-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HIJFXi1XicI7SVoOdHX3A2M79WfT4rnfFHEFiXBx/39/DlTxniRt4thOGpD7rqJr uJgdDb9pQuc04P4acRl3iA== 0001017062-99-001485.txt : 19990817 0001017062-99-001485.hdr.sgml : 19990817 ACCESSION NUMBER: 0001017062-99-001485 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIFE FINANCIAL CORP CENTRAL INDEX KEY: 0001028918 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 330743196 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22193 FILM NUMBER: 99691493 BUSINESS ADDRESS: STREET 1: 10540 N MAGNOLIA ACE STREET 2: UNIT B CITY: RIVERSIDE STATE: CA ZIP: 92503 BUSINESS PHONE: 9098869751 MAIL ADDRESS: STREET 1: 1598 EAST HIGHLAND AVENUE CITY: SAN BERNADINO STATE: CA ZIP: 92404 10-Q 1 LIFE FINANCIAL CORPORATION - 10-Q - 6/30/1999 United States Securities and Exchange Commission Washington, DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 Commission File Number 0-22193 LIFE FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 33-0743196 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10540 MAGNOLIA AVENUE, RIVERSIDE, CALIFORNIA 92505 - -------------------------------------------------------------------------------- (909) 637 - 4000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. (X) Yes ( ) No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 6,568,436 shares of common stock, par value $0.01 per share, were outstanding as of August 13, 1999. LIFE FINANCIAL CORPORATION AND SUBSIDIARIES FORM 10-Q INDEX
PART I FINANCIAL INFORMATION PAGE Item 1 Consolidated Statements of Financial Condition: June 30, 1999 and December 31, 1998 (unaudited) ............................................ 1 Consolidated Statements of Operations: For the Six months ended June 30, 1999 and 1998 and for the Three months ended June 30, 1999 and 1998 (unaudited)............................... 2 Consolidated Statements of Cash Flows: For the Six months ended June 30, 1999 and 1998 (unaudited)........................................................................ 3 Notes to Consolidated Financial Statements (unaudited)...................................... 4 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition............................................... 8 Item 3 Quantitative and Qualitative Disclosures About Market Risk.................................. 18 PART II OTHER INFORMATION Item 1 Legal Proceedings........................................................................... 19 Item 2 Changes in Securities and Use of Proceeds................................................... 19 Item 3 Defaults Upon Senior Securities............................................................. 19 Item 4 Submission of Matters to a Vote of Security Holders......................................... 19 Item 5 Other Information........................................................................... 19 Item 6 Exhibits and Reports on Form 8-K............................................................ 19
ii Item 1. Financial Statements. LIFE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except share data) (UNAUDITED)
June 30, December 31, 1999 1998 ---- ---- ASSETS Cash and cash equivalents..................................... $ 50,868 $ 8,152 Trading securities............................................ 26,396 Securities held to maturity, estimated fair value of $1,008 and $2,020 at June 30, 1999 and December 31, 1998........................................ 1,006 2,008 Residual assets, at fair value............................... 44,436 50,296 Loans held for sale........................................... 276,258 243,307 Loans held for investment - net of allowance for loan losses of $3,393 and $2,777 at June 30, 1999 and December 31, 1998...................... 94,737 91,017 Mortgage servicing rights..................................... 16,218 13,119 Accrued interest receivable................................... 4,197 2,762 Foreclosed real estate - net................................. 1,752 1,898 Premises and equipment - net.................................. 6,527 7,145 Federal Home Loan Bank stock.................................. 2,653 2,463 Other assets.................................................. 6,490 5,911 -------- -------- TOTAL ASSETS............................................. $531,538 $428,078 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposit accounts.............................................. $433,196 $323,476 Other borrowings............................................. 26,432 39,977 Subordinated debentures....................................... 1,500 1,500 Accounts payable and other liabilities........................ 15,949 11,127 -------- -------- Total liabilities........................................ 477,077 376,080 -------- -------- STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares outstanding Common stock, $.01 par. Value; 25,000,000 shares authorized; 6,568,436 (1999) and 6,562,396 (1998) shares issued and outstanding...................... 66 66 Additional paid-in capital.................................... 42,243 42,223 Retained earnings, partially restricted....................... 12,152 9,709 -------- -------- Total stockholders' equity............................... 54,461 51,998 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................. $531,538 $428,078 ======== ========
See accompanying notes to unaudited consolidated financial statements. 1 LIFE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except share data) (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, --------------------------- ------------------------------ 1999 1998 1999 1998 ---------- ---------- -------------- ------------- Interest Income: Loans $ 10,396 $ 7,973 $ 9,754 $ 15,439 Residual assets 1,626 1,659 3,300 3,150 Securities held to maturity 15 73 46 147 Other interest-earning assets 659 440 925 780 ---------- ---------- --------- ---------- Total interest income 12,696 10,145 4,025 19,516 ---------- ---------- --------- ---------- Interest Expense: Deposit accounts 5,677 3,612 0,597 6,881 Federal Home Loan Bank advances and other borrowings 835 1,593 1,646 3,322 Subordinated debentures 53 349 105 691 ---------- ---------- --------- ---------- Total interest expense 6,565 5,554 2,348 10,894 ---------- ---------- --------- ---------- Net Interest Income Before Provision for loan losses 6,131 4,591 1,677 8,622 Provision for loan losses 1,750 - 2,208 1,630 ---------- ---------- --------- ---------- Net Interest Income After Provision for loan losses 4,381 4,591 9,469 6,992 Non-interest Income: Loan servicing and other fees 989 1,915 2,110 2,967 Service charges on deposit accounts 88 34 163 73 Net gains from mortgage financing operations 3,649 2,433 4,384 10,502 Other income 61 125 109 290 ---------- ---------- --------- ---------- Total non-interest income 4,787 4,507 6,766 13,832 ---------- ---------- --------- ---------- Non-interest Expense: Compensation and benefits 2,744 2,550 5,686 5,527 Premises and occupancy 942 850 1,912 1,481 Data processing 391 344 792 648 Net (gain) loss on foreclosed real estate (78) 105 (75) 186 FDIC insurance premiums 77 34 140 60 Marketing 155 669 202 999 Telephone 266 276 617 493 Professional services 467 517 804 811 Other expense 1,013 1,019 1,754 1,535 ---------- ---------- --------- ---------- Total non-interest expense 5,977 6,364 1,832 11,740 ---------- ---------- --------- ---------- Income Before Provision for tax expense 3,191 2,734 4,403 9,084 Provision for tax expense 1,432 1,213 1,960 3,848 ---------- ---------- --------- ---------- Net Income $ 1,759 $ 1,521 $ 2,443 $ 5,236 ========== ========== ========= ========== Basic earnings per share $ 0.27 $ 0.23 $ 0.37 $ 0.80 ========== ========== ========= ========== Basic weighted average shares outstanding 6,564,743 6,550,852 6,53,569 6,548,789 ========== ========== ========= ========== Diluted earnings per share $ 0.27 $ 0.22 $ 0.37 $ 0.76 ========== ========== ========= ========== Diluted weighted average shares outstanding 6,619,504 6,904,438 6,62,896 6,875,099 ========== ========== ========= ==========
