UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-Q
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[GRAPHIC OMITTED] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ X ] For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-24744
Life Bancorp, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1711207
- -------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
109 East Main Street
Norfolk, Virginia 23510
- -------------------------------- --------------------------------
(Address of principal executive office) (Zip Code)
(757) 858-1000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock (par value $.01 per share) 9,846,840
- --------------------------------------- -----------------------------
(Title of Class) (Number of Shares Outstanding
as of November 8, 1996)
LIFE BANCORP, INC.
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
Acquisition of Seaboard Bancorp, Inc.................................................................. 7
Stock Repurchases..................................................................................... 7
Impact of Recently Enacted Legislation..................................................................... 8
SAIF Recapitalization................................................................................. 8
BIF/SAIF Premium Disparity....................................................................... 8
Proposed Risk-Based Premium Assessment........................................................... 8
Merger of BIF and SAIF........................................................................... 9
Bad Debt Reserve Recapture............................................................................ 9
Financial Condition....................................................................................... 10
Assets............................................................................................... 10
Liabilities and Stockholders' Equity................................................................. 11
Asset Quality........................................................................................ 11
General......................................................................................... 11
Impaired Loans.................................................................................. 11
Troubled Debt Restructurings.................................................................... 13
Non-Performing Assets........................................................................... 14
Potential Problem Loans......................................................................... 14
Allowance for Loan Losses....................................................................... 15
Results of Operations..................................................................................... 17
Comparison of Results of Operations for the Three Months Ended September 30,
1996 and 1995................................................................................... 17
General......................................................................................... 17
Net Interest Income............................................................................. 17
Yields Earned and Rates Paid.................................................................... 18
Provision for Loan Losses....................................................................... 18
Noninterest Income.............................................................................. 18
i
Noninterest Expense............................................................................. 19
Income Tax Provision............................................................................ 19
Comparison of Results of Operations for the Nine Months Ended September 30, 1996
and 1995........................................................................................ 19
General......................................................................................... 19
Net Interest Income............................................................................. 19
Yields Earned and Rates Paid.................................................................... 20
Provision for Loan Losses....................................................................... 20
Noninterest Income.............................................................................. 21
Noninterest Expense............................................................................. 21
Income Tax Provision............................................................................ 21
Liquidity and Capital Resources........................................................................... 21
PART II - OTHER INFORMATION.................................................................................... 22
Item 1. Legal Proceedings.................................................................................... 22
Item 2. Changes in Securities................................................................................ 22
Item 3. Defaults Upon Senior Securities...................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 22
Item 5. Other Information.................................................................................... 22
Item 6. Exhibits and Reports on Form 8-K..................................................................... 22
SIGNATURES..................................................................................................... 23
ii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LIFE BANCORP, INC.
Unaudited Consolidated Balance Sheets
(In thousands, except stock data)
September 30, 1996 December 31, 1995
------------------ ------------------
Assets
Cash and cash equivalents........................................... $ 10,637 $ 8,845
Investment securities, available-for-sale........................... 35,316 23,040
Mortgage-backed securities:
Held-to-maturity (Market value of $146.0 million and
$169.2 million at 09/30/96 and 12/31/95, respectively).......... 147,174 168,602
Available-for-sale................................................ 574,680 393,587
Loans receivable, net............................................... 592,103 467,424
Accrued interest and dividends receivable........................... 11,036 9,443
Real estate owned................................................... 1,276 622
Federal Home Loan Bank stock, at cost............................... 8,740 8,310
Premises and equipment.............................................. 15,493 13,975
Excess of cost over net assets of companies acquired................ 4,794 459
Other assets........................................................ 3,511 2,693
---------- ----------
Total assets................................................ $1,404,760 $1,097,000
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits.......................................................... $ 720,920 $ 607,139
Notes payable and other borrowings:
Advances from Federal Home Loan Bank of Atlanta................. 154,011 148,636
Securities sold under agreements to repurchase.................. 358,145 162,000
Secured note due to Thrift Financing Corporation................ 5,222 6,518
Advances from borrowers for taxes and insurance................... 4,254 2,981
Other liabilities................................................. 16,762 8,785
---------- ----------
Total liabilities........................................... 1,259,314 936,059
---------- ----------
Stockholders' Equity:
Preferred stock of $0.01 par value, authorized 5,000,000
shares, none issued or outstanding.............................. -- --
Common stock of $0.01 par value, authorized 30,000,000
shares, issued and outstanding 9,846,840 shares at
September 30, 1996 and 10,910,625 at December 31, 1995.......... 98 109
Additional paid-in capital........................................ 91,939 106,659
Retained earnings, substantially restricted....................... 61,706 59,447
Common stock held by ESOP and RRP trusts.......................... (7,684) (7,073)
Unrealized gain (loss) on securities (net of taxes)............... (613) 1,799
---------- ----------
Total stockholders' equity.................................. 145,446 160,941
---------- ----------
Total liabilities and stockholders' equity.................. $1,404,760 $1,097,000
========== ==========
<FN>
See Notes to Unaudited Consolidated Financial Statements
</FN>
1
LIFE BANCORP, INC.
Unaudited Consolidated Statements of Operations - Three Months
(In thousands, except per share data)
For the
Three Months Ended
September 30,
-----------------------
1996 1995
------- -------
Interest income:
Interest on loans.............................................. $12,523 $ 9,902
Interest on investment securities.............................. 687 160
Interest on mortgage-backed securities......................... 11,619 9,390
------- -------
Total interest income.................................... 24,829 19,452
------- -------
Interest expense:
Interest on deposits........................................... 9,254 7,765
Interest on notes payable and other borrowings................. 7,100 4,540
------- -------
Total interest expense................................... 16,354 12,305
------- -------
Net interest income...................................... 8,475 7,147
Provision for loan losses........................................ (295) 75
------- -------
Net interest income after provision
for loan losses......................................... 8,770 7,072
------- -------
Noninterest income:
Deposit fees and related income................................ 162 111
Servicing fees................................................. 141 157
Net gain on sales of mortgage loans held-
for-sale...................................................... 2 51
Net gain of sales of mortgage-backed securities
available-for-sale............................................ 14 --
Net gain on sales of real estate owned......................... 213 51
Net gain on sales of assets.................................... -- 62
Other.......................................................... 408 368
------- -------
Total noninterest income................................. 940 800
------- -------
Noninterest expense:
Compensation and employee benefits............................. 2,856 2,622
Occupancy and office operations................................ 791 623
FDIC Premium................................................... 4,776 344
Advertising and promotion...................................... 53 85
Provision for losses on real estate owned...................... 34 1
Amortization of excess of cost over net assets
of companies acquired......................................... 599 43
Other.......................................................... 365 357
------- --------
Total noninterest expense................................ 9,474 4,075
------- -------
Income before income taxes....................................... 236 3,797
Income tax provision............................................. 70 1,443
------- -------
Net income....................................................... $ 166 $ 2,354
======= =======
Earnings per common and common equivalent share.................. $ 0.02 $ 0.23
======= ========
Dividends paid per common share.................................. $ 0.11 $ 0.11
======= ========
<FN>
See Notes to Unaudited Consolidated Financial Statements
</FN>
2
LIFE BANCORP, INC.
Unaudited Consolidated Statements of Operations - Year-to-Date
(In thousands, except stock data)
For the
Nine Months Ended
September 30,
------------------------
1996 1995
-------- --------
Interest income:
Interest on loans.............................................. $35,736 $28,518
Interest on investment securities.............................. 2,155 883
Interest on mortgage-backed securities......................... 31,409 27,816
------- -------
Total interest income.................................... 69,300 57,217
------- -------
Interest expense:
Interest on deposits........................................... 26,335 22,328
Interest on notes payable and other borrowings................. 17,738 13,300
------- -------
Total interest expense................................... 44,073 35,628
------- -------
Net interest income...................................... 25,227 21,589
Provision for loan losses........................................ (299) 366
------- -------
Net interest income after provision
for loan losses......................................... 25,526 21,223
------- -------
Noninterest income:
Deposit fees and related income................................ 464 303
Servicing fees................................................. 437 481
Net gain on sales of mortgage loans held-
for-sale...................................................... 8 119
Net gain of sales of mortgage-backed securities
available-for-sale............................................ 14 --
Net gain on sales of real estate owned......................... 290 83
Net gain on sales of assets.................................... 12 62
Other.......................................................... 1,257 1,107
------- -------
Total noninterest income................................. 2,482 2,155
------- -------
Noninterest expense:
Compensation and employee benefits............................. 8,337 7,320
Occupancy and office operations................................ 2,306 1,897
FDIC Premium................................................... 5,549 1,021
Advertising and promotion...................................... 418 460
Provision for losses on real estate owned...................... 34 41
Amortization of excess of cost over net assets
of companies acquired......................................... 857 84
Other.......................................................... 1,428 1,244
------- -------
Total noninterest expense................................ 18,929 12,067
------- -------
Income before income taxes....................................... 9,079 11,311
Income tax provision............................................. 3,635 4,297
------- -------
Net income....................................................... $ 5,444 $ 7,014
======= =======
Earnings per common and common equivalent share.................. $ 0.56 $ 0.69
======= =======
Dividends paid per common share.................................. $ .33 $ 0.33
======= =======
<FN>
See Notes to Unaudited Consolidated Financial Statements
</FN>
3
LIFE BANCORP, INC.
Unaudited Consolidated Statement of Changes in Stockholders' Equity
(In thousands)
Common Unrealized
Stock Gain (loss)
Held on Securities
Additional by ESOP Available-
Common Paid-in Retained and RRP for-Sale Total
Stock Capital Earnings Trusts (Net of Tax) Equity
------- ---------- --------- -------- ------------ ---------
Balance, December 31, 1995.............. $109 $106,659 $59,447 $(7,073) $ 1,799 $160,941
Net income.............................. 5,444 5,444
Cash dividends paid..................... (3,185) (3,185)
Common Stock released by
ESOP trust............................ 521 1,015 1,536
Common Stock in RRP trust............... (90) (1,626) (1,716)
Common Stock repurchased &
retired............................... (11) (15,151) (15,162)
Unrealized gain (loss) on
securities, net of tax................ (2,412) (2,412)
----- -------- ------- ------- ------- --------
Balance, September 30, 1996............. $ 98 $ 91,939 $61,706 $(7,684) $ (613) $145,446
===== ======== ======= ======= ======= ========
<FN>
See Notes to Unaudited Consolidated Financial Statements
</FN>
4
LIFE BANCORP, INC.
Unaudited Consolidated Statements of Cash Flows
(In thousands)
For the Nine Months
Ended September 30,
--------------------------
1996 1995
--------- ---------
Cash flows from operating activities:
Net Income................................................................. $ 5,444 $ 7,014
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for losses on loans and real estate owned.................... (265) 407
Depreciation and amortization.......................................... 465 417
Net amortization of premiums and discounts on investments.............. (23) 245
Amortization of excess of cost over net assets of companies acquired... 857 84
Net gain on sales of real estate owned................................. (290) (83)
Net gain on sales of mortgage loans.................................... (8) (119)
Net gain on sales of assets............................................ (12) (62)
Loans originated for resale................................................ (637) (7,434)
Proceeds from loans sold to others......................................... 645 7,553
Non-Cash ESOP Expenses..................................................... 827 --
Changes in assets and liabilities:
(Increase) decrease in assets:
Accrued interest receivable............................................ (1,774) (121)
Deferred loan fees..................................................... (676) (394)
Deferred income taxes.................................................. (492) 4,133
Other assets........................................................... (192) 700
Increase (decrease) in liabilities:
Accrued expenses and other liabilities................................. 7,988 1,281
-------- --------
Net cash provided by (used in) operating activities................ 11,857 13,621
-------- --------
Cash flows from investing activities:
Proceeds from sales and maturities of investments and mortgage-backed
securities............................................................... 8,007 15,075
Purchase of investment securities.......................................... (19,425) --
Principal collected on loans............................................... 54,476 38,676
Loans originated for investment............................................ (115,714) (72,219)
Proceeds from sale of premises and equipment............................... 5 146
Purchases of premises and equipment........................................ (1,023) (260)
Purchase of Seaboard Bancorp............................................... (8,235) --
Purchases of mortgage-backed securities.................................... (271,290) (103,185)
Principal collected on mortgage-backed securities.......................... 111,325 56,312
Proceeds from sale of real estate owned.................................... 620 691
Redemption of FHLB stock................................................... 351 957
Principal collected on ESOP loan........................................... 943 934
Purchase of FHLB stock..................................................... -- (518)
-------- --------
Net cash provided by (used in) investing activities................ (239,960) (63,391)
-------- --------
Cash flows from financing activities:
Net increase in checking deposits, liquid assets deposits, savings
deposits, and certificates of deposits accounts.......................... 49,977 9,773
Advances from borrowers for taxes and insurance............................ 1,273 1,957
Dividends Paid on Common Stock............................................. (3,421) (3,600)
Repurchase of Common Stock................................................. (15,162) --
Stock purchase for RRP Trust............................................... (2,996) --
Proceeds from notes payable and other borrowings........................... 893,662 607,053
Repayment of notes payable and other borrowings............................ (693,438) (568,235)
-------- --------
Net cash provided by (used in) financing activities................ 229,895 46,948
-------- --------
Net increase (decrease) in cash and cash equivalents............................ 1,792 (2,822)
Cash and cash equivalents at beginning of period................................ 8,845 7,945
-------- --------
Cash and cash equivalents at end of period...................................... $ 10,637 $ 5,123
======== ========
<FN>
See Notes to Unaudited Consolidated Financial Statements
</FN>
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 nine months
ended September 30, 1996 are not necessarily indicative of the results
that may be expected for the entire year or for any interim period.
Principles of Consolidation
The consolidated financial statements include the accounts of Life
Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Life
Savings Bank, FSB (the "Bank"). All significant intercompany
transactions have been eliminated in consolidation. Additionally,
certain reclassifications may have been made to prior period financial
statements in order to conform with the current presentation. The
accompanying consolidated financial statements have been prepared on the
accrual basis.
2. Earnings Per Share
Earnings per share for the three- and nine-month periods ended September
30, 1996 was determined by dividing income for the periods by the
weighted average number of common and common equivalent shares
outstanding during the periods. There is no material difference between
primary and fully-diluted earnings per share.
Common equivalent shares include shares issuable upon exercise of
dilutive options outstanding under the treasury stock method. The
Company accounts for the shares acquired by its Employee Stock Ownership
Plan ("ESOP") in accordance with Statement of Position 93-6. Shares
acquired by the ESOP and the Recognition and Retention Plan ("RRP")
Trusts are not considered in the weighted average shares outstanding
until the shares are committed for allocation or vested to an employee's
individual account.
The weighted average number of common and common equivalent shares
outstanding during the periods are as follows:
For the three months ended September 30, 1996 9,189,655
For the three months ended September 30, 1995 10,189,909
For the nine months ended September 30, 1996 9,659,171
For the nine months ended September 30, 1995 10,183,347
3. Subsequent Event
On October 21, 1996, the Board of Directors declared a quarterly
dividend of $0.11 per share payable on November 29, 1996 to stockholders
of record on November 15, 1996.
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.
Acquisition of Seaboard Bancorp, Inc. On January 31, 1996, the Company
completed its previously announced acquisition of Seaboard Bancorp, Inc.
("Seaboard"), the holding company for Seaboard Savings Bank, F.S.B., ("Seaboard
Savings"). Seaboard Savings, headquartered in Virginia Beach, operated three
offices, one each in the Virginia cities of Chesapeake, Virginia Beach and
Portsmouth. The operations of Seaboard Savings were merged into the Bank
effective February 1, 1996, representing a natural extension of the Bank's
existing operations and strengthening its presence in the Hampton Roads market.
The purchase of Seaboard is being accounted for under the purchase
method of accounting, whereby the purchase price is allocated to the underlying
assets acquired and liabilities assumed based on their respective fair values at
the date of acquisition. The purchase price for Seaboard, $8.2 million, exceeded
the fair value of the net assets by approximately $5.4 million which is being
accounted for as goodwill and amortized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 72. Results of operations of
Seaboard, beginning February 1, 1996, are included in the results of the
Company.
At December 31, 1995, Seaboard's assets totaled approximately $81.8
million and its deposits totaled approximately $67.0 million. The financial
results of the Company for 1995 do not include the results of the acquisition of
Seaboard.
Stock Repurchases. During the first nine months of 1996, the Company
repurchased and retired 1,063,785 shares, or 9.75% of its outstanding shares on
December 31, 1995, at a total acquisition price of approximately $15.2 million.
On August 13, 1996, the Company announced that it had received approval
from the OTS to repurchase up to an additional 15% of its outstanding shares, 5%
during the period ending October 11, 1996, and another 10% during the period
beginning October 12, 1996, and ending October 11, 1997. No shares were
repurchased between August 13, 1996, and October 11, 1996.
Future decisions by the Company to repurchase shares will be based on,
among other things, the then current market value of the stock, alternative
opportunities for utilization of capital and the anticipated positive effect of
the repurchase program on the Company's long-term shareholder value.
7
Impact of Recently Enacted Legislation
SAIF Recapitalization
BIF/SAIF Premium Disparity. On September 30, 1996, the President signed
into law the Omnibus Consolidated Appropriations Act. Part of this act, the
Deposit Insurance Funds Act of 1996 ("BIF/SAIF Legislation"), provides for,
among other things, the resolution of the FDIC premium disparity between Bank
Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF") insured
financial institutions. Prior to the legislation, most insured depository
institutions holding BIF-assessable deposits paid the statutory minimum of
$2,000 for deposit insurance while most insured depository institutions with
SAIF-assessable deposits, such as the Bank, paid 23 basis points (100 basis
points being equal to 1%).
The BIF/SAIF Legislation requires a one-time special assessment to
recapitalize the SAIF. The assessment is based on the amount of SAIF-assessable
deposits held by an institution as of March 31, 1995, is effective on September
30, 1996, and, in accordance with final rules adopted by the FDIC, is payable on
November 27, 1996. The FDIC has determined that, in order to fully capitalize
the SAIF to statutory mandated levels, all SAIF insured depository institutions
(except certain "weak institutions") will be assessed 65.7 basis points on
SAIF-assessable deposits as of March 31, 1995. If an institution has merged with
or acquired another institution since March 31, 1995, it must add to its special
assessment base the March 31, 1995, assessable deposits of the institution that
was acquired.
The Emerging Issues Task Force of the Financial Accounting Standards
Board ("FASB") previously discussed the financial reporting issues relating to a
special assessment, and, in November, 1995, indicated that institutions with
SAIF-assessable deposits should accrue the liability when the legislation is
enacted and the related charge should be reported as a component of operating
expenses in the period that includes the enactment date. Further, the charge
should not be reported as an extraordinary item.
Consistent with the BIF/SAIF Legislation, the Bank's pro-rata one-time
special assessment to recapitalize the SAIF is $4.4 million. In conformity with
the applicable FASB guidelines, the Bank accrued this liability on September 30,
1996, resulting in an additional one-time increase in FDIC premiums.
Proposed Risk-Based Premium Assessment. Effective January 1, 1997, the
BIF/SAIF Legislation requires that SAIF members will have the same risk-based
assessment schedule as BIF members, ranging from 0 basis points for
"well-capitalized institutions" to 27 basis points for "weak institutions."
Additionally, the legislation provides for sharing of the Financing Corporation
bond obligation ("FICO Bonds")1 between members of the SAIF and the BIF.
Beginning January 1, 1997, FICO Bond assessments of 6.4 and 1.3 basis points
will be added to the regular assessment for the SAIF-assessable base and the
BIF-assessable base, respectively, until December 31, 1999. Thereafter, about
2.4 basis points will be added to each regular assessment for all insured
depositories, achieving full pro-rata FICO sharing. The BIF/SAIF Legislation
also provides for the conditional merger of the BIF and the SAIF no
- --------
1 FICO Bonds were issued in an attempt undertaken between 1987 and 1989 to
provide funds for the ailing Federal Savings and Loan Insurance Corporation
(FSLIC) without a direct taxpayer expense. Since the establishment of the SAIF
in 1989, a portion of the SAIF premiums has been earmarked to satisfy the $780
million in annual interest obligations on FICO Bonds, payments that continue
until 2019.
8
earlier than January 1, 1999. When the funds are merged, the FICO Bond premium
will be equal for all members of the new fund.
As a "well capitalized institution", the Bank was previously assessed
the lowest FDIC-SAIF insurance premium at the rate of 23 basis points on insured
deposits for the fourth quarter of 1996. Since the SAIF became fully capitalized
as of October 1, 1996, the regular assessment rate for SAIF-member institutions
has been lowered retroactively to that date. Until January 1, 1997, FICO
payments can be made only from assessments on SAIF-member institutions;
therefore, during the fourth quarter of 1996 the SAIF premium assessment will be
the amount necessary to cover the FICO obligations. Overpayment of fourth
quarter FDIC premiums (currently estimated at approximately 1.25 basis points,
or $88,300 for the Bank) will be refunded or credited toward future FDIC
insurance premiums. Beginning January 1, 1997, unless the base rate for "well
capitalized institutions" is modified, the Bank's FDIC premium should be 6.4
basis points (the FICO Bond obligation). Based on current deposit levels, this
will reduce the Bank's annual premium assessment by approximately $1.2 million.
Merger of BIF and SAIF. The BIF/SAIF Legislation provides for the
conditional merger of the BIF and the SAIF on January 1, 1999, if no insured
depository institution is a savings association on that date. By March 31, 1997,
the Secretary of the Treasury is required to conduct a study and prepare a
report to Congress addressing all issues which the Secretary considers relevant
with respect to the development of a common charter for all insured depository
institutions and the abolition of separate and distinct charters between banks
and savings institutions.
Bad Debt Reserve Recapture
On August 20, 1996, as part of the Small Business Job Protection Act of
1996 (SBJPA), Congress enacted a new law that makes it substantially easier for
savings institutions to convert to a commercial bank charter, diversify their
assets, or merge into a commercial bank. In essence, the legislation forgives
the recapture of bad debt reserves accumulated before 1988 and requires all
savings institutions to recapture their post-1987 reserves.
Since 1952, savings institutions have received special tax treatment
with respect to calculating deductions for bad debt. Generally, most businesses
compute bad debt deductions by using the specific charge-off method, which
allows a taxpayer to deduct the amount of any debt that becomes wholly or
partially worthless during the year. Under previous law, a qualified savings
institution, such as the Bank, could elect to use one of two reserve methods of
accounting, -- the experience method or the percentage of taxable income method.
To qualify, 60% of a savings institution's assets had to consist of "qualifying
assets" such as cash, government obligations, or loans secured by residential
real property. If a savings institution used the reserve method, it was required
to establish and maintain a reserve for bad debts and charge actual losses
against the reserve. Regardless of whether a savings institution experienced
actual losses, it was allowed to deduct annual additions to its bad debt reserve
that were computed by using either the percentage of taxable income method or
the experience method. A savings institution's reserve, however, was subject to
recapture if it converted to a commercial bank, was acquired by a commercial
bank, or failed to satisfy the 60% qualified asset test.
The SBJPA prohibits the continued use of the percentage of taxable
income method for all savings institutions. While savings institutions with less
than $500 million in assets may still use the experience method, all others will
be required to use the specific charge-off method. Reserves accumulated after
1987 must be restored to taxable income ratably over a six-year period starting
after December 31, 1995, unless the institution meets a residential loan
requirement, in which case the recapture may be suspended
9
on a per annum basis for up to two years. A savings institution with more than
$500 million in assets, such as the Bank, is generally required to recapture its
entire post-1987 additions to its bad debt reserve. The Bank has determined that
approximately $1.4 million of post-1987 tax reserves are subject to recapture.
Since the Bank previously established a deferred tax liability corresponding to
its post-1987 tax reserves, the effects of the recapture are not material to the
Bank's financial condition or results of operations. The impact to the Bank will
be the loss of earnings on the cash payment of the deferred tax liability.
Additionally, the SBJPA repeals certain other provisions in present tax
law applicable only to savings institutions, including special rules applicable
to foreclosures; a reduction in the dividends received deduction; the ability of
a savings institution to use net operating losses to offset its income from a
residual interest in a Real Estate Mortgage Investment Conduit (REMIC); and the
denial of a portion of certain tax credits to a savings institution. The Bank
has not determined what effect, if any, these changes may have on its financial
condition or results of operations.
Financial Condition
Assets
Total assets of the Company increased by $307.8 million, or 28.1%, from
$1.1 billion at December 31, 1995 to $1.4 billion at September 30, 1996. This
increase was in part due to a net addition of $159.7 million in mortgage-backed
securities and the aforementioned merger of Seaboard Savings into the Bank,
which added $79.0 million to the Company's total assets.
During the nine-month period, the Bank's net loans receivable, increased
by $124.7 million, or 26.7%, from $467.4 million at December 31, 1995, to $592.1
million at September 30, 1996. The merger of Seaboard Savings into the Bank
initially increased net loan receivables by $72.1 million. The Bank had no
mortgage loans held-for-sale at either September 30, 1996 or December 31, 1995.
Investment securities available-for-sale increased by $12.3 million, or
53.3%, from $23.0 million at December 31, 1995, to $35.3 million at September
30, 1996, primarily as a part of the Bank's asset/liability management strategy
to increase government agency investment securities during the interest rate
environment which existed during the first part of 1996.
Mortgage-backed securities increased $159.7 million, or 28.4%, from $562.2
million at December 31, 1995, to $721.9 million at September 30, 1996,
reflecting the continuing emphasis by the Bank on investing in mortgage-backed
securities as part of its asset/liability management strategy and an arbitrage
program instituted by the Bank in June, 1996, consistent with its Business Plan.
Under the arbitrage program, the Bank increased its investment in government
agency mortgage-backed securities and funded such investments with additional
borrowed money. This arbitrage program is intended to partially leverage the
Company's excess capital, increase its return on equity and improve earnings per
share until such time as more appropriate alternative opportunities for
utilization of capital exist.
The excess of cost over net assets of companies acquired increased $4.3
million to $4.8 million at September 30, 1996 from $459,000 at December 31,
1995. This increase resulted from the aforementioned purchase of Seaboard and is
net of amortizations of $386,000 during the nine-month period and a $451,000
adjustment in the valuation of acquired goodwill due to the SAIF special
10
assessment. This valuation adjustment reduces the amount of goodwill to be
amortized to future period noninterest expenses.
The increases in assets were primarily funded by increases in repurchase
agreements and deposits.
Liabilities and Stockholders' Equity
Deposits increased by $113.8 million, or 18.7%, from $607.1 million at
December 31, 1995, to $720.9 million at September 30, 1996. The merger of
Seaboard Savings into the Bank initially increased deposits by $66.9 million.
Repurchase agreements increased by $196.1 million, or 121.1%, from $162.0
million at December 31, 1995, to $358.1 million at September 30, 1996. FHLB
advances increased by $5.4 million, or 3.6%, from $148.6 million at December 31,
1995, to $154.0 million at September 30, 1996. Initially, the mortgage-backed
securities purchased as part of the Bank's arbitrage program mostly were funded
with short term reverse repurchase agreements.
Stockholders' equity decreased by $15.5 million, or 9.6%, from $160.9
million at December 31, 1995, to $145.4 million at September 30, 1996. The
decrease in stockholders' equity was a net result of the Company's net income of
$5.4 million for the nine months ended September 30, 1996, which was more than
offset by decreases in equity during the nine-month period resulting from (i)
the repurchase and retirement of 1,063,785 shares of Common Stock at a total
acquisition cost of $15.2 million; (ii) a $2.4 million market valuation
adjustment in unrealized losses, net of taxes, in the Company's
available-for-sale securities portfolio, consistent with the required accounting
treatment under SFAS No. 115; and, (iii) quarterly cash dividends totaling $3.2
million or $0.11 per share paid on each of February 29, May 31, and August 31,
1996.
Asset Quality
General. When a borrower fails to make a required payment on a loan, the
Bank attempts to cure the deficiency by contacting the borrower and seeking
payment. Contacts are generally made 15 days after a payment is due. In most
cases, deficiencies are cured promptly. If a delinquency continues, late charges
are assessed and additional efforts are made to collect the loan. While the Bank
prefers to work with borrowers to resolve such problems, when the account
becomes 90 days delinquent, the Bank generally pursues foreclosure or other
proceedings, as necessary, to minimize any potential loss.
Impaired Loans. The Company has adopted SFAS No. 114, as amended by SFAS
118. SFAS No. 114, as amended, provides that a loan is impaired when, based on
current information and events, it is probable that the creditor will be unable
to collect all principal and interest amounts due according to the contractual
terms of the loan agreement. SFAS No. 114, as amended, requires that impaired
loans be measured based on the present value of the expected future cash flows,
discounted at the loan's effective interest rate. The effective interest rate of
a loan is defined as the contractual interest rate adjusted for any net deferred
loan fees or costs, premiums or discounts existing at the inception or
acquisition of the loan. If the loan is collateral dependent, as a practical
expedient, impairment can be based on a loan's observable market price or the
fair value of the collateral. The value of the loan is adjusted through a
valuation allowance created through a charge to the provision for loan losses.
Residential mortgages, consumer installment obligations and credit cards may be
excluded. Loans that were treated as in-substance foreclosures under previous
accounting pronouncements are considered to be impaired loans and under SFAS No.
114 will remain in the loan portfolio.
11
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.
The following table sets forth information relating to the Bank's
recorded investment in impaired loans at or during the periods indicated. Loan
balances are not net of specific reserves.
Three Months Ended Year Ended
September 30, June 30, March 31, December 31,
1996 1996 1996 1995
------------ -------- --------- -----------
(In thousands)
Impaired loans for which there is a
related allowance for credit losses $8,306 $8,538 $11,607 4,223
Impaired loans for which there is
no related allowance for credit
losses -- -- -- --
Total impaired loans $8,306 $8,538 $11,607 $4,223
====== ====== ======= ======
Allowance for credit losses on
impaired loans $3,317 $3,358 $ 3,361 $ 768
====== ====== ======= ======
Average impaired loans during the
period $8,371 $9,560 $11,615 $4,234
====== ====== ======= ======
Interest income recognized on
impaired loans during the time
within the period that the loans
were impaired $ 126 $ 190 $ 140 $ 98
====== ====== ======= ======
Interest income recognized on
impaired loans using a cash-basis
method of accounting during the time
within the period that the loans
were impaired $ 126 $ 190 $ 140 $ 98
====== ====== ======= ======
In conjunction with the acquisition of Seaboard Savings, completed
during the first quarter, the Bank, in accordance with its impaired loan policy,
classified $6.8 million of the loans acquired from
12
Seaboard as impaired loans. Of the $3.3 million allowance for credit losses on
impaired loans, $2.4 million relates to the Seaboard Savings loans acquired.
Troubled Debt Restructurings. Under Generally Accepted Accounting
Principles ("GAAP"), the Bank is required to account for certain loan
modifications or restructurings as "troubled debt restructurings." In general,
the modification or restructuring of a debt constitutes a troubled debt
restructuring if the Bank, for economic or legal reasons related to the
borrower's financial difficulties, grants a concession to the borrower that the
Bank would not otherwise consider under current market conditions. Debt
restructurings or loan modifications for a borrower do not necessarily always
constitute troubled debt restructurings, however, and troubled debt
restructurings do not necessarily result in non-accrual loans. The Bank had $2.5
million of troubled debt restructurings, net of specific reserves, at September
30, 1996. Included in the Bank's troubled debt restructurings at September 30,
1996, is an office warehouse complex with a carrying value of $1.1 million, net
of specific reserves. At September 30, 1996, this loan was classified
substandard. The loan was added as a troubled debt restructuring as a result of
the purchase of Seaboard Savings and at September 30, 1996, was current. The
remaining $1.4 million of troubled debt restructurings at September 30, 1996,
consisted of loans secured by multi-family and commercial properties located in
Virginia Beach and Norfolk.
13
Non-Performing Assets. The following table sets forth information
relating to the carrying balances of the Bank's non-performing assets and
troubled debt restructurings at the dates indicated. Loans obtained in the
acquisition of Seaboard Savings resulted in increases of $1.0 million to the
total non-performing assets and $1.1 million to the troubled debt
restructurings.
September 30, December 31,
1996 1995
------------- ------------
(In thousands)
Non-performing assets:
Non-accruing loans:
Mortgage loans:
Single-family:
Conventional $ 777 $ 859
FHA/VA 608 245
Multi-family -- --
Commercial -- 436
Consumer loans 258 195
------ ------
Total non-accruing loans 1,643 1,735
Real estate owned, net 1,227 622
------ ------
Total non-performing assets 2,870 2,357
Troubled debt restructurings 2,486 4,525
------ ------
Total non-performing assets and
troubled debt restructurings $5,356 $6,882
====== ======
Non-accruing loans to total loans held
for investment 0.28% 0.37%
==== ====
Total non-performing assets to total
assets 0.20% 0.21%
==== ====
Total non-performing assets and
troubled debt restructurings to total
assets 0.38% 0.63%
==== ====
The Bank's Real Estate Owned ("REO") at September 30, 1996, consisted of
17 properties. During the first nine months of 1996, the Bank sold eight single
family residences, two hotel condominiums, one multi-family residence previously
acquired in foreclosure and one parcel of land acquired through a deed in lieu
of foreclosure for a combined sale price of $3,937,000. After satisfying
superior liens and deductions for valuation allowances, repairs, holding costs
and settlement expenses, the Bank realized a net gain on the sale of these
properties of $289,846.
Potential Problem Loans. In addition to the loans included in the above
impaired loans and non-performing assets and troubled debt restructurings
tables, at September 30, 1996, the Bank had loans totaling $12.0 million which,
even though they were not impaired or categorized as a non-performing asset or
troubled debt restructuring, were designated as substandard or special mention.
14
At September 30, 1996, there were eight performing loans, totaling $5.6
million, to five borrowers which the Bank had designated as substandard. One
such loan, a performing construction loan, is secured by a retirement home 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, in-process disbursements totaled $3.3
million. The appropriate insurance claims have been filed. At September 30,
1996, the loan was current as the borrower continues to fund interest payments
and plans to rebuild. Of the remaining seven loans, two loans, totaling $1.5
million, are secured by commercial properties located in Norfolk, Virginia;
three loans, totaling $600,000, 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 September 30, 1996, there were five performing loans,
totaling $6.4 million, to four borrowers which the Bank had designated as
special mention. Two of these loans, totaling $2.2 million, are secured by
multi-family dwelling units in Norfolk, Virginia; two loans totaling $3.5
million, are secured by multi-family units and town houses in Virginia Beach,
Virginia; and one loan totaling $700,000, is secured by several single-family
units located in Virginia Beach, Virginia. At this time, the Bank does not
anticipate losses on any of these loans.
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.
15
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1996 1995 1996 1995
--------- -------- ------- -------
(In thousands)
Allowance at beginning of period $ 9,505 $4,356 $ 4,438 $4,459
Addition to allowance from acquisition
of Seaboard Savings -- -- 5,192 --
Provision for loan losses (295) 75 (299) 366
Charge-offs:
Mortgage loans:
Single-family (33) (19) (150) (150)
Multi-family (38) -- (38) (161)
Construction -- -- -- --
Commercial (40) (17) (40) (291)
Residential lots -- -- -- --
Consumer loans (57) (22) (249) (99)
------- ------ -------- ------
Total charge-offs (168) (58) (477) (701)
Recoveries:
Mortgage loans:
Single-family 62 3 64 20
Multi-family 10 25 10 58
Construction -- -- -- --
Commercial 1,468 -- 1,623 154
Consumer loans 12 16 43 61
------- ------ ------- ------
Total recoveries 1,552 44 1,740 293
------- ------ ------- ------
Allowance at end of period $10,594 $4,417 $10,594 $4,417
======= ====== ======= ======
Allowance for loan losses to total non-
accruing loans at end of period 644.80% 579.66% 644.80% 579.66%
======= ====== ======= ======
Allowance for loan losses to total
impaired loans at end of period 127.59% 103.83% 127.59% 103.83%
======= ====== ======= ======
Allowance for loan losses to total loans
held for investment at end of period 1.79% 0.97% 1.79% 0.97%
======= ====== ======== ======
In July, 1996, the Bank accepted a deed in lieu of foreclosure on
property located in Williamsburg, Virginia in settlement of a previously
charged-off deficiency relating to three Williamsburg hotels sold in October,
1994. The property was sold for $3.3 million and settled on September 30, 1996.
After satisfying superior liens on the property and other costs associated with
the acquisition and sale, the Bank netted a loan loss recovery of $1.4 million
and a gain on sale of REO of $206,000. This sizable recovery during the third
quarter more than offset normally determined adjustments to the Bank's loan loss
allowance and resulted in a net negative loan loss provision of $295,000.
16
Management of the Bank presently believes that its allowance for loan
losses is adequate to cover possible losses in the Bank's loan portfolio.
However, future adjustments to this allowance may be necessary, and the Bank's
results of operations could be adversely affected if circumstances differ
substantially from the assumptions used by management in making its
determinations in this regard.
Results of Operations
Comparison of Results of Operations for the Three Months Ended September
30, 1996 and 1995
General. The Company reported net income of approximately $3.1 million
for the three months ended September 30, 1996, before a one time statutorily
mandated SAIF assessment and a related charge. This income reflects an increase
of 32.4% over the $2.4 million for the three months ended September 30, 1995.
After the effect of the SAIF assessment and related charge, the Company's net
income was reduced to approximately $166,000 for the three-month period ended
September 30, 1996.
Net Interest Income. Net interest income increased by $1.3 million, or
18.6%, in the three months ended September 30, 1996, to $8.5 million, compared
to $7.1 million during the same period in 1995. The reason for such increase was
a $5.4 million improvement in interest income, mainly due to an increase in
average interest-earning assets of $305.6 million, or 30.0%, to $1.3 billion for
the three months ended September 30, 1996. The additional interest-earning
assets resulted from the Company's acquisition of Seaboard, consummated on
February 1, 1996, as well as increases in mortgage-backed and investment
securities and internal growth in the Bank's loan portfolio. Interest on loans
increased $2.6 million, or 26.5%, as a result of a $139.5 million, or 30.8%,
increase in the average balance of the loan portfolio partially offset by a 29
basis point (100 basis points being equal to 1%) decrease in the average yield
earned thereon. Interest income on mortgage-backed securities increased $2.2
million as a result of a $132.9 million, or 23.9%, increase in the average
balance of the mortgage-backed securities portfolio partially offset by a one
basis point decrease in the average yield earned thereon. The improvement in
interest income was partially offset by a $4.0 million increase in interest
expense mainly as a result of an increase of $309.9 million in average
interest-bearing liabilities. Interest on deposits increased $1.5 million, or
19.2%, as a result of an increase in the average balance of deposits of $119.3
million, or 20.0%, and a decrease in the cost of deposits from 5.22% to 5.18%.
Interest expense on borrowings increased by $2.6 million, or 56.4%, as a result
of an increase in the average balance of $190.6 million, or 65.9%, partially
offset by a decrease in the average rate paid on borrowings from 6.28% to 5.92%.
The Bank's average interest rate spread and net interest margin amounted to
2.02% and 2.56%, respectively, during the three months ended September 30, 1996,
compared to 2.08% and 2.81% for the comparable period in 1995.
17
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 September 30,
----------------------------------------------------------------
1996 1995
------------------------------ --------------------------------
Yield/Cost Average Average
at September 30, Average Yield/ Average Yield/
1996 Balance Interest Cost (1) Balance Interest Cost (1)
------------ ---------- -------- -------- ---------- -------- --------
(In thousands)
Interest-earning assets:
Loans receivable:
Mortgage loans 8.00% $ 520,280 $10,871 8.36% $ 399,548 $ 8,603 8.61%
Consumer loans 10.23% 71,714 1,652 9.21% 52,909 1,299 9.82%
---------- ------- ---------- -------
Total loans 8.27% 591,994 12,523 8.46% 452,457 9,902 8.75%
Mortgage-backed securities 7.06% 689,370 11,619 6.74% 556,422 9,390 6.75%
Investment securities 6.71% 36,406 623 6.85% 3,027 49 6.48%
Other earning assets 5.80% 6,886 64 3.72% 7,102 111 6.25%
---------- ------- ---------- -------
Total interest-earning assets 7.60% 1,324,656 24,829 7.50% 1,019,008 19,452 7.64%
------- -------
Noninterest-earning assets 38,757 37,633
---------- ----------
Total assets $1,363,413 $1,056,641
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits 2.95% $ 36,680 228 2.49% $ 25,686 139 2.16%
Passbook savings 3.25% 53,452 430 3.22% 62,358 501 3.21%
Certificates 5.51% 624,620 8,596 5.50% 507,407 7,125 5.62%
---------- ------- ---------- -------
Total deposits 5.18% 714,752 9,254 5.18% 595,451 7,765 5.22%
Borrowings 5.80% 479,909 7,100 5.92% 289,338 4,540 6.28%
---------- ------- ---------- -------
Total interest-bearing
liabilities 5.44% 1,194,661 16,354 5.48% 884,789 12,305 5.56%
------- -------
Noninterest-bearing liabilities 21,440 15,642
---------- ----------
Total liabilities 1,216,101 900,431
Stockholders' equity 147,312 156,210
---------- ----------
Total liabilities and
stockholders' equity $1,363,413 $1,056,641
========== ==========
Net interest-earning assets $ 129,995 $ 134,219
========== ==========
Net interest income and
interest-rate spread 2.16% $ 8,475 2.02% $ 7,147 2.08%
======= =======
Net interest margin 2.56% 2.81%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.11x 1.15x
- -----------------
<FN>
(1) Annualized
</FN>
Provision for Loan Losses. The net negative provision for loan losses
amounted to $295,000 for the three months ended September 30, 1996, compared to
a net positive provision of $75,000 for the three months ended September 30,
1995. For additional discussion of the loan loss provision and the Bank's loan
loss policy, see "Financial Condition - Asset Quality - Allowance for Loan
Losses."
Noninterest Income. Noninterest income increased by $140,000, or 17.5%,
to $940,000 during the quarter ended September 30, 1996, compared to $800,000 in
the comparable three months of 1995. This increase primarily resulted from an
increase in the net gains on sales on REO of $162,000 and an
18
increase of $48,700 in commission income from a Bank subsidiary. For additional
information relating to the net gain on sales of REO, see "Financial Condition -
Asset Quality - Non-Performing Assets."
Noninterest Expense. Noninterest expense increased by $5.4 during the
three months ended September 30, 1996, to $9.5 million, compared to $4.1 million
during the three months ended September 30, 1995. Consistent with the recently
enacted SAIF recapitalization legislation, the Bank was assessed $4.4 million by
the FDIC as its pro rata share to recapitalize the SAIF. See "Impact of Recently
Enacted Legislation - SAIF Recapitalization." As a result of the special
assessment, relative to deposits obtained in the Seaboard acquisition, the
acquired goodwill relating to Seaboard was adjusted through a charge to
noninterest expense of $451,000. Before the one time assessment and related
charge, noninterest expenses increased by $569,000, or 14.0%, in the three
months ended September 30, 1996, over the comparable prior year period. This
increase primarily resulted from the expenses related to the acquisition and
integration of the operations of Seaboard Savings Bank during the quarter.
Income Tax Provision. The provision for income taxes decreased by $1.4
million due to both a decrease in the provision rate and the level of income
before income taxes. The income tax provision rate decreased from 38.0% of
income before taxes for the third quarter of 1995, to 29.7% for the third
quarter of 1996 due to differences in non-taxable and non-deductible items in
the third quarter of 1996, compared to the third quarter of 1995 and the effects
of less taxable income in higher income tax brackets in 1996.
Comparison of Results of Operations for the Nine Months Ended September 30,
1996 and 1995
General. The Company reported net income of approximately $8.4 million
for the nine months ended September 30, 1996, before a one time statutorily
mandated SAIF assessment and a related charge. This income reflects an increase
of 19.7% over the $7.0 million for the nine months ended September 30, 1995.
After the effect of the SAIF assessment and related charge, the Company's net
income was reduced to $5.4 million for the nine-month period ended September 30,
1996.
Net Interest Income. Net interest income increased by $3.6 million, or
16.9%, in the nine months ended September 30, 1996, to $25.2 million, compared
to $21.6 million during the same period in 1995. The reason for such increase
was a $12.1 million improvement in interest income, mainly due to an increase in
average interest-earning assets of $204.8 million, or 20.3%, to $1.2 billion for
the nine months ended September 30, 1996. The additional interest-earning assets
resulted from the Company's acquisition of Seaboard, consummated on February 1,
1996, as well as increases in mortgage-backed and investment securities and
internal growth in the Bank's loan portfolio. Interest on loans increased $7.2
million, or 25.3%, as a result of a $112.4 million, or 25.2%, increase in the
average balance of the loan portfolio together with a one basis point increase
in the average yield earned thereon. Interest income on mortgage-backed
securities increased $3.6 million as a result of a $66.1 million, or 12.2%,
increase in the average balance of the mortgage-backed securities portfolio
together with a five basis point increase in the average yield earned thereon.
The improvement in interest income was partially offset by a $8.4 million
increase in interest expense mainly as a result of an increase of $199.1 million
in average interest-bearing liabilities. Interest on deposits increased $4.0
million, or 17.9%, as a result of both an increase in the average balance of
deposits of $85.1 million, or 14.3%, and an increase in the cost of deposits
from 4.99% to 5.15%. Interest expense on borrowings increased by $4.4 million,
or 33.4%, as a result of an increase in the average balance of $114.0 million,
or 40.6%, partially offset by a decrease in the average rate paid on borrowings
from 6.31% to 5.99%. The Bank's average interest rate spread and net
19
interest margin amounted to 2.16% and 2.79%, respectively, during the nine
months ended September 30, 1996, compared to 2.15% and 2.86% for the comparable
period in 1995.
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.
Nine Months Ended September 30,
-----------------------------------------------------------------
1996 1995
------------------------------ ---------------------------------
Yield/Cost Average Average
at September 30, Average Yield/ Average Yield/
1996 Balance Interest Cost (1) Balance Interest Cost (1)
----------- ---------- -------- -------- ---------- -------- --------
(In thousands)
Interest-earning assets:
Loans receivable:
Mortgage loans 8.00% $ 491,892 $31,101 8.43% $ 397,413 $24,763 8.31%
Consumer loans 10.23% 66,964 4,635 9.23% 49,061 3,755 10.20%
---------- ------- ---------- -------
Total loans 8.27% 558,856 35,736 8.53% 446,474 28,518 8.52%
Mortgage-backed securities 7.06% 608,757 31,409 6.88% 542,628 27,816 6.83%
Investment securities 6.71% 36,800 1,887 6.84% 12,783 650 6.78%
Other earning assets 5.80% 7,597 268 4.70% 5,302 233 5.86%
---------- ------- ---------- -------
Total interest-earning assets 7.60% 1,212,010 69,300 7.62% 1,007,187 57,217 7.57%
------- -------
Noninterest-earning assets 40,361 37,905
----------- ----------
Total assets $1,252,371 $1,045,092
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits 2.95% $ 34,255 682 2.65% $ 25,417 410 2.15%
Passbook savings 3.25% 54,886 1,350 3.28% 62,497 1,511 3.22%
Certificates 5.51% 592,198 24,303 5.47% 508,333 20,407 5.35%
---------- ------- ---------- -------
Total deposits 5.18% 681,339 26,335 5.15% 596,247 22,328 4.99%
Borrowings 5.80% 394,950 17,738 5.99% 280,941 13,300 6.31%
---------- ------- ---------- -------
Total interest-bearing
liabilities 5.44% 1,076,289 44,073 5.46% 877,188 35,628 5.42%
------- -------
Noninterest-bearing liabilities 22,683 15,059
---------- ----------
Total liabilities 1,098,972 892,247
Stockholders' equity 153,399 152,845
---------- ----------
Total liabilities and
stockholders' equity $1,252,371 $1,045,092
========== ==========
Net interest-earning assets $ 135,721 $ 129,999
========== ==========
Net interest income and
interest-rate spread 2.16% $25,227 2.16% $21,589 2.15%
======= =======
Net interest margin 2.79% 2.86%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.13x 1.15x
- -----------------
<FN>
(1) Annualized
</FN>
Provision for Loan Losses. The net negative provision for loan losses
amounted to $299,000 for the nine months ended September 30, 1996, compared to a
net positive provision of $366,000 for the nine months ended September 30, 1995.
For additional discussion of the loan loss provision and the Bank's loan loss
policy, see "Financial Condition - Asset Quality - Allowance for Loan Losses."
20
Noninterest Income. Noninterest income increased $327,000, or 15.2%, to
$2.5 million during the nine months ended September 30, 1996, compared to $2.2
million in the comparable nine months of 1995. The additional noninterest income
resulted from an increase in the net gains on sales of REO of $207,000 and an
increase of $164,500 in commission income from a Bank subsidiary. For additional
information relating to the net gain on sales of REO, see "Financial Condition -
Asset Quality - Non-Performing Assets."
Noninterest Expense. Noninterest expense increased by $6.9 million
during the nine months ended September 30, 1996, to $18.9 million, compared to
$12.1 million during the nine months ended September 30, 1995. Consistent with
the recently enacted SAIF recapitalization legislation, the Bank was assessed
$4.4 million by the FDIC as its pro rata share to recapitalize the SAIF. See
"Impact of Recently Enacted Legislation - SAIF Recapitalization." As a result of
the special assessment, relative to deposits obtained in the Seaboard
acquisition, the acquired goodwill relating to Seaboard was adjusted through a
charge to noninterest expense of $451,000. Before the one time assessment and
related charge, noninterest expenses increased by $2.0 million, or 16.8%, during
the nine months ended September 30, 1996, over the comparable prior year period.
This increase primarily resulted from the expenses related to the acquisition
and integration of the operations of Seaboard Savings Bank during the nine
months.
Income Tax Provision. The provision for income taxes decreased by
$662,000 for the nine months ended September 30, 1996, compared to the
comparable period of 1995 due to a decrease in the level of income before taxes
partially offset by an increase in the provision rate. The income tax provision
rate increased from 38.0% of income before taxes, for the first nine months of
1995, to 40.0%, for the first nine months of 1996, due to differences in
non-taxable and non-deductible items in the first nine months of 1996, compared
to the 1995 nine-month period.
Liquidity and Capital Resources
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's primary
sources of funds are deposits; borrowings; amortization, prepayments and
maturities of outstanding loans and mortgage-backed securities; sales of loans;
maturities of investment securities and other short-term investments; and funds
provided from operations. While scheduled payments from the amortization of
loans and mortgage-backed securities and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. In addition, the Bank invests excess funds
in overnight deposits and other short-term interest-earning assets which provide
liquidity to meet lending requirements. The Bank has been able to generate
sufficient cash through its deposits as well as borrowings (primarily consisting
of FHLB advances and repurchase agreements). At September 30, 1996, the Bank had
$154.0 million of outstanding FHLB advances and $363.4 million in repurchase
agreements and other borrowings.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Bank maintains a
strategy of investing in various lending products. The Bank uses its funds
acquired primarily to meet its ongoing commitments, to provide funds for
maturing savings certificates and savings withdrawals, fund loan commitments and
maintain a portfolio of mortgage-backed and other investment securities. At
September 30, 1996, the total approved loan commitments outstanding amounted to
$63.9 million. At the same date, commitments under unused lines of credit
amounted to $6.1 million. Certificates of deposit scheduled to mature in one
year or less at September 30, 1996,
21
totaled $353.5 million. Management believes that a significant portion of
maturing deposits will remain with the Bank. The Bank anticipates that even with
interest rates at lower levels than have been experienced in recent years, it
will continue to have sufficient funds to meet its current commitments. At
September 30, 1996, the Bank had a liquidity ratio of 10.8%, which exceeded the
required minimum liquid asset ratio of 5.0%.
At September 30, 1996, the Bank's regulatory capital was well in excess
of applicable minimums required by federal regulations. The Bank, as a member of
the thrift industry, is required to maintain tangible capital of 1.5% of
adjusted total assets, core capital of 3.0% of adjusted total assets and
risk-based capital of 8.0% of adjusted risk-weighted assets. At September 30,
1996, the Bank's tangible capital was $117.6 million, or 8.4% of adjusted total
assets, core capital was $117.6 million, or 8.4% of adjusted total assets and
risk-based capital was $124.0 million, or 22.4% of adjusted risk-weighted
assets, exceeding the requirements by $96.6 million, $75.6 million and $79.8
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) Not applicable.
b) No Form 8-K Reports were filed during the quarter.
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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: November 14, 1996 By: /s/ Tollie W. Rich, Jr.
-----------------------
Tollie W. Rich, Jr., Executive Vice President,
Chief Operating Officer
Date: November 14, 1996 By: /s/ Emory J. Dunning, Jr.
-------------------------
Emory J. Dunning, Jr., Senior Vice President,
Treasurer and Chief Financial Officer
23