<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 June 30, 1999
Commission File Number 0-22193
LIFE FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0743196
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10540 MAGNOLIA AVENUE, RIVERSIDE, CALIFORNIA 92505
- --------------------------------------------------------------------------------
(909) 637 - 4000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such 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: 6,568,436 shares of common
stock, par value $0.01 per share, were outstanding as of August 13, 1999.
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
Item 1 Consolidated Statements of Financial Condition:
June 30, 1999 and December 31, 1998 (unaudited) ............................................ 1
Consolidated Statements of Operations:
For the Six months ended June 30, 1999 and 1998 and
for the Three months ended June 30, 1999 and 1998 (unaudited)............................... 2
Consolidated Statements of Cash Flows:
For the Six months ended June 30, 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........................................................................... 19
Item 2 Changes in Securities and Use of Proceeds................................................... 19
Item 3 Defaults Upon Senior Securities............................................................. 19
Item 4 Submission of Matters to a Vote of Security Holders......................................... 19
Item 5 Other Information........................................................................... 19
Item 6 Exhibits and Reports on Form 8-K............................................................ 19
</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>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents..................................... $ 50,868 $ 8,152
Trading securities............................................ 26,396
Securities held to maturity, estimated fair value of
$1,008 and $2,020 at June 30, 1999 and
December 31, 1998........................................ 1,006 2,008
Residual assets, at fair value............................... 44,436 50,296
Loans held for sale........................................... 276,258 243,307
Loans held for investment - net of allowance for
loan losses of $3,393 and $2,777 at
June 30, 1999 and December 31, 1998...................... 94,737 91,017
Mortgage servicing rights..................................... 16,218 13,119
Accrued interest receivable................................... 4,197 2,762
Foreclosed real estate - net................................. 1,752 1,898
Premises and equipment - net.................................. 6,527 7,145
Federal Home Loan Bank stock.................................. 2,653 2,463
Other assets.................................................. 6,490 5,911
-------- --------
TOTAL ASSETS............................................. $531,538 $428,078
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts.............................................. $433,196 $323,476
Other borrowings............................................. 26,432 39,977
Subordinated debentures....................................... 1,500 1,500
Accounts payable and other liabilities........................ 15,949 11,127
-------- --------
Total liabilities........................................ 477,077 376,080
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 5,000,000
shares authorized;
no shares outstanding
Common stock, $.01 par. Value; 25,000,000 shares
authorized; 6,568,436 (1999) and 6,562,396
(1998) shares issued and outstanding...................... 66 66
Additional paid-in capital.................................... 42,243 42,223
Retained earnings, partially restricted....................... 12,152 9,709
-------- --------
Total stockholders' equity............................... 54,461 51,998
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................................. $531,538 $428,078
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
1
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ------------------------------
1999 1998 1999 1998
---------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
Interest Income:
Loans $ 10,396 $ 7,973 $ 9,754 $ 15,439
Residual assets 1,626 1,659 3,300 3,150
Securities held to maturity 15 73 46 147
Other interest-earning assets 659 440 925 780
---------- ---------- --------- ----------
Total interest income 12,696 10,145 4,025 19,516
---------- ---------- --------- ----------
Interest Expense:
Deposit accounts 5,677 3,612 0,597 6,881
Federal Home Loan Bank
advances and other borrowings 835 1,593 1,646 3,322
Subordinated debentures 53 349 105 691
---------- ---------- --------- ----------
Total interest expense 6,565 5,554 2,348 10,894
---------- ---------- --------- ----------
Net Interest Income Before Provision for
loan losses 6,131 4,591 1,677 8,622
Provision for loan losses 1,750 - 2,208 1,630
---------- ---------- --------- ----------
Net Interest Income After Provision for
loan losses 4,381 4,591 9,469 6,992
Non-interest Income:
Loan servicing and other fees 989 1,915 2,110 2,967
Service charges on deposit accounts 88 34 163 73
Net gains from mortgage financing operations 3,649 2,433 4,384 10,502
Other income 61 125 109 290
---------- ---------- --------- ----------
Total non-interest income 4,787 4,507 6,766 13,832
---------- ---------- --------- ----------
Non-interest Expense:
Compensation and benefits 2,744 2,550 5,686 5,527
Premises and occupancy 942 850 1,912 1,481
Data processing 391 344 792 648
Net (gain) loss on foreclosed real estate (78) 105 (75) 186
FDIC insurance premiums 77 34 140 60
Marketing 155 669 202 999
Telephone 266 276 617 493
Professional services 467 517 804 811
Other expense 1,013 1,019 1,754 1,535
---------- ---------- --------- ----------
Total non-interest expense 5,977 6,364 1,832 11,740
---------- ---------- --------- ----------
Income Before Provision for tax expense 3,191 2,734 4,403 9,084
Provision for tax expense 1,432 1,213 1,960 3,848
---------- ---------- --------- ----------
Net Income $ 1,759 $ 1,521 $ 2,443 $ 5,236
========== ========== ========= ==========
Basic earnings per share $ 0.27 $ 0.23 $ 0.37 $ 0.80
========== ========== ========= ==========
Basic weighted average shares outstanding 6,564,743 6,550,852 6,53,569 6,548,789
========== ========== ========= ==========
Diluted earnings per share $ 0.27 $ 0.22 $ 0.37 $ 0.76
========== ========== ========= ==========
Diluted weighted average shares outstanding 6,619,504 6,904,438 6,62,896 6,875,099
========== ========== ========= ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 2,443 $ 5,236
Net income
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 860 779
Provision for estimated loan losses 2,208 1,630
(Accretion) amortization of deferred fees 57 4
