UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission File Number 0-24744
Life Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1711207
- ---------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
109 East Main Street
Norfolk, Virginia 23510
- ---------------------------- --------------------------------
(Address of principal executive office) (Zip Code)
(757) 858-1000
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(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. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock (par value $.01 per share) 9,846,840
- ---------------------------------------- -----------------------------------
(Title of Class) (Number of Shares Outstanding as
of August 9, 1996)
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LIFE BANCORP, INC.
TABLE OF CONTENTS
Page
<S> <C>
PART I - FINANCIAL INFORMATION.................................................................................. 1
Item 1. Financial Statements.................................................................................. 1
Unaudited Consolidated Balance Sheets...................................................................... 1
Unaudited Consolidated Statements of Operations............................................................ 2
Unaudited Consolidated Statements of Operations............................................................ 3
Unaudited Consolidated Statement of Changes in Stockholders'Equity......................................... 4
Unaudited Consolidated Statements of Cash Flows............................................................ 5
Notes to Unaudited Consolidated Financial Statements....................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................................ 7
General.................................................................................................... 7
Financial Condition........................................................................................ 8
Assets................................................................................................ 8
Liabilities and Stockholders' Equity.................................................................. 8
Asset Quality......................................................................................... 9
General.......................................................................................... 9
Impaired Loans................................................................................... 9
Troubled Debt Restructurings.................................................................... 10
Non-Performing Assets........................................................................... 11
Allowance for Loan Losses....................................................................... 11
Results of Operations..................................................................................... 13
Comparison of Results of Operations for the Three Months Ended June 30, 1996 and
1995............................................................................................ 13
General......................................................................................... 13
Net Interest Income............................................................................. 13
Provision for Loan Losses....................................................................... 13
Yields Earned and Rates Paid.................................................................... 14
Noninterest Income.............................................................................. 14
Noninterest Expense............................................................................. 14
Income Tax Provision............................................................................ 15
Comparison of Results of Operations for the Six Months Ended June 30, 1996 and
1995............................................................................................ 15
General......................................................................................... 15
Net Interest Income............................................................................. 15
Provision for Loan Losses....................................................................... 15
Yields Earned and Rates Paid.................................................................... 16
Noninterest Income.............................................................................. 16
i
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Noninterest Expense............................................................................. 16
Income Tax Provision............................................................................ 17
Impact of Legislation Under Consideration................................................................. 17
FDIC Insurance Premiums.............................................................................. 17
Liquidity and Capital Resources........................................................................... 18
PART II - OTHER INFORMATION.................................................................................... 19
Item 1. Legal Proceedings.................................................................................... 19
Item 2. Changes in Securities................................................................................ 19
Item 3. Defaults Upon Senior Securities...................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 19
Item 5. Other Information.................................................................................... 19
Item 6. Exhibits and Reports on Form 8-K..................................................................... 19
SIGNATURES..................................................................................................... 20
ii
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<TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LIFE BANCORP, INC.
Unaudited Consolidated Balance Sheets
(In thousands, except stock data)
June 30, 1996 December 31, 1995
--------------- -----------------
<S> <C> <C>
Assets
Cash and cash equivalents........................................ $ 11,434 $ 8,845
Investment securities, available-for-sale........................ 34,809 23,040
Mortgage-backed securities:
Held-to-maturity (Market value of $153.0 million and
$169.2 million at 06/30/96 and 12/31/95, respectively)....... 154,238 168,602
Available-for-sale............................................. 427,373 393,587
Loans receivable, net............................................ 568,024 467,424
Accrued interest and dividends receivable........................ 10,774 9,443
Real estate owned................................................ 741 622
Federal Home Loan Bank stock, at cost............................ 8,740 8,310
Premises and equipment........................................... 15,242 13,975
Excess of cost over net assets of companies acquired............. 5,369 459
Other assets..................................................... 3,776 2,693
---------- ----------
Total assets............................................. $1,240,520 $1,097,000
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits....................................................... $ 705,796 $ 607,139
Notes payable and other borrowings:
Advances from Federal Home Loan Bank of Atlanta.............. 143,681 148,636
Securities sold under agreements to repurchase............... 223,000 162,000
Secured note due to Thrift Financing Corporation............. 5,989 6,518
Advances from borrowers for taxes and insurance................ 2,488 2,981
Other liabilities.............................................. 10,848 8,785
---------- ----------
Total liabilities........................................ 1,091,802 936,059
---------- ----------
Stockholders' Equity:
Preferred stock of $0.01 par value, authorized 5,000,000
shares, none issued or outstanding........................... -- --
Common stock of $0.01 par value, authorized 30,000,000
shares, issued and outstanding 10,097,094 shares at
June 30, 1996 and 10,910,625 at December 31, 1995............ 101 109
Additional paid-in capital..................................... 95,340 106,659
Retained earnings, substantially restricted.................... 62,546 59,447
Unearned common stock held by ESOP and RRP trusts.............. (7,895) (7,073)
Unrealized gain (loss) on securities (net of taxes)............ (1,374) 1,799
---------- -----------
Total stockholders' equity............................... 148,718 160,941
---------- -----------
Total liabilities and stockholders' equity............... $1,240,520 $1,097,000
========== ==========
<FN>
See Notes to Unaudited Consolidated Financial Statements
</FN>
</TABLE>
1
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<CAPTION>
LIFE BANCORP, INC.
