- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NO.: 0-22193
----------------
LIFE FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0743196
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10540 MAGNOLIA AVENUE, SUITE B, RIVERSIDE, CALIFORNIA 92505
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(909) 637-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(TITLE OF CLASS)
----------------
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, i.e., persons other than directors and executive officers of the
registrant is $119,140,640 and is based upon the last sales price as quoted on
The Nasdaq Stock Market for March 17, 1998.
As of March 17, 1998, the Registrant had 6,546,716 shares outstanding
(excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT FOR THE 1998 ANNUAL MEETING OF STOCKHOLDERS
ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INDEX
PAGE
----
PART I
Item 1. Business....................................................... 1
Additional Item. Executive Officers of the Registrant.......... 46
Item 2. Properties..................................................... 47
Item 3. Legal Proceedings.............................................. 48
Item 4. Submission of Matters to a Vote of Security Holders............ 48
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 49
Item 6. Selected Financial Data........................................ 49
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 51
Item 8. Financial Statements and Supplementary Data.................... 64
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 99
PART III
Item 10. Directors and Executive Officers of the Registrant............. 99
Item 11. Executive Compensation......................................... 99
Item 12. Security Ownership of Certain Beneficial Owners and Management. 99
Item 13. Certain Relationships and Related Transactions................. 99
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K.............................................................. 99
SIGNATURES............................................................... 100
i
ITEM 1. BUSINESS
GENERAL
LIFE Financial Corporation (the "Company") is a Delaware chartered savings
and loan holding company, headquartered in Riverside, California. The Company
became the parent company of Life Bank (formerly "Life Savings Bank, Federal
Savings Bank") (the "Bank") pursuant to the holding company reorganization of
the Bank (the "Reorganization") undertaken in connection with the Company's
initial public offering of its Common Stock (the "IPO"). The Company completed
the IPO on June 30, 1997. Together with shares issued subsequent to that date
pursuant to the exercise of the underwriter's overallotment option, the
Company issued a total of 3,335,000 shares of Common Stock in the IPO at a
price of $11.00 per share. Net proceeds from the IPO amounted to $32.8
million.
The Company originates, purchases, sells, securitizes and services primarily
non-conventional mortgage loans principally secured by first and second
mortgages on one- to four-family residences. The Company makes Liberator
Series loans, which are for the purchase or refinance of residential real
property by borrowers who generally would not qualify for Fannie Mae ("FNMA")
or Freddie Mac ("FHLMC") loans ("sub-prime borrowers"), and Portfolio Series
loans, which are debt consolidation loans for borrowers whose credit history
qualifies them for FNMA and FHLMC loans ("Agency-Qualified Borrowers") with
loan-to-value ratios generally up to 125%. While the Company is currently
emphasizing the origination of Portfolio Series loans, it intends to market
both products as demand permits. Liberator Series and Portfolio Series loans
are the Company's "core products." In addition, to a much lesser extent, the
Company originates multi-family residential and commercial loans.
The Company conducts its business from thirteen locations: the Company's
corporate headquarters and Western regional lending center in Riverside,
California, two additional regional lending centers, one in Jacksonville,
Florida and one in the Denver, Colorado metropolitan area, the national
servicing center located in Riverside, California, and two bank branch offices
in San Bernardino and Riverside, California. In addition, the Company has
recently opened eight low-cost retail lending offices, and intends to enter
into leases for an additional six retail lending offices by the end of 1998,
located in the Southern California area. Such offices are expected to become
operational in 1998.
At December 31, 1997, the Company had consolidated total assets of $411.8
million, total deposits of $211.8 million and total stockholders' equity of
$54.8 million. During the year ended December 31, 1997, the Company originated
or purchased, through a network of approved correspondents and independent
mortgage brokers (the "Originators"), $773.1 million of non-conventional
mortgage products, and sold or securitized $509.7 million of such products.
The Bank's deposits are insured up to the maximum allowable amount by the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). The Company's headquarters are located at 10540 Magnolia
Avenue, Suite B, Riverside, California 92505, and its telephone number at that
location is (909) 637-4000.
