<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, 1999
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 filing
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: 6,613,436 shares of
common stock, par value $0.01 per share, were outstanding as of November 10,
1999.
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION PAGE
Item 1 Consolidated Balance Sheets:
September 30, 1999 (unaudited) and December 31, 1998 ............................ 1
Consolidated Statements of Earnings
For the Three months ended September 30, 1999 and 1998 and
for the Nine months ended September 30, 1999 and 1998 (unaudited)............... 2
Consolidated Statements of Cash Flows:
For the Nine months ended September 30, 1999
and 1998 (unaudited)............................................................. 3
Consolidated Statements of Stockholders' Equity
For the Nine months ended September 30, 1999 and 1998 (unaudited)................ 4
Average Balance Sheets for the Three months ended September 30, 1999
and 1998 and for the Nine months ended September 30, 1999 and 1998 (unaudited)... 5
Notes to Consolidated Financial Statements (unaudited)........................... 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................... 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk....................... 19
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................................ 20
Item 2 Changes in Securities and Use of Proceeds........................................ 20
Item 3 Defaults Upon Senior Securities.................................................. 20
Item 4 Submission of Matters to a Vote of Security Holders.............................. 20
Item 5 Other Information................................................................ 20
Item 6 Exhibits and Reports on Form 8-K................................................. 21
</TABLE>
ii
<PAGE>
Item 1. Financial Statements.
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents.............................................. $ 97,684 $ 8,152
Mortgage and Other Securities.......................................... 85,435 52,304
Loans held for sale.................................................... 248,023 243,307
Loans held for investment - net of allowance........................... 96,343 91,017
Mortgage servicing rights.............................................. 15,536 13,119
Accrued interest receivable............................................ 3,064 2,762
Foreclosed real estate - net........................................... 3,030 1,898
Premises and equipment - net........................................... 6,145 7,145
Federal Home Loan Bank stock........................................... 2,686 2,463
Other assets........................................................... 6,528 5,911
-------- --------
TOTAL ASSETS........................................................ $564,474 $428,078
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts....................................................... $430,832 $323,476
Other borrowings....................................................... 59,257 39,977
Subordinated debentures................................................ 1,500 1,500
Accounts payable and other liabilities................................. 18,522 11,127
-------- --------
Total liabilities................................................... 510,111 376,080
-------- --------
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; 6,568,436 (1999) and 6,562,396
(1998) shares issued and outstanding................................. 66 66
Additional paid-in capital............................................. 42,243 42,223
Retained earnings, partially restricted................................ 13,189 9,709
Accumulated other adjustments to stockholders' equity.................. (1,135) --
-------- --------
Total stockholders' equity.......................................... 54,363 51,998
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $564,474 $428,078
======== ========
</TABLE>
Accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income:
Loans $ 9,683 $ 9,611 $ 29,437 $ 25,050
Securities held to maturity 8 60 54 207
Other interest-earning assets 741 2,172 4,967 6,109
---------- ---------- ---------- ----------
Total interest income 10,432 11,843 34,458 31,366
---------- ---------- ---------- ----------
Interest Expense:
Deposit accounts 5,259 3,513 15,856 10,393
Federal Home Loan Bank & other borrowings 844 3,085 2,490 6,407
Subordinated debentures 53 353 158 1,045
---------- ---------- ---------- ----------
Total interest expense 6,156 6,951 18,504 17,845
---------- ---------- ---------- ----------
Net Interest Income 4,276 4,892 15,954 13,521
Provision for loan losses 430 736 2,638 2,366
---------- ---------- ---------- ----------
Net Interest Income After Provision for
loan losses 3,846 4,156 13,316 11,155
Noninterest Income:
Loan servicing and other fees 1,410 1,162 3,521 4,129
Service charges on deposit accounts 90 50 253 123
Net gains from mortgage financing operations 4,273 6,047 8,657 16,541
Other income 581 125 689 415
---------- ---------- ---------- ----------
Total noninterest income 6,354 7,384 13,120 21,208
---------- ---------- ---------- ----------
Noninterest Expense:
Compensation and benefits 3,350 3,076 9,036 8,602
Premises and occupancy 1,009 963 2,921 2,444
Data processing 321 406 1,113 1,054
Net loss (gain) on foreclosed real estate 16 32 (59) 218
FDIC insurance premiums 60 39 200 99
Marketing 193 788 395 1,786
Telephone 186 321 803 814
Professional services 309 360 1,112 1,172
Other expense 1,750 1,135 3,506 2,670
Unscheduled Severance 1,199 -- 1,199 --
---------- ---------- ---------- ----------
Total noninterest expense 8,393 7,120 20,226 18,859
---------- ---------- ---------- ----------
Income Before Income Taxes 1,807 4,420 6,210 13,504
Provision for Income Taxes 770 1,885 2,730 5,733
---------- ---------- ---------- ----------
Net Income $ 1,037 $ 2,535 $ 3,480 $ 7,771
---------- ---------- ---------- ----------
Basic average shares outstanding 6,568,436 6,558,997 6,565,192 6,552,192
Basic earnings per share $ 0.16 $ 0.39 $ 0.53 $ 1.19
Diluted weighted average shares outstanding 6,623,906 6,773,454 6,609,858 6,841,217
Diluted earnings per share $ 0.16 $ 0.37 $ 0.53 $ 1.14
</TABLE>
Accompanying notes are an integral part of these 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,
----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998
--------------------- --------------------
<S> <C> <C>
Net Income 3,480 7,771
Adjustments to net income
Depreciation 1,372 1,244
Provision for loan losses 2,638 2,366
Accretion of deferred fees 393 (4)
Provision for losses on REO 32
(Gain) loss on sale of REO 368 87
Gain on sale of loans held for sale (13,228) (23,007)
Unrealized losses on residual assets 4,585 6,658
Net accretion of residual assets (3,313) (4,892)
Change in allowance on mortgage servicing rights 1,234 381
Amortization of mortgage servicing rights 3,671 1,909
Purchase and origination of loans held for sale (722,310) (930,884)
Proceeds from the sales of loans held for sale 619,737 963,526
(Increase) decrease in accrued interest receivable (302) 431
Deferred taxes 2,729 --
Increase (decrease) in accounts payable & other liabilities 4,465 10,362
Federal Home Loan Bank stock dividend (99) (63)
