<PAGE>
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, 1998
Commission File Number 0-22193
LIFE FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(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 AVENUE, RIVERSIDE, CALIFORNIA 92505
- --------------------------------------------------------------------------------
(909) 637 - 4000
- --------------------------------------------------------------------------------
(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.
[X] Yes [_] 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: 6,562,396 shares of common
stock, par value $0.01 per share, were outstanding as of November 13, 1998.
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 Consolidated Statements of Financial Condition:
September 30, 1998 and December 31, 1997 (unaudited)............... 1
Consolidated Statements of Operations:
For the Nine months ended September 30, 1998 and 1997 and for the
Three months ended September 30, 1998 and 1997 (unaudited)......... 2
Consolidated Statements of Cash Flows:
For the Nine months ended September 30, 1998 and 1997 (unaudited).. 3
Notes to Consolidated Financial Statements (unaudited)............. 4
Item 2 Management's Discussion and Analysis of
Results of Operations and Financial Condition...................... 7
Item 3 Quantitative and Qualitative Disclosures About Market Risk......... 19
PART II OTHER INFORMATION
Item 1 Legal Proceedings.................................................. 19
Item 2 Changes in Securities and Use of Proceeds.......................... 19
Item 3 Defaults Upon Senior Securities.................................... 19
Item 4 Submission of Matters to a Vote of Security Holders................ 19
Item 5 Other Information.................................................. 19
Item 6 Exhibits and Reports on Form 8-K................................... 20
ii
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Item 1. Financial Statements.
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................... $ 37,750 $ 11,503
Restricted cash.................................... 12,920 12,339
Securities held to maturity, estimated fair value
of $3,023 and $5,030 at September 30, 1998 and
December 31, 1997................................ 3,007 5,012
Residual assets, at fair value..................... 47,932 40,746
Loans held for sale................................ 213,882 272,655
Loans held for investment - net of allowance for
loan losses of $1,751 and $2,573 at
September 30, 1998 and December 31, 1997......... 16,074 29,076
Warehouse financing receivable..................... 1,450 16,613
Mortgage servicing rights, net..................... 13,235 8,526
Accrued interest receivable........................ 2,207 2,638
Foreclosed real estate, net........................ 2,002 1,440
Premises and equipment - net....................... 6,979 4,764
Federal Home Loan Bank stock....................... 2,427 1,067
Other assets....................................... 20,478 5,406
-------- --------
TOTAL ASSETS................................... $380,343 $411,785
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts................................... $253,271 $211,765
Federal Home Loan Bank advances.................... - 9,000
Other borrowings................................... 13,787 100,170
Subordinated debentures............................ 10,000 10,000
Accounts payable and other liabilities............. 41,741 26,031
-------- --------
Total liabilities.............................. 318,799 356,966
-------- --------
COMMITMENTS AND CONTINGENCIES...................... - -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares outstanding................ - -
Common stock, $.01 par. value; 25,000,000 shares
authorized; 6,562,396 (1998) and 6,546,716 (1997)
shares issued and outstanding.................... 66 65
Additional paid-in capital......................... 42,223 42,171
Retained earnings, partially restricted............ 19,255 12,583
-------- --------
Total stockholders' equity..................... 61,544 54,819
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..... $380,343 $411,785
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
1
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Loans $ 9,551 $ 4,781 $ 24,914 $ 10,001
Residual assets 1,220 495 3,951 1,056
Securities held to maturity 60 131 208 376
Other interest-earning assets 737 290 1,975 719
---------- ---------- ---------- ----------
Total interest income 11,568 5,697 31,048 12,152
---------- ---------- ---------- ----------
Interest Expense:
Deposit accounts 3,513 2,259 10,393 5,440
Federal Home Loan Bank
advances and other borrowings 3,085 468 6,407 888
Subordinated debentures 353 353 1,045 773
---------- ---------- ---------- ----------
Total interest expense 6,951 3,080 17,845 7,101
---------- ---------- ---------- ----------
Net Interest Income Before Provision for
loan losses 4,617 2,617 13,203 5,051
Provision for loan losses 736 400 2,366 900
---------- ---------- ---------- ----------
Net Interest Income After Provision for
loan losses 3,881 2,217 10,837 4,151
Non-interest Income:
Loan servicing and other fees 1,162 218 4,129 413
Service charges on deposit accounts 50 34 123 94
Net gains from mortgage financing operations 4,890 8,344 14,807 17,413
Other income 316 106 607 265
---------- ---------- ---------- ----------
Total non-interest income 6,418 8,702 19,666 18,185
---------- ---------- ---------- ----------
Non-interest Expense:
Compensation and benefits 3,076 2,477 8,602 5,534
Premises and occupancy 963 332 2,444 805
Data processing 406 229 1,054 524
Net loss on foreclosed real estate 32 25 217 94
FDIC insurance premiums 39 31 100 69
Marketing 788 72 1,786 195
Telephone 321 222 814 439
Professional services 360 111 1,172 243
Other expense 1,134 680 2,670 1,247
---------- ---------- ---------- ----------
Total non-interest expense 7,119 4,179 18,859 9,150
---------- ---------- ---------- ----------
Income Before Provision for tax expense 3,180 6,740 11,644 13,186
Provision for tax expense 1,375 2,809 4,969 5,491
---------- ---------- ---------- ----------
Net Income $ 1,805 $ 3,931 $ 6,675 $ 7,695
========== ========== ========== ==========
Basic earnings per share $ 0.28 $ 0.60 $ 1.02 1.78
========== ========== ========== ==========
Basic weighted average shares outstanding 6,558,997 6,537,377 6,552,192 4,320,270
========== ========== ========== ==========
Diluted earnings per share $ 0.27 $ 0.57 $ 0.98 $ 1.73
========== ========== ========== ==========
Diluted weighted average shares outstanding 6,773,454 6,853,584 6,841,217 4,436,353
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,675 $ 7,695
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 1,244 358
Provision for estimated loan losses 2,366 900
Accretion of deferred fees (4) (435)
Provision for estimated losses of foreclosed real estate 32 68
Loss (gain) on sale of foreclosed real estate, net 87 (46)
Gain on sale and securitization of loans held for sale (30,968) (16,374)
Unrealized (gain) loss on residual assets 8,480 (1,039)
Net accretion of residual assets (3,992) (1,965)
Valuation allowance on mortgage servicing rights 381 248
Amortization of mortgage servicing rights 1,909 698
Purchase and origination of loans held for sale, net of loan fees (930,884) (435,041)
Proceeds from sales and securitization of loans held for sale 984,031 287,910
Increase in restricted cash (581) (8,360)
Decrease in warehouse financing receivable 15,163 -
Decrease (increase) in accrued interest receivable 431 (1,177)
Increase in accounts payable and other liabilities 15,710 7,543
Federal Home Loan Bank stock dividend (63) (41)
Increase in other assets (15,072) (252)
--------- ---------
Net cash provided by (used in) operating activities 54,945 (159,310)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in loans 37,684 (17,558)
Proceeds from sale of foreclosed real estate 1,882 619
Purchase of securities held to maturity - (1,000)
Proceeds from maturities of securities held to maturity 2,000 2,000
Additions to premises and equipment (3,416) (2,541)
Purchase of Federal Home Loan Bank stock (1,297) (195)
Cash (paid) received on residual assets (11,674) 3,065
--------- ---------
Net cash provided (used) by investing activities 25,179 (15,610)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 41,506 74,129
(Repayments of) proceeds from other borrowings (86,383) 58,245
Net proceeds from issuance of common stock - 32,509
Repayment of Federal Home Loan Bank advances (9,000) -
Net proceeds from issuance of subordinated debentures - 9,644
--------- ---------
Net cash (used) provided by financing activities (53,877) 174,527
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 26,247 (393)
CASH AND CASH EQUIVALENTS, beginning of period 11,503 13,265
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 37,750 $ 12,872
========= =========
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $18,963 $5,446
======= ======
Income taxes paid $ - $3,524
======= ======
NONCASH INVESTING ACTIVITIES DURING THE PERIOD:
Transfers from loans to foreclosed real estate $ 3,066 $1,221
======= ======
Loans to facilitate sales of foreclosed real estate $ - $ 166
======= ======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(UNAUDITED)
1. Basis of Presentation:
----------------------
The consolidated financial statements include the accounts of LIFE
Financial Corporation (the "Company") and its subsidiaries, LIFE Bank (formerly
Life Savings Bank, Federal Savings Bank), (the "Bank") and Life Investment
Holdings, Inc. All material intercompany accounts and transactions have been
eliminated in consolidation.