Provision for estimated losses of foreclosed real
estate 32
Loss on sale of foreclosed real estate, net 323 56
Gain on sale and securitization of loans held for sale (8,968) (13,379)
Unrealized loss on residual assets 4,585 2,877
Net accretion of residual assets (3,300) (3,150)
Valuation allowance on mortgage servicing rights 379 381
Amortization of mortgage servicing rights 2,330 1,137
Purchase and origination of loans held for sale, net
of loan fees (468,967) (562,553)
Proceeds from sales and securitization of loans held
for sale 363,050 478,501
Increase in accrued interest receivable (1,435) (259)
Increase in accounts payable and other liabilities 4,822 5,384
Federal Home Loan Bank stock dividend (66) (32)
Decrease (increase) in other assets (579) 277
---------- ---------
Net cash used in operating activities (102,258) (83,079)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments on loans 67,639 43,426
Proceeds from sale of foreclosed real estate 2,333 1,004
Purchase of trading securities (26,396)
Proceeds from maturities of securities held to maturity 1,000 1,000
Additions to premises and equipment (248) (2,740)
Cash received on residual assets 4,575
Purchase of Federal Home Loan Bank stock (124) (1,297)
---------- ---------
Net cash provided by investing activities 48,779 41,393
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 109,720 54,560
Proceeds from (repayments of) other borrowings (13,545) 6,364
Net proceeds from exercise of stock options 20
Repayment of Federal Home Loan Bank advances (9,000)
---------- ---------
Net cash provided by financing activities 96,195 51,924
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 42,716 10,238
CASH AND CASH EQUIVALENTS, beginning of period 8,152 3,467
---------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 50,868 $ 13,705
========== =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 12,604 $ 11,124
========== =========
Income taxes paid $ 3,495 $ -
========== =========
NONCASH INVESTING ACTIVITIES DURING THE PERIOD:
Transfers from loans to foreclosed real estate $ 2,312 $ 1,730
========== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 subordinated debentures from the Bank.
The Bank is a federally chartered stock savings bank whose primary business
is 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 and, to a much lesser extent, multi-family residential,
commercial real estate, and construction loans. The Company's revenues are
derived from gains from mortgage financing operations and net interest on its
loans and residual assets. The primary sources of funds for the Company have
been from deposits, Federal Home Loan Bank ("FHLB") advances, $300 million in a
line of credit from a major investment bank, a $40 million residual financing
line of credit, as well as from loan sales and securitizations. As of June 30,
1999, the Bank had five depository branch offices in San Bernardino, Riverside,
Redlands, Huntington Beach and the recently opened Seal Beach, California
location, five regional loan centers located in Riverside, California,
Jacksonville, Florida, the Boston, Massachusetts area, the San Jose, California
area and the Denver, Colorado metropolitan area. A consumer finance location is
also located in Riverside California.
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 and six month periods
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the entire fiscal year.
2. Approved Stock Compensation Plans
---------------------------------
On November 21, 1996, the Board of Directors of the Bank adopted the Life
Bank 1996 Stock Option Plan (the "1996 Option Plan") which was approved by the
stockholders of the Bank at the Annual Meeting of Stockholders of the Bank, held
on May 21, 1997. The 1996 Option Plan authorizes the granting of options equal
to 321,600 (adjusted for the three for one exchange) shares of common stock for
issuance to executives, key employees, officers and directors. The 1996 Option
Plan will be in effect for a period of ten years from the adoption by the Board
of Directors. Options granted under the 1996 Option Plan will be made at an
exercise price equal to the fair market value of the stock on the date of grant.
Awards granted to officers and employees may
4
<PAGE>
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, 1998, there were 27,540 options held by three retired
directors which were exercisable. On May 20, 1998, 9,180 options were exercised;
the remaining 18,360 options are held by two retired directors as of June 30,
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 June 30, 1999, 202,000
shares of the 1997 Option Plan were granted at exercise prices ranging from
$11.00 to $18.50 per share. The options granted under the 1997 Option Plan will
vest at a rate of 33.3% per year, beginning on June 30, 2000. Under the 1997
Option Plan, there were 17,500 options at December 31, 1998 and June 30, 1999
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 and six months ended June
30, 1999 and the three months and six months ended June 30, 1998.
4. Earnings Per Share
------------------
5
<PAGE>
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 June 30,
-----------------------------------
1999 1998
------------------------------------- --------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $ 1,759 $ 1,521
=========== ===========
Basic EPS Earnings available
to common stockholders $ 1,759 6,564,743 $ 0.27 $ 1,521 6,550,852 $ 0.23
========= =========
Effect of Dilutive Securities
Options - 70,715 - 353,586
----------- ------------- ----------- -------------
Diluted EPS Earnings available
to common stockholders plus
assumed conversions $ 1,759 6,619,504 $ 0.27 $ 1,521 6,904,438 $ 0.22
=========== ============= ========= =========== ============= ==========
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June 30,
---------------------------------
1999 1998
------------------------------------- --------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $ 2,443 $ 5,236
=========== ===========
Basic EPS Earnings available
to common stockholders $ 2,443 6,563,569 $ 0.37 $ 5,236 6,548,789 $ 0.80
============= =========
Effect of Dilutive Securities
Options - 59,327 - 326,310
----------- ------------- ----------- -------------
Diluted EPS Earnings available
to common stockholders plus
assumed conversions $ 2,443 6,622,896 $ 0.37 $ 5,236 6,875,099 $ 0.76
=========== ============= ========= =========== ============= =========
</TABLE>
5. Asset Securitizations
In June 1999, the Company completed an early clean up of the Life Financial
Services Trust 1996-1 securitization. The clean up reduced the company's
residual assets from securitization by $4.4 million. Additionally, $4.7
million in previously restricted cash that served as credit enhancement to
the 1996-1 Trust was released to Life Financial Corporation.
