<PAGE>
United States Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q/A
(AMENDMENT NO. 2)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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 AVE., SUITE B, 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: 6,546,716 shares of common
stock, par value $0.01 per share, were outstanding as of May 12, 1998.
This Amendment No. 2 on Form 10-Q/A amends the Registrant's Quarterly
Report on Form 10-Q/A for the period ended March 31, 1998, as filed by the
Registrant on August 27, 1998 and is being filed to reflect the restatement of
the Registrant's consolidated financial statements (the "Restatement"). The
Restatement reflects the revaluation of residual assets retained in certain of
the Company's 1997 and 1996 Securitization transactions. See Note 7 of Notes to
Consolidated Financial Statements.
<PAGE>
LIFE FINANCIAL CORPORATION. AND SUBSIDIARIES
FORM 10-Q/A
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
Item 1 Consolidated Statements of Financial Condition:
March 31, 1998 (restated) and December 31, 1997 (unaudited)....... 1
Consolidated Statements of Operations:
For the Three months ended March 31, 1998 (restated) and
1997 (restated) (unaudited)....................................... 2
Consolidated Statements of Cash Flows:
For the Three months ended March 31, 1998 (restated) and
1997 (restated) (unaudited)....................................... 3
Notes to Consolidated Financial Statements (unaudited)............ 4
Item 2 Management's Discussion and Analysis of
Results of Operations and Financial Condition..................... 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk ....... 16
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................. 17
Item 2 Changes in Securities and Use of Proceeds......................... 17
Item 3 Defaults Upon Senior Securities................................... 17
Item 4 Submission of Matters to a Vote of Security Holders............... 17
Item 5 Other Information................................................. 17
Item 6 Exhibits and Reports on Form 8-K.................................. 17
</TABLE>
ii
<PAGE>
Item 1. Financial Statements.
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------------- -------------------
(As restated,
see Note 7)
<S> <C> <C>
ASSETS:
Cash and cash equivalents.................................................. $ 61,177 $ 3,467
Securities held-to-maturity, estimated fair value of
$5,027 and $5,030 at March 31, 1998 and
December 31, 1997..................................................... 5,011 5,012
Residual assets, at fair value............................................. 50,071 45,352
Loans held-for-sale........................................................ 202,956 289,268
Loans held-for-investment - net of allowance for
estimated loan losses of $4,132 and $2,573
at March 31, 1998 and December 31, 1997............................... 27,873 29,076
Mortgage servicing rights.................................................. 9,932 8,526
Accrued interest receivable................................................ 2,052 2,638
Foreclosed real estate - net............................................... 1,645 1,440
Premises and equipment - net............................................... 6,012 4,764
Federal Home Loan Bank stock............................................... 1,083 1,067
Other assets............................................................... 5,007 6,461
------------ ------------
TOTAL ASSETS..................................................... $ 372,819 $ 397,071
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposit accounts........................................................... $ 239,805 $ 211,765
Federal Home Loan Bank advances............................................ 9,000
Other borrowings........................................................... 48,482 100,170
Subordinated debentures.................................................... 10,000 10,000
Accounts payable and other liabilities..................................... 19,930 15,250
------------ ------------
Total liabilities..................................................... 318,217 346,185
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 25,000,000 shares authorized; 6,546,716 shares
issued and outstanding as of March 31, 1998 and December 31, 1997...... 65 65
Additional paid-in capital.................................................. 42,171 42,171
Retained earnings, partially restricted..................................... 12,366 8,650
------------ ------------
Total stockholders' equity............................................. 54,602 50,886
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY......................................................... $ 372,819 $ 397,071
============ ============
</TABLE>
See accompanying notes to the 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
MARCH 31,
--------------------------------------
1998 1997
---- ----
(As restated, (As restated,
see Note 7) see Note 7)
<S> <C> <C>
INTEREST INCOME:
Loans $ 7,466 $ 1,872
Residual assets 1,491 179
Securities held to maturity 74 106
Other interest-earning assets 340 124
------------- --------------
Total interest income 9,371 2,281
------------- --------------
INTEREST EXPENSE:
Deposit accounts 3,269 1,317
FHLB advances and other borrowings 1,729 173
Subordinated debentures 342 71
------------- --------------
Total interest expense 5,340 1,561
------------- --------------
Net Interest Income Before Provision for
estimated loan losses 4,031 720
