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United States Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q
/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2001
Commission File Number 0-22193
LIFE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE (State or other jurisdiction of incorporation or organization) | 33-0743196 (I.R.S. Employer Identification No.) | |
10540 MAGNOLIA AVENUE, RIVERSIDE, CALIFORNIA (Address of principal executive offices) | 92505 (Zip Code) |
(909) 637 - 4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ 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: 1,333,572 shares of common stock, par value $0.01 per share, were outstanding as of November 9, 2001.
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
| | PAGE | ||
---|---|---|---|---|
PART I | FINANCIAL INFORMATION | |||
Item 1 | Consolidated Statements of Financial Condition: September 30, 2001 (unaudited) and December 31, 2000 | 1 | ||
Consolidated Statements of Operations (unaudited): For the Three and Nine Months ended September 30, 2001 and 2000 | 2 | |||
Consolidated Statements of Stockholders' Equity and Comprehensive Loss (unaudited): For the Nine Months ended September 30, 2001 | 3 | |||
Consolidated Statements of Cash Flows (unaudited): For the Nine Months ended September 30, 2001 and 2000 | 4 | |||
Notes to Consolidated Financial Statements (unaudited) | 5 | |||
Item 2 | Management's Discussion and Analysis of Financial Condition And Results of Operations | 9 | ||
Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 19 | ||
Item 4 | Subsequent Events | 20 | ||
PART II | OTHER INFORMATION | |||
Item 1 | Legal Proceedings | 20 | ||
Item 2 | Changes in Securities and Use of Proceeds | 20 | ||
Item 3 | Defaults Upon Senior Securities | 20 | ||
Item 4 | Submission of Matters to a Vote of Security Holders | 20 | ||
Item 5 | Other Information | 20 | ||
Item 6 | Exhibits and Reports on Form 8-K | 20 |
ii
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
| September 30, 2001 (Unaudited) | December 31, 2000 | ||||||
---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||
Cash and due from banks | $ | 9,286 | $ | 7,810 | ||||
Federal funds sold | — | 730 | ||||||
Cash and cash equivalents | 9,286 | 8,540 | ||||||
Securities held under repurchase agreements | — | 25,000 | ||||||
Investment securities available for sale | 32,138 | 42,370 | ||||||
Loans held for sale | 5,924 | — | ||||||
Loans held for investment, net of allowance for loan losses of $4,679 in 2001 and $5,384 in 2000, respectively | 207,687 | 316,724 | ||||||
Mortgage servicing rights | 109 | 5,652 | ||||||
Accrued interest receivable | 1,811 | 3,187 | ||||||
Foreclosed real estate | 5,579 | 1,683 | ||||||
Premises and equipment | 2,067 | 3,100 | ||||||
Current tax receivable | — | 202 | ||||||
Deferred income taxes | — | 901 | ||||||
Participation contract | 4,429 | 4,429 | ||||||
Other assets | 2,493 | 2,633 | ||||||
TOTAL ASSETS | $ | 271,523 | $ | 414,421 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
LIABILITIES | ||||||||
Deposit accounts | ||||||||
Non-interest bearing | $ | 8,229 | $ | 9,858 | ||||
Interest bearing | 249,585 | 335,235 | ||||||
Borrowings | — | 47,120 | ||||||
Subordinated debentures | 1,500 | 1,500 | ||||||
Accrued expenses and other liabilities | 2,368 | 6,808 | ||||||
Total liabilities | 261,682 | 400,521 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Common stock, $.01 par value; 25,000,000 shares authorized; 1,333,572 and 1,333,687 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively | 13 | 13 | ||||||
Additional paid-in capital | 42,628 | 42,629 | ||||||
Accumulated deficit | (32,904 | ) | (28,912 | ) | ||||
Accumulated other comprehensive income | 104 | 170 | ||||||
Total stockholders' equity | 9,841 | 13,900 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 271,523 | $ | 414,421 | ||||
Accompanying notes are an integral part of these consolidated financial statements.
1
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(UNAUDITED)
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2001 | September 30, 2000 | September 30, 2001 | September 30, 2000 | ||||||||||
INTEREST INCOME: | ||||||||||||||
Loans | $ | 5,148 | $ | 8,810 | $ | 17,752 | $ | 30,749 | ||||||
Other interest-earning assets | 642 | 921 | 2,022 | 2,399 | ||||||||||
Total interest income | 5,790 | 9,731 | 19,774 | 33,148 | ||||||||||
INTEREST EXPENSE: | ||||||||||||||
Interest-bearing deposits | 3,392 | 6,610 | 12,462 | 19,806 | ||||||||||
Other borrowings | 347 | 405 | 993 | 2,164 | ||||||||||
Subordinated debentures | 53 | 53 | 157 | 158 | ||||||||||
Total interest expense | 3,792 | 7,068 | 13,612 | 22,128 | ||||||||||
NET INTEREST INCOME | 1,998 | 2,663 | 6,162 | 11,020 | ||||||||||
PROVISION FOR LOAN LOSSES | 959 | 716 | 2,166 | 716 | ||||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 1,039 | 1,947 | 3,996 | 10,304 | ||||||||||
NONINTEREST INCOME (LOSS): | ||||||||||||||
Loan servicing and mortgage banking fee income | 333 | 2,351 | 1,572 | 5,890 | ||||||||||
Bank and other fee income | 152 | 150 | 498 | 413 | ||||||||||
Net gain (loss) from loan sales | 72 | (5,798 | ) | 465 | (5,887 | ) | ||||||||
Net gain(loss) on investment securities | 327 | (1,025 | ) | 871 | (1,025 | ) | ||||||||
Other income(loss) | 97 | (65 | ) | 624 | 159 | |||||||||
Total noninterest income(loss) | 981 | (4,387 | ) | 4,030 | (450 | ) | ||||||||
NONINTEREST EXPENSE: | ||||||||||||||
Compensation and benefits | 1,213 | 2,778 | 4,156 | 9,270 | ||||||||||
Premises and occupancy | 628 | 1,100 | 1,967 | 3,399 | ||||||||||
Data processing | 167 | 186 | 579 | 836 | ||||||||||
Net loss on foreclosed real estate | 44 | 256 | 185 | 319 | ||||||||||
Other expense | 1,737 | 2,383 | 4,165 | 6,267 | ||||||||||
Total noninterest expense | 3,789 | 6,703 | 11,052 | 20,091 | ||||||||||
LOSS BEFORE INCOME TAXES | (1,769 | ) | (9,143 | ) | (3,026 | ) | (10,237 | ) | ||||||
PROVISION FOR INCOME TAXES | 966 | 2,068 | 966 | 1,623 | ||||||||||
NET LOSS | $ | (2,735 | ) | $ | (11,211 | ) | $ | (3,992 | ) | $ | (11,860 | ) | ||
(LOSS) PER SHARE: | ||||||||||||||
Basic (loss) per share | $ | (2.05 | ) | $ | (8.41 | ) | $ | (2.99 | ) | $ | (8.89 | ) | ||
Diluted (loss) per share | $ | (2.05 | ) | $ | (8.41 | ) | $ | (2.99 | ) | $ | (8.89 | ) | ||
WEIGHTED AVERAGE SHARES OUTSTANDING: | ||||||||||||||
Basic | 1,333,572 | 1,333,687 | 1,333,636 | 1,333,632 | ||||||||||
Diluted | 1,333,572 | 1,333,687 | 1,333,636 | 1,333,632 |
Accompanying notes are an integral part of these consolidated financial statements.
