<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 March 31, 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 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: 6,562,396 shares of common
stock, par value $0.01 per share, were outstanding as of May 17, 1999.
<PAGE>
LIFE FINANCIAL CORPORATION. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 Consolidated Statements of Financial Condition:
March 31, 1999 and December 31, 1998 (unaudited).......... 1
Consolidated Statements of Operations:
For the Three months ended March 31, 1999 and
1998 (unaudited).......................................... 2
Consolidated Statements of Cash Flows:
For the Three months ended March 31, 1999 and
1998 (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 18
PART II OTHER INFORMATION
Item 1 Legal Proceedings......................................... 18
Item 2 Changes in Securities and Use of Proceeds................. 18
Item 3 Defaults Upon Senior Securities........................... 18
Item 4 Submission of Matters to a Vote of Security Holders....... 19
Item 5 Other Information......................................... 19
Item 6 Exhibits and Reports on Form 8-K.......................... 19
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,
1999 1998
--------- -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,001 $ 8,152
Securities held-to-maturity, estimated fair value of
$1,012 and $2,020 at March 31, 1999 and
December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,007 2,008
Residual assets, at fair value . . . . . . . . . . . . . . . . . . . . . . . . 50,261 50,296
Loans held-for-sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315,090 243,307
Loans held-for-investment - net of allowance for
estimated loan losses of $2,586 and $2,777
at March 31, 1999 and December 31, 1998 . . . . . . . . . . . . . . . . . 94,309 91,107
Mortgage servicing rights. . . . . . . . . . . . . . . . . . . . . . . . . . . 15,175 13,119
Accrued interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 3,158 2,762
Foreclosed real estate - net . . . . . . . . . . . . . . . . . . . . . . . . . 1,580 1,898
Premises and equipment - net . . . . . . . . . . . . . . . . . . . . . . . . . 6,727 7,145
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . 2,496 2,463
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,381 5,911
-------- --------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $529,185 $428,078
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $414,537 $323,476
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . 20,000
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,932 39,977
Subordinated debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 1,500
Accounts payable and other liabilities . . . . . . . . . . . . . . . . . . . . 13,534 11,127
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 476,503 376,080
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; 6,562,396 shares
issued and outstanding as of March 31, 1999 and December 31, 1998. . . . . 66 66
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . 42,223 42,223
Retained earnings, partially restricted . . . . . . . . . . . . . . . . . . . . 10,393 9,709
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 52,682 51,998
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . $529,185 $428,078
======== ========
</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,
----------------------
1999 1998
---- ----
<S> <C> <C>
Interest Income:
Loans $ 9,358 $ 7,466
Residual assets 1,674 1,491
Securities held to maturity 31 74
Other interest-earning assets 266 340
---------- ----------
Total interest income 11,329 9,371
---------- ----------
Interest Expense:
Deposit accounts 4,920 3,269
Federal Home Loan Bank
advances and other borrowings 811 1,729
Subordinated debentures 52 342
---------- ----------
Total interest expense 5,783 5,340
---------- ----------
Net Interest Income Before Provision for
loan losses 5,546 4,031
Provision for loan losses 458 1,630
Net Interest Income After Provision for
loan losses 5,088 2,401
Non-Interest Income:
Loan servicing and other fees 1,121 1,052
Service charges on deposit accounts 75 39
Net gains from mortgage financing operations 735 8,069
Other income 48 165
---------- ----------
Total non-interest income 1,979 9,325
---------- ----------
Non-Interest Expense:
Compensation and benefits 2,942 2,976
Premises and occupancy 970 631
Data processing 401 304
Net loss on foreclosed real estate 3 82
FDIC insurance premiums 63 26
Marketing 47 330
Telephone 351 217
Professional services 337 294
Other expense 741 516
---------- ----------
Total non-interest expense 5,855 5,376
---------- ----------
Income Before Provision for tax expense 1,212 6,350
Provision for tax expense 528 2,635
---------- ----------
Net Income $ 684 $ 3,715
========== ==========
Basic earnings per share $ 0.10 $ 0.57
========== ==========
Basic weighted average shares outstanding 6,562,396 6,546,716
========== ==========
Diluted earnings per share $ 0.10 $ 0.54
========== ==========
Diluted weighted average shares outstanding 6,629,328 6,845,761
========== ==========
</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,
--------------------------
1999 1998
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 684 $ 3,715
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation and amortization 457 353
Provision for loan losses 458 1,630
Accretion of deferred fees (75) (10)
Provision for estimated losses of foreclosed real estate (17) 41
Loss (gain) on sale of foreclosed real estate, net 179 (4)
Gain on sale and securitization of loans held-for-sale (2,444) (8,023)
