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 March 31, 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) 9,846,840
- - ---------------------------------------- --------------------
(Title of Class) (Number of Shares Outstanding
as of May 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............................................................ 2
Unaudited Consolidated Statement of Changes in Stockholders' Equity........................................ 3
Unaudited Consolidated Statements of Cash Flows............................................................ 4
Notes to Unaudited Consolidated Financial Statements....................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 6
General.................................................................................................... 6
Financial Condition........................................................................................ 6
Assets.................................................................................................. 6
Liabilities and Stockholders' Equity.................................................................... 6
Asset Quality........................................................................................... 7
General.............................................................................................. 7
Impaired Loans....................................................................................... 7
Troubled Debt Restructurings......................................................................... 8
Non-Performing Assets................................................................................ 9
Potential Problem Loans.............................................................................. 9
Allowance for Loan Losses............................................................................ 10
Results of Operations...................................................................................... 12
Comparison of Results of Operations for the Three Months Ended March 31, 1997 and 1996.................. 12
General.............................................................................................. 12
Net Interest Income.................................................................................. 12
Provision for Loan Losses............................................................................ 12
Yields Earned and Rates Paid......................................................................... 13
Noninterest Income................................................................................... 13
Noninterest Expense.................................................................................. 13
Income Tax Provision................................................................................. 14
Impact of New Accounting Standards......................................................................... 14
Liquidity and Capital Resources............................................................................ 14
PART II - OTHER INFORMATION..................................................................................... 15
Item 1. Legal Proceedings....................................................................................... 15
Item 2. Changes in Securities................................................................................... 15
Item 3. Defaults Upon Senior Securities......................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders..................................................... 15
Item 5. Other Information....................................................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................................................ 15
SIGNATURES...................................................................................................... 16
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LIFE BANCORP, INC.
Unaudited Consolidated Balance Sheets
(In thousands, except stock data)
March 31, 1997 December 31, 1996
------------------ -------------------
Assets
Cash and cash equivalents............................................ $ 11,129 $ 11,283
Investment securities, available-for-sale............................ 29,957 30,742
Mortgage-backed securities:
Held-to-maturity (Market value of $132,120 and
$141,269, respectively).......................................... 133,034 140,974
Available-for-sale................................................. 544,211 565,086
Loans receivable, net................................................ 638,872 622,405
Accrued interest and dividends receivable............................ 10,524 10,824
Real estate owned, net............................................... 666 1,202
Federal Home Loan Bank stock, at cost................................ 15,044 13,086
Premises and equipment, net.......................................... 17,463 17,468
Excess of cost over net assets acquired.............................. 4,652 4,792
Other assets......................................................... 2,309 1,900
---------- ----------
Total assets................................................. $1,407,861 $1,419,762
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits........................................................... $ 738,709 $ 732,322
Notes payable and other borrowings:
Advances from Federal Home Loan Bank of Atlanta.................. 300,553 261,711
Securities sold under agreements to repurchase................... 199,000 259,000
Secured note due to Thrift Financing Corporation................. 4,652 5,227
Advances from borrowers for taxes and insurance.................... 2,982 1,795
Other liabilities.................................................. 10,166 8,769
---------- ----------
Total liabilities............................................ 1,256,062 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 9,846,840 shares.................. 98 98
Additional paid-in capital......................................... 92,324 92,122
Retained earnings, substantially restricted........................ 66,307 63,871
Unearned common stock held by ESOP and RRP trusts.................. (7,048) (7,121)
Unrealized gain on securities (net of taxes)....................... 118 1,968
---------- ----------
Total stockholders' equity................................... 151,799 150,938
---------- ----------
Total liabilities and stockholders' equity................... $1,407,861 $1,419,762
========== ==========
<FN>
See Notes to Unaudited Consolidated Financial Statements
</FN>
1
LIFE BANCORP, INC.