2
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(Dollars in thousands)
(UNAUDITED)
| Common Stock | | | Accumulated Other Comprehensive Income | | | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Additional Paid-in Capital | Accumulated Deficit | Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||
Balance at December 31, 2000 | 1,333,687 | $ | 13 | $ | 42,629 | $ | (28,912 | ) | $ | 170 | $ | 13,900 | ||||||||||
Comprehensive loss | ||||||||||||||||||||||
Net loss | — | — | — | (3,992 | ) | — | $ | (3,992 | ) | (3,992 | ) | |||||||||||
Reversal of unrealized gains on investments, net of tax of $79 | — | — | — | — | (66 | ) | (66 | ) | (66 | ) | ||||||||||||
Total comprehensive loss | — | — | — | — | — | $ | (4,058 | ) | — | |||||||||||||
Common Stock Repurchase | (115 | ) | — | (1 | ) | — | — | (1 | ) | |||||||||||||
Balance at September 30, 2001 | 1,333,572 | $ | 13 | $ | 42,628 | $ | (32,904 | ) | $ | 104 | $ | 9,841 | ||||||||||
Accompanying notes are an integral part of these consolidated financial statements
3
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
| Nine Months Ended September 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||
Net Loss | $ | (3,992 | ) | $ | (11,860 | ) | ||||
Adjustments to net loss | ||||||||||
Depreciation and amortization | 970 | 1,579 | ||||||||
Provision for loan losses | 2,166 | 716 | ||||||||
Loss on sale and provision for losses on premises and equipment | — | 724 | ||||||||
Loss on sale, provision, and write-down of foreclosed real estate | 1,350 | 467 | ||||||||
Net unrealized and realized (gains)/losses and accretion on investment securities, residual mortgage-backed securities, participation contract and related mortgage servicing rights | (151 | ) | 1,106 | |||||||
Change in allowance on mortgage servicing rights | — | (576 | ) | |||||||
Loss on sale and securitization of loans held for sale | — | 4,639 | ||||||||
Gain on sale of investment securities available for sale | (871 | ) | — | |||||||
Purchase and origination of loans held for sale | — | (450,497 | ) | |||||||
Proceeds from the sales of and principal payments from loans held for sale | 1,268 | 489,235 | ||||||||
Write-down of loans transferred to held for investment | (15 | ) | 1,688 | |||||||
Change in current and deferred income tax receivable | 1,103 | 19,705 | ||||||||
Decrease in accrued expenses and other liabilities | (4,440 | ) | (17,713 | ) | ||||||
Federal Home Loan Bank stock dividend | (143 | ) | (160 | ) | ||||||
Decrease in other assets | 1,515 | 5,773 | ||||||||
Net cash (used in) provided by operating activities | (1,240 | ) | 44,826 | |||||||
CASH FLOW FROM INVESTING ACTIVITIES | ||||||||||
Proceeds from sale and principal payments on loans held for investment | 123,090 | 45,735 | ||||||||
Purchase and origination of loans held for investment | (31,940 | ) | — | |||||||
Gain on sale of loans held for investment | (132 | ) | — | |||||||
Principal payments on securities | 1,112 | 51,691 | ||||||||
Proceeds from sale of foreclosed real estate | 3,429 | 1,389 | ||||||||
Purchase of securities | (49,596 | ) | (64,605 | ) | ||||||
Proceeds from sale or maturity of securities | 59,830 | — | ||||||||
Cash received on residual assets | — | 356 | ||||||||
Proceeds from sale of mortgage servicing rights | 5,508 | — | ||||||||
Decrease in securities held under repurchase agreements | 25,000 | — | ||||||||
Decrease (increase) in premises and equipment | 98 | (312 | ) | |||||||
Purchase of FHLB stock | (14 | ) | — | |||||||
Net cash provided by investing activities | 136,385 | 34,254 | ||||||||
CASH FLOW FROM FINANCING ACTIVITIES | ||||||||||
Net decrease in deposit accounts | (87,279 | ) | (59,932 | ) | ||||||
Proceeds from (repayment of) other borrowings | (27,120 | ) | 12,460 | |||||||
Repayment of FHLB advances | (20,000 | ) | — | |||||||
Net proceeds from issuance of common stock | — | 50 | ||||||||
Net cash (used in) provided by financing activities | (134,399 | ) | (47,422 | ) | ||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 746 | 31,658 | ||||||||
CASH AND CASH EQUIVALENTS, beginning of period | 8,540 | 20,315 | ||||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 9,286 | $ | 51,973 | ||||||
SUPPLEMENTAL CASH FLOW DISCLOSURES: | ||||||||||
Interest paid | $ | 13,960 | $ | 21,941 | ||||||
Income taxes paid | $ | — | $ | 73 | ||||||
NONCASH INVESTING ACTIVITIES DURING THE PERIOD: | ||||||||||
Loan Transfers-Loans held for sale to (from) held for investment | $ | (9,251 | ) | $ | 253,597 | |||||
Transfers from loans to foreclosed real estate | $ | 8,676 | $ | 977 | ||||||
Accompanying notes are and integral part of these consolidated financial statements.