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 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 over-
allotment option, bringing the total shares outstanding to 6,546,716. The
consolidated financial condition and results of operations of the Company for
the periods prior to the date of Reorganization consist of those of the Bank.
Since the Reorganization and the IPO, the Company has purchased residual
assets, restricted cash and the subordinated debentures 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 Company'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
Company have been from deposits, Federal Home Loan Bank ("FHLB") advances, $275
million in lines of credit from two major investment banks, a $40 million
residual financing line of credit, as well as from loan sales and
securitizations. As of September 30, 1998, the Bank had three depository branch
offices in San Bernardino, Riverside and Redlands, California, nine retail
lending offices in Southern California, four regional loan centers located in
Riverside, California, Jacksonville, Florida, the Boston, Massachusetts area and
the Denver, Colorado metropolitan area, a telemarketing center located in
Riverside, California and a capital markets group located in Seattle,
Washington.
4
<PAGE>
The accompanying unaudited 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. Certain reclassifications have been made to
the consolidated financial statements for 1997 to conform to the 1998
presentation. The results of operations for the three and nine month periods
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for the entire fiscal year.
2. Approved Stock Compensation Plans
---------------------------------
On November 21, 1996, the Board of Directors of the Bank adopted the Life
Bank 1996 Stock Option Plan (the "1996 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 1996 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 1996 Option
Plan will be in effect for a period of ten years from the adoption by the Board
of Directors. Options granted under the 1996 Option Plan will be made at an
exercise price equal to the fair market value of the stock 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 which change in control did not include the
reorganization of the Bank into the holding company. 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
Board of Directors. The options granted under the 1996 Option Plan will vest at
a rate of 33.3% per year, beginning on November 21, 1999. At December 31,
1997, there were 27,540 options held by three retired directors which were
exercisable. On May 20, 1998, 9,180 options were exercised; the remaining
18,360 options are held by two retired directors as of September 30, 1998.
The Board of Directors of the Company has adopted the LIFE Financial
Corporation 1997 Stock Option Plan (the "1997 Option Plan"), which became
effective upon the Reorganization (the 1996 Option Plan and the 1997 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 that were exchanged for Bank options
pursuant to the 1996 Option Plan for issuance under the Option Plans. Stock
options with respect to shares of the Bank's Common Stock granted under the 1996
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. Through September 30, 1998, 201,000
shares of the 1997 Option Plan were granted at exercise prices ranging from
$11.00 to $18.50 per share. The options granted under the 1997 Option Plan will
vest at a rate of 33.3% per year, beginning on June 30, 2000. Under the 1997
Option Plan, there were 17,500 options at December 31, 1997 and September 30,
1998 held by one retired director which were exercisable.
3. Comprehensive Income
--------------------
The Company adopted Statement Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" effective with the fiscal year beginning
January 1, 1998. SFAS No. 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings, paid-in capital in the equity section of the
statement of financial position. The Company has no differences between net
income and comprehensive income for the nine months ended September 30, 1998.
5
<PAGE>
4. Earnings Per Share
------------------
The Company adopted SFAS No. 128 "Earnings Per Share" effective as of
December 31, 1997. The Statement establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly-held
common stock or potential common stock. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS calculation to the numerator and denominator of the
diluted EPS computation. The adoption of SFAS No. 128 did not have a significant
impact on the Company's earnings per share.
Earnings per share has been adjusted retroactively to reflect the three-
for-one stock exchange effected pursuant to the Reorganization and the stock
split effected in the form of a dividend during 1996.
The following table is a reconciliation of the numerators and denominators
of the basic and diluted EPS computations for the net earnings for the Company
(dollars in thousands, except share data):
<TABLE>
<CAPTION>
For the three months ended September 30,
---------------------------------------------------------------------------
1998 1997
----------------------------------- -------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $1,805 $3,931
====== ======
Basic EPS Earnings available
to common stockholders $1,805 6,558,997 $ 0.28 $3,931 6,537,377 $0.60
====== =====
Effect of Dilutive Securities
Options - 214,457 - 316,207
------ ---------- ------ ----------
Diluted EPS Earnings available
to common stockholders plus
assumed conversions $1,805 6,773,454 $ 0.27 $3,931 6,853,584 $0.57
====== ========== ====== ====== ========== =====
<CAPTION>
For the nine months ended September 30,
---------------------------------------------------------------------------
1998 1997
----------------------------------- -------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Net Earnings $6,675 $7,695
====== ======
Basic EPS Earnings available
to common stockholders $6,675 6,552,192 $ 1.02 $7,695 4,320,270 $1.78
====== =====
Effect of Dilutive Securities
Options - 289,025 - 116,083
------ ---------- ------ ----------
Diluted EPS Earnings available
to common stockholders plus
assumed conversions $6,675 6,841,217 $ 0.98 $7,695 4,436,353 $1.73
====== ========== ====== ====== ========== =====
</TABLE>
6
<PAGE>
5. FIRSTPLUS Financial Group merger
--------------------------------
On March 11, 1998, the Company entered into an agreement and plan of merger
("Merger Agreement") with FIRSTPLUS Financial group, Inc. ("FIRSTPLUS"). The
Merger Agreement provided for the merger of the Company with and into FIRSTPLUS,
with FIRSTPLUS as the surviving corporation. Under the Merger Agreement, at the
effective date of the merger, each outstanding share of Company common stock
would have been converted into the right to receive between 0.500 and 0.667
share of FIRSTPLUS common stock. On October 9, 1998, the Company advised
FIRSTPLUS that it was terminating the Merger Agreement based upon, among other
reasons, certain breaches of the Merger Agreement by FIRSTPLUS. On October 19,
1998, the Company filed a lawsuit against FIRSTPLUS arising out of the Merger
Agreement in the United States Federal District Court for Dallas, Texas.