On March 11, 1998, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") with FIRSTPLUS Financial Group, Inc. ("FIRSTPLUS"),
pursuant to which the Company will be acquired by and become a wholly-owned
subsidiary of FIRSTPLUS. The Merger Agreement is subject to the receipt of
regulatory approval and the approval of shareholders of the Company. Under the
Merger Agreement, at the effective date of the merger, each outstanding share
of common stock of the Company will be converted into the right to receive
between 0.500 and 0.667 shares of FIRSTPLUS common stock, as calculated
pursuant to the Exchange Ratio outlined in the Merger Agreement.
HISTORICAL STRATEGY OF THE COMPANY
During the early 1990's, as a result of reduced employment levels and
corporate relocations in Southern California and the general weakness of the
national economy, the Company's market area experienced a
1
weakening of real estate values and a reduction in home sales and
construction. When confronted with increased competition and nominal growth
during this same period, the Company's results of operations were adversely
impacted and the Company began to experience increases in total non-performing
loans held for investment. In response, in 1994, the Company retained new
management experienced in sub-prime lending to redirect its business focus,
revise its underwriting policies and procedures and enhance its related
servicing capabilities. A plan was developed pursuant to which the Company
reorganized its lending operations from that of a thrift emphasizing
traditional mortgage banking and portfolio lending to that of a diversified
financial services operation focusing on the origination for sale or
securitization, with servicing retained, of various loan products to include
Liberator Series loans, Portfolio Series loans, and, to a much lesser extent,
commercial and multi-family real estate loans. The Company also adopted
revised underwriting policies and instituted more aggressive procedures for
resolving problem loans and for reducing the level of non-performing assets.
As a result of these steps, the Company improved its profitability.
As part of the Company's strategic plan, the Bank developed an internal
structure of operating divisions, each with distinct objectives and management
focus. The five divisions include (i) the Financial Services Division which
emphasizes the wholesale origination of the Bank's core products; (ii) the
Income Capital Services Division which originates and sells commercial and
multi-family mortgage loans; (iii) the Retail Loan Division which concentrates
on offering loan products directly to the public primarily in the Bank's
primary market area; (iv) the Asset Management Division which services loans
and REO for both the Bank and for Loan Purchasers; and (v) the Banking
Division which offers depository services to the public.
CORPORATE STRUCTURE
The Company and the Bank consummated the Reorganization in June of 1997
whereby the Bank became a wholly-owned subsidiary of the Company. Management
believes that the holding company form of organization provides the Company
with more flexibility and a greater ability to compete with other financial
services companies in the market place. In addition, due to regulatory capital
limitations, the Bank is limited in the amount of investments in residuals and
restricted cash resulting from securitizations that it can retain. The Company
is not subject to such limitations, and thus will reduce the restrictions on
the Bank's regulatory capital by acquiring loans and creating the residuals as
part of a securitization.
CORE LENDING PRODUCTS
General. The Company originates, purchases, sell, securitizes and services
primarily non-conventional mortgage loans principally secured by first and
second mortgages on one- to four-family residences. The Company makes
Liberator Series loans, which are for the purchase or refinance of residential
real property by sub-prime borrowers, and Portfolio Series loans, which are
debt consolidation loans for Agency-Qualified Borrowers with loan-to-value
ratios generally up to 125%. While the Company is currently emphasizing the
origination of Portfolio Series loans, it intends to market both products as
demand permits. In addition, to a much lesser extent, the Company originates
multi-family residential and commercial loans.
The Company purchases and originates mortgage loans and other real estate
secured loans primarily through a network of Originators on a nationwide
basis. In addition, the Company has begun to open low-cost retail lending
offices. Except for a limited number of loans specifically originated for
retention in the Bank's portfolio as loans held for investment, loans
originated or purchased since 1994 through the Company's regional lending
centers are generally originated for sale in the secondary mortgage market
and, since the fourth quarter of 1996, in asset securitizations with servicing
retained by the Company.
Adjustable-Rate Mortgages. The Company's adjustable rate mortgage ("ARM")
products consist of both first and second mortgages. The repayment and
amortization terms on first mortgage ARMs are 360 months. The repayment and
amortization terms on second mortgage ARMs may be 300, 240 or 180 months.
Interest rates adjust every six or twelve months, and are tied to the six-
month LIBOR or to the 1-Year U.S. Treasury Index,
2
respectively. The periodic rate caps vary between 1% and 3% on each rate
change date. All ARM products are assumable, subject to new borrower
qualification, assumption agreements and fees. The lifetime rate cap on ARMs
is 6% to 7% above the initial rate. None of the ARM products permit negative
amortization. There are no fixed-rate conversion options on any of the ARM
products. Certain ARM products impose prepayment penalties and others do not.