4
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(UNAUDITED)
The consolidated financial statements include the accounts of LIFE Financial Corporation (the "Company") and its subsidiaries, LIFE Bank (formerly Life Savings Bank, Federal Savings Bank), (the "Bank"), Life Financial Insurance Services, Inc. and Life Investment Holdings, Inc. All material intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's financial position as of September 30, 2001 and December 31, 2000, and the results of its operations and its cash flows for the three and nine months ended September 30, 2001 and 2000. Operating results for the three and nine months ended September 30, 2001, are not necessarily indicative of the results that may be expected for any other interim period or the full year ending December 31, 2001.
Certain information and note disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Certain amounts reflected in the 2000 consolidated financial statements have been reclassified where practicable, to conform to the presentation for 2001.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires that an entity recognize all derivatives as ether assets or liabilities in the balance sheet and measure those derivatives at fair value. The accounting for the gains or losses resulting from changes in the values of those derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. In May 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of SFAS No. 133," that amends SFAS No. 133 and defers the effective date to fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 did not have a material impact on the Company's results of operations or financial position.
In addition, in June 2001, the FASB issued SFAS No. 141 (FAS 141), Business Combinations, and SFAS No. 142 (FAS 142), Goodwill and Other Intangible Assets. FAS 141, effective June 30, 2001, requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting; the use of the pooling-of-interests method of accounting is eliminated. FAS 141 also establishes how the purchase method is to be applied for business combinations completed after June 30, 2001. This guidance is similar to previous generally accepted accounting principles (GAAP). However, FAS 141 establishes additional disclosure requirements for transactions occurring after the effective date. The adoption of this standard is not expected to have a material effect on the Company's financial condition, results of operations and cash flows.
5
FAS 142 eliminates amortization of goodwill associated with business combinations completed after June 30, 2001. During a transition period from July 1, 2001 through December 31, 2001, goodwill associated with business combinations completed prior to July 1, 2001 will continue to be amortized through the income statement. Effective January 1, 2002, all goodwill amortization expense will cease and goodwill be assessed (at least annually) for impairment at the reporting unit level by applying a fair-value based test. FAS 142 also provides additional guidance on acquired intangibles that should be separately recognized and amortized, which could result in the recognition of additional intangible assets, as compared with previous GAAP. The adoption of this standard is not expected to have a material effect on the Company's financial condition, results of operations and cash flows.
On September 25, 2000, the Company consented to the issuance of an Order to Cease and Desist (the "Order") by the Office of Thrift Supervision (the "OTS") which requires that the Company, among other things, contribute $5.2 million to the capital of the Bank, not later than December 31, 2000, subject to extension by the OTS.
Also, on September 25, 2000, the Bank entered into a Supervisory Agreement with the OTS that requires the Bank, among other things, to achieve a core capital of at least 6.0% and a total risk-based capital of at least 11.0% by March 31, 2001. In calculating these ratios, the Bank must double risk weight the amount of all loans, in excess of capital, that are secured by owner-occupied 1-4 family residential property with a loan-to-value (LTV) ratio of 90% or greater unless the loan has appropriate credit support. Additionally, the Bank must risk weight all subprime loans it holds at double the regularly prescribed risk weighting.
In March 2001, the OTS issued a Prompt Corrective Action Directive (the "PCA Directive") requiring the Bank, among other things, to raise sufficient capital through securities issuance to achieve the following capital levels by June 30, 2001: Total risk-based capital of 8.0%; Tier 1 risk-based capital of 4.0%; and Leverage ratio of 4.0%, or as an alternative, to recapitalize by merging or being acquired prior to September 30, 2001.
The additional $5.2 million capital contribution has not been raised. Since the Bank has failed to raise the capital, the OTS and the Bank have entered into a Marketing Assistance Agreement and Consent to the Appointment of a Conservator or Receiver as of October 25, 2001.
6
The Bank's capital amounts and ratios are presented in the following table:
| Actual | To be adequately capitalized under the Prompt Corrective Action Directive: | Individual Minimum Capital required under the Supervisory Agreement | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||
| (dollars in thousands) | |||||||||||||||
At September 30, 2001 | ||||||||||||||||
Total Capital (to risk-weighted assets) | $ | 13,954 | 5.59 | % | $ | 19,965 | 8.00 | % | $ | 27,452 | 11.00 | % | ||||
Core Capital (to adjusted tangible assets) | 10,834 | 4.00 | % | 10,836 | 4.00 | % | 16,253 | 6.00 | % | |||||||
Tangible Capital (to tangible assets) | 10,834 | 4.00 | % | N.A. | N.A. | N.A. | N.A. | |||||||||
Tier 1 Capital (to risk-weighted assets) | 13,954 | 4.34 | % | 9,982 | 4.00 | % | N.A. | N.A. | ||||||||
At December 31, 2000 | ||||||||||||||||
Total Capital (to risk-weighted assets) | $ | 16,518 | 6.99 | % | $ | 18,904 | 8.00 | % | $ | 29,400 | 11.00 | % | ||||
Core Capital (to adjusted tangible assets) | 17,968 | 4.33 | % | 16,616 | 4.00 | % | 24,924 | 6.00 | % | |||||||
Tangible Capital (to tangible assets) | 17,968 | 4.33 | % | N.A. | N.A. | N.A. | N.A. | |||||||||
Tier 1 Capital (to risk-weighted assets) | 13,539 | 5.73 | % | 9,452 | 4.00 | % | N.A. | N.A. |
The September 30, 2001 capital ratios are calculated using double risk weighting for certain high loan to value residential and subprime loans in accordance with the Supervisory Agreement.
The table below sets forth the Company's loss per share calculations for the three and nine months ended September 30, 2001 and 2000.
Basic loss per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted loss per share is computed by dividing income available to common stockholders including common stock equivalents, such as outstanding stock options by the weighted-average number of common shares outstanding for the period. The computations for loss per share assuming dilution for the three months ended September 30, 2000 and 2001 were anti-dilutive. The outstanding shares for three and nine months ending September 30, 2000 have been adjusted for the one for five reverse stock split approved by the shareholders at the June 7, 2001 Annual Meeting of Stockholders.