Decrease (increase) in other assets (616) (16,347)
---------------------- ---------------------
Net cash provided by (used in) operating activities (95,196) 19,570
---------------------- ---------------------
CASH FLOW FROM INVESTING ACTIVITIES
Principal payments on loans 90,702 52,847
Principal payments on securities 3,032 --
Proceeds from the sale of REO 3,355 1,882
Purchase of securities (45,244) --
Proceeds from maturities of securities 2,000 2,000
Additions to premise and equipment, net (323) (3,416)
Purchase of FHLB stock (124) (1,297)
Cash (paid) received on residual assets 4,674 --
---------------------- ---------------------
Net cash provided by (used in) investing activities 58,072 52,016
---------------------- ---------------------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in deposit accounts 107,356 42,919
Repayment of other borrowings (39,977) (86,383)
(Repayments of) proceeds from FHLB advances 59,257 (9,000)
Proceeds from stock options 20 --
--------------------- ---------------------
Net cash provided by (used in) financing activities 126,656 (52,464)
--------------------- ---------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 89,532 19,122
CASH AND CASH EQUIVALENTS, beginning of period 8,152 3,467
---------------------- ---------------------
CASH AND CASH EQUIVALENTS, end of period $ 97,684 $ 22,589
====================== =====================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 18,966 $ 18,963
====================== =====================
Income taxes paid $ 4,028 $ --
====================== =====================
NONCASH INVESTING ACTIVITIES DURING THE PERIOD:
Transfers from loans to foreclosed real estate $ 4,530 $ 3,066
====================== =====================
</TABLE>
Accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Accumulated Total
Common Paid-in Retained Other Stockholders'
Stock Capital Earnings Adjustments Equity
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 $65 $42,171 $ 8,650 $ -- $50,886
Exercise of stock options 1 52 -- 53
Net income 7,771 7,771
----------------------------------------------------------------------------------------
BALANCE, September 30, 1998 $66 $42,223 $16,421 $ -- $58,710
========================================================================================
BALANCE, December 31, 1998 $66 $42,223 $ 9,709 $ -- $51,998
Exercise of stock options -- 20 20
Net gain/(loss) on available
for sale mortgage securities (1,135) (1,135)
Net income 3,480 3,480
----------------------------------------------------------------------------------------
Comprehensive income 2,365
----------------------------------------------------------------------------------------
BALANCE, September 30, 1999 $66 $42,243 $13,189 $(1,135) $54,363
========================================================================================
</TABLE>
Accompanying notes are an integral part of these consolidated financial
statements.
4
<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, 1999 and 1998. 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 that are considered
adjustments to yields.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
(Dollars in thousands) September 30, 1999 September 30, 1998
- -------------------------------------------------------------------------- --------------------------------------
Assets Average Average Average Average
Interest-earning assets: Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- -------- ----------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits
and short-term investments $ 15,897 $ 151 3.77% $ 29,349 $ 384 5.19%
Investment securities, net 3,257 43 5.24% 6,406 106 6.56%
Loans receivable, net 385,979 9,683 10.03% 398,497 9,610 9.65%
Mortgage-backed securities 38,210 555 5.81% 8 0 0.00%
Residual MBS 44,351 0 0.00% 49,483 1,742 14.08%
-------- -------- ----------- -------- ------- ----------
Total interest-earning assets 487,694 10,432 8.56% 483,743 11,842 9.79%
Non-interest-earning assets 48,633 39,442
-------- --------
Total assets $536,327 $523,185
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
Passbook accounts 4,732 25 2.10% 4,355 27 2.46%
Money market accounts 7,113 77 4.29% 5,226 67 5.09%
Checking accounts 25,742 90 1.39% 19,295 76 1.56%
Certificate accounts 379,695 5,068 5.30% 225,861 3,343 5.87%
-------- -------- ----------- -------- ------- ----------
Total 417,282 5,260 5.00% 254,737 3,513 5.47%
Borrowings 44,796 895 7.93% 196,272 3,438 6.95%
-------- -------- ----------- -------- ------- ----------
Total interest-bearing
liabilities 462,078 6,155 5.28% 451,009 6,951 6.11%
Non-interest-bearing
liabilities 19,231 15,064
-------- --------
Total liabilities 481,309 466,073
Equity 55,018 57,112
-------- --------
Total liabilities and equity $536,327 $523,185
======== ========
Net interest income $ 4,277 $ 4,891
======== =======
Net interest rate spread 3.28% 3.68%
Net interest margin 3.51% 4.04%
Ratio of interest-earning assets
To interest-bearing
liabilities 105.54% 107.26%
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
(Dollars in thousands) September 30, 1999 September 30, 1998
- -------------------------------------------------------------------------- --------------------------------------
Assets Average Average Average Average
Interest-earning assets: Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- -------- ----------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits
and short-term investments $ 26,352 $ 913 4.63% $ 28,811 $ 1,130 5.24%
Investment securities, net 3,846 159 5.53% 6,534 294 6.02%
Loans receivable, net 394,180 29,437 9.96% 341,298 25,051 9.79%
Mortgage-backed securities 15,736 648 5.49% 9 0 0.00%
Residual MBS 47,993 3,300 9.17% 49,163 4,892 13.27%
-------- -------- ----------- -------- ------- ----------
Total interest-earning assets 488,107 34,457 9.41% 425,815 31,367 9.82%
Non-interest-earning assets 34,494 34,718
-------- --------
Total assets $522,601 $460,533
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
Passbook accounts $ 4,590 $ 72 2.10% $ 4,144 $ 76 2.45%
Money market accounts 7,116 229 4.30% 3,834 141 4.92%
Checking accounts 19,505 235 1.61% 18,455 238 1.72%
Certificate accounts 383,024 15,321 5.35% 224,565 9,938 5.92%
-------- -------- ----------- -------- ------- ----------
Total 414,235 15,857 5.12% 250,998 10,393 5.54%
Borrowings 46,809 2,647 7.56% 139,440 7,452 7.15%
-------- -------- ----------- -------- ------- ----------
Total interest-bearing
liabilities 461,044 18,504 5.37% 390,438 17,845 6.11%
Non-interest-bearing
liabilities 7,865 15,229
-------- --------
Total liabilities 468,909 405,667
Equity 53,692 54,866
-------- --------
Total liabilities and equity $522,601 $460,533
======== ========
Net interest income $15,953 $13,522
======== =======
Net interest rate spread 4.04% 3.71%
Net interest margin 4.36% 4.23%
Ratio of interest-earning assets
To interest-bearing
liabilities 105.87% 109.06%
</TABLE>
6
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(UNAUDITED)
Note 1 - Basis of Presentation:
- -------------------------------
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 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 adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation,
have been included. The results of operations for the three and nine month
periods ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the entire fiscal year.