6. Recent Accounting Pronouncements
--------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131 establishes
standards of reporting by publicly held business enterprises and requires
disclosures for each segment that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. It requires limited segment data on a
quarterly basis. It also requires geographic data by country, as opposed to
broader geographic regions, as permitted under current standards. SFAS No. 131
is effective for the fiscal years beginning after December 15, 1997 with earlier
application permitted. The Company does not anticipate the adoption of SFAS No.
131 will have a material impact on its financial reporting.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
adoption of this standard is not expected to have a material effect on the
Company's financial condition, results of operation and cash flows.
In October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage-Banking Enterprise", which is effective for the first fiscal quarter
beginning after December 15, 1998. This statement amends SFAS No. 65,
"Accounting for Certain Mortgage-Backed Activities" to require that after
securitization of the mortgage loans held for sale, an entity engaged in
mortgage-banking activities classify the resulting mortgage-backed securities or
retained interest based on its ability and intent to sell or hold those
investments. Management does not anticipate that adoption of this statement
will have a material impact on the Company's financial condition, results of
operation and cash flows.
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 Annual
Report on Form 10-K, which focuses upon relevant matters occurring during the
year ended December 31, 1997. Accordingly, the ensuing discussion focuses upon
the material matters at and for the three months and nine months ended September
30, 1998.
7
<PAGE>
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
("Originators") throughout the country. The Company funds substantially all of
the loans which it originates or purchases through deposits, internally
generated funds, FHLB advances and various lines of credit. 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 or sell loans is influenced by
the general level of product available from its correspondent relationships and
the willingness of investors to purchase the loans at an acceptable price to the
Company. Due to substantial activity in the purchase and sale of loans in
recent years, 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 $1.8 million for the three months ended September 30, 1998
compared to $3.9 million for the three months ended September 30, 1997, a
decrease of $2.1 million. For the nine months ended September 30, 1998, the
Company recorded net income of $6.7 million compared to $7.7 million for the
nine months ended September 30, 1997. The declines in net income for the three
and nine month periods ending September 30, 1998 are primarily due to the pre-
tax write-down on the residual assets for $5.0 million for the three months
ended September 30, 1998 and $8.5 million for the nine months ended September
30, 1998. For the three months ended September 30, 1998 and September 30, 1997,
the diluted earnings per share were $0.27 and $0.57, respectively. This decline
is principally due to the increase in shares outstanding due to the completion
of the Company's IPO on June 30, 1997. The diluted earnings per share for the
nine months ended September 30, 1998 were $0.98 compared to $1.73 for the nine
months ended September 30, 1997. The decrease in earnings per share for the
nine months was partially attributable to an increase in shares outstanding due
to the completion of the Company's IPO on June 30, 1997 combined with the
decline in earnings.
Interest Income
- ---------------
Interest income was $11.6 million for the three months ended September 30,
1998 compared to $5.7 million for the three months ended September 30, 1997 due
primarily to an increase in the average balance of interest-earning assets
offset partially by a slight decline in the yield on those assets. Average
interest-earning assets increased to $492.4 million for the three months ended
September 30, 1998 compared to $239.0 million for the three months ended
September 30, 1997. The yield on interest-earning assets decreased to 9.40% for
the three months ended September 30, 1998 compared to 9.53% for the three months
ended September 30, 1997. The largest single component of interest-earning
assets was loans receivable, net, which were $396.1 million with a yield of
9.57% for the three months ended September 30, 1998 compared to $195.9 million
with a yield of 9.76% for the three months ended September 30, 1997. The
increase in average loans receivable, net was due to an increase in loans held-
for-sale. Average loans held-for-sale were $380.9 million for the three months
ended September 30, 1998 compared to $170.7 million for the three months ended
September 30, 1997.
8
<PAGE>
Interest income for the nine months ended September 30, 1998 was $31.0
million, compared to $12.2 million for the nine months ended September 30, 1997,
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 $432.6 million for the nine months ended September 30, 1998
compared to $176.1 million for the nine months ended September 30, 1997. The
yield on interest-earning assets increased to 9.57% for the nine months ended
September 30, 1998 compared to 9.20% for the nine months ended September 30,
1997. The largest single component of interest-earning assets was loans
receivable, net, which were $339.2 million with a yield of 9.82% for the nine
months ended September 30, 1998, compared to $140.9 million with a yield of
9.46% for the nine months ended September 30, 1997.
Interest Expense
- ----------------
Interest expense increased to $7.0 million for the three months ended
September 30, 1998 compared to $3.1 million for the three months ended September
30, 1997 due primarily to an increase in the average interest-bearing
liabilities. Reliance on certificate accounts and an increased usage of the
various lines of credit resulted in an decrease in the average cost of interest-
bearing liabilities to 6.11% for the three months ended September 30, 1998
compared to 6.15% for the three months ended September 30, 1997. Average
interest-bearing liabilities were $451.0 million for the three months ended
September 30, 1998 compared to $200.4 million for the three months ended
September 30, 1997. The largest component of average interest-bearing
liabilities was certificate accounts, which averaged $225.9 million with a cost
of 5.87% for the three months ended September 30, 1998, compared to $142.5
million with a cost of 6.02% for the three months ended September 30, 1997.
The second largest component of average interest-bearing liabilities is
borrowings, which increased to an average balance of $196.3 million with a cost
of 6.95% for the three months ended September 30, 1998 compared to $39.7 million
with a cost of 8.28% for the three months ended September 30, 1997. In addition
to the subordinated debentures (Debentures) which were issued during 1997, the
Company began utilizing two warehouse lines of credit and a residual financing
line for total lines of $315 million which are indexed to London Interbank
Offering Rate index ("LIBOR").
