<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, 2000
Commission File Number 0-22193
LIFE FINANCIAL CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0743196
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10540 MAGNOLIA AVENUE, RIVERSIDE, CALIFORNIA 92505
--------------------------------------------------------------------------------
(909) 637 - 4000
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(X) Yes ( ) No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 6,668,436 shares of common
stock, par value $0.01 per share, were outstanding as of August 14, 2000.
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1 Consolidated Statements of Financial Condition:
June 30, 2000 (unaudited) and December 31, 1999........................... 1
Consolidated Statements of Operations:
For the Three and Six Months ended June 30, 2000 (unaudited) and 1999..... 2
Consolidated Statements of Stockholders' Equity:
For the Six Months ended June 30, 2000 (unaudited)........................ 3
Consolidated Statements of Cash Flows:
For the Six Months ended June 30, 2000 (unaudited) and 1999............... 4
Notes to Consolidated Financial Statements (unaudited).................... 5
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk................ 19
PART II OTHER INFORMATION
Item 1 Legal Proceedings......................................................... 19
Item 2 Changes in Securities and Use of Proceeds................................. 19
Item 3 Defaults Upon Senior Securities........................................... 19
Item 4 Submission of Matters to a Vote of Security Holders....................... 19
Item 5 Other Information......................................................... 19
Item 6 Exhibits and Reports on Form 8-K.......................................... 20
</TABLE>
ii
<PAGE>
Item 1. Financial Statements.
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
(Unaudited)
----------------- ----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 28,879 $ 20,315
Investment securities 55,348 32,833
Loans:
Loans held for sale 177,620 330,727
Loans held for investment, net 236,852 103,601
Mortgage servicing rights 5,426 6,431
Accrued interest receivable 4,174 3,676
Foreclosed real estate - net 1,767 2,214
Premises and equipment, net 5,155 6,003
Current tax receivable 3,823 18,653
Accounts receivable, mortgage-backed securities residual sale - 10,127
Other assets 18,017 13,028
----------- ----------
TOTAL ASSETS $ 537,061 $ 547,608
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts $ 452,113 $ 468,859
Other borrowings 40,400 17,873
Subordinated debentures 1,500 1,500
Accrued expenses and other liabilities 10,028 24,914
----------- ----------
Total liabilities 504,041 513,146
----------- ----------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares authorized; 67 67
6,668,436 (2000) and 6,568,436 (1999) shares issued and outstanding
Additional paid-in capital 42,575 42,525
Accumulated deficit (8,779) (8,130)
Accumulated adjustments to stockholders' equity (843) -
----------- ----------
Total stockholders' equity 33,020 34,462
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 537,061 $ 547,608
=========== ==========
</TABLE>
Accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------------------- -----------------------------------
June 30 June 30 June 30 June 30
INTEREST INCOME: 2000 1999 2000 1999
--------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Loans $ 11,249 $ 10,396 $ 22,499 $ 19,754
Other interest-earning assets 966 2,300 1,477 4,271
---------- ----------- ---------- ----------
Total interest income 12,215 12,696 23,976 24,025
INTEREST EXPENSE:
Interest-bearing deposits 6,665 5,677 13,195 10,597
Loan and securities repurchase advances 911 835 1,497 1,646
Subordinated debentures and other 152 53 366 105
---------- ----------- ---------- ----------
Total interest expense 7,728 6,565 15,058 12,348
---------- ----------- ---------- ----------
NET INTEREST INCOME 4,487 6,131 8,918 11,677
PROVISION FOR LOAN LOSSES - 1,750 - 2,208
---------- ----------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,487 4,381 8,918 9,469
NONINTEREST INCOME:
Loan servicing and mortgage banking fee income 448 989 1,495 2,110
Bank and other fee income 145 88 263 163
Net gain/(loss) from mortgage banking 1,263 3,649 (90) 4,384
Net gain/(loss) on Mortgage-backed securities 148 - 166 -
Other income (143) 61 58 109
---------- ----------- ---------- ----------
Total noninterest income 1,861 4,787 1,892 6,766
NONINTEREST EXPENSE:
Compensation and benefits 3,057 2,744 6,231 5,686
Premises and occupancy 1,024 942 2,199 1,912
Data processing 333 391 650 792
Net loss/(gain) on foreclosed real estate 95 (78) 63 (75)
Other expense 1,609 1,978 2,760 3,517
---------- ----------- ---------- ----------
Total noninterest expense 6,118 5,977 11,903 11,832
---------- ----------- ---------- ----------
INCOME BEFORE INCOME TAXES 230 3,191 (1,093) 4,403
PROVISION FOR INCOME TAXES 105 1,432 (444) 1,960
---------- ----------- ---------- ----------
NET INCOME (LOSS) $ 125 $ 1,759 $ (649) $ 2,443
========== =========== ========== ==========
Earnings per common share:
Basic average shares outstanding 6,668,436 6,564,743 6,668,024 6,563,569
Basic earnings(loss) per share $ 0.02 $ 0.27 $ (0.10) $ 0.37
Diluted average shares outstanding 6,669,780 6,619,504 6,668,024 6,622,896
Diluted earnings(loss) per share $ 0.02 $ 0.27 $ (0.10) $ 0.37
</TABLE>
Accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional Accumulated Accumulated Total
Paid-in Deficit Other Stockholders'
Shares Amount Capital Earnings Adjustments Equity
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 6,653,436 $ 67 $ 42,525 $ (8,130) $ - $ 34,462