Certain amounts reflected in the consolidated financial statements for the
three-month and nine-month period ended September 30, 1998 have been
reclassified to conform to the presentation for the three-month and nine-month
period ended September 30, 1999.
Note 2 - Mortgage and Other Securities
- --------------------------------------
A summary of the Company's trading, available for sale, and held to maturity
mortgage and other securities as of September 30, 1999 and December 31, 1998
follows:
<TABLE>
<CAPTION>
September 30, 1999
------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
(Dollars in thousands) Cost Gain Loss Market Value
- ---------------------------------- ------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Mortgage-backed securities
Retained in securitization $44,350 $88 $1,223 $43,215
Securities held to maturity 6 - - 6
Trading Securities 42,214 - - 42,214
------------- ---------------- ---------------- -----------------
Total Mortgage & Other
Securities $86,570 $88 $1,223 $85,435
============= ================ ================ =================
<CAPTION>
December 31, 1998
-------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Market Value
------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Mortgage-backed securities
retained in securitization $50,296 $ - $ - $50,296
Securities held to maturity 2,008 12 - 2,020
Trading Securities - - - -
------------- ---------------- ---------------- -----------------
Total Mortgage & Other
Securities $52,304 $12 $ - $52,316
============= ================ ================ =================
</TABLE>
The Company's mortgage-backed residual securities decreased from $50.3
million at December 31, 1998 to $43.2 million as of September 30, 1999. The
14.1% decrease resulted from $1.6 million in monthly cash distributions and
mark-to-market write-downs for the six months ending June 30, 1999, unrealized
losses of $1.1 million recognized during the third quarter of 1999 related to
the reclassification of residual mortgage-backed securities in accordance with
SFAS "134", and the desecuritization of the $4.4 million residual mortgage-
backed security related to the Life Financial Services Trust 1996-1
securitization. The Company successfully completed an early termination of the
1996-1 securitization trust that eliminated the $4.4 million residual mortgage-
backed security and released $4.7 million of previously restricted cash to the
Company from the 1996-1 securitization Reserve Account.
7
<PAGE>
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 became effective January 1, 1999.
This Statement requires mortgage-banking enterprises to classify as "trading
securities" any retained mortgage-backed securities that it commits to sell
before or during the securitization process. It also requires mortgage-banking
enterprises to classify as "available for sale" any retained mortgage-backed
securities of loans previously held for sale, based on the enterprise's ability
and intent to hold the securities. The Company adopted SFAS "134" on July 1,
1999 and, as a result, reclassified all retained residual mortgage-backed
securities held as trading securities to available for sale. The fair value of
the portfolio that was reclassified by the Company was $44.3 million.
Note 3 - Loan Originations and Sales
- ------------------------------------
A summary of the Company's loan originations and sales for each quarter
through September 30, 1999 follows:
<TABLE>
<CAPTION>
3rd Quarter Ended 2nd Quarter Ended 1st Quarter Ended
(Dollars in thousands) September 30, 1999 June 30, 1999 March 31, 1999
- -------------------------------------- ---------------------- -------------------- -------------------
<S> <C> <C> <C>
Beginning balance, gross $388,680 $420,300 $337,554
Loans originated and purchased
One to four family 250,826 243,566 188,932
Other loans 16,176 23,586 21,983
---------------------- -------------------- -------------------
Quarterly Production 267,002 267,152 210,915
---------------------- -------------------- -------------------
Total Loans Receivable 655,682 687,452 548,469
Less:
Principal repayments 31,464 39,465 21,924
Whole loan sales 256,687 257,961 105,089
Loan Securitizations 0 0 0
Transfers to REO 2,218 1,346 1,156
---------------------- -------------------- -------------------
Ending balance, gross 365,313 388,680 420,300
Loans in process, loan fees (17,627) (14,292) (8,315)
Allowance for loan losses (3,320) (3,393) (2,586)
---------------------- -------------------- -------------------
Total Loans receivable, net 344,366 370,995 409,399
====================== ==================== ===================
</TABLE>
Note 4 - Mortgage Servicing Rights
- ----------------------------------
The activity for the Company's mortgage servicing rights was as follows.
<TABLE>
<CAPTION>
(Dollars in thousands) Nine Months Ended
Mortgage Servicing Rights September 30, 1999
-------------------
<S> <C>
Balance at December 31, 1998 $14,541
Additions 7,322
Scheduled Amortization (3,671)
Adjustment in Valuation (810)
-------------------
Balance before valuation reserve at September
30, 1999 17,382
-------------------
Reserve for Impairment of Mortgage Servicing Rights
Balance at December 31, 1998 (1,422)
Reductions (additions) (424)
-------------------
Balance at September 30, 1999 (1,846)
===================
Mortgage Servicing Rights, net $15,536
===================
</TABLE>
8
<PAGE>
Note 5 - Earnings Per Share
- ---------------------------
In December 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. "128", "Earnings Per Share". 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. Basic
earnings per share is computed by dividing income available to common
stockholders by the average number of common shares outstanding for the period.
The Statement also requires presentation of earnings per share assuming full
dilution. The diluted earnings per share calculation includes net shares that
could be issued under outstanding stock options and employee stock purchase
plans, and common shares that would result from the conversion of convertible
preferred stock and convertible debentures. In the diluted calculation, net
income is not reduced by dividends related to convertible preferred stock, since
such dividends would not be paid if the preferred stock were converted to common
stock. In addition, interest on convertible debentures (net of tax) is added to
net income, since this interest would not be paid if the debentures were
converted to common stock.