6
<PAGE>
6. 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 six months ended June 30, 1999 and 1998 is as follows (dollars
in thousands):
<TABLE>
<CAPTION>
June 30, 1999
-------------
Mortgage Mortgage Mortgage
-------- -------- --------
Financing Financing Financing
--------- --------- ---------
Banking Portfolio Liberator Other Total
------- --------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue for the period $ 1,806 $6,089 $16,884 $6,012 $30,791
Interest income 1,205 4,794 13,293 4,733 24,025
Interest expense 10,595 368 1,021 364 12,348
Net income (loss) for the period (11,036) 2,831 7,851 2,797 2,443
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998
-------------
Mortgage Mortgage Mortgage
-------- -------- --------
Financing Financing Financing
--------- --------- ---------
Banking Portfolio Liberator Other Total
------- --------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue for the period $ 1,321 $3,362 $24,053 $4,612 $33,348
Interest income 1,220 1,921 13,741 2,634 19,516
Interest expense 6,876 422 3,018 578 10,894
Net income (loss) for the period (7,125) 1,298 9,283 1,780 5,236
</TABLE>
Information as of June 30, 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 June 30, $78,779 $114,993 $264,069 $73,697 $531,538
1999
Assets employed as of December 36,121 110,074 247,375 34,517 428,078
31, 1998
</TABLE>
7
<PAGE>
7. 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, 2000. 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.
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 and six months ended June 30,
1999.
GENERAL
- -------
The Company is involved in the origination, purchase, sale and servicing of
non-conventional mortgage loans principally secured by first and second mortgage
loans on one- to four-family residences. The Company has focused on Liberator
Series loans which are for the purchase or refinance of residential real
property by borrowers who may have had prior credit problems or who do not have
an adequate credit history, or loans which have other non-conforming features.
In addition, the Company originates 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. Deposit flows and
cost of funds are influenced by prevailing market rates of interest primarily on
competing investments, account maturities and the levels of savings in the
Company's market area. The Company's ability to purchase or sell loans is
influenced by the general level of product available from its correspondent
relationships and the willingness of investors to purchase the loans at an
acceptable price to the Company. Due to substantial activity in the purchase and
sale of loans in recent years, the net gains from mortgage financing operations
have been significant. The Company's results of operations are also affected by
the Company's provision for loan losses and the level of operating expenses. The
Company's operating expenses primarily consist of employee compensation and
benefits, premises and occupancy expenses, and other general expenses. The
Company's results of operations are also affected by prevailing economic
conditions, competition, government policies and actions of regulatory agencies.
RESULTS OF OPERATIONS
- ---------------------
Net income was $1.8 million for the three months ended June 30, 1999
compared to $1.5 million for the three months ended June 30, 1998, an increase
of $238,000. For the six months ended June 30, 1999, the Company recorded net
income of $2.4 million compared to $5.2 million for the six months ended June
30, 1998. For the three months ended June 30, 1999 and June 30, 1998, the
diluted earnings per share were $0.27 and $0.22, respectively. The diluted
earnings per share for the six months ended June 30, 1999 were $0.37 compared to
$0.76 for the six months ended June 30, 1998.
Interest Income
- ---------------
Interest income was $12.7 million for the three months ended June 30, 1999
compared to $10.1 million for the three months ended June 30, 1998 due primarily
to an increase in the average balance of interest-earning assets offset
partially by a slight decline in the yield on those assets. Average interest-
earnings assets increased to $534.8 million for the three months ended June 30,
1999 compared to $399.8 million for the three months ended June 30, 1998. The
yield on interest-earning assets decreased to 9.50% for the three months ended
June 30, 1999 compared
8
<PAGE>
to 10.15% for the three months ended June 30, 1998. The largest single component
of interest-earning assets was loans receivable, net, which were $415.9 million
with a yield of 10.00% for the three months ended June 30, 1999 compared to
$312.4 million with a yield of 10.21% for the three months ended June 30, 1998.
The increase in average loans receivable, net was due to an increase in loans
held-for-sale. Loans held-for-sale were $276.3 million as of June 30, 1999
compared to $243.3 million as of December 31, 1998.
Interest income for the six months ended June 30, 1999 was $24.0 million,
compared to $19.5 million for the six months ended June 30, 1998, due to an
increase in the average balance of interest-earning assets, combined with a
decrease in the yield on those assets. Average interest-earning assets
increased to $502.7 million for the six months ended June 30, 1999 compared to
$394.3 million for the six months ended June 30, 1998. The yield on interest-
earning assets decreased to 9.56% for the six months ended June 30, 1999
compared to 9.90% for the six months ended June 30, 1998. The largest single
component of interest-earning assets was loans receivable, net, which were
$398.3 million with a yield of 9.92% for the six months ended June 30, 1999,
compared to $312.2 million with a yield of 9.89% for the six months ended June
30, 1998.