Provision for estimated loan losses 1,630 500
Net Interest Income After Provision for
estimated loan losses 2,401 220
NON-INTEREST INCOME:
Loan servicing and other fees 1,052 120
Service charges on deposit accounts 39 30
Net gains from mortgage financing operations 8,069 1,767
Other income 165 58
------------- --------------
Total non-interest income 9,325 1,975
------------- --------------
NON-INTEREST EXPENSE:
Compensation and benefits 2,976 1,582
Premises and occupancy 631 223
Data processing 304 135
Net loss on foreclosed real estate 82 63
FDIC insurance premiums 26 18
Marketing 330 68
Telephone 217 85
Professional services 294 58
Other expense 516 260
------------- --------------
Total non-interest expense 5,376 2,492
------------- --------------
Income (loss) Before Provision for tax expense 6,350 (297)
Provision (benefit) for tax expense 2,635 (107)
------------- --------------
NET INCOME(LOSS) $ 3,715 $ (190)
============= ==============
Basic earnings (loss) per share $ 0.57 $ (0.06)
============= ==============
Basic weighted average shares outstanding 6,546,716 3,211,716
============= ==============
Diluted earnings (loss) per share $ 0.54 $ (0.06)
============= ==============
Diluted weighted average shares outstanding 6,845,761 3,211,716
============= ==============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
2
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1998 1997
------------ ------------
(As restated, (As restated,
See Note 7) See Note 7)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ 3,715 $ (190)
Adjustments to reconcile net income(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 353 100
Provision for estimated loan losses 1,630 500
Accretion of deferred fees (10) (1)
Provision for estimated losses of foreclosed real estate 41 26
Gain on sale of foreclosed real estate, net (4) (3)
Gain on sale and securitization of loans held-for-sale (8,023) (1,207)
Unrealized gain on residual assets (46) (560)
Net accretion of residual assets (1,491) (179)
Change in valuation allowance on mortgage servicing rights (202)
Amortization of mortgage servicing rights 418 172
Purchase and origination of loans held-for-sale, net of loan fees (254,118) (93,866)
Proceeds from sales and securitization of loans held-for-sale 309,207 75,453
(Increase) decrease in accrued interest receivable 586 (129)
Deferred income taxes (2) (1,701)
Increase (decrease) in accounts payable and other liabilities 12,681 (822)
Federal Home Loan Bank stock dividend (16) (13)
Decrease (increase) in other assets 703 (740)
----------- ---------
Net cash provided by (used in) operating activities 65,624 (23,362)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments on loans 25,891 4,470
Proceeds from sale of foreclosed real estate 443 35
Purchase of securities held-to-maturity (1,000)
Proceeds from maturities of securities held-to-maturity 1,000
Additions to premises and equipment, net (1,591) (181)
Purchase of Federal Home Loan Bank stock (171)
----------- ---------
Net cash provided by investing activities 24,743 4,153
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 28,040 45,097
Proceeds from other borrowings (51,697) (3,278)
Repayment of Federal Home Loan Bank advances (9,000) -
Net proceeds from issuance of subordinated debentures - 9,644
----------- ---------
Net cash (used in) provided by financing activities (32,657) 51,463
----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 57,710 32,254
CASH AND CASH EQUIVALENTS, beginning of period 3,467 12,575
----------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 61,177 $ 44,829
=========== =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 5,267 $ 1,507
=========== =========
Income taxes paid $ - $ 1,240
=========== =========
NONCASH INVESTING ACTIVITIES DURING THE PERIOD:
Transfers from loans to foreclosed real estate $ 685 $ 846
=========== =========
Loans to facilitate sales of foreclosed real estate $ - $ 166
=========== =========
</TABLE>
3
<PAGE>
See accompanying notes to the unaudited consolidated financial statements.
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 from the Bank.
The Bank is a federally chartered stock savings and loan 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 advances, $250 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
March 31, 1998, the Bank had two depository branch offices in San Bernardino and
Riverside, 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 and a
capital markets group located in Seattle, Washington.
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 month period ended March
31, 1998 are not necessarily indicative of the results that may be expected for
the entire fiscal year. Certain reclassifications have been made to the 1997
financial statements to conform to the 1998 presentation.
2. Approved Stock Compensation Plans
---------------------------------
4
<PAGE>
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
and March 31, 1998, 27,540 options held by three retired directors were
exercisable.
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. On March 31, 1998, 201,000 shares of
the 1997 Option Plan were granted at an 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. There were 17,500 options at
December 31, 1997 and March 31, 1998 held by one 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 as of March 31, 1998.
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 replaces the presentation of primary
EPS with a presentation of basic EPS. 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 (loss) 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.