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
(dollars in thousands, ---------------------------------------------------------------------------------------
except share data): 1999 1998
- ---------------------------- ---------------------------------------------- --------------------------------------
Net Per Share Net Per Share
Earnings Shares Amount Earnings Shares Amount
------------- --------------- --------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $ 1037 $2,535
============= =============
Basic EPS Earnings available
to common stockholders $1,037 6,568,436 $0.16 $2,535 6,558,997 $0.39
============== =========
Effect of Dilutive Stock
Options $ - 55,470 $ - 214,457
------------- --------------- ------------- -----------
Diluted EPS Earnings available
to common stockholders plus
assumed conversions $1,037 6,623,906 $0.16 $2,535 6,773,454 $0.37
============= =============== ============== ============= =========== =========
<CAPTION>
For the Nine Months Ended September 30,
(dollars in thousands, ---------------------------------------------------------------------------------------
except share data): 1999 1998
- ---------------------------- ---------------------------------------------- -------------------------------------
Net Per Share Net Per Share
Earnings Shares Amount Earnings Shares Amount
------------- --------------- -------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $3,481 $7,771
============= =============
Basic EPS Earnings available
to common stockholders $3,481 6,565,192 $0.53 $7,771 6,552,192 $1.19
============== ====
Effect of Dilutive Stock
Options $ - 44,666 $ - 289,025
------------- --------------- ------------- -----------
Diluted EPS Earnings available
to common stockholders plus
assumed conversions $3,481 6,609,858 $0.53 $7,771 6,841,217 $1.14
============= =============== ============== ============= =========== ==========
</TABLE>
9
<PAGE>
Note 6 - Segment Information
----------------------------
The Company's reportable operating segments within the financial services
industry are banking, mortgage banking and loan servicing activities.
Information about these segments for the three and nine months ended September
30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
------------------------------------------------------------------------------------------------------
September 30, 1999 September 30, 1998
-------------------------------------------------- -------------------------------------------------
Mortgage Loan Mortgage Loan
(Dollars in thousands) Bank Banking Servicing Total Bank Banking Servicing Total
- ---------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-Interest Revenues $ 369 $ 4,609 $ 1,376 $ 6,354 $ 70 $ 6,022 $ 1,292 $ 7,384
Interest Earned 5,093 5,339 0 10,432 1,970 9,873 0 11,843
Interest Charges (3,003) (3,153) 0 (6,156) (1,127) (5,824) 0 (6,951)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest Income
(expense) 2,090 2,186 0 4,276 843 4,049 0 4,892
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue $ 2,459 $ 6,795 $ 1,376 $ 10,630 $ 913 $ 10,071 $ 1,292 $ 12,276
========== ========== ========== ========== ========== ========== ========== ==========
Segment earnings (pre-tax) $ (136) $ 1,739 $ 204 $ 1,807 $ 23 $ 4,014 $ 383 $ 4,420
Segment assets $ 266,088 $ 279,351 $ 19,035 $ 564,474 $ 56,081 $ 289,802 $ 16,911 $ 362,794
<CAPTION>
For the Nine Months Ended
------------------------------------------------------------------------------------------------------
September 30, 1999 September 30, 1998
-------------------------------------------------- -------------------------------------------------
Mortgage Loan Mortgage Loan
Bank Banking Servicing Total Bank Banking Servicing Total
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-Interest Revenues $ 576 $ 8,189 $ 4,355 $ 13,120 $ 189 $ 17,519 $ 3,500 $ 21,208
Interest Earned 16,837 17,621 0 34,458 5,258 26,108 0 31,366
Interest Charges (9,026) (9,478) 0 (18,504) (2,893) (14,952) 0 (17,845)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income
(expense) 7,811 8,143 0 15,954 2,365 11,156 0 13,521
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue $ 8,387 $ 16,332 $ 4,355 $ 29,074 $ 2,554 $ 28,675 $ 3,500 $ 34,729
========== ========== ========== ========== ========== ========== ========== ==========
Segment earnings (pre-tax) $ 2,134 $ 2,745 $ 1,331 $ 6,210 $ 237 $ 12,213 $ 1,054 $ 13,504
Segment assets $ 266,088 $ 279,351 $ 19,035 $ 564,474 $ 56,081 $ 289,802 $ 16,911 $ 362,794
</TABLE>
Segments
--------
The change in reportable segments and the format of segment reporting was
changed effective July 1, 1999. The change was implemented based on an overall
strategy implemented during the third quarter 1999 by the Company's new
management team. The new management team views the Company's principal operating
segments to be traditional retail banking, mortgage banking and loan servicing.
Note 7 - Recent Accounting Pronouncements
- -----------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. "133", "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those derivatives at fair value. The accounting for the gains or losses
resulting from changes in the value of those derivatives will depend on the
intended use of the derivative and whether it qualifies for hedge accounting. On
June 23, 1999, the FASB voted to approve a proposal to delay the effective date
of SFAS No. "133" to fiscal years beginning after June 15, 2000 (calendar year
2001 for the Company). 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 became effective January 1, 1999. This
Statement requires mortgage-banking enterprises to classify as "trading
securities" any retained mortgage-backed securities that it commits to sell
before or during the securitization process. It also
10
<PAGE>
requires mortgage-banking enterprises to classify as "available for sale" any
retained mortgage-backed securities of loans previously held for sale, based on
the enterprise's ability and intent to hold the securities. The Company adopted
SFAS "134" on July 1, 1999. The adoption of SFAS "134" had no impact on the
prior six months 1999 net earnings and earnings per share since all securities
reclassified were classified as "trading securities" and required, under prior
accounting pronouncements, mark-to-market adjustments affecting earnings and
earnings per share.
Note 8 - Subsequent Events
- --------------------------
On October 15, 1999, the Company successfully completed an early clean up
of the LIFE Financial Services Trust 1997-1A and 1997-1B securitization. The
clean up reduced residual assets by $7.6 million. Additionally, $8.0 million in
previously restricted cash was released to LIFE Financial Corporation from the
1997-1A and 1997-1B Reserve Accounts.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain forward-looking statements
that reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties, including those identified below, which could cause
actual results to differ materially from historical results or those
anticipated. The words "believe," "expect," "anticipate," "intend," "estimate,"
"should," and other expressions which indicate future events and trends identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any forward
looking statements, whether as a result of new information, future events or
otherwise. The following factors could cause actual results to differ materially
from historical results or those anticipated: (1) the level of demand for
mortgage credit, which is affected by such external factors as the level of
interest rates, the strength of the various segments of the economy and the
demographics of the Company's lending markets; (2) the direction of interest
rates; (3) the relationship between mortgage interest rates and the cost of
funds; (4) federal and state regulation of the Company's banking, mortgage
banking and loan servicing operations; (5) competition within the banking
industry, mortgage banking industry and loan servicing industry; and (6) the
ability of the Company to manage expenses.