Unrealized loss (gain) on residual assets 1,709 (46)
Net accretion of residual assets (1,674) (1,491)
Change in valuation allowance on mortgage servicing rights 68
Amortization of mortgage servicing rights 1,024 418
Purchase and origination of loans held-for-sale (210,960) (254,118)
Proceeds from sales and securitization of loans held-for-sale 105,089 309,207
(Increase) decrease in accrued interest receivable (396) 586
Deferred income taxes 528 (2)
Increase in accounts payable and other liabilities 1,879 12,681
Federal Home Loan Bank stock dividend (33) (16)
(Increase) decrease in other assets (470) 703
--------- ---------
Net cash (used in) provided by operating activities (103,994) 65,624
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loans 28,554 25,891
Proceeds from sale of foreclosed real estate 1,311 443
Proceeds from maturities of securities held-to-maturity 1,000
Additions to premises and equipment, net (38) (1,591)
--------- ---------
Net cash provided by investing activities 30,827 24,743
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 91,061 28,040
Repayment of other borrowings (13,045) (51,697)
Proceeds from (Repayment of) Federal Home Loan Bank advances 20,000 (9,000)
--------- ---------
Net cash provided by (used in) financing activities 98,016 (32,657)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period 24,849 57,710
CASH AND CASH EQUIVALENTS, end of period 8,152 3,467
--------- ---------
$ 33,001 $ 61,177
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 6,013 $ 5,267
========= =========
Income taxes paid $ 1,273 $ -
========= =========
NONCASH INVESTING ACTIVITIES DURING THE PERIOD:
Transfers from loans to foreclosed real estate $ 1,155 $ 685
========= =========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(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 and the subordinated debentures 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, construction and
consumer loans. The Company's revenues are derived from gains from mortgage
financing operations and net interest income on its loans and residual assets.
The primary sources of funds for the Company have been from deposits, Federal
Home Loan Bank advances, $375 million in lines of credit from two major
investment banks, a $40 million residual financing line of credit, as well as,
from loan sales. As of March 31, 1999, the Bank had four depository branch
offices in San Bernardino, Riverside, Redlands and Huntington Beach, California,
five regional loan centers located in Riverside and San Jose, California,
Jacksonville, Florida, the Boston, Massachusetts area and the Denver, Colorado
metropolitan area, a consumer financing center located in Riverside, California
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 1998 to conform to the 1999
presentation. The results of operations for the three month period ended March
31, 1999 are not necessarily indicative of the results that may be expected for
the entire fiscal year.
4
<PAGE>
2. Approved Stock Compensation Plans
---------------------------------
On November 21, 1996, the Board of Directors of the Bank adopted the Life
Bank 1996 Stock Option Plan (the "1996 Option Plan") which was approved by the
stockholders of the Bank at the Annual Meeting of Stockholders of the Bank, held
on May 21, 1997. The 1996 Option Plan authorizes the granting of options equal
to 321,600 (adjusted for the three for one exchange) shares of common stock for
issuance to executives, key employees, officers and directors. The 1996 Option
Plan will be in effect for a period of ten years from the adoption by the Board
of Directors. Options granted under the 1996 Option Plan will be made at an
exercise price equal to the fair market value of the stock on the date of grant.
Awards granted to officers and employees may include incentive stock options,
non-statutory stock options and limited rights which are exercisable only upon
change in control of the Bank which change in control did not include the
reorganization of the Bank into the holding company. Awards granted to non-
employee directors are non-statutory options. All 1996 options were granted at
an exercise price of $3.33 per share (adjusted for the three for one exchange).
Stock options will become vested and exercisable in the manner specified by the
Board of Directors. The options granted under the 1996 Option Plan will vest at
a rate of 33.3% per year, beginning on November 21, 1999.
The Board of Directors of the Company has adopted the LIFE Financial
Corporation 1997 Stock Option Plan (the "1997 Option Plan"), which became
effective upon the Reorganization (the 1996 Option Plan and the 1997 Option Plan
will sometimes hereinafter be referred to as the "Option Plans"). The Board of
Directors of the Company has reserved shares equal to 10% of the issued and
outstanding shares of the Company giving effect to the Reorganization and the
Public Offering, including Company options that were exchanged for Bank options
pursuant to the 1996 Option Plan for issuance under the Option Plans. Stock
options with respect to shares of the Bank's Common Stock granted under the 1996
Option Plan and outstanding prior to completion of the Reorganization
automatically became options to purchase three shares of the Company's Common
Stock upon identical terms and conditions. Through March 31, 1999, 202,000
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. Under the 1997
Stock Option Plan there were 17,500 options at December 31, 1997 and March 31,
1998 held by one retired director which were exercisable.