See accompanying notes to unaudited consolidated financial statements. 2 LIFE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (UNAUDITED)
Six months ended June 30, ----------------------------------- 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: $ 2,443 $ 5,236 Net income Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 860 779 Provision for estimated loan losses 2,208 1,630 (Accretion) amortization of deferred fees 57 4 Provision for estimated losses of foreclosed real estate 32 Loss on sale of foreclosed real estate, net 323 56 Gain on sale and securitization of loans held for sale (8,968) (13,379) Unrealized loss on residual assets 4,585 2,877 Net accretion of residual assets (3,300) (3,150) Valuation allowance on mortgage servicing rights 379 381 Amortization of mortgage servicing rights 2,330 1,137 Purchase and origination of loans held for sale, net of loan fees (468,967) (562,553) Proceeds from sales and securitization of loans held for sale 363,050 478,501 Increase in accrued interest receivable (1,435) (259) Increase in accounts payable and other liabilities 4,822 5,384 Federal Home Loan Bank stock dividend (66) (32) Decrease (increase) in other assets (579) 277 ---------- --------- Net cash used in operating activities (102,258) (83,079) ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Principal payments on loans 67,639 43,426 Proceeds from sale of foreclosed real estate 2,333 1,004 Purchase of trading securities (26,396) Proceeds from maturities of securities held to maturity 1,000 1,000 Additions to premises and equipment (248) (2,740) Cash received on residual assets 4,575 Purchase of Federal Home Loan Bank stock (124) (1,297) ---------- --------- Net cash provided by investing activities 48,779 41,393 ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposit accounts 109,720 54,560 Proceeds from (repayments of) other borrowings (13,545) 6,364 Net proceeds from exercise of stock options 20 Repayment of Federal Home Loan Bank advances (9,000) ---------- --------- Net cash provided by financing activities 96,195 51,924 ---------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 42,716 10,238 CASH AND CASH EQUIVALENTS, beginning of period 8,152 3,467 ---------- --------- CASH AND CASH EQUIVALENTS, end of period $ 50,868 $ 13,705 ========== ========= SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $ 12,604 $ 11,124 ========== ========= Income taxes paid $ 3,495 $ - ========== ========= NONCASH INVESTING ACTIVITIES DURING THE PERIOD: Transfers from loans to foreclosed real estate $ 2,312 $ 1,730 ========== =========
See accompanying notes to unaudited consolidated financial statements. 3 LIFE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 (UNAUDITED) 1. Basis of Presentation: ---------------------- The consolidated financial statements include the accounts of LIFE Financial Corporation (the "Company") and its subsidiaries, LIFE Bank (formerly Life Savings Bank, Federal Savings Bank), (the "Bank") and Life Investment Holdings, Inc. All material intercompany accounts and transactions have been eliminated in consolidation. The Company is a savings and loan holding company, incorporated in the State of Delaware, that was initially organized for the purpose of acquiring all of the capital stock of the Bank through the holding company reorganization (the "Reorganization") of the Bank, which was consummated on June 27, 1997. Pursuant to the Reorganization, the Company issued 3,211,716 shares of common stock in exchange for the 1,070,572 shares of the Bank's outstanding common stock. Such business combination was accounted for at historical cost in a manner similar to a pooling of interests. On June 30, 1997, the Company completed its sale of 2,900,000 additional shares of its common stock through an initial public offering (the "IPO"). On July 2, 1997, the Company issued 435,000 shares of common stock to the public through the exercise of the underwriter's over- allotment option, bringing the total shares outstanding to 6,546,716. The consolidated financial condition and results of operations of the Company for the periods prior to the date of Reorganization consist of those of the Bank. Since the Reorganization and the IPO, the Company has purchased residual assets and subordinated debentures from the Bank. The Bank is a federally chartered stock savings bank whose primary business is the origination, purchase, sale and servicing of non-conventional mortgage loans principally secured by first and second mortgage loans on one- to four- family residences and, to a much lesser extent, multi-family residential, commercial real estate, and construction loans. The Company's revenues are derived from gains from mortgage financing operations and net interest on its loans and residual assets. The primary sources of funds for the Company have been from deposits, Federal Home Loan Bank ("FHLB") advances, $300 million in a line of credit from a major investment bank, a $40 million residual financing line of credit, as well as from loan sales and securitizations. As of June 30, 1999, the Bank had five depository branch offices in San Bernardino, Riverside, Redlands, Huntington Beach and the recently opened Seal Beach, California location, five regional loan centers located in Riverside, California, Jacksonville, Florida, the Boston, Massachusetts area, the San Jose, California area and the Denver, Colorado metropolitan area. A consumer finance location is also located in Riverside California. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments necessary for a fair presentation, have been included. Certain reclassifications have been made to the consolidated financial statements for 1998 to conform to the 1999 presentation. The results of operations for the three and six month periods ended June 30, 1999 are not necessarily indicative of the results that may be expected for the entire fiscal year. 2. Approved Stock Compensation Plans --------------------------------- On November 21, 1996, the Board of Directors of the Bank adopted the Life Bank 1996 Stock Option Plan (the "1996 Option Plan") which was approved by the stockholders of the Bank at the Annual Meeting of Stockholders of the Bank, held on May 21, 1997. The 1996 Option Plan authorizes the granting of options equal to 321,600 (adjusted for the three for one exchange) shares of common stock for issuance to executives, key employees, officers and directors. The 1996 Option Plan will be in effect for a period of ten years from the adoption by the Board of Directors. Options granted under the 1996 Option Plan will be made at an exercise price equal to the fair market value of the stock on the date of grant. Awards granted to officers and employees may 4 include incentive stock options, non-statutory stock options and limited rights which are exercisable only upon change in control of the Bank which change in control did not include the reorganization of the Bank into the holding company. Awards granted to non-employee directors are non-statutory options. All 1996 options were granted at an exercise price of $3.33 per share (adjusted for the three for one exchange). Stock options will become vested and exercisable in the manner specified by the Board of Directors. The options granted under the 1996 Option Plan will vest at a rate of 33.3% per year, beginning on November 21, 1999. At December 31, 1998, there were 27,540 options held by three retired directors which were exercisable. On May 20, 1998, 9,180 options were exercised; the remaining 18,360 options are held by two retired directors as of June 30, 1999. The Board of Directors of the Company has adopted the LIFE Financial Corporation 1997 Stock Option Plan (the "1997 Option Plan"), which became effective upon the Reorganization (the 1996 Option Plan and the 1997 Option Plan will sometimes hereinafter be referred to as the "Option Plans"). The Board of Directors of the Company has reserved shares equal to 10% of the issued and outstanding shares of the Company giving effect to the Reorganization and the Public Offering, including Company options that were exchanged for Bank options pursuant to the 1996 Option Plan for issuance under the Option Plans. Stock options with respect to shares of the Bank's Common Stock granted under the 1996 Option Plan and outstanding prior to completion of the Reorganization automatically became options to purchase three shares of the Company's Common Stock upon identical terms and conditions. Through June 30, 1999, 202,000 shares of the 1997 Option Plan were granted at exercise prices ranging from $11.00 to $18.50 per share. The options granted under the 1997 Option Plan will vest at a rate of 33.3% per year, beginning on June 30, 2000. Under the 1997 Option Plan, there were 17,500 options at December 31, 1998 and June 30, 1999 held by one retired director which were exercisable. 