Stock options exercised 15,000 --- 50 --- --- 50
Change in net unrealized loss on --- --- --- --- (843) (843)
available-for-sale investments
Net Income --- --- --- (649) --- (649)
--------------------------------------------------------------------------------
Comprehensive income 50 (649) --- (599)
--------------------------------------------------------------------------------
BALANCE, June 30, 2000 6,668,436 $ 67 $ 42,575 $ (8,779) $ (843) $ 33,020
================================================================================
</TABLE>
Accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 2000 1999
------------- -------------
<S> <C> <C>
Net Income $ (649) $ 2,443
Adjustments to net income
Depreciation and amortization 1,140 860
Provision for credit losses ---- 2,208
Accretion of deferred fees 1,737 57
Amortization and accretion from investment securities 19 ----
Provision for losses and write-down on foreclosed real estate 272 ----
(Gain) loss on sale of foreclosed real estate (123) 323
Gain on sale and securitization of loans held for sale ---- (8,968)
Net unrealized losses and accretion on residual assets ---- 1,285
Change in allowance on mortgage servicing rights ---- 379
Amortization of mortgage servicing rights 1,005 2,330
Purchase and origination of loans held for sale (369,139) (468,967)
Proceeds from the sales of loans held for sale 344,063 363,050
Write-off loans held for sale (3,000) ----
Increase in accrued interest receivable (498) (1,435)
Cash received on residual Mortgage Backed Securities 10,127 ----
Change in current income tax receivable 14,830 ----
Unrealized loss on available for sale securities (843) ----
(Decrease) increase in accrued expenses & other liabilities (14,886) 4,822
Federal Home Loan Bank stock dividend ---- (66)
Increase in other assets (4,989) (579)
----------- ------------
Net cash used in operating activities (20,934) (102,258)
----------- ------------
CASH FLOW FROM INVESTING ACTIVITIES
Principal payments on loans 45,426 67,639
Principal payments on securities 33,087 ----
Proceeds from the sale of foreclosed real estate 1,067 2,333
Purchase of securities held to maturity (55,676) ----
Proceeds from maturities of securities held to maturity 150 1,000
Purchase of trading securities ---- (26,396)
Cash received on residual assets ---- 4,575
Purchase of Federal Home Loan Bank stock (95) (124)
Additions to premise and equipment, net (292) (248)
----------- ------------
Net cash provided by investing activities 23,667 48,779
----------- ------------
CASH FLOW FROM FINANCING ACTIVITIES
Net (decrease) increase in deposit accounts (16,746) 109,720
Repayment of other borrowings (17,873) (13,545)
Proceeds from FHLB advances 40,400 -
Net proceeds from issuance of common stock 50 20
----------- ------------
Net cash provided by financing activities 5,831 96,195
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,564 42,716
CASH AND CASH EQUIVALENTS, beginning of period 20,315 8,152
----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 28,879 $ 50,868
=========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 14,725 $ 12,604
=========== ============
Income taxes paid $ 73 $ 3,495
=========== ============
NONCASH INVESTING ACTIVITIES DURING THE PERIOD:
Transfers from loans held for sale to loans held for investment $ 139,012 $ ----
=========== ============
Transfers from loans to foreclosed real estate $ 769 $ 2,312
=========== ============
</TABLE>
Accompanying notes are and integral part of these consolidated financial
statements.
4
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(UNAUDITED)
Note 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"), Life Financial
Investment and Insurance and Life Investment Holdings, Inc. All material
intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, the unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the Company's financial position as of June 30, 2000
and December 31, 1999, and the results of its operations and its cash flows for
the three and six months ended June 30, 2000 and 1999. Operating results for the
three and six months ended June 30, 2000, are not necessarily indicative of the
results that may be expected for any other interim period or the full year
ending December 31, 2000.
Certain information and note disclosures normally included in financial
statements prepared in accordance with Generally Accepted Accounting Principles
("GAAP") have been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). The unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1999.
Note 2 - Reclassification
-------------------------
Certain amounts reflected in the 1999 consolidated financial statements
have been reclassified where practicable, to conform to the presentation for
2000.
Note 3 - Accounting Pronouncements
----------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies
to record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. In May 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133", that amends SFAS
No. 133 and defers the effective date to fiscal years beginning after June 15,
2000. Management of the Company does not believe the adoption of SFAS No. 133
will have a material impact on the Company's results of operations or financial
position when adopted.
Note 4 - Earnings Per Share
---------------------------
The table below sets forth the Company's earnings per share calculations
for the three and six months ended June 30, 2000 and 1999.
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share is computed by dividing income available to
common stockholders including common stock equivalents, such as outstanding
stock options by the weighted-average number of common shares outstanding for
the period.