5
<PAGE>
The following table is a reconciliation of the numerators and denominators
of the basic and diluted EPS computations for the net earnings (loss) for the
Company (dollars in thousands, except share data):
<TABLE>
<CAPTION>
For the three months ended March 31,
--------------------------------------------------------------------------------
1998(a) 1997
-------------------------------------- ---------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss) $ 3,715 ($ 190)
Basic EPS
Earnings (loss) available to
common stockholders 3,715 6,546,716 $ 0.57 (190) 3,211,716 ($ 0.06)
========= =======
Effect of Dilutive Securities
Options 299,045 - -
--------- --------- ------ ---------
Diluted EPS
Earnings available to common
stockholders plus assumed
conversions $ 3,715 6,845,761 $ 0.54 ($ 190) 3,211,716 ($ 0.06)
========= ========= ======= ====== ========= =======
</TABLE>
(a) Options to purchase 3,500 shares of common stock at $18.50 per share were
outstanding during the three months ended March 31, 1998 but were not included
in the computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares. The options, which
expire July 22, 2007, were still outstanding at March 31, 1998.
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 provides for the merger of the Company with and into FIRSTPLUS, with
FIRSTPLUS as the surviving corporation. The Merger Agreement is subject to the
receipt of regulatory approval and the approval of the shareholders of the
Company. Under the Merger Agreement, at the effective date of the merger, each
outstanding share of Company common stock will be converted into the right to
receive between 0.500 and 0.667 share of FIRSTPLUS common stock.
6. Recent Accounting Pronouncements
--------------------------------
In June 1997, the Financial Accounting Standards Board issued 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.
6
<PAGE>
7. Restatement
-----------
Subsequent to the issuance of the Company's Quarterly Report on Form 10-Q/A
for the three month period ended March 31, 1998, the Company's management
determined that residual assets retained in certain of the Company's 1997 and
1996 securitization transactions had not been determined using the cash-out
method, as required by the Financial Accounting Standards Board's (FASB) Special
Report, A Guide to Implementation of Statement 125 on Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, Second
Edition, dated December 1998, and related guidance set forth in statements made
by the staff of the Securities and Exchange Commission (SEC) on December 8,
1998.
From December 1996 through June 1997, the Company completed two
securitizations, which total $155 million of original loan balance securitized,
that are effected by this restatement. The Company's other securitization
transactions have been properly measured and accounted for using the cash-out
method. Initial deposits to restricted cash accounts and subsequent cash flows
received by securitization trusts sponsored by the Company accumulate as credit
enhancement assets until certain targeted levels are achieved, after which cash
is distributed to the Company on an unrestricted basis. Under the method
previously used by the Company, (i) the assumed discount period for measuring
the present value of credit enhancement assets ended when cash flows were
received by the securitization trusts and (ii) interest-bearing initial deposits
to restricted cash accounts were recorded at face value. Under the cash-out
method required by the FASB and SEC, the assumed discount period for measuring
the fair value of credit enhancement assets ends when cash, including return of
the initial deposits, is distributed to the Company on an unrestricted basis.
As a result, the financial statements as of March 31, 1998 and for the
three months ended March 31, 1998 and 1997, have been restated from amounts
previously reported to properly reflect the pretax fair values of the residual
assets, including restricted cash, and the resulting pretax gains and income tax
provision as computed on the cash-out basis. The tax impact of the restatement
is reflected as a reduction in deferred tax liabilities, included within
accounts payable and other liabilities, of $2.8 million at March 31, 1998.
A summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
1998
--------------------
As
Previously As
Reported Restated
<S> <C> <C>
AT MARCH 31,
Restricted cash $13,481 $ -
Residual assets, as fair value 43,275 50,071
Retained earnings, partially restricted 16,300 12,366
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
1998 1997
------------------------- -----------------------
As As
Previously As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED JUNE 30,
Total interest income $9,376 $9,371 $2,304 $2,281
Net gains from mortgage financing operations 5,877 1,767
Income (loss) before income tax provision (benefit) 6,354 6,350 3,836 (297)
Income tax provision (benefit) 2,637 2,635 1,594 (107)
Net income (loss) 3,717 3,715 2,242 (190)
Net income (loss) per share - Basic $ 0.57 $ 0.57 $ 0.70 $(0.06)
Net income (loss) per share - Diluted $ 0.54 $ 0.54 $ 0.70 $(0.06)
</TABLE>
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 10K/A, 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 ended March 31, 1998.