Interest Expense
- ----------------
Interest expense increased to $6.6 million for the three months ended June
30, 1999 compared to $5.5 million for the three months ended June 30, 1998 due
primarily to an increase in the average interest-bearing liabilities. Reliance
on certificate accounts and an increased usage of the FHLB line of credit
resulted in a decrease in the average cost of interest-bearing liabilities to
5.34% for the three months ended June 30, 1999 compared to 6.04% for the three
months ended June 30, 1998. Average interest-bearing liabilities were $492.8
million for the three months ended June 30, 1999 compared to $368.8 million for
the three months ended June 30, 1998. The largest component of average
interest-bearing liabilities was certificate accounts, which averaged $414.6
million with a cost of 5.32% for the three months ended June 30, 1999, compared
to $234.4 million with a cost of 5.93% for the three months ended June 30, 1998.
The second largest component of average interest-bearing liabilities is
borrowings, which decreased to an average balance of $49.0 million with a cost
of 7.26% for the three months ended June 30, 1999 compared to $106.3 million
with a cost of 7.33% for the three months ended June 30, 1998. The Company
utilizes a warehouse lines of credit of $300 million and a residual financing
which are indexed to London Interbank Offering Rate index ("LIBOR").
For the six months ended June 30, 1999, interest expense was $12.3 million
compared to $10.9 million for the six months ended June 30, 1998 due to an
increase in the average interest-bearing liabilities combined with a decrease in
the rate paid on those liabilities. Average interest-bearing liabilities were
$460.5 million with a cost of 5.41% for the six months ended June 30, 1999
compared to $359.6 million with a cost of 6.11% for the six months ended June
30, 1998.
The largest component of average interest-bearing liabilities was
certificate accounts, which averaged $384.7 million with a cost of 5.37% for the
six months ended June 30, 1999 compared to $223.9 million with a cost of 5.94%
for the six months ended June 30, 1998. The second largest component of average
interest-bearing liabilities is borrowings, which decreased to an average
balance of $47.8 million with a cost of 7.38% for the six months ended June 30,
1999 compared to $110.6 million with a cost of 7.32% for the six months ended
June 30, 1998.
Net Interest Income Before Provision for Loan Losses
- ----------------------------------------------------
Net interest income before provision for loan losses for the three months
ended June 30, 1999 was $6.1 million compared to $4.6 million for the three
months ended June 30, 1998. This increase is the net effect of an increase in
the ratio of interest-earning assets to interest-bearing liabilities. Average
interest-earning assets increased to $534.8 million with a yield of 9.50% for
the three months ended June 30, 1999 compared to $399.8 million with a yield of
10.15% for the three months ended June 30, 1998. Average interest-bearing
liabilities increased to $492.8 million with a cost of 5.34% for the three
months ended June 30, 1999 compared to $368.8 million with a cost of 6.04% for
the three months ended June 30, 1998. The net interest margin remained stable
at
9
<PAGE>
4.59% for the three months ended June 30, 1999 and for the three months ended
June 30, 1998. The ratio of interest-earning assets to interest-bearing
liabilities was 108.51% for the three months ended June 30, 1999 compared to
108.41% for the three months ended June 30, 1998.
Net interest income before provision for loan losses for the six months
ended June 30, 1999 was $11.7 million compared to $8.6 million for the six
months ended June 30, 1998. This increase is the net effect of an increase in
average interest-earning assets and average interest-bearing liabilities, an
increase in the net interest margin and a decrease in the ratio of interest-
earning assets to interest-bearing liabilities. Average interest-earning assets
increased to $502.7 million with an average yield of 9.56% for the six months
ended June 30, 1999 compared to $394.3 million with an average yield of 9.90%
for the six months ended June 30, 1998. Average interest-bearing liabilities
increased to $460.5 million with a cost of 5.41% for the six months ended June
30, 1999 compared to $359.6 million with a cost of 6.11% for the six months
ended June 30, 1998. The net interest margin was 4.15% for the six months ended
June 30, 1999 compared to 3.79% for the six months ended June 30, 1998. The
ratio of interest-earning assets to interest-bearing liabilities was 109.17% for
the six months ended June 30, 1999 compared to 109.64% for the six months ended
June 30, 1998.
10
<PAGE>
Average Balance Sheets. The following tables set forth certain information
- ----------------------
relating to the Company for the three month and six month periods ended June 30,
1999 and 1998. The yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
shown. Unless otherwise noted, average balances are measured on a daily basis.