Unaudited Consolidated Statements of Operations
(In thousands, except stock data)
Three Months Ended
March 31,
-------------------
1997 1996
------- -------
Interest income:
Interest on loans.................................................. $13,273 $11,229
Interest on investment securities.................................. 672 723
Interest on mortgage-backed securities............................. 11,512 9,734
------- -------
Total interest income........................................ 25,457 21,686
------- -------
Interest expense:
Interest on deposits............................................... 9,212 8,232
Interest on notes payable and other borrowings..................... 7,214 5,217
------- -------
Total interest expense....................................... 16,426 13,449
------- -------
Net interest income.......................................... 9,031 8,237
Provision for loan losses............................................ 270 34
------- -------
Net interest income after provision for loan losses.......... 8,761 8,203
------- -------
Noninterest income:
Deposit account fees and related income............................ 139 141
Servicing fees..................................................... 133 151
Net gain on sales of mortgage loans held for sale.................. 17 6
Net gain (loss) on sales of real estate owned...................... (33) 7
Net gain on sales of assets........................................ 34 3
Net gain on sale of mortgage backed securities..................... 986 --
Other.............................................................. 503 391
------- -------
Total noninterest income..................................... 1,779 699
Noninterest expense:
Compensation and employee benefits................................. 2,869 2,724
Occupancy and office operations.................................... 835 737
FDIC Premium....................................................... 27 377
Advertising and promotion.......................................... 187 139
Provision for losses on real estate owned.......................... 46 --
Amortization of excess of cost over net assets
of companies acquired............................................ 150 107
Other.............................................................. 475 421
------- -------
Total noninterest expense.................................... 4,589 4,505
------- -------
Income before income taxes........................................... 5,951 4,397
Income tax provision................................................. 2,495 1,810
------- -------
Net income........................................................... $ 3,456 $ 2,587
======= =======
Net income per common and common equivalent share:
Primary...................................................... $0.36 $0.25
======= =======
Fully diluted................................................ $0.36 $0.25
======= =======
Dividends paid per common share...................................... $0.11 $0.11
======= =======
<FN>
See Notes to Unaudited Consolidated Financial Statements
</FN>
2
LIFE BANCORP, INC.
Unaudited Consolidated Statement of Changes in Stockholders' Equity
(In thousands)
Unearned
Common Unrealized
Stock Gain (loss)
Held on Securities
Additional by ESOP Available
Common Paid-in Retained and RRP for Sale Total
Stock Capital Earnings Trusts (Net of Tax) Equity
---------- ----------- ---------- ---------- -------------- ----------
Balance at December 31, 1996............ $ 98 $92,122 $63,871 $(7,121) $ 1,968 $150,938
Net income.............................. -- -- 3,456 -- -- 3,456
Cash dividends paid..................... -- -- (1,020) -- -- (1,020)
Common Stock released by
ESOP trust............................ -- 319 -- 329 -- 648
Common Stock purchased for
RRP trust............................. -- (117) -- (256) -- (373)
Unrealized gain (loss) on
securities, net of tax................ -- -- -- -- (1,850) (1,850)
---- ------- ------- -------- ------- --------
Balance at March 31, 1997............... $ 98 $92,324 $66,307 $(7,048) $ 118 $151,799
===== ======= ======= ======= ======= ========
<FN>
See Notes to Unaudited Consolidated Financial Statements
</FN>
3
LIFE BANCORP, INC.
