UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-24744
Life Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Virginia 54-1711207
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
109 East Main Street
Norfolk, Virginia 23510
(Address of principal executive office) (Zip Code)
(757) 858-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock (par value $.01 per share) 9,846,881
(Title of Class) (Number of Shares Outstanding
as of August 8, 1997)
LIFE BANCORP, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION.......................................................................................1
Item 1. Financial Statements......................................................................................1
Unaudited Consolidated Balance Sheets...........................................................................1
Unaudited Consolidated Statements of Operations - Three Months..................................................2
Unaudited Consolidated Statements of Operations - Year to Date..................................................3
Unaudited Consolidated Statement of Changes in Stockholders' Equity.............................................4
Unaudited Consolidated Statements of Cash Flows.................................................................5
Notes to Unaudited Consolidated Financial Statements............................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................7
General.........................................................................................................7
Financial Condition.............................................................................................7
Assets.......................................................................................................7
Liabilities and Stockholders' Equity.........................................................................7
Asset Quality................................................................................................8
Results of Operations..........................................................................................13
Comparison of Results of Operations for the Three Months Ended June 30, 1997 and 1996.......................13
Comparison of Results of Operations for the Six Months Ended June 30, 1997 and 1996.........................15
Impact of New Accounting Standards.............................................................................17
Liquidity and Capital Resources................................................................................17
PART II - OTHER INFORMATION.........................................................................................18
Item 1. Legal Proceedings........................................................................................18
Item 2. Changes in Securities....................................................................................18
Item 3. Defaults Upon Senior Securities..........................................................................18
Item 4. Submission of Matters to a Vote of Security Holders......................................................18
Item 5. Other Information........................................................................................18
Item 6. Exhibits and Reports on Form 8-K.........................................................................18
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LIFE BANCORP, INC.
Unaudited Consolidated Balance Sheets
(In thousands, except stock data)
June 30, 1997 December 31, 1996
Assets
Cash and cash equivalents.............................................. $ 8,714 $ 11,283
Investment securities, available-for-sale.............................. 30,331 30,742
Mortgage-backed securities:
Held-to-maturity (Market value of $127,593 and
$141,269, respectively)............................................ 127,254 140,974
Available-for-sale................................................... 621,292 565,086
Loans receivable, net.................................................. 648,922 622,405
Accrued interest and dividends receivable.............................. 11,820 10,824
Real estate owned, net................................................. 773 1,202
Federal Home Loan Bank stock, at cost.................................. 15,044 13,086
Premises and equipment, net............................................ 17,326 17,468
Excess of cost over net assets acquired................................ 4,502 4,792
Other assets........................................................... 2,279 1,900
---------- ----------
Total assets................................................... $1,488,257 $1,419,762
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits............................................................. $ 738,427 $ 732,322
Notes payable and other borrowings:
Advances from Federal Home Loan Bank of Atlanta.................... 299,528 261,711
Securities sold under agreements to repurchase..................... 275,500 259,000
Secured note due to Thrift Financing Corporation................... 4,657 5,227
Advances from borrowers for taxes and insurance...................... 1,337 1,795
Other liabilities.................................................... 11,825 8,769
----------- ----------
Total liabilities.............................................. 1,331,274 1,268,824
----------- -----------
Stockholders' Equity:
Preferred stock of $0.01 par value, authorized 5,000,000
shares, none issued or outstanding................................. -- --
Common stock of $0.01 par value, authorized 30,000,000 shares,
issued and outstanding 9,846,881 and 9,846,840 shares, respectively 98 98
Additional paid-in capital........................................... 92,681 92,122
Retained earnings, substantially restricted.......................... 68,395 63,871
Unearned common stock held by ESOP and RRP trusts.................... (7,042) (7,121)
Unrealized gain on securities (net of taxes)......................... 2,851 1,968
----------- ----------
Total stockholders' equity..................................... 156,983 150,938
----------- ----------
Total liabilities and stockholders' equity..................... $1,488,257 $1,419,762
=========== ==========
See Notes to Unaudited Consolidated Financial Statements
1
LIFE BANCORP, INC.
Unaudited Consolidated Statements of Operations - Three Months
(In thousands, except per share data)
For the Three Months
Ended June 30,
---------------------------
1997 1996
------- --------
Interest income:
Interest on loans............................................... $13,808 $11,984
Interest on investment securities............................... 639 745
Interest on mortgage-backed securities.......................... 12,064 10,056
-------- --------
Total interest income..................................... 26,511 22,785
-------- --------
Interest expense:
Interest on deposits............................................ 9,462 8,849
Interest on notes payable and other borrowings.................. 7,682 5,421
-------- -------
Total interest expense.................................... 17,144 14,270
-------- -------
Net interest income....................................... 9,367 8,515
Provision for loan losses......................................... (235) (38)
-------- -------
Net interest income after provision for loan losses....... 9,602 8,553
-------- -------
Noninterest income:
Deposit account fees and related income......................... 122 161
Servicing fees.................................................. 131 145
Net gain on sales of mortgage loans held for sale............... 26 --
Net gain (loss) on sales of real estate owned................... (10) 70
Net gain (loss) on sales of assets.............................. (1) 9
Net gain on sale of mortgage backed securities.................. -- --
Other........................................................... 504 458
Total noninterest income.................................. 772 843
-------- -------
Noninterest expense:
Compensation and employee benefits.............................. 2,960 2,757
Occupancy and office operations................................. 883 778
FDIC Premium.................................................... 119 396
Advertising and promotion....................................... 155 226
Provision for losses on real estate owned....................... 83 --
Amortization of excess of cost over net assets
of companies acquired......................................... 162 151
Other........................................................... 416 642
-------- -------
Total noninterest expense................................. 4,778 4,950
-------- -------
Income before income taxes........................................ 5,596 4,446
Income tax provision.............................................. 2,395 1,755
-------- -------
Net income........................................................ $ 3,201 $ 2,691
======= =======
Net income per common and common equivalent share:
Primary................................................... $0.34 $0.28
======= =======
Fully diluted............................................. $0.33 $0.28
======= =======
Dividends paid per common share................................... $0.12 $0.11
======= =======
See Notes to Unaudited Consolidated Financial Statements
2
LIFE BANCORP, INC.
Unaudited Consolidated Statements of Operations - Year to Date
(In thousands, except per share data)
For the Six Months
Ended June 30,
------------------------
1997 1996
------- -------
Interest income:
Interest on loans............................................... $27,081 $23,213
Interest on investment securities............................... 1,311 1,468
Interest on mortgage-backed securities.......................... 23,576 19,790
-------- --------
Total interest income..................................... 51,968 44,471
-------- --------
Interest expense:
Interest on deposits............................................ 18,674 17,081
Interest on notes payable and other borrowings.................. 14,896 10,638
-------- --------
Total interest expense.................................... 33,570 27,719
-------- --------
Net interest income....................................... 18,398 16,752
Provision for loan losses......................................... 35 (4)
-------- --------
Net interest income after provision for loan losses....... 18,363 16,756
-------- --------
Noninterest income:
Deposit account fees and related income......................... 261 302
Servicing fees.................................................. 264 296
Net gain on sales of mortgage loans held for sale............... 43 6
Net gain (loss) on sales of real estate owned................... (43) 77
Net gain on sales of assets..................................... 33 12
Net gain on sale of mortgage backed securities.................. 986 --
Other........................................................... 1,007 849
-------- --------
Total noninterest income.................................. 2,551 1,542
-------- --------
Noninterest expense:
Compensation and employee benefits.............................. 5,829 5,481
Occupancy and office operations................................. 1,718 1,515
FDIC Premium.................................................... 146 773
Advertising and promotion....................................... 342 365
Provision for losses on real estate owned....................... 83 --
Amortization of excess of cost over net assets
of companies acquired......................................... 312 258
Other........................................................... 937 1,063
-------- --------
Total noninterest expense................................. 9,367 9,455
-------- --------
Income before income taxes........................................ 11,547 8,843
Income tax provision.............................................. 4,890 3,565
-------- --------
Net income........................................................ $ 6,657 $ 5,278
======== =========
Net income per common and common equivalent share:
Primary................................................... $0.70 $0.53
======== =========
Fully diluted............................................. $0.69 $0.53
======== =========
Dividends paid per common share................................... $0.23 $0.22
======== =========
See Notes to Unaudited Consolidated Financial Statements
3
LIFE BANCORP, INC.
Unaudited Consolidated Statement of Changes in Stockholders' Equity
(In thousands)
Unearned
Common Unrealized
Stock Gain
Held on Securities
Additional by ESOP Available
Common Paid-in Retained and RRP for Sale
Stock Capital Earnings Trusts (Net of Tax) Total Equity
-------- ----------- ----------- ---------- ------------- ------------
Balance at December 31, 1996........ $ 98 $92,122 $63,871 $(7,121) $ 1,968 $150,938
Net income.......................... -- -- 6,657 -- -- 6,657
Cash dividends paid................. -- -- (2,133) -- -- (2,133)
Common Stock released by
ESOP trust........................ -- 711 -- 663 -- 1,374
Common Stock purchased for
RRP trust......................... -- (153) -- (584) -- (737)
Common Stock
options Exercised................... -- 1 -- -- -- 1
Unrealized gain on
securities, net of tax............ -- -- -- -- 883 883
---- ---- ---- ----- -------- --------
Balance at June 30, 1997............ $ 98 $92,681 $68,395 $(7,042) $ 2,851 $156,983
==== ======= ======= ======= ========== ========
See Notes to Unaudited Consolidated Financial Statements
4
LIFE BANCORP, INC.
Unaudited Consolidated Statements of Cash Flows
(In thousands)
For the Six Months
Ended June 30,
1997 1996
------ ------
Cash flows from operating activities:
Net Income............................................................................ $ 6,657 $ 5,278
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for losses on loans and real estate owned............................ 118 (4)
Depreciation and amortization.................................................. 372 286
Net amortization of premiums and discounts on investments and mortgage
backed securities........................................................... (9) (19)
Amortization of excess of cost over net assets acquired........................ 312 258
Net (gain) loss on sales of real estate owned.................................. 43 (77)
Net gain on sales of mortgage loans............................................ (44) (6)
Net gain on sales of assets.................................................... (34) (5)
Net gain on sales of mortgage backed securities................................ (986) --
Loans originated for resale........................................................... (3,892) (335)
Proceeds from loans sold to others.................................................... 3,936 340
Noncash ESOP Expenses................................................................. 1,373 530
Changes in assets and liabilities:
(Increase) decrease in assets:
Accrued interest receivable.................................................... (1,128) (812)
Deferred loan fees............................................................. 23 (839)
Deferred income taxes.......................................................... -- (965)
Other assets................................................................... 824 (2,279)
Increase (decrease) in liabilities:
Deferred income taxes.......................................................... 524 --
Accrued expenses and other liabilities......................................... 2,697 3,668
------ -------
Net cash provided by (used in) operating activities.................... 10,786 5,019
------ -------
Cash flows from investing activities:
Proceeds from sales and maturities of investments and mortgage-backed securities...... 64,998 8,000
Purchase of investment securities..................................................... -- (19,425)
Principal collected on loans.......................................................... 58,188 32,162
Loans originated for investment....................................................... (85,331) (71,838)
Proceeds from sale of premises and equipment.......................................... 42 5
Purchases of premises and equipment................................................... (145) (594)
Purchase of Seaboard Bancorp, Inc., net of cash acquired.............................. -- (6,074)
Purchases of mortgage-backed securities............................................... (186,688) (86,751)
Principal collected on mortgage-backed securities..................................... 79,102 67,378
Proceeds from sale of real estate owned............................................... 704 506
Principal collected on ESOP loan...................................................... 636 628
(Purchases) redemption of FHLB stock.................................................. (1,958) 351
------- -------
Net cash provided by (used in) investing activities.................... (70,452) (75,652)
-------- -------
Cash flows from financing activities:
Net increase in checking deposits, savings deposits, and
certificates of deposit............................................................ 6,106 34,853
Net decrease in advances from borrowers for taxes and insurance....................... (457) (494)
Dividends paid on common stock........................................................ (2,265) (2,338)
Repurchase of common stock............................................................ -- (11,621)
Purchase of common stock held for RRP................................................. (604) (2,694)
Proceeds from notes payable and other borrowings...................................... 842,973 322,697
Repayment of notes payable and other borrowings....................................... (788,656) (267,181)
-------- --------
Net cash provided by (used in) financing activities.................... 57,097 73,222
-------- --------
Net increase (decrease) in cash and cash equivalents.......................................... (2,569) 2,589
Cash and cash equivalents at beginning of period.............................................. 11,283 8,845
-------- -------
Cash and cash equivalents at end of period.................................................... $ 8,714 $ 11,434
======== ========
See Notes to Unaudited Consolidated Financial Statements
5
LIFE BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions to Form 10-Q, and, therefore,
do not include all of the disclosures or footnotes necessary for a
complete presentation of financial position, results of operations and
cash flows in conformity with generally accepted accounting principles.
However, all normal, recurring adjustments, which, in the opinion of
management, are necessary for a fair presentation of the financial
statements, have been included. The results of operations for the three
and six months ended June 30, 1997, are not necessarily indicative of
the results that may be expected for the entire year or for any interim
period.
Principles of Consolidation
The consolidated financial statements include the accounts of Life
Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Life
Savings Bank, FSB (the "Bank"). All significant intercompany
transactions have been eliminated in consolidation. Additionally,
certain reclassifications may have been made in order to conform with
the current presentation. The accompanying consolidated financial
statements have been prepared on the accrual basis.
2. Net Income Per Share
For the purpose of calculating net income per common and common
equivalent share for each of the quarterly periods presented, the
Company used the respective numbers of weighted-average outstanding
shares shown below (in thousands):
For the Three Months Ended
June 30, 1997 June 30, 1996
For primary net income per share......... 9,535 9,664
For fully diluted net income per share... 9,684 9,664
For the Six Months Ended
June 30, 1997 June 30, 1996
For primary net income per share......... 9,499 9,975
For fully diluted net income per share... 9,665 9,975
The dilutive securities included in the calculations above consist
entirely of common equivalent shares in the form of common shares
contingently issuable under the Company's Stock Option Plan and
Recognition and Retention Plan.
3. Subsequent Events
On July 21, 1997, the Board of Directors approved a quarterly dividend
of $0.12 per share. The dividend will be payable on August 29, 1997, to
Life Bancorp's stockholders of record at the close of business on August
15, 1997.
6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The Company's principal business is conducted through the Bank from its
headquarters located in Norfolk, Virginia and 20 full-service retail banking
offices located in the cities of Norfolk, Chesapeake, Portsmouth, Suffolk, and
Virginia Beach, Virginia. The Bank's deposits are insured by the Savings
Association Insurance Fund ("SAIF") to the maximum extent permitted by law. The
Bank is subject to examination and comprehensive regulation by the Office of
Thrift Supervision ("OTS"), which is the Bank's chartering authority and primary
regulator. The Bank is also subject to regulation by the Federal Deposit
Insurance Corporation ("FDIC"), as the administrator of the SAIF, and to certain
reserve requirements established by the Federal Reserve Board ("FRB"). The Bank
is a member of the Federal Home Loan Bank ("FHLB") of Atlanta.
Financial Condition
Assets
Total assets of the Company remained relatively unchanged during the
quarter, totaling $1.4 billion at December 31, 1996 and $1.5 billion at June 30,
1997.
Loans receivable increased by $26.5 million, or 4.3%, from $622.4
million at December 31, 1996, to $648.9 million at June 30, 1997. The Bank had
no mortgage loans held-for-sale at either December 31, 1996 or June 30, 1997.
Investment securities, available-for-sale, remained relatively
unchanged, totaling $30.7 million at December 31, 1996, and $30.3 million at
June 30, 1997.
Mortgage-backed securities increased $42.5 million, or 6.0%, from $706.1
million at December 31, 1996, to $748.5 million at June 30, 1997, reflecting the
continuing emphases by the Bank on investing in mortgage-backed securities as
part of its asset liability management strategy.
The increases in assets were mostly funded by increases in deposits and
repurchase agreements and to a lesser extent by a decrease in cash and cash
equivalents, from $11.3 million at December 31, 1996, to $8.7 million at June
30, 1997.
Liabilities and Stockholders' Equity
Deposits increased from $732.3 million at December 31, 1996 to $738.4
million at June 30, 1997. Advances from the Federal Home Loan Bank of Atlanta
increased by $37.8 million, or 14.4%, from $261.7 million at December 31, 1996
to $299.5 million at June 30, 1997. Repurchase agreements increased by $16.5
million, or 6.4%, from $259.0 million at December 31, 1996 to $275.5 million at
June 30, 1997.
Stockholders' equity increased from $150.9 million at December 31, 1996
to $157.0 million at June 30, 1997. This increase was primarily due to the
results of the Company's net income of $6.7 million for the six months coupled
with a $900,000 increase in unrealized gains, net of taxes, as a result of the
Statement of Financial Accounting Standards ("SFAS") No. 115 required market
valuation of the Company's securities portfolio; which was partially offset by
quarterly cash dividends totaling $2.1 million, or $0.11 per share, paid on
February 28, 1997, to stockholders of record on
7
February 14, 1997, and $0.12 per share, paid on May 31, 1997 to shareholders of
record on May 16, 1997.
Asset Quality
General. When a borrower fails to make a required payment on a loan,
the Bank attempts to cure the deficiency by contacting the borrower and seeking
payment. Contacts are generally made 15 days after a payment is due. In most
cases, deficiencies are cured promptly. If a delinquency continues, late charges
are assessed and additional efforts are made to collect the loan. While the Bank
prefers to work with borrowers to resolve such problems, when the account
becomes 90 days delinquent, the Bank generally pursues foreclosure or other
proceedings, as necessary, to minimize any potential loss.
Impaired Loans. The Company has adopted SFAS No. 114, as amended by
SFAS 118. SFAS No. 114, as amended, provides that a loan is impaired when, based
on current information and events, it is probable that the creditor will be
unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement. SFAS No. 114, as amended, requires that
impaired loans be measured based on the present value of the expected future
cash flows, discounted at the loan's effective interest rate. The effective
interest rate of a loan is defined as the contractual interest rate adjusted for
any net deferred loan fees or costs, premiums or discounts existing at the
inception or acquisition of the loan. If the loan is collateral dependent, as a
practical expedient, impairment can be based on a loan's observable market price
or the fair value of the collateral. The value of the loan is adjusted through a
valuation allowance created through a charge against income. Residential
mortgages, consumer installment obligations and credit cards may be excluded.
Loans that were treated as in-substance foreclosures under previous accounting
pronouncements are considered to be impaired loans and under SFAS No. 114 will
remain in the loan portfolio.
A loan may be placed on non-accrual status and not classified as an
impaired loan when, in the opinion of management, based on current information
and events, it is probable that the Bank will eventually collect all principal
and interest amounts due according to the contractual terms of the loan
agreement. Interest income for impaired loans is generally recognized on an
accrual basis unless it is deemed inappropriate to do so. In those cases in
which the receipt of interest payments is deemed more uncertain, the cash basis
of income recognition is utilized. Loans are placed on a non-accrual status
when, in the judgment of management, the probability of timely collection of
interest is deemed to be insufficient to warrant further accrual. As a matter of
policy, the Bank does not accrue interest on loans past due 90 days or more
except when the estimated value of the collateral and collection efforts are
deemed sufficient to ensure full recovery. When a loan is placed on a
non-accrual status, previously accrued but unpaid interest is deducted from
interest income.
8
The following table sets forth information relating to the Bank's
recorded investment in impaired loans at or during the periods indicated.
Specific reserves have not been netted against loan balances.
Three Months Ended Year Ended
June 30, March 31, December 31,
1997 1997 1996
(Dollars in thousands)
Impaired loans for which there is a related allowance for
credit losses $8,141 $8,996 $9,022
Impaired loans for which there is no related allowance for
credit losses -- -- --
Total impaired loans $8,141 $8,996 $9,022
====== ====== ======
Allowance for credit losses on impaired loans $3,745 $3,907 $ 3,500
====== ====== =======
Average impaired loans during the period $8,507 $9,006 $9,659
====== ====== ======
Interest income recognized on impaired loans during
the time within the period that the loans were impaired
$ 114 $ 87 $ 506
======= ======= ========
Interest income recognized on impaired loans using a
cash-basis method of accounting during the time
within the period that the loans were impaired $ 114 $ 87 $ 506
======= ======= ========
Troubled Debt Restructurings. Under Generally Accepted Accounting
Principles, the Bank is required to account for certain loan modifications or
restructurings as "troubled debt restructurings." In general, the modification
or restructuring of a debt constitutes a troubled debt restructuring if the
Bank, for economic or legal reasons related to the borrower's financial
difficulties, grants a concession to the borrower that the Bank would not
otherwise consider under current market conditions. Debt restructurings or loan
modifications for a borrower do not necessarily always constitute troubled debt
restructurings however, and troubled debt restructurings do not necessarily
result in non-accrual loans. The Bank had $1.6 million of troubled debt
restructurings, net of specific reserves, at June 30, 1997. Included in the
Bank's troubled debt restructurings at June 30, 1997, is an office warehouse
complex with a carrying value of $1.1 million net of specific reserves. At June
30, 1997, this loan was classified substandard and was current. The remaining
$500,000 of troubled debt restructuring at June 30, 1997, consisted of loans
secured by multi-family and commercial properties located in Virginia Beach and
Norfolk.
9
Non-Performing Assets. The following table sets forth information
relating to the Bank's non-performing assets and troubled debt restructurings
at the dates indicated.
June 30, 1997 December 31, 1996
(Dollars in Thousands)
Non-performing assets:
Non-accruing loans:
Mortgage loans:
Single-family:
Conventional........................... $1,433 $ 1,498
FHA/VA................................. 879 698
Multi-family............................. 257 --
Commercial............................... 409 46
Consumer loans............................. 554 308
------ -------
Total non-accruing loans..................... 3,532 2,550
Real estate owned, net (1)................... 773 1,202
------ -------
Total non-performing assets.................... 4,305 3,752
Troubled debt restructurings, net (2).......... 1,551 2,464
------ -------
Total non-performing assets and troubled debt
restructurings................................. $5,856 $6,216
======= =======
Non-accruing loans to total loans held for
investment..................................... 0.54% 0.41%
======== ========
Total non-performing assets to total assets.... 0.29% 0.26%
======== ========
Total non-performing assets and troubled debt
restructurings to total assets................. 0.39% 0.44%
======== ========
(1) Amounts are net of the allowance for real estate owned which
amounted to $20,000 at June 30, 1997 and $30,000 December 31, 1996.
(2) Amounts are net of specific valuation allowance which totaled $3.7
million at June 30, 1997 and $3.7 million December 31, 1996.
The Bank's real estate owned at June 30, 1997 consisted of 18
properties. During the first six months of 1997, the Bank sold six single family
residences, one lot and two multi-family residences previously acquired in
foreclosure for a combined sale price of $485,000. After satisfying deductions
for valuation allowances, repairs, holding costs and settlement expenses, the
Bank realized a loss on the sale of these properties of approximately $43,000.
10
Potential Problem Loans. In addition to the loans included in the
preceding impaired loans and non-performing assets and troubled debt
restructurings tables, at June 30, 1997, the Bank had loans totaling $8.9
million which, even though they were not impaired or categorized as
non-performing assets or troubled debt restructurings, were designated as
substandard or special mention.
At June 30, 1997, there were eight performing loans to five borrowers,
totaling $5.5 million, which the Bank had designated as substandard. One such
loan, a performing construction loan, is secured by a retirement facility under
construction in Virginia Beach. In August 1996, the partially constructed
building was substantially destroyed by fire and the Bank classified the loan as
substandard. At the time of the fire, construction loan disbursements totaled
$3.3 million. At June 30, 1997, the loan was current as the borrower continues
to fund interest payments. Of the remaining seven loans, two loans, totaling
$1.5 million, are secured by commercial properties located in Norfolk, Virginia;
three loans, totaling $548,000, are secured by commercial properties in Virginia
Beach, Virginia; and two loans, totaling $200,000, are secured by various
multi-family properties and developed lots in Norfolk, Virginia. At this time,
the Bank does not anticipate losses on any of these loans.
Additionally, at June 30, 1997, there were two performing loans to one
borrower, totaling $3.4 million, which the Bank had designated as special
mention. These loans are secured by a multi-family dwelling unit and duplexes in
Virginia Beach, Virginia.
Allowance for Loan Losses. The Bank's policy is to establish reserves
for estimated losses on loans when it determines that losses may be incurred on
such loans. The allowance for losses on loans is maintained at a level believed
adequate by management to absorb potential losses in the portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio; past loss experience; current economic conditions; volume, growth and
composition of the portfolio; and other relevant factors. The allowance is
increased by provisions for loan losses, which are charged against income.
11
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
(Dollars in thousands)
Allowance at beginning of period $9,992 $9,545 $9,656 $4,438
Addition to allowance from acquisition
of Seaboard Savings -- -- -- 5,192
Provision for loan losses (235) (38) 35 (4)
Charge-offs:
Mortgage loans:
Single-family (87) (27) (87) (117)
Multi-family (160) -- (160) --
Construction -- -- -- --
Commercial -- -- -- --
Residential lots -- -- -- --
Consumer loans (238) (142) (355) (192)
------- ------ ----- ----
Total charge-offs (485) (169) (602) (309)
Other charge offs -- -- -- --
Recoveries:
Mortgage loans:
Single-family 3 1 30 2
Multi-family -- -- -- --
Construction -- -- -- --
Commercial 16 150 16 155
Consumer loans 30 16 49 31
------- ------ ----- ----
Total recoveries 49 167 95 188
Other recoveries 425 -- 562 --
-------
Allowance at end of period $9,746 $9,505 $9,746 $9,505
====== ====== ====== ======
Allowance for loan losses to total non-
accruing loans at end of period 275.93% 537.92% 275.93% 537.92%
====== ====== ====== ======
Allowance for loan losses to total
impaired loans at end of period 119.72% 111.33% 119.72% 111.33%
====== ====== ====== ======
Allowance for loan losses to total loans
held for investment at end of period 1.50% 1.67% 1.50% 1.67%
====== ====== ====== ======
Based on facts and circumstances currently available, the Bank presently
believes that the allowance for loan losses was adequate at June 30, 1997.
However, there can be no assurances that additions to such allowance will not be
necessary in future periods, in which case the Company's results of operations
would be adversely affected.
12
Results of Operations
Comparison of Results of Operations for the Three Months
Ended June 30, 1997 and 1996
General. The Company reported net income of approximately $3.2 million
and $2.7 million for the three months ended June 30, 1997 and 1996,
respectively. The $510,000 increase in net income for the three months ended
June 30, 1997, compared to the corresponding period in 1996, was due primarily
to a $852,000, or 10.0%, increase in net interest income; an increase in the
negative loan loss provision of $197,000; and a decrease in noninterest expenses
of $172,000, or 3.5%. These increases were partially offset by a $640,000, or
36.5%, increase in provision for income taxes.
Net Interest Income. Net interest income increased by $852,000, or
10.0%, in the three months ended June 30, 1997, to $9.4 million, compared to
$8.5 million during the same period in 1996. The reason for such increase was a
$3.7 million improvement in interest income, mainly due to an increase in
average interest-earning assets of $221.4 million, or 18.9%, to $1.4 billion for
the three months ended June 30, 1997. The additional interest-earning assets
primarily resulted from increases in mortgage-backed securities and internal
growth in the Bank's loan portfolio. Interest on loans increased $1.8 million,
or 15.2%, as a result of a $103.2 million, or 18.7%, increase in the average
balance of the loan portfolio partially offset by a 26 basis point (100 basis
points being equal to 1%) decrease in the average yield earned thereon. Interest
income on mortgage-backed securities increased $2.0 million as a result of a
$126.7 million, or 22.0%, increase in the average balance of the mortgage-backed
securities portfolio partially offset by an 11 basis point decrease in the
average yield earned thereon. The improvement in interest income was partially
offset by a $2.9 million increase in interest expense mainly as a result of an
increase of $225.9 million in average interest-bearing liabilities. Interest on
deposits increased $613,000, or 6.9%, as a result of an increase in the average
balance of deposits of $42.8 million, or 6.2%, together with an increase in the
cost of deposits from 5.10% to 5.14%. Interest expense on borrowings increased
by $2.3 million, or 41.7%, as a result of an increase in the average balance of
$183.1 million, or 50.8%, partially offset by a decrease in the average rate
paid on borrowings from 6.02% to 5.65%. The Bank's average interest rate spread
and net interest margin amounted to 2.24% and 2.69%, respectively, during the
three months ended June 30, 1997, compared to 2.34% and 2.91% for the comparable
period in 1996.
Provision for Loan Losses. The negative provision for loan losses
amounted to $235,000 for the three months ended June 30, 1997, compared to a
negative provision of $38,000 during the three months ended June 30, 1996. For
additional discussion of the Bank's loan loss policy, see "Financial Condition -
Asset Quality Allowance for Loan Losses."
13
Yields Earned and Rates Paid. The following table sets forth, for the
periods indicated, information regarding (i) the total dollar amount of interest
income of the Company from interest-earning assets and the resultant average
yields; (ii) the total dollar amount of interest expense on interest-bearing
liabilities and the resultant average rate; (iii) net interest income; (iv)
interest-rate spread; and (v) net interest margin. Average balances are
determined on an average daily balance basis.
Three Months Ended June 30,
1997 1996
Yield/Cost Average Average
at June 30, Average Yield/ Average Yield/
1997 Balance Interest Cost (1) Balance Interest Cost (1)
(Dollars in Thousands)
Interest-earning assets:
Loans receivable:
Mortgage loans........... 8.04% $ 572,001 $11,854 8.29% $ 483,909 $ 10,496 8.68%
Consumer loans........... 10.67% 81,536 1,954 9.59% 66,459 1,488 8.96%
---------- ------- ------ -----
Total loans................ 8.37% 653,537 13,808 8.45% 550,368 11,984 8.71%
Mortgage-backed securities. 7.18% 703,939 12,064 6.86% 577,191 10,056 6.97%
Investment securities...... 6.81% 29,962 539 7.18% 37,097 640 6.90%
Other earning assets......... 5.47% 7,792 100 5.13% 9,145 105 4.59%
---------- ------ --------- --------
Total interest-earning assets 7.70% 1,395,230 26,511 7.60% 1,173,801 22,785 7.76%
------ --------
Noninterest-earning assets. 54,466 51,895
---------- --------
Total assets........... $1,449,696 $1,225,696
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits.......... 3.37% $103,424 873 3.38% $ 44,266 315 2.85%
Passbook savings......... 3.29% 52,364 426 3.25% 47,316 372 3.14%
Certificates............. 5.65% 580,420 8,163 5.63% 601,827 8,162 5.42%
-------- ----- ---------- --------
Total deposits............. 5.16% 736,208 9,462 5.14% 693,409 8,849 5.10%
Borrowings................. 5.72% 543,497 7,682 5.65% 360,355 5,421 6.02%
---------- ----- ---------- -------
Total interest-bearing
liabilities............ 5.41% 1,279,705 17,144 5.36% 1,053,764 14,270 5.42%
------ --------
Noninterest-bearing liabilities 18,747 19,346
----------- ----------
Total liabilities...... 1,298,452 1,073,110
Stockholders' equity....... 151,244 152,586
----------- ----------
Total liabilities and
stockholders' equity... $1,449,696 $1,225,696
========== ==========
Net interest-earning assets $ 115,525 $ 120,037
========== ==========
Net interest income and
interest-rate spread..... 2.29% $ 9,367 2.24% $ 8,515 2.34%
======= =======
Net interest margin........ 2.69% 2.91%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.09x 1.11x
(1) Annualized
Noninterest Income. Noninterest income for the quarter ended June 30,
1997, was $772,000, relatively unchanged compared to $843,000 in the comparable
three months of 1996.
Noninterest Expense. Noninterest expenses were also relatively unchanged
during the quarter, but decreased by $172,000. Deposit insurance premiums
decreased $277,000, which was offset by (i) the added expense recognition in the
Company's Employee Stock Ownership Plan ("ESOP") due to the increased market
price of the Company's stock, and (ii) the costs associated with the
installation and operation of the Bank's new computer system.
14
Income Tax Provision. The provision for income taxes increased by
$640,000 due to both an increase in the provision rate and the level of pre-tax
income. The income tax provision rate increased from 39.5% of income before
taxes, for the second quarter of 1996, to 42.8%, for the second quarter of 1997,
due to additional taxable income in higher income tax brackets for 1997.
Comparison of Results of Operations for the
Six Months Ended June 30, 1997 and 1996
General. The Company reported net income of approximately $6.7 million
and $5.3 million for the six months ended June 30, 1997 and 1996, respectively.
The $1.4 million increase in net income for the six months ended June 30, 1997,
compared to the corresponding period in 1996, was due primarily to a $1.6
million, or 9.8%, increase in net interest income, and a $1.0 million, or 65.4%
increase in noninterest income; which was partially offset by an increase in the
provision for income taxes of $1.3 million, or 37.2%.
Net Interest Income. Net interest income increased by $1.6 million, or
9.8%, in the six months ended June 30, 1997, to $18.4 million, compared to $16.8
million during the same period in 1996. The reason for such increase was a $7.5
million improvement in interest income, mainly due to an increase in average
interest-earning assets of $233.1 million, or 20.4%, to $1.4 billion for the six
months ended June 30, 1997. The additional interest-earning assets primarily
resulted from increases in mortgage-backed securities and internal growth in the
Bank's loan portfolio. Interest on loans increased $3.9 million, or 16.7%, as a
result of a $113.5 million, or 21.4%, increase in the average balance of the
loan portfolio partially offset by a 33 basis point decrease in the average
yield earned thereon. Interest income on mortgage-backed securities increased
$3.8 million as a result of a $124.9 million, or 22.0%, increase in the average
balance of the mortgage-backed securities portfolio partially offset by a 16
basis point decrease in the average yield earned thereon. The improvement in
interest income was partially offset by a $5.9 million increase in interest
expense mainly as a result of an increase of $242.8 million in average
interest-bearing liabilities. Interest on deposits increased $1.6 million, or
9.3%, as a result of an increase in the average balance of deposits of $66.3
million, or 9.9%, partially offset by a decrease in the cost of deposits from
5.11% to 5.08%. Interest expense on borrowings increased by $4.3 million, or
40.0%, as a result of an increase in the average balance of $176.5 million, or
50.2%, partially offset by a decrease in the average rate paid on borrowings
from 6.05% to 5.64%. The Bank's average interest rate spread and net interest
margin amounted to 2.23% and 2.67%, respectively, during the six months ended
June 30, 1997, compared to 2.35% and 2.94% for the comparable period in 1996.
Provision for Loan Losses. The provision for loan losses amounted to
$35,000 for the six months ended June 30, 1997, compared to a negative provision
of $4,000 during the six months ended June 30, 1996. For additional discussion
of the Bank's loan loss policy, see "Financial Condition - Asset Quality -
Allowance for Loan Losses."
15
Yields Earned and Rates Paid. The following table sets forth, for the
periods indicated, information regarding (i) the total dollar amount of interest
income of the Company from interest-earning assets and the resultant average
yields; (ii) the total dollar amount of interest expense on interest-bearing
liabilities and the resultant average rate; (iii) net interest income; (iv)
interest-rate spread; and (v) net interest margin. Average balances are
determined on an average daily balance basis.
Six Months Ended June 30,
1997 1996
Yield/Cost Average
at Average Yield/ Average Average Yield/
June 30, 1997 Balance Interest Cost (1) Balance Interest Cost (1)
(Dollars in Thousands)
Interest-earning assets:
Loans receivable:
Mortgage loans........... 8.04% $ 564,912 $23,285 8.24% $ 467,361 $ 20,230 8.66%
Consumer loans........... 10.67% 80,202 3,796 9.47% 64,242 2,983 9.29%
---------- ------- ---------- --------
Total loans................ 8.37% 645,114 27,081 8.40% 531,603 23,213 8.73%
Mortgage-backed securities. 7.18% 693,217 23,576 6.80% 568,287 19,790 6.96%
Investment securities...... 6.81% 30,242 1,079 7.13% 36,604 1,264 6.91%
Other earning assets....... 5.47% 9,278 232 5.00% 8,272 204 4.93%
---------- ------ ---------- -------
Total interest-earning
assets.................. 7.70% 1,377,851 51,968 7.54% 1,144,766 44,471 7.77%
------- -------
Noninterest-earning assets. 55,448 49,802
----------- -----------
Total assets........... $1,433,299 $1,194,568
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits.......... 3.34% $103,467 1,702 3.29% $ 38,714 550 2.84%
Passbook savings......... 3.29% 52,631 848 3.22% 52,707 824 3.13%
Certificates............. 5.65% 578,537 16,124 5.57% 576,924 15,707 5.45%
---------- ------ ---------- -------
Total deposits............. 5.16% 734,635 18,674 5.08% 668,345 17,081 5.11%
Borrowings................. 5.72% 528,066 14,896 5.64% 351,586 10,638 6.05%
---------- ------ ---------- -------
Total interest-bearing
liabilities............ 5.41% 1,262,701 33,570 5.32% 1,019,931 27,719 5.44%
------ -------
Noninterest-bearing 17,843 19,709
----------- ----------
liabilities................
Total liabilities...... 1,280,544 1,039,640
Stockholders' equity....... 152,755 154,928
----------- ----------
Total liabilities and
stockholders' equity... $1,433,299 $1,194,568
========== ==========
Net interest-earning assets $ 115,150 $ 124,835
========== ==========
Net interest income and
interest-rate spread..... 2.29% $ 18,398 2.23% $ 16,752 2.35%
======== ========
Net interest margin........ 2.67% 2.94%
Ratio of average interest-
earning assets to average
interest-bearing liabilities.. 1.09x 1.12x
(1) Annualized
Noninterest Income. Noninterest income for the six months ended June 30,
1997, was $2.6 million compared to $1.5 million in the comparable six months of
1996. This increase resulted mostly from a $986,000 profit on the sale of
mortgage-backed securities during the first quarter of 1997.
Noninterest Expense. Noninterest expenses were relatively unchanged
during the six months but decreased by $88,000. Deposit insurance premiums
decreased $627,000, which was offset by (i) the added expense recognition in the
Company's ESOP due to the increased market price of the Company's stock, and
(ii) the costs associated with the installation and operation of the Bank's new
computer system.
16
Income Tax Provision. The provision for income taxes increased by $1.3
million due to both an increase in the provision rate and the level of pre-tax
income. The income tax provision rate increased from 40.3% of income before
taxes, for the first six months of 1996, to 42.3%, for the six months of 1997,
due to additional taxable income in higher income tax brackets for 1997.
Impact of New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued SFAS
128, "Earnings per Share", which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share ("EPS") and restate all prior periods. The new
requirements replace the current primary EPS and fully diluted EPS with two new
calculations, basic EPS and diluted EPS. Basic EPS, unlike primary EPS, excludes
all dilution caused by any common stock equivalents (e.g., options on stock).
Diluted EPS is calculated similarly to fully diluted EPS, except diluted EPS
uses the average price of the Company's stock during the accounting period,
while fully diluted EPS uses the price of the Company's stock at the end of the
accounting period. If SFAS 128 had been in effect during the first six months of
1997, the Company would have reported basic EPS of $0.35 and diluted EPS of
$0.34, for the three months ended June 30, 1997, and basic EPS of $0.73 and
diluted EPS of $0.70, for the six months ended June 30, 1997.
Liquidity and Capital Resources
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's primary
sources of funds are deposits; borrowings; amortization, prepayments and
maturities of outstanding loans and mortgage-backed securities; sales of loans;
maturities of investment securities and other short-term investments; and funds
provided from operations. While scheduled payments from the amortization of
loans and mortgage-backed securities and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. In addition, the Bank invests excess funds
in overnight deposits and other short-term interest-earning assets, which
provide operational liquidity. The Bank has been able to generate sufficient
cash through its deposits as well as borrowings (primarily consisting of FHLB
advances and repurchase agreements). At June 30, 1997, the Bank had $299.5
million of outstanding FHLB advances and $280.2 million in repurchase agreements
and other borrowings.
Excess liquidity is generally invested in short-term investments such as
overnight deposits. On a longer-term basis, the Bank maintains a strategy of
investing in various lending products. The Bank uses its sources of funds
primarily to meet its ongoing operations, to fund maturing savings certificates
and savings withdrawals and to fund loan commitments and its portfolio of
mortgage-backed and investment securities. At June 30, 1997, the total approved
loan commitments outstanding amounted to $25.7 million. At the same date,
commitments under unused lines of credit amounted to $9.9 million. Certificates
of deposits scheduled to mature in one year or less at June 30, 1997, totaled
$398.7 million; however, management believes that a significant portion of
maturing deposits will remain with the Bank. The Bank anticipates that even with
interest rates at lower levels than have been experienced in recent years, it
will continue to have sufficient funds to meet its operational needs. At June
30, 1997, the Bank had a liquidity ratio of 8.4%, which exceeded the required
minimum liquid asset ratio of 5.0%.
17
At June 30, 1997, the Bank's regulatory capital was well in excess of
applicable minimums required by federal regulations. The Bank, as a member of
the thrift industry, is required to maintain tangible capital of 1.5% of
adjusted total assets, core capital of 3.0% of adjusted total assets and
risk-based capital of 8.0% of adjusted risk-weighted assets. At June 30, 1997,
the Bank's tangible capital was $128.8 million, or 8.7%, of adjusted total
assets, core capital was $128.8 million, or 8.7%, of adjusted total assets and
risk-based capital was $134.6 million, or 21.9%, of adjusted risk-weighted
assets, exceeding the requirements by $106.6 million, $84.4 million and $85.5
million, respectively.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits required by Item 601 of Regulation S-K.
None
b) Reports on Form 8-K filed during the quarter.
None
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LIFE BANCORP, INC.
Date: May 14, 1997 By: /s/ Tollie W. Rich, Jr.
----------------------------------------------
Tollie W. Rich, Jr., Executive Vice President,
Chief Operating Officer
Date: May 14, 1997 By: /s/ Emory J. Dunning, Jr.
---------------------------------------------
Emory J. Dunning, Jr., Senior Vice President,
Treasurer and Chief Financial Officer
19