7
Loss per share reconciliation is as follows (dollars in thousands, except per share data):
| For the Three Months Ended September 30, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | |||||||||||||||
| Net Loss | Shares | Per Share Amount | Net Loss | Shares | Per Share Amount | |||||||||||
Net Loss | $ | (2,735 | ) | $ | (11,211 | ) | |||||||||||
Basic EPS Loss Available to common Stockholders | $ | (2,735 | ) | 1,333,572 | $ | (2.05 | ) | $ | (11,211 | ) | 1,333,687 | $ | (8.41 | ) | |||
Effect of Dilutive Stock Options | — | — | — | — | |||||||||||||
Diluted EPS Loss Available to common stockholders plus assumed conversions | $ | (2,735 | ) | 1,333,572 | $ | (2.05 | ) | $ | (11,211 | ) | 1,333,687 | $ | (8.41 | ) | |||
| For the Nine Months Ended September 30, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | |||||||||||||||
| Net Loss | Shares | Per Share Amount | Net Loss | Shares | Per Share Amount | |||||||||||
Net Loss | $ | (3,992 | ) | $ | (11,860 | ) | |||||||||||
Basic EPS Loss Available to common Stockholders | $ | (3,992 | ) | 1,333,636 | $ | (2.99 | ) | $ | (11,860 | ) | 1,333,632 | $ | (8.89 | ) | |||
Effect of Dilutive Stock Options | — | — | — | — | |||||||||||||
Diluted EPS Loss Available to common stockholders plus assumed conversions | $ | (3,992 | ) | 1,333,636 | $ | (2.99 | ) | $ | (11,860 | ) | 1,333,632 | $ | (8.89 | ) | |||
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following presents management's discussion and analysis of the consolidated financial condition and operating results of the Company for the nine and three months ended September 30, 2001 and 2000. The discussion should be read in conjunction with the Company's Management's Discussion and Analysis included in both the Quarterly Report on Form 10-Q for the quarters ended March 31, 2001 and June 30, 2001 and the 2000 Annual Report on Form 10-K, plus the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report.
The statements contained herein that are not historical facts are forward-looking statements based on management's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be the same as those anticipated by management. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve risks and uncertainties. These include, but are not limited to, the following risks: (1) Changes in the performance of the financial markets, (2) Changes in the demand for and market acceptance of the Company's products and services, (3) Changes in general economic conditions including interest rates, presence of competitors with greater financial resources, and the impact of competitive projects and pricing, (4) the effect of the Company's policies, (5) the continued availability of adequate funding sources, (6) actual prepayment rates and credit losses as compared to prepayment rates and credit losses assumed by the Company for purposes of its valuation of mortgage derivative securities (the "participation contract"), (7) the effect of changes in market interest rates on the spread between the coupon rate and the pass through rate and on the discount rate assumed by the Company in its valuation of its participation contract, and (8) various legal, regulatory and litigation risks.
The Company, a Delaware corporation organized in 1997, is a savings and loan holding company that owns 100% of the capital stock of the Bank, the Company's principal operating subsidiary. The Company's primary business is community retail banking and real estate lending.
The Bank was founded in 1983 as a state chartered savings and loan and became a federally chartered stock savings bank in 1991. The Bank is a member of the Federal Home Loan Bank of San Francisco ("FHLB"), which is a member bank of the Federal Home Loan Bank System. The Bank's deposit accounts are insured up to the $100,000 maximum amount currently allowable under federal laws by the Savings Association Insurance Fund ("SAIF"), which is a separate insurance fund administered by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is subject to examination and regulation by the Office of Thrift Supervision ("OTS") and the FDIC. The Bank is further subject to regulations of the Board of Governors of the Federal Reserve System ("FRB") concerning reserves required to be maintained against deposits and certain other matters.
The Bank operates five full-service branches located in our market area of San Bernardino, Riverside, and Orange Counties, California. The Bank offers a variety of products and services for consumers and small businesses, which include checking, savings and money market accounts as well as certificates of deposit. The Bank originates and purchases conforming and jumbo prime credit quality real estate secured loans through a network of approved mortgage brokers within the state of California. Additionally, the Bank originates residential construction loans on a retail basis in Southern California. The Bank funds its lending activities primarily with retail deposits obtained through its branches and advances from the FHLB of San Francisco. Advances from the FHLB need to be approved by their credit committee and are limited to overnight borrowings.
9
The Company's principal sources of income are the net spread between interest earned and the interest costs associated with deposits and other borrowings used to finance its loans and investment portfolio.
Total assets of the Company were $271.5 million at September 30, 2001 compared to $414.4 million at December 31, 2000. The $142.9 million decrease in total assets from December 31, 2000 was primarily a result of a $103.1 million decrease in the loan portfolio.
A summary of the Company's securities as of September 30, 2001 and December 31, 2000 is as follows (dollars in thousands):
| September 30, 2001 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized Cost | Unrealized Gain | Unrealized Loss | Estimated Market Value | |||||||||
Securities Available for Sale: | |||||||||||||
Mortgage-Backed Securities | $ | 9,896 | $ | 113 | $ | $ | 10,009 | ||||||
Mutual Funds | 19,022 | 36 | — | 19,058 | |||||||||
Other Securities | 3,071 | — | — | 3,071 | |||||||||
$ | 31,989 | $ | 149 | $ | — | $ | 32,138 | ||||||
| December 31, 2000 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized Cost | Unrealized Gain | Unrealized Loss | Estimated Market Value | |||||||||
Securities Available for Sale: | |||||||||||||
Mortgage-Backed Securities | $ | 39,160 | $ | 322 | $ | (27 | ) | $ | 39,455 | ||||
Other Securities | 2,915 | — | — | 2,915 | |||||||||
$ | 42,075 | $ | 322 | $ | (27 | ) | $ | 42,370 | |||||
Loans totaled $213.6 million at September 30, 2001, including $5.9 million in loans held for sale, compared to $316.7 million at December 31, 2000, or a decrease of $103.1 million. The decrease includes loans sold of $29.3 million resulting in a gain of approximately $132,000. Additionally, the Bank originated $9.4 million in loans during the nine months ending September 30, 2001. Together with loan purchases of $11.5 million, total loan production for the nine months ending September 30, 2001 was $20.9 million with principal repayments totaling $93.5 million.
