and equipment to $3.8 million as of September 30, 1997
compared to $1.6 million as of December 31, 1996. Real estate owned increased
to $975,000 as of September 30, 1997 compared to $561,000 as of December 31,
1996 as part of the Company's continuing effort to resolve problem assets.
During the nine months ended September 30, 1997, the Company issued $10.0
million in Subordinated Debentures in order to increase its risk based capital.
The additional funds, net of debt issuance costs, were used to fund loans during
the nine months ended September 30, 1997. In addition, the Company increased its
liabilities by increasing deposit accounts to $159.8 million as of September 30,
1997 compared to $85.7 million as of December 31, 1996. The major component of
deposit accounts is certificates of deposit, which increased to $146.0 million
as of September 30, 1997 compared to $69.4 million as of December 31, 1996. The
additional funds were used to fund loans during the nine months ended September
30, 1997.
The Bank also increased its use of FHLB advances and other borrowings to
fund loans held for sale. The Bank has added two warehouse lines of credit with
a combined credit limit of $250 million which provides the ability to match the
cash demands of the Bank while holding loans for sale and the ability to reduce
this cash need upon sale or securitization of the loans. FHLB advances and other
borrowings increased to $61.5 million as of September 30, 1997 compared to $3.3
million as of December 31, 1996. The warehouse lines of credit have a total
aggregate limit of $250 million, and range in interest rates from Libor + 50
basis points to Libor + 100 basis points.
Accounts payable and other liabilities increased to $13.3 million as of
September 30, 1997 compared to $5.7 million as of December 31, 1996 due to an
increase in loans serviced for other investors and the corresponding increase in
amounts due investors between the time the borrowers make payments to the
Company and the time the Company remits payments to the investors.
Stockholders' equity increased to $49.5 million as of September 30, 1997
from $9.3 million as of December 31, 1996 due to the issuance of 2,900,000
shares of Company common stock to the public in the Company's initial public
offering, completed on June 30, 1997 and the issuance of an additional 435,000
Shares to the public pursuant to the exercise of the underwriter's overallotment
option. The initial offering price to the public was $11.00 per share, which
resulted in $32.9 million in net proceeds after expenses. Subsequent to
September 30, 1997, the Company issued an additional 435,000 shares to the
public at $11.00 per share pursuant to the exercise of the underwriter's
overallotment option.
15
<PAGE>
The Company's non-performing assets increased to $4.0 million as of
September 30, 1997 compared to $3.0 million as of December 31, 1996. Non-
performing loans as a percent of gross loans receivable declined to 1.39% as of
September 30, 1997 from 3.50% as of December 31, 1996. Non-performing assets as
a percent of total assets decreased to 1.38% as of September 30, 1997 from 2.86%
as of December 31, 1996. The following table sets forth the non-performing
assets at September 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1997 1996
------ ------
(dollars in thousands)
<S> <C> <C>
Non-accrual loans $3,070 $2,416
Foreclosed real estate 975 561
Total non-performing assets ------ ------
$4,045 $2,977
====== ======
Allowance for estimated loan losses as a percent
of gross loans receivable 0.84% 2.36%
Allowance for estimated loan losses as a percent of total non-
performing loans 60.62 67.26
Non-performing loans as a percent of gross loans receivable 1.39 3.50
Non-performing assets as a percent of total assets 1.38 2.86
</TABLE>
The Company, in consideration of the current economic environment and the
condition of the loan portfolio, has established an allowance for estimated loan
losses as of September 30, 1997 of $1.9 million. The allowance for estimated
losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and estimable.
The allowance is based upon a number of factors, including current economic
conditions, actual loss experience and industry trends. The Company's non-
performing loans are primarily made up of one- to four-family residential
mortgage loans.
The following table sets forth the activity in the Company's allowance for
estimated loan losses for the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
(dollars in thousands) % of Loans held
for investment
----------------
<S> <C> <C>
Balance as of December 31, 1996 $1,625 4.22%
Add:
Provision for estimated loan losses 900
Recoveries of previous charge-offs 9
Less:
Charge-offs 675
------
Balance as of September 30, 1997 $1,859 5.47
======
</TABLE>
16
<PAGE>
MANAGEMENT OF INTEREST RATE RISK
- --------------------------------
The principal objective of the Company's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of appropriate risk given the Company's business
focus, operating environment, capital and liquidity requirements and performance
objectives and manage the risk consistent with Board approved guidelines through
the establishment of prudent asset concentration guidelines. Through such
management, management of the Company seeks to reduce the vulnerability of the
Company's operations to changes in interest rates. Management of the Company
monitors its interest rate risk as such risk relates to its operating
strategies. The Company's Board of Directors reviews on a quarterly basis the
Company's asset/liability position, including simulations of the effect on the
Company's capital of various interest rate scenarios. The extent of movement in
interest rates, higher or lower, is an uncertainty that could have a negative
impact on the earnings of the Company.
Between the time the Company originates loans and purchase commitments are
issued, the Company is exposed to both upward and downward movements in interest
rates which may have a material adverse effect on the Company. The Board of
Directors of the Company recently implemented a hedge management policy
primarily for the purpose of hedging the risks associated with loans held for
sale in the Company's mortgage pipeline. In a flat or rising interest rate
environment, this policy enables management to utilize mandatory forward
commitments to sell fixed rate assets as the primary hedging vehicles to shorten
the maturity of such assets. In a declining interest environment, the policy
enables management to utilize put options. The hedge management policy also
permits management to extend the maturity of its liabilities through the use of
short financial futures positions, purchase of put options, interest rate caps
or collars, and entering into "long" interest rate swap agreements. Management
may also utilize "short" interest rate swaps to shorten the maturity of long-
term liabilities when the net cost of funds raised by using such a strategy is
attractive, relative to short-term CD's or borrowings. No hedging positions
were outstanding as of September 30, 1997.