5
<PAGE>
Earnings per share reconciliation is as follows:
<TABLE>
<CAPTION>
(dollars in thousands, For the Three Months Ended June 30,
-----------------------------------------------------------------------------------------
Except per share data): 2000 1999
---------------------------- -------------------------------------------- ------------------------------------------
Net Per Share Net Per Share
Earnings Shares Amount Earnings Shares Amount
-------------- -------------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $ 125 $ 1,759
============== ============
Basic EPS Earnings available
To common stockholders $ 125 6,668,436 $ 0.02 $ 1,759 6,564,743 $ 0.27
=========== ==========
Effect of Dilutive Stock
Options - 1,344 - 54,761
-------------- ------------ ------------ ----------
Diluted EPS Earnings available
To common stockholders plus
Assumed conversions $ 125 6,669,780 $ 0.02 $ 1,759 6,619,504 $ 0.27
============== ============ =========== ============ ========== ==========
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands, For the Six Months Ended June 30,
-----------------------------------------------------------------------------------------
Except per share data): 2000 1999
---------------------------- -------------------------------------------- ------------------------------------------
Net Per Share Net Per Share
Earnings Shares Amount Earnings Shares Amount
-------------- -------------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $ (649) $ 2,443
============== ============
Basic EPS Earnings available
To common stockholders $ (649) 6,668,024 $ (0.10) $ 2,443 6,563,569 $ 0.37
========== ==========
Effect of Dilutive Stock
Options - - - 59,327
-------------- ------------ ------------ ------------
Diluted EPS Earnings available
To common stockholders plus
Assumed conversions $ (649) 6,668,024 $ (0.10) $ 2,443 6,622,896 $ 0.37
============== ============ ========== ============ ============ ==========
</TABLE>
6
<PAGE>
Note 5 - Segment Information
----------------------------
The Company's reportable operating segments within the financial services
industry are banking, mortgage banking and loan servicing activities.
The change in reportable segments and the format of segment reporting was
changed effective July 1, 1999. The change was implemented based on an overall
strategy implemented during the third quarter 1999 by the Company's new
management team. The new management team views the Company's principal operating
segments to be traditional retail banking, mortgage banking and loan servicing.
The table below sets forth information about these segments for the six
months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
For the Six Months Ended For the Six Months Ended
--------------------------------------------------- -----------------------------------------------
June 30, 2000 June 30, 1999
--------------------------------------------------- -----------------------------------------------
Mortgage Loan Mortgage Loan
(Dollars in thousands) Bank Banking Servicing Total Bank Banking Servicing Total
------------------------ --------- ---------- ------------ --------- -------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-Interest Revenues $ 319 $ 78 $ 1,495 $ 1,892 $ 266 $ 4,385 $ 2,115 $ 6,766
Interest Earned 23,977 - - 23,977 24,025 - - 24,025
Interest Charges (15,059) - - (15,059) (12,348) - - (12,348)
-------- --------- ----------- --------- -------- ---------- ----------- --------
Net interest Income 8,918 - - 8,918 11,677 - - 11,677
(expense)
-------- --------- ----------- --------- -------- ---------- ----------- --------
Total revenue $ 9,237 $ 78 $ 1,495 $ 10,810 $ 11,943 $ 4,385 $ 2,115 $ 18,443
======== ========= =========== ========= ======== ========== =========== ========
Segment earn (loss) pretax $ 2,204 $ (3,531) $ 234 $ (1,093) $ 5,697 $ (1,640) $ 346 $ 4,403
Segment assets $511,403 $ 18,320 $ 7,338 $ 537,061 $500,542 $ 13,015 $ 17,980 $531,537
</TABLE>
Note 6 - Subsequent Events
--------------------------
On July 20, 2000 the OTS requested Life Financial Corporation the
("Company") to stipulate to the entry of an Order to Cease and Desist and the
Bank to enter into a Supervisory Agreement. Under the Order among other things
the Company will be required to infuse capital into the Bank and observe certain
requirements regarding transactions with affiliates, tax sharing between it and
the Bank and the maintenance of a separate corporate existence. Under the
Agreement, the Bank among other things will be required to adopt policies and
procedures pertaining to internal asset review, allowances for loan and lease
losses, interest rate risk management, mortgage banking operations, liquidity,
loans to one borrower, board oversight and development of a management plan.
The Company and the Bank are in discussions with the OTS as to the specific
provisions and language of the Order and the Agreement. When the Order and
Agreement are finalized, the Company will release a more detailed description of
their terms and conditions.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
The following presents management's discussion and analysis of the
consolidated financial condition and operating results of the Company for the
six and three month periods ended June 30, 2000 and 1999. The discussion should
be read in conjunction with the Company's unaudited consolidated financial
statements and the notes thereto appearing elsewhere in this report.
Certain statements in this Report on Form 10-Q may contain "forward-looking
statements" that reflect the Company's current views with respect to future
events and financial performance. These "forward-looking statements" are
subject to certain risks and uncertainties, including those identified below,
which could cause actual results to differ materially from historical results or
those anticipated. The words "believe," "expect," "anticipate," "intend,"
"estimate," "should," and other expressions which indicate future events and
trends identify "forward-looking statements". Readers are cautioned not to
place undue reliance on these "forward-looking statements", which speak only as
of their dates. The Company undertakes no obligation to publicly update or
revise any "forward looking statements", whether as a result of new information,
future events or otherwise. The following factors could cause actual results to
differ materially from historical results or those anticipated: (1) the level of
demand for mortgage credit, which is affected by such external factors as the
level of interest rates, the strength of the various segments of the economy and
the demographics of the Company's lending markets; (2) the direction of interest
rates; (3) the relationship between mortgage interest rates and the cost of
funds; (4) federal and state regulation of the Company's banking, mortgage
banking and loan servicing operations; (5) competition within the banking
industry, mortgage banking industry and loan servicing industry; and (6) the
ability of the Company to manage expenses.
GENERAL
-------
The Company, a Delaware corporation organized in 1997, is a savings and
loan holding company that owns 100% of the capital stock of LIFE Bank (the
"Bank"), the Company's principal operating subsidiary. The Bank was
incorporated and commenced operations in 1983. The Bank is a federally chartered
stock savings bank whose primary business includes retail banking, mortgage
banking and loan servicing.