For the nine months ending September 30, 2000, the Bank originated $200.1 million in loans. The Bank's loan production total for the nine months ending September 30, 2000 was $444.0 million and included $243.9 million of purchased loans. Loan sales totaled $464.8 million for the nine months ending September 30, 2000.
The reduction in loan production is the result of ceasing the origination of loans for sale and of the Bank's stated intent to originate higher credit quality loans and to eliminate subprime originations. The reduction in loans and in new loan production was partially the result of management's efforts to comply with the Prompt Corrective Action Directive issued by the Office of Thrift Supervision on March 23, 2001.
10
A summary of the Company's loan originations and sales for the nine months ended September 30, 2001 and 2000 are as follows (dollars in thousands):
| For the Nine Months ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2001 | September 30, 2000 | ||||||||
Beginning balance, gross | $ | 335,266 | $ | 458,556 | ||||||
Loans originated: | ||||||||||
One to four family | 6,888 | 165,695 | ||||||||
Construction loans | 1,557 | 24,338 | ||||||||
Other loans | 1,003 | 10,088 | ||||||||
Total loans originated | 9,448 | 200,121 | ||||||||
Loans purchased | 11,502 | 243,912 | ||||||||
Subtotal—Production | 20,950 | 444,033 | ||||||||
Total | 356,216 | 902,589 | ||||||||
Less: | ||||||||||
Principal repayments | 93,508 | 73,756 | ||||||||
Charge-offs | 2,871 | |||||||||
Sales of loans | 29,343 | 464,791 | ||||||||
Transfers to REO | 8,676 | 977 | ||||||||
Ending balance, gross | 221,818 | 363,065 | ||||||||
Loans in process, loan fees | (3,528 | ) | (16,934 | ) | ||||||
Allowance for loan losses | (4,679 | ) | (3,326 | ) | ||||||
Total Loans receivable, net | 213,611 | 342,805 | ||||||||
Less: Loans held for sale | 5,924 | — | ||||||||
Loans held for investment | $ | 207,687 | $ | 342,805 | ||||||
For the nine months ended September 30, 2001, the Company made a $2.2 million provision for loan losses compared to a $716 thousand provision during the nine months ended September 30, 2000.
Allowance for loan losses totaled $4.7 million and $5.4 million at September 30, 2001 and December 31, 2000, respectively. The September 30, 2001 allowance for loan losses as a percent of total impaired loans was 26.64%, compared to 20.18% at December 31, 2000. Impaired loans, as a percent of gross loans was 7.92% at September 30, 2001, compared to 7.96% at December 31, 2000.
The Company's determination of the level of the allowance for loan losses and correspondingly, the provision for loan losses, rests upon various judgments and assumptions, including current economic conditions, loan portfolio composition, prior loan loss experience and industry trends. Given the composition of the Company's loan portfolio, the $4.7 million allowance for loan losses was considered adequate to cover losses inherent in the Company's loan portfolio at September 30, 2001. However, no assurance can be given that the Company will not, in any particular period, sustain loan losses that exceed the amount reserved, or that subsequent evaluation of the loan portfolio, in light of the prevailing factors, including economic conditions which may adversely affect the Company's or the Bank's service area or other circumstances, will not require significant increases in the loan loss allowance. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additional provisions to increase the allowance or take charge-offs in anticipation of future losses.
11
The table below summarizes the activity of the Company's allowance for loan losses for the three and nine months ended September 30, 2001 and 2000 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2001 | 2000 | ||||||||||
Balance, beginning of period | $ | 4,143 | $ | 2,710 | $ | 5,384 | $ | 2,749 | ||||||
Provision for loan losses | 959 | 716 | 2,166 | 716 | ||||||||||
Recoveries | 121 | 12 | 300 | 12 | ||||||||||
Charge-offs | (544 | ) | (112 | ) | (3,171 | ) | (151 | ) | ||||||
Net charge-offs | (423 | ) | (100 | ) | (2,871 | ) | (139 | ) | ||||||
Balance, end of period | $ | 4,679 | $ | 3,326 | $ | 4,679 | $ | 3,326 | ||||||
Composition of Impaired Assets
The table below summarizes the Company's composition of impaired assets as of the dates indicated:
| At September 30, 2001 | At December 31, 2000 | ||||||
---|---|---|---|---|---|---|---|---|
Impaired loans (1): | ||||||||
One to four family | $ | 14,252 | $ | 24,764 | ||||
Multi-family | 66 | 67 | ||||||
Construction | 2,530 | 2,184 | ||||||
Commercial | 686 | — | ||||||
Other loans | 29 | 55 | ||||||
Specific Allowance | (1,493 | ) | (386 | ) | ||||
Total impaired loans | 16,070 | 26,684 | ||||||
REO | 5,579 | 1,683 | ||||||
Participation Contract | 4,429 | — | ||||||
Total impaired assets | $ | 26,078 | $ | 28,367 | ||||
Allowance for loan losses as a percent of gross loans | 2.11 | % | 1.61 | % | ||||
Allowance for loan losses as a percent of total impaired loans | 26.64 | % | 20.18 | % | ||||
Impaired loans as a percent of gross loans receivable | 7.92 | % | 7.96 | % | ||||
Impaired assets as a percent of total assets | 9.60 | % | 6.84 | % |
- (1)
- Impaired loans consisted of all loans 90 days past due and foreclosures in process less than 90 days past due of $1.4 million and $4.5 million at September 30, 2001 and December 31, 2000, respectively. Also included in the September 30, 2001 impaired assets are $2.1 million in construction and commercial loans that are not past due but have been deemed impaired for reasons other than delinquency.
The Bank continues to carry the Participation Contract at $4.4 million, which was the value presented in the December 31, 2000 financial statement. The Bank does not believe there is an active market for this type of asset and has determined the estimated fair value utilizing a cash flow model which determines the present value of the estimated expected cash flows from this contract using a
12
40% discount rate which the Bank believes is commensurate with the risks involved. Additionally, the Bank is not accreting the discount, at this time, due to the significant uncertainty surrounding the asset.
Liabilities and Stockholders' Equity
Total liabilities of the Company decreased from $400.5 million at December 31, 2000 to $261.7 million at September 30, 2001. The decrease was primarily from decreases in deposits and reduced borrowing requirements.