Marketing. The Company's primary means of marketing its products is direct
contact between its account executives and Originators. Each of the Company's
27 account executives is responsible for maintaining and expanding existing
Originator relationships within the account executive's assigned territory
through personal contact and promotional materials. Each account executive is
typically responsible for approximately 20 key Originators and is expected to
have weekly contact with each of these Originators. In addition, each account
executive is responsible for up to 30 additional Originators with whom the
account executive will have frequent contact. Each account executive also
works to develop Originator relationships through "cold calls" and following
up on inquiries made by Originators to the Company's toll-free number. Each
account executive works as part of a team with one of the Company's loan
coordinators and assistant coordinators. Each loan coordinator and assistant
loan coordinator works with three or four account executives. The loan
coordinators and their assistants are responsible for inputting the new loans
into the Company's data systems and for shepherding the loans from the point
of origination through funding. After origination, the whole loan coordinators
and their assistants are available to talk to Originators on a daily basis.
Whole loan coordinators and their assistants are located in each of the
Company's regional lending centers.
The Company believes that the key element in developing, maintaining and
expanding its relationships with Originators is to provide the highest
possible level of product knowledge and customer service. Each account
executive receives comprehensive training prior to being assigned to a
territory. In most cases, training includes experience in the loan production
department so that the account executive will be familiar with all phases of
loan origination and production and will also become acquainted with the whole
loan coordination team. This training enables the account executive to quickly
review a loan application in order to identify the borrower's probable risk
classification and then assist the Originator in identifying the appropriate
product for the borrower, thereby enhancing the likelihood that the loan will
be approved at the rate and on the terms anticipated by the borrower. After a
loan package is submitted to the Company, the loan coordination team provides
assistance to the Originator throughout the process to complete the loan
transaction. Account executives, loan coordinators and assistant coordinators
are compensated based on the number and the dollar volume of loans funded. A
significant portion of a regional manager's compensation is tied to the
profitability of his or her regional lending center and includes a component
based on loan performance.
Origination and Purchase of Loans. Loans are originated both through the
Company's wholesale network of Originators and on a retail basis through the
Company's Retail Lending Division. The Company has also made bulk purchases of
loans from time to time and has recently hired a senior management employee
experienced in bulk purchases to gradually expand the Company's loan
purchases.
The Company's mortgage financing and servicing operations are conducted
primarily through regional lending centers located in Riverside, California,
Jacksonville, Florida and the Denver, Colorado metropolitan area. Over the
next nine months, the Company intends to open an additional low cost regional
lending center to better serve its Originators. This regional lending center
will be located in the Northeast sector of the United States. From its present
locations, the Company is able to originate or purchase its core products in
the District of Columbia and all 50 states with the exception of Louisiana,
Mississippi and Alaska.
3
The following table sets forth for the periods shown the aggregate dollar
amounts and the percentage of core products originated or purchased by the
Company in each state where 5.0% or more of the loans were originated or
purchased during the three months ended December 31, 1997:
FOR THE THREE MONTHS ENDED
----------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997 1997 1997
------------- ------------- -------------- -------------- --------------
$ % $ % $ % $ % $ %
------- ----- ------- ----- -------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
California.............. $20,434 29.5% $26,421 29.8% $ 32,827 24.3% $ 33,614 19.8% $ 71,853 22.3%
Virginia................ 5,961 8.6 5,884 6.6 7,489 5.5 9,575 5.6 19,842 6.2
Florida................. 4,897 7.1 3,405 3.8 7,995 5.9 6,946 4.1 19,038 5.9
Maryland................ 4,878 7.1 4,492 5.1 6,839 5.1 9,851 5.8 17,670 5.5
Other................... 32,990 47.7 48,437 54.7 80,057 59.2 110,151 64.7 193,166 60.1
------- ----- ------- ----- -------- ----- -------- ----- -------- -----
Total................. $69,160 100.0% $88,639 100.0% $135,207 100.0% $170,137 100.0% $321,569 100.0%
======= ===== ======= ===== ======== ===== ======== ===== ======== =====
The Company's geographic markets are currently divided into three regions,
with a completely self-contained mortgage banking team assigned to each
region. Each team is headed up by a regional manager and includes dedicated
account executives, loan coordinators and assistant coordinators,
underwriters, and other production personnel so that the team can originate
and produce loans in that region. This concept of regional processing teams,
which the Company believes is efficient but quite rare in the industry,
enables the Company to more effectively anticipate and respond to Originator
and borrower needs in each region. Management believes that the concept also
appeals to independent brokers who may be reluctant to deal with a larger,
more remote lender. Each regional team is connected to senior management in
Riverside, California by a computer link that enables senior management to
monitor all regional functions on a real time basis.