The principal business of the Bank is attracting retail deposits from the
general public and investing those deposits, together with funds generated from
operations and borrowings, primarily in one- to four-family residential mortgage
loans. The Bank currently has six retail bank branches located in Orange, San
Bernardino and Riverside Counties, California. Additionally, the Bank conducts
its national mortgage banking and loan servicing business from its corporate
headquarters in Riverside, California.
The mortgage banking business originates, purchases and sells conforming,
jumbo, non-conforming and other non-prime credit quality mortgage loans through
a network of approved independent mortgage brokers. The Company's originations
and purchases are primarily 1st lien conforming, jumbo and other non-conforming
mortgages with approximately 75% of all originations within the "A", "Alt A" and
"A minus" credit categories. Additionally, the Bank originates residential
construction loans.
The loan servicing division services approximately $1.1 billion in mortgage
and consumer loans. The loan-servicing portfolio is comprised of loans owned by
the Bank and loans sold by the Bank to other investors on a servicing retained
basis.
The Company's principal sources of income are the net spread between
interest earned and the interest costs associated with deposits and other
borrowings used to finance its loans and investment portfolio, gains recognized
on whole loan sales, and servicing fee income.
FINANCIAL CONDITION
--------------------
Total assets of the Company were $537.1 million for the period ending June
30, 2000 compared to $547.6 million for the period ending December 31, 1999. The
net change resulted primarily from decreases in loans, current tax receivables,
accounts receivable related to the residual mortgage-backed securities sale that
occurred in December 1999 and deposits offset by increases in cash and cash
equivalents, investments securities portfolio and other borrowings.
8
<PAGE>
Mortgage and Other Securities (Unaudited)
-----------------------------------------
The Company's securities held to maturity increased from $32.8 million at
December 31, 1999 to $55.3 million as of June 30, 2000. The $22.5 million
increase resulted from purchases of $31.5 million in FNMA and $21.5 million in
GNMA adjustable rate mortgage-backed securities, $1.3 million of collateralized
mortgage obligations offset by maturities of $29.9 million in U.S. Treasury
Bills and principal payments.
A summary of the Company's held to maturity securities as of June 30, 2000
and December 31, 1999 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 2000
---------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gain (Loss) Market Value
--------------------------------------- ------------------ ----------------- ---------------- --------------------
<S> <C> <C> <C> <C>
Securities Held to Maturity:
Mortgage-Backed Securities $ 51,275 $ - $ (140) $ 51,135
Collateralized Mortgage Obligations 1,256 3 - 1,259
Other Securities 2,817 - - 2,817
========= ======= =========== ==========
Total Securities Held to Maturity $ 55,348 $ 3 $ (140) $ 55,211
========= ======= =========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gain (Loss) Market Value
------------------ ----------------- ---------------- --------------------
<S> <C> <C> <C> <C>
Securities Held to Maturity:
US Treasury and Other Agency Securities $ 29,955 $ - $ (10) $ 29,945
Mortgage-Backed Securities 5 - - 5
Other Securities 2,873 - - 2,873
-------------- --------------- ------------- -----------------
Total Securities Held to Maturity $ 32,833 $ - $ (10) $ 32,823
============== =============== ============= =================
</TABLE>
Loans
-----
Net loans for the period ending June 30, 2000 of $414.5 million decreased
$19.9 million from December 31, 1999. Loans held for investment totaled $236.9
million at June 30, 2000 compared to $103.6 million at December 31, 1999. Loans
held for sale totaled $177.6 million at June 30, 2000 compared to $330.7 million
at December 31, 1999. In the first quarter of 2000 the Bank transferred $139.0
million of loans from held for sale to loans held for investment.
The Bank originated $152.9 million in loans during the six months ending
June 30, 2000 which consisted of $129.9 million in real estate loans, $17.0
million in construction loans and $6.0 million in other loans. Together with
loan purchases of $216.2 million, total loan production for the six months
ending June 30, 2000 was $369.1 million. Loan sales for the six months ending
June 30, 2000 totaled $344.1 million. For the six months ending June 30, 1999,
the Bank originated $243.0 million in loans, which consisted of $197.4 million
in real estate loans, $28.8 million in construction loans and $16.8 million in
other loans. The Bank's loan production total for the six months ending June 30,
1999 was $478.1 and included $235.1 million of purchased loans. Loan sales
totaled $363.1 million for the six months ending June 30, 1999. The reduction in
loan production is partly the result of the Bank's stated intent to originate
higher credit quality loans and to reduce the levels of sub-prime originations.
Additionally, the decrease in loan production can be attributed to the decrease
in the overall loan volumes in the mortgage market due to recent interest rate
increases.
9
<PAGE>
Allowance for Loan and Lease Losses
-----------------------------------
For the six and three months ended June 30, 2000, the Company had no
provision for credit losses on loans compared to $2.2 million and $1.7 million
for the six and three months ended June 30, 1999, respectively.
Allowance for loan and lease losses totaled $2.7 million for the periods
ending June 30, 2000 and December 31, 1999. The June 30, 2000 allowance for
loan and lease losses as a percent of total non-performing loans was 42.1%,
compared to 68.4% at December 31, 1999. Nonperforming loans, as a percent of
gross loans was 1.48% at June 30, 2000, compared to 0.88% for December 31, 1999.