GENERAL
- -------
The Company originates, purchases, sells, services and securitzes primarily
non-conventional mortgage loans principally secured by first and second mortgage
loans on one- to-four family residences. The Company makes Liberator Series
loans, which are for the purchase or refinance of residential real property by
sub-prime borrowers and Portfolio Series loans, which are debt consolidation
loans for borrowers whose credit qualifies for Fannie Mae or Freddie Mac loans
("Agency-Qualified Borrowers"), generally with loan-to-value ratios of up to
125%. While the Company is currently emphasizing the origination of Portfolio
Series loans, it intends to market both products as demand permits. In addition,
to a much lesser extent, the Company originates multi-family residential and
commercial loans. 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, three warehouse lines of
credit and cash proceeds, if any, received from securitizations. Deposit flows
and cost of funds are influenced by prevailing market rates of interest
primarily on competing investments, account maturities and the levels of savings
in the Company's market area. The Company's ability to purchase, sell and
securitize loans is influenced by the general level of product available from
its correspondent relationships and the willingness of investors to purchase the
loans at an acceptable price to the Company. Due to substantial activity in the
purchase, sale and securitization of loans in recent periods, the net gains from
mortgage financing operations have been significant. The Company's results of
operations are also affected by the Company's provision for loan losses and the
level of operating expenses. The Company's operating expenses primarily consist
of employee compensation and benefits, premises and occupancy expenses, and
other general expenses. The Company's results of operations are also
8
<PAGE>
affected by prevailing economic conditions, competition, government policies and
actions of regulatory agencies.
Subsequent to the issuance of the Company's Quarterly Report on Form 10-Q/A
for the three month period ended March 31, 1998, the Company's management
determined that residual assets retained in certain of the Company's 1997 and
1996 securitization transactions had not been determined using the cash-out
method, as required by the Financial Accounting Standards Board's (FASB) Special
Report, A Guide to Implementation of Statement 125 on Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, Second
Edition, dated December 1998, and related guidance set forth in statements made
by the staff of the Securities and Exchange Commission (SEC) on December 8,
1998.
From December 1996 through June 1997, the Company completed two
securitizations, which total $155 million of original loan balance securitized,
that are effected by this restatement. The Company's other securitization
transactions have been properly measured and accounted for using the cash-out
method. Initial deposits to restricted cash accounts and subsequent cash flows
received by securitization trusts sponsored by the Company accumulate as credit
enhancement assets until certain targeted levels are achieved, after which cash
is distributed to the Company on an unrestricted basis. Under the method
previously used by the Company, (i) the assumed discount period for measuring
the present value of credit enhancement assets ended when cash flows were
received by the securitization trusts and (ii) interest-bearing initial deposits
to restricted cash accounts were recorded at face value. Under the cash-out
method required by the FASB and SEC, the assumed discount period for measuring
the fair value of credit enhancement assets ends when cash, including return of
the initial deposits, is distributed to the Company on an unrestricted basis.
As a result, the financial statements as of March 31, 1998 and for the
three months ended March 31, 1998 and 1997, have been restated from amounts
previously reported to properly reflect the pretax fair values of the residual
assets, including restricted cash, and the resulting pretax gains and income tax
provision as computed on the cash-out basis. The effects of the restatement are
presented in Note 7 of Notes to Consolidated Financial Statements and have been
reflected herein.
RESULTS OF OPERATIONS
- ---------------------
Net income was $3.7 million for the three months ended March 31, 1998
compared to a net loss of $190,000 for the three months ended March 31, 1997, an
increase of $3.9 million. For the three month periods ending March 31, 1998 and
1997, the diluted earnings (loss) per share were $0.54 and ($0.06),
respectively. The increase in net income was primarily enhanced by gains from
whole loan sale activities and other related mortgage financing operations as
well as an increase in net interest income.
Interest Income
- ---------------
Interest income was $9.4 million for the three months ended March 31, 1998
compared to $2.3 million for the three months ended March 31, 1997 due primarily
to an increase in the average balance of interest-earning assets combined with
an increase in the yield on those assets. Average interest-earning assets
increased to $388.8 million for the three months ended March 31, 1998 compared
to $119.5 million for the three months ended March 31, 1997. The yield on
interest-earning assets increased to 9.64% for the three months ended March 31,
1998 compared to 7.63% for the three months ended March 31, 1997. The largest
single component of interest-earning assets was average loans receivable, net,
which were $312.0 million with a yield of 9.57% for the three months ended March
31, 1998 compared to $98.9 million with a yield of 7.57% for the three months
ended March 31, 1997. The increase in average loans receivable, net was due to
an increase in loans held-for-sale. Loans held-for-sale were $203.0 million at
March 31, 1998 compared to $38.3 million at March 31, 1997. This increase was
attributed to the continued growth of the Company's mortgage financing
operation.