Management personnel staffing a regional lending center are trained in the
Company's Riverside office. For a period of six to twelve months after the
establishment of a regional lending center all loans originated through that
office are reunderwritten by staff at the Riverside office to assure quality
control. In addition, the quality control department and the Company's
internal auditor regularly visit the regional lending centers for quality
control purposes.
In recent years, the Company has focused on both Liberator Series loans and
Portfolio Series loans. While the Company is currently emphasizing the
origination of Portfolio Series loans, it intends to originate both types of
loans as demand permits.
Liberator Series loans are loans for the purchase or refinance of one- to
four-family residential real property by sub-prime borrowers and loans which
otherwise do not conform to FHLMC or FNMA guidelines ("conforming loans").
Loans to sub-prime borrowers are perceived by management as being advantageous
to the Company because they generally have higher interest rates and
origination and servicing fees and generally lower loan-to-value ratios than
conforming loans. In addition, management believes the Company has the
resources to adequately service loans acquired pursuant to this program as
well as the experience to resolve loans that become non-performing. The
Company has established specific underwriting policies and procedures,
invested in facilities and systems and developed correspondent relationships
with Originators throughout the country enabling it to develop its niche as an
originator and purchaser of one-to four-family residential loans to sub-prime
borrowers. Since the beginning of 1997, the Company has widely advertised its
NINA loan product, which is a limited documentation, lower loan-to-value loan
product within the Liberator Series loan portfolio. The Company intends to
continue to expand the volume of Liberator Series loans which it originates to
market areas throughout the country to sub-prime borrowers who meet its niche
lending criteria. Loans to sub-prime borrowers present a higher level of risk
of default than conforming loans because of the increased potential for
default by borrowers who may have had previous credit problems or who do not
have an adequate credit history. Loans to sub-prime borrowers also involve
additional liquidity risks, as these loans generally have a more limited
secondary market than conventional loans. The actual rates of delinquencies,
foreclosures and losses on loans to
4
sub-prime borrowers could be higher under adverse economic conditions than
those currently experienced in the mortgage lending industry in general. While
the Company believes that the underwriting procedures and appraisal processes
it employs enable it to somewhat mitigate the higher risks inherent in loans
made to these borrowers, no assurance can be given that such procedures or
processes will afford adequate protection against such risks.
Portfolio Series loans, which are debt consolidation loans for Agency
Qualified Borrowers, are originated both on a wholesale basis through the
Company's Life Financial Services Division, and through its Retail Lending
Division. These loans are consumer-oriented loans secured by real estate,
primarily home equity lines of credit and second deeds of trust, generally for
up to 125% of the appraised value of the real estate underlying the aggregate
loans on the property. Although the loan-to-value ratio on Portfolio Series
loans is higher than that offered by other mortgage products, management
believes that the higher yield and the low level of credit risk of the
borrowers offsets the risks involved. In the event of a default on a Portfolio
Series loan by a borrower, there generally would be insufficient collateral to
pay off the balance of such loan and the Company, as holder of a second
position on the property, would likely lose a substantial portion, if not all,
of its investment. While the Company believes that the underwriting procedures
it employs enable it to somewhat mitigate the higher risks inherent in such
loans, no assurance can be given that such procedures will afford adequate
protection against such risks.
The following table sets forth the principal balance of each of the
Company's core loan products originated during the periods shown:
FOR THE THREE MONTHS ENDED
----------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997 1997 1997
------------ --------- -------- ------------- ------------
(IN THOUSANDS)
Liberator Series (full
documentation)......... $39,465 $39,629 $ 39,589 $ 44,484 $ 63,262
Liberator Series
(NINA)(1).............. -- -- 7,803 21,410 26,719
Portfolio Series........ 29,695 49,010 87,815 104,243 231,588
------- ------- -------- -------- --------
Total................. $69,160 $88,639 $135,207 $170,137 $321,569
======= ======= ======== ======== ========
- -------
(1) The Company did not originate a material amount of Liberator Series (NINA)
loans during the three months ended December 31, 1996 and March 31, 1997.