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
For the
Three Months Ended
June 30,
------------------------------------
<S> <C> <C>
1996 1995
------ ------
Interest income:
Interest on loans.............................................. $ 11,984 $ 9,407
Interest on investment securities.............................. 745 353
Interest on mortgage-backed securities......................... 10,056 9,265
-------- --------
Total interest income.................................... 22,785 19,025
-------- --------
Interest expense:
Interest on deposits........................................... 8,849 7,557
Interest on notes payable and other borrowings................. 5,421 4,513
-------- --------
Total interest expense................................... 14,270 12,070
-------- --------
Net interest income...................................... 8,515 6,955
Provision for loan losses........................................ (38) 123
-------- --------
Net interest income after provision
for loan losses......................................... 8,553 6,832
-------- --------
Noninterest income:
Deposit fees and related income................................ 161 95
Servicing fees................................................. 145 158
Net gain on sales of mortgage loans held
for sale...................................................... -- 46
Net gain on sales of real estate owned......................... 70 20
Net gain on sales of assets.................................... 9 --
Other.......................................................... 458 361
-------- --------
Total noninterest income................................. 843 680
-------- --------
Noninterest expense:
Compensation and employee benefits............................. 2,757 2,375
Occupancy and office operations................................ 778 639
FDIC Premium................................................... 396 339
Advertising and promotion...................................... 226 198
Provision for losses on real estate owned...................... -- 10
Amortization of excess of cost over net assets
of companies acquired......................................... 151 20
Other.......................................................... 642 430
-------- --------
Total noninterest expense................................ 4,950 4,011
-------- --------
Income before income taxes....................................... 4,446 3,501
Income tax provision............................................. 1,755 1,341
-------- --------
Net income....................................................... $ 2,691 $ 2,160
======== ========
Earnings per common and common equivalent share.................. $ 0.28 $ 0.21
======== ========
Dividends paid per common share.................................. $ 0.11 $ 0.11
======== ========
<FN>
See Notes to Unaudited Consolidated Financial Statements
</FN>
</TABLE>
2
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<TABLE>
<CAPTION>
LIFE BANCORP, INC.
Unaudited Consolidated Statements of Operations
(In thousands, except stock data)
For the
Six Months Ended
June 30,
----------------------------------
1996 1995
------- -------
<S> <C> <C>
Interest income:
Interest on loans.............................................. $23,213 $18,616
Interest on investment securities.............................. 1,468 723
Interest on mortgage-backed securities......................... 19,790 18,426
------- --------
Total interest income.................................... 44,471 37,765
------- -------
Interest expense:
Interest on deposits........................................... 17,081 14,563
Interest on notes payable and other borrowings................. 10,638 8,760
------- -------
Total interest expense................................... 27,719 23,323
------- -------
Net interest income...................................... 16,752 14,442
Provision for loan losses........................................ (4) 291
------- -------
Net interest income after provision
for loan losses......................................... 16,756 14,151
------- -------
Noninterest income:
Deposit fees and related income................................ 302 192
Servicing fees................................................. 296 324
Net gain on sales of mortgage loans held
for sale...................................................... 6 68
Net gain on sales of real estate owned......................... 77 32
Net gain on sales of assets.................................... 12 --
Other.......................................................... 849 739
------- -------
Total noninterest income................................. 1,542 1,355
------- -------
Noninterest expense:
Compensation and employee benefits............................. 5,481 4,698
Occupancy and office operations................................ 1,515 1,274
FDIC Premium................................................... 773 677
Advertising and promotion...................................... 365 375
Provision for losses on real estate owned...................... -- 40
Amortization of excess of cost over net assets
of companies acquired......................................... 258 41
Other.......................................................... 1,063 887
------- -------
Total noninterest expense................................ 9,455 7,992
------- -------
Income before income taxes....................................... 8,843 7,514
Income tax provision............................................. 3,565 2,854
------- -------
Net income....................................................... $ 5,278 $ 4,660
======= =======
Earnings per common and common equivalent share.................. $ 0.53 $ 0.46
======= =======
Dividends paid per common share.................................. $ 0.22 $ 0.22
======= =======
<FN>
See Notes to Unaudited Consolidated Financial Statements
</FN>
</TABLE>
3
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<TABLE>
<CAPTION>
LIFE BANCORP, INC.
Unaudited Consolidated Statement of Changes in Stockholders' Equity
(In thousands)
Unearned
Common Unrealized
Stock Gain (loss)
Held on Securities
Additional by ESOP Available
Common Paid-in Retained and RRP for Sale Total
Stock Capital Earnings Trusts (Net of Tax) Equity
--------- ----------- ---------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995.............. $109 $106,659 $59,447 $(7,073) $ 1,799 $160,941
Net income.............................. 5,278 5,278
Cash dividends paid..................... (2,179) (2,179)
Common Stock released by
ESOP trust............................ 331 672 1,003
Common Stock in RRP trust............... (37) (1,494) (1,531)
Common Stock repurchased &
retired............................... (8) (11,613) (11,621)
Unrealized gain (loss) on
securities, net of tax................ (3,173) (3,173)
---- -------- ------- ------- ------- --------
Balance, June 30, 1996.................. $101 $ 95,340 $62,546 $(7,895) $(1,374) $148,718
==== ======== ======= ======= ======= ========
<FN>
See Notes to Unaudited Consolidated Financial Statements
</FN>
</TABLE>
4
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<TABLE>
<CAPTION>
LIFE BANCORP, INC.
Unaudited Consolidated Statements of Cash Flows
(In thousands)
For the Six Months
Ended June 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net Income .......................................................... $ 5,278 $ 4,660
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for losses on loans and real estate owned.............. (4) 331
Depreciation and amortization.................................... 286 279
Net amortization of premiums and discounts on investments........ (19) 139
Amortization of excess of cost over net assets of companies
acquired....................................................... 258 41
Net gain on sales of real estate owned........................... (77) (32)
Net gain on sales of mortgage loans.............................. (6) (68)
Net gain on sales of premises and equipment...................... (5) --
Loans originated for resale.......................................... (335) (2,436)
Proceeds from loans sold to others................................... 340 2,504
Non-Cash ESOP Expenses............................................... 530 --
Changes in assets and liabilities:
(Increase) decrease in assets:
Accrued interest receivable...................................... (812) (971)
Deferred loan fees............................................... (839) (48)
Deferred income taxes............................................ (965) 945
Other assets..................................................... (118) 368
Increase (decrease) in liabilities:
Accrued expenses and other liabilities........................... 3,668 870
-------- --------
Net cash provided by (used in) operating activities.......... 7,180 6,582
-------- --------
Cash flows from investing activities:
Proceeds from sales and maturities of investments and mortgage-backed
securities......................................................... 8,000 --
Purchase of investment securities.................................... (19,425) --
Principal collected on loans......................................... 32,162 26,111
Loans originated for investment...................................... (71,838) (54,873)
Proceeds from sale of premises and equipment......................... 5 --
Purchases of premises and equipment.................................. (594) (292)
Purchase of Seaboard Bancorp......................................... (8,235) --
Purchases of mortgage-backed securities.............................. (86,751) (66,582)
Principal collected on mortgage-backed securities.................... 67,378 31,173
Proceeds from sale of real estate owned.............................. 506 307
Redemption of FHLB stock............................................. 351 957
Principal collected on ESOP loan..................................... 628 623
Purchase of FHLB stock............................................... -- (518)
-------- --------
Net cash provided by (used in) investing activities (77,813) (63,094)
-------- --------
Cash flows from financing activities:
Net increase in checking deposits, liquid assets deposits, savings
deposits, and certificates of deposits accounts.................... 34,853 13,632
Advances from borrowers for taxes and insurance...................... (494) (72)
Dividends Paid on Common Stock....................................... (2,338) (2,400)
Repurchase of Common Stock........................................... (11,621) --
Stock purchase for RRP Trust......................................... (2,694) --
Proceeds from notes payable and other borrowings..................... 322,697 537,187
Repayment of notes payable and other borrowings...................... (267,181) (491,087)
-------- --------
Net cash provided by (used in) financing activities.......... 73,222 57,260
-------- --------
Net increase (decrease) in cash and cash equivalents...................... 2,589 748
Cash and cash equivalents at beginning of period.......................... 8,845 7,945
-------- --------
Cash and cash equivalents at end of period................................ $ 11,434 $ 8,693
======== ========
<FN>
See Notes to Unaudited Consolidated Financial Statements
</FN>
</TABLE>
5
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LIFE BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions to Form 10-Q, and therefore, do
not include all of the disclosures or footnotes necessary for a complete
presentation of financial position, results of operations and cash flows
in conformity with generally accepted accounting principles. However,
all normal, recurring adjustments which, in the opinion of management,
are necessary for a fair presentation of the financial statements, have
been included. The results of operations for the three and six months
ended June 30, 1996 are not necessarily indicative of the results that
may be expected for the entire year or for any interim period.