LIQUIDITY
- ---------
The Company's primary sources of funds are deposits, warehouse lines of
credit, FHLB advances, principal and interest payments on loans, cash proceeds
from the sale of loans and securitizations, and to a lesser extent, interest
payments on investment securities and proceeds from the maturation of investment
securities. While maturities and scheduled amortization of loans are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
However, the Company has continued to maintain the required minimum levels of
liquid assets as defined by OTS regulations. This requirement, which may be
varied at the direction of the OTS depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term borrowings.
The required ratio is currently 5%. The Company's average liquidity ratios were
9.23% and 11.08% for the three months ended September 30, 1997 and September 30,
1996, respectively.
17
<PAGE>
COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------
As of September 30, 1997, the Bank had outstanding commitments to originate
or purchase mortgage loans of $38.0 million compared to $9.2 million as of
December 31, 1996 due to the expansion of the mortgage financing operations.
Other than commitments to originate or purchase mortgage loans, there were no
material changes to the Company's commitments or contingent liabilities as of
September 30, 1997 compared to the period ended December 31, 1996 as discussed
in the notes to the audited financial statements of Life Savings Bank,
Federal Savings Bank for the year ended December 31, 1996 included in the
Registration Statement.
REGULATORY CAPITAL
- ------------------
The Office of Thrift Supervision (OTS) capital regulations require savings
institutions to meet three minimum capital requirements: a 1.5% tangible capital
ratio, a 3.0% leverage (core capital) ratio and an 8.0% risk-based capital
ratio. The core capital requirement has been effectively increased to 4.0%
because the prompt corrective action legislation provides that institutions with
less than 4.0% core capital will be deemed "undercapitalized". In addition, the
OTS, under the prompt corrective action regulation can impose various
constraints on institutions depending on their level of capitalization ranging
from well-capitalized to critically undercapitalized. As of September 30, 1997,
the Bank was considered "well-capitalized".
18
<PAGE>
The Bank was in compliance with the capital requirements in effect as of
September 30, 1997. The following table reflects the required ratios and the
actual capital ratios of the Bank as of September 30, 1997:
<TABLE>
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
-------- ----------- --------- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $15,951 $ 3,952 $11,999 6.06% 1.50%
Core $15,951 $ 7,903 $ 8,048 6.06% 3.00%
Risk-based $27,583 $16,574 $11,009 13.31% 8.00%
</TABLE>
The Bank has been required by the OTS since the Bank's examination
completed August 9, 1996 to compute its regulatory capital ratios based upon the
higher of (1) the average of total assets based on month-end results or (2)
total assets as of quarter-end.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is involved as plaintiff or defendant in various legal
actions incident to its business, none of which is believed by management to be
material to the financial condition of the Company.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibits are filed as part of this report:
3.1 Certificate of Incorporation of Life Financial Corp.*
3.2 Bylaws of Life Financial Corp.*
27.0 Financial data schedule (filed herewith).
(b) Reports on Form 8-K
None.
* Incorporated herein by reference to Exhibits of the same number from the
Company's Registration Statement on Form S-4 (filed initially on Form S-1),
filed on January 27, 1997, as amended on March 27, 1997, and as further
amended on May 29, 1997 and June 11, 1997 (Registration No. 333-20497).
SIGNATURES
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.
LIFE FINANCIAL CORP.
November 14, 1997 By: /s/ DANIEL L. PERL
- ----------------- -------------------------------
Date Daniel L. Perl
President and Chief
Executive Officer
(principal executive officer)
November 14, 1997 /s/ L. BRUCE MILLS, JR.
- ----------------- -------------------------------
Date L. Bruce Mills, Jr.
Executive Vice President
Chief Financial Officer and
Treasurer
(principal financial and accounting
officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,984
<INT-BEARING-DEPOSITS> 10,844
<FED-FUNDS-SOLD> 2,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,533
<INVESTMENTS-CARRYING> 7,015
<INVESTMENTS-MARKET> 7,019
<LOANS> 225,547
<ALLOWANCE> 1,859
<TOTAL-ASSETS> 294,102
<DEPOSITS> 159,840
<SHORT-TERM> 61,523
<LIABILITIES-OTHER> 13,262
<LONG-TERM> 10,000
0
0
<COMMON> 65
<OTHER-SE> 49,412
<TOTAL-LIABILITIES-AND-EQUITY> 294,102
<INTEREST-LOAN> 10,001
<INTEREST-INVEST> 334
<INTEREST-OTHER> 1,817
<INTEREST-TOTAL> 12,152
<INTEREST-DEPOSIT> 5,440
<INTEREST-EXPENSE> 7,101
<INTEREST-INCOME-NET> 5,051
<LOAN-LOSSES> 900
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,150
<INCOME-PRETAX> 13,186
<INCOME-PRE-EXTRAORDINARY> 13,186
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,695
<EPS-PRIMARY> 1.78
<EPS-DILUTED> 1.78
<YIELD-ACTUAL> 9.20
<LOANS-NON> 3,070
<LOANS-PAST> 0
<LOANS-TROUBLED> 130
<LOANS-PROBLEM> 2,509
<ALLOWANCE-OPEN> 1,625
<CHARGE-OFFS> 675
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 1,859
<ALLOWANCE-DOMESTIC> 1,859
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,613
</TABLE>