Unaudited Consolidated Statements of Cash Flows
(In thousands)
For the Three Months
Ended March 31,
-------------------------
1997 1996
---------- ----------
Cash flows from operating activities:
Net Income................................................................................ $ 3,456 $ 2,587
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for losses on loans and real estate owned................................ 316 34
Depreciation and amortization...................................................... 185 142
Net amortization of premiums and discounts on investments.......................... (5) (14)
Amortization of excess of cost over net assets of companies acquired............... 150 107
Net (loss) on sales of real estate owned........................................... 33 (7)
Net gain on sales of mortgage loans................................................ (16) (6)
Net gain on sales of premises and equipment........................................ (34) (3)
Net gain on sale of investments.................................................... (1,081) --
Loans originated for resale............................................................... (1,452) (335)
Proceeds from loans sold to others........................................................ 1,469 340
Non-Cash ESOP Expenses.................................................................... 682 272
Changes in assets and liabilities:
(Increase) decrease in assets:
Accrued interest receivable........................................................ 225 (502)
Deferred loan fees................................................................. 156 (898)
Deferred income taxes.............................................................. -- 1,405
Other assets....................................................................... (14) (579)
Increase (decrease) in liabilities:
Accrued expenses and other liabilities............................................. 1,397 2,394
-------- --------
Net cash provided by (used in) operating activities........................ 5,467 4,937
-------- --------
Cash flows from investing activities:
Proceeds from sales and maturities of investments and mortgage-backed securities.......... 64,998 5,000
Purchase of investment securities......................................................... -- (19,425)
Principal collected on loans.............................................................. 27,877 17,143
Loans originated for investment........................................................... (42,736) (24,698)
Proceeds from sale of premises and equipment.............................................. 179 3
Purchases of premises and equipment....................................................... (192) 34
Purchase of Seaboard Bancorp.............................................................. -- (8,235)
Purchases of mortgage-backed securities................................................... (76,866) (35,282)
Principal collected on mortgage-backed securities......................................... 38,057 30,008
Proceeds from sale of real estate owned................................................... 552 69
Redemption of FHLB stock.................................................................. -- 351
Principal collected on ESOP loan.......................................................... 314 314
Purchase of FHLB stock.................................................................... (1,958) --
------- --------
Net cash provided by (used in) investing activities........................ 10,225 (34,718)
-------- --------
Cash flows from financing activities:
Net increase in checking deposits, savings deposits, and
certificates of deposit................................................................ 6,387 7,013
Advances from borrowers for taxes and insurance........................................... 1,187 1,307
Dividends Paid on Common Stock............................................................ (1,083) (1,201)
Repurchase of Common Stock................................................................ -- (7,244)
Stock purchase for RRP Program............................................................ (604) (939)
Proceeds from notes payable and other borrowings.......................................... 353,869 176,348
Repayment of notes payable and other borrowings........................................... (375,602) (142,644)
-------- --------
Net cash provided by (used in) financing activities........................ (15,846) 32,640
-------- --------
Net increase (decrease) in cash and cash equivalents.............................................. (154) 2,859
Cash and cash equivalents at beginning of period.................................................. 11,283 8,845
-------- --------
Cash and cash equivalents at end of period........................................................ $ 11,129 $ 11,704
======== ========
<FN>
See Notes to Unaudited Consolidated Financial Statements
</FN>
4
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
months ended March 31, 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
---------------------------------
March 31, 1997 March 31, 1996
--------------- ---------------
For primary net income per share....... 9,485 10,281
For fully diluted net income per share. 9,485 10,281
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 April 21, 1997, the Board of Directors increased the quarterly
dividend by 9.1%, to $0.12 per share. The dividend will be payable on
May 31, 1997, to Life Bancorp's stockholders of record at the close of
business on May 16, 1997.
5
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 March 31, 1997.
Loans receivable increased by $16.5 million, or 2.6%, from $622.4
million at December 31, 1996, to $638.9 million at March 31, 1997. The Bank had
no mortgage loans held-for-sale at either December 31, 1996 or March 31, 1997.
Investment securities, available-for-sale remained relatively unchanged
totaling $30.7 million at December 31, 1996, and $30.0 million at March 31,
1997.
During the first quarter, the general interest rate environment and the
valuation of certain mortgage-backed securities allowed the Bank an opportunity
to restructure a portion of its mortgage-backed securities portfolio to improve
interest-rate sensitivity in anticipation of rising interest rates, while also
realizing a significant profit. To take advantage of this opportunity, the Bank
sold approximately $65.0 million of relatively lower yielding fixed-rate
mortgage-backed securities and adjustable-rate mortgage-backed securities with
an annual interest-rate adjustment cap of 1% and will replace these securities
with adjustable-rate mortgage-backed securities having higher annual adjustment
caps. As a result of this restructuring, total mortgage-backed securities, both
held-to-maturity and available-for-sale, decreased $28.8 million, or 4.1%, from
$706.1 million at December 31, 1996, to $677.2 million at March 31, 1997.
Liabilities and Stockholders' Equity
Deposits increased from $732.3 million at December 31, 1996, to $738.7
million at March 31, 1997. Total liabilities, however, decreased during the
quarter, as the not yet reinvested proceeds from the aforementioned sale of
mortgage-backed securities were used to reduce borrowings. The total of
6
advances from the FHLB of Atlanta and repurchase agreements decreased $21.1
million, from $520.7 million at December 31, 1996 to $499.6 million at March 31,
1997.