3. Comprehensive Income -------------------- The Company adopted Statement Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" effective with the fiscal year beginning January 1, 1998. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings, paid-in capital in the equity section of the statement of financial position. The Company has no differences between net income and comprehensive income for the three months and six months ended June 30, 1999 and the three months and six months ended June 30, 1998. 4. Earnings Per Share ------------------ 5 The following table is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the net earnings for the Company (dollars in thousands, except share data):
For the three months ended June 30, ----------------------------------- 1999 1998 ------------------------------------- -------------------------------------- Earnings Shares Per Share Earnings Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- --------- Net Earnings $ 1,759 $ 1,521 =========== =========== Basic EPS Earnings available to common stockholders $ 1,759 6,564,743 $ 0.27 $ 1,521 6,550,852 $ 0.23 ========= ========= Effect of Dilutive Securities Options - 70,715 - 353,586 ----------- ------------- ----------- ------------- Diluted EPS Earnings available to common stockholders plus assumed conversions $ 1,759 6,619,504 $ 0.27 $ 1,521 6,904,438 $ 0.22 =========== ============= ========= =========== ============= ==========
For the six months ended June 30, --------------------------------- 1999 1998 ------------------------------------- -------------------------------------- Earnings Shares Per Share Earnings Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- --------- Net Earnings $ 2,443 $ 5,236 =========== =========== Basic EPS Earnings available to common stockholders $ 2,443 6,563,569 $ 0.37 $ 5,236 6,548,789 $ 0.80 ============= ========= Effect of Dilutive Securities Options - 59,327 - 326,310 ----------- ------------- ----------- ------------- Diluted EPS Earnings available to common stockholders plus assumed conversions $ 2,443 6,622,896 $ 0.37 $ 5,236 6,875,099 $ 0.76 =========== ============= ========= =========== ============= =========
5. Asset Securitizations In June 1999, the Company completed an early clean up of the Life Financial Services Trust 1996-1 securitization. The clean up reduced the company's residual assets from securitization by $4.4 million. Additionally, $4.7 million in previously restricted cash that served as credit enhancement to the 1996-1 Trust was released to Life Financial Corporation. 6 6. Segment Information The Company's operations within the financial services industry principally focus on banking and mortgage financing activities. Information about these segments for the six months ended June 30, 1999 and 1998 is as follows (dollars in thousands):
June 30, 1999 ------------- Mortgage Mortgage Mortgage -------- -------- -------- Financing Financing Financing --------- --------- --------- Banking Portfolio Liberator Other Total ------- --------- --------- ----- ----- Revenue for the period $ 1,806 $6,089 $16,884 $6,012 $30,791 Interest income 1,205 4,794 13,293 4,733 24,025 Interest expense 10,595 368 1,021 364 12,348 Net income (loss) for the period (11,036) 2,831 7,851 2,797 2,443
June 30, 1998 ------------- Mortgage Mortgage Mortgage -------- -------- -------- Financing Financing Financing --------- --------- --------- Banking Portfolio Liberator Other Total ------- --------- --------- ----- ----- Revenue for the period $ 1,321 $3,362 $24,053 $4,612 $33,348 Interest income 1,220 1,921 13,741 2,634 19,516 Interest expense 6,876 422 3,018 578 10,894 Net income (loss) for the period (7,125) 1,298 9,283 1,780 5,236
Information as of June 30, 1999 and December 31, 1998 is as follows (dollars in thousands):
Mortgage Mortgage Mortgage -------- -------- -------- Financing Financing Financing --------- --------- --------- Banking Portfolio Liberator Other Total ------- --------- --------- ----- ----- Assets employed as of June 30, $78,779 $114,993 $264,069 $73,697 $531,538 1999 Assets employed as of December 36,121 110,074 247,375 34,517 428,078 31, 1998
7 7. Recent Accounting Pronouncements -------------------------------- In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is effective for fiscal years beginning after June 15, 2000. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The adoption of this standard is not expected to have a material effect on the Company's financial condition, results of operation and cash flows. Item 2. Management's Discussion and Analysis of Results of Operations and ----------------------------------------------------------------- Financial Condition -------------------- This Management's Discussion and Analysis should be read in conjunction with the Management's Discussion and Analysis contained in the Company's Annual Report on Form 10-K/A, which focuses upon relevant matters occurring during the year ended December 31, 1998. Accordingly, the ensuing discussion focuses upon the material matters at and for the three months and six months ended June 30, 1999. GENERAL - ------- The Company is involved in the origination, purchase, sale and servicing of non-conventional mortgage loans principally secured by first and second mortgage loans on one- to four-family residences. The Company has focused on Liberator Series loans which are for the purchase or refinance of residential real property by borrowers who may have had prior credit problems or who do not have an adequate credit history, or loans which have other non-conforming features. In addition, the Company originates Portfolio Series loans which are debt consolidation loans for borrowers whose credit history qualify for Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") loans ("Agency Qualified Borrowers"). The Company purchases and originates mortgage loans and other real estate secured loans through a network of approved correspondents and independent mortgage brokers ("Originators") throughout the country. The Company funds substantially all of the loans which it originates or purchases through deposits, internally generated funds, FHLB advances and various lines of credit. Deposit flows and cost of funds are influenced by prevailing market rates of interest primarily on competing investments, account maturities and the levels of savings in the Company's market area. The Company's ability to purchase or sell loans is influenced by the general level of product available from its correspondent relationships and the willingness of investors to purchase the loans at an acceptable price to the Company. Due to substantial activity in the purchase and sale of loans in recent years, the net gains from mortgage financing operations have been significant. The Company's results of operations are also affected by the Company's provision for loan losses and the level of operating expenses. The Company's operating expenses primarily consist of employee compensation and benefits, premises and occupancy expenses, and other general expenses. The Company's results of operations are also affected by prevailing economic conditions, competition, government policies and actions of regulatory agencies. RESULTS OF OPERATIONS - --------------------- Net income was $1.8 million for the three months ended June 30, 1999 compared to $1.5 million for the three months ended June 30, 1998, an increase of $238,000. For the six months ended June 30, 1999, the Company recorded net income of $2.4 million compared to $5.2 million for the six months ended June 30, 1998. For the three months ended June 30, 1999 and June 30, 1998, the diluted earnings per share were $0.27 and $0.22, respectively. The diluted earnings per share for the six months ended June 30, 1999 were $0.37 compared to $0.76 for the six months ended June 30, 1998. Interest Income - --------------- Interest income was $12.7 million for the three months ended June 30, 1999 compared to $10.1 million for the three months ended June 30, 1998 due primarily to an increase in the average balance of interest-earning assets offset partially by a slight decline in the yield on those assets. Average interest- earnings assets increased to $534.8 million for the three months ended June 30, 1999 compared to $399.8 million for the three months ended June 30, 1998. The yield on interest-earning assets decreased to 9.50% for the three months ended June 30, 1999 compared 8 to 10.15% for the three months ended June 30, 1998. The largest single component of interest-earning assets was loans receivable, net, which were $415.9 million with a yield of 10.00% for the three months ended June 30, 1999 compared to $312.4 million with a yield of 10.21% for the three months ended June 30, 1998. The increase in average loans receivable, net was due to an increase in loans held-for-sale. Loans held-for-sale were $276.3 million as of June 30, 1999 compared to $243.3 million as of December 31, 1998. Interest income for the six months ended June 30, 1999 was $24.0 million, compared to $19.5 million for the six months ended June 30, 1998, due to an increase in the average balance of interest-earning assets, combined with a decrease in the yield on those assets. Average interest-earning assets increased to $502.7 million for the six months ended June 30, 1999 compared to $394.3 million for the six months ended June 30, 1998. The yield on interest- earning assets decreased to 9.56% for the six months ended June 30, 1999 compared to 9.90% for the six months ended June 30, 1998. The largest single component of interest-earning assets was loans receivable, net, which were $398.3 million with a yield of 9.92% for the six months ended June 30, 1999, compared to $312.2 million with a yield of 9.89% for the six months ended June 30, 1998. Interest Expense - ---------------- Interest expense increased to $6.6 million for the three months ended June 30, 1999 compared to $5.5 million for the three months ended June 30, 1998 due primarily to an increase in the average interest-bearing liabilities. Reliance on certificate accounts and an increased usage of the FHLB line of credit resulted in a decrease in the average cost of interest-bearing liabilities to 5.34% for the three months ended June 30, 1999 compared to 6.04% for the three months ended June 30, 1998. Average interest-bearing liabilities were $492.8 million for the three months ended June 30, 1999 compared to $368.8 million for the three months ended June 30, 1998. The largest component of average interest-bearing liabilities was certificate accounts, which averaged $414.6 million with a cost of 5.32% for the three months ended June 30, 1999, compared to $234.4 million with a cost of 5.93% for the three months ended June 30, 1998. The second largest component of average interest-bearing liabilities is borrowings, which decreased to an average balance of $49.0 million with a cost of 7.26% for the three months ended June 30, 1999 compared to $106.3 million with a cost of 7.33% for the three months ended June 30, 1998. The Company utilizes a warehouse lines of credit of $300 million and a residual financing which are indexed to London Interbank Offering Rate index ("LIBOR"). For the six months ended June 30, 1999, interest expense was $12.3 million compared to $10.9 million for the six months ended June 30, 1998 due to an increase in the average interest-bearing liabilities combined with a decrease in the rate paid on those liabilities. Average interest-bearing liabilities were $460.5 million with a cost of 5.41% for the six months ended June 30, 1999 compared to $359.6 million with a cost of 6.11% for the six months ended June 30, 1998. The largest component of average interest-bearing liabilities was certificate accounts, which averaged $384.7 million with a cost of 5.37% for the six months ended June 30, 1999 compared to $223.9 million with a cost of 5.94% for the six months ended June 30, 1998. The second largest component of average interest-bearing liabilities is borrowings, which decreased to an average balance of $47.8 million with a cost of 7.38% for the six months ended June 30, 1999 compared to $110.6 million with a cost of 7.32% for the six months ended June 30, 1998. Net Interest Income Before Provision for Loan Losses - ---------------------------------------------------- Net interest income before provision for loan losses for the three months ended June 30, 1999 was $6.1 million compared to $4.6 million for the three months ended June 30, 1998. This increase is the net effect of an increase in the ratio of interest-earning assets to interest-bearing liabilities. Average interest-earning assets increased to $534.8 million with a yield of 9.50% for the three months ended June 30, 1999 compared to $399.8 million with a yield of 10.15% for the three months ended June 30, 1998. Average interest-bearing liabilities increased to $492.8 million with a cost of 5.34% for the three months ended June 30, 1999 compared to $368.8 million with a cost of 6.04% for the three months ended June 30, 1998. The net interest margin remained stable at 9 4.59% for the three months ended June 30, 1999 and for the three months ended June 30, 1998. The ratio of interest-earning assets to interest-bearing liabilities was 108.51% for the three months ended June 30, 1999 compared to 108.41% for the three months ended June 30, 1998. Net interest income before provision for loan losses for the six months ended June 30, 1999 was $11.7 million compared to $8.6 million for the six months ended June 30, 1998. This increase is the net effect of an increase in average interest-earning assets and average interest-bearing liabilities, an increase in the net interest margin and a decrease in the ratio of interest- earning assets to interest-bearing liabilities. Average interest-earning assets increased to $502.7 million with an average yield of 9.56% for the six months ended June 30, 1999 compared to $394.3 million with an average yield of 9.90% for the six months ended June 30, 1998. Average interest-bearing liabilities increased to $460.5 million with a cost of 5.41% for the six months ended June 30, 1999 compared to $359.6 million with a cost of 6.11% for the six months ended June 30, 1998. The net interest margin was 4.15% for the six months ended June 30, 1999 compared to 3.79% for the six months ended June 30, 1998. The ratio of interest-earning assets to interest-bearing liabilities was 109.17% for the six months ended June 30, 1999 compared to 109.64% for the six months ended June 30, 1998. 10 Average Balance Sheets. The following tables set forth certain information - ---------------------- relating to the Company for the three month and six month periods ended June 30, 1999 and 1998. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Unless otherwise noted, average balances are measured on a daily basis. The yields and costs include fees which are considered adjustments to yields.
Three months ended Three months ended June 30, 1999 June 30, 1998 ------------------ ------------------- (Dollars in thousands) Assets: Average Average Average Average Interest-earning assets Balance Interest Yield/Cst Balance Interest Yield/Cst ------- -------- --------- ------- -------- --------- Interest-earning deposits and short-term investments $42,697 $ 529 4.97% $ 31,706 $ 415 5.25% Investment securities (1) 3,818 52 5.46 7.111 98 5.53 Loans receivable, net(2) 415,939 10,396 10.00 312,446 7,973 10.21 Mortgage-backed securities, net(1) 8,573 93 4.34 8 - 0.00 Residual assets 63,735 1,626 10.20 48,560 1,659 13.67 -------- ------- -------- ------- Total interest-earning assets 534,762 12,696 9.50 399,831 10,145 10.15 Non-interest-earning assets(3) 14,355 ------- 32,208 ------- -------- -------- Total assets(3) $549,117 $432,039 ======== ======== Liabilities and Equity: Interest-bearing liabilities: Passbook accounts 4,489 23 2.06 4,067 25 2.47 Money market accounts 6,996 75 4.30 3,426 42 4.92 Checking accounts 17,725 75 1.70 20,691 82 1.59 Certificate accounts 414,606 5,504 5.32 234,364 3,463 5.93 --------- ------- 5.13 -------- ------- 5.52 Total deposit accounts 443,816 5,677 7.26 262,548 3,612 7.33 Borrowings 49,029 888 5.34 106,257 1,942 6.04 --------- ------- -------- ------- Total interest-bearing liabilities 492,845 6,565 368,805 5,554 Non-interest-bearing liabilities(3) 2,623 ------- 7,894 ------- --------- -------- Total liabilities(3) 495,468 376,699 Equity(3) 53,649 55,340 --------- -------- Total liabilities and equity(3) $549,117 $432,039 $ 4,591 ========= ======== ======= Net interest income before provision for loan losses $ 6,131 Net interest rate spread(4) ======= 4.16 4.11 Net interest margin(5) 4.59 4.59 Ratio of interest-earning assets to interest-bearing liabilities 108.51% 108.41% Six months ended Six months ended June 30, 1999 June 30, 1999 ------------------------------ ------------------------------- Average Average Average Average Assets: Balance Interest Yield/Cst Balance Interest Yield/Cst Interest-earning assets: -------- --------- --------- -------- -------- --------- Interest-earning deposits and short-term investments $ 31,666 $ 762 4.85% $ 28,537 $ 739 5.22% Investment securities(1) 4,145 116 5.64 6,599 188 5.75 Loans receivable, net(2) 398,348 19,754 9.92 312,225 15,439 9.89 Mortgage-backed securities, net(1) 4,314 93 4.31 10 - 0.00 Residual assets 64,270 3,300 10.27 46,953 3,150 13.42 -------- ------- 9.56 -------- ------- Total interest-earning assets 502,743 24,025 394,324 19,516 9.90 Non-interest-earning assets(3) 13,291 ------- 30,281 ------- -------- -------- Total assets(3) $516,034 $424,605 ======== ======== Liabilities and Equity: Interest-bearing liabilities: Passbook accounts $ 4,517 47 2.10 $ 4,037 48 2.40 Money market accounts 7,118 152 4.31 3,126 73 4.71 Checking accounts 16,336 145 1.79 18,028 162 1.81 Certificate accounts 384,717 10,253 5.37 223,906 6,598 5.94 -------- ------- 5.18 -------- ------- Total deposit accounts 412,688 10,597 7.38 249,097 6,881 5.57 Borrowings 47,831 1,751 5.41 110,552 4,013 7.32 -------- ------- -------- ------- Total interest-bearing liabilities 460,519 12,348 359,649 10,894 6.11 Non-interest-bearing liabilities(3) 2,470 ------- 21,485 ------- -------- -------- Total liabilities(3) 462,989 381,134 Equity(3) 53,045 57,645 -------- -------- Total liabilities and equity(3) $516,034 $438,779 ======== ======== Net interest income before provision for loan losses $11,677 $ 8,622 Net interest rate spread(4) ======= 4.15 ======= 3.79 Net interest margin(5) 4.65 4.37 Ratio of interest-earning assets to interest-bearing liabilities 109.17% 109.64%
(1) Includes unamortized discounts and premiums. (2) Amount is net of deferred loan origination fees, unamortized discounts, premiums and allowance for loan losses and includes loans held-for-sale, non-performing loans and warehouse financing receivable. (3) Average balances are measured on a month-end basis. (4) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. (5) Net interest margin represents net interest income divided by average interest-earning assets. 11 Provision for Loan Losses - ------------------------- Based upon management's analysis, there were provisions for loan losses of $1.8 million for the three month period ended June 30, 1999. There were no provisions for loan losses for the three month period ended June 30, 1998.Provisions for loan losses were $2.2 million for the six months ended June 30, 1999 compared to $1.6 million for the six months ended June 30, 1998. The increase in provisions was based on an estimate of charge offs for the six months ended June 30, 1999 combined with a re-evaluation of the composition of the Company's loan portfolio. (See "Financial Condition") Non-Interest Income - ------------------- Net gains from mortgage financing operations for the three months ended June 30, 1999 totaled $3.6 million, compared to $2.4 million for the quarter ended June 30, 1999. For the six months ended June 30, 1999, net gains from mortgage financing operations totaled $4.4 million compared to $10.5 million for the six months ended June 30, 1998. The decrease was due to fewer loan sales for the quarter ended March 31, 1999. Another item which affected the decline in net gains was a second quarter pre-tax $2.9 million Mark to Market writedown of residual assets. Non-Interest Expense - -------------------- Non-interest expense was $6.0 million for the three months ended June 30, 1999 compared to $6.4 million for the three months ended June 30, 1998. For the six months ended June 30, 1999, non-interest expense was $11.8 million compared to $11.7 million for the six months ended June 30, 1998. Compensation and benefits increased to $2.7 million for the three months ended June 30, 1999 from $2.6 million for the three months ended June 30, 1998. For the six months ended June 30, 1999, compensation and benefits were $5.7 million compared to $5.5 million for the six months ended June 30, 1998. Average number of employees for the six months ended June 30, 1999 were 272 compared to 281 for the six months ended June 30, 1998. Premises and occupancy expenses increased to $942,000 for the three months ended June 30, 1999 compared to $850,000 for the three months ended June 30, 1998, and were $1.9 million for the six months ended June 30, 1999 compared to $1.5 million for the six months ended June 30, 1998 due to the opening of the Seal Beach bank branch. Data processing increased to $391,000 for the three months ended June 30, 1999 compared to $344,000 for the three months ended June 30, 1998, and was $792,000 for the six months ended June 30, 1999 compared to $648,000 for the six months ended June 30, 1998. Marketing decreased to $155,000 for the three months ended June 30, 1999 compared to $669,000 for the three months ended June 30, 1998, and was $202,000 for the six months ended June 30, 1999 compared to $999,000 for the six months ended June 30, 1998. Professional services decreased to $467,000 for the three months ended June 30, 1999 compared to $517,000 for the three months ended June 30, 1998, and was $804,000 for the six months ended June 30, 1999 compared to $811,000 for the six months ended June 30, 1998. Telephone and other expense increased to $266,000 and $1.0 million, respectively, for the three months ended June 30, 1999 compared to $276,000 and $1.0 million for the three months ended June 30, 1998 and were $617,000 and $1.8 million for the six months ended June 30, 1999 compared to $493,000 and $1.5 million for the six months ended June 30, 1998. Income Taxes - ------------ The provision for income taxes increased to $1.4 million for the three months ended June 30, 1999 compared to $1.2 million for the three months ended June 30, 1998 due to an increase in income before income tax provision. Income before income tax provision increased to $3.2 million for the three months ended June 30, 1999 from $2.7 million for the three months ended June 30, 1998. The effective tax rate increased to 44.8% for the three months ended June 30, 1999 from 44.4% for the three months ended June 30, 1998. The provision for income taxes decreased to $2.0 million for the six months ended June 30, 1999 compared to $3.8 million for the six months ended June 30, 1998. Income before income tax provision decreased to $4.4 million for the six months ended June 30, 1999 compared to $9.1 million for the six months ended June 30, 1998. 12 COMPARISON OF FINANCIAL CONDITION AS OF JUNE 30, 1999 AND DECEMBER 31, 1998 - ---------------------------------------------------------------------------- Total assets increased to $531.5 million as of June 30, 1999 compared to $428.1 million as of December 31, 1998. This increase was attributable to the increase in cash and trading securities. Loans held-for-sale totaled $276.3 million as of June 30, 1999 compared to $243.3 million as of December 31, 1998. Loans held-for-investment increased to $94.7 million as of June 30, 1999 compared to $91.0 million as of December 31, 1998. Residual assets decreased to $44.4 million as of June 30, 1999 compared to $50.3 million as of December 31, 1998 due to the desecuritization of 1996-1. Cash and cash equivalents were $50.9 million as of June 30, 1999 compared to $8.2 million as of December 31, 1998. Cash and cash equivalents increased by $42.7 million as of June 30, 1999 due to the timing of loan originations and purchases. Premises and equipment decreased to $6.5 million as of June 30, 1999 compared to $7.1 million as of December 31, 1998. Real estate owned decreased to $1.8 million as of June 30, 1999 compared to $1.9 million as of December 31, 1998 as part of the Company's continuing effort to resolve problem assets. The Company increased its liabilities by increasing deposit accounts to $433.2 million as of June 30, 1999 compared to $323.5 million as of December 31, 1998 due to the opening of the Seal Beach branch plus the additional reliance on wholesale deposits. The major component of deposit accounts is certificates of deposit, which increased to $400.6 million as of June 30, 1999 compared to $297.0 million as of December 31, 1998. The Company decreased FHLB advances and borrowings from $40.0 million at December 31, 1998 to $26.4 million at June 30, 1999 due to the increase in deposit accounts of $109.7 million offset by the higher loan receivable balance as of June 30, 1999 of $36.7 million. Accounts payable and other liabilities increased to $15.9 million as of June 30, 1999 compared to $11.1 million as of December 31, 1998 due to an increase in loans serviced for other investors and the corresponding increase in amounts due investors between the time the borrowers make payments to the Company and the time the Company remits payments to the investors. Stockholders' equity increased to $54.5 million as of June 30, 1999 from $52.0 million as of December 31, 1998 due to earnings of $2.5 million. The Company's non-performing assets increased to $10.2 million as of June 30, 1999 compared to $9.4 million as of December 31, 1998. The increase of $.8 million is due primarily to non-accrual loans with an increase of $1.0 million in one- to-four family residential loans offset by a decrease of $0.2 million in consumer loans. Non-performing loans as a percent of gross loans receivable decreased to 2.16% as of June 30, 1999 from 2.23% as of December 31, 1998. Non- performing assets as a percent of total assets decreased to 1.91% as of June 30, 1999 from 2.21% as of December 31, 1998. The following table sets forth the non-performing assets at June 30, 1999 and December 31, 1998: 13
As of As of June 30, December 31, 1999 1998 ---- ---- (Dollars in thousands) Non-accrual loans Foreclosed real estate, net (1) $ 8,405 $7,544 1,752 1,898 Total non-performing assets ------- ------ $10,157 $9,442 ======= ====== Allowance for loan losses as a percent of gross loans receivable(2) 0.87% 0.82% Allowance for loan losses as a percent of total non-performing loans(3) 40.37 36.81 Non-performing loans as a percent of gross loans receivable(2) 2.16 2.23 Non-performing assets as a percent of total assets(4) 1.91 2.21
________________ (1) Foreclosed real estate balances are shown net of related loss allowances. (2) Gross loans receivable is comprised of loans held-for-sale and loans held- for-investment. (3) Non-performing loans consisted of all loans 90 days or more past due and all other non-accrual loans. (4) Non-performing assets is comprised of non-accrual loans and foreclosed real estate. The Company, in consideration of the current economic environment and the condition of the loan portfolio, has established an allowance for loan losses as of June 30, 1999 of $3.4 million compared to $2.8 million as of December 31, 1998. The allowance is based upon a number of factors, including current economic conditions, actual loss experience and industry trends. The Company's non-performing loans consist of one- to-four family residential mortgage loans and consumer loans. Management believes that the allowance for loan losses at June 30, 1999 was adequate to absorb known and inherent risks in the Company's loan portfolio. No assurances can be given, however, that economic conditions which may adversely affect the Company's or the Bank's service area or other circumstances will not be reflected in increased losses in the loan portfolio. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance or to take charge- offs (reductions of the allowance) in anticipation of losses. The following table sets forth the activity in the Company's allowance for loan losses for the six months ended June 30, 1999: (Dollars in thousands) Balance as of December 31, 1998 $2,777 Add: Provision for loan losses 2,208 Recoveries of previous charge-offs 96 Less: Charge-offs 1,688 ------ Balance as of June 30, 1999 $3,393 ====== LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company's primary sources of funds are deposits, warehouse lines of credit, FHLB advances, principal and interest payments on loans, cash proceeds from the sale of loans and securitizations, and to a lesser extent, interest payments on investment securities and proceeds from the maturation of investment securities. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. However, the Company has continued to maintain the required minimum levels of liquid assets as defined by OTS regulations. This requirement, which may be varied at the direction of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required ratio is currently 14 4%. The Bank's average liquidity ratios were 10.93% and 10.94% for the six months ended June 30, 1999 and June 30, 1998, respectively. The Bank had $30.3 million in deposits maturing within one month as of June 30, 1999. The Bank anticipates that it will retain a portion of these accounts. The Company's cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities and financing activities. Cash flows used in operating activities were $102.3 million and $83.1 million for the six months ended June 30, 1999 and 1998, respectively. Such cash flows primarily consisted of loans originated and purchased for sale (net of loan fees), of $469.0 million and $562.6 million, net of proceeds from the sale and securitization of loans held-for-sale of $363.1 million and $478.5 million for the six months ended June 30, 1999 and 1998, respectively. Net cash provided from investing activities were $48.8 million and $41.4 million for the six months ended June 30, 1999 and 1998, respectively, and consisted primarily of principal collections on loans. Proceeds from the principal collections were $67.6 million and $43.4 million for the six months ended June 30, 1999 and 1998, respectively. Net cash provided from financing activities consisted primarily of net activity in deposit accounts and borrowings. The net increase in deposits and borrowings was $96.2 million and $51.9 million for the six months ended June 30, 1999 and 1998, respectively. The Company received proceeds from the lines of credit of $6.4 million for the six months ended June 30, 1998 and repayments of these lines of $(13.5) million for the six months ended June 30, 1999. Net deposits increased by $109.7 million and $54.6 million for the six months ended June 30, 1999 and 1998, respectively. At June 30, 1999, the Company had no outstanding FHLB advances. The Company's most liquid assets are unrestricted cash and short-term investments. The levels of these assets are dependent on the Company's operating, lending and investing activities during any given period. At June 30, 1999, cash and short-term investments totaled $50.9 million. The Company has other sources of liquidity if a need for additional funds arises, including the utilization of FHLB advances. Other sources of liquidity include investment securities maturing within one year. The Bank also has a warehouse line of credit available in the amount of $300 million of which zero had been drawn upon at June 30, 1999. The Company has a residual financing line of credit in the amount of $40.0 million, with an outstanding balance of $15.5 million as of June 30, 1999. The OTS capital regulations require savings institutions to meet three minimum capital requirements: a 1.5% tangible capital ratio, a 3.0% leverage (core capital) ratio and an 8.0% risk-based capital ratio. The core capital requirement has been effectively increased to 4.0% because the prompt corrective action legislation provides that institutions with less than 4.0% core capital will be deemed "undercapitalized". In addition, the OTS, under the prompt corrective action regulation, can impose various constraints on institutions depending on their level of capitalization ranging from well-capitalized to critically undercapitalized. As of June 30, 1999, the Bank was considered "well capitalized". 15 The Bank was in compliance with the minimum capital requirements in effect as of June 30, 1999. The following table reflects the required ratios and the actual capital ratios of the Bank as of June 30, 1999:
Actual Required Excess Actual Required Capital Capital Amount Percent Percent(a) ------- ------- ------ ------- ---------- (Dollars in thousands) Tangible $ 31,884 $ 7,792 $ 24,092 6.14% 1.50% Core $ 31,884 $ 20,779 $ 11,105 6.14% 4.00% Risk-based $ 35,260 $ 28,190 $ 7,070 10.01% 8.00%
(a) The percentages and ratios to be well-capitalized under prompt and corrective action provisions as issued by the OTS are 10.00% for risk-based assets, 5% for core capital and 6% for Tier I capital. At June 30, 1999, the Bank's ratios were 10.01%, 6.14% and 9.05%, respectively. The Bank has been required by the OTS since the Bank's examination completed August 9, 1996 to compute its regulatory capital ratios based upon the higher of (1) the average of total assets based on month-end results or (2) total assets as of quarter-end. As of June 30, 1999, the Bank had outstanding commitments to originate or purchase mortgage loans of $18.1 million compared to $11.0 million as of December 31, 1998 due to the expansion of the mortgage financing operations. Other than commitments to originate or purchase mortgage loans, there were no material changes to the Company's commitments or contingent liabilities as of June 30, 1999 compared to the period ended December 31, 1998 as discussed in the notes to the audited consolidated financial statements of LIFE Financial Corporation for the year ended December 31, 1998 included in the Company's Annual Report on Form 10K/A. Year 2000 Compliance: As a financial institution operating in multiple --------------------- states, the Company is dependent on computer systems and applications to conduct its business. The year 2000 (Y2k) issue is the result of computer programs being written using two digit year fields instead of four digit year fields. If the computer systems cannot distinguish between the year 1900 and the year 2000, system failures or miscalculations could result, disrupting operations and causing, among other things, a temporary inability to process transactions or engage in normal business activities for both the Company and its customers. The Program The Company's program addresses the Y2k issue from a comprehensive risk- based view. "Computer systems and equipment" includes systems generally thought of as information technology (IT) dependent, such as accounting, data processing, and telephone equipment, as well as systems not obviously IT dependent, such as photocopiers, facsimile machines, and security systems. The non-IT dependent systems may contain embedded technology, and the Company included these systems as part of the program. The Company defines year 2000 readiness as information technology that accurately processes date/time data from, into, and between the years 1999 and 2000, as well as leap year calculations, with: All mission-critical systems and processes reviewed, renovated or replaced, as necessary. All mission-critical systems and processes tested. All key vendors, customers, and business partners identified and assessed for risk. Adequate change control procedures in place for re-testing of new or upgraded systems. Contingency plans in place to support business resumption requirements. 16 The Y2k program consists of five stages: (i) awareness, (ii) assessment, (iii) renovation, (iv) validation, and (v) implementation. During the awareness phase, the Company identified the project team and responsibilities, prepared and allocated the project budget, defined the project scope, and established program and management policies. This phase, although complete, continues to be reviewed. The assessment phase entailed an inventory of IT and non-IT systems, hardware, vendors, material customers, and facilities. Inventoried systems were also prioritized to identify critical systems. The renovation, validation, and implementation phases were completed as of June 30, 1999 and included internal systems as well as interfaces to third party systems. The Company is engaged in an ongoing review of its relationships with business partners, including vendors and suppliers, to continue to assess whether these entities are effectively addressing year 2000 issues. This includes the evaluation of strategies to manage and mitigate the risk to the Company of their failures. Although the Company is establishing reasonable safeguards, there can be no assurance that all business partners will adequately address their Y2k issues. Therefore, failures of third parties to adequately address their Y2k issues could adversely affect the business and operations of the Company. The Company's systems use a combination of methodologies for date fields. Where possible, date fields were expanded to a full eight digits. For date fields that were retained in a six-digit format, a windowing technique was used. For the Company's mission critical business financial systems, the windowing technique is described as follows. If the last two digits of the date are 00- 49, the century is 2000. If the last two digits of the date are 50-99, the century is 1900. Contingency Planning An institution-wide contingency plan is substantially complete, with Y2k issues incorporated. The contingency plan is intended to enable the Company to continue to operate, to the extent that it can do so safely, including performing certain processes manually, repairing or obtaining replacement systems, and changing vendors. To date, no systems or vendors have had to be replaced and it is anticipated that none will be. The Company believes, however, that due to the widespread nature of the potential Y2k issues, the contingency planning process is an ongoing one, which will require further modifications as the Company obtains additional information resulting from: (i) the Company's initial test of the contingency and business resumption plan during the third quarter of 1999, and (ii) the status of third party or business partner Y2k readiness. Costs The total budget for the Company's Y2k effort is approximately $650,000. To date, the amounts incurred and expensed for developing and implementing the Y2k program have been less than $200,000 with no material effect on the Company's operations. The total remaining cost for addressing Y2k compliance is based on management's current estimates; it is not expected to exceed $300,000 in total. These costs will be funded through operating cash flows and will be funded by reallocating existing resources rather than incurring incremental costs. None of the Company's other information technology projects have been delayed or deferred as a result of implementing the Y2k program. Risks The Company believes that the completed renovations on its internal systems and equipment will allow it to be Y2k compliant. There can be no assurances, however, that the Company's internal systems or equipment, or those of third parties on which the Company relies, will be Y2k compliant in a timely manner, or that the Company's or third parties' contingency plans will mitigate the effects of noncompliance. The Company has initiated communications with its critical external relationships to determine the extent to which the Company will assess and attempt to mitigate its risks with respect to the failure of these entities to be Y2k ready. The effect, if any, on the Company's results of operations from the failure of such parties to be Y2k ready cannot reasonably be estimated. The Company is part of a regulated industry which has issued standards for Y2k readiness and is conducting audits to ensure compliance with those standards. To date, the Company has satisfied its regulators as to its compliance with Y2k standards. The Company believes its most likely worst case scenario is that customers could experience some manual processes or an inability to access their cash immediately. Although the Company does not believe that this scenario will occur, it is assessing the effect of such scenarios by using current financial data. In the event that this scenario does occur, the Company does not expect that it would have a material adverse effect on the Company's 17 financial position, liquidity, and results of operations. Forward-looking Statements The preceding Y2k issue discussion contains various forward-looking statements which represent the Company's beliefs or expectations regarding future events. When used in the Y2k issue discussion, the words "believes," "expects," "estimates," and similar expressions are intended to identify forward-looking statements. Forward-looking statements include, without limitation, the Company's expectations as to future events with regard to its Y2k program, as well as its contingency plans; its estimated cost of achieving Y2k readiness; and the Company's belief that its internal systems and equipment will be Y2k compliant in a timely manner. All forward-looking statements involve a number of risks and uncertainties that could cause the actual results to differ materially from the projected results. Factors that may cause these differences include, but are not limited to: the availability of qualified personnel and other information technology resources, the ability to identify and renovate all data sensitive lines of computer code or to replace embedded computer chips in affected systems and equipment, and the actions of government agencies and other third parties with respect to Y2k readiness. Item 3. Quantitative and Qualitative Disclosure About Market Risk --------------------------------------------------------- Management of Interest Rate Risk: The principal objective of the Company's -------------------------------- interest rate risk management function is to evaluate the interest rate risk included in certain balance sheet accounts, determine the level of appropriate risk given the Company's business focus, operating environment, capital and liquidity requirements and performance objectives and manage the risk consistent with Board approved guidelines through the establishment of prudent asset concentration guidelines. Through such management, management of the Company seeks to reduce the vulnerability of the Company's operations to changes in interest rates. Management of the Company monitors its interest rate risk as such risk relates to its operating strategies. The Company's Board of Directors reviews on a quarterly basis the Company's asset/liability position, including simulations of the effect on the Company's capital of various interest rate scenarios. The extent of movement in interest rates, higher or lower, is an uncertainty that could have a negative impact on the earnings of the Company. Between the time the Company originates loans and purchase commitments are issued, the Company is exposed to both upward and downward movements in interest rates which may have a material adverse effect on the Company. The Board of Directors of the Company has implemented a hedge management policy primarily for the purpose of hedging the risks associated with loans held for sale in the Company's mortgage pipeline. In a flat or rising interest rate environment, this policy enables management to utilize mandatory forward commitments to sell fixed rate assets as the primary hedging vehicles to shorten the maturity of such assets. In a declining interest environment, the policy enables management to utilize put options. The hedge management policy also permits management to extend the maturity of its liabilities through the use of short financial futures positions, purchase of put options, interest rate caps or collars, and entering into "long" interest rate swap agreements. Management may also utilize "short" interest rate swaps to shorten the maturity of long-term liabilities when the net cost of funds raised by using such a strategy is attractive, relative to short-term CD's or borrowings. Management is continuing to evaluate and refine its hedging policies. No hedging positions were outstanding as of June 30, 1999 or December 31, 1998. 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings ----------------- The Company is involved as plaintiff or defendant in various legal actions incident to its business, none of which is believed by management to be material to the financial condition of the Company. Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- None. Item 3. Defaults Upon Senior Securities ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- On June 10, 1999, the Company held its annual meeting of stockholders for the purpose of electing two Directors to a term of three years and the ratification of Deloitte & Touche LLP as the Company's independent auditors. The number of votes cast at the meeting as to each matter acted upon was as follows:
For Withheld --------- -------- 1. Election of Director: Ronald G. Skipper.... 5,602,985 243,232 Election of Director: Daniel L. Perl....... 5,604,385 241,832
The Directors whose terms continued and the years their terms expire are as follows: Milt Johnson (2001), Edgar Keller (2001), John Goddard (2000).
Broker For Withheld Abstains Non-Votes --------- -------- -------- --------- 2. Ratification of Deloitte & Touche LLP as the Company's independent auditors..... 5,820,416 15,101 10,700 0
Item 5. Other Information ----------------- On July 28, 1999, the Company announced that pursuant to a board meeting on July 27, 1999, Daniel L. Perl is no longer its President and Chief Executive Officer nor President/Chief Executive Officer and Chairman of the Company's wholly-owned subsidiary, Life Bank. On August 2, 1999, the Company announced that Robert K. Riley has been named as President and Chief Executive Officer of the Company and its wholly- owned subsidiary, Life Bank. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) The following exhibits are filed as part of this report: 3.1 Certificate of Incorporation of Life Financial Corp. * 3.2 Bylaws of Life Financial Corp. * 11.0 Earnings per share (see footnote 4 to the financial statements included herein) 27.0 Financial data schedule (filed herewith). (b) Reports on Form 8-K None. ____________ * Incorporated herein by reference to Exhibits of the same number from the Company's Registration Statement on Form S-4 (filed initially on Form S-1), filed on January 27, 1997, as amended on March 27, 1997, and as further amended on May 29, 1997 and June 11, 1997 ( Registration No. 333-20497). 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LIFE FINANCIAL CORPORATION August 16, 1999 By: /s/ Robert K. Riley - --------------- --------------------------------- Date Robert K. Riley President and Chief Executive Officer (principal executive officer) August 16, 1999 /s/ Jeffrey L. Blake - --------------- --------------------------------- Date Jeffrey L. Blake Chief Financial Officer and Treasurer (principal financial and accounting officer) 20 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 12,263 34,505 4,100 26,396 0 1,006 1,008 370,995 3,393 531,538 433,196 26,432 15,949 1,500 0 0 66 54,395 531,538 19,754 46 4,225 24,025 10,597 12,348 11,677 2,208 0 11,832 4,403 4,403 0 0 2,443 .38 .37 4.65 8,405 4 361 0 2,777 1,688 96 3,393 3,393 0 0
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