Total Bank deposits at September 30, 2001 was $257.8 million, compared to $345.1 million at December 31, 2000. The 25.30% decrease in deposits from December 31, 2000 is primarily due to decreases in wholesale and broker deposits. The Bank's strategy continues to focus more heavily on increasing retail deposits through the growth of both local consumer and business accounts and to reduce reliance on other borrowings. Previously the Company utilized brokered deposits, but according to the OTS' Prompt Corrective Action guidelines for undercapitalized institutions, the Bank cannot renew existing brokered deposits. At September 30, 2001, all brokered deposits have matured and the accounts have been closed.
There were no other borrowings as of September 30, 2001 compared to $47.1 million at December 31, 2000. The $47.1 million decrease is due to reduced borrowing requirements with the decrease in loans.
13
Results for the quarter and year-to-date ended September 30, 2001 are compared to the quarter and year-to-date ended September 30, 2000 below.
Highlights for the three and nine months ended September 30, 2001 and 2000:
The Company reported a net loss of $2.7 million for the quarter ended September 30, 2001, or $2.05 loss per share, compared with net loss of $11.2 million, or $8.41 loss per share for the quarter ended September 30, 2000. Net loss year-to-date for 2001 is $4.0 million, or $2.99 loss per share, compared to net loss of $11.9 million, or $8.89 loss per share, for the nine months ended September 30, 2000.
The loss of $2.7 million for the quarter ended September 30, 2001 included a $507,000 expense accrual for various potential liabilities and a $970,000 writeoff of the Company's deferred tax asset. For the nine months ended September 30, 2001 the loss of $4.0 million included one-time gain of $871,000 from the sale of investment securities, $102,000 from the sale of servicing rights, and $132,000 from the sale of subprime loans.
For the three and nine months ended September 30, 2001, the Company's noninterest expense decreased in comparison to the three and nine months ended September 30, 2000, by $3.9 million and $9.0 million, respectively. The decrease in noninterest expense is consistent with the reduction in the scale of operations and is a result of efforts by management to gain efficiencies.
The Company's net interest income before provision for credit losses decreased 25.0% to $2.0 million during the three months ended September 30, 2001, compared to $2.7 million for the three months ended September 30, 2000. Additionally, net interest income for the nine months ended September 30, 2001 decreased $4.9 million from September 30, 2000. The decline is primarily due to the decrease in loans outstanding and loan yield. Average loans for the nine months ending September 30, 2001 decreased $179.9 million from the same prior year period. Additionally, the average loan yield was 23 basis points lower during the nine months ended September 30, 2001 as compared to the same period in 2000.
For the three months ending September 30, 2001, the Company's net interest margin was 2.86% as compared to a net interest margin of 2.30% during the same period in 2000. The change in the Company's net interest margin was primarily due to the increase in loan yield of 37 basis points. Average interest bearing deposits cost was 5.14% for the quarter ended September 30, 2001 as compared to 6.06% for the quarter ended September 30, 2000. For the nine months ending September 30, 2001, the Company's net interest margin was 2.64% as compared to a net interest margin of 3.01% during the same period in 2000.
The following table sets forth the Company's average balance sheets (unaudited), and the related weighted average yields and costs on average interest-earning assets and interest-bearing liabilities, for the three months ended September 30, 2001 and 2000.
14
The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are measured on a daily basis. The yields and costs include fees that are considered adjustments to yields.
| Three Months Ended September 30, 2001 | Three Months Ended September 30, 2000 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average Balance | Interest | Average Annualized Yield/Cost | Average Balance | Interest | Average Annualized Yield/Cost | ||||||||||||
(Dollars in thousands) | (unaudited) | (unaudited) | ||||||||||||||||
Assets | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||
Cash and cash equivalents | $ | 14,814 | $ | 152 | 4.10 | % | $ | 1,406 | $ | 54 | 15.36 | % | ||||||
Federal funds sold | 458 | 3 | 2.98 | % | 3,706 | 63 | 6.80 | % | ||||||||||
Investment securities | 36,745 | 487 | 5.30 | % | 52,642 | 804 | 6.12 | % | ||||||||||
Loans receivable | 227,547 | 5,148 | 9.05 | % | 405,962 | 8,810 | 8.68 | % | ||||||||||
Total interest-earning assets | 279,564 | 5,790 | 8.29 | % | 463,716 | 9,731 | 8.40 | % | ||||||||||
Non-interest-earning assets | 19,640 | 48,542 | ||||||||||||||||
Total assets | $ | 299,204 | $ | 512,258 | ||||||||||||||
Liabilities and Equity | ||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||
Interest-bearing deposits | $ | 26,280 | 89 | 1.36 | % | $ | 31,534 | $ | 170 | 2.16 | % | |||||||
Certificate accounts | 237,613 | 3,303 | 5.56 | % | 405,110 | 6,440 | 6.36 | % | ||||||||||
Total interest-bearing deposits | 263,893 | 3,392 | 5.14 | % | 436,644 | 6,610 | 6.06 | % | ||||||||||
Other borrowings | 19,348 | 347 | 7.18 | % | 24,194 | 405 | 6.68 | % | ||||||||||
Subordinated debentures | 1,500 | 53 | 14.01 | % | 1,500 | 53 | 14.01 | % | ||||||||||
Total interest-bearing liabilities | 284,741 | 3,792 | 5.33 | % | 462,338 | 7,068 | 6.12 | % | ||||||||||
Non-interest-bearing liabilities | 2,513 | 17,561 | ||||||||||||||||
Total liabilities | 287,254 | 479,899 | ||||||||||||||||
Equity | 11,950 | 32,359 | ||||||||||||||||
Total liabilities and equity | $ | 299,204 | $ | 512,258 | ||||||||||||||
Net interest income | $ | 1,998 | $ | 2,663 | ||||||||||||||
Net interest rate spread | 2.96 | % | 2.28 | % | ||||||||||||||
Net interest margin | 2.86 | % | 2.30 | % | ||||||||||||||
Ratio of interest-earning assets to interest-bearing liabilities | 98.18 | % | 100.34 | % | ||||||||||||||
The following table sets forth the Company's average balance sheets (unaudited), and the related weighted average yields and costs on average interest-earning assets and interest-bearing liabilities, for the nine months ended September 30, 2001 and 2000.