GENERAL
- -------
The Company is a saving and loan holding company that owns 100% of the
capital stock of LIFE Bank (the "Bank"), the Company's principal operating
subsidiary. The Bank is a federally chartered stock savings bank whose primary
business includes retail banking, mortgage banking and loan servicing.
The Bank currently has five retail bank branches located in Huntington
Beach, Redlands, Riverside, San Bernardino, and Seal Beach, California.
Additionally, the Company conducts its national mortgage banking business from
four regional loan centers located in Riverside, California; Jacksonville,
Florida; Boston, Massachusetts; and Denver, Colorado. Finally, the Company
operates the loan servicing business from its corporate headquarters in
Riverside, California.
The mortgage banking business originates and purchases conforming, jumbo
and other non-conforming mortgage loans and other real estate secured loans
through a network of approved correspondents and independent mortgage brokers.
The Company's originations and purchases are primarily 1st lien conforming,
jumbo and other non-conforming mortgages with approximately 80% of all
originations within the "A", "Alt A" and "A minus" credit categories.
The loan servicing division services approximately $1.7 billion in mortgage
and consumer loans. The loan-servicing portfolio is comprised of loans owned by
the Bank and loans sold by the Bank to other investors on a servicing retained
basis.
11
<PAGE>
The Company's principal sources of income are gains recognized on the sale
of mortgage and consumer loans, the net spread between interest earned on
mortgage and consumer loans and the interest costs associated with deposits and
other borrowings used to finance such loans pending their sale, and servicing
fee income.
FINANCIAL CONDITION
- --------------------
Total assets of the Company increased from $428.1 million at December 31,
1998 to $564.5 million as of September 30, 1999. The net change resulted
primarily from increased cash and cash equivalents, trading securities, loans,
and mortgage servicing rights. The $89.5 million increase in cash and cash
equivalents at September 30, 1999 represents higher levels of liquidity from
loan sales that occurred late in the third quarter. The Company's trading
securities portfolio was higher due to the purchase of the Company's "AAA" rated
Life Financial Services Trust 1997-1A and 1997-1B securities which were redeemed
on October 15, 1999 in exchange for the underlying loans owned by those Trusts.
Loans held for sale and loans held for investment increased 3.0% to $344.4 at
September 30, 1999. The increase is primarily the result of the overall growth
of the Company's balance sheet. The Company's mortgage servicing asset increased
18.42% from $13.1 million at December 31,1998 to $15.5 million at September 30,
1999. The increase is the result of loan sales during the year of the Company's
loan product on a servicing retained basis.
Loan Production, Sales and Securitizations
- ------------------------------------------
Loan originations and purchases for the quarter ended September 30, 1999
were $267.0 million compared to $376.8 million in loans originated and purchased
for the quarter ended September 30, 1998. Originations and purchases for the
nine months ended September 30, 1999 were $745.1 million, compared to $946.8
million for the same period in 1998. This 21.3% year to date decrease in
production is the result of the Company's exit from the high loan-to-value/125
2nd lien mortgage product and a reduced focus on all other 2nd lien mortgage
products.
Asset origination continued to be geographically diversified as the bank's
national lending operations were enhanced by increased penetration of local
markets by previously established regional offices in California, Florida,
Massachusetts and Colorado.
The company completed whole loan sales of $256.7 million during the third
quarter of 1999 resulting in a net gain of $4.3 million. This compares to whole
loan sales and securitizations of $476.5 million for the same period in 1998
resulting in a net gain of $6.0 million. Whole loan sales during the quarter
were comprised primarily of the Company's 1st lien mortgage product. In
addition, the Company completed $39.4 million in whole loan sales of its
seasoned high loan-to-value/125 and other 2nd lien products as it transitions to
more traditional 1st lien products.
Loan Loss Allowance and Credit Quality
- --------------------------------------
Total nonperforming assets were $12.1 million at the end of the third
quarter, up from $8.6 million for the year earlier period. Substantially all of
the increase was in real estate secured one-to-four family loans and Real Estate
Owned. The nonperforming asset ratio was 2.14% at September 30, 1999, down from
2.38% for the same period in 1998.
The charge-off ratio was .78% in the third quarter at $753 thousand,
compared to .71% and $705 thousand for the year earlier period.
The allowance for loan losses at September 30, 1999 was $3.3 million, up
89.6% over the year earlier allowance of $1.8 million. The allowance for loan
losses as a percent of total non-performing loans was 36.62% at the end of the
third quarter, up from 26.35% from one year ago. The allowance for loan losses
as a percent of gross loans receivable was .91% at September 30, 1999, up from
.77% for the same period 1998.
The Company's determination of the level of the allowance and
correspondingly, the provision for loan losses, rests upon various judgments and
assumptions, including current economic conditions, loan portfolio composition,
prior loan loss experience, industry trends and LIFE Bank's ongoing examination
process. LIFE Bank recognized a $2.6 million provision for the nine-months
ending September 30, 1999, compared to a $2.4 million provision for the same
nine-month period in 1998. The larger increase in loan loss allowance from $2.8
million at December 31, 1998 to $3.3 million at September 30, 1999 was
considered necessary given the growth in the
12
<PAGE>
Company's loan portfolio and corresponding increase of non-performing assets.
The Company's non-performing loans consist of one- to-four family residential
mortgage loans and consumer loans. Given the composition of the Company's loan
portfolio at September 30, 1999, the $3.3 million loan loss allowance was
considered adequate to cover losses inherent in the Company's loan portfolio at
September 30, 1999. However, no assurance can be given, that the Company will
not, in any particular period, sustain loan losses that exceed the amount
reserved, or that subsequent evaluation of the loan portfolio, in light of the
prevailing factors, including economic conditions which may adversely affect the
Company's or the Bank's service area or other circumstances will not require
significant increases in the loan loss allowance. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's loan loss allowance. Such agencies may require the Bank to recognize
additional provisions to increase the allowance or take charge-offs in
anticipation of future losses.