3. Comprehensive Income
--------------------
The Company adopted Statement Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" effective with the fiscal year beginning
January 1, 1998. SFAS No. 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings, paid-in capital in the equity section of the
statement of financial position. The Company has no differences between net
income and comprehensive income for the three months ended March 31, 1999.
5
<PAGE>
4. Earnings Per Share
------------------
The following table is a reconciliation of the numerators and denominators
of the basic and diluted EPS computations for the net earnings for the Company
(dollars in thousands, except share data):
<TABLE>
<CAPTION>
For the three months ended March 31,
------------------------------------
1999 1998(a)
----------------------------------------------- --------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------ --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net earnings $ 684 $3,715
Basic EPS earnings
available to
common stockholders 684 6,562,396 $ 0.10 3,715 6,546,716 $0.57
======== =====
Effect of Dilutive
Securities Options 66,932 - 299,045
------- ---------- ------ ---------
Diluted EPS earnings
available to common
stockholders plus
assumed conversions $ 684 6,629,328 $ 0.10 $3,715 6,845,761 $0.54
======= ========== ======== ====== ========= =====
</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. Segment Information
-------------------
The Company's operations within the financial services industry principally
focus on banking and mortgage financing activities. Information about these
segments for the three months ended March 31, 1999 and 1998 is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1999
--------------
Mortgage Mortgage Mortgage
--------- --------- ---------
Financing Financing Financing
--------- --------- ---------
Banking Portfolio Liberator Other Total
------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenue for the period $ 658 $2,655 $9,392 $603 $13,308
Interest income 440 2,332 8,249 308 11,329
Interest expense 4,918 159 561 145 5,783
Net income (loss) for the period (5,153) 1,250 4,423 164 684
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
March 31, 1998
--------------
Mortgage Mortgage Mortgage
--------- --------- ---------
Financing Financing Financing
--------- --------- ---------
Banking Portfolio Liberator Other Total
------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenue for the period $ 402 $7,170 $10,790 $334 $18,696
Interest income 340 3,540 5,327 164 9,371
Interest expense 3,008 914 1,375 43 5,340
Net income (loss) for the period (3,427) 2,800 4,213 129 3,715
</TABLE>
Information as of March 31, 1999 and December 31, 1998 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Mortgage Mortgage Mortgage
--------- --------- ---------
Financing Financing Financing
--------- --------- ---------
Banking Portfolio Liberator Other Total
------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Assets employed as of
March 31, 1999 38,445 104,637 358,319 27,784 529,185
Assets employed as of
December 31, 1998 36,121 110,074 247,375 34,517 428,078
</TABLE>
6. Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
is effective for fiscal years beginning after June 15, 1999. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The adoption of this standard is not expected to have a
material effect on the Company's financial condition, results of operation and
cash flows.
In October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage-Banking Enterprise", which is effective for the first fiscal quarter
beginning after December 15, 1998. This statement amends SFAS No. 65,
"Accounting for Certain Mortgage-Backed Activities" to require that after
securitization of the mortgage loans held for sale, an entity engaged in
mortgage-banking activities classify the resulting mortgage-backed securities or
retained interest based on its ability and intent to sell or hold those
investments. The Company has not yet completed its analysis of the effect this
standard will have on the Company's financial condition, results of operations,
or cash flows.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition
-----------------------
This Management's Discussion and Analysis should be read in conjunction
with the Management's Discussion and Analysis contained in the Company's Annual
Report on Form 10-K/A, which focuses upon relevant matters occurring during the
year ended December 31, 1998. Accordingly, the ensuing discussion focuses upon
the material matters at and for the three months ended March 31, 1999.
Discussions of certain matters under this caption constitute "forward-
looking statements" under the Reform Act which involve risks and uncertainties.
The Company's actual results may differ significantly from the results discussed
in such forward-looking statements. Factors that might cause such a difference
include but are not limited to economic conditions, competition in the
geographic and business areas in which the Company conducts its operations,
fluctuations in interest rates, credit quality and government regulation. For
additional information concerning these factors, see "Item 1 - Business"
contained in the Company's Annual Report on Form 10-K/A.