The following table sets forth selected information relating to originations
of Liberator Series loans during the periods shown:
FOR THE THREE MONTHS FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED ENDED ENDED
FOR THE THREE FOR THE THREE JUNE 30, 1997 SEPTEMBER 30, 1997 DECEMBER 31, 1997
MONTHS ENDED MONTHS ENDED -------------------- --------------------- ---------------------
DECEMBER 31, MARCH 31, FULL FULL FULL
1996 1997 DOCUMENTATION NINA DOCUMENTATION NINA DOCUMENTATION NINA
------------- ------------- ------------- ------ ------------- ------- ------------- -------
(DOLLARS IN
THOUSANDS)
Principal balance....... $39,465 $39,629 $39,589 $7,803 $44,484 $21,410 $63,262 $26,719
Average principal
balance per loan....... 85 100 81 103 91 114 88 118
Combined weighted
average initial loan-
to-value ratio......... 73.4% 72.8% 78.2% 69.0% 77.3% 73.1% 78.2% 74.4%
Percent of first
mortgage loans......... 85.4 91.8 88.8 100.0 87.4 98.5 90.4 99.6
Property securing loans:
Owner occupied......... 86.4 77.3 90.5 92.9 91.5 93.6 94.8 96.5
Non-owner occupied..... 13.6 22.7 9.5 7.1 8.5 6.4 5.2 3.5
Percentage fixed-rate... 44.2 35.6 42.4 24.1 33.4 23.1 42.5 26.7
Percentage ARMs......... 55.8 64.4 57.6 75.9 66.6 76.9 57.5 73.3
Weighted average
interest rate:
Fixed-rate............. 11.3 10.8 10.9 11.2 11.2 11.2 10.3 10.6
ARMs................... 9.6 9.1 10.0 10.0 9.4 9.3 9.4 9.1
5
The following table sets forth selected information relating to originations
of Portfolio Series loans during the periods shown:
FOR THE FOR THE FOR THE FOR THE FOR THE
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997 1997 1997
------------ ------------ ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
Principal balance....... $29,695 $49,010 $87,815 $104,243 $231,588
Average principal
balance per loan....... 31 32 33 32 34
Combined weighted
average initial
loan-to-value ratio.... 108.4% 107.7% 110.0% 109.5% 108.4%
Percent of first
mortgage loans......... 0.1 0.5 0.1 -- 0.2
Property securing loans:
Owner occupied........ 99.5 99.8 100.0 100.0 100.0
Non-owner occupied.... 0.5 0.2 -- -- --
Percentage fixed-rate... 96.3 96.0 98.0 94.5 92.9
Percentage ARMs......... 3.7 4.0 2.0 5.5 7.1
Weighted average
interest rate:
Fixed-rate............ 14.1 13.8 14.0 13.8 14.1
ARMs.................. 11.2 10.3 11.3 11.3 11.0
Use and Qualifications of Originators. The Company purchases loans from
select Originators throughout the country. Such Originators must be approved
by the Company prior to submitting loans to the Company. Pursuant to the
Company's approval process, each Originator is generally required to have a
specified minimum level of experience in originating non-conforming loans, and
provide representations, warranties, and buy-back provisions to the Company.
The Company provides clear and concise criteria regarding its well-defined
core products to Originators with whom it may do business. If, following a
period of training and relationship building, Originators consistently fail to
present a high level of loans meeting the Company's underwriting criteria, the
Company will cease to do business with them. As a result, the Company has
developed, since 1994, a core group of Originators who form its nationwide
network of Originators. The Company generally classifies the Originators with
which it does business into four classes with descending priority with regard
to the terms and the pricing of the loans the Company purchases from such
Originators.
JUNIOR THIRD PARTY MORTGAGE
CORRESPONDENTS CORRESPONDENTS ORIGINATORS BROKERS(1)
-------------- -------------- ----------- ----------
Net Worth(2).............. $250,000 $100,000 $50,000 N/A
Years in Business......... 2 2 2 N/A
Warehouse Credit Facility. Yes Yes No No
Errors and Omissions
Insurance................ $1.0 million No No No
Number Doing Business with
the Company at December
31, 1997................. 133 56 81 950
- --------
(1) Mortgage brokers are those persons who do not meet the specific foregoing
criteria but have demonstrated to the Company, or have a reputation for,
the ability to originate real estate secured loans and have acceptable
credit and finance industry references.
(2) Correspondents provide audited financial statements prepared in accordance
with GAAP from which net worth is determined. Junior Correspondents and
Third Party Originators provide unaudited financial information from which
net worth is obtained.
6
The Company purchases substantially all loans on an individual basis from
qualified Originators. No single Originator accounted for more than 3.1% of
the loans originated by the Company for the year ended December 31, 1997. It
is the Company's general policy to limit the percentage of loans closed by any
single Originator to approximately 5.0% of loans closed in any given period.
Underwriting. The underwriting and quality control functions are managed
through the Company's administrative offices in Riverside, California. The
Company believes that its underwriting process begins with the experience of
its staff, the education of its network of Originators, the quality of its
correspondent relationships and its loan approval procedures. As an integral
part of its lending operation, the Company ensures that its underwriters
assess each loan application and subject property against the Company's
underwriting guidelines.
Personnel in the Company's regional lending centers review in its entirety
each loan application submitted by the Company, Originators or through bulk
purchases for approval. The Company conducts its own underwriting review of
each loan, including those loans originated for or purchased by it from its
Originators. Loan files are reviewed for completeness, accuracy and compliance
with the Company's underwriting criteria and applicable governmental
regulations. This underwriting process is intended to assess both the
prospective borrower's ability to repay the loan and the adequacy of the real
property security as collateral for the loan granted, tailored to the general
nature of the Portfolio Series and the Liberator Series loans, respectively.
Based on the initial review, the personnel in the regional lending center will
inform the Originators of additional requirements that must be fulfilled to
complete the loan file. The Company strives to process each loan application
received from its network of Originators as quickly as possible in accordance
with the Company's loan application approval procedures. Accordingly, most
loan applications receive decisions within 48 hours of receipt and generally
are funded within one day following satisfaction of all conditions for
approval of the loan which is typically seven business days after the initial
approval.
Each prospective borrower is required to complete a mortgage loan
application that may include (depending on the program requirement)
information detailing the applicant's liabilities, income, credit history,
employment history and personal information. Since most of the loan
applications are presented through the Company's network of Originators, the
Company completes an additional credit report on all applications received.
Such report typically contains information relating to such matters as credit
history with local and national merchants and lenders, installment debt
payments and any record of defaults, bankruptcies, repossessions or judgments.
This credit report is obtained through a sophisticated computer program that
accesses what management believes to be the most appropriate credit bureau in
a particular zip code and combines that information with the Company's own
credit risk score.
This application and review procedure is used by the Company to analyze the
applicant's creditworthiness (i.e., a determination of the applicant's ability
to repay the loan). Creditworthiness is assessed by examination of a number of
factors, including calculating a debt-to-income ratio obtained by dividing a
borrower's fixed monthly debt by the borrower's gross monthly income. Fixed
monthly debt generally includes (i) the monthly payment under any related
senior mortgages which will include calculations for insurance and real estate
taxes, (ii) the monthly payment on the loan applied for and (iii) other
installment debt, including, for revolving debt, the required monthly payment
thereon, or, if no such payment is specified, 3% of the balance as of the date
of calculation. Fixed monthly debt may not include any debt (other than
revolving credit debt) described above that matures within less than 10 months
of the date of calculation.
Prior to funding a loan, several procedures are used to verify information
obtained from an applicant. The applicant's outstanding balance and payment
history on any senior mortgage may be verified by calling the senior mortgage
lender. If the senior mortgage lender cannot be reached by telephone to verify
this information, the Originators may rely upon information provided by the
applicant, such as a recent statement from the senior lender and verification
of payment, such as canceled checks, or upon information provided by national
credit bureaus. In order to verify an applicant's employment status, the
Originators may obtain from the applicant recent tax returns or other tax
forms (e.g., W-2 forms) or current pay stubs or may telephone the applicant's
7
employer or obtain written verification from the employer. As in the case of
the senior mortgage lender verification procedures, if the employer will not
verify employment history over the telephone, the Company or other Originators
may rely solely on the other information provided by the applicant. The
Company does offer NINA loans at reduced loan-to-value ratios in lieu of
documenting cash flow and/or assets of the borrower. See "--Liberator Series
(NINA)" for further information on NINA loans.
Debt to income ratios for Portfolio Series mortgage loans generally do not
exceed 45%, but in certain instances where deemed appropriate by the Company,
the ratio may go as high as 50%. For Liberator Series mortgage loans, debt to
income ratios may vary depending upon a number of other factors used to
ascertain the creditworthiness of the borrower.
8
The general criteria currently used by the Company in classifying
prospective borrowers of its core loan products are summarized in the charts
below.
LIBERATOR SERIES (FULL DOCUMENTATION)
"Ax" RISK "A-" RISK "B" RISK "C" RISK "Cx" RISK
-------------- -------------- -------------- -------------- --------------
Maximum Loan-to-Value
Ratio:
Primary residence...... 95% 95% 80% 75% 65%
Secondary residence.... 90% 90% 70% 70% 65%
Investor property...... 90% 85% 70% 70% 65%
Home equity line of
credit................ 90% 90% 80% -- --
Debt Service to Income
Ratio................. 42-50% 42-50% 50-55% 50-60% 60%
Mortgage Credit......... Maximum one Maximum two Maximum four Maximum six Currently
30-day late 30-day late 30-day late 30-day late delinquent
payment in the payments in payments payments, two
last 12 months the last 12 and/or one 60- 60-day late
months day late payments
payment in the and/or one 90-
last 12 months day late
payment in
last 12 months
Installment Credit...... Maximum one No more than No more than No more than Sporadic
30-day late 30 days late 60 days late 90 days late payment
payment in the in last 12 on any account on any account pattern;
last 12 months; in last 12 in last 12 apparent
months; overall good months; months; disregard
maximum two credit; overall overall fair toward timely
30-day late maximum 25% average credit credit payments or
payments in of credit credit
the last 24 accounts standing
months delinquent in
last 24 months
Revolving Credit........ Maximum two No more than No more than No more than Sporadic
30-day late 30 days late 60 days late 90 days late payment
payments in in last 12 on any account on any account pattern;
the last 12 months; in last 12 in last 12 apparent
months; isolated 60- months; months; disregard
maximum three day late isolated minor isolated late toward timely
30-day late payment 90-day late payment over payments or
payments in allowed with payment 90 days credit
last 24 months compensating allowed with allowed with standing
factors; compensating compensating
maximum 25% factors factors
of credit
accounts
delinquent in
last 24 months
Bankruptcy Filings...... No bankruptcy No bankruptcy No bankruptcy No bankruptcy Discharged
in last 36 in last 24 in last 18 in last 12 within 12
months months months months months
preceding
application;
current
Chapter 13 or
foreclosure
acceptable
when paid in
full or cured
from loan
proceeds
Minimum Credit Score.... 670/650 620 550 500 less than 500
9
LIBERATOR SERIES (NINA)
"AX" RISK "A-" RISK "B" RISK "C" RISK "CX" RISK
-------------- -------------- -------------- -------------- --------------
Loan-to-Value Ratio:
Primary residence...... 90%(1) 75% 70% 70% 65%
Secondary residence.... 75% 70% 65% 65% 60%
Investor property...... 75% 70% 65% 65% 60%
Mortgage Credit......... Maximum one Maximum two Maximum four Maximum six Currently
30-day late 30-day late 30-day late 30-day late delinquent
payment in the payments in payments payments, two
last 12 the last 12 and/or one 60- 60-day late
months; no 30 months day late payments
days late payment in the and/or one 90-
payments in last 12 months day late
last 24 months payment in
for 90% last 12 months
Installment Credit...... Maximum one No more than No more than No more than Sporadic
30-day late 30 days late 60 days late 90 days late payment
payment in the in last 12 on any account on any account patterns;
last 12 months; within last 12 in last 12 apparent
months; overall good months; months; disregard
maximum two credit; overall overall fair toward timely
30-day late maximum 25% of average credit credit payments or
payments in credit credit
the last 24 accounts standing
months; no 30 delinquent in
days late last