The tables below summarize the changes to the Company's loan loss allowance
and the composition of non-performing assets for the nine months ended September
30, 1999:
LOAN LOSS ALLOWANCE
- -------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
- ----------------------
<S> <C>
Balance as of December 31, 1998 $ 2,777
Add:
Provision for loan losses 2,638
Recoveries of previous charge-offs 362
Less:
Transfers to REO specific reserve 16
Charge-offs 2,441
-------
Balance as of September 30, 1999 $ 3,320
=======
</TABLE>
COMPOSITION OF NON-PERFORMING ASSETS
- ------------------------------------
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
(Dollars in thousands) 1999 1998
- ---------------------- ------------- ------------
<S> <C> <C>
Non-accrual loans (consumer/unsecured) $ 40 $ 279
Non-accrual loans (real estate secured) 9,026 7,265
Foreclosed real estate, net (1) 3,030 1,898
------- ------
Total non-performing assets $12,096 $9,442
======= ======
Loan loss allowance as a percent of gross loans receivable(2) 0.91% 0.82%
Loan loss allowance as a percent of total non-performing loans(3) 36.62 36.81
Non-performing loans as a percent of gross loans receivable(2) 2.48 2.23
Non-performing assets as a percent of total assets(4) 2.14 2.21
</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.
Mortgage and Other Securities
- -----------------------------
The Company's mortgage-backed residual securities decreased from $50.3
million at December 31, 1998 to $43.2 million as of September 30, 1999. The
14.1% decrease resulted from $1.6 million in monthly cash distributions and
mark-to-market write-downs for the six months ending June 30, 1999, unrealized
losses of $1.1 million recognized during the third quarter of 1999 related to
the reclassification of residual mortgage-backed securities in accordance with
SFAS "134", and the desecuritization of the $4.4 million residual mortgage-
backed security related to the Life Financial Services Trust 1996-1
securitization. The Company
13
<PAGE>
successfully completed an early termination of the 1996-1 securitization trust
that eliminated the $4.4 million residual mortgage-backed security and released
$4.7 million of previously restricted cash to the Company from the 1996-1
securitization Reserve Account.
Liabilities and Stockholders' Equity
- ------------------------------------
Most of the Company's asset growth during the nine months ending September
30, 1999 was funded by increased bank deposits and stockholders' equity. Total
deposits grew 33% from $323.5 million at December 31, 1998 to $430.8 million at
September 30, 1999. The increase in deposits is primarily the result of new
retail deposit growth in the Bank's new branches in Huntington Beach and Seal
Beach, California. In addition, the ratio of retail deposits to total deposits
increased to 48% for the period ended September 30, 1999, compared to 33% at
December 31, 1998.
Accounts payable and other liabilities increased to $18.5 million as of
September 30, 1999 compared to $11.1 million as of December 31, 1998. The
increase reflects obligations to investors on loans serviced resulting from the
timing differences from when borrowers make payments to the Company and when the
Company remits payments to the investors.
Stockholders' equity increased to $54.4 million as of September 30, 1999
from $52.0 million as of December 31, 1998. The net change to stockholders'
equity is the result of earnings of $3.5 million for the nine-months ended
September 30, 1999 partially offset by $1.1 million in unrealized losses on the
Company's residual mortgage-backed securities.
RESULTS OF OPERATIONS
- ---------------------
Quarter ended September 30, 1999 compared to the quarter ended September 30,
1998
Highlights for the quarters ended September 30, 1999 and 1998
The Company reported net income of $1.0 million or $0.16 per diluted share
for the third quarter of 1999, compared with net income of $2.5 million, or
$0.37 per diluted share for the quarter ended September 30, 1998. The $1.5
million decrease is primarily the result of a one-time severance charge related
to the separation of a former employee coupled with lower net interest income
and non-interest income. Net income for the third quarter 1999 before the one-
time severance charge would have been $1.7 million, or $0.26 per diluted share.
Interest Income
- ---------------
Total interest income for the three months ended September 30, 1999 was
$10.4 million, compared to $11.8 million for the three months ended September
30, 1998. The decrease of $1.4 million is the result of a lower realized yield
on the Company's residual mortgage-backed securities partially offset by
slightly higher average balances of interest-earning assets. The yield on
interest-earning assets decreased from 9.79% for the quarter ended September 30,
1998 to 8.56% for the quarter ended September 30, 1999. The largest single
contributor to the reduced yield was the underperformance of Company's residual
mortgage-backed securities.
Interest Expense
- ----------------
Interest expense for the quarter was down approximately $800 thousand, from
$7.0 million at September 30, 1998 to $6.2 million at September 30, 1999. The
reduction in interest expense reflects an increase in the Company's deposit base
and a lower reliance on other borrowed funds. The increase in retail deposits
coupled with increased usage of the FHLB line of credit resulted in a decrease
in the average cost of interest-bearing liabilities to 5.28% for the three
months ended September 30, 1999 compared to 6.11% for the three months ended
September 30, 1998.
Net Interest Income
- --------------------
Net interest income was $4.3 million in the third quarter, compared with
$4.9 million in the 1998 third quarter. The reduction is reflective of a lower
yield on other interest earning assets and a lower ratio of interest-
14
<PAGE>
earning assets to interest-bearing liabilities partially offset by a lower cost
of funds from increased retail deposits. The net interest margin was 3.51%, down
from 4.04% in the year ago quarter. The ratio of interest-earning assets to
interest-bearing liabilities was 105.54% for the three months ended September
30, 1999 compared to 107.26% for the three months ended September 30, 1998.
Provision for Loan Losses
- -------------------------
The provision for loan losses decreased from $736 thousand in the third
quarter of 1998 to $430 thousand in the third quarter of 1999. The lower
provision was primarily the result of excess reserves established from
recoveries and related to changes in the composition of non-performing assets
during 1999. As of September 30, 1999, the $3.3 million loan loss allowance was
considered adequate to cover losses inherent in the loan portfolio.
Noninterest Income
- ------------------
Noninterest income was $6.4 million down 14% from 1998's third quarter.
Lower noninterest income resulted from lower net gains from mortgage whole loan
sales partially offset by increased servicing and other fee income. Net gains
for the third quarter 1999 were $4.3 million on whole loan sales of $256.7
million, compared to $6.0 million on whole loan sales and securitizations of
$476.5 million for the same period in 1998.
Noninterest Expense
- -------------------
Noninterest expense for the third quarter 1999 was $8.4 million versus $7.1
million for the same quarter 1998. The increase was primarily the result of a
contractual one-time severance payment related to the separation of a former
employee of the Company. Noninterest expense, excluding the one-time severance
charge, was flat to the previous year's third quarter at $7.2 million.