GENERAL
- -------
The Company is involved in the origination, purchase, sale and servicing of
non-conventional mortgage loans principally secured by first and second mortgage
loans on one- to four-family residences. Since October 1998 the Company has
focused on its Liberator Series loans which are loans originated for the
purchase or refinance of residential real property by borrowers who may have had
prior credit problems or who do not have an adequate credit history, and are
considered "sub-prime borrowers," or loans which have other non-conforming
features. In addition, the Company has originated a substantial number of
Portfolio Series loans which are debt consolidation loans for borrowers whose
credit history qualify for Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC") loans ("Agency Qualified
Borrowers"). The Company purchases and originates mortgage loans and other real
estate secured loans through a network of approved correspondents and
independent mortgage brokers ("Originators") throughout the country. The
Company funds substantially all of the loans which it originates or purchases
through deposits, internally generated funds, FHLB advances and various lines of
credit. In the immediate and foreseeable future, the Company will also fund
loans from the cash proceeds, if any, received from securitizations. Deposit
flows and cost of funds are influenced by prevailing market rates of interest
primarily on competing investments, account maturities and the levels of savings
in the Company's market area. The Company's ability to purchase or sell loans
is influenced by the general level of product available from its correspondent
relationships and the willingness of investors to purchase the loans at an
acceptable price to the Company. Due to substantial activity in the purchase
and sale of loans in recent years, the net gains from mortgage financing
operations have been significant. The Company's results of operations are also
affected by the Company's provision for loan losses and the level of operating
expenses. The Company's operating expenses primarily consist of employee
compensation and benefits, premises and occupancy expenses, and other general
expenses. The Company's results of operations are also affected by prevailing
economic conditions, competition, government policies and actions of regulatory
agencies.
RESULTS OF OPERATIONS
- ---------------------
Net income was $684,000 for the three months ended March 31, 1999 compared
to net income of $3.7 million for the three months ended March 31, 1998, a
decrease of $3.0 million. The decline in net income for the three month period
ending March 31, 1999 is primarily due to decreased loan sales. Additionally, a
pre-tax write-down of residual assets of $1.7 million affected the current
period results of operations. Also, the Company is exiting the second trust
deed, high loan-to-value business ,as well as retaining more loans in the total
portfolio. For the three month periods ending March 31, 1999 and 1998, the
diluted earnings per share were $0.10 and $0.54, respectively.
8
<PAGE>
Interest Income
- ---------------
Interest income was $11.3 million for the three months ended March 31, 1999
compared to $9.4 million for the three months ended March 31, 1998 due primarily
to an increase in the average balance of interest-earning assets. Average
interest-earning assets increased to $470.3 million for the three months ended
March 31, 1999 compared to $388.8 million for the three months ended March 31,
1998. The yield on interest-earning assets decreased slightly to 9.63% for the
three months ended March 31, 1999 compared to 9.64% for the three months ended
March 31, 1998. The largest single component of interest-earning assets was
average loans receivable, net, which were $380.5 million with a yield of 9.84%
for the three months ended March 31, 1999 compared to $312.0 million with a
yield of 9.57% for the three months ended March 31, 1998. The increase in
average loans receivable, net was due to an increase in loans held-for-sale.
Loans held-for-sale were $315.1 million at March 31, 1999 compared to $203.0
million at March 31, 1998. This increase was attributed to the continued
growth of the Company's mortgage financing operation.
Interest Expense
- ----------------
Interest expense increased to $5.8 million for the three months ended March
31, 1999 compared to $5.3 million for the three months ended March 31, 1998 due
to an increase in the average interest-bearing liabilities offset with a
decrease in the cost of those liabilities. Average interest-bearing
liabilities were $427.8 million for the three months ended March 31, 1999
compared to $350.4 million for the three months ended March 31, 1998.
The largest component of average interest-bearing liabilities was
certificate accounts, which averaged $354.5 million with an average cost of
5.43% for the three months ended March 31, 1999, compared to $213.3 million with
an average cost of 5.96% for the three months ended March 31, 1998. The
increase is due to increased reliance on certificates on deposit versus higher
cost Wall Street funds to fund operations. The second largest component of
average interest-bearing liabilities was borrowings, which decreased to an
average balance of $46.6 million with an average cost of 7.51% for the three
months ended March 31, 1999 compared to $114.9 million with an average cost of
7.31% for the three months ended March 31, 1998.
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, 1999 was $5.5 million compared to $4.0 million for
the three months ended March 31, 1998. 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. Average
interest-earning assets increased to $470.3 million with a yield of 9.63% for
the three months ended March 31, 1999 compared to $388.8 million with a yield of
9.64% for the three months ended March 31, 1998. Average interest-bearing
liabilities increased to $427.8 million with an average cost of 5.48% for the
three months ended March 31, 1999 compared to $350.4 million with an average
cost of 6.18% for the three months ended March 31, 1998. The net interest
margin increased to 4.72% for the three months ended March 31, 1999 compared to
3.46% for the three months ended March 31, 1998.