Stockholders' equity increased from $150.9 million at December 31, 1996,
to $151.8 million at March 31, 1997. This increase was primarily due to the
results of the Company's net income of $3.5 million for the three months, which
was partially offset by (i) a $1.9 million decrease 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; and
(ii) quarterly cash dividends totaling $1.0 million, or $0.11 per share, paid on
February 28, 1997, to stockholders of record on February 14, 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. Residential mortgages, consumer installment
obligations and credit cards may be excluded. 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. 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.
7
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
March 31, December 31,
1997 1996
-------------- -------------
(Dollars in Thousands)
Impaired loans for which there is a related
allowance for credit losses............................... $ 8,996 $ 9,022
Impaired loans for which there is no related
allowance for credit losses............................... -- --
------- -------
Total impaired loans...................................... $ 8,996 $ 9,022
======= =======
Allowance for credit losses on impaired loans............. $ 3,907 $ 3,500
======= =======
Average impaired loans during the period.................. $ 8,806 $ 9,659
======= =======
Interest income recognized on impaired loans
during the time within the period that the loans
were impaired............................................. $ 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... $ 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 $2.4 million of troubled debt
restructurings, net of specific reserves, at March 31, 1997. Included in the
Bank's troubled debt restructurings at March 31, 1997, is an office warehouse
complex with a carrying value of $1.1 million net of specific reserves. At March
31, 1997, this loan was classified substandard and was current. The remaining
$1.3 million of troubled debt restructuring at March 31, 1997, consisted of
loans secured by multi-family and commercial properties located in Virginia
Beach and Norfolk.
8
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.
March 31, 1997 December 31, 1996
------------------- -------------------
(Dollars in Thousands)
Non-performing assets:
Non-accruing loans:
Mortgage loans:
Single-family:
Conventional.............................. $1,840 $1,498
FHA/VA.................................... 829 698
Multi-family................................ -- --
Commercial.................................. 574 46
Consumer loans................................ 572 308
------ ------
Total non-accruing loans........................ 3,815 2,550
Real estate owned, net (1)......................... 666 1,202
------ ------
Total non-performing assets....................... 4,481 3,752
Troubled debt restructurings, net (2)................ 2,429 2,464
------ ------
Total non-performing assets and troubled
debt restructurings............................... $6,910 $6,216
====== ======
Non-accruing loans to total loans held for
investment........................................ 0.60% 0.41%
===== =====
Total non-performing assets to total
assets............................................ 0.32% 0.26%
===== =====
Total non-performing assets and troubled
debt restructurings to total assets............... 0.49% 0.44%
===== =====
- - ------------------------------------
<FN>
(1) Amounts are net of the allowance for real estate owned which amounted
to $28,000 at March 31, 1997 and $30,000 at December 31, 1996.
(2) Amounts are net of specific valuation allowance which totaled
$4.1 million at March 31, 1997 and $3.5 million at December 31, 1996.
</FN>
The Bank's real estate owned at March 31, 1997, consisted of 14
properties. During the first three months of 1997, the Bank sold four single
family residences and two multi-family residences previously acquired in
foreclosure for a combined sale price of $318,000. 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 $33,000.
9
Potential Problem Loans. In addition to the loans included in the
preceding impaired loans and non-performing assets and troubled debt
restructurings tables, at March 31, 1997, the Bank's portfolio contained loans
totaling $10.2 million which were designated as substandard or special mention,
even though they were not impaired or categorized as a non-performing asset or
troubled debt restructuring.
At March 31, 1997, there were eight performing loans to five borrowers,
totaling $5.6 million, 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 March 31, 1997,
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 March 31, 1997, there were three performing loans to
two borrowers, totaling $4.6 million, which the Bank had designated as special
mention. One of these loans, totaling $1.3 million, is secured by a multi-family
dwelling unit in Norfolk, Virginia and two loans totaling $3.3 million, are
secured by multi-family units 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.