Nine months ended September 30, 1999 compared to the nine months ended September
30, 1998
Highlights for the nine months ended September 30, 1999 and 1998
The Company reported net income of $3.5 million or $0.52 per diluted share
for the nine months ended September 30, 1999, compared with net income of $7.8
million, or $1.14 per diluted share for the same period in 1998. The $4.3
million decrease reflects much lower noninterest income and the one-time
severance charge related to the separation of the former employee partially
offset by increased net interest income. Lower noninterest income for the nine
months ended September 30, 1999 resulted from management's decision to eliminate
securitization, and related gain-on-sale accounting treatment, as an exit
strategy for the Company's loan originations.
Interest Income
- ---------------
Total interest income for the nine months ended September 30, 1999 was
$34.5 million, compared to $31.4 million for the nine months ended September 30,
1998. The increase of $3.1 million reflects a 14.6% increase in average
interest-earning assets partially offset by a lower yield resulting from reduced
yields on the Company's residual mortgage-backed securities. The yield on
interest-earning assets decreased from 9.82% for the nine months ended September
30, 1998 to 9.41% for the nine months ended September 30, 1999. The reduced
yield resulted from a lower effective yield on the Company's residual mortgage-
backed securities, investment securities and other short-term investments.
Interest Expense
- ----------------
For the nine months ended September 30, 1999, interest expense was $18.5
million compared to $17.8 million for the nine months ended September 30, 1998.
The $700 thousand increase reflects $70.6 million higher average interest-
bearing liabilities to support the growth in the Company's assets. The 3.7%
increase in interest expense resulted from an 18.1% increase in interest-bearing
liabilities offset by lower funding costs on the Company's retail deposit base.
The increase in retail deposits coupled with increased usage of the FHLB line of
credit resulted in a decrease in the average cost of interest-bearing
liabilities to 5.37% for the nine months ended September 30, 1999 compared to
6.11% for the three months ended September 30, 1998.
15
<PAGE>
Net Interest Income
- --------------------
Net interest income was $16.0 million for the nine months ended September
30, 1999, compared with $13.5 million for the same nine-month period in 1998.
The $2.5 million increase in net interest income is reflective of higher average
earning assets and a slightly higher net interest margin for the nine months
ended September 30, 1999, compared to the same nine-month period in 1998. Net
interest margin was 4.36% for the nine months ended September 30, 1999, up from
4.23% during the same period in 1998. The ratio of interest-earning assets to
interest-bearing liabilities was 105.87% for the nine months ended September 30,
1999 compared to 109.06% for the nine months ended September 30, 1998.
Provision for Loan Losses
- -------------------------
The provision for loan losses increased from $2.4 million for the nine
months ending September 30, 1998 to $2.6 million for the nine months ending
September 30, 1999. The 11.5% increase to the Company's provision was primarily
the result of increases in average loans partially offset by excess reserves
established from recoveries and related to changes in the composition of non-
performing assets during 1999. As of September 30, 1999, the $3.3 million loan
loss allowance was considered adequate to cover losses inherent in the loan
portfolio. The increase in provisions was based on an estimate of charge offs
for the nine months ended September 30, 1999 combined with an evaluation of the
composition of the Company's loan portfolio. (See "Financial Condition")
Noninterest Income
- ------------------
Noninterest income was $13.1 million down 38% from 1998's nine-month period.
Lower noninterest income primarily reflects 47.7% lower net gains from mortgage
loan sales resulting from the Company's exit from the high loan-to-value/125 2nd
lien mortgage product and a reduced focus on all other sub-prime and 2nd lien
mortgage products. Net gains from mortgage sales were $8.7 million on whole loan
sales of $619.7 million and $16.5 million on whole loan sales and
securitizations of $961.7 million for the nine months ending September 30, 1999
and 1998, respectively.
Noninterest Expense
- -------------------
Noninterest expense for the nine months ended September 30, 1999 was $20.2
million versus $18.9 million for the same nine-month period in 1998. The
increase was primarily the result of the contractual one-time severance payment
related to the separation of a former employee of the Company. Noninterest
expense, excluding the one-time severance charge, was flat to the previous
year's nine-month period at $19.0 million.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of funds are deposits, principal and interest
payments on loans, cash proceeds from the sale of loans and securitizations,
FHLB advances, mortgage loan warehouse lines of credit, 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 4.10% and 11.13% for the quarters ended September
30, 1999 and September 30, 1998, respectively. The Bank had $63.3 million in
deposits maturing within one month as of September 30, 1999. The Bank
anticipates that it will retain a portion of these accounts as well as raise new
deposits to sufficiently maintain liquidity.
The Company's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows used in operating activities were $95.2 million for the
nine months ended September 30, 1999, compared to cash flows provided by
operating activities of $19.6 million for the nine months ended September 30,
1998. Primarily uses of cash were loan originations and purchases in the amount
of $722.3 million partially offset by $619.7 million in loan sales to the
Company's investors. Net cash
16
<PAGE>
provided from investing activities was $58.1 million and $52.0 million for the
nine months ended September 30, 1999 and 1998, respectively. Principal
collections on loans and securities and proceeds on REO were the primary
components of cash provided from investing activities. Net cash provided from
financing activities primarily consisted of increased retail deposits and FHLB
borrowings. The net increase in deposits and borrowings was $166.6 million and
$33.9 million for the nine months ended September 30, 1999 and 1998,
respectively. Net deposits increased by $107.4 million and $42.9 million for the
nine months ended September 30, 1999 and 1998, respectively.
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, 1999, cash and short-term investments totaled $97.7 million. The
Company has other sources of liquidity if a need for additional funds arises,
including the utilization of FHLB advances and a warehouse line of credit
available in the amount of $250 million of which zero had been drawn upon at
September 30, 1999. Other sources of liquidity include investment securities
maturing within one year. The Company also has a revolving line of credit in the
amount of $10 million with $6.0 million outstanding at September 30, 1999.
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, 1999, the Bank was
considered "well capitalized".
The following table reflects the required ratios and the actual capital
ratios of the Bank as of September 30, 1999:
Dollars in Thousands
- --------------------
<TABLE>
<CAPTION>
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent(a)
------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Core $33,195 $21,009 $12,186 6.32% 4.00%
Total Risk-Based $36,515 $26,104 $10,411 11.19% 8.00%
Tier 1 Risk-Based $33,195 $13,052 $20,143 10.17% 4.00%
Tangible $33,195 $ 7,878 $25,317 6.32% 1.50%
</TABLE>
- ----------
(a) The percentages and ratios to be well-capitalized under prompt and
corrective action provisions as issued by the OTS are 5.0% core capital,
10.0% risk-based capital, 6.0% Tier 1 risk-based capital and 2.0% tangible
capital. At September 30, 1999, the Bank was "well-capitalized" with ratios
of 6.32%, 11.19%, 10.17% and 6.32%, 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.