The yields and costs include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 1999 June 30, 1998
------------------ -------------------
(Dollars in thousands)
Assets: Average Average Average Average
Interest-earning assets Balance Interest Yield/Cst Balance Interest Yield/Cst
------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits and
short-term investments $42,697 $ 529 4.97% $ 31,706 $ 415 5.25%
Investment securities (1) 3,818 52 5.46 7.111 98 5.53
Loans receivable, net(2) 415,939 10,396 10.00 312,446 7,973 10.21
Mortgage-backed securities, net(1) 8,573 93 4.34 8 - 0.00
Residual assets 63,735 1,626 10.20 48,560 1,659 13.67
-------- ------- -------- -------
Total interest-earning assets 534,762 12,696 9.50 399,831 10,145 10.15
Non-interest-earning assets(3) 14,355 ------- 32,208 -------
-------- --------
Total assets(3) $549,117 $432,039
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
Passbook accounts 4,489 23 2.06 4,067 25 2.47
Money market accounts 6,996 75 4.30 3,426 42 4.92
Checking accounts 17,725 75 1.70 20,691 82 1.59
Certificate accounts 414,606 5,504 5.32 234,364 3,463 5.93
--------- ------- 5.13 -------- ------- 5.52
Total deposit accounts 443,816 5,677 7.26 262,548 3,612 7.33
Borrowings 49,029 888 5.34 106,257 1,942 6.04
--------- ------- -------- -------
Total interest-bearing liabilities 492,845 6,565 368,805 5,554
Non-interest-bearing liabilities(3) 2,623 ------- 7,894 -------
--------- --------
Total liabilities(3) 495,468 376,699
Equity(3) 53,649 55,340
--------- --------
Total liabilities and equity(3) $549,117 $432,039 $ 4,591
========= ======== =======
Net interest income before provision
for loan losses $ 6,131
Net interest rate spread(4) ======= 4.16 4.11
Net interest margin(5) 4.59 4.59
Ratio of interest-earning assets to
interest-bearing liabilities 108.51% 108.41%
<CAPTION>
Six months ended Six months ended
June 30, 1999 June 30, 1999
------------------------------ -------------------------------
Average Average Average Average
Assets: Balance Interest Yield/Cst Balance Interest Yield/Cst
Interest-earning assets: -------- --------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits and
short-term investments $ 31,666 $ 762 4.85% $ 28,537 $ 739 5.22%
Investment securities(1) 4,145 116 5.64 6,599 188 5.75
Loans receivable, net(2) 398,348 19,754 9.92 312,225 15,439 9.89
Mortgage-backed securities, net(1) 4,314 93 4.31 10 - 0.00
Residual assets 64,270 3,300 10.27 46,953 3,150 13.42
-------- ------- 9.56 -------- -------
Total interest-earning assets 502,743 24,025 394,324 19,516 9.90
Non-interest-earning assets(3) 13,291 ------- 30,281 -------
-------- --------
Total assets(3) $516,034 $424,605
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
Passbook accounts $ 4,517 47 2.10 $ 4,037 48 2.40
Money market accounts 7,118 152 4.31 3,126 73 4.71
Checking accounts 16,336 145 1.79 18,028 162 1.81
Certificate accounts 384,717 10,253 5.37 223,906 6,598 5.94
-------- ------- 5.18 -------- -------
Total deposit accounts 412,688 10,597 7.38 249,097 6,881 5.57
Borrowings 47,831 1,751 5.41 110,552 4,013 7.32
-------- ------- -------- -------
Total interest-bearing liabilities 460,519 12,348 359,649 10,894 6.11
Non-interest-bearing liabilities(3) 2,470 ------- 21,485 -------
-------- --------
Total liabilities(3) 462,989 381,134
Equity(3) 53,045 57,645
-------- --------
Total liabilities and equity(3) $516,034 $438,779
======== ========
Net interest income before provision
for loan losses $11,677 $ 8,622
Net interest rate spread(4) ======= 4.15 ======= 3.79
Net interest margin(5) 4.65 4.37
Ratio of interest-earning assets to
interest-bearing liabilities 109.17% 109.64%
</TABLE>
(1) Includes unamortized discounts and premiums.
(2) Amount is net of deferred loan origination fees, unamortized discounts,
premiums and allowance for loan losses and includes loans held-for-sale,
non-performing loans and warehouse financing receivable.
(3) Average balances are measured on a month-end basis.
(4) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
11
<PAGE>
Provision for Loan Losses
- -------------------------
Based upon management's analysis, there were provisions for loan losses of
$1.8 million for the three month period ended June 30, 1999. There were no
provisions for loan losses for the three month period ended June 30,
1998.Provisions for loan losses were $2.2 million for the six months ended June
30, 1999 compared to $1.6 million for the six months ended June 30, 1998. The
increase in provisions was based on an estimate of charge offs for the six
months ended June 30, 1999 combined with a re-evaluation of the composition of
the Company's loan portfolio. (See "Financial Condition")
Non-Interest Income
- -------------------
Net gains from mortgage financing operations for the three months ended
June 30, 1999 totaled $3.6 million, compared to $2.4 million for the quarter
ended June 30, 1999.
For the six months ended June 30, 1999, net gains from mortgage financing
operations totaled $4.4 million compared to $10.5 million for the six months
ended June 30, 1998. The decrease was due to fewer loan sales for the quarter
ended March 31, 1999. Another item which affected the decline in net gains was
a second quarter pre-tax $2.9 million Mark to Market writedown of residual
assets.
Non-Interest Expense
- --------------------
Non-interest expense was $6.0 million for the three months ended June 30,
1999 compared to $6.4 million for the three months ended June 30, 1998. For the
six months ended June 30, 1999, non-interest expense was $11.8 million compared
to $11.7 million for the six months ended June 30, 1998.
Compensation and benefits increased to $2.7 million for the three months
ended June 30, 1999 from $2.6 million for the three months ended June 30, 1998.
For the six months ended June 30, 1999, compensation and benefits were $5.7
million compared to $5.5 million for the six months ended June 30, 1998. Average
number of employees for the six months ended June 30, 1999 were 272 compared to
281 for the six months ended June 30, 1998.
Premises and occupancy expenses increased to $942,000 for the three months
ended June 30, 1999 compared to $850,000 for the three months ended June 30,
1998, and were $1.9 million for the six months ended June 30, 1999 compared to
$1.5 million for the six months ended June 30, 1998 due to the opening of the
Seal Beach bank branch.
Data processing increased to $391,000 for the three months ended June 30,
1999 compared to $344,000 for the three months ended June 30, 1998, and was
$792,000 for the six months ended June 30, 1999 compared to $648,000 for the six
months ended June 30, 1998. Marketing decreased to $155,000 for the three
months ended June 30, 1999 compared to $669,000 for the three months ended June
30, 1998, and was $202,000 for the six months ended June 30, 1999 compared to
$999,000 for the six months ended June 30, 1998. Professional services decreased
to $467,000 for the three months ended June 30, 1999 compared to $517,000 for
the three months ended June 30, 1998, and was $804,000 for the six months ended
June 30, 1999 compared to $811,000 for the six months ended June 30, 1998.