Principles of Consolidation
The consolidated financial statements include the accounts of Life
Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Life
Savings Bank, FSB (the "Bank"). All significant intercompany
transactions have been eliminated in consolidation. Additionally,
certain reclassifications may have been made to prior period financial
statements in order to conform with the current presentation. The
accompanying consolidated financial statements have been prepared on the
accrual basis.
2. Earnings Per Share
Earnings per share for the three and six months' periods ended June 30,
1996 was determined by dividing income for the periods by the weighted
average number of common and common equivalent shares outstanding during
the periods. There is no material difference between primary and
fully-diluted earnings per share.
Common equivalent shares include shares issuable upon exercise of
dilutive options outstanding under the treasury stock method. The
Company accounts for the shares acquired by its Employee Stock Ownership
Plan ("ESOP") in accordance with Statement of Position 93-6. Shares
acquired by the ESOP and the Recognition and Retention Plan ("RRP")
Trusts are not considered in the weighted average shares outstanding
until the shares are committed for allocation or vested to an employee's
individual account.
The weighted average number of common and common equivalent shares
outstanding during the periods are as follows:
For the three months ended June 30, 1996 9,610,714
For the three months ended June 30, 1995 10,064,469
For the six months ended June 30, 1996 9,896,508
For the six months ended June 30, 1995 10,126,362
6
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3. Subsequent Event
On July 22, 1996, the Board of Directors declared a quarterly dividend
of $0.11 per share payable on August 30, 1996 to stockholders of record
on August 16, 1996.
On July 30, 1996, the Company announced that, as intended in the stock
repurchase program approved in April, 1996, it had completed the
repurchase and retirement of an additional 518,254, or 5%, of its
outstanding shares. Between May 7, 1996 and July 29, 1996, the Company
repurchased and retired 518,254 shares at a total acquisition price of
approximately $7.4 million. When coupled with the 545,531 shares
repurchased between January 31, 1996 and April 8, 1996, at a total
acquisition price of approximately $7.8 million, the Company has
repurchased and retired 1,063,785 shares, or 9.75% of its outstanding
shares on December 31, 1995. The Company also announced that it had
applied to the OTS for approval to repurchase additional shares in a
continuing open-market repurchase program. The Company has not received
an indication as to whether such approval will be granted, or the period
of time necessary for the OTS to act on the Company's request. If
approval is granted, any decision to repurchase shares will be based on,
among other things, the then current market value of the stock, other
alternative opportunities for utilization of capital and the anticipated
positive effect of the repurchase program on the Company's long-term
stockholder value.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company's principal business is conducted through the Bank from its
headquarters located in Norfolk, Virginia and 20 full-service retail banking
offices located in the cities of Norfolk, Chesapeake, Portsmouth, Suffolk, and
Virginia Beach, Virginia. The Bank's deposits are insured by the Savings
Association Insurance Fund ("SAIF") to the maximum extent permitted by law. The
Bank is subject to examination and comprehensive regulation by the Office of
Thrift Supervision ("OTS"), which is the Bank's chartering authority and primary
regulator. The Bank is also subject to regulation by the Federal Deposit
Insurance Corporation ("FDIC"), as the administrator of the SAIF, and to certain
reserve requirements established by the Federal Reserve Board ("FRB"). The Bank
is a member of the Federal Home Loan Bank ("FHLB") of Atlanta.
Acquisition of Seaboard Bancorp, Inc. On January 31, 1996, the Company
completed its previously announced acquisition of Seaboard Bancorp, Inc.
("Seaboard"), the holding company for Seaboard Savings Bank, F.S.B., ("Seaboard
Savings"). Seaboard Savings, headquartered in Virginia Beach, operated three
offices, one each in the Virginia cities of Chesapeake, Virginia Beach and
Portsmouth. The operations of Seaboard Savings were merged into the Bank
effective February 1, 1996, representing a natural extension of the Bank's
existing operations and strengthening its presence in the Hampton Roads market.
The purchase of Seaboard will be accounted for under the purchase method
of accounting, whereby the purchase price is allocated to the underlying assets
acquired and liabilities assumed based on their respective fair values at the
date of acquisition. The purchase price for Seaboard, $8.2 million, exceeded the
fair value of the net assets by approximately $5.4 million which will be
accounted for as goodwill
7
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and amortized, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 72. Results of operations of Seaboard, beginning February 1, 1996,
are included in the results of the Company.
At December 31, 1995, Seaboard's assets totaled approximately $81.8
million and its deposits totaled approximately $67.0 million. The financial
results of the Company for 1995 do not include the results of the acquisition of
Seaboard.
Financial Condition
Assets
Total assets of the Company increased by $143.5 million, or 13.1%, from
$1.1 billion at December 31, 1995 to $1.2 billion at June 30, 1996. This
increase was mostly due to the aforementioned merger of Seaboard Savings into
the Bank, which added $79.0 million to the Company's total assets.