9
<PAGE>
Average Balance Sheets. The following tables set forth certain information
- ----------------------
relating to the Company for the three month periods ended March 31, 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 which are considered adjustments to yields.
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1999 March 31, 1998
------------------------------- ----------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets: Average Average Average Average
Interest-earning assets: Balance Interest Yield/Cst Balance Interest Yield/Cst
Interest-earning deposits and short- ------ -------- --------- ------- -------- ---------
term investments $ 20,512 $ 232 4.59% $ 25,334 $ 324 5.19%
Investment securities(1) 4,476 65 5.89 6,081 90 6.00
Loans receivable, net(2) 380,537 9,358 9.84 312,001 7,466 9.57
Mortgage-backed securities, net(l) 7 0.00 11 0.00
Residual assets 64,810 1,674 10.33 45,328 1,491 13.16
-------- ------- ------- ------
Total interest-earning assets 470,342 11,329 9.63 388,755 9,371 9.64
Non-interest-earning assets(3) 15,897 ------- 15,470 ------
-------- --------
Total assets(3) $486,239 $404,225
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
Passbook accounts $ 4,545 24 2.14 $ 4,007 24 2.43
Money market accounts 7,241 77 4.31 2,822 31 4.46
Checking accounts 14,932 70 1.90 15,335 80 2.12
Certificate accounts 354,496 4,749 5.43 213,333 3,134 5.96
-------- ------- -------- ------
Total deposit accounts 381,214 4,920 5.23 235,497 3,269 5.63
Borrowings 46,619 863 7.51 114,895 2,071 7.31
-------- ------- -------- ------
Total interest-bearing liabilities 427,833 5,783 5.48 350,392 5,340 6.18
------- ------
Non-interest-bearing liabilities(3) 6,056 1,430
-------- --------
Total liabilities(3) 433,889 351,822
Equity(3) 52,350 52,403
-------- --------
Total liabilities and equity(3) $486,239 $404,225
======== ========
Net interest income before provision
for loan losses $ 5,546 $ 4,031
======== =======
Net interest rate spread(4) 4.15 3.46
Net interest margin(5) 4.72 4.15
Ratio of interest-earning assets to
interest-bearing liabilities 109.94% 110.95%
</TABLE>
(1) Includes unamortized discounts and premiums.
(2) Amount is net of deferred loan origination fees, unamortized discounts,
premiums and allowance for loan losses and includes loans held-for-sale,
non-performing loans and warehouse financing receivable.
10
<PAGE>
(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
- -----------------------------------
The allowance for loan losses is based upon a number of factors, including
current economic conditions, actual loss experience and industry trends. The
Company's non-performing loans consist of one- to-four family residential
mortgage loans and consumer loans. Management believes that the allowance for
loan losses at March 31, 1999 and 1998 was adequate to absorb known and inherent
risks in the Company's loan portfolio. Based upon management's analysis, there
were provisions for loan losses of $458,000 and $1.6 million for the three month
periods ended March 31, 1999 and 1998, respectively.
Non-Interest Income
- -------------------
Net gains from mortgage financing operations for the three months ended
March 31, 1999 totaled $735,000, compared to $8.1 million for the quarter ended
March 31, 1998. During the three months ended March 31, 1999, the Company had
fewer loan sales. Fewer loan sales have resulted in lower net gains. For the
three months ended March 31, 1999, loans sold totaled $105.0 million compared to
loans sold and securitized totaling $311.8 million for the three months ended
March 31, 1998. The Company is currently originating more loans as held-for-
sale and held-for-investment instead of selling them into the secondary market.
The Company completed no securitizations during the three months ended March
31, 1999. Another item which affected the decline in net gains was a pre-tax
$1.7 million mark-to-market write down of residual assets. At March 31, 1999,
the Company utilized prepayment assumptions ranging from 17% to 50%, an
estimated loss factor assumption ranging from 1.00% to 6.00% and a weighted
average discount rate of 13.5% to value residual assets. Loans originated and
purchased totaled $210.9 million for the three months ended March 31, 1999,
compared to $254.1 million for the three months ended March 31, 1998.
Non-Interest Expense
- --------------------
Non-interest expense was $5.9 million for the three months ended March 31,
1999 compared to $5.4 million for the three months ended March 31, 1998. The
increase was due primarily to an increase in premises and occupancy and other
operating expenses resulting from the expansion of the banking and mortgage
financing operations.
Compensation and benefits decreased to $2.9 million for the three months
ended March 31, 1999 from $3.0 million for the three months ended March 31,
1998.
Premises and occupancy expenses increased to $970,000 for the three months
ended March 31, 1999 compared to $631,000 for the three months ended March 31,
1998 due to the expansion of the banking and mortgage financing operation, the
implementation of the consumer finance division in California and the build-out
of a retail bank branch in Seal Beach, California. The Company anticipates that
premises and occupancy expense will continue to increase as the Company adds the
Seal Beach, California branch expected to open in June, 1999.
As a result of the expansion of the banking and mortgage financing
operations, other operating expenses increased as well. Data processing
increased to $401,000 for the three months ended March 31, 1999 compared to
$304,000 for the three months ended March 31, 1998. Marketing expense decreased
to $47,000 for the three months ended March 31, 1999 compared to $330,000 for
the three months ended March 31, 1998 as marketing campaigns to increase retail
loan originations were substantially reduced versus prior quarters. Telephone,
professional services and other expense increased to $351,000, $337,000 and
$741,000, respectively, for the three months ended March 31, 1999 compared to
$217,000, $294,000 and $516,000 for the three months ended March 31, 1998.
12
<PAGE>
Income Taxes
- ------------
The provision for income taxes decreased to $528,000 for the three months
ended March 31, 1999 compared to $2.6 million for the three months ended March
31, 1998 due to a decrease in income before income tax provision. Income before
income tax provision decreased to $1.2 million for the three months ended March
31, 1999 from $6.4 million for the three months ended March 31, 1998.
COMPARISON OF FINANCIAL CONDITION AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
- ----------------------------------------------------------------------------
Total assets increased to $529.2 million as of March 31, 1999 compared to
$428.1 million as of December 31, 1998. This increase was attributable to the
increase in loans held-for-sale during the period ended March 31, 1999. Loans
held-for-sale totaled $315.1 million as of March 31, 1999 compared to $243.5
million as of December 31, 1998. Loans held-for-investment increased to $94.3
million as of March 31, 1999 compared to $90.8 million as of December 31, 1998
due primarily to origination of construction loans.
Mortgage servicing rights increased as a result of the loan sales with
servicing retained to $15.2 million as of March 31, 1999 compared to $13.1
million as of December 31, 1998.
Cash and cash equivalents were $33.0 million as of March 31, 1999 compared
to $8.2 million as of December 31, 1998. Cash and cash equivalents increased by
$24.8 million during the quarter ended March 31, 1999 due to loan sales
occurring on March 30, 1999. Premises and equipment decreased to $6.7 million
as of March 31, 1999 compared to $7.1 million as of December 31, 1998. Real
estate owned decreased to $1.6 million as of March 31, 1999 compared to $1.9
million as of December 31, 1998 as part of the Company's continuing effort to
resolve problem assets.
The Company increased its liabilities by increasing deposit accounts to
$414.5 million as of March 31, 1999 compared to $323.4 million as of December
31, 1998 due to the opening of the Huntington Beach branch plus the additional
reliance on wholesale deposits . The major component of deposit accounts is
certificates of deposit, which increased to $388.1 million as of March 31, 1999
compared to $297.0 million as of December 31, 1998.
The Company increased FHLB advances and borrowings from $41.5 million at
December 31, 1998 to $48.4 million at March 31, 1999 due to the reduced reliance
on higher priced Wall Street funds.
Accounts payable and other liabilities increased to $13.5 million as of
March 31, 1999 compared to $11.2 million as of December 31, 1998 due primarily
to the transfer of custodial funds to cover charge offs in the loan
securitizations.
Stockholders' equity increased to $52.7 million as of March 31, 1999 from
$52.0 million as of December 31, 1998 due to the quarterly earnings of $684,000.
The Company's non-performing assets decreased to $9.3 million as of March
31, 1999 compared to $9.4 million as of December 31, 1998. Non-performing loans
as a percent of gross loans receivable decreased to 1.84% as of March 31, 1999
from 2.23% as of December 31, 1998. Non-performing assets as a percent of total
assets decreased to 1.76% as of March 31, 1999 from 2.21% as of December 31,
1998.
13
<PAGE>
The following table sets forth the non-performing assets at March 31, 1999 and
December 31, 1998:
<TABLE>
<S> <C> <C>
As of As of
March 31, December 31,
1999 1998
------ ------
(Dollars in thousands)
Non-accrual loans $7,744 $7,544
Foreclosed real estate (1) 1,580 1,898
------ ------
Total non-performing assets $9,324 $9,442
====== ======
Allowance for loan losses as a percent of gross loans receivable(2) 0.62% 0.82%
Allowance for loan losses as a percent of total non-performing loans(3) 33.39 36.81
Non-performing loans as a percent of gross loans receivable (2) 1.84 2.23
Non-performing assets as a percent of total assets (4) 1.76 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.
The Company, in consideration of the current economic environment and
the condition of the loan portfolio, has established an allowance for losses as
of March 31, 1999 of $2.6 million compared to $2.8 million as of December 31,
1998. 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, 1999 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 loan
losses for the three months ended March 31, 1999:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Balance as of December 31, 1998 $2,777
Add:
Provision for loan losses 458
Recoveries of previous charge-offs 46
Less:
Charge-offs 695
------
Balance as of March 31, 1999 $2,586
======
</TABLE>
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the three months ended March 31, 1999, current market conditions
have effected the liquidity of numerous mortgage lenders. The Company has
warehouse lines of credit available of $375 million. As of March 31, 1999 there
was a zero outstanding balance owed. The Company has other sources of funds
which continue to lessen the impact of current market conditions on its
liquidity. The Company's other primary sources of funds are deposits, FHLB
advances, principal and interest payments on loans, cash proceeds from the sale
of loans and securitizations, and to a lesser extent, interest payments on
investment securities and proceeds from the maturation of investment securities.
While maturities and scheduled amortization of loans are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. However, the Company has
continued to maintain the required minimum levels of liquid assets as defined by
OTS regulations. This requirement, which may be varied at the direction of the
OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required ratio is
currently 4%. The Bank's average liquidity ratios were 8.60% and 9.25% for the
three months ended March 31, 1999 and March 31, 1998, respectively. The Bank
had $24.6 million in deposits maturing within one month as of March 31, 1999.
The Bank anticipates that it will retain a portion of these accounts.
The Company's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows (used in) provided by operating activities were $(104.0)
million and $65.6 million for the quarters ended March 31, 1999 and 1998,
respectively. Such cash flows primarily consisted of loans originated and
purchased for sale of $211.0 million and $254.1 million, net of proceeds from
the sale and securitization of loans held for sale of $105.1 million and $309.2
million for the quarters ended March 31, 1999 and 1998, respectively. Net cash
provided by investing activities were $30.8 million and $24.7 million for the
quarters ended March 31, 1999 and 1998, respectively, and consisted primarily of
principal collections on loans. Proceeds from the principal collections were
$28.6 million and $25.9 million for the quarters ended March 31, 1999 and 1998,
respectively. Net cash provided by financing activities consisted primarily of
net activity in deposit accounts and borrowings. The net increase/(decrease) in
deposits and borrowings was $98.0 million and $(32.7) million for the quarters
ended March 31, 1999 and 1998, respectively. The Company paid down the lines of
credit by $13.0 million and $51.7 million for the quarters ended March 31, 1999
and 1998, respectively. Net deposits increased by $91.1 million and $28.0
million for the quarters ended March 31, 1999 and 1998, respectively. During
the quarter ended March 31, 1999, the Company received advances from the FHLB
totaling $20.0 million. 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.
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, 1999, cash and
short-term investments totaled $33.0 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 $375 million which has a zero balance as of March 31,
1999. The Company has a residual financing line of credit in the amount of
$40.0 million; $19.0 million has been drawn down on this line as of March 31,
1999.
The Office of Thrift Supervision (OTS) capital regulations require savings
institutions to meet three minimum capital requirements: a 1.5% tangible capital
ratio, a 4.0% leverage (core capital) ratio and an 8.0% risk-based capital
ratio. 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, 1999, the Bank was considered "adequately capitalized".
15
<PAGE>
The Bank was in compliance with the minimum capital requirements in effect
as of March 31, 1999. The following table reflects the required ratios and the
actual capital ratios of the Bank as of March 31, 1999:
<TABLE>
<CAPTION>
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent(a)
-------- ----------- --------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible
$28,133 $ 7,444 $20,689 5.67% 1.50%
Core
$28,133 $19,851 $ 8,282 5.67% 4.00%
Risk-based
$30,584 $26,920 $ 3,664 9.09% 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, 1999, the
Bank's ratios were 9.09%, 5.67% and 8.36%, 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, 1999, the Bank had outstanding commitments to originate
or purchase mortgage loans of $7.9 million compared to $11.0 million as of
December 31, 1998 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, 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 10-K/A.