Telephone and other expense increased to $266,000 and $1.0 million,
respectively, for the three months ended June 30, 1999 compared to $276,000 and
$1.0 million for the three months ended June 30, 1998 and were $617,000 and $1.8
million for the six months ended June 30, 1999 compared to $493,000 and $1.5
million for the six months ended June 30, 1998.
Income Taxes
- ------------
The provision for income taxes increased to $1.4 million for the three
months ended June 30, 1999 compared to $1.2 million for the three months ended
June 30, 1998 due to an increase in income before income tax provision. Income
before income tax provision increased to $3.2 million for the three months ended
June 30, 1999 from $2.7 million for the three months ended June 30, 1998. The
effective tax rate increased to 44.8% for the three months ended June 30, 1999
from 44.4% for the three months ended June 30, 1998.
The provision for income taxes decreased to $2.0 million for the six months
ended June 30, 1999 compared to $3.8 million for the six months ended June 30,
1998. Income before income tax provision decreased to $4.4 million for the six
months ended June 30, 1999 compared to $9.1 million for the six months ended
June 30, 1998.
12
<PAGE>
COMPARISON OF FINANCIAL CONDITION AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
- ----------------------------------------------------------------------------
Total assets increased to $531.5 million as of June 30, 1999 compared to
$428.1 million as of December 31, 1998. This increase was attributable to the
increase in cash and trading securities. Loans held-for-sale totaled $276.3
million as of June 30, 1999 compared to $243.3 million as of December 31, 1998.
Loans held-for-investment increased to $94.7 million as of June 30, 1999
compared to $91.0 million as of December 31, 1998.
Residual assets decreased to $44.4 million as of June 30, 1999 compared to
$50.3 million as of December 31, 1998 due to the desecuritization of 1996-1.
Cash and cash equivalents were $50.9 million as of June 30, 1999 compared to
$8.2 million as of December 31, 1998. Cash and cash equivalents increased by
$42.7 million as of June 30, 1999 due to the timing of loan originations and
purchases. Premises and equipment decreased to $6.5 million as of June 30, 1999
compared to $7.1 million as of December 31, 1998. Real estate owned decreased to
$1.8 million as of June 30, 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
$433.2 million as of June 30, 1999 compared to $323.5 million as of December 31,
1998 due to the opening of the Seal Beach branch plus the additional reliance on
wholesale deposits. The major component of deposit accounts is certificates of
deposit, which increased to $400.6 million as of June 30, 1999 compared to
$297.0 million as of December 31, 1998.
The Company decreased FHLB advances and borrowings from $40.0 million at
December 31, 1998 to $26.4 million at June 30, 1999 due to the increase in
deposit accounts of $109.7 million offset by the higher loan receivable balance
as of June 30, 1999 of $36.7 million.
Accounts payable and other liabilities increased to $15.9 million as of
June 30, 1999 compared to $11.1 million as of December 31, 1998 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 $54.5 million as of June 30, 1999 from
$52.0 million as of December 31, 1998 due to earnings of $2.5 million.
The Company's non-performing assets increased to $10.2 million as of June
30, 1999 compared to $9.4 million as of December 31, 1998. The increase of $.8
million is due primarily to non-accrual loans with an increase of $1.0 million
in one- to-four family residential loans offset by a decrease of $0.2 million in
consumer loans. Non-performing loans as a percent of gross loans receivable
decreased to 2.16% as of June 30, 1999 from 2.23% as of December 31, 1998. Non-
performing assets as a percent of total assets decreased to 1.91% as of June 30,
1999 from 2.21% as of December 31, 1998. The following table sets forth the
non-performing assets at June 30, 1999 and December 31, 1998:
13
<PAGE>
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Non-accrual loans
Foreclosed real estate, net (1) $ 8,405 $7,544
1,752 1,898
Total non-performing assets ------- ------
$10,157 $9,442
======= ======
Allowance for loan losses as a percent of gross loans receivable(2) 0.87% 0.82%
Allowance for loan losses as a percent of total non-performing loans(3) 40.37 36.81
Non-performing loans as a percent of gross loans receivable(2) 2.16 2.23
Non-performing assets as a percent of total assets(4) 1.91 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 loan losses as
of June 30, 1999 of $3.4 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
June 30, 1999 was adequate to absorb known and inherent risks in the Company's
loan portfolio. No assurances can be given, however, that economic conditions
which may adversely affect the Company's or the Bank's service area or other
circumstances will not be reflected in increased losses in the loan portfolio.
In addition, regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance or to take charge-
offs (reductions of the allowance) in anticipation of losses.
The following table sets forth the activity in the Company's allowance for loan
losses for the six months ended June 30, 1999:
(Dollars in thousands)
Balance as of December 31, 1998 $2,777
Add:
Provision for loan losses 2,208
Recoveries of previous charge-offs 96
Less:
Charge-offs 1,688
------
Balance as of June 30, 1999 $3,393
======
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
14
<PAGE>
4%. The Bank's average liquidity ratios were 10.93% and 10.94% for the six
months ended June 30, 1999 and June 30, 1998, respectively. The Bank had $30.3
million in deposits maturing within one month as of June 30, 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 operating activities were $102.3 million and
$83.1 million for the six months ended June 30, 1999 and 1998, respectively.
Such cash flows primarily consisted of loans originated and purchased for sale
(net of loan fees), of $469.0 million and $562.6 million, net of proceeds from
the sale and securitization of loans held-for-sale of $363.1 million and $478.5
million for the six months ended June 30, 1999 and 1998, respectively. Net cash
provided from investing activities were $48.8 million and $41.4 million for the
six months ended June 30, 1999 and 1998, respectively, and consisted primarily
of principal collections on loans. Proceeds from the principal collections were
$67.6 million and $43.4 million for the six months ended June 30, 1999 and 1998,
respectively. Net cash provided from financing activities consisted primarily
of net activity in deposit accounts and borrowings. The net increase in
deposits and borrowings was $96.2 million and $51.9 million for the six months
ended June 30, 1999 and 1998, respectively. The Company received proceeds from
the lines of credit of $6.4 million for the six months ended June 30, 1998 and
repayments of these lines of $(13.5) million for the six months ended June 30,
1999. Net deposits increased by $109.7 million and $54.6 million for the six
months ended June 30, 1999 and 1998, respectively. At June 30, 1999, the Company
had no outstanding FHLB advances.
The Company's most liquid assets are unrestricted cash and short-term
investments. The levels of these assets are dependent on the Company's
operating, lending and investing activities during any given period. At June
30, 1999, cash and short-term investments totaled $50.9 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 a warehouse line of
credit available in the amount of $300 million of which zero had been drawn upon
at June 30, 1999. 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 June
30, 1999.
The OTS capital regulations require savings institutions to meet three
minimum capital requirements: a 1.5% tangible capital ratio, a 3.0% leverage
(core capital) ratio and an 8.0% risk-based capital ratio. The core capital
requirement has been effectively increased to 4.0% because the prompt corrective
action legislation provides that institutions with less than 4.0% core capital
will be deemed "undercapitalized". In addition, the OTS, under the prompt
corrective action regulation, can impose various constraints on institutions
depending on their level of capitalization ranging from well-capitalized to
critically undercapitalized. As of June 30, 1999, the Bank was considered "well
capitalized".
15
<PAGE>
The Bank was in compliance with the minimum capital requirements in effect
as of June 30, 1999. The following table reflects the required ratios and the
actual capital ratios of the Bank as of June 30, 1999:
<TABLE>
<CAPTION>
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent(a)
------- ------- ------ ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible
$ 31,884 $ 7,792 $ 24,092 6.14% 1.50%
Core
$ 31,884 $ 20,779 $ 11,105 6.14% 4.00%
Risk-based
$ 35,260 $ 28,190 $ 7,070 10.01% 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 June 30, 1999,
the Bank's ratios were 10.01%, 6.14% and 9.05%, 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 June 30, 1999, the Bank had outstanding commitments to originate
or purchase mortgage loans of $18.1 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
June 30, 1999 compared to the period ended December 31, 1998 as discussed in the
notes to the audited consolidated financial statements of LIFE Financial
Corporation for the year ended December 31, 1998 included in the Company's
Annual Report on Form 10K/A.
Year 2000 Compliance: As a financial institution operating in multiple
---------------------
states, the Company is dependent on computer systems and applications to conduct
its business. The year 2000 (Y2k) issue is the result of computer programs being
written using two digit year fields instead of four digit year fields. If the
computer systems cannot distinguish between the year 1900 and the year 2000,
system failures or miscalculations could result, disrupting operations and
causing, among other things, a temporary inability to process transactions or
engage in normal business activities for both the Company and its customers.
The Program
The Company's program addresses the Y2k issue from a comprehensive risk-
based view. "Computer systems and equipment" includes systems generally thought
of as information technology (IT) dependent, such as accounting, data
processing, and telephone equipment, as well as systems not obviously IT
dependent, such as photocopiers, facsimile machines, and security systems. The
non-IT dependent systems may contain embedded technology, and the Company
included these systems as part of the program.
The Company defines year 2000 readiness as information technology that
accurately processes date/time data from, into, and between the years 1999 and
2000, as well as leap year calculations, with:
All mission-critical systems and processes reviewed, renovated or replaced, as
necessary.
All mission-critical systems and processes tested.
All key vendors, customers, and business partners identified and assessed for
risk.
Adequate change control procedures in place for re-testing of new or upgraded
systems.
Contingency plans in place to support business resumption requirements.
16
<PAGE>
The Y2k program consists of five stages: (i) awareness, (ii) assessment,
(iii) renovation, (iv) validation, and (v) implementation. During the awareness
phase, the Company identified the project team and responsibilities, prepared
and allocated the project budget, defined the project scope, and established
program and management policies. This phase, although complete, continues to be
reviewed. The assessment phase entailed an inventory of IT and non-IT systems,
hardware, vendors, material customers, and facilities. Inventoried systems were
also prioritized to identify critical systems. The renovation, validation, and
implementation phases were completed as of June 30, 1999 and included internal
systems as well as interfaces to third party systems.
The Company is engaged in an ongoing review of its relationships with
business partners, including vendors and suppliers, to continue to assess
whether these entities are effectively addressing year 2000 issues. This
includes the evaluation of strategies to manage and mitigate the risk to the
Company of their failures. Although the Company is establishing reasonable
safeguards, there can be no assurance that all business partners will adequately
address their Y2k issues. Therefore, failures of third parties to adequately
address their Y2k issues could adversely affect the business and operations of
the Company.
The Company's systems use a combination of methodologies for date fields.
Where possible, date fields were expanded to 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 substantially complete, 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 resulting from: (i)
the Company's initial test of the contingency and business resumption plan
during the third quarter of 1999, and (ii) the status of third party or business
partner Y2k readiness.