10
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
Three Months Ended
March 31,
---------------------------
1997 1996
------------ ------------
(Dollars in Thousands)
Allowance at beginning of period................... $9,656 $4,438
Allowance from acquisition......................... -- 5,192
Provision charged to operations.................... 270 34
Loans charged-off:
Mortgage loans:
Single-family.................................. -- (90)
Multi-family................................... -- --
Construction................................... -- --
Commercial..................................... -- --
Residential lots............................... -- --
Consumer loans................................... (117) (50)
------ ------
Total........................................ (117) (140)
Other charge-off................................... -- --
Loan recoveries:
Mortgage loans:
Single-family.................................. 11 1
Multi-family................................... -- --
Construction................................... -- --
Commercial..................................... 16 5
Consumer loans................................... 19 15
------ ------
Total........................................ 46 21
Other recoveries................................... 137 --
------ ------
Allowance at end of period......................... $9,992 $9,545
====== ======
Allowance for loan losses to total non-
accruing loans at end of period................. 261.91% 444.57%
====== ======
Allowance for loan losses to total
impaired loans at end of period................. 111.44% 82.23%
====== ======
Allowance for loan losses to total loans
held for investment at end of period............ 1.56% 1.77%
====== ======
Based on facts and circumstances currently available, the Bank presently
believes that the allowance for loan losses was adequate at March 31, 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.
11
Results of Operations
Comparison of Results of Operations for the Three Months Ended
March 31, 1997 and 1996
General. The Company reported net income of approximately $3.5 million
and $2.6 million for the three months ended March 31, 1997 and 1996,
respectively. The $869,000 increase in net income for the three months ended
March 31, 1997, compared to the corresponding period in 1996, was due primarily
to a $794,000, or 9.6%, increase in net interest income, and a $1.1 million, or
154.5% increase in noninterest income; which were partially offset by a $236,000
increase in the provision for loan losses, an $84,000, or 1.9%, increase in
noninterest expenses and a $685,000, or 37.8%, increase in provision for income
taxes.
Net Interest Income. Net interest income increased by $794,000, or 9.6%,
in the three months ended March 31, 1997, to $9.0 million, compared to $8.2
million during the same period in 1996. The reason for such increase was a $3.8
million improvement in interest income, mainly due to an increase in average
interest-earning assets of $237.4 million, or 21.2%, to $1.4 billion for the
three months ended March 31, 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 $2.0 million,
or 18.2%, as a result of a $123.4 million, or 24.1%, increase in the average
balance of the loan portfolio partially offset by a 42 basis point (100 basis
points being equal to 1%) decrease in the average yield earned thereon. Interest
income on mortgage-backed securities increased $1.8 million as a result of a
$116.0 million, or 20.5%, increase in the average balance of the mortgage-backed
securities portfolio partially offset by a 12 basis point decrease in the
average yield earned thereon. The improvement in interest income was partially
offset by a $3.0 million increase in interest expense mainly as a result of an
increase of $259.3 million in average interest-bearing liabilities. Interest on
deposits increased $980,000, or 11.9%, as a result of an increase in the average
balance of deposits of $91.3 million, or 14.2%, partially offset by a decrease
in the cost of deposits from 5.13% to 5.02%. Interest expense on borrowings
increased by $2.0 million, or 38.3%, as a result of an increase in the average
balance of $168.0 million, or 48.8%, partially offset by a decrease in the
average rate paid on borrowings from 6.06% to 5.63%. The Bank's average interest
rate spread and net interest margin amounted to 2.22% and 2.66%, respectively,
during the three months ended March 30, 1997, compared to 2.28% and 2.84% for
the comparable period in 1996.
Provision for Loan Losses. The provision for loan losses amounted to
$270,000 for the three months ended March 31, 1997, compared to $34,000 during
the three months ended March 31, 1996. For additional discussion of the Bank's
loan loss policy, see "Financial Condition - Asset Quality Allowance for Loan
Losses."