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 Company is preparing its systems and applications for the
year 2000 (Y2k). The 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 is actively engaged in a comprehensive risk-based program
designed to make its computer systems and equipment Y2k ready. "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 has 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
16
<PAGE>
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. This phase is also complete, but
is reviewed continually to manage changes to systems and relationships. The
renovation phase is substantially complete, with minor patches and upgrades to
internal non-critical IT systems to be complete by June 30, 1999. The
validation and implementation phases have been completed for the Company's
mission critical business financial systems. Other third party systems are in
process of being validated and implemented, and these phases are estimated to be
complete by June 30, 1999.
To complete the five program phases, the Company is primarily using
internal resources. The service bureau responsible for the Company's mission
critical business financial systems is providing assistance with validation of
third party systems that interface with their systems through proxy testing.
The Company's systems use a combination of methodologies for date fields.
Where possible, date fields were expanded to a full eight digits. For date
fields that were retained in a six-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 process and anticipated to be
completed by the second quarter of 1999, with Y2k issues incorporated. The
contingency plan is intended to enable the Company to continue to operate, to
the extent that it can do so safely, including performing certain processes
manually, repairing or obtaining replacement systems, and changing vendors. To
date, no systems or vendors have had to be replaced and it is anticipated that
none will be. The Company believes, however, that due to the widespread nature
of the potential Y2k issues, the contingency planning process is an ongoing one,
which will require further modifications as the Company obtains additional
information regarding: (i) the Company's internal systems and equipment during
the validation phase of its Y2k program, and (ii) the status of third party Y2k
readiness.
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 implementation of completed renovations on its
internal systems and equipment will allow it to be Y2k compliant in a timely
manner. There can be no assurances, however, that the Company's internal
systems or equipment, or those of third parties on which the Company relies,
will be Y2k compliant in a timely manner, or that the Company's or third
parties' contingency plans will mitigate the effects of noncompliance. The
Company 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 which 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.
17
<PAGE>
Forward-looking Statements
The preceding Y2k issue discussion contains various forward-looking
statements which 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 when it will complete the
renovation, validation, and implementation phases of 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. 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, 1999 nor 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.
18
<PAGE>
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. *
11.0 Earnings per share (see footnote 4 to the financial statements
included herein)
27.0 Financial data schedule (filed herewith).
(b) Reports on Form 8-K
None
. Incorporated herein by reference to Exhibits of the same number from the
Company's Registration Statement on Form S-4 (filed initially on Form S-1),
filed on January 27, 1997, as amended on March 27, 1997, and as further
amended on May 29, 1997 and June 11, 1997 ( Registration No. 333-20497).
19
<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.
May 17, 1999 By: /s/ DANIEL L. PERL
- ------------ -----------------------
Date Daniel L. Perl
President and Chief
Executive Officer
(principal executive officer)
May 17, 1999 /s/ JEFFREY BLAKE
- ------------ -----------------------
Date Chief Financial Officer and
Treasurer
(principal financial and accounting
officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 8,501 8,152
<INT-BEARING-DEPOSITS> 20,000 0
<FED-FUNDS-SOLD> 4,500 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0
<INVESTMENTS-CARRYING> 1,007 2,008
<INVESTMENTS-MARKET> 1,012 2,020
<LOANS> 409,399 334,414
<ALLOWANCE> 2,586 2,777
<TOTAL-ASSETS> 529,185 428,078
<DEPOSITS> 414,537 323,476
<SHORT-TERM> 46,932 39,977
<LIABILITIES-OTHER> 13,534 11,127
<LONG-TERM> 1,500 1,500
0 0
0 0
<COMMON> 66 66
<OTHER-SE> 52,616 51,932
<TOTAL-LIABILITIES-AND-EQUITY> 529,185 428,078
<INTEREST-LOAN> 9,358 7,466
<INTEREST-INVEST> 31 74
<INTEREST-OTHER> 1,940 1,831
<INTEREST-TOTAL> 11,329 9,371
<INTEREST-DEPOSIT> 4,920 3,269
<INTEREST-EXPENSE> 5,783 5,340
<INTEREST-INCOME-NET> 5,546 4,031
<LOAN-LOSSES> 458 1,630
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 5,855 5,376
<INCOME-PRETAX> 1,212 6,350
<INCOME-PRE-EXTRAORDINARY> 1,212 6,350
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 684 3,715
<EPS-PRIMARY> .10 .57
<EPS-DILUTED> .10 .54
<YIELD-ACTUAL> 4,524 4,734
<LOANS-NON> 7,744 7,544
<LOANS-PAST> 1,580 1,898
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 2,777 2,573
<CHARGE-OFFS> 695 4,071
<RECOVERIES> 46 109
<ALLOWANCE-CLOSE> 2,586 2,777
<ALLOWANCE-DOMESTIC> 2,586 2,777
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