9
<PAGE>
Interest Expense
- ----------------
Interest expense increased to $5.3 million for the three months ended March
31, 1998 compared to $1.6 million for the three months ended March 31, 1997 due
to an increase in the average interest-bearing liabilities combined with an
increase in the cost of those liabilities. On March 14, 1997, the Company issued
$10 million in subordinated debentures (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. The issuance of debentures, combined
with an increased reliance on certificate accounts and other borrowings,
resulted in an increase in the average cost of interest-bearing liabilities to
6.18% for the three months ended March 31, 1998 compared to 5.33% for the three
months ended March 31, 1997. Average interest-bearing liabilities were $350.4
million for the three months ended March 31, 1998 compared to $118.7 million for
the three months ended March 31, 1997.
The largest component of average interest-bearing liabilities was
certificate accounts, which averaged $213.3 million with an average cost of
5.96% for the three months ended March 31, 1998, compared to $86.3 million with
an average cost of 5.70% for the three months ended March 31, 1997. The second
largest component of average interest-bearing liabilities was borrowings, which
increased to an average balance of $114.9 million with an average cost of 7.31%
for the three months ended March 31, 1998 compared to $15.4 million with an
average cost of 6.45% for the three months ended March 31, 1997. In addition to
the Debentures during 1997, the Company began utilizing two warehouse lines of
credit and a residual financing line for total lines of credit of $290.0 million
which are indexed to London Interbank Offering Rate index ("LIBOR").
Net Interest Income Before Provision for Estimated Loan Losses
- --------------------------------------------------------------
Net interest income before provision for estimated loan losses for the
three months ended March 31, 1998 was $4.0 million compared to $720,000 for the
three months ended March 31, 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 $388.8 million with a yield of 9.64% for
the three months ended March 31, 1998 compared to $119.5 million with a yield of
7.63% for the three months ended March 31, 1997. Average interest-bearing
liabilities increased to $350.4 million with an average cost of 6.18% for the
three months ended March 31, 1998 compared to $118.7 million with an average
cost of 5.33% for the three months ended March 31, 1997. The net interest margin
increased to 4.15% for the three months ended March 31, 1998 compared to 2.41%
for the three months ended March 31, 1997. The ratio of interest-earning assets
to interest-bearing liabilities was 110.95% for the three months ended March 31,
1998 compared to 100.71% for the three months ended March 31, 1997.
10
<PAGE>
Average Balance Sheets. The following tables set forth certain information
- ----------------------
relating to the Company for the three month periods ended March 31, 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
March 31, 1998 March 31, 1997
--------------------------------- ------------------------------------
(Dollars in thousands)
Interest
Average -------- Average Average Average
Balance Yield/Cst Balance Interest Yield/Cst
------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits and short-
term investments $ 25,334 $ 324 5.19% $ 6,947 $ 110 6.42%
Investment securities(1) 6,081 90 6.00 8,629 120 5.64
Loans receivable, net(2) 312,001 7,466 9.57 98,890 1,872 7.57
Mortgage-backed securities, net(1) 11 0.00 10 - 0.00
Residual assets 45,328 1,491 13.16 5,050 179 14.18
-------- ------- -------- -----
Total interest-earning assets 388,755 - 9.64 119,526 2,281 7.63
-----
Non-interest-earning assets(3) 15,470 9,371 9,812
-------- ------- --------
Total assets(3) $404.225 $129,338
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
Passbook accounts $ 4,007 24 2.43 $ 3,959 20 2.05
Money market accounts 2,822 31 4.46 3,025 23 3.08
Checking accounts 15,335 80 2.12 10,006 61 2.47
Certificate accounts 213,333 3,134 5.96 86,347 1,213 5.70
-------- ------ -------- ----- 5.17
Total deposit accounts 235,497 3,269 5.63 103,337 1,317 6.45
Borrowings 114,895 2,071 7.31 15,350 244 5.33
-------- ------ -------- -----
Total interest-bearing liabilities 350,392 5,340 6.18 118,687 1,561
------ -----
Non-interest-bearing liabilities(3) 1,430 3,071
-------- --------
Total liabilities(3) 351,822 121,758
Equity(3) 52,403 7,580
-------- --------
Total liabilities and equity(3) $404,225 $129,338
======== ========
Net interest income before Provision
for estimated loan losses $4,031 $ 720
====== =====
Net interest rate spread(4) 3.46 2.30
Net interest margin(5) 4.15 2.41
Ratio of interest-earning assets to
interest-bearing liabilities 110.95% 100.71%
</TABLE>
(1) Includes unamortized discounts and premiums.