15
The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are measured on a daily basis. The yields and costs include fees that are considered adjustments to yields.
| Nine Months Ended September 30, 2001 | Nine Months Ended September 30, 2000 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average Balance | Interest | Average Annualized Yield/Cost | Average Balance | Interest | Average Annualized Yield/Cost | |||||||||||||
(Dollars in thousands) | (unaudited) | (unaudited) | |||||||||||||||||
Assets | |||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 25,662 | $ | 945 | 4.91 | % | $ | 2,532 | $ | 223 | 11.74 | % | |||||||
Federal funds sold | 459 | 15 | 4,30 | % | 3,027 | 205 | 9.03 | % | |||||||||||
Investment securities | 24,608 | 1,062 | 5.75 | % | 41,837 | 1,971 | 6.28 | % | |||||||||||
Loans receivable | 261,044 | 17,752 | 9.07 | % | 440,900 | 30,749 | 9.30 | % | |||||||||||
Total interest-earning assets | 311,773 | 19,774 | 8.46 | % | 488,296 | 33,148 | 9.05 | % | |||||||||||
Non-interest-earning assets | 23,346 | 58,595 | |||||||||||||||||
Total assets | $ | 335,119 | $ | 546,891 | |||||||||||||||
Liabilities and Equity | |||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||
Interest-bearing deposits | $ | 26,786 | 301 | 1.50 | % | $ | 31,993 | $ | 524 | 2.18 | % | ||||||||
Certificate accounts | 267,412 | 12,161 | 6.06 | % | 419,803 | 19,282 | 6.12 | % | |||||||||||
Total interest-bearing deposits | 294,198 | 12,462 | 5.65 | % | 451,796 | 19,806 | 5.85 | % | |||||||||||
Other borrowings | 20,715 | 993 | 6.39 | % | 38,668 | 2,164 | 7.46 | % | |||||||||||
Subordinated debentures | 1,500 | 157 | 14.01 | % | 1,500 | 158 | 14.04 | % | |||||||||||
Total interest-bearing liabilities | 316,413 | 13,612 | 5.74 | % | 491,964 | 22,128 | 6.00 | % | |||||||||||
Non-interest-bearing liabilities | 5,602 | 20,756 | |||||||||||||||||
Total liabilities | 322,015 | 512,720 | |||||||||||||||||
Equity | 13,104 | 34,171 | |||||||||||||||||
Total liabilities and equity | $ | 335,119 | $ | 546,891 | |||||||||||||||
Net interest income | $ | 6,162 | $ | 11,020 | |||||||||||||||
Net interest rate spread | 2.72 | % | 3.05 | % | |||||||||||||||
Net interest margin | 2.64 | % | 3.01 | % | |||||||||||||||
Ratio of interest-earning assets To interest-bearing liabilities | 98.53 | % | 99.25 | % | |||||||||||||||
The provision for loan loss was $2.2 million for the nine months ended September 30, 2001 compared to $716 thousand for the nine months ended September 30, 2000. The increase is comprised of $2.2 million increase in charge-offs, the aforementioned $634 thousand mark-to-market adjustment, partially offset by a reduction in the provision for the decrease in loans outstanding. Additionally, the change in provision for loan loss increased the allowance for loan loss as a percentage of gross loans from 1.61% at year ended December 31, 2000 to 2.11% at nine months ended September 30, 2001.
16
Noninterest income was $981,000 and $4.0 million for the three and nine months ended September 30, 2001 compared to $4.4 million loss and $450,000 loss for the three and nine months ended September 30, 2000, respectively. The $4.4 million loss for the three months ended September 30, 2000 was the result of a $5.8 million loss from the sale of subprime loans, a $1.0 million writedown of the participation contract offset by $2.4 million income from loan servicing and mortgage banking fee income. The $981,000 non-interest income for the three months ended September 30, 2001 resulted from a $327,000 gain from the sale of investment securities and $333,000 of loan servicing income plus other noninterest income.
The noninterest loss for the nine months ended September 30, 2000 was the result of $5.9 million loss on the sale of subprime loans, a $1.0 million writedown of the participation contract offset by $5.9 million of income from loan servicing and mortgage banking fee income.
The $4.0 million of noninterest income included $1.6 million of servicing fee income. The $4.2 million decrease in servicing income is primarily the result of the sale of mortgage servicing rights during the first quarter of 2001. The other components of noninterest income were $500,000 of bank and other fee income, $465,000 gain on loan sales, $871,000 gain from the sale of investment securities and $624,000 of other income.
Noninterest expense was $3.8 million for the three months ended September 30, 2001, which was $2.9 million lower than the same period in 2000. The 43.3% decrease is primarily a result of reduced compensation expense of $1.5 million related to reduction in personnel, and a $507,000 provision for the recording of assignments and reconveyances and other potential liabilities, and a $472 thousand decrease in premises and occupancy expense related to the closure of the mortgage banking offices and a retail branch location during 2000. Noninterest expense for the nine months ended September 30, 2001 was $11.1 million compared to $20.1 million for the nine months ended September 30, 2000.
The Company's primary sources of funds are principal and interest payments on loans and deposits. 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 Bank's average liquidity ratios were 16.61% and 10.95% for the quarters ended September 30, 2001 and 2000, respectively.
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) provided by operating activities was ($1.2) million for the nine months ended September 30, 2001, compared to $44.8 million for the nine months ended September 30, 2000. Net cash provided by investing activities was $136.4 million and $34.3 million for the nine months ended September 30, 2001 and 2000, respectively. Cash provided by investing activities during the nine months ended September 30, 2001 was a result of principal collections on loans of $92.2 million, sale of subprime loans of $30.7 million and the decrease in securities held under repurchase agreements of $25 million. Principal collections on loans of $45.7 million offset partially by the net increase in securities of $12.9 million were the primary components of cash provided by investing activities for the nine months ended September 30, 2000. Net cash used in financing activities were $134.4 million and $47.4 million for the nine months ended
17
September 30, 2001 and 2000, respectively. This was due to decreased deposit accounts and Federal Home Loan Bank 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 September 30, 2001, cash and short-term investments totaled $9.3 million. The Company has other sources of liquidity if a need for additional funds arises including the utilization of a line of credit at the Federal Home Loan Bank (FHLB) which is limited to overnight advances with new borrowings requiring FHLB credit committee approval.