For the nine months ended September 30, 1998, interest expense was $17.8
million compared to $7.1 million for the nine months ended September 30, 1997
due to an increase in the average interest-bearing liabilities combined with an
increase in the rate paid on those liabilities. On March 14, 1997, the Company
issued $10 million in Debentures through a private placement and pursuant to a
Debenture Purchase Agreement. The Debentures mature on March 15, 2004 and bear
interest at a rate of 13.5% per annum, payable semi-annually. The Debentures
are redeemable at the option of the Company, in whole or in part, at any time
after September 15, 1998 at the aggregate principal amount thereof, plus accrued
and unpaid interest, if any. By September 15, 1998, $7.0 million of this
debentures were called for payment on or before December 15, 1998. This issuance
of debentures, combined with an increased reliance on certificate accounts and
other borrowings, resulted in an increase in the average interest-bearing
liabilities to $390.4 million for the nine months ended September 30, 1998
compared to $161.0 million for the nine months ended September 30, 1997. The
decline in the cost on borrowings to 7.15% for the nine months ended September
30, 1998 compared to 8.11% for the nine months ended September 30, 1997 reflects
the higher proportional average balance of warehouse lines of credit to the
average balance of subordinated debt during the nine months ended September 30,
1998.
The largest component of average interest-bearing liabilities was
certificate accounts, which averaged $224.6 million with a cost of 5.92% for the
nine months ended September 30, 1998 compared to $116.0 million with a cost of
5.87% for the nine months ended September 30, 1997. The second largest
component of average interest-bearing liabilities is borrowings, which increased
to an average balance of $139.4 million with a cost of 7.15% for the nine months
ended September 30, 1998 compared to $27.3 million with a cost of 8.11% for the
nine months ended September 30, 1997. This decline in the cost of borrowings is
reflective of the higher proportional average balance of the warehouse lines of
credit to the average balance of the subordinated debt during the nine months
ended September 30, 1998.
9
<PAGE>
Net Interest Income Before Provision for Loan Losses
- ----------------------------------------------------
Net interest income before provision for loan losses for the three months
ended September 30, 1998 was $4.6 million compared to $2.6 million for the three
months ended September 30, 1997. 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 $492.4 million with a yield of 9.40% for the three
months ended September 30, 1998 compared to $239.0 million with a yield of 9.53%
for the three months ended September 30, 1997. Average interest-bearing
liabilities increased to $451.0 million with a cost of 6.11% for the three
months ended September 30, 1998 compared to $200.4 million with a cost of 6.15%
for the three months ended September 30, 1997. The net interest margin
increased to 3.75% for the three months ended September 30, 1998 compared to
4.38% for the three months ended September 30, 1997. The ratio of interest-
earning assets to interest-bearing liabilities was 109.18% for the three months
ended September 30, 1998 compared to 119.29% for the three months ended
September 30, 1997.
Net interest income before provision for loan losses for the nine months
ended September 30, 1998 was $13.2 million compared to $5.1 million for the nine
months ended September 30, 1997. This increase is the net effect of an increase
in average interest-earning assets and average interest-bearing liabilities, an
increase in the net interest margin and the ratio of interest-earning assets to
interest-bearing liabilities. Average interest-earning assets increased to
$432.6 million with a yield of 9.57% for the nine months ended September 30,
1998 compared to $176.1 million with a yield of 9.20% for the nine months ended
September 30, 1997. Average interest-bearing liabilities increased to $390.4
million with a cost of 6.11% for the nine months ended September 30, 1998
compared to $161.0 million with a cost of 5.88% for the nine months ended
September 30, 1997. The net interest margin was 4.07% for the nine months ended
September 30, 1998 compared to 3.83% for the nine months ended September 30,
1997. The ratio of interest-earning assets to interest-bearing liabilities was
110.81% for the nine months ended September 30, 1998 compared to 109.33% for the
nine months ended September 30, 1997.
10
<PAGE>
Average Balance Sheets. The following tables set forth certain information
- ----------------------
relating to the Company for the three month and nine month periods ended
September 30, 1998 and 1997. 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 Nine months ended
September 30, 1998 September 30, 1997 September 30, 1998
----------------------------- ----------------------------- -----------------------------
(Dollars in thousands)
Assets: Average Average Average Average Average Average
Interest-earning assets: Balance Interest Yield/Cst Balance Interest Yield/Cst Balance Interest Yield/Cst
-------- -------- --------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning deposits and
short-term investments $ 44,497 $ 691 6.16% $ 19,469 $ 290 5.96% $ 43,972 $ 1,889 5.74%
Investment securities(l) 6,406 106 6.56 9,043 131 5.79 6,534 294 6.02
Loans receivable, net(2) 396,093 9,551 9.57 195,860 4,781 9.76 339,174 24,914 9.82
Mortgage-backed securities, net(l) 8 - 0.00 9 - 0.00 9 - 0.00
Residual assets 45,386 1,220 10.66 14,644 495 13.52 42,945 3,951 12.30
-------- ------- -------- ------ -------- -------
Total interest-earning assets 492,390 11,568 9.40 239,025 5,697 9.53 432,634 31,048 9.57
------- ------ -------
Non-interest-earning assets(3) 44,901 27,771 42,184
-------- -------- --------
Total assets(3) $537,291 $266,796 $474,818
======== ======== ========
Liabilities and Equity:
Interest-bearing liabilities:
Passbook accounts 4,355 27 2.46 $ 4,031 21 2.08 $ 4,144 76 2.45
Money market accounts 5,226 67 5.09 2,959 22 2.97 3,834 141 4.92
Checking accounts 19,295 76 1.56 11,212 70 2.50 18,455 238 1.72
Certificate accounts 225,861 3,343 5.87 142,517 2,146 6.02 224,565 9,938 5.92
-------- ------- -------- ------ -------- -------
Total deposit accounts 254,737 3,513 5.47 160,719 2,259 5.62 250,998 10,393 5.54
Borrowings 196,272 3,438 6.95 39,661 821 8.28 139,440 7,452 7.15
-------- ------- -------- ------ -------- -------
Total interest-bearing liabilities 451,009 6,951 6.11 200,380 3,080 6.15 390,438 17,845 6.11
------- ------ -------
Non-interest-bearing liabilities(3) 25,877 27,523 25,838
-------- -------- --------
Total liabilities(3) 476,886 227,903 416,276
Equity(3) 60,405 38,893 58,542
-------- -------- --------
Total liabilities and equity(3) $537,291 $266,796 $474,818
======== ======== ========
Net interest income before
provision for loan losses $ 4,617 $2,617 $13,203
======= ====== =======
Net interest rate spread(4) 3.29 3.38 3.46
Net interest margin(5) 3.75 4.38 4.07
Ratio of interest-earning assets
to interest-bearing liabilities 109.18% 119.29% 110.81%
<CAPTION>
Nine months ended
September 30, 1997
-----------------------------
Assets: Average Average
Interest-earning assets: Balance Interest Yield/Cst
-------- -------- ---------
<S> <C> <C> <C>
Interest-earning deposits and
short-term investments $ 15,387 $ 719 6.23%
Investment securities(l) 8,901 376 5.63
Loans receivable, net(2) 140,916 10,001 9.46
Mortgage-backed securities, net(l) 9 - 0.00
Residual assets 10,854 1,056 12.97
-------- -------
Total interest-earning assets 176,067 12,152 9.20
-------
Non-interest-earning assets(3) 19,302
--------
Total assets(3) $195,369
========
Liabilities and Equity:
Interest-bearing liabilities:
Passbook accounts $ 4,027 63 2.09
Money market accounts 2,978 67 3.00
Checking accounts 10,691 201 2.51
Certificate accounts 116,035 5,109 5.87
-------- -------
Total deposit accounts 133,731 5,440 5.42
Borrowings 27,308 1,661 8.11
-------- -------
Total interest-bearing liabilities 161,039 7,101 5.88
-------
Non-interest-bearing liabilities(3) 12,439
--------
Total liabilities(3) 173,478
Equity(3) 21,891
--------
Total liabilities and equity(3) $195,369
========
Net interest income before
provision for loan losses $ 5,051
=======
Net interest rate spread(4) 3.32
Net interest margin(5) 3.83
Ratio of interest-earning assets
to interest-bearing liabilities 109.33%
</TABLE>
(1) Includes unamortized discounts and premiums.