(2) Amount is net of deferred loan origination fees, unamortized discounts,
premiums and allowance for estimated loan losses and includes loans held-
for-sale.
(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 Estimated Loan Losses
- -----------------------------------
Provisions for estimated loan losses were $1.6 million for the three
months ended March 31, 1998 compared to $500,000 for the three months ended
March 31, 1997. The increase in provisions is due to management's analysis of
the risks inherent in its loans held-for-investment and loans held-for-sale
portfolios. With the additional provision, the level of allowances for estimated
loan losses as a percent of non-performing loans was 53.14% as of March 31, 1998
compared to 50.2% as of December 31, 1997. The ratio of non-performing assets as
a percentage of total assets increased to 2.53% as of December 31, 1997 compared
to 1.65% as of December 31, 1997. (See "Financial Condition").
Non-Interest Income
- -------------------
Net gains from mortgage financing operations for the three months ended
March 31, 1998 totaled $8.1 million, compared to $1.8 million for the three
months ended March 31, 1997. This gain is net of a mark-to-market write down on
residual assets of $280,000 which was the result of loan characteristic on the
Company's 1997-2 securitization of loans. The increase in gains from mortgage
financing operations was attributable to the increase in the level of mortgage
financing operations, due to whole loan sales of $249.3 million and the
completion of the pre-fund for the 1997-3 securitization in the amount of $62.5
million for a total of $311.8 million, compared to loans sold totaling $83.2
million for the three months ended March 31, 1997. Net gains from mortgage
financing operations as a percent of loans sold or securitized was 2.60% for the
three months ended March 31, 1998, as compared to 2.16% for the three months
ended March 31, 1997. This increase in percentage reflected the effects of the
securitization of loans compared to whole loan sales. Loans originated and
purchased, net of loan fees, totaled $254.1 million for the three months ended
March 31, 1998, compared to $93.9 million for the three months ended March 31,
1997.
Non-Interest Expense
- --------------------
Non-interest expense was $5.4 million for the three months ended March
31, 1998 compared to $2.5 million for the three months ended March 31, 1997. The
increase was due primarily to an increase in compensation and benefits and other
operating expenses resulting from the expansion of the mortgage financing
operations.
Compensation and benefits increased to $3.0 million for the three
months ended March 31, 1998 from $1.6 million for the three months ended March
31, 1997. These costs are directly related to the expansion of the mortgage
financing operations and the corresponding increase in personnel, to an average
of 293 employees for the three months ended March 31, 1998 compared to 161 for
the three months ended March 31, 1997.
Premises and occupancy expenses increased to $631,000 for the three
months ended March 31, 1998 compared to $223,000 for the three months ended
March 31, 1997 due to the expansion of the mortgage financing operation and the
addition of the regional operating center in the Denver, Colorado metropolitan
operating area, as well as the opening of the new Corporate Headquarters and
regional lending center located in Riverside, California, the relocation of the
Florida regional office, the addition of nine low cost retail lending offices in
California, and the opening of one new retail bank branch in Riverside,
California. The Company anticipates that premises and occupancy expense will
continue to increase as the Company adds new retail lending and retail banking
offices with the Call Center opening in May in Riverside and the Redlands,
California branch opening in June, 1998; as well as, additional office space for
the expansion of the loan servicing operations.
As a result of the expansion of the mortgage financing operations,
other operating expenses increased as well. Data processing increased to
$304,000 for the three months ended March 31, 1998 compared to $135,000 for the
three months ended March 31, 1997. Marketing expense increased to $330,000 for
the three months ended March 31, 1998 compared to $68,000 for the three months
ended March 31, 1997 as marketing campaigns to increase retail deposits and loan
originations were implemented during the current quarter. Telephone,
professional services and other expense increased to $217,000, $294,000 and
$516,000, respectively, for the three months ended March 31, 1998 compared to
$85,000, $58,000 and $260,000 for the three months ended March 31, 1997.
12
<PAGE>
Income Taxes
- ------------
The provision (benefit) for income taxes increased to $2.6 million for
the three months ended March 31, 1998 compared to ($107,000) for the three
months ended March 31, 1997 due to an increase in income before income tax
provision. Income (loss) before income tax provision increased to $6.4 million
for the three months ended March 31, 1998 from ($297,000) for the three months
ended March 31, 1997.
COMPARISON OF FINANCIAL CONDITION AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
- ----------------------------------------------------------------------------
Total assets decreased to $372.8 million as of March 31, 1998 compared
to $397.1 million as of December 31, 1997. This decrease was attributable to the
cash loan sales during the quarter ended March 31, 1998. Loans held-for-sale
totaled $203.0 million as of March 31, 1998 compared to $289.3 million as of
December 31, 1997. Loans held-for-investment decreased to $27.9 million as of
March 31, 1998 compared to $29.1 million as of December 31, 1997.
