<PAGE>
United States Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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 May 10, 2000.
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 Consolidated Balance Sheets:
March 31, 2000 (unaudited) and December 31, 1999................ 1
Consolidated Statements of Earnings
For the Three months ended March 31, 2000 and 1999 (unaudited).. 2
Consolidated Statements of Cash Flows:
For the Three months ended March 31, 2000
and 1999 (unaudited)............................................ 3
Consolidated Statements of Stockholders' Equity
For the Three months ended March 31, 2000 (unaudited)........... 4
Average Balance Sheets for the Three months ended
March 31, 2000 and 1999 (unaudited)............................. 5
Notes to Consolidated Financial Statements (unaudited) ......... 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk...... 15
PART II OTHER INFORMATION
Item 1 Legal Proceedings............................................... 15
Item 2 Changes in Securities and Use of Proceeds....................... 16
Item 3 Defaults Upon Senior Securities................................. 16
Item 4 Submission of Matters to a Vote of Security Holders............. 16
Item 5 Other Information............................................... 16
Item 6 Exhibits and Reports on Form 8-K................................ 16
ii
<PAGE>
Item 1. Financial Statements.
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION> (UNAUDITED)
March 31 December 31
2000 1999
-------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,506 $ 20,315
Investment securities 49,431 32,833
Loans:
Loans held for sale 162,966 330,727
Loans held for investment, net 247,127 103,601
Mortgage servicing rights 5,961 6,431
Accrued interest receivable 3,676 3,676
Foreclosed real estate - net 1,752 2,214
Premises and equipment, net 5,526 6,003
Current tax receivable 3,796 18,653
Accounts receivable, mortgage-backed securities residual sale - 10,127
Other assets 19,683 13,028
-------- --------
TOTAL ASSETS $506,424 $547,608
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $455,079 $468,859
Other borrowings 3,300 17,873
Subordinated debentures 1,500 1,500
Accrued expenses and other liabilities 11,729 24,914
-------- --------
Total liabilities 471,608 513,146
-------- --------
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; 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 (7,826) (8,130)
Accumulated adjustments to stockholders' equity - -
-------- --------
Total stockholders' equity 34,816 34,462
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $506,424 $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>
Three Months Ended
--------------------------
March 31 March 31
INTEREST INCOME: 2000 1999
- ------------------------------------------------------------- ----------
<S> <C> <C>
Loans $ 11,250 $ 9,358
Other interest-earning assets 511 1,971
---------- ----------
Total interest income 11,761 11,329
INTEREST EXPENSE:
Interest-bearing deposits 6,530 4,920
Loan and securities repurchase advances 476 242
Subordinated debentures and other 215 621
---------- ----------
Total interest expense 7,221 5,783
---------- ----------
NET INTEREST INCOME 4,540 5,546
PROVISION FOR LOAN LOSSES - 458
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,540 5,088
NONINTEREST INCOME:
Loan servicing and mortgage banking fee income 1,047 1,121
Bank and other fee income 118 75
Net gain/(loss) from mortgage banking 400 2,444
Net gain/(loss) on Mortgage-backed securities 18 (1,709)
Other income 201 48
---------- ----------
Total noninterest income 1,784 1,979
NONINTEREST EXPENSE
Compensation and benefits 3,174 2,942
Premises and occupancy 1,175 970
Data processing 317 401
Net loss/(gain) on foreclosed real estate (32) 3
Other expense 1,150 1,539
---------- ----------
Total noninterest expense 5,784 5,855
---------- ----------
INCOME BEFORE INCOME TAXES 540 1,212
PROVISION FOR INCOME TAXES 236 528
---------- ----------
NET INCOME (LOSS) $ 304 $ 684
========== ==========
Earnings per common share
Basic average shares outstanding 6,667,612 6,562,396
Basic earnings(loss) per share $ 0.05 $ 0.10
Diluted average shares outstanding 6,671,055 6,627,073
Diluted earnings(loss) per share $ 0.05 $ 0.10
</TABLE>
Accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES 2000 1999
--------- ---------
Net Income $ 304 $ 684
Adjustments to net income
Depreciation 616 457
Provision for loan losses --- 458
Accretion of deferred fees (629) (75)
Provision for estimated losses on foreclosed real estate --- (17)
(Gain) loss on sale of foreclosed real estate 36 179
Gain on sale and securitization of loans held for sale --- (2,444)
Net unrealized losses (gains) on residual assets --- 1,709
Net accretion of residual assets --- (1,674)
Change in allowance on mortgage servicing rights --- 68
Amortization of mortgage servicing rights 494 1,024
Purchase and origination of loans held for sale (206,620) (210,960)
Proceeds from the sales of loans held for sale 205,910 105,089
Write-off loans held for sale (3,000) ---
(Increase) decrease in accrued interest receivable --- (396)
Deferred income taxes --- 528
Increase (decrease) in accrued expenses & other liabilities (12,947) 1,879
Federal Home Loan Bank stock dividend (38) (33)
(Increase) decrease in other assets 18,283 (470)
--------- ---------
Net cash provided by (used in) operating activities 2,409 (103,994)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Principal payments on loans 28,090 28,554
Principal payments on securities 803 ---
Proceeds from the sale of foreclosed real estate 694 1,311
Purchase of securities held to maturity (47,318) ---
Proceeds from maturities of securities held to maturity 29,955 1,000
Additions to premise and equipment, net (139) (38)
--------- ---------
Net cash provided by (used in) investing activities 12,085 30,827
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in deposit accounts (13,780) 91,061
Repayment of other borrowings (16,873) (13,045)
(Repayments of) proceeds from FHLB advances 2,300 20,000
Net proceeds from issuance of common stock 50 ---
--------- ---------
Net cash provided by (used in) financing activities (28,303) 98,016
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,809) 24,849
CASH AND CASH EQUIVALENTS, beginning of period 20,315 8,152
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 6,506 $ 33,001
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 6,828 $ 6,013
========= =========
Income taxes paid $ --- $ 1,273
========= =========
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 $ 481 $ 1,155
========= =========
</TABLE>
Accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Accumulated Total
Common Paid-in Accumulated Other Stockholders'
Stock Capital Deficit Adjustments Equity
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 $67 $42,525 $(8,130) $ --- $34,462
Exercise of stock options --- 50 --- --- 50
Net income (comprehensive income) --- --- 304 --- 304
--------------------------------------------------------------------------------------
BALANCE, March 31, 2000 $67 $42,575 $(7,826) $ --- $34,816
======================================================================================
</TABLE>
Accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Average Balance Sheets. The following tables set forth certain information
- ----------------------
relating to the Company for the three month period ended March 31, 2000 and
1999. 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> (Unaudited) (Unaudited)
Three Months Ended Three Months Ended
(Dollars in thousands) March 31, 2000 March 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Assets Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------- -------- ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Cash and cash equivalents $ 5,986 $ 115 7.68% $ 18,399 $ 232 5.04%
Investment securities, net 27,569 396 5.75% 4,483 65 5.80%
Loans receivable, net 463,189 11,250 9.72% 380,077 9,358 9.85%
Residual mortgage-backed securities 0 0 0.00% 50,296 1,674 13.31%
----------- -------- ---------- -------- -------- -----------
Total interest-earning assets 496,744 11,761 9.47% 453,255 11,329 10.00%
Non-interest-earning assets 64,513 60,694
----------- --------
Total assets $561,257 $513,949
=========== ========
Liabilities and Equity:
Interest-bearing liabilities:
Interest-bearing deposits 32,586 175 2.15% 26,615 172 2.59%
Certificate accounts 428,906 6,355 5.93% 354,496 4,748 5.36%
----------- -------- --------- -------- -------- -----------
Total interest-bearing deposits 461,492 6,530 5.66% 381,111 4,920 5.16%
Loan and securities repurchase advances 30,710 476 6.20% 18,369 242 5.27%
Subordinated debentures and other
borrowings 6,885 215 12.49% 28,250 621 8.79%
----------- -------- ---------- -------- -------- -----------
Total interest-bearing liabilities 499,087 7,221 5.79% 427,730 5,783 5.41%
Non-interest-bearing liabilities 25,835 32,633
----------- --------
Total liabilities 524,922 460,363
Equity 36,335 53,586
----------- --------
Total liabilities and equity $561,257 $513,949
=========== ========
Net interest income $ 4,540 $ 5,546
======== ========
Net interest rate spread 3.68% 4.59%
Net interest margin 3.66% 4.89%
Ratio of interest-earning assets
To interest-bearing liabilities 99.53% 105.97%
</TABLE>
5
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(UNAUDITED)
Note 1 - Basis of Presentation:
- -------------------------------
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation,
have been included. The results of operations for the three month period ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the entire fiscal year.
Certain amounts reflected in the consolidated financial statements for the
three-month period ended March 31, 1999 have been reclassified to conform to the
presentation for the three-month period ended March 31, 2000.
Note 2 - Mortgage and Other Securities (Unaudited)
- --------------------------------------------------
A summary of the Company's held to maturity securities as of March 31, 2000
and December 31, 1999 follows:
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------------------------------------------------------------
Amortized Unrealized Amortized Estimated
(Dollars in thousands) Cost Gain Loss Market Value
- ---------------------------------------- ---------------------- ---------------- --------------- ---------------------
<S> <C> <C> <C> <C> <C>
Securities held to maturity
US Treasury and other agency - - - -
securities
Mortgage-backed securities 46,521 - 156 46,365
Other securities 2,910 - - 2,910
=================== ================ =============== =====================
Total securities held to maturity $49,431 $- $156 $49,275
=================== ================ =============== =====================
December 31, 1999
-----------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Market Value
------------------- ---------------- --------------- ---------------------
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>
The Company's mortgage-backed securities increased from $5 thousand at
December 31, 1999 to $46.5 million as of March 31, 2000. The increase in
securities resulted from the acquisition of $32.7 million FNMA and $13.9 million
GNMA adjustable rate mortgage-backed securities, offset by monthly cash
distributions. US Treasury securities decreased from $29.9 million at December
31, 1999 to zero as of March 31, 2000 as a result scheduled maturities.
6
<PAGE>
Note 3 - Loan Originations and Sales (Unaudited)
- ------------------------------------------------
A summary of the Company's loan originations and sales for the indicated
quarters follows:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Quarter Ended
(Dollars in thousands) March 31, 2000 December 31, 1999 March 31, 1999
- -------------------------------------- ------------------------- ----------------------- ----------------------
<S> <C> <C> <C>
Beginning balance, gross $458,556 365,313 $337,554
Loans originated and purchased:
One to four family 189,063 278,300 188,932
Other loans 17,557 17,797 21,983
Quarterly Production 206,620 296,097 210,915
------------------------- ----------------------- ----------------------
Total Loans Receivable 665,176 661,410 548,469
Less:
Principal repayments 24,478 22,089 21,924
Whole loan sales 205,910 179,616 105,089
Transfers to REO 481 1,149 1,156
Ending balance, gross 434,307 458,556 420,300
Loans in process, loan fees (21,465) (21,479) (8,315)
Allowance for loan losses (2,749) (2,749) (2,586)
------------------------- ----------------------- ----------------------
Total Loans receivable, net $410,093 $434,328 $409,399
========================= ======================= ======================
</TABLE>
Note 4 - Mortgage Servicing Rights (Unaudited)
- ----------------------------------------------
The activity for the Company's mortgage servicing rights was as follows.
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Ended
Mortgage Servicing Rights March 31, 2000
---------------------
<S> <C> <C>
Balance at December 31, 1999 $7,180
Additions 24
Scheduled Amortization (494)
Adjustment in Valuation ----
---------------------
Balance before valuation reserve at March 31,
2000 6,710
---------------------
Reserve for Impairment of Mortgage Servicing Rights
Balance at December 31, 1999 (749)
Reductions (additions) ----
---------------------
Balance at March 31, 2000 (749)
=====================
Mortgage Servicing Rights, net $5,961
=====================
</TABLE>
Note 5 - Earnings Per Share (Unaudited)
- ---------------------------------------
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.
Earnings per share reconciliation is as follows:
7
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
(dollars in thousands, -------------------------------------------------------------------------------------------------
Except share data): 2000 1999
- ------------------- -------------------------------------------------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Per Share Net Per Share
Earnings Shares Amount Earnings Shares Amount
--------------- --------------- -------------- ------------------------ --------------- --------------
Net Earnings $304 $684
================ ========================
Basic EPS Earnings available
To common stockholders $304 6,668 $0.05 $684 6,562 $0.10
============== ==============
Effect of Dilutive Stock
Options $ - 3 $ - 65
---------------- --------------- ------------------------ ---------------
Diluted EPS Earnings available
To common stockholders plus
Assumed conversions $304 6,671 $0.05 $684 6,627 $0.10
================ =============== ============== ======================== =============== ==============
</TABLE>
Note 6 - Segment Information (Unaudited)
----------------------------------------
The Company's reportable operating segments within the financial services
industry are banking, mortgage banking and loan servicing activities.
Information about these segments for the three months ended March 31, 2000 and
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
------------------------------------------------------------------------------------------------------
March 31, 2000 December 31, 1999
------------------------------------------------------------------------------------------------------
Mortgage Loan Mortgage Loan
(Dollars in thousand) Bank Banking Servicing Total Bank Banking Servicing Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-Interest Revenues $ 312 $ 422 $1,050 $ 1,784 $ 196 $(31,920) $1,426 $(30,298)
Interest Earned 11,761 - - 11,761 11,921 - - 11,921
Interest Charges (7,221) - - (7,221) (7,068) - (5) (7,073)
-------- ------- ------ -------- -------- -------- ------ --------
Net interest Income
(expense) 4,540 - - 4,540 4,853 - (5) 4,848
-------- ------- ------ -------- -------- -------- ------ --------
Total revenue $ 4,852 $ 422 $1,050 $ 6,324 $ 5,049 $(31,920) $1,421 $(25,450)
======== ======= ====== ======== ======== ======== ====== ========
Segment earnings (pre-tax) $ 1,673 $(1,510) $ 377 $ 540 $ (307) $(35,307) $ 161 $(35,453)
Segment assets $480,221 $18,320 $7,883 $506,424 $499,453 $ 39,366 $8,789 $547,608
</TABLE>
8
<PAGE>
Note 7 - Recent Accounting Pronouncements
- -----------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. "133", "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those derivatives at fair value. The accounting for the gains or losses
resulting from changes in the value of those derivatives will depend on the
intended use of the derivative and whether it qualifies for hedge accounting. On
June 23, 1999, the FASB voted to approve a proposal to delay the effective date
of SFAS No. "133" to fiscal years beginning after June 15, 2000 (calendar year
2001 for the Company). The adoption of this standard is not expected to have a
material effect on the Company's financial condition, results of operation and
cash flows.
Note 8 - Subsequent Events
- --------------------------
None
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain forward-looking statements
that reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties, including those identified below, which could cause
actual results to differ materially from historical results or those
anticipated. The words "believe," "expect," "anticipate," "intend," "estimate,"
"should," and other expressions which indicate future events and trends identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any forward
looking statements, whether as a result of new information, future events or
otherwise. The following factors could cause actual results to differ materially
from historical results or those anticipated: (1) the level of demand for
mortgage credit, which is affected by such external factors as the level of
interest rates, the strength of the various segments of the economy and the
demographics of the Company's lending markets; (2) the direction of interest
rates; (3) the relationship between mortgage interest rates and the cost of
funds; (4) federal and state regulation of the Company's banking, mortgage
banking and loan servicing operations; (5) competition within the banking
industry, mortgage banking industry and loan servicing industry; and (6) the
ability of the Company to manage expenses.
GENERAL
- -------
Life Financial Corporation ("Life Financial" or "Company"), a Delaware
corporation organized in 1997, is a saving and loan holding company that owns
100% of the capital stock of LIFE Bank (the "Bank"), the Company's principal
operating subsidiary. The Bank 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
9
<PAGE>
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 correspondents and 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 and consumer related loans.
The loan servicing division services approximately $1.2 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 decreased from $547.6 million at December 31,
1999 to $506.4 million as of March 31, 2000. The net change resulted primarily
from decreased cash and cash equivalents, loans, and accounts receivable related
to the residual mortgage-backed securities sale that occurred in December 1999
offset by an increase in the mortgage-backed securities portfolio.
Total liabilities of the Company decreased from $513.1 million at December
31, 1999 to $471.6 million at March 31, 2000. The net change resulted from the
elimination of $17.9 million of revolving line of credit outstandings and
callable residual financings as a result of the sale of the residual mortgage-
backed securities.
Loan Production, Sales and Securitizations
- ------------------------------------------
Loan originations and purchases for the quarter ended March 31, 2000 were
$206.7 million compared to $296.1 million in loans originated and purchased for
the quarter ended December 31, 1999. During the previous two quarters, the Bank
reduced its exposure in second trust, commercial and multifamily mortgage
products. Throughout the fourth quarter of 1999 and first quarter 2000, the
Bank sold $78.1 million second trust mortgage loans and $27.4 million
commercial/multifamily mortgage loans reducing outstandings to $48.4 million and
$20.7 million, respectively. As of March 31, 2000, the Bank transferred $123.9
million of first trust mortgage product and $15.1 million of second trust
mortgage product to its held for investment portfolio. The transfer increased
loans held for investment to $249.9 million at March 31, 2000 compared to $106.4
million for the quarter earlier period. Subsequent to the transfer, the Bank's
loans held for sale portfolio was $163.0 million comprised primarily of first
trust mortgage product with average seasoning of less than one month.
Loan Loss Allowance and Credit Quality
- --------------------------------------
The allowance for loan losses was $2.7 million for the period ended March
31, 2000, compared to $2.7 million at December 31, 1999. The March 31, 2000
allowance for loan losses as a percent of total non-performing loans was 95.75%,
compared to 68.4% at December 31, 1999. Non-performing loans as a percent of
gross loans was 0.66% at March 31, 2000, compared to 0.88% for the quarter
earlier period. LIFE Bank's 30+ day delinquency rate at March 31, 2000 was
1.68%, compared to 1.96% at December 31, 1999. The reduced delinquency rate was
the result of the sale of sub- and non-performing loans held in the Bank's
available for sale portfolio.
The Company's determination of the level of the allowance and
correspondingly, the provision for loan losses, rests upon various judgments and
assumptions, including current economic conditions, loan portfolio composition,
prior loan loss experience, industry trends and LIFE Bank's ongoing examination
process. Given the composition of the Company's loan portfolio at March 31,
2000, the $2.7 million loan loss allowance was considered adequate to cover
losses inherent in the Company's loan portfolio at March 31, 2000. However, no
assurance can be given, that the Company will not, in any particular period,
sustain loan losses that exceed the
10
<PAGE>
amount reserved, or that subsequent evaluation of the loan portfolio, in light
of the prevailing factors, including economic conditions which may adversely
affect the Company's or the Bank's service area or other circumstances will not
require significant increases in the loan loss allowance. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's loan loss allowance. Such agencies may require
the Bank to recognize additional provisions to increase the allowance or take
charge-offs in anticipation of future losses.
The table below summarizes the changes to the Company's loan loss allowance
related to loans held for investment for the three months ended March 31, 2000.
Loans held for sale loan losses and recoveries in the amount of $289 thousand
for the three months ended March 31, 2000 were taken as charges to net
gain/(loss) from mortgage banking.
LOAN LOSS ALLOWANCE (dollars in thousands)
- ------------------------------------------
Balance as of December 31, 1999 $2,749
Add:
Provision for loan losses 0
Recoveries of previous charge-offs 0
Less:
Transfers to REO specific reserve 0
Charge-offs 0
------
Balance as of March 31, 2000 $2,749
======
The table below summarizes the Company's composition of non-performing assets
for the periods indicated.
COMPOSITION OF NON-PERFORMING ASSETS
- ------------------------------------
<TABLE>
<CAPTION>
At March 31 At December 31 At March 31
----------- ------------- ------------
2000 1999 1999
----------- ------------- ------------
<S> <C> <C> <C>
Non-accrual loans:
Residential real estate:
One to four family
1st Trust Deeds $1,480 $1,248 $ 7,059
2nd Trust Deeds 1,315 1,214 386
Multi-family 0 198 0
Commercial and land 0 0 131
Other loans 76 27 168
----------- ------------- ------------
Total non accrual loans 2,871 2,687 7,744
In process foreclosure 0 1,331 1,338
----------- ------------- ------------
Total non-performing loans 2,871 4,018 9,082
REO, net (1) 1,752 2,214 1,580
----------- ------------- ------------
Total non-performing assets $4,623 $6,232 $10,662
=========== ============= ============
Allowance for estimated loan
Losses as a percent of gross
Loans held for investment 1.00% 2.09% 2.35%
Allowance for estimated loan
Losses as a percent of total
Non-performing loans (3) 95.75% 68.43% 28.47%
Non-performing loans as a
Percent of gross loans
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C> <C>
Receivable (2) 0.66% 0.88% 2.16%
Non-performing assets as a
Percent of total assets (4) 0.91% 1.14% 2.01%
</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,
foreclosures in process less than 90 days past due and all other non-accrual
loans.
(4) Non-performing assets is comprised of non-performing loans and foreclosed
real estate.
Mortgage and Other Securities
- -----------------------------
The Bank's held-to-maturity securities portfolio increased from $32.8
million at December 31, 1999 to $49.4 million as of March 31, 2000. The 50.6%
increase is the beginning of the Bank's transition of the balance sheet and
liquidity profile by building its held-to-maturity mortgage-backed securities
portfolio. At March 31, 2000 the portfolio represented 9.3% of total Bank
assets and consisted of $32.7 million FNMA and $13.9 million GNMA adjustable
rate mortgage-backed securities. The portfolio will modestly augment interest
income and through repurchase agreements will provide short-term liquidity to
better manage the Bank's balance sheet and net interest margin which is impacted
from timing differences related to mortgage loan originations and sales.
Additionally, the portfolio reduces the Bank's dependence on third-party
warehouse lines to fund its mortgage banking operations.
Liabilities and Stockholders' Equity
- ------------------------------------
Total Bank deposits for the quarter ended March 31, 2000 were $455.9
million, compared to $469.4 million at December 31, 1999. The Bank's strategy
continues to focus heavily on increasing retail and core deposits to reduce
reliance on wholesale certificates of deposit and other borrowings. The 2.9%
decrease in total deposits from December 31, 1999 was primarily due to reduced
outstandings in wholesale certificates of deposit. The ratio of retail deposits
to total deposits increased to 58.8% at March 31, 2000, compared to 52.4% for
the period ended December 31, 1999.
Accrued expenses and other liabilities decreased $13.2 million from $24.9
million at December 31, 1999 to $11.7 million at March 31, 2000 primarily as a
result of lower obligations to investors on loans serviced and securitizations
resulting from the sale of the Company's residual mortgage-backed securities.
LIFE Bank's core, tier 1 and total risk-based capital ratios at March 31,
2000 were 6.54%, 10.67% and 11.57%, respectively, compared to 5.67%, 8.36% and
9.09% for the year earlier period.
RESULTS OF OPERATIONS
- ---------------------
Quarter ended March 31, 2000 compared to the quarter ended March 31, 1999
Highlights for the quarters ended March 31, 2000 and 1999
The Company reported net income of $304 thousand or $0.05 per share for
the first quarter of 2000, compared to net income of $684 thousand, or $0.10 per
share for the first quarter ended March 31, 1999. Net income included a $506.5
thousand mark-to-market related to the repurchase of first trust mortgages from
loans sales completed in early 1999 and other charges related to the
consolidation of the Bank's mortgage banking operations and corporate
downsizing.
Interest Income
- ---------------
The Company's net interest income was $4.5 million in the first quarter
2000, compared to $5.5 million for the year earlier period. Net interest income
is $1.0 million lower than the year earlier period primarily from the
elimination of $1.7 million in interest income recognized on the Company's
residual mortgage-backed securities, during the first quarter 1999. Adjusting
for the $1.7 million, which was written off as a first quarter 1999 market
adjustment on the residual securities, net interest income for the first quarter
2000 was $668 thousand higher than the year earlier period.
Interest Expense
- ----------------
12
<PAGE>
Interest expense for the quarter increased approximately $1.4 million, from
$5.8 million at March 31, 1999 to $7.2 million at March 31, 2000. The increase
in interest expense reflects an increase in the Company's deposit base and a
lower reliance on other borrowed funds. The average costs of interest-bearing
deposits increased from 5.16% for the three months ended March 31, 1999 to 5.66%
for the three months ended March 31, 2000.
Noninterest Income
- ------------------
Noninterest income was $1.8 million down 9.9% from 1999's first quarter.
Lower noninterest income resulted from a $506.5 thousand mark-to-market related
to the repurchase of first trust mortgages from loan sales completed in early
1999. Excluding the $506.5 thousand mark-to-market adjustment related to loan
repurchases from sales completed in the second and third quarter of 1999, the
Company recognized a net gain of approximately $906.6 thousand. The net gains
for both the quarter ended March 31, 2000 and December 31, 1999 were compressed
due to the systematic divestiture of seasoned product from the Bank's held for
sale portfolio as the Bank transitions to more first trust mortgage product.
Noninterest Expense
- -------------------
Noninterest expenses for the first quarter 2000 were $5.8 million, down a
modest 1.2% over the year earlier period. The non-operating component relating
to the Company's consolidation and downsizing was $266.9 thousand for the
quarter ended March 31, 2000. The Company's operating expenses to average loans
was 5.0% compared to 6.2% at March 31, 1999.
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 4.88% and 8.60% for the quarters ended March 31,
2000 and March 31, 1999, respectively. The Bank had $49.8 million in deposits
maturing within one month as of March 31, 2000, which represents 11.75% of
certificate accounts. The Bank anticipates that it will retain a portion of
these accounts as well as raise new deposits to sufficiently maintain liquidity.
The Company's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows provided in operating activities were $2.4 million for
the three months ended March 31, 2000, compared to cash flows used in operating
activities of $104.0 million for the three months ended March 31, 1999.
Primarily net cash was provided by the settlement of several accounts receivable
related to the residual mortgage-backed securities sale occurring in December
1999. Additionally, cash was provided by loan originations and purchases in the
amount of $206.4 million offset by $205.9 million in loan sales to the Company's
investors. Net cash provided from investing activities was $12.1 million and
$30.8 million for the three months ended March 31, 2000 and 1999, respectively.
Principal collections on loans and securities offset partially by the purchase
of securities were the primary components of cash provided from investing
activities. Net cash used in financing activities primarily consisted of
decreased deposit accounts and repayment of other borrowings. The net decrease
in deposits and borrowings was $28.4 million for the three months ended March
31, 2000, compared to a net increase in deposits and borrowings of $98.0 million
in March 31, 1999.
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 March
31, 2000, cash and short-term investments totaled $6.5 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 FHLB advances and a warehouse line of
credit available in the amount of $250 million of which $1.0 million had been
drawn upon at
13
<PAGE>
March 31, 2000.
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 March 31, 2000, the Bank was considered
"well capitalized".
The following table reflects the required and actual capital ratios of the
Bank as of March 31, 2000:
Dollars in Thousands
- --------------------
<TABLE>
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent(a)
------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Core $32,880 $20,112 $12,768 6.54% 4.00%
Total Risk-Based $35,629 $24,642 $10,987 11.57% 8.00%
Tier 1 Risk-Based $32,880 $12,321 $20,559 10.67% 4.00%
Tangible $32,880 $ 7,542 $25,338 6.54% 1.50%
</TABLE>
- --------------------------------
(a) The percentages and ratios to be well-capitalized under prompt and
corrective action provisions as issued by the OTS are 5.0% core capital,
10.0% risk-based capital, 6.0% Tier 1 risk-based capital and 2.0% tangible
capital.
As of March 31, 2000, the Bank had outstanding commitments to originate or
purchase mortgage loans of $9.1 million compared to $8.4 million as of December
31, 1999 due to consistent originations within the mortgage banking operations.
Additionally, the Bank had outstanding commitments to purchase $3.1 million in
mortgage-backed securities. Other than commitments to originate or purchase
mortgage loans and to purchase investment securities, there were no material
changes to the Company's commitments or contingent liabilities as of March 31,
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.
14
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Management of Interest Rate Risk
--------------------------------
The principal objective of the Company's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of appropriate risk given the Company's business
focus, operating environment, capital and liquidity requirements and performance
objectives and manage the risk consistent with Board approved guidelines through
the establishment of prudent asset concentration guidelines. Pursuant to the
guidelines, management of the Company seeks to reduce the vulnerability of the
Company's operations to changes in interest rates. Management of the Company
monitors its interest rate risk as such risk relates to its operating
strategies. The Company's Board of Directors reviews on a quarterly basis the
Company's asset/liability position, including simulations of the effect on the
Company's capital of various interest rate scenarios. The extent of movement in
interest rates, higher or lower, is an uncertainty that could have a negative
impact on the earnings of the Company.
Between the time the Company originates loans and purchase commitments are
issued, the Company is exposed to both upward and downward movements in interest
rates which may have a material adverse effect on the Company. The Board of
Directors of the Company has implemented a hedge management policy primarily for
the purpose of hedging the risks associated with loans held for sale in the
Company's mortgage pipeline. In a flat or rising interest rate environment,
this policy enables management to utilize mandatory forward commitments to sell
fixed rate assets as the primary hedging vehicles to shorten the maturity of
such assets. In a declining interest environment, the policy enables management
to utilize put options. The hedge management policy also permits management to
extend the maturity of its liabilities through the use of short financial
futures positions, purchase of put options, interest rate caps or collars, and
entering into "long" interest rate swap agreements. Management may also utilize
"short" interest rate swaps to shorten the maturity of long-term liabilities
when the net cost of funds raised by using such a strategy is attractive,
relative to short-term CD's or borrowings. Management is continuing to evaluate
and refine its hedging policies. No hedging positions were outstanding as of
March 31, 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 filed in the
United States District Court to assert claims against the defendants under the
Securities Exchange
15
<PAGE>
Act of 1934 and the Securities Act of 1933.
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
(a) Exhibits
27.0 Financial data schedule (filed herewith).
16
<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
May 15, 2000 By: /s/ Robert K. Riley
- ------------ --------------------------------
Date Robert K. Riley
President and Chief Executive Officer
(principal executive officer)
May 15, 2000 /s/ W. Todd Peterson
- ------------ --------------------------------
Date W. Todd Peterson
Executive Vice President and Chief
Financial Officer (principal
financial and accounting officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,506
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 49,431
<INVESTMENTS-MARKET> 49,275
<LOANS> 412,842
<ALLOWANCE> 2,749
<TOTAL-ASSETS> 506,424
<DEPOSITS> 455,079
<SHORT-TERM> 3,300
<LIABILITIES-OTHER> 0
<LONG-TERM> 1,500
0
0
<COMMON> 67
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 506,424
<INTEREST-LOAN> 11,250
<INTEREST-INVEST> 511
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,761
<INTEREST-DEPOSIT> 6,530
<INTEREST-EXPENSE> 7,221
<INTEREST-INCOME-NET> 4,540
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,150
<INCOME-PRETAX> 304
<INCOME-PRE-EXTRAORDINARY> 304
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 304
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.05
<YIELD-ACTUAL> 3.66
<LOANS-NON> 2,871
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,871
<LOANS-PROBLEM> 1,752
<ALLOWANCE-OPEN> 2,749
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,749
<ALLOWANCE-DOMESTIC> 2,749
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