The Company's determination of the level of the allowance for loan and
lease losses and correspondingly, the provision for credit losses, rests upon
various judgments and assumptions, including current economic conditions, loan
portfolio composition, prior loan loss experience, industry trends and LIFE
Bank's ongoing examination process. Given the composition of the Company's loan
portfolio at June 30, 2000, the $2.7 million allowance for loan and lease losses
was considered adequate to cover losses inherent in the Company's loan portfolio
at June 30, 2000. However, no assurance can be given, that the Company will not,
in any particular period, sustain loan losses that exceed the amount reserved,
or that subsequent evaluation of the loan portfolio, in light of the prevailing
factors, including economic conditions which may adversely affect the Company's
or the Bank's service area or other circumstances will not require significant
increases in the loan loss allowance. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan and lease losses. Such agencies may require the Bank to
recognize additional provisions to increase the allowance or take charge-offs in
anticipation of future losses.
The table below summarizes the activity of the Company's allowance for loan
and lease losses for the six and three months ended June 30, 2000 and June 30,
1999. Net charge-off's for the six and three months ending June 30, 2000 were
$39 thousand compared to $1.6 million and $943 thousand for the same periods in
1999, respectively.
ALLOWANCE FOR LOAN AND LEASE LOSSES (dollars in thousands):
-----------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
-------------------------------- -----------------------------
2000 1999 2000 1999
-------------------------------- -----------------------------
<S> <C> <C> <C> <C>
Allowance for loan and lease losses $ 2,749 $ 2,777 $ 2,749 $ 2,586
balance at beginning of period
Charge-off's (39) (1,688) (39) (992)
Recoveries - 96 - 49
------------------------------- -----------------------------
Net charge-off's (39) (1,592) (39) (943)
Provision for loan losses - 2,208 - 1,750
------------------------------- -----------------------------
Allowance for loan and lease losses
balance at end of period $ 2,710 $ 3,393 $ 2,710 $ 3,393
=============================== =============================
</TABLE>
10
<PAGE>
The table below summarizes the Company's composition of non-performing assets as
of the dates indicated.
COMPOSITION OF NON-PERFORMING ASSETS
------------------------------------
<TABLE>
<CAPTION>
At June 30 At December 31 At June 30
2000 1999 1999
----------------- ---------------- --------------
<S> <C> <C> <C>
Non-accrual loans:
Residential real estate:
One to four family
1st Trust Deeds $ 4,054 $ 1,248 $ 8,185
2nd Trust Deeds 454 1,214 198
Multi-family - 198 -
Other loans 196 27 22
--------- --------- ---------
Total non accrual loans 4,704 2,687 8,405
In process foreclosure 1,723 1,331 -
--------- --------- ---------
Total non-performing loans 6,427 4,018 8,405
REO, net (1) 1,767 2,214 1,752
--------- --------- ---------
Total non-performing assets $ 8,194 $ 6,232 $ 10,157
========= ========= =========
Allowance for Loan and Lease
Losses as a percent of gross
Loans held for investment 1.05% 2.09% 2.89%
Allowance for Loan and Lease
Losses as a percent of total
Non-performing loans (2) 42.17% 68.43% 40.37%
Non-performing loans as a
Percent of gross loans
Receivable (3) 1.48% 0.88% 2.16%
Non-performing assets as a
Percent of total assets (4) 1.53% 1.14% 1.91%
</TABLE>
_______________________
(1) Foreclosed real estate balances are shown net of related loss allowances.
(2) Non-performing loans consisted of all loans 90 days or more past due,
foreclosures in process less than 90 days past due and all other non-accrual
loans.
(3) Gross loans receivable is comprised of loans held-for-sale and loans held-
for-investment.
(4) Non-performing assets is comprised of non-performing loans and foreclosed
real estate.
11
<PAGE>
Mortgage Servicing Rights
-------------------------
The activity for the Company's mortgage servicing rights was as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Six Months Ended
Mortgage Servicing Rights: June 30, 2000
--------------------
<S> <C>
Balance at December 31, 1999 $ 7,180
Additions 60
Scheduled Amortization (1,065)
---------------
Balance before valuation reserve at June 30, 2000 6,175
---------------
Reserve for Impairment of Mortgage Servicing Rights:
Balance at December 31, 1999 (749)
Reductions (additions) ----
---------------
Balance at June 30, 2000 (749)
---------------
Mortgage Servicing Rights, net $ 5,426
===============
</TABLE>
Liabilities and Stockholders' Equity
------------------------------------
Total liabilities of the Company decreased from $513.1 million at December
31, 1999 to $504 million at June 30, 2000. The net change resulted primarily
from decreases in deposits and accrued expenses offset by increases in other
borrowings.
Total Bank deposits for the period ending June 30, 2000 were $452.1
million, compared to $468.9 million at December 31, 1999. The 3.6% decrease in
deposits from December 31, 1999 is primarily due to decreases in certificates of
deposit. The Bank's strategy continues to focus heavily on increasing Branch
deposits through the growth of both local consumer and business accounts to
reduce reliance on wholesale certificates of deposit and other borrowings. The
ratio of Branch Bank deposits to total deposits increased to 60.2% at June 30,
2000 compared to 54.50% for the period ended December 31, 1999.
Accrued expenses and other liabilities decreased $14.9 million from $24.9
million at December 31, 1999 to $10.0 million at June 30, 2000, primarily as a
result of decreases in collections on other investor loans and accrued Federal
and State income taxes.
Other borrowings as of June 30, 2000 was $40.4 million compared to $17.9
million at December 31, 1999. The $22.5 million increase was due to timing
differences between receipt of loan sale proceeds and payment of outstanding
borrowings.
The Bank's core, tier 1 and total risk-based capital ratios based upon
period end risk-based assets at June 30, 2000 were 5.79%, 7.55% and 8.45%,
respectively, compared to 6.40%, 9.04% and 10.00% for the period ended June 30,
1999. The corresponding core, tier 1 and total risk-based capital ratios based
upon quarterly average risk-based assets at June 30, 2000 were 5.58%, 7.15%, and
8.0%, respectively, compared to 6.14%, 9.05%, and 10.01% for the period ended
June 30, 1999.
RESULTS OF OPERATIONS
---------------------
Quarter and year-to-date ended June 30, 2000 compared to the quarter and year-
to-date ended June 30, 1999
Highlights for the three and six months ended June 30, 2000 and 1999:
---------------------------------------------------------------------
The Company reported second quarter 2000 net income of $125,000, or $0.02
per diluted share, compared with net income of $1.8 million, or $0.27 per
diluted share for the quarter ended June 30, 1999. Net loss year-to-date for
2000 is $649,000, or ($0.10) per diluted share, compared to net earnings of $2.4
million, or $0.37 per diluted share, for the six months ended June 30, 1999.
12
<PAGE>
Net Interest Income:
-------------------
The Company's net interest income before provision for credit losses
decreased 26.8% to $4.5 million during the three months ended June 30, 2000,
compared to $6.1 million for the three months ended June 30, 1999.
Additionally, net interest income for the six months ending June 30, 2000
decreased $2.8 million from June 30, 1999. The $2.8 million decrease consisted
primarily of increases of $2.7 million in interest income on loans offset by
increases of $2.6 million in interest bearing deposit expense and decreases of
$2.8 million in other interest-earning asset income. Average loans for the six
months ending June 30, 2000 increased $60.7 million from the same prior year
period which contributed to the increase offset by the average loan yield
decreasing 12 basis points during the same period. Additionally, interest
income decreased as a result of the Company's sale of interest earning residual
mortgage-backed securities in 1999. For the six months ending June 30, 2000,
the Company's net interest margin was 3.53% as compared to a net interest margin
of 4.81% during the same period in 1999.
For the three months ending June 30, 2000, the Company's net interest
margin was 3.49% as compared to a net interest margin of 4.74% during the second
quarter of 1999. This change in the Company's net interest margin was caused by
yield increases in investment securities and cash and cash equivalent offset by
yield increases in interest bearing deposits and loan and securities
repurchases. Average investment securities increased $41.7 million and average
net loans increased $38.5 million offset by average deposits increasing $14.7
million, average borrowings increasing $8.3 million and average residual
mortgage-backed securities decreasing $49.4 million. For the six months ending
June 30, 2000, the Company's net interest margin was 3.53% as compared to a net
interest margin of 4.81% during the same period 1999.
The following table sets forth the Company's average balance sheets
(unaudited), and the related weighted average yields and costs on average
interest-earning assets and interest-bearing liabilities, for the three and six
months period ended June 30, 2000 and 1999.
13
<PAGE>
The yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods shown.
Unless otherwise noted, average balances are measured on a daily basis. The
yields and costs include fees that are considered adjustments to yields.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
----------------------------------------------------------------------------------- ---------------------------------------
(Dollars in thousands) (unaudited) (unaudited)
----------------------------------------------------------------------------------- ---------------------------------------
Average Average
Assets Average Annualized Average Annualized
Balance Interest Yield/Cost Balance Interest Yield/Cost
---------------- ------------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Cash and cash equivalents $ 5,581 $ 119 8.53% 40,230 $ 530 5.27%
Investment securities, net 54,082 847 6.26% 12,392 145 4.68%
Loans receivable, net 453,933 11,249 9.91% 415,454 10,396 13.16%
Residual mortgage-backed securities - - 0.00% 49,398 1,625 10.01%
---------------- ------------- ------------- ------------ ----------- -------------
Total interest-earning assets 513,596 12,215 9.51% 517,474 12,696 9.81%
Non-interest-earning assets 55,105 65,349
---------------- ------------
Total assets $568,701 $582,823
================ ============
Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing deposits 32,697 178 2.18% 28,904 173 2.39%
Certificate accounts 425,557 6,487 6.10% 414,606 5,504 5.31%
---------------- ------------- ------------- ------------ ----------- -------------
Total interest-bearing deposits 458,254 6,665 5.82% 443,510 5,677 5.12%
Loan and securities repurchase advances 55,873 911 6.52% 47,529 835 7.03%
Subordinated debt and other borrowings 1,500 152 40.53% 1,500 53 14.13%
---------------- ------------- ------------- ------------ ----------- -------------
Total interest-bearing liabilities 515,627 7,728 6.00% 492,539 6,565 5.33%
Non-interest-bearing liabilities 18,462 35,431
---------------- ------------
Total liabilities 534,089 527,970
Equity 34,612 54,853
---------------- ------------
Total liabilities and equity $568,701 $582,823
================ ============
Net interest income $ 4,487 $ 6,131
============= ===========
Net interest rate spread 3.51% 4.48%
Net interest margin 3.49% 4.74%
============= =============
Ratio of interest-earning assets
To interest-bearing liabilities 99.61% 105.06%
============= =============
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
----------------------------------------------------------------------------------- -----------------------------------------
(Dollars in thousands) (unaudited) (unaudited)
----------------------------------------------------------------------------------- -----------------------------------------
Average Average
Assets Average Annualized Average Annualized
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- ---------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Cash and cash equivalents $ 5,784 $ 234 8.09% $ 29,375 $ 761 5.18%
Investment securities, net 40,825 1,243 6.09% 8,459 210 4.97%
Loans receivable, net 458,561 22,499 9.81% 397,863 19,754 9.93%
Residual mortgage-backed securities - - - 49,844 3,300 13.24%
--------- ---------- ------------ --------- ---------- ------------
Total interest-earning assets 505,170 23,976 9.49% 485,541 24,025 9.90%
Non-interest-earning assets 59,821 63,035
--------- ---------
Total assets $564,991 $548,576
========= =========
Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing deposits 32,573 353 2.17% 27,768 344 2.48%
Certificate accounts 427,231 12,842 6.01% 384,717 10,253 5.33%
--------- ---------- ------------ --------- ---------- ------------
Total interest-bearing deposits 459,804 13,195 5.74% 412,485 10,597 5.14%
Loan and securities repurchase advances 43,292 1,497 6.92% 19,509 1,646 7.11%
Subordinated debt and other borrowings 4,193 366 17.46% 28,322 105 14.00%
--------- ---------- ------------ --------- ---------- ------------
Total interest-bearing liabilities 507,289 15,058 5.94% 460,316 12,348 5.37%
Non-interest-bearing liabilities 22,372 34,167
--------- ---------
Total liabilities 529,661 494,483
Equity 35,330 54,093
--------- ---------
Total liabilities and equity $564,991 $548,576
========= =========
Net interest income $ 8,918 $11,677
========== ==========
Net interest rate spread 3.55% 4.53%
============ ============
Net interest margin 3.53% 4.81%
============ ============
Ratio of interest-earning assets
Total interest-bearing liabilities 99.58% 105.48%
============ ============
</TABLE>
Noninterest Income
------------------
Noninterest income was $1.9 million for the three and six months ended June
30, 2000 compared to $4.8 million and $6.8 million for the three and six months
ended June 30, 1999, respectively. Lower noninterest income resulted from a
$506.5 thousand mark-to-market adjustment related to the repurchase of first
trust mortgages from loan sales completed in early 1999 and from a $1.6 million
reduction in gain on mortgage banking related to a loan sale yield enhancement.
The net gains were compressed due to the systematic divestiture of seasoned
product from the Bank's held for sale portfolio, as the Bank transitions to
higher credit grade first trust mortgage products.
15
<PAGE>
A summary of the Company's loan originations and sales for the six months
ended June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Year-to-Date Year-to-Date
(Dollars in thousands) June 30, 2000 June 30, 1999
-------------------------------------- ------------------- -------------------
<S> <C> <C>
Beginning balance, gross $458,556 337,304
Loans originated and purchased:
One to four family 129,889 197,423
Construction loans 17,021 28,757
Other loans 6,034 16,812
------------------- -------------------
Total loans originated 152,944 242,992
------------------- -------------------
Loans purchased 216,195 235,075
Subtotal - Production 369,139 478,067
------------------- -------------------
Total 827,695 815,371
Less:
Principal repayments 49,543 61,139
Sales of loans 344,063 363,050
Transfers to REO 768 2,502
------------------- -------------------
Ending balance, gross 433,321 388,680
Loans in process, loan fees (16,139) (14,292)
Allowance for loan losses (2,710) (3,393)
------------------- -------------------
Total Loans receivable, net 414,472 370,995
Loans held for sale 177,620 276,258
------------------- -------------------
Loans held for investment $236,852 $ 94,737
=================== ===================
</TABLE>
Noninterest Expense
-------------------
Noninterest expenses were $6.1 million for the three months ended June 30,
2000 which was $141,000 higher than the same period in 1999. During the second
quarter ended 2000 the Company incurred $824,000 of non-recurring charges of
which $161,000 was related to the closure of two of its wholesale operations
offices. Noninterest expense for the six month periods ending June 30, 2000 and
1999 was $11.9 million.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's primary sources of funds are deposits, principal and interest
payments on loans, cash proceeds from the sale of loans, FHLB advances,
investment security interest payments and repurchase agreements, and to a lesser
extent, mortgage loan warehouse lines of credit. 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 5.69% and 10.93% for the quarters ended June 30,
2000 and June 30, 1999, respectively. The Bank had $50.1 million in deposits
maturing within one month as of June 30, 2000, which represents 11.92% of
certificate accounts. The Bank anticipates that it will retain a portion of
these accounts as well as raise new deposits to maintain sufficient liquidity.
16
<PAGE>
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 $20.9 million for the
six months ended June 30, 2000, compared to cash flows used in operating
activities of $102.3 million for the six months ended June 30, 1999. Primarily
net cash was used for loan originations and purchases in the amount of $369.1
million offset by $344.1 million in loan sales to the company's investors. Net
cash provided by investing activities was $23.7 million and $48.8 million for
the six months ended June 30, 2000 and 1999, respectively. Principal collections
on loans and securities offset partially by the purchase of securities were the
primary components of cash provided by investing activities. Net cash used in
financing activities primarily consisted of decreased deposit accounts,
repayment of other borrowings offset by proceeds from Federal Home Loan Bank
advances. Net cash provided by financing activities was $5.8 million and $96.2
million for the six months ended June 30, 2000 and 1999, respectively.
The Company's most liquid assets are unrestricted cash and short-term
investments. The levels of these assets are dependent on the Company's
operating, lending and investing activities during any given period. At June
30, 2000, cash and short-term investments totaled $28.9 million. The Company
increased its portfolio of held-to-maturity mortgage-backed securities to
provide liquidity to the mortgage banking operation through repurchase
agreements. The Company has other sources of liquidity if a need for additional
funds arises including the utilization of a $112.0 million line of credit at the
Federal Home Loan Bank (FHLB) and a $250.0 million warehouse line of credit.
Advances outstanding as of June 30, 2000 consisted of $40.4 million at the FHLB.
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".
On June 16, 2000 Life Financial Corporation's principal subsidiary, Life
Bank ("the Bank"), received written notice from the OTS that it considers the
Bank, based upon the Bank's average assets capital calculation for the first
quarter of 2000, to be "undercapitalized" as of March 31, 2000. The change in
the Bank's capital category from "well capitalized" to "undercapitalized"
resulted from a determination by the OTS that for purposes of the Bank's risk-
based capital calculations, certain of the Bank's assets which the Bank had
risk-weighted in the 100% risk-weight category must instead be treated as low-
level recourse assets. This change in the risk-weighting of these assets for
risk-based capital calculations resulted in a decrease in the Bank's risk-based
capital ratios.
As outlined in Note 6 - Subsequent Events, the Bank is engaged in
discussions with the OTS regarding the Supervisory Agreement issued by the OTS
on July 20, 2000. When the Order and Agreement are finalized, the Company will
release a more detailed description of their terms and conditions.
17
<PAGE>
The following table reflects the Bank's capital ratios based on ending assets
for the period ending June 30, 2000 and the related OTS requirements for
adequately capitalized:
Dollars in Thousands
--------------------
<TABLE>
<CAPTION>
Actual Required Excess Actual Required
Capital(a) Capital Amount Percent(a) Percent(b)
---------- ------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Core $30,822 $21,285 $ 9,537 5.79% 4.00%
Total Risk-Based $25,443 $24,078 $ 1,365 8.45% 8.00%
Tier 1 Risk-Based $22,735 $12,039 $10,696 7.55% 4.00%
Tangible $30,822 $ 7,982 $22,840 5.79% 1.50%
</TABLE>
The following table reflects the Bank's capital ratios based on average assets
for the period ending June 30, 2000 and the related OTS requirements for
adequately capitalized:
Dollars in Thousands
--------------------
<TABLE>
<CAPTION>
Actual Required Excess Actual Required
Capital(a) Capital Amount Percent(a) Percent(b)
---------- ------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Core $30,822 $22,110 $ 8,712 5.58% 4.00%
Total Risk-Based $25,443 $25,431 $ 12 8.00% 8.00%
Tier 1 Risk-Based $22,735 $12,715 $10,020 7.15% 4.00%
Tangible $30,822 $ 8,291 $22,531 5.58% 1.50%
</TABLE>
(a) As of June 30, 2000 the Bank met the capital ratios required to be
considered adequately capitalized, however, for regulatory purposes the
Bank is deemed to be undercapitalized until the OTS notifies the Bank that
its capital category has changed.
(b) The percentages and ratios to be "well-capitalized" under prompt and
corrective action provisions as issued by the OTS are 5.0% core capital,
10.0% risk-based capital, 6.0% Tier 1 risk-based capital and 2.0% tangible
capital.
As of June 30, 2000, the Bank had outstanding commitments to originate or
purchase mortgage loans of $8.0 million compared to $8.4 million as of December
31, 1999 due to consistent originations within the mortgage banking operations.
Other than commitments to originate or purchase mortgage loans, there were no
material changes to the Company's commitments or contingent liabilities as of
June 30, 2000 compared to the period ended December 31, 1999 as discussed in the
notes to the audited consolidated financial statements of LIFE Financial
Corporation for the year ended December 31, 1999 included in the Company's
Annual Report on Form 10K.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Management of Interest Rate Risk
--------------------------------
The principal objective of the Company's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of appropriate risk given the Company's business
focus, operating environment, capital and liquidity requirements and performance
objectives and manage the risk consistent with Board approved guidelines through
the establishment of prudent asset concentration guidelines. Pursuant to the
guidelines, management of the Company seeks to reduce the vulnerability of the
Company's operations to changes in interest rates. Management of the Company
monitors its interest rate risk as such risk relates to its operating
strategies. The Company's Board of Directors reviews on a quarterly basis the
Company's asset/liability position, including simulations of the effect on the
Company's capital of various interest rate scenarios. The extent of
18
<PAGE>
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 rate 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 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. No
hedging positions were outstanding as of June 30, 2000 and December 31, 1999.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In December 1999, certain shareholders of Life Financial Corporation filed
a federal securities lawsuit against the Company, various officers and directors
of the Company, and certain other third parties. The lawsuit was originally
filed in the United States District Court for the Southern District of New York
and asserted claims against the defendants under the Securities Exchange Act of
1934 and the Securities Act of 1933. A substantially similar action was filed in
the United States District Court for the Central District of California in
January 2000 and subsequently dismissed without prejudice. In April 2000, the
Company and its officer and director defendants filed motions to dismiss the
lawsuit or transfer it to California. Both motions are currently under
submission.
The Company intends to vigorously defend against the claims asserted in the
litigation. The Company believes that the litigation will not have a material
adverse impact on the results of operations or financial condition of the
Company or the Bank.
Additionally, the Company is involved as plaintiff or defendant in various
legal actions incident to its business, none of which is believed by management
to be material to the financial condition of the Company.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
(a) 27.0 Financial data schedule (filed herewith).
(b) Reports on Form 8K
Current Report on Form 8-K dated 06/02/00 and filed
06/09/00.
Current Report on Form 8-K dated 06/16/00 and filed
06/27/00.
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 14, 2000 By: /s/ Steven R. Gardner
--------------- --------------------------------------
Date Steven R. Gardner
President and Chief Operations Officer
(principal executive officer)
August 14, 2000 /s/ Roy Painter
--------------- -----------------------------
Date Roy Painter
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)
20