As a result of the Company's loan securitization activities during the
past year, residual assets increased to $50.1 million of March 31, 1998 compared
to $45.4 million as of December 31, 1997. Mortgage servicing rights also
increased as a result of the loan sales with servicing retained to $9.9 million
as of March 31, 1998 compared to $8.5 million as of December 31, 1997.
Cash and cash equivalents were $61.2 million as of March 31, 1998
compared to $3.5 million as of December 31, 1997. Cash and cash equivalents
increased by $57.7 million during the quarter ended March 31, 1998 due to the
March 30 loan sales. Premises and equipment increased to $6.0 million as of
March 31, 1998 compared to $4.8 million as of December 31, 1997. This increase
of $1.2 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 will open in May, 1998. Real estate owned increased
to $1.6 million as of March 31, 1998 compared to $1.4 million as of December 31,
1997 as part of the Company's continuing effort to resolve problem assets.
The Company increased its liabilities by increasing deposit accounts to
$239.8 million as of March 31, 1998 compared to $211.8 million as of December
31, 1997. The major component of deposit accounts is certificates of deposit,
which increased to $217.1 million as of March 31, 1998 compared to $193.8
million as of December 31, 1997.
The Bank decreased FHLB advances and other borrowings from $119.2
million at December 31, 1997 to $58.5 million at March 31, 1998 with the
proceeds of the loan sales completed during the first quarter of 1998.
Accounts payable and other liabilities increased to $19.9 million as of
March 31, 1998 compared to $15.3 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.
Stockholders' equity increased to $54.6 million as of March 31, 1998
from $50.9 million as of December 31, 1997 due to the quarterly earnings of $3.7
million.
The Company's non-performing assets increased to $9.4 million as of
March 31, 1998 compared to $6.6 million as of December 31, 1997. The increase of
$2.9 million is due primarily to non-accrual loans with an increase of $2.1
million in one- to-four family residential loans and $596,000 in consumer loans.
Non-performing loans as a percent of gross loans receivable increased to 3.39%
as of March 31, 1998 from 1.64% as of December 31, 1997. Non-performing assets
as a percent of total assets decreased to 2.53% as of March 31, 1998 from 1.65%
as of December 31, 1997.
13
<PAGE>
The following table sets forth the non-performing assets at March 31, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Non-accrual loans $ 7,775 $ 5,126
Foreclosed real estate 1,645 1,440
------------- -----------
Total non-performing assets $ 9,420 $ 6,566
============= ===========
Allowance for estimated loan losses as a percent of gross loans
receivable(1) 1.80% 0.88%
Allowance for estimated loan losses as a percent of total non-performing loans(2) 53.14 50.20
Non-performing loans as a percent of gross loans receivable(1)(2) 3.39 1.64
Non-performing assets as a percent of total assets(2) 2.53 1.65
</TABLE>
- ---------------
(1) Gross loans receivable is comprised of loans held-for-sale and loans held-
for-investment.
(2) Non-performing loans 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 estimated
loan losses as of March 31, 1998 of $4.1 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 March 31, 1998 was adequate to absorb known and inherent risks in
the Company's loan portfolio. No assurances can be given, however, the 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
estimated loan losses for the three months ended March 31, 1998:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Balance as of December 31, 1997 $ 2,573
Add:
Provision for estimated loan losses 1,630
Recoveries of previous charge-offs -
Less:
Charge-offs 71
-------
Balance as of March 31, 1998 $ 4,132
=======
</TABLE>
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of funds are deposits, warehouse lines of
credit, FHLB advances, principal and interest payments on loans, cash proceeds
from the sale of loans and securitizations, and to a lesser extent, interest
payments on investment securities and proceeds from the maturation of investment
securities. While maturities and scheduled amortization of loans are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
However, the Company has continued to maintain the required minimum levels of
liquid assets as defined by OTS regulations. This requirement, which may be
varied at the direction of the OTS depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term borrowings.
The required ratio is currently 4.00%. The Company's average liquidity ratios
were 9.25% and 12.60% for the three months ended March 31, 1998 and March 31,
1997, respectively.