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."
Under the Supervisory Agreement, dated September 25, 2000, between the Bank and the OTS, the OTS is requiring the Bank to achieve a minimum individual core capital ratio of 6% and a minimum individual risked-based capital ratio of 11%. In calculating these ratios, the Bank is required to double risk weight all subprime loans and all loans secured by owner-occupied 1-4 family residential property with a loan-to-value (LTV) ratio of 90% or greater unless the loan has appropriate credit support. Appropriate credit support may include mortgage insurance, government guarantee, or readily marketable collateral that reduces the LTV ratio below 90%.
Additionally, the Supervisory Agreement requires the Company to contribute to the Bank's capital $5.2 million. As of September 30, 2001, the capital infusion has not taken place. The Board of Directors has consented to the appointment of a receiver by the OTS. The basis for the consent is the Bank is significantly undercapitalized, is in violation of the Supervisory Agreement dated September 25, 2000, the Bank is in violation of a Prompt Corrective Action Directive dated March 23, 2001, and the OTS considers the Bank to be in an unsafe and unsound condition. Since the Bank has failed to raise the capital, the OTS and the Bank have entered into a Marketing Assistance Agreement and Consent to the Appointment of a Conservator or Receiver as of October 25, 2001. The Bank has requested forbearance from the appointment of a receiver from the OTS pending the proposed acquisition of the Company as described in Item 4 below. The OTS has not responded to the Bank's request.
18
The following table reflects the Bank's capital ratios based on ending assets at September 30, 2001 and the related OTS requirements for adequately capitalized:
Dollars in Thousands
| Actual | To be adequately capitalized under the Prompt Corrective Action Directive: | Individual Minimum Capital required under the Supervisory Agreement | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||
| | | (dollars in thousands) | | | |||||||||||
At September 30, 2001 | ||||||||||||||||
Total Capital (to risk-weighted assets) | $ | 13,954 | 5.59 | % | $ | 19,965 | 8.00 | % | $ | 27,452 | 11.00 | % | ||||
Core Capital (to adjusted tangible assets) | 10,834 | 4.00 | % | 10,836 | 4.00 | % | 16,253 | 6.00 | % | |||||||
Tangible Capital (to tangible assets) | 10,834 | 4.00 | % | N.A. | N.A. | N.A. | N.A. | |||||||||
Tier 1 Capital (to risk-weighted assets) | 13,954 | 4.34 | % | 9,982 | 4.00 | % | N.A. | N.A. |
- a)
- As of September 30, 2001, the Bank did not meet the capital ratios required to be considered adequately capitalized.
- b)
- The percentages and ratios to be "well-capitalized" under prompt and corrective action provisions as issued by the OTS are 5.0% core capital, 10.0% risk-based capital, 6.0% Tier 1 risk-based capital and 2.0% tangible capital.
As of September 30, 2001, the Bank had outstanding commitments to originate or purchase mortgage loans of $939,000 compared to $1.4 million as of December 31, 2000. Other than commitments to originate or purchase mortgage loans, there were no material changes to the Company's commitments or contingent liabilities as of September 30, 2001 compared to the period ended December 31, 2000 as discussed in the notes to the audited consolidated financial statements of LIFE Financial Corporation for the year ended December 31, 2000 included in the Company's Annual Report on Form 10K.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Management of Interest Rate Risk
The principal objective of the Company's interest rate risk management function is to evaluate the interest rate risk included in certain balance sheet accounts, determine the level of appropriate risk given the Company's business focus, operating environment, capital and liquidity requirements and performance objectives and manage the risk consistent with Board approved guidelines through the establishment of prudent asset concentration guidelines. Pursuant to the guidelines, management of the Company seeks to reduce the vulnerability of the Company's operations to changes in interest rates. Management of the Company monitors its interest rate risk as such risk relates to its operating strategies. The Company's Board of Directors reviews on a quarterly basis the Company's asset/liability position. The extent of movement in interest rates, higher or lower, is an uncertainty that could have a negative impact on the earnings of the Company. There has not been a significant change in the Company's interest rate risk during the nine months ending September 30, 2001.
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.
19
The Company has entered into an agreement in principle with Vineyard National Bancorp (Vineyard) to acquire Life Financial Corporation through the exchange of Life Financial shares for newly issued Vineyard shares. The transaction is subject to Board of Director, shareholder and regulatory approval, the receipt of fairness opinions from independent financial advisors, and the execution of a definitive agreement. In the event the transaction with Vineyard is not executed, the Board of Directors has consented to the appointment of a receiver by the OTS. The basis for the consent is the Bank is significantly undercapitalized, is in violation of the Supervisory Agreement dated September 25, 2000, the Bank is in violation of a Prompt Corrective Action Directive dated March 23, 2001, and the OTS considers the Bank to be in an unsafe and unsound condition.
There were no material legal proceeding developments during the three-month period ended September 30, 2001.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
- (a)
- Reports on Form 8K
20
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LIFE FINANCIAL CORPORATION | |||
November 14, 2001 Date | By: | /s/ STEVEN R. GARDNER Steven R. Gardner President and Chief Executive Officer (principal executive officer) | |
November 14, 2001 Date | By: | /s/ ROY L. PAINTER Roy L. Painter Senior Vice President and Chief Financial Officer (principal financial and accounting officer) |
21
APPLICABLE ONLY TO CORPORATE ISSUERS
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES FORM 10-Q INDEX FOR THE QUARTER ENDED SEPTEMBER 30, 2001
Item 1. Financial Statements.
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands)
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) (UNAUDITED)
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS (Dollars in thousands) (UNAUDITED)
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Dollars in thousands)
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (UNAUDITED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
- FORWARD-LOOKING STATEMENTS
GENERAL
FINANCIAL CONDITION
Investment Securities
Loans
Allowance for Loan Losses
Composition of Impaired Assets
Participation Contract
Liabilities and Stockholders' Equity
- Highlights for the three and nine months ended September 30, 2001 and 2000
Net Interest Income
Provision for Loan Losses
Noninterest Income (loss)
Noninterest Expense
CAPITAL RESOURCES
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Subsequent Events
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES