<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 September 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 November 8, 2000.
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Consolidated Statements of Financial Condition:
September 30, 2000 (unaudited) and December 31, 1999......................... 1
2 Consolidated Statements of Operations:
For the Three and Nine Months ended September 30, 2000 (unaudited) and 1999.. 2
3 Consolidated Statements of Stockholders' Equity:
For the Nine Months ended September 30, 2000 (unaudited)..................... 3
4 Consolidated Statements of Cash Flows:
For the Nine Months ended September 30, 2000 (unaudited) and 1999............ 4
5 Notes to Consolidated Financial Statements (unaudited)....................... 5
Item 2 Management's Discussion and Analysis of Financial Condition.................. 9
And Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk................... 19
PART II OTHER INFORMATION
Item 1 Legal Proceedings............................................................ 20
Item 2 Changes in Securities and Use of Proceeds.................................... 20
Item 3 Defaults Upon Senior Securities.............................................. 20
Item 4 Submission of Matters to a Vote of Security Holders.......................... 20
Item 5 Other Information............................................................ 20
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)
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,883 $ 17,315
Federal funds sold 44,090 3,000
Participation contract 7,895 9,288
Investment securities available for sale 45,915 --
Investment securities held to maturity -- 32,833
Loans:
Loans held for sale -- 330,727
Loans held for investment 346,131 106,350
Allowance for loan losses (3,326) (2,749)
Mortgage servicing rights 5,977 6,431
Accrued interest receivable 3,516 3,676
Foreclosed real estate 1,335 2,214
Premises and equipment 4,454 6,003
Current tax receivable 2,395 18,653
Deferred income taxes 1,749 5,196
Other assets 3,058 8,671
------------ ------------
TOTAL ASSETS $ 471,072 $ 547,608
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts $ 408,927 $ 468,859
Other borrowings 30,333 17,873
Subordinated debentures 1,500 1,500
Accrued expenses and other liabilities 7,591 24,914
------------ ------------
Total liabilities 448,351 513,146
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares authorized; 6,668,436
(2000) and 6,653,436 (1999) shares issued and outstanding 67 67
Additional paid-in capital 42,575 42,525
Accumulated deficit (19,990) (8,130)
Accumulated other comprehensive income 69 -
------------ ------------
Total stockholders' equity 22,721 34,462
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 471,072 $ 547,608
============ ============
</TABLE>
Accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
LIFE FINANCIAL CORPORATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
---------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
INTEREST INCOME: 2000 1999 2000 1999
--------------- ------------------ ----------------- ---------------
<S> <C> <C> <C> <C>
Loans $ 9,358 $ 9,683 $ 31,858 $ 29,437
Other interest-earning assets 922 749 2,399 5,021
--------------- ------------------ ----------------- ---------------
Total interest income 10,280 10,432 34,257 34,458
INTEREST EXPENSE:
Interest-bearing deposits 6,611 5,259 19,806 15,856
Other borrowings 404 844 2,147 2,490
Subordinated debentures 53 53 175 158
--------------- ------------------ ----------------- ---------------
Total interest expense 7,068 6,156 22,128 18,504
--------------- ------------------ ----------------- ---------------
NET INTEREST INCOME 3,212 4,276 12,129 15,954
PROVISION FOR LOAN LOSSES 716 430 716 2,638
--------------- ------------------ ----------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,496 3,846 11,413 13,316
NONINTEREST INCOME:
Loan servicing and mortgage banking fee income 1,259 1,488 3,027 3,989
Bank and other fee income 150 90 413 253
Net gain/(loss) from mortgage banking - - - -
Net loss on participation contract and
investment securities (1,025) - (1,025) -
Other income (loss) (64) 581 (4) 689
--------------- ------------------ ----------------- ---------------
Total noninterest income 320 2,159 2,411 4,931
NONINTEREST EXPENSE:
Compensation and benefits 1,718 1,448 5,408 3,756
Premises and occupancy 920 460 2,508 1,284
Data processing 164 208 757 669
Net loss/(gain) on foreclosed real estate 256 16 319 (59)
Other expense 1,494 3,127 3,855 5,418
--------------- ------------------ ----------------- ---------------
Total noninterest expense 4,552 5,259 12,847 11,068
--------------- ------------------ ----------------- ---------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (1,736) 746 977 7,179
PROVISION FOR INCOME TAXES 3,337 1,224 3,217 2,314
--------------- ------------------ ----------------- ---------------
NET INCOME (LOSS) FROM CONTINUING (5,073) (478) (2,240) 4,865
OPERATIONS
DISCONTINUED OPERATIONS :
Income (loss) from operations of discontinued
mortgage banking operations (less applicable
income tax provision/(benefit) of $(457), $(454),
$(782), and $416, respectively) (4,890) 1,515 (8,372) (1,385)
Gain (loss) on disposal of mortgage banking
(less applicable income tax provision/(benefits)
of $(812) (1,248) - (1,248) -
--------------- ------------------ ----------------- ---------------
NET INCOME (LOSS) FROM DISCONTINUED
OPERATIONS (6,138) 1,515 (9,620) (1,385)
--------------- ------------------ ----------------- ---------------
NET INCOME (LOSS) $ (11,211) $ 1,037 $ (11,860) $ 3,480
=============== ================== ================= ===============
Basic earnings (loss) per common share
Continuing operations $ (0.75) $ (0.07) $ (0.34) $ 0.74
Discontinued operations $ (0.93) $ 0.23 $ (1.44) $ (0.21)
--------------- ------------------ ----------------- ---------------
Net income (loss) per common share $ (1.68) $ 0.16 $ (1.78) $ 0.53
Weighted average shares outstanding 6,668,436 6,568,436 6,668,162 6,564,700
Diluted earnings (loss) per common share
Continuing operations $ (0.76) $ (0.07) $ (0.34) $ 0.74
Discontinued operations $ (0.92) $ 0.23 $ (1.44) $ (0.21)
--------------- ------------------ ----------------- ---------------
Net income (loss) per common share $ (1.68) $ (0.16) $ (1.78) $ 0.53
Weighted average shares outstanding 6,668,436 6,623,906 6,668,162 6,564,700
</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, except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Income 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
Net unrealized gain on --- --- --- --- 69 69
available-for-sale
securities, net of tax
Net loss --- --- --- (11,860) --- (11,860)
------------------------------------------------------------------------------------
Comprehensive income (loss) (11,860) 69 (11,791)
------------------------------------------------------------------------------------
BALANCE, September 30, 2000 6,668,436 $ 67 $ 42,575 $ (19,990) $ 69 $ 22,721
====================================================================================
</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>
Nine Months Ended
September 30,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (11,860) $ 3,480
Adjustments to net income
Depreciation and amortization 549 1,765
Provision for credit losses 716 2,638
Loss on sale and provision for losses on premises and equipment 724 ----
Loss on sale, provision, and write-down of foreclosed real estate 467 368
Loss (gain) on sale and securitization of loans held for sale 4,639 (13,228)
Net unrealized losses and accretion on investment securities and 1,106 1,272
residual assets
Change in allowance on mortgage servicing rights (576) 1,234
Amortization of mortgage servicing rights 1,030 3,671
Purchase and origination of loans (450,497) (722,310)
Proceeds from the sales of loans 461,353 619,737
Write-down of loans transferred to held for investment 1,688 ----
Change in current and deferred income tax receivable 19,705 2,729
(Decrease) increase in accrued expenses and other liabilities (17,713) 4,465
Federal Home Loan Bank stock dividend (160) (99)
Decrease (Increase) in other assets 5,773 (918)
----------- -----------
Net cash provided (used) in operating activities 16,944 (95,196)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Principal payments on loans 73,617 90,702
Principal payments on securities 51,691 3,032
Proceeds from the sale of foreclosed real estate 1,389 3,355
Purchase of securities (64,605) (45,244)
Proceeds from maturities of securities ---- 2,000
Increase in Federal funds sold (41,090) (13,008)
Cash received on residual assets 356 4,674
Purchase of Federal Home Loan Bank stock ---- (124)
Additions to premise and equipment (312) (323)
----------- -----------
Net cash provided by investing activities 21,046 45,064
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Net (decrease) increase in deposit accounts (59,932) 107,356
Proceeds from (repayment of) other borrowings 12,460 (39,977)
Proceeds from FHLB advances ---- 59,257
Net proceeds from issuance of common stock 50 20
----------- -----------
Net cash (used) provided by financing activities (47,422) 126,656
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (9,432) 76,524
CASH AND CASH EQUIVALENTS, beginning of period 17,315 8,152
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 7,883 $ 84,676
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 21,941 $ 18,966
=========== ===========
Income taxes paid $ 73 $ 4,028
=========== ===========
NONCASH INVESTING ACTIVITIES DURING THE PERIOD:
Transfers from loans held for sale to loans held for investment $ 253,597 ----
=========== ===========
Transfers from loans to foreclosed real estate $ 977 $ 4,530
=========== ===========
</TABLE>
Accompanying notes are and integral part of these consolidated financial
statements.
4
<PAGE>
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 Insurance Services, 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 September 30,
2000 and December 31, 1999, and the results of its operations and its cash flows
for the three and nine months ended September 30, 2000 and 1999. Operating
results for the three and nine months ended September 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 September 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 September 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 nine months ended September 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 (loss) per share reconciliation is as follows (dollars in
thousands, except per share data):
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
------------------------------------------------------------------------------------------
2000 1999
------------------------------------------ ---------------------------------------------
Net Per Share Net Per Share
Loss Shares Amount Earnings Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings (Loss) $ (11,211) $ 1,037
============ ============
Basic EPS Earnings available
To common stockholders $ (11,211) 6,668,436 $ (1.68) $ 1,037 6,568,436 $ 0.16
Effect of Dilutive Stock
Options - - - 55,470
------------ ------------ ------------ ------------
Diluted EPS Earnings available
To common stockholders plus
Assumed conversions $ (11,211) 6,668,436 $ (1.68) $ 1,037 6,623,906 $ 0.16
============ ============ ============ ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
------------------------------------------------------------------------------------------
2000 1999
------------------------------------------ ---------------------------------------------
Net Per Share Net Per Share
Loss Shares Amount Earnings Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings (Loss) $ (11,860) $ 3,480
============ ============
Basic EPS Earnings available
To common stockholders $ (11,860) 6,668,162 $ (1.78) $ 3,480 6,564,700 $ 0.53
Effect of Dilutive Stock
Options - - - 44,666
------------ ------------ ------------ ------------
Diluted EPS Earnings available
To common stockholders plus
Assumed conversions
$ (11,860) 6,668,162 $ (1.78) $ 3,480 6,609,366 $ 0.53
============ ============ ============ ============ ============ ===========
</TABLE>
6
<PAGE>
NOTE 5 - DISCONTINUED OPERATIONS AND SEGMENT INFORMATION
In September 2000, the Company ceased its mortgage banking operations,
which consisted of selling originated and purchased mortgage loans directly in
the secondary market in whole loan sales whereby the Company would recognize
gains or losses. Accordingly, the mortgage banking operations are reported as a
discontinued operation at September 30, 2000, and the financial statements have
been reclassified to report separately the operating results of that business.
The Company's prior years' operating results have been restated to reflect
continuing operations. Net assets previously reported for the mortgage banking
operation consisted primarily of loans held for sale. As of September 30, 2000,
the remaining loans held for sale were transferred to loans held for investment
and a lower of cost or market adjustment of $1.7 million was recorded.
The table below sets forth information about the discontinued operating
segment of mortgage banking as well as the remaining continuing operations of
banking and loan servicing for the nine months ended September 30, 2000 and 1999
(dollars in thousands).
<TABLE>
<CAPTION>
For the Nine Months Ended For the Nine Months Ended
---------------------------------------------------------------------------------------------------
September 30, 2000 September 30, 1999
------------------------------------------------- ------------------------------------------------
Mortgage Loan Mortgage Loan
Bank Banking Servicing Total Bank Banking Servicing Total
------------ ------------ ---------- ----------- ----------- ----------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-Interest Revenues $ (615) $ (6,001) $ 3,026 $ (3,590) $ 576 $ 8,189 $ 4,355 $ 13,120
Interest Earned 34,001 -- -- 34,001 34,458 -- -- 34,458
Interest Charges (22,127) -- (1) (22,128) (18,504) -- -- (18,504)
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest Income 11,874 -- (1) 11,873 15,954 -- -- 15,954
(expense)
--------- --------- --------- --------- --------- --------- --------- ---------
Net revenue $ 11,259 $ (6,001) $ 3,025 $ 8,283 $ 16,530 $ 8,189 $ 4,355 $ 29,074
========= ========= ========= ========= ========= ========= ========= =========
Segment pre-tax income
(loss) $ (106) $ (11,214) $ 1,083 $ (10,237) $ 5,849 $ (970) $ 1,331 $ 6,210
Segment assets $ 463,604 $ -- $ 7,468 $ 471,072 $ 514,111 $ 31,328 $ 19,035 $ 564,474
</TABLE>
NOTE 6 REGULATORY MATTERS
On September 25, 2000, the Company consented to the issuance of an Order to
Cease and Desist (the "Order") by the Office of Thrift Supervision (the "OTS").
The Order requires the Company, among other things, to contribute $5.2 million
to the capital of the Bank, not later than December 31, 2000, subject to
extension by the OTS. The Company is also required to observe certain
requirements regarding transactions with affiliates, books and records, tax
sharing arrangements with the Bank and the maintenance of a separate corporate
existence from the Bank.
Also, on September 25, 2000, the Bank entered into a Supervisory Agreement with
the OTS. The Supervisory Agreement requires the Bank, among other things, to
achieve a core capital of at least 6.0% and a total risk-based capital of at
least 11.0% by March 31, 2001. In calculating these ratios, the Bank must risk
weight all sub-prime loans it holds at double the regularly prescribed risk
weighting. The Supervisory Agreement also requires that the Bank add at least
two new independent members to its Board of Directors, not pay dividends without
OTS approval and revise many of its policies and procedures, including those
pertaining to internal asset review, allowances for loan losses, interest rate
risk management, mortgage banking operations, liquidity, separate corporate
existence, loans to one borrower and oversight by the Board of Directors.
7
<PAGE>
NOTE 7 INCOME TAXES
Income taxes for the period ended September 30, 2000 for continuing operations
consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
Current provision (benefit): 2000
-------------------------
<S> <C>
Federal $ -
State -
-------------------------
-
Deferred (benefit) provision:
Federal 3,217
State 731
-------------------------
3,217
Total income tax provision (benefit) $ 3,217
=========================
</TABLE>
A reconciliation from statutory federal income taxes to the Company's effective
income taxes for continuing operations for the period ended September 30, 2000
is as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
2000
-----------------------
<S> <C>
Statutory federal taxes $ 332
State taxes, net of federal income tax benefit 68
Valuation allowance 2,816
-----------------------
$ 3,217
=======================
</TABLE>
Deferred tax assets (liabilities) were comprised of the following at September
30, 2000 and December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
2000 1999
------------------------- ----------------------
<S> <C> <C>
Deferred tax assets:
Depreciation $ 11 $ 10
Accrued expenses 890 272
Net operating loss 5,816 -
Allowance for loan losses 1,219 859
Capital loss carryforward 60 60
Loans held for sale - 3,414
Other - 905
------------------------- ----------------------
7,996 5,520
Deferred tax liabilities:
Federal Home Loan Bank stock (248) (248)
Other (368) (76)
------------------------- ----------------------
(616) (324)
Less valuation allowance (5,631) -
------------------------- ----------------------
Net deferred tax asset $ 1,749 $ 5,196
========================= ======================
</TABLE>
At September 30, 2000, a valuation allowance in the amount of $5.6 million was
recorded against the deferred tax asset as it is more likely than not that such
benefit would not be realized.
8
<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
nine and three month periods ended September 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 reflects 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 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.
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 and servicing fee
income.
FINANCIAL CONDITION
Total assets of the Company were $471.1 million at September 30,
2000 compared to $547.6 million at December 31, 1999. The $76.5 million
decrease in total assets from December 31, 1999 was primarily a result of a
$90.9 million decrease in the loan portfolio. During the period ending
September 30, 2000, the Company sold $121.7 million in loans resulting in a
loss of $3.5 million. The decrease in the loan portfolio was partially offset
by an increase of $52.8 million in other interest earning assets, such as
investment securities and federal funds sold.
MORTGAGE AND OTHER SECURITIES
The Company transferred the securities portfolio from held to
maturity to available for sale during the quarter ended September 30, 2000.
Total securities increased from $42.1 million at December 31, 1999 to $53.8
million as of September 30, 2000. The $11.7 million increase resulted from
purchases of FNMA and GNMA adjustable rate mortgage-backed securities offset
by maturities of U.S. Treasury Bills and principal payments. The
participation contract, a retained interest in prior years' mortgage
securitizations was revalued during the period. This revaluation reflected
current estimates of
9
<PAGE>
prepayment speeds and anticipated losses on the loans underlying the contract,
which resulted in a charge to earnings of approximately $1.0 million.
A summary of the Company's securities as of September 30, 2000 and
December 31, 1999 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 2000
--------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Market Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Participation Contract $ 7,895 $ - - $ 7,895
Securities Available for Sale:
Mortgage-Backed Securities 42,928 161 (41) 43,048
Other Securities 2,867 - - 2,867
------------ ------------ ------------ ------------
45,795 161 (41) 45,915
------------ ------------ ------------ ------------
$ 53,690 $ 161 $ (41) $ 53,810
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Market Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Participation Contract $ 9,288 $ -- $ -- $ 9,288
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
------------ ------------ ------------ ------------
32,833 -- (10) 32,823
------------ ------------ ------------ ------------
$ 42,121 $ -- $ (10) $ 42,111
============ ============ ============ ============
</TABLE>
LOANS
It is part of the Company's strategic plan to discontinue the sale of
loans to the secondary market, thus, all loans held for sale have been
reclassified as loans held for investment. Total loans reclassified from held
for sale had a carrying value of $114.6 million. The lower of cost or market
adjustment at the time of the transfer was $1.7 million. Loans totaled $342.8
million at September 30, 2000 compared to $434.3 million at December 31, 1999,
or a decrease of $91.5 million. The decrease is primarily due to loans sold of
$121.7 million resulting in a loss of $3.5 million.
Additionally, the Bank originated $200.1 million in loans during the
nine months ending September 30, 2000 which consisted of $165.7 million in real
estate loans, $24.3 million in construction loans and $10.1 million in other
loans. Together with loan purchases of $243.9 million, total loan production for
the nine months ending September 30, 2000 was $444.0 million. Loan sales for the
nine months ending September 30, 2000 totaled $464.8 million. For the nine
months ending September 30, 1999, the Bank originated $351.3 million in loans,
which consisted of $289.6 million in real estate loans, $40.1 million in
construction loans and $21.6 million in other loans. The Bank's loan production
total for the nine months ending September 30, 1999 was $745.1 and included
$393.8 million of purchased loans. Loan sales totaled $619.7 million for the
nine months ending September 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.
10
<PAGE>
ALLOWANCE FOR LOAN LOSSES
For the nine and three months ended September 30, 2000, the Company
had a $716 thousand provision for credit losses on loans compared to $2.6
million and $430 thousand for the nine and three months ended September 30,
1999, respectively.
Allowance for loan losses totaled $3.3 million and $2.7 million at
September 30, 2000 and December 31, 1999 respectively. The September 30, 2000
allowance for loan losses as a percent of total non-performing loans was
30.97%, compared to 102.3% at December 31, 1999. Nonperforming loans, as a
percent of gross loans was 2.96% at September 30, 2000, compared to 0.59% at
December 31, 1999.
The Company's determination of the level of the allowance for loan
losses and correspondingly, the provision for loan losses, rests upon various
judgments and assumptions, including current economic conditions, loan
portfolio composition, prior loan loss experience and industry trends. Given
the composition of the Company's loan portfolio, the $3.3 million allowance
for loan losses was considered adequate to cover losses inherent in the
Company's loan portfolio at September 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
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 losses for the nine and three months ended September 30, 2000 and September
30, 1999.
ALLOWANCE FOR LOAN LOSSES (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------- ------------------------------
2000 1999 2000 1999
----------------------------- -------------------------------
<S> <C> <C> <C> <C>
Allowance for loan losses
Balance at beginning of period $ 2,749 $ 2,777 $ 2,710 $ 3,393
Charge-off's (151) (2,441) (112) (753)
Recoveries 12 362 12 266
----------- ---------- ----------- -----------
Net charge-off's (139) (2,079) (100) (487)
Transfer to REO specific reserve -- (16) -- (16)
Privision for loan losses 716 2,638 716 430
----------- ---------- ----------- -----------
Allowance for loan losses balance at
end of period $ 3,326 $ 3,320 $ 3,326 $ 3,320
=========== ========== =========== ===========
</TABLE>
11
<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 SEPTEMBER 30, AT DECEMBER 31,
2000 1999
----------------------- -----------------------
<S> <C> <C>
Non-accrual loans:
Residential real estate:
One to four family $ 10,617 $ 2,462
Multi-family 67 198
Other loans 57 27
----------------------- -----------------------
Total non-performing loans 10,741 2,687
REO, net (1) 1,319 2,214
----------------------- -----------------------
Total non-performing assets $ 12,060 $ 4,901
======================= =======================
Allowance for loan losses as a percent of
gross loans held for investment .92% 2.09%
Allowance for loan losses as a percent of
total non performing loans (2) 30.97% 102.3%
Non-performing loans as a
percent of gross loans receivable (3) 2.96% 0.59%
Non-performing assets as a
percent of total assets 2.56% 0.89%
</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.
(3) Gross loans receivable is comprised of loans held-for-sale and loans
held-for-investment.
12
<PAGE>
MORTGAGE SERVICING RIGHTS
The activity for the Company's mortgage servicing rights was as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
Mortgage Servicing Rights: September 30, 2000
-----------------------
<S> <C>
Balance at December 31, 1999 $ 7,180
Additions 57
Scheduled amortization (1,087)
--------------
Balance before valuation reserve at September 30, 2000 6,150
--------------
Reserve for Impairment of Mortgage Servicing Rights:
Balance at December 31, 1999 (749)
Reductions 576
--------------
Balance at September 30, 2000 (173)
--------------
Mortgage Servicing Rights, net $ 5,977
==============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities of the Company decreased from $513.1 million at
December 31, 1999 to $448.3 million at September 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 September 30, 2000 were
$408.9 million, compared to $468.9 million at December 31, 1999. The 12.8%
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 retail 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 retail deposits to total deposits increased to
72.5% at September 30, 2000 compared to 54.5 at December 31, 1999.
Accrued expenses and other liabilities decreased $17.3 million from
$24.9 million at December 31, 1999 to $7.6 million at September 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 September 30, 2000 was $30.3 million compared to
$17.9 million at December 31, 1999. The $12.4 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 September 30, 2000 were 5.28%, 6.62% and
7.87%, respectively, compared to 6.32%, 10.17% and 11.19% at September 30,
1999.
13
<PAGE>
RESULTS OF OPERATIONS
QUARTER AND YEAR-TO-DATE ENDED SEPTEMBER 30, 2000 COMPARED TO THE QUARTER AND
YEAR-TO-DATE ENDED SEPTEMBER 30, 1999
HIGHLIGHTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999:
The Company reported third quarter 2000 net loss of $11.2 million,
or $1.68 loss per diluted share, compared with net income of $1.0 million, or
$0.16 per diluted share for the quarter ended September 30, 1999. The third
quarter $1.68 loss per diluted share was comprised of a $0.75 loss from
continuing operations and a $0.93 loss from discontinued mortgage banking
operations. Net loss year-to-date for 2000 is $11.9 million, or $1.78 loss
per diluted share, compared to net earnings of $3.5 million, or $0.53 per
diluted share, for the nine months ended September 30, 1999. The year to date
for 2000 $1.78 loss per diluted share was comprised of a $0.34 loss from
continuing operations and a $1.44 loss from discontinued mortgage banking
operations. The primary reasons for such a decline were due to losses of $3.8
million on sale of non-performing loans, and amortization of premiums for
those loans. The Bank made a lower of cost or market adjustment of $1.7
million on the transfer of loans from available for sale to held for
investment. Although, this adjustment is not part of the allowance for loan
losses evaluation policy, the adjustment provides for an offset against
future losses on these loans. Additionally, the Bank made a permanent write
down of $1.0 million on the participation contract due to changes in
assumptions based on the historical performance of the loans underlying the
contract
NET INTEREST INCOME:
The Company's net interest income before provision for credit losses
decreased 30.9% to $3.0 million during the three months ended September 30,
2000, compared to $4.3 million for the three months ended September 30, 1999.
Additionally, net interest income for the nine months ending September 30, 2000
decreased $4.1 million from September 30, 1999. The decline is due to the
combination of decreased loan yields and increased cost of funds. The yield
decrease is a result of the reversal of non-accrual interest and the
amortization of deferred premiums and discounts on the loans transferred from
held for sale to loans held for investment. The deposit rate increase is a
result of higher market interest rates. Average loans for the nine months ending
September 30, 2000 increased $46.7 million from the same prior year period which
was partially offset by the decrease due to the average loan yield decreasing 40
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 nine months ending September 30, 2000, the Company's
net interest margin was 3.21% as compared to a net interest margin of 4.36%
during the same period in 1999.
For the three months ending September 30, 2000, the Company's net
interest margin was 2.51% as compared to a net interest margin of 3.51%
during the third quarter of 1999. This change in the Company's net interest
margin was caused by yield increases investment securities and cash and cash
equivalent offset by increases in the cost of funds for interest bearing
deposits and other borrowings. Average investment securities increased $49.4
million, participation contract increased $8.0 million, and average net loans
increased $20.0 million offset by average deposits decreasing $19.4 million,
average borrowings decreasing $19.1 million and average residual
mortgage-backed securities decreasing $38.2 million.
14
<PAGE>
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 nine months period
ended September 30, 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>
Three Months Ended Three Months Ended
September 30, 2000 September 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 $ 618 $ 45 29.13% $ 5,949 $ 29 1.95%
Federal funds sold 4,494 72 6.41% 9,948 122 4.91%
Participation contract 7,970 - 0.00% - - -
Investment securities, net 52,642 805 6.12% 3,257 43 5.28%
Loans receivable, net 405,962 9,102 8.97% 385,979 9,683 10.03%
Mortgage-backed securities - - - 38,210 555 5.81%
Residual mortgage-backed securities - - - 44,351 - 0.00%
-------------- ----------- ------------ ----------- ---------- ------------
Total interest-earning assets 471,686 10,024 8.50% 487,694 10,432 8.56%
Non-interest-earning assets 40,572 48,633
-------------- -----------
Total assets $ 512,258 $ 536,327
============== ===========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Interest-bearing deposits 31,534 170 2.16% 37,587 192 2.04%
Certificate accounts 405,110 6,441 6.36% 379,695 5,067 5.34%
-------------- ----------- ------------ ----------- ---------- ------------
Total interest-bearing deposits 436,644 6,611 6.06% 417,282 5,259 5.04%
Other borrowings 24,194 404 6.68% 43,296 844 7.80%
Subordinated debentures 1,500 53 14.13% 1,500 53 14.13%
-------------- ----------- ------------ ----------- ---------- ------------
Total interest-bearing liabilities 462,338 7,068 6.12% 462,078 6,156 5.32%
Non-interest-bearing liabilities 17,561 19,231
-------------- -----------
Total liabilities 479,899 481,309
Equity 32,359 55,018
-------------- -----------
Total liabilities and equity $ 512,258 $536,327
============== ===========
Net interest income $ 2,956 $4,276
=========== ==========
Net interest rate spread 4.69% 5.35%
============ ============
Net interest margin 2.51% 3.51%
============ ============
Ratio of interest-earning assets
To interest-bearing liabilities 102.02% 105.54%
============ ============
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 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 $ 2,532 $ 223 11.74% $ 5,468 $ 180 4.39%
Federal funds sold 3,027 205 9.03% 20,884 734 4.69%
Participation contract 5,660 - 0.00% - - -
Investment securities, net 41,837 1,971 6.28% 3,846 159 5.51%
Loans receivable, net 440,900 31,602 9.56% 394,180 29,437 9.96%
Mortgage-backed securities 15,736 648 5.49%
Residual mortgage-backed securities - - - 47,993 3,300 9.17%
-------------- ----------- ------------ ----------- ---------- ------------
Total interest-earning assets 493,956 34,001 9.18% 488,107 34,458 9.41%
Non-interest-earning assets 52,935 34,494
-------------- -----------
Total assets $ 546,891 $522,601
============== ===========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Interest-bearing deposits 31,993 524 2.18% 31,211 536 2.29%
Certificate accounts 419,803 19,282 6.12% 383,024 15,320 5.33%
-------------- ----------- ------------ ----------- ---------- ------------
Total interest-bearing deposits 451,796 19,806 5.85% 414,235 15,856 5.10%
Other borrowings 38,668 2,147 7.40% 45,309 2,490 7.33%
Subordinated debentures 1,500 175 15.56% 1,500 158 14.04%
-------------- ----------- ------------ ----------- ---------- ------------
Total interest-bearing liabilities 491,964 22,128 6.00% 461,044 18,504 5.35%
Non-interest-bearing liabilities 20,756 7,865
-------------- -----------
Total liabilities 512,720 468,909
Equity 34,171 53,692
-------------- -----------
Total liabilities and equity $ 546,891 $522,601
============== ===========
Net interest income $11,873 $15,954
=========== ==========
Net interest rate spread 4.76% 4.06%
============ ============
Net interest margin 3.21% 4.36%
============ ============
Ratio of interest-earning assets
Total interest-bearing liabilities 100.40% 105.87%
============ ============
</TABLE>
NONINTEREST INCOME (LOSS)
Noninterest income (loss) was ($5.5) million and ($3.6) million for
the three and nine months ended September 30, 2000, respectively, compared to
$6.4 million and $13.1 million for the three and nine months ended September
30, 1999, respectively. This major decline in noninterest income is primarily
due to the restructuring of the Company. The Bank incurred a $3.8 loss on the
sale of non-performing loans; amortized $1.0 million in loan fees associated
with non-performing loans; wrote down the participation contract by $1.0
million; and recorded a lower of cost or market adjustment on the transfer of
loans to held for investment of $1.7 million.
16
<PAGE>
A summary of the Company's loan originations and sales for the nine
months ended September 30, 2000 and 1999 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year-to-Date Year-to-Date
September 30, 2000 September 30, 1999
----------------------------------------- ----------------------- ---------------------
<S> <C> <C>
Beginning balance, gross $ 458,556 $ 337,554
Loans originated:
One to four family 165,695 289,556
Construction loans 24,338 40,112
Other loans 10,088 21,633
----------------------- ---------------------
Total loans originated 200,121 351,301
Loans purchased 243,912 393,768
----------------------- ---------------------
Subtotal - Production 444,033 745,069
----------------------- ---------------------
Total 902,589 1,082,623
Less:
Principal repayments 73,756 92,853
Sales of loans 464,791 619,737
Transfers to REO 977 4,720
----------------------- ---------------------
Ending balance, gross 363,065 365,313
Loans in process, loan fees (16,934) (17,627)
Allowance for loan losses (3,326) (3,320)
----------------------- ---------------------
Total Loans receivable, net 342,805 344,366
Loans held for sale -- 248,023
----------------------- ---------------------
Loans held for investment $ 342,805 $ 96,343
======================= =====================
</TABLE>
NONINTEREST EXPENSE
Noninterest expense was $5.9 million for the three months ended
September 30, 2000, which were $2.5 million lower than the same period in
1999. The 29.7% decrease is primarily a result of reduced compensation
expense of $734 thousand related to reduction in personnel, and a $958
thousand decrease in other expenses related to professional services. The
decrease is partially offset by a severance payment of $1.2 million made
during the third quarter of 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. 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 10.95% and 4.10% for the
quarters ended September 30, 2000 and September 30, 1999, respectively. The Bank
had $50.1 million in deposits maturing within one month as of September 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.
17
<PAGE>
The Company's cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities
and financing activities. Cash flows provided by operating activities were
$16.9 million for the nine months ended September 30, 2000, compared to cash
flows used in operating activities of $95.2 million for the nine months ended
September 30, 1999. Net cash was primarily used for loan originations and
purchases in the amount of $444.0 million offset by $464.8 million in loan
sales to the company's investors. Net cash provided by investing activities
was $21.0 million and $45.1 million for the nine months ended September 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, offset by proceeds from
Federal Home Loan Bank advances. Net cash provided by (used in) financing
activities was ($47.4) million and $126.7 million for the nine months ended
September 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
September 30, 2000, cash and short-term investments totaled $520 million. The
Company has other sources of liquidity if a need for additional funds arises
including the utilization of a line of credit at the Federal Home Loan Bank
(FHLB). Advances outstanding as of September 30, 2000 consisted of $30.3 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 the Company's principal subsidiary, 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 ratio.
18
<PAGE>
The following table reflects the Bank's capital ratios based on ending assets
at September 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 $ 24,907 $ 18,859 $ 6,048 5.28% 4.00%
Total Risk-Based $ 20,226 $ 20,564 $ (338) 7.87% 8.00%
Tier 1 Risk-Based $ 17,012 $ 10,282 $ 6,730 6.62% 4.00%
Tangible $ 24,907 $ 7,072 $ 17,835 5.28% 1.50%
</TABLE>
a) As of September 30, 2000 the Bank did not meet the capital ratios
required to be considered adequately capitalized.
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 September 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. Other than commitments to originate or purchase mortgage
loans, there were no material changes to the Company's commitments or contingent
liabilities as of September 30, 2000 compared to the period ended December 31,
1999 as discussed in the notes to the audited consolidated financial statements
of the Company 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. 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. No hedging positions were outstanding
as of September 30, 2000 and December 31, 1999.
19
<PAGE>
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 itself 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.
In September 1999, Pool Depot of Georgia, Inc. and Pool Depot of
Texas, Inc. (collectively known as "Pool Depot") filed a lawsuit against the
Bank. The complaint alleges causes of action against Life Bank for breach of
oral and written hold-back agreement, fraud and attorneys' fees. The Bank
filed a counterclaim against Pool Depot for breach of contract and a motion
for leave to amend counterclaim to add Peachtree Investment Associates, Inc.
as a party. Discovery is underway and motions are pending before the Court.
Life Bank intends to vigorously defend itself 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.
Current Report on Form 8-K dated 09/25/00 and filed
09/29/00.
20
<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
NOVEMBER 14, 2000 By: /s/ Steven R. Gardner
---------------------------
Date Steven R. Gardner
President and Chief Executive Officer
(principal executive officer)
NOVEMBER 14, 2000 /s/ Roy Painter
----------------------------
Date Roy Painter
Senior Vice President and Chief Financial
Officer (principal financial and
accounting officer)
21