The Company's cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities and
financing activities. Cash flows provided in (used in) operating activities were
$65.6 million and $(23.4) million for the quarters ended March 31, 1998 and
1997, respectively. Such cash flows primarily consisted of loans originated and
purchased for sale (net of loan fees) of $254.1 million and $93.9 million, net
of proceeds from the sale and securitization of loans held for sale of $309.2
million and $75.5 million for the quarters ended March 31, 1998 and 1997,
respectively. Net cash provided by investing activities were $24.7 million and
$4.2 million for the quarters ended March 31, 1998 and 1997, respectively, and
consisted primarily of principal collections on loans. Proceeds from the
principal collections were $25.9 million and $4.5 million for the quarters ended
March 31, 1998 and 1997, respectively. Net cash provided by financing activities
consisted primarily of net activity in deposit accounts and borrowings. The net
(decrease)/increase in deposits and borrowings was $(32.7) million and $51.5
million for the quarters ended March 31, 1998 and 1997, respectively. The
Company paid down the lines of credit by $51.7 million and $3.3 million for the
quarters ended March 31, 1998 and 1997, respectively. Net deposits increased by
$28.0 million and $45.1 million for the quarters ended March 31, 1998 and 1997,
respectively. During the quarter ended March 31, 1998, the Company reduced its
FHLB advances by $9.0 million and had no outstanding advances at quarter 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's most liquid assets are 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 March 31, 1998, cash and
short-term investments totalled $61.2 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 $250 million of which $33.0 million had been drawn upon at March
31, 1998. The Company has a residual financing line of credit in the amount of
$40.0 million, with an outstanding balance of $15.5 million as of the quarter
ending March 31, 1998.
The Office of Thrift Supervision (OTS) capital regulations require
savings institutions to meet three minimum capital requirements: a 1.5% tangible
capital ratio, a 3.0% leverage (core capital) ratio and an 8.0% risk-based
capital ratio. The core capital requirement has been effectively increased to
4.0% because the prompt corrective action legislation provides that institutions
with less than 4.0% core capital will be deemed "undercapitalized". In addition,
the OTS, under the prompt corrective action regulation can impose various
constraints on institutions depending on their level of capitalization ranging
from well-capitalized to critically undercapitalized. As of March 31, 1998, the
Bank was considered "well-capitalized".
15
<PAGE>
The Bank was in compliance with the capital requirements in effect as
of March 31, 1998. The following table reflects the required ratios and the
actual capital ratios of the Bank as of March 31, 1998:
<TABLE>
<CAPTION>
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent(a)
------- ------- ------ ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $ 25,305 $ 5,328 $ 19,977 7.12% 1.50%
Core $ 25,305 $ 14,208 $ 11,097 7.12% 3.00%
Risk-based $ 27,551 $ 21,793 $ 5,758 10.11% 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 March 31, 1998, the
Bank's ratios were 12.20%, 7.67% and 11.20%, 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 March 31, 1998, the Bank had outstanding commitments to originate
or purchase mortgage loans of $28.7 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
March 31, 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/A.
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 March 31, 1998 nor December 31, 1997.
16
<PAGE>
Year 2000 Compliance: As the year 2000 approaches, a critical business
--------------------
issue has emerged regarding how existing application software programs and
operating systems can accommodate this date value. The Company has implemented a
program designed to ensure that all software used in connection with the
Company's business will manage and manipulate data involving the transition from
1999 to 2000 without functional or data abnormality and without inaccurate
results related to such data. The Company will utilize internal resources to
monitor and test for year 2000 compliance. However, there can be no assurances
that such a program will be effective. To the extent that the Company system's
are not fully year 2000 compliant, there can be no assurances that potential
system interruptions or the cost necessary to update software would not have a
material effect on the Company's business, financial condition, results of
operation and business prospects. In addition, the Company has limited
information concerning the compliance status of its suppliers and customers. In
the event that any of the Company's significant suppliers do not successfully
and timely achieve year 2000 compliance, the Company's business or operations
could be adversely affected. The costs associated with the compliance efforts
are not expected to have a significant impact on the Company's ongoing results
of operation.
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.
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. *
(b) Reports on Form 8-K
On March 25, 1998, the Company filed a report on Form 8-K,
reporting under Item 5 the entrance into a definite Agreement
and Plan of Merger between the Company and FIRSTPLUS Financial
Group, Inc. The Agreement and Plan of Merger was filed as an
Exhibit at Item 7.
* 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).
17
<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 CORP.
April 15, 1999 By: /s/ Daniel L. Perl
- -------------- ------------------------------------
Date Daniel L. Perl
President and Chief
Executive Officer
(principal executive officer)
April 15, 1999 /s/ Jeffrey Blake
- -------------- ------------------------------------
Date Chief Financial Officer and
Treasurer
(principal financial and accounting
officer)
18