(2) Amount is net of deferred loan origination fees, unamortized discounts,
premiums and allowance for loan losses and includes loans held-for-sale,
non-performing loans and warehouse financing receivable.
(3) Average balances are measured on a month-end basis.
(4) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
11
<PAGE>
Provision for Loan Losses
- -------------------------
The allowance for loan losses is based upon a number of factors, including
current economic conditions, actual loss experience and industry trends. The
Company's non-performing loans consist of one- to-four family residential
mortgage loans and consumer loans. Management believes that the allowance for
loan losses at September 30, 1998 and 1997 was adequate to absorb known and
inherent risks in the Company's loan portfolio. Based upon management's
analysis, there were provisions for loan losses of $736,000 and $400,000 for the
three month periods ended September 30, 1998 and 1997, respectively.
Provisions for loan losses were $2.4 million for the nine months ended
September 30, 1998 compared to $900,000 for the nine months ended September 30,
1997. The increase in provisions was based on charge offs for the nine months
ended September 30, 1998 combined with a re-evaluation of the composition of the
Company's loan portfolio. (See "Financial Condition")
Non-Interest Income
- -------------------
Net gains from mortgage financing operations for the three months ended
September 30, 1998 totaled $4.9 million, compared to $8.3 million for the
quarter ended September 30, 1997. This decrease was attributable to a pre-tax
$5.0 million mark-to-market write down of residual assets partially offset by an
increase in the level of mortgage financing operations, with loans sold and
securitized totaling $476.8 million (including $154.8 million in whole loan
sales) during the three months ended September 30, 1998, compared to loans
securitized totaling $100.9 million for the three months ended September 30,
1997. The write down of residual assets was directly the result of a decline in
interest rates and a corresponding increase in prepayments speeds associated
with the 1996-1, 1997-1A and 1B and 1997-2 securitizations which were issued
respectively in December 1996, March 1997 and September 1997. At September 30,
1998, the Company utilized prepayment assumptions ranging from 17% to 50%, an
estimated loss factor assumption ranging from 1.00% to 2.50% and a weighted
average discount rate of 13.5% to value residual assets. The residual asset
valuation associated with the 1998-1 securitization completed during the three
months ended September 30, 1998 utilized prepayment assumptions of 35% on
adjustable rates and a 36.6% ramped CPR on fixed rates, an estimated loss factor
assumption of 1%, and a weighted average discount rate of 13.5%. Net gains from
mortgage financing operations as a percent of loans sold or securitized
(excluding the effect of the $5.0 million write down) was 2.13% for the three
months ended September 30, 1998, as compared to 8.27% for the three months ended
September 30, 1997. This decrease in percentage reflects current market
conditions and prepayment assumptions on residual asset valuations. During the
three months ended September 30, 1998, there were no loans sold to FIRSTPLUS of
Dallas, Texas. Loans originated and purchased totaled $368.3 million for the
three months ended September 30, 1998, compared to $194.4 million for the three
months ended September 30, 1997.
For the nine months ended September 30, 1998, net gains from mortgage
financing operations totaled $14.8 million compared to $17.4 million for the
nine months ended September 30, 1997. This decrease was primarily attributable
to the write down on residual assets of $8.5 million for the nine months ended
September 30, 1998. This decline was offset by an increase in the level of
mortgage financing operations, with loans sold or securitized totaling $961.7
million (including $577.2 million in whole loans sales) during the nine months
ended September 30, 1998, compared to loans sold or securitized totaling $277.3
million (including $73.3 million in whole loans sales) for the nine months ended
September 30, 1997. Net gains from mortgage financing operations as a percent
of loans sold and securitized (excluding the effect of the $8.5 million write
down of residual assets) was 2.60% for the nine months ended September 30, 1998
compared to 6.28% for the nine months ended September 30, 1997. This decrease
in percentage reflected the effects of the prepayment assumptions used in the
securitization of loans completed in 1997 versus 1998 and the percentage of
whole loans sales in 1998 of 60.0% compared to whole loan sales in 1997 of
26.4%. For the nine months ended September 30, 1998, $210.5 million of the
$961.7 million (or 21.9%) was sold to FIRSTPLUS for a gain of $6.6 million.
Loans originated and purchased totaled $930.9 million for the nine months ended
September 30, 1998 compared to $435.0 million for the nine months ended
September 30, 1997.
12
<PAGE>
Non-Interest Expense
- --------------------
Non-interest expense was $7.1 million for the three months ended September
30, 1998 compared to $4.2 million for the three months ended September 30, 1997.
For the nine months ended September 30, 1998, non-interest expense was $18.9
million compared to $9.2 million for the nine months ended September 30, 1997.
The increase was due primarily to an increase in compensation and benefits and
other operating expenses resulting from the expansion of mortgage financing
operations.
Compensation and benefits increased to $3.1 million for the three months
ended September 30, 1998 from $2.5 million for the three months ended September
30, 1997. For the nine months ended September 30, 1998, compensation and
benefits were $8.6 million compared to $5.5 million for the nine months ended
September 30, 1997. These costs are directly related to the expansion of the
mortgage financing operations and the corresponding increase in personnel, to an
average of 343 employees for the three months ended September 30, 1998 compared
to 180 employees for the three months ended September 30, 1997. Average number
of employees for the nine months ended September 30, 1998 were 302 compared to
163 for the nine months ended September 30, 1997.
Premises and occupancy expenses increased to $963,000 for the three months
ended September 30, 1998 compared to $332,000 for the three months ended
September 30, 1997, and were $2.4 million for the nine months ended September
30, 1998 compared to $805,000 for the nine months ended September 30, 1997 due
to the expansion of the mortgage financing operation and the addition of the
regional operating centers in Denver, Colorado, Attleboro, Massachusetts, and
San Jose, California, as well as the opening of the new Corporate Headquarters
and regional lending center located in Riverside, California, and the relocation
of the Florida regional office, the addition of nine low cost retail lending
offices in California, the opening of retail bank branches in Riverside and
Redlands, California and additional office space for the expansion of the loan
servicing operations in March 1998. The Company anticipates that premises and
occupancy expense will continue to increase as the Company expands into new
retail lending and retail banking offices as evidenced by the opening of a 67
seat national telemarketing center in May, 1998 in Riverside and the Huntington
Beach, California branch opening anticipated in the fourth quarter of 1998.
As a result of the expansion noted, other operating expenses increased as
well. Data processing increased to $406,000 for the three months ended
September 30, 1998 compared to $229,000 for the three months ended September 30,
1997, and was $1.1 million for the nine months ended September 30, 1998 compared
to $524,000 for the nine months ended September 30, 1997. Marketing increased
to $788,000 for the three months ended September 30, 1998 compared to $72,000
for the three months ended September 30, 1997, and was $1.8 million for the nine
months ended September 30, 1998 compared to $195,000 for the nine months ended
September 30, 1997. The increase in marketing reflects an increased emphasis on
radio and mail advertising in order to increase demand for mortgage banking
operations. Professional services increased to $360,000 for the three months
ended September 30, 1998 compared to $111,000 for the three months ended
September 30, 1997, and was $1.2 million for the nine months ended September 30,
1998 compared to $243,000 for the nine months ended September 30, 1997. The
increase in professional services was partially related to the merger-related
costs incurred inconjunction with the FIRSTPLUS transaction. Telephone and other
expense increased to $321,000 and $1.1 million, respectively, for the three
months ended September 30, 1998 compared to $222,000 and $680,000 for the three
months ended September 30, 1997 and were $814,000 and $2.7 million for the nine
months ended September 30, 1998 compared to $439,000 and $1.2 million for the
nine months ended September 30, 1997.
Income Taxes
- ------------
The provision for income taxes decreased to $1.4 million for the three
months ended September 30, 1998 compared to $2.8 million for the three months
ended September 30, 1997 due to a decrease in income before income tax
provision. Income before income tax provision decreased to $3.2 million for the
three months ended September 30, 1998 from $6.7 million for the three months
ended September 30, 1997. The effective tax rate increased to 43.2% for the
three months ended September 30, 1998 from 41.7% for the three months ended
September 30, 1997 due to $94,000 of non-tax deductible merger-related costs
expensed during the quarter.
13
<PAGE>
The provision for income taxes decreased to $5.0 million for the nine
months ended September 30, 1998 compared to $5.5 million for the nine months
ended September 30, 1997. Income before income tax provision decreased to $11.6
million for the nine months ended September 30, 1998 compared to $13.2 million
for the nine months ended September 30, 1997. The effective tax rate increased
to 42.7% for the nine months ended September 30, 1998 compared to 41.6% for the
nine months ended September 30, 1997 due to the inclusion of merger-related
costs of $300,000 during the period.
COMPARISON OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Total assets decreased to $380.3 million as of September 30, 1998 compared
to $411.8 million as of December 31, 1997. This increase was attributable to
the decrease in loans held-for-sale during the period ended September 30, 1998
due to a $322.1 million securitization during the quarter ending September 30,
1998. Loans held-for-sale totaled $213.9 million as of September 30, 1998
compared to $272.7 million as of December 31, 1997. Loans held-for-investment
decreased to $16.1 million as of September 30, 1998 compared to $29.1 million as
of December 31, 1997 due to a whole loan sale and normal loan payment activity.
Warehouse financing receivable decreased to $1.5 million as of September
30, 1998 compared to $16.6 million as of December 31, 1997. This decline
reflects the Company dissolving a joint venture at the end of 1997. The
warehouse financing receivable business was started internally during 1998.
Current market conditions which are effecting mortgage lenders and tightened
credit policies initiated by the Company have caused this portfolio to reflect
minimal growth.
Residual assets and restricted cash increased slightly to $47.9 million and
$12.9 million, respectively, as of September 30, 1998 compared to $40.7 million
and $12.3 million as of December 31, 1997. This increase reflects the additional
residuals from the pre-fund on the 1997-3 securitization during the first
quarter and the residual from the 1998-1 securitization during the third quarter
offset by the residual asset write down as described previously. Mortgage
servicing rights increased as a result of the loan sales with servicing retained
to $13.2 million as of September 30, 1998 compared to $8.5 million as of
December 31, 1997.
Cash and cash equivalents were $37.8 million as of September 30, 1998
compared to $11.5 million as of December 31, 1997. Cash and cash equivalents
increased by $26.3 million as of September 30, 1998 due to the timing of loan
originations and purchases. Premises and equipment increased to $7.0 million as
of September 30, 1998 compared to $4.8 million as of December 31, 1997. This
increase of $2.2 million is primarily due to the loan servicing department
moving to a new location and retrofitting their previous facility in order to
house the new Call Center operation which opened in May, 1998. Real estate
owned increased to $2.0 million as of September 30, 1998 compared to $1.4
million as of December 31, 1997 as part of the Company's continuing effort to
resolve problem assets.
Other assets were $20.5 million as of September 30, 1998 compared to $5.4
million as of December 31, 1997. The increase was due primarily to a $16
million receivable with the cash received on October 1.
The Company increased its liabilities by increasing deposit accounts to
$253.3 million as of September 30, 1998 compared to $211.8 million as of
December 31, 1997. The major component of deposit accounts is certificates of
deposit, which increased to $230.7 million as of September 30, 1998 compared to
$193.8 million as of December 31, 1997.
The Company decreased FHLB advances and borrowings from $119.2 million at
December 31, 1997 to $23.8 million at September 30, 1998 due to the increase in
deposit accounts of $41.5 million and a reduction in the loan receivable balance
as of September 30, 1998 of $58.8 million due to loans sales.
Accounts payable and other liabilities increased to $41.7 million as of
September 30, 1998 compared to $26.0 million as of December 31, 1997 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.
14
<PAGE>
Stockholders' equity increased to $61.5 million as of September 30, 1998
from $54.8 million as of December 31, 1997 due to the earnings of $6.7 million.
The Company's non-performing assets increased to $8.6 million as of
September 30, 1998 compared to $6.6 million as of December 31, 1997. The
increase of $2.0 million is due primarily to non-accrual loans with an increase
of $2.9 million in one- to-four family residential loans offset by a decrease of
$1.4 million in consumer loans. Non-performing loans as a percent of gross
loans receivable increased to 2.95% as of September 30, 1998 from 1.76% as of
December 31, 1997. Non-performing assets as a percent of total assets increased
to 2.27% as of September 30, 1998 from 1.59% as of December 31, 1997. The
following table sets forth the non-performing assets at September 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1998 1997
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Non-accrual loans $6,645 $5,126
Foreclosed real estate, net (1) 2,002 1,440
------ ------
Total non-performing assets $8,647 $6,566
====== ======
Allowance for loan losses as a percent of gross loans receivable(2) 0.78% 0.88%
Allowance for loan losses as a percent of total non-performing loans(3) 26.35 50.20
Non-performing loans as a percent of gross loans receivable(2) 2.95 1.76
Non-performing assets as a percent of total assets(4) 2.27 1.59
</TABLE>
_______________
(1) Foreclosed real estate balances are shown net of related loss allowances.
(2) Gross loans receivable is comprised of loans held-for-sale and loans held-
for-investment.
(3) Non-performing loans consisted of all loans 90 days or more past due and all
other non-accrual loans.
(4) Non-performing assets is comprised of non-accrual loans and foreclosed real
estate.
The Company, in consideration of the current economic environment and the
condition of the loan portfolio, has established an allowance for loan losses as
of September 30, 1998 of $1.8 million compared to $2.6 million as of December
31, 1997. 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 consist of one- to-four family residential mortgage loans
and consumer loans. Management believes that the allowance for loan losses at
September 30, 1998 was adequate to absorb known and inherent risks in the
Company's loan portfolio. No assurances can be given, however, that economic
conditions which may adversely affect the Company's or the Bank's service area
or other circumstances will not be reflected in increased losses in the loan
portfolio. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance or to
take charge-offs (reductions of the allowance) in anticipation of losses. The
following table sets forth the activity in the Company's allowance for loan
losses for the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Balance as of December 31, 1997 $2,573
Add:
Provision for loan losses 2,366
Recoveries of previous charge-offs 68
Less:
Charge-offs 3,256
------
Balance as of September 30, 1998 $1,751
======
</TABLE>
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the three months ended September 30, 1998, current market conditions
have effected the liquidity of numerous mortgage lenders. The Company's
warehouse lines of credit as of September 30, 1998 remain at a balance of $275
million with one of the lenders evaluating the possibility of increasing the
limit. The lines were paid off as of September 30, 1998. The Company has other
sources of funds which continue to lessen the impact of current market
conditions on its liquidity. The Company's other primary sources of funds are
deposits, 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 4%. The Bank's average liquidity ratios were
11.18% and 9.23% for the nine months ended September 30, 1998 and September 30,
1997, respectively. The Bank had $30.8 million in deposits maturing within one
month as of September 30, 1998. The Bank anticipates that it will retain a
portion of these accounts.
The Company's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows provided by (used in) operating activities were $54.9
million and $(159.3) million for the nine months ended September 30, 1998 and
1997, respectively. Such cash flows primarily consisted of loans originated and
purchased for sale (net of loan fees), of $930.9 million and $435.0 million, net
of proceeds from the sale and securitization of loans held-for-sale of $984.0
million and $287.9 million for the nine months ended September 30, 1998 and
1997, respectively. Net cash provided by (used from) investing activities were
$25.2 million and $(15.6) million for the nine months ended September 30, 1998
and 1997, respectively, and consisted primarily of principal collections on
loans. Proceeds from the principal collections were $37.7 million and $(17.6)
million for the nine months ended September 30, 1998 and 1997, respectively.
Net cash provided from financing activities consisted primarily of net activity
in deposit accounts and borrowings. The net increase in deposits and borrowings
was $53.9 million and $174.5 million for the nine months ended September 30,
1998 and 1997, respectively. The Company made repayments on the lines of credit
of $86.4 million for the nine months ended September 30, 1998 and were provided
funds from these lines of $58.2 million for the nine months ended September 30,
1997. Net deposits increased by $41.5 million and $74.1 million for the nine
months ended September 30, 1998 and 1997, respectively. During the nine months
ended September 30, 1998, the Company reduced its FHLB advances by $9.0 million
and had no outstanding advances at the period end. During the quarter ended
March 31, 1997, the Company received the proceeds of $9.6 million on the
issuance of subordinated debentures. The Company received net proceeds from the
IPO of the Company's Common Stock of $32.5 million as of September 30, 1997.
The Company's most liquid assets are unrestricted cash and short-term
investments. The levels of these assets are dependent on the Company's
operating, lending and investing activities during any given period. At
September 30, 1998, cash and short-term investments totaled $37.8 million. The
Company has other sources of liquidity if a need for additional funds arises,
including the utilization of FHLB advances. Other sources of liquidity include
investment securities maturing within one year. The Bank also has two warehouse
lines of credit available in the amount of $275 million, of which zero had been
drawn upon at September 30, 1998. The Company has a residual financing line of
credit in the amount of $40.0 million, with an outstanding balance of $13.8
million as of September 30, 1998.
The 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, 1998, the Bank was considered
"adequately capitalized".
16
<PAGE>
The Bank was in compliance with the minimum capital requirements in effect
as of September 30, 1998. The following table reflects the required ratios and
the actual capital ratios of the Bank as of September 30, 1998:
<TABLE>
<CAPTION>
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent(a)
------- -------- ------ ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $29,530 $20,079 $9,451 5.88% 1.50%
Core $29,530 $20,079 $9,451 5.88% 3.00%
Risk-based $31,129 $29,012 $2,117 8.58% 8.00%
</TABLE>
(a) The percentages and ratios to be well-capitalized under prompt and
corrective action provisions as issued by the OTS are 10.00% for risk-based
assets, 5% for core capital and 6% for Tier I capital. At September 30, 1998,
the Bank's ratios were 8.58%, 5.88% and 8.14%, respectively.
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.
Under the framework, the Bank's capital levels at September 30, 1998 do not
allow the Bank to accept brokered deposits without the prior approval from the
regulators. The Bank had approximately $2.7 million of brokered deposits at
September 30, 1998. This is not expected to materially impact the Bank as it
has other sources of funds.
As of September 30, 1998, the Bank had outstanding commitments to originate
or purchase mortgage loans of $24.3 million compared to $29.2 million as of
December 31, 1997 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, 1998 compared to the period ended December 31, 1997 as discussed
in the notes to the audited consolidated financial statements of LIFE Financial
Corporation for the year ended December 31, 1997 included in the Company's
Annual Report on Form 10K.
Year 2000 Compliance: As a financial institution operating in multiple
---------------------
states, the Company is dependent on computer systems and applications to conduct
its business. The Year 2000 (Y2K) issue is the result of computer programs
being written using two digits rather than four digits to define the applicable
year. Many of the Company's computer programs that are data sensitive may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruption of
operations, including, among other things, a temporary inability to process
transactions or engage in normal business activities for both the Company and
its customers who rely on its financial products and services.
The Company is activity engaged in, and is currently executing, a
comprehensive risk-based plan designed to make its computer systems,
applications and facilities Y2K ready. The plan covers five stages including:
(i) awareness, (ii) assessment, (iii) renovation, (iv) validation and (v)
implementation. During the awareness phase, the Company identified the project
team and responsibilities, prepared and allocated the project budget, defined
the project scope and established program and management policies. This phase
although complete continues to be reviewed. The assessment phase, which
entailed an inventory of software, hardware, vendors, material customers, and
facilities has been completed. The renovation phase is currently in process and
the Company is utilizing internal resources to test all major missions critical
systems (deposit, loan and general ledger) which are provided by a service
bureau. The renovation process is targeted to be largely completed by December
31, 1998 through the use of internal resources. Inventoried systems have been
prioritized. All of the Company's computer hardware and software is being
tested, as well as network and telecommunications equipment. Non-compliant
systems are being reviewed for
17
<PAGE>
replacement. All equipment with date-sensitive operating controls have been
identified and are being tested. The Company's mission critical business
financial software was Y2K compliant as of May 15, 1998 and compliance testing
was completed during the end of September and the beginning of October. This
test work is currently in the validation stage but initial results reflected
minimal Y2K issues. Another mission critical system is the Federal Reserve
software system, this system is scheduled for testing during November 1998. The
software uses a combination of methodologies for date fields. Where possible,
date fields were expanded to a full eight digits. For those date fields that
were retained in a six-digit format, a windowing technique was used. If the last
two digits of the date are 00-49, the century is 2000. If the last two digits
are 50-99, the century is 1999. The validation phase is using a variety of test
strategies, including (but not limited to) testing of internal systems as they
relate to each other, as well as testing external interfaces with business
partners. Where appropriate, the testing is using an aged environment. Testing
of all mission critical systems by simulating various date scenarios is
scheduled to be completed by December 31, 1998 with the remainder of systems
scheduled to be tested by March 31, 1999. The final phase is implementation,
which involves the replacement of the remainder of the hardware and software
that is not compliant or requires updates. An institution-wide contingency plan
is in process and anticipated to be completed by the first quarter of 1999, with
the Y2K issues incorporated as part of the business continuation planning. These
plans, which are intended to enable the Company to continue to operate to the
extent that it can do so safely, include performing certain processes manually,
repairing or obtaining replacement systems, and changing suppliers. The Company
believes, however, that due to the widespread nature of the potential Y2K
issues, the contingency planning process is an ongoing one which will require
further modifications as the Company obtains additional information regarding
(1) the Company's internal systems and equipment during the renovation and
testing phases of its Y2K program, and (2) the status of third party Y2K
readiness.
To date, the amounts incurred and expensed for developing and implementing
the plan have not had a material effect on the Company's operations. The total
remaining cost for addressing Y2K compliance of approximately $600,000, which is
based upon management's current estimates, is not expected to be material to the
Company's operations. All remaining Y2K costs will be funded through operating
cash flows and will be funded by reallocating existing resources rather than
incurring incremental costs. The Company is initiating communications with its
critical external relationships to determine the extent to which the Company
will assess and attempt to mitigate its risks with respect to the failure of
these entities to be Year 2000 ready. The effect, if any, on the Company's
results of operations from the failure of such parties to be Year 2000 ready, is
not reasonably estimable.
The Company believes that completed modifications and conversions of its
internal systems and equipment will allow it to be Y2K compliant in a timely
manner. There can be no assurances, however, that the Company's internal
systems or equipment, or those of third parties on which the Company relies,
will be Y2K compliant in a timely manner or that the Company's or third parties
contingency plans will mitigate the effects of noncompliance. The Company is a
part of a regulated industry which has issued standards for Y2K and is
conducting audits to ensure compliance with Y2K guidelines. To date, the
Company has satisfied its regulators as to its compliance with Y2K guidelines.
The Company believes its most likely worst case scenario is that customers could
experience some manual processes or an inability to access their cash
immediately. Although, the Company does not believe that this scenario will
occur, it is assessing the effect of such scenarios by using current financial
data. In the event that these scenarios do occur, the Company does not expect
that it would have a material adverse effect on the Company's financial
position, liquidity and results of operation.
The preceding Y2K issue discussion contains various forward-looking
statements which represent the Company's belief or expectations regarding future
events. When used in the Y2K issue discussion, the words "believes," "expects,"
"estimates" and similar expressions are intended to identify forward-looking
statements. Forward-looking statements include, without limitation, the
Company's expectations as to when it will complete the renovation and testing
phases of its Y2K program as well as its Y2K contingency plans; its estimated
cost of achieving Y2K readiness; and the Company's belief that its internal
systems and equipment will be Y2K compliant in a timely manner. All forward-
looking statements involve a number of risks and uncertainties that could cause
the actual results to differ materially from the projected results. Factors
that may cause these differences include, but are not limited to, the
availability of qualified personnel and other information technology resources;
the ability to identify and renovate all data sensitive lines of computer code
or to replace embedded computer chips in affected systems and equipment; and the
actions of government agencies and other third parties with respect to Y2K
problems.
18
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
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 has 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. Management is continuing
to evaluate and refine its hedging policies. No hedging positions were
outstanding as of September 30, 1998 or December 31, 1997.
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
___________
* 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 CORPORATION
November 13, 1998 By:/s/ Daniel L. Perl
- ----------------- -----------------------------------
Date Daniel L. Perl
President and Chief
Executive Officer
(principal executive officer)
November 13, 1998 /s/ Jeffrey L. Blake
- ----------------- --------------------------------------
Date Jeffrey L. Blake
Acting 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-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 22,550
<INT-BEARING-DEPOSITS> 12,920
<FED-FUNDS-SOLD> 15,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 231,707
<ALLOWANCE> 1,751
<TOTAL-ASSETS> 380,343
<DEPOSITS> 253,271
<SHORT-TERM> 20,787
<LIABILITIES-OTHER> 41,741
<LONG-TERM> 3,000
0
0
<COMMON> 66
<OTHER-SE> 61,478
<TOTAL-LIABILITIES-AND-EQUITY> 380,343
<INTEREST-LOAN> 24,914
<INTEREST-INVEST> 208
<INTEREST-OTHER> 5,926
<INTEREST-TOTAL> 31,048
<INTEREST-DEPOSIT> 10,393
<INTEREST-EXPENSE> 17,845
<INTEREST-INCOME-NET> 13,203
<LOAN-LOSSES> 2,366
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 18,859
<INCOME-PRETAX> 11,644
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,675
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 0.98
<YIELD-ACTUAL> 9.57
<LOANS-NON> 6,645
<LOANS-PAST> 6,645
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,573
<CHARGE-OFFS> 3,256
<RECOVERIES> 68
<ALLOWANCE-CLOSE> 1,751
<ALLOWANCE-DOMESTIC> 1,751
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,599
</TABLE>