The increase in total assets during the six month period was mainly due
to a $100.6 million, or 21.5%, increase in the Bank's loan receivables, net. Of
this increase, $69.2 million resulted from the merger of Seaboard Savings into
the Bank. The Bank had no mortgage loans held-for-sale at either June 30, 1996
or December 31, 1995.
Investment securities available-for-sale increased by $11.8 million, or
51.1%, from $23.0 million at December 31, 1995, to $34.8 million at June 30,
1996, primarily as a part of the Bank's asset liability management strategy to
increase government agency investment securities during the interest rate
environment which existed during the first part of 1996.
Mortgage-backed securities increased $19.4 million, or 3.5%, from $562.2
million at December 31, 1995, to $581.6 million at June 30, 1996, reflecting the
continuing emphasis by the Bank on investing in mortgage-backed securities as
part of its asset liability management strategy.
The excess of cost over net assets of companies acquired increased $4.9
million to $5.4 million at June 30, 1996 from $459,000 at December 31, 1995.
This increase resulted from the aforementioned purchase of Seaboard and is net
of amortizations of $258,000 during the six month period.
The increases in assets were primarily funded by increases in deposits
and repurchase agreements.
Liabilities and Stockholders' Equity
Deposits increased by $98.7 million, or 16.3%, from $607.1 million at
December 31, 1995, to $705.8 million at June 30, 1996. Repurchase agreements
increased by $61.0 million, or 37.7%, from $162.0 million at December 31, 1995
to $223.0 million at June 30, 1996. These increases in liabilities were
partially offset by the decrease in FHLB advances of $5.0 million, or 3.3%, from
$148.6 million at December 31, 1995 to $143.7 million at June 30, 1996. The
increased utilization of repurchase agreements as a funding source reflects the
lower cost of repurchase agreements compared to FHLB advances during the period,
and provided the Bank an opportunity to improve asset and liability maturity
matching at a reduced funding cost.
8
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Stockholders' equity decreased by $12.2 million, or 7.6%, from $160.9
million at December 31, 1995, to $148.7 million at June 30, 1996. The decrease
in stockholders' equity was a net result of the Company's net income of $5.3
million for the six months ended June 30, 1996, which was more than offset by
(i) the decrease in equity of $11.6 million resulting from the repurchase and
retirement of 813,531 shares of Common Stock during the six months; (ii) a $3.2
million market valuation adjustment in unrealized losses, net of taxes, in the
Company's available-for-sale securities portfolio, consistent with the required
accounting treatment under SFAS No. 115; and, (iii) quarterly cash dividends
totaling $2.2 million or $0.11 per share paid on February 29, 1996, to
stockholders of record on February 16, 1996, and $0.11 per share paid on May 31,
1996, to stockholders of record on May 17, 1996.
Asset Quality
General. When a borrower fails to make a required payment on a loan, the
Bank attempts to cure the deficiency by contacting the borrower and seeking
payment. Contacts are generally made 15 days after a payment is due. In most
cases, deficiencies are cured promptly. If a delinquency continues, late charges
are assessed and additional efforts are made to collect the loan. While the Bank
prefers to work with borrowers to resolve such problems, when the account
becomes 90 days delinquent, the Bank generally pursues foreclosure or other
proceedings, as necessary, to minimize any potential loss.
Impaired Loans. The Company has adopted SFAS No. 114, as amended by SFAS
118. SFAS No. 114, as amended, provides that a loan is impaired when, based on
current information and events, it is probable that the creditor will be unable
to collect all principal and interest amounts due according to the contractual
terms of the loan agreement. SFAS No. 114, as amended, requires that impaired
loans be measured based on the present value of the expected future cash flows,
discounted at the loan's effective interest rate. The effective interest rate of
a loan is defined as the contractual interest rate adjusted for any net deferred
loan fees or costs, premiums or discounts existing at the inception or
acquisition of the loan. If the loan is collateral dependent, as a practical
expedient, impairment can be based on a loan's observable market price or the
fair value of the collateral. The value of the loan is adjusted through a
valuation allowance created through a charge to the provision for loan losses.
Residential mortgages, consumer installment obligations and credit cards may be
excluded. Loans that were treated as in-substance foreclosures under previous
accounting pronouncements are considered to be impaired loans and under SFAS No.
114 will remain in the loan portfolio.
A loan may be placed on non-accrual status and not classified as an
impaired loan when in the opinion of management, based on current information
and events, it is probable that the Bank will eventually collect all principal
and interest amounts due according to the contractual terms of the loan
agreement. Interest income for impaired loans is generally recognized on an
accrual basis unless it is deemed inappropriate to do so. In those cases in
which the receipt of interest payments is deemed more uncertain, the cash basis
of income recognition is utilized. Loans are placed on a non-accrual status
when, in the judgment of management, the probability of timely collection of
interest is deemed to be insufficient to warrant further accrual. As a matter of
policy, the Bank does not accrue interest on loans past due 90 days or more
except when the estimated value of the collateral and collection efforts are
deemed sufficient to ensure full recovery. When a loan is placed on a
non-accrual status, previously accrued but unpaid interest is deducted from
interest income.
9
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The following table sets forth information relating to the Bank's
recorded investment in impaired loans at or during the periods indicated. Loan
balances are not net of specific reserves.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
June 30, March 31, December 31,
1996 1996 1995
------------ ------------ -----------
(In thousands)
<S> <C> <C> <C>
Impaired loans for which there is a related
allowance for credit losses $8,538 $11,607 $4,223
Impaired loans for which there is no related
allowance for credit losses -- -- --
Total impaired loans $8,538 $11,607 $4,223
====== ======= ======
Allowance for credit losses on impaired loans $3,358 $ 3,361 $ 768
====== ======= ======
Average impaired loans during the period $9,560 $11,615 $4,234
====== ======= ======
Interest income recognized on impaired loans
during the time within the period that the loans
were impaired $ 190 $ 140 $ 98
======= ======== =======
Interest income recognized on impaired loans using
a cash-basis method of accounting during the time
within the period that the loans were impaired $ 190 $ 140 $ 98
======= ======== =======
</TABLE>
In conjunction with the acquisition of Seaboard Savings, completed
during the first quarter, the Bank, in accordance with its impaired loan policy,
classified $6.8 million of the loans acquired from Seaboard as impaired loans.