As of September 30, 1999, the Bank had outstanding commitments to originate
or purchase mortgage loans of $10.6 million compared to $11.0 million as of
December 31, 1998 due to consistent originations within the mortgage banking
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, 1999 compared to the period ended December 31,
1998 as discussed in the notes to the audited consolidated financial statements
of LIFE Financial Corporation for the year ended December 31, 1998 included in
the Company's Annual Report on Form 10K/A.
17
<PAGE>
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
digit year fields instead of four digit year fields. If the computer systems
cannot distinguish between the year 1900 and the year 2000, system failures or
miscalculations could result, disrupting operations and causing, among other
things, a temporary inability to process transactions or engage in normal
business activities for both the Company and its customers.
The Program
- -----------
The Company's program addresses the Y2k issue from a comprehensive risk-
based view. "Computer systems and equipment" includes systems generally thought
of as information technology (IT) dependent, such as accounting, data
processing, and telephone equipment, as well as systems not obviously IT
dependent, such as photocopiers, facsimile machines, and security systems. The
non-IT dependent systems may contain embedded technology, and the Company
included these systems as part of the program.
The Company defines year 2000 readiness as information technology that
accurately processes date/time data from, into, and between the years 1999 and
2000, as well as leap year calculations, with:
All mission-critical systems and processes reviewed, renovated or replaced, as
necessary.
All mission-critical systems and processes tested.
All key vendors, customers, and business partners identified and assessed for
risk.
Adequate change control procedures in place for re-testing of new or upgraded
systems.
Contingency plans in place to support business resumption requirements.
The Y2k program consists of five stages: (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 entailed an inventory of IT and non-IT systems,
hardware, vendors, material customers, and facilities. Inventoried systems were
also prioritized to identify critical systems. The renovation, validation, and
implementation phases were completed as of September 30, 1999 and included
internal systems as well as interfaces to third party systems.
The Company is engaged in an ongoing review of its relationships with
business partners, including vendors and suppliers, to asses whether these
entities are effectively addressing year 2000 issues. This includes the
evaluation of strategies to manage and mitigate the risk to the Company of their
failures. Although the Company is establishing reasonable safeguards, there can
be no assurance that all business partners will adequately address their Y2k
issues. Therefore, failures of third parties to adequately address their Y2k
issues could adversely affect the business and operations of the Company.
The Company's systems use a combination of methodologies for date fields.
Where possible, date fields were expanded to eight digits. For date fields that
were retained in a nine-digit format, a windowing technique was used. For the
Company's mission critical business financial systems, the windowing technique
is described as follows. If the last two digits of the date are 00-49, the
century is 2000. If the last two digits of the date are 50-99, the century is
1900.
Contingency Planning
- --------------------
An institution-wide contingency plan is in place, with Y2k issues
incorporated, and testing complete. The contingency plan enables the Company to
continue to operate, to the extent that it can do so safely, including
performing certain processes manually and repairing or obtaining replacement
systems.
18
<PAGE>
Costs
- -----
To date, the amounts incurred and expensed for developing and
implementing the Y2k program have not had a material effect on the Company's
operations. The total remaining cost for addressing Y2k compliance is based on
management's current estimates; it is not expected to be material to the
Company's operations. All remaining costs will be funded through operating cash
flows and will be funded by reallocating existing resources rather than
incurring incremental costs. None of the Company's other information technology
projects have been delayed or deferred as a result of implementing the Y2k
program.
Risks
- -----
The Company believes that the completed renovations on its internal
systems and equipment will allow it to be Y2k compliant. 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 has initiated 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 Y2k ready. The effect, if any, on the Company's results of
operations from the failure of such parties to be Y2k ready cannot reasonably be
estimated.
The Company is part of a regulated industry that has issued standards
for Y2k readiness and is conducting audits to ensure compliance with those
standards. To date, the Company has satisfied its regulators as to its
compliance with Y2k standards. 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 this scenario does
occur, the Company does not expect that it would have a material adverse effect
on the Company's financial position, liquidity, and results of operations.
FORWARD-LOOKING STATEMENTS
The preceding Y2k issue discussion contains various forward-looking
statements that represent the Company's beliefs 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 future events with regard to its Y2k program, as
well as its 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 readiness.
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. Pursuant to the
guidelines, 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.
19
<PAGE>
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, 1999 or December 31, 1998.
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
(a) Changes in Executive Management
------------------------------------
Daniel L. Perl's employment as President and Chief Executive
Officer of the Company and Chairman of the Board, Chief Executive
Officer and President of LIFE Bank was terminated on July 27, 1999. On
August 3, 1999, Robert K. Riley was named to the positions of President
and Chief Executive Officer of both the Company and LIFE Bank. On
August 25, 1999, Daniel L. Perl resigned from the Board of Directors of
both the Company and LIFE Bank.
On October 13, 1999, the Company and LIFE Bank named a new senior
management team for both the Company and the Bank.
(b) Change in Company's Accountants
------------------------------------
On October 7, 1999, Deloitte and Touche LLP resigned as the
Company's auditors. On October 21, 1999, Grant Thornton LLP was named
as the Company's new auditors.
(c) New Bank Branch Approval
-----------------------------
On November 2, 1999, the Company received approval from the
Office of Thrift Supervision to open its sixth retail bank branch. The
new branch will be located in Huntington Beach, California.
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.0 Earnings per share (see footnote 5 to the financial
statements included herein)
27.0 Financial data schedule (filed herewith).
(b) Reports on Form 8-K
Current Report on Form 8-K dated October 7, 1999 and filed
October 14, 1999, Item 4.
Current Report on Form 8-K dated October 22, 1999 and filed
October 22, 1999, Item 4.
21
<PAGE>
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 15, 1999 By: /s/ ROBERT K. RILEY
- ----------------- -------------------------------
Date Robert K. Riley
President and Chief Executive Officer
(principal executive officer)
November 15, 1999 /s/ W. TODD PETERSON
- ----------------- -------------------------------
Date W. Todd Peterson
Chief Financial Officer & Treasurer
(principal financial and accounting officer)
22
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