Costs
The total budget for the Company's Y2k effort is approximately $650,000.
To date, the amounts incurred and expensed for developing and implementing the
Y2k program have been less than $200,000 with no 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 exceed $300,000
in total. These costs will be funded through operating cash flows and will be
funded by reallocating existing resources rather than incurring incremental
costs. None of the Company's other information technology projects have been
delayed or deferred as a result of implementing the Y2k program.
Risks
The Company believes that the completed renovations on its internal systems
and equipment will allow it to be Y2k compliant. There can be no assurances,
however, that the Company's internal systems or equipment, or those of third
parties on which the Company relies, will be Y2k compliant in a timely manner,
or that the Company's or third parties' contingency plans will mitigate the
effects of noncompliance. The Company has initiated communications with its
critical external relationships to determine the extent to which the Company
will assess and attempt to mitigate its risks with respect to the failure of
these entities to be Y2k ready. The effect, if any, on the Company's results of
operations from the failure of such parties to be Y2k ready cannot reasonably be
estimated.
The Company is part of a regulated industry 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
17
<PAGE>
financial position, liquidity, and results of operations.
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 future events with regard to its
Y2k program, as well as its contingency plans; its estimated cost of achieving
Y2k readiness; and the Company's belief that its internal systems and equipment
will be Y2k compliant in a timely manner. All forward-looking statements
involve a number of risks and uncertainties that could cause the actual results
to differ materially from the projected results. Factors that may cause these
differences include, but are not limited to: the availability of qualified
personnel and other information technology resources, the ability to identify
and renovate all data sensitive lines of computer code or to replace embedded
computer chips in affected systems and equipment, and the actions of government
agencies and other third parties with respect to Y2k readiness.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
Management of Interest Rate Risk: The principal objective of the Company's
--------------------------------
interest rate risk management function is to evaluate the interest rate risk
included in certain balance sheet accounts, determine the level of appropriate
risk given the Company's business focus, operating environment, capital and
liquidity requirements and performance objectives and manage the risk consistent
with Board approved guidelines through the establishment of prudent asset
concentration guidelines. 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
June 30, 1999 or December 31, 1998.
18
<PAGE>
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
---------------------------------------------------
On June 10, 1999, the Company held its annual meeting of stockholders for
the purpose of electing two Directors to a term of three years and the
ratification of Deloitte & Touche LLP as the Company's independent auditors.
The number of votes cast at the meeting as to each matter acted upon was as
follows:
<TABLE>
<CAPTION>
For Withheld
--------- --------
<S> <C> <C>
1. Election of Director: Ronald G. Skipper.... 5,602,985 243,232
Election of Director: Daniel L. Perl....... 5,604,385 241,832
</TABLE>
The Directors whose terms continued and the years their terms
expire are as follows:
Milt Johnson (2001), Edgar Keller (2001), John Goddard (2000).
<TABLE>
<CAPTION>
Broker
For Withheld Abstains Non-Votes
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
2. Ratification of Deloitte & Touche LLP
as the Company's independent auditors..... 5,820,416 15,101 10,700 0
</TABLE>
Item 5. Other Information
-----------------
On July 28, 1999, the Company announced that pursuant to a board meeting on
July 27, 1999, Daniel L. Perl is no longer its President and Chief Executive
Officer nor President/Chief Executive Officer and Chairman of the Company's
wholly-owned subsidiary, Life Bank.
On August 2, 1999, the Company announced that Robert K. Riley has been
named as President and Chief Executive Officer of the Company and its wholly-
owned subsidiary, Life Bank.
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 CORPORATION
August 16, 1999 By: /s/ Robert K. Riley
- --------------- ---------------------------------
Date Robert K. Riley
President and Chief
Executive Officer
(principal executive officer)
August 16, 1999 /s/ Jeffrey L. Blake
- --------------- ---------------------------------
Date Jeffrey L. Blake
Chief Financial Officer and
Treasurer
(principal financial and
accounting officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 12,263
<INT-BEARING-DEPOSITS> 34,505
<FED-FUNDS-SOLD> 4,100
<TRADING-ASSETS> 26,396
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 1,006
<INVESTMENTS-MARKET> 1,008
<LOANS> 370,995
<ALLOWANCE> 3,393
<TOTAL-ASSETS> 531,538
<DEPOSITS> 433,196
<SHORT-TERM> 26,432
<LIABILITIES-OTHER> 15,949
<LONG-TERM> 1,500
0
0
<COMMON> 66
<OTHER-SE> 54,395
<TOTAL-LIABILITIES-AND-EQUITY> 531,538
<INTEREST-LOAN> 19,754
<INTEREST-INVEST> 46
<INTEREST-OTHER> 4,225
<INTEREST-TOTAL> 24,025
<INTEREST-DEPOSIT> 10,597
<INTEREST-EXPENSE> 12,348
<INTEREST-INCOME-NET> 11,677
<LOAN-LOSSES> 2,208
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,832
<INCOME-PRETAX> 4,403
<INCOME-PRE-EXTRAORDINARY> 4,403
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,443
<EPS-BASIC> .38
<EPS-DILUTED> .37
<YIELD-ACTUAL> 4.65
<LOANS-NON> 8,405
<LOANS-PAST> 4
<LOANS-TROUBLED> 361
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,777
<CHARGE-OFFS> 1,688
<RECOVERIES> 96
<ALLOWANCE-CLOSE> 3,393
<ALLOWANCE-DOMESTIC> 3,393
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