12
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 March 31,
--------------------------------------------------------------
1997 1996
------------------------------ ------------------------------
Yield/Cost Average Average
at March 31, Average Yield/ Average Yield/
1997 Balance Interest Cost(1) Balance Interest Cost(1)
----------- ---------- -------- -------- ---------- -------- --------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable:
Mortgage loans........... 8.08% $ 556,522 $11,430 8.22% $ 449,969 $ 9,735 8.65%
Consumer loans........... 10.44% 79,039 1,843 9.33% 62,197 1,494 9.61%
---------- ------- ---------- -------
Total loans................ 8.35% 635,561 13,273 8.35% 512,166 11,229 8.77%
Mortgage-backed securities. 7.13% 682,495 11,512 6.75% 566,449 9,734 6.87%
Investment securities...... 6.81% 30,605 540 7.06% 36,183 624 6.90%
Other earning assets....... 5.40% 10,765 132 4.90% 7,268 99 5.45%
---------- ------- ----------- -------
Total interest-earning assets 7.71% 1,359,426 25,457 7.49% 1,122,066 21,686 7.73%
------- -------
Noninterest-earning assets. 49,567 43,145
---------- ----------
Total assets........... $1,408,993 $1,165,211
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits.......... 2.05% $ 43,194 222 2.06% $ 32,345 224 2.77%
Passbook savings......... 3.30% 61,025 506 3.32% 58,131 473 3.25%
Certificates............. 5.45% 629,480 8,484 5.39% 551,928 7,535 5.46%
---------- ------- ---------- -------
Total deposits............. 5.11% 733,699 9,212 5.02% 642,404 8,232 5.13%
Borrowings................. 5.66% 512,635 7,214 5.63% 344,586 5,217 6.06%
---------- ------- ---------- -------
Total interest-bearing
liabilities............ 5.33% 1,246,334 16,426 5.27% 986,990 13,449 5.45%
------- -------
Noninterest-bearing liabilities 10,241 17,719
---------- ----------
Total liabilities...... 1,256,575 1,004,709
Stockholders' equity....... 152,418 160,502
---------- ----------
Total liabilities and
stockholders' equity... $1,408,993 $1,165,211
========== ==========
Net interest-earning assets $ 113,092 $ 135,076
========== ==========
Net interest income and
interest-rate spread..... 2.38% $ 9,031 2.22% $ 8,237 2.28%
======= =======
Net interest margin........ 2.66% 2.84%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.09x 1.13x
<FN>
- - ------------------------------------
(1) Annualized
</FN>
Noninterest Income. Noninterest income for the quarter ended March 31,
1997, was $1.8 million compared to $699,000 in the comparable three months of
1996. This increase resulted mostly from a $986,000 profit on the previously
discussed sale of mortgage-backed securities.
Noninterest Expense. Noninterest expenses were relatively unchanged during
the quarter, increasing by only $84,000. Deposit insurance premiums decreased
$350,000, which was offset by the added expense recognition in the Company's
Employee Stock Ownership Plan ("ESOP") due to the
13
increased market price of the Company's stock, the costs associated with the
installation and operation of the Bank's new computer system, and an increase in
the amortization of goodwill resulting from the acquisition of Seaboard Savings
Bank in 1996.
Income Tax Provision. The provision for income taxes increased by
$685,000 due to both an increase in the provision rate and the level of pre-tax
income. The income tax provision rate increased from 41.2% of income before
taxes, for the first quarter of 1996, to 41.9%, for the first quarter 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 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 potential common stock (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 were in effect during the first quarter of 1997, the Company would
have reported basic EPS of $0.37 and diluted EPS of $0.36.
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 March 31, 1997, the Bank had $300.6
million of outstanding FHLB advances and $203.7 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 March 31, 1997, the total approved
loan commitments outstanding amounted to $40.0 million. At the same date,
commitments under unused lines of credit amounted to $9.0 million. Certificates
of deposits scheduled to mature in one year or less at March 31, 1997, totaled
$364.0 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 March
31,
14
1997, the Bank had a liquidity ratio of 10.02%, which exceeded the required
minimum liquid asset ratio of 5.0%.
At March 31, 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 March 31, 1997, the
Bank's tangible capital was $125.0 million, or 8.91%, of adjusted total assets,
core capital was $125.0 million, or 8.91%, of adjusted total assets and
risk-based capital was $130.7 million, or 22.5%, of adjusted risk-weighted
assets, exceeding the requirements by $104.0 million, $82.9 million and $84.2
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
15
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
16