Of the $3.4 million allowance for credit losses on impaired loans, $2.4 million
relates to the Seaboard Savings loans acquired.
Troubled Debt Restructurings. Under Generally Accepted Accounting
Principles ("GAAP"), the Bank is required to account for certain loan
modifications or restructurings as "troubled debt restructurings." In general,
the modification or restructuring of a debt constitutes a troubled debt
restructuring if the Bank, for economic or legal reasons related to the
borrower's financial difficulties, grants a concession to the borrower that the
Bank would not otherwise consider under current market conditions. Debt
restructurings or loan modifications for a borrower do not necessarily always
constitute troubled debt restructurings, however, and troubled debt
restructurings do not necessarily result in non-accrual loans. The Bank had $2.5
million of troubled debt restructurings, net of specific reserves, at June 30,
1996. Included in the Bank's troubled debt restructurings at June 30, 1996, is
an office warehouse complex with a carrying value of $1.1 million, net of
specific reserves. At June 30, 1996, this loan was classified substandard. The
loan was added as a troubled debt restructuring as a result of the purchase of
Seaboard Savings and at June 30, 1996, was current. The remaining $1.4 million
of troubled debt restructurings at June 30, 1996, consisted of loans secured by
multi-family and commercial properties located in Virginia Beach and Norfolk.
10
<PAGE>
Non-Performing Assets. The following table sets forth information
relating to the Bank's non-performing assets and troubled debt restructurings at
the dates indicated. Loans obtained in the acquisition of Seaboard Savings
resulted in increases of $1.0 million to the total non-performing assets and
$1.1 million to the troubled debt restructurings.
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------- ------------
(In thousands)
<S> <C> <C>
Non-performing assets:
Non-accruing loans:
Mortgage loans:
Single-family:
Conventional $ 821 $ 859
FHA/VA 389 245
Multi-family -- --
Commercial 232 436
Consumer loans 325 195
------ ------
Total non-accruing loans 1,767 1,735
Real estate owned, net 741 622
------ ------
Total non-performing assets 2,508 2,357
Troubled debt restructurings 2,520 4,525
------ ------
Total non-performing assets and
troubled debt restructurings $5,028 $6,882
====== ======
Non-accruing loans to total loans held
for investment 0.31% 0.37%
====== ======
Total non-performing assets to total
assets 0.20% 0.21%
====== ======
Total non-performing assets and
troubled debt restructurings to total assets 0.41% 0.63%
====== ======
</TABLE>
The Bank's real estate owned at June 30, 1996, consisted of 12
properties. During the first six months of 1996, the Bank sold four single
family residences, two hotel condominiums and one multi-family property
previously acquired in foreclosure for a sales price of approximately $551,900.
After deductions for valuation allowances, repairs, holding costs and settlement
expenses, the Bank realized a net gain on the sale of these properties of
approximately $77,000. Additionally, one single family condominium and one
duplex, having carrying values totalling $64,000, were donated to charitable
non-profit organizations, providing the Bank with a combined tax benefit of
approximately $49,300.
Allowance for Loan Losses. The Bank's policy is to establish reserves
for estimated losses on loans when it determines that losses may be incurred on
such loans. The allowance for losses on loans is maintained at a level believed
adequate by management to absorb potential losses in the portfolio.
11
<PAGE>
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio; past loss experience; current economic conditions;
volume, growth and composition of the portfolio; and other relevant factors. The
allowance is increased by provisions for loan losses which are charged against
income.
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------
1996 1995 1996 1995
------------ ----------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Allowance at beginning of period $9,545 $4,473 $4,438 $4,459
Addition to allowance from acquisition
of Seaboard Savings -- -- 5,192 --
Provision for loan losses (38) 123 (4) 291
Charge-offs:
Mortgage loans:
Single-family (27) (34) (117) (112)
Multi-family -- (22) -- (161)
Construction -- -- -- --
Commercial -- (273) -- (273)
Residential lots -- -- -- --
Consumer loans (142) (33) (192) (73)
------ ------ ------ ------
Total charge-offs (169) (362) (309) (619)
Recoveries:
Mortgage loans:
Single-family 1 12 2 17
Multi-family -- 28 -- 31
Construction -- -- -- --
Commercial 150 79 155 154
Consumer loans 16 25 31 45
------ ------ ------ ------
Total recoveries 167 144 188 247
------ ------ ------ ------
Allowance at end of period $9,505 $4,378 $9,505 $4,378
====== ====== ====== ======
Allowance for loan losses to total non-
accruing loans at end of period 537.92% 120.84% 537.92% 120.84%
====== ====== ====== ======
Allowance for loan losses to total
impaired loans at end of period 111.33% 102.89% 111.33% 102.89%
====== ====== ====== ======
Allowance for loan losses to total loans
held for investment at end of period 1.67% 0.97% 1.67% 0.97%
====== ======= ====== ======
</TABLE>
Management of the Bank presently believes that its allowance for loan
losses is adequate to cover potential losses in the Bank's loan portfolio.
However, future adjustments to this allowance may be
12
<PAGE>
necessary, and the Bank's results of operations could be adversely affected if
circumstances differ substantially from the assumptions used by management in
making its determinations in this regard.
Results of Operations
Comparison of Results of Operations for the Three Months Ended June 30,
1996 and 1995
General. The Company reported net income of approximately $2.7 million
and $2.2 million for the three months ended June 30, 1996 and 1995,
respectively. The $531,000 increase in net income for the three months ended
June 30, 1996, compared to the corresponding period in 1995, was due primarily
to a $1.6 million, or 22.4%, increase in net interest income, a $161,000, or
130.9% decrease in the provision for loan losses and a $163,000, or 24.0%
increase in noninterest income; which were partially offset by a $939,000, or
23.4%, increase in noninterest expenses and a $414,000, or 30.9%, increase in
provision for income taxes.
Net Interest Income. Net interest income increased by $1.6 million, or
22.4%, in the three months ended June 30, 1996, to $8.5 million, compared to
$7.0 million during the same period in 1995. The reason for such increase was a
$3.8 million improvement in interest income, mainly due to an increase in
average interest-earning assets of $160.8 million, or 15.9%, to $1.2 billion for
the three months ended June 30, 1996. The additional interest-earning assets
resulted from the Company's acquisition of Seaboard, consummated on February 1,
1996, as well as internal growth in the Bank's loan portfolio. Interest on loans
increased $2.6 million, or 27.4%, as a result of a $102.8 million, or 23.0%,
increase in the average balance of the loan portfolio together with a 30 basis
point (100 basis points being equal to 1%) increase in the average yield earned
thereon. Of the increase in the average loan portfolio, $62.4 million resulted
from the acquisition of Seaboard. Interest income on mortgage-backed securities
increased $791,000 as a result of a $33.1 million, or 6.1%, increase in the
average balance of the mortgage-backed securities portfolio together with a 16
basis point increase in the average yield earned thereon. The improvement in
interest income was partially offset by a $2.2 million increase in interest
expense mainly as a result of an increase of $169.1 million in average
interest-bearing liabilities. Interest on deposits increased $1.3 million, or
17.1%, as a result of both an increase in the average balance of deposits of
$93.9 million, or 15.7%, and an increase in the cost of deposits from 5.04% to
5.10%. Of the increase in the average balance of deposits, $55.1 million
resulted from the acquisition of Seaboard. Interest expense on borrowings
increased by $908,000, or 20.1%, as a result of an increase in the average
balance of $75.2 million, or 26.4%, partially offset by a decrease in the
average rate paid on borrowings from 6.33% to 6.02%. The Bank's average interest
rate spread and net interest margin amounted to 2.34% and 2.91%, respectively,
during the three months ended June 30, 1996, compared to 2.05% and 2.76% for the
comparable period in 1995.
Provision for Loan Losses. The negative provision for loan losses
amounted to $38,000 for the three months ended June 30, 1996, compared to a
positive provision of $123,000 for the three months ended June 30, 1995. For
additional discussion of the Bank's loan loss policy, see "Financial Condition -
Asset Quality - Allowance for Loan Losses."
13
<PAGE>
Yields Earned and Rates Paid. The following table sets forth, for the
periods indicated, information regarding (i) the total dollar amount of interest
income of the Company from interest-earning assets and the resultant average
yields; (ii) the total dollar amount of interest expense on interest-bearing
liabilities and the resultant average rate; (iii) net interest income; (iv)
interest-rate spread; and (v) net interest margin. Average balances are
determined on an average daily balance basis.
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------------------------------------
1996 1995
------------------------------ -------------------------------
Yield/Cost Average Average
at June 30, Average Yield/ Average Yield/
1996 Balance Interest Cost (1) Balance Interest Cost (1)
----------- --------- ----------- ------- ----------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans 8.07% $ 483,909 $10,496 8.68% $ 399,124 $ 8,148 8.17%
Consumer loans 10.16% 66,459 1,488 8.96% 48,421 1,259 10.40%
---------- ------- ---------- -------
Total loans 8.30% 550,368 11,984 8.71% 447,545 9,407 8.41%
Mortgage-backed securities 7.10% 577,191 10,056 6.97% 544,124 9,265 6.81%
Investment securities 6.82% 37,097 640 6.90% 17,124 285 6.66%
Other earning assets 5.35% 9,145 105 4.59% 4,201 68 6.47%
---------- ------- ----------
Total interest-earning assets 7.68% 1,173,801 22,785 7.76% 1,012,994 19,025 7.51%
---------- ----------
Noninterest-earning assets 51,895 40,029
---------- -----------
Total assets $1,225,696 $1,053,023
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits 2.94% $ 35,933 227 2.53% $ 25,473 142 2.23%
Passbook savings 3.26% 55,649 460 3.31% 62,732 495 3.16%
Certificates 5.50% 601,827 8,162 5.42% 511,312 6,920 5.41%
---------- ------- ---------- -------
Total deposits 5.17% 693,409 8,849 5.10% 599,517 7,557 5.04%
Borrowings 5.96% 360,355 5,421 6.02% 285,142 4,513 6.33%
---------- ------- ---------- -------
Total interest-bearing
liabilities 5.44% 1,053,764 14,270 5.42% 884,659 12,070 5.46%
-------
Noninterest-bearing liabilities 19,346 15,052
---------- ----------
Total liabilities 1,073,110 899,711
Stockholders' equity 152,586 153,312
---------- ----------
Total liabilities and
stockholders' equity $1,225,696 $1,053,023
========== ==========
Net interest-earning assets $ 120,037 $ 128,335
========== ==========
Net interest income and
interest-rate spread 2.24% $ 8,515 2.34% $ 6,955 2.05%
======= =======
Net interest margin 2.91% 2.76%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.11x 1.15x
<FN>
(1) Annualized
</FN>
</TABLE>
Noninterest Income. Noninterest income increased by $163,000, or 24.0%,
to $843,000 during the quarter ended June 30, 1996, compared to $680,000 in the
comparable three months of 1995. This increase primarily resulted from an
increase of $112,000 in commission income from a Bank subsidiary.
Noninterest Expense. Noninterest expense increased by $939,000, or
23.4%, in the three months ended June 30, 1996, to $5.0 million, compared to
$4.0 million in the three months ended June 30, 1995. This increase primarily
resulted from the expenses associated with the Company's Employee Stock
14
<PAGE>
Ownership Plan, the Recognition and Retention Plan and the costs related to the
acquisition and integration of the operations of Seaboard Savings Bank during
the quarter.
Income Tax Provision. The provision for income taxes increased by
$414,000 due to both an increase in the provision rate and the level of income
before income taxes. The income tax provision rate increased from 38.3% of
income before taxes, for the second quarter of 1995, to 39.5%, for the second
quarter of 1996, due to differences in non-taxable and non-deductible items in
the second quarter of 1996, compared to the second quarter of 1995 and the
effects of more taxable income in higher income tax brackets in 1996.
Comparison of Results of Operations for the Six Months Ended June 30, 1996
and 1995
General. The Company reported net income of approximately $5.3 million
and $4.7 million for the six months ended June 30, 1996 and 1995, respectively.
The $618,000 increase in net income for the six months ended June 30, 1996,
compared to the corresponding period in 1995, was due primarily to a $2.3
million, or 16.0%, increase in net interest income, a $295,000, or 101.4%
decrease in the provision for loan losses and a $187,000, or 13.8% increase in
noninterest income; which were partially offset by a $1.5 million, or 18.3%,
increase in noninterest expenses and a $711,000, or 24.9%, increase in provision
for income taxes.
Net Interest Income. Net interest income increased by $2.3 million, or
16.0%, in the six months ended June 30, 1996, to $16.8 million, compared to
$14.4 million during the same period in 1995. The reason for such increase was a
$6.7 million improvement in interest income, mainly due to an increase in
average interest-earning assets of $147.7 million, or 14.8%, to $1.1 billion for
the six months ended June 30, 1996. The additional interest-earning assets
mostly resulted from the Company's acquisition of Seaboard, consummated on
February 1, 1996, coupled with internal loan growth in the Bank's loan
portfolio. Interest on loans increased $4.6 million, or 24.7%, as a result of a
$90.7 million, or 20.6%, increase in the average balance of the loan portfolio
together with a 29 basis point increase in the average yield earned thereon. Of
the increase in the average loan portfolio, $52.9 million resulted from the
acquisition of Seaboard. Interest income on mortgage-backed securities increased
$1.4 million as a result of a $24.5 million, or 4.5%, increase in the average
balance of the mortgage-backed securities portfolio together with a 7 basis
point increase in the average yield earned thereon. The improvement in interest
income was partially offset by a $4.4 million increase in interest expense
mainly as a result of an increase of $153.0 million in average interest-bearing
liabilities. Interest on deposits increased $2.5 million, or 17.3%, as a result
of both an increase in the average balance of deposits of $71.6 million, or
12.0%, and an increase in the cost of deposits from 4.88% to 5.11%. Of the
increase in the average balance of deposits, $46.5 million resulted from the
acquisition of Seaboard. Interest expense on borrowings increased by $1.9
million, or 21.4%, as a result of an increase in the average balance of $81.5
million, or 30.2%, partially offset by a decrease in the average rate paid on
borrowings from 6.49% to 6.05%. The Bank's average interest rate spread and net
interest margin amounted to 2.35% and 2.94%, respectively, during the six months
ended June 30, 1996, compared to 2.20% and 2.90% for the comparable period in
1995.
Provision for Loan Losses. The negative provision for loan losses
amounted to $4,000 for the six months ended June 30, 1996, compared to a
positive provision of $291,000 for the six months ended June 30, 1995. For
additional discussion of the Bank's loan loss policy, see "Financial Condition -
Asset Quality - Allowance for Loan Losses."
15
<PAGE>
Yields Earned and Rates Paid. The following table sets forth, for the
periods indicated, information regarding (i) the total dollar amount of interest
income of the Company from interest-earning assets and the resultant average
yields; (ii) the total dollar amount of interest expense on interest-bearing
liabilities and the resultant average rate; (iii) net interest income; (iv)
interest-rate spread; and (v) net interest margin. Average balances are
determined on an average daily balance basis.
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------------------------------
1996 1995
------------------------------ -------------------------------
Yield/Cost Average Average
at June 30, Average Yield/ Average Yield/
1996 Balance Interest Cost (1) Balance Interest Cost (1)
----------- ---------- -------- ------- ---------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans 8.07% $ 467,361 $20,230 8.66% $ 393,612 $16,160 8.21%
Consumer loans 10.16% 64,242 2,983 9.29% 47,250 2,456 10.40%
---------- ------- -------
Total loans 8.30% 531,603 23,213 8.73% 440,862 18,616 8.44%
Mortgage-backed securities 7.10% 568,287 19,790 6.96% 543,768 18,426 6.89%
Investment securities 6.82% 36,604 1,264 6.91% 17,248 593 6.88%
Other earning assets 5.35% 8,272 204 4.93% 4,176 130 6.23%
---------- ------- --------- -------
Total interest-earning assets 7.68% 1,144,766 44,471 7.77% 997,054 37,765 7.58%
------- -------
Noninterest-earning assets 49,802 43,835
---------- ---------
Total assets $1,194,568 $1,040,889
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits 2.94% $ 34,547 454 2.63% $ 25,743 271 2.11%
Passbook savings 3.26% 56,874 920 3.24% 62,916 1,010 3.21%
Certificates 5.50% 576,924 15,707 5.45% 508,122 13,282 5.23%
---------- -------- ---------- -------
Total deposits 5.17% 668,345 17,081 5.11% 596,781 14,563 4.88%
Borrowings 5.96% 351,586 10,638 6.05% 270,132 8,760 6.49%
---------- -------- ---------- -------
Total interest-bearing
liabilities 5.44% 1,019,931 27,719 5.44% 866,913 23,323 5.38%
-------- -------
Noninterest-bearing liabilities 19,709 22,744
---------- ----------
Total liabilities 1,039,640 889,657
Stockholders' equity 154,928 151,232
---------- ----------
Total liabilities and
stockholders' equity $1,194,568 $1,040,889
========== ==========
Net interest-earning assets $ 124,835 $ 130,141
========== ==========
Net interest income and
interest-rate spread 2.24% $16,752 2.35% $14,442 2.20%
======= =======
Net interest margin 2.94% 2.90%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.12x 1.15x
<FN>
(1) Annualized
</FN>
</TABLE>
Noninterest Income. Noninterest income increased $187,000, or 13.8%, to
$1.5 million during the six months ended June 30, 1996, compared to $1.4 million
in the comparable six months of 1995. The additional noninterest income related
to an increase of $116,000 in commission income from a Bank subsidiary.
Noninterest Expense. Noninterest expense increased by $1.5 million, or
18.3%, in the six months ended June 30, 1996, to $9.5 million, compared to $8.0
million in the six months ended June 30, 1995. This increase primarily resulted
from the expenses associated with the Company's Employee Stock
16
<PAGE>
Ownership Plan, the Recognition and Retention Plan and the costs related to the
acquisition and integration of the operations of Seaboard Savings Bank during
the six months.
Income Tax Provision. The provision for income taxes increased by
$711,000 due to both an increase in the provision rate and the level of income
before income taxes. The income tax provision rate increased from 38.0% of
income before taxes, for the first six months of 1995, to 40.3%, for the first
six months of 1996, due to differences in non-taxable and non-deductible items
in the first six months of 1996, compared to the comparable 1995 period and the
effects of more taxable income in higher income tax brackets in 1996.
Impact of Legislation Under Consideration
FDIC Insurance Premiums. Included in noninterest expense are FDIC
insurance premiums. Currently, there is a disparity in the ratio of reserves to
insured deposits in the FDIC Savings Association Insurance Fund ("SAIF"),
maintained for savings institutions, and the Bank Insurance Fund ("BIF"),
maintained for commercial and other banks. The Bank currently pays an insurance
premium to the FDIC equal to 23 cents per $100 of insured deposits. Effective
January 1, 1996, the FDIC lowered the annual insurance premium for most members
of BIF, primarily commercial banks, to $2,000. This reduction put the Bank at a
material competitive disadvantage to BIF members and could have a material
adverse effect on the operations of the Bank in future periods. The disparity in
insurance premiums between those required for the Bank and BIF members could
allow BIF members to attract and retain deposits at a lower effective cost than
that possible for the Bank and put competitive pressure on the Bank to raise its
interest rates paid on deposits, thus increasing its cost of funds and possibly
reducing net interest income. The resultant competitive disadvantage could
result in the Bank losing deposits to BIF members, who have a lower cost of
funds and are, therefore, able to pay higher rates of interest on deposits.
Although the Bank has other sources of funds, these other sources may have
higher cost than those of deposits.
Several alternatives to mitigate the effect of the BIF/SAIF insurance
premium disparity have recently been proposed by the U.S. Congress, federal
regulators, industry trade associations and the Administration. One plan, that
has gained support of several sponsors, would require all SAIF member
institutions, including the Bank, to pay a one time fee to recapitalize the SAIF
of up to 85 basis points on the amount of deposits held by the member
institution. If this proposal is enacted by Congress, the payment may be
immediately charged to earnings. If the proposed assessment of 85 cents per $100
of assessable deposits was enacted, based on deposits as of the proposed
assessment date of March 31, 1995, the negative impact for the Bank could be
approximately $5.1 million.
As part of the BIF/SAIF issue, some legislators are also discussing the
charter conversion of all savings institutions, including the Bank, into
commercial banks. Proposed federal legislation contained in the Revenue
Reconciliation Bill of 1995, vetoed by the President, and other proposals, would
effectively require thrift institutions, like the Bank, to surrender their
federal thrift charters and become either state-chartered or federally chartered
banks. Questions regarding the tax consequences resulting from such conversions
and the permissible activities of converted institutions and thrift holding
companies, such as the Company, are still being debated in Congress. The charter
change, as proposed, would require the recapture (for income tax purposes) of
post-1987 bad debt reserves. Under proposed legislation, the taxes generated by
such recapture would be paid rateably over six years beginning in 1996, and
thrifts could delay those payments by two years if they meet certain residential
lending requirements. Since the Bank has provided deferred taxes on those bad
debt reserves accumulated since
17
<PAGE>
1987, management believes that the enactment of these proposals will have
minimal effect on the earnings of the Bank or the Company.
At this time, although a consensus appears to be developing among
regulators, legislators and bankers, no assurance can be given what, if any,
action will be taken by the regulators or by Congress in order to address the
disparity between BIF and SAIF deposit assessments and reserve funds.
Consequently, the Company cannot analyze the potential effect, if any, on the
Company's financial condition or results of operations.
Liquidity and Capital Resources
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's primary
sources of funds are deposits; borrowings; amortization, prepayments and
maturities of outstanding loans and mortgage-backed securities; sales of loans;
maturities of investment securities and other short-term investments; and funds
provided from operations. While scheduled payments from the amortization of
loans and mortgage-backed securities and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. In addition, the Bank invests excess funds
in overnight deposits and other short-term interest-earning assets which provide
liquidity to meet lending requirements. The Bank has been able to generate
sufficient cash through its deposits as well as borrowings (primarily consisting
of FHLB advances and repurchase agreements). At June 30, 1996, the Bank had
$143.7 million of outstanding FHLB advances and $228.9 million in repurchase
agreements and other borrowings.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Bank maintains a
strategy of investing in various lending products. The Bank uses its funds
acquired primarily to meet its ongoing commitments, to provide funds for
maturing savings certificates and savings withdrawals, fund loan commitments and
maintain a portfolio of mortgage-backed and other investment securities. At June
30, 1996, the total approved loan commitments outstanding amounted to $51.0
million. At the same date, commitments under unused lines of credit amounted to
$8.2 million. Certificates of deposit scheduled to mature in one year or less at
June 30, 1996, totaled $367.8 million. Management believes that a significant
portion of maturing deposits will remain with the Bank. The Bank anticipates
that even with interest rates at lower levels than have been experienced in
recent years, it will continue to have sufficient funds to meet its current
commitments. At June 30, 1996, the Bank had a liquidity ratio of 14.3%, which
exceeded the required minimum liquid asset ratio of 5.0%.
At June 30, 1996, the Bank's regulatory capital was well in excess of
applicable minimums required by federal regulations. The Bank, as a member of
the thrift industry, is required to maintain tangible capital of 1.5% of
adjusted total assets, core capital of 3.0% of adjusted total assets and
risk-based capital of 8.0% of adjusted risk-weighted assets. At June 30, 1996,
the Bank's tangible capital was $116.7 million, or 9.44% of adjusted total
assets, core capital was $116.7 million, or 9.44% of adjusted total assets and
risk-based capital was $122.7 million, or 23.6% of adjusted risk-weighted
assets, exceeding the requirements by $98.1 million, $79.6 million and $81.6
million, respectively.
In June, 1996, the Board of Directors authorized the Bank to borrow an
additional 10% of total assets and to invest such amount in mortgage-backed
securities issued by the Federal National Mortgage Association ("FNMA"), the
Government National Mortgage Association ("GNMA") or the Federal Home
18
<PAGE>
Loan Mortgage Corporation ("FHLMC") ("agency mortgage-backed securities"). This
arbitrage program is intended to partially leverage the Company's excess
capital, increase its return on equity and improve earnings per share until such
time as more appropriate alternative opportunities for utilization of capital
exist. During July, 1996, the Bank purchased $133.0 million of one-year
adjustable rate agency mortgage-backed securities and funded such purchase with
short-term reverse repurchase agreements.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Not applicable.
b) No Form 8-K Reports were filed during the quarter.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LIFE BANCORP, INC.
Date: August 12, 1996 By: /s/ Tollie W. Rich, Jr.
----------------------
Tollie W. Rich, Jr., Executive Vice President,
Chief Operating Officer
Date: August 12, 1996 By: /s/ Emory J. Dunning, Jr.
-------------------------
Emory J. Dunning, Jr., Senior Vice President,
Treasurer and Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
June 30, 1996, 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000926039
<NAME> LIFE BANCORP, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1.000
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0
0
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</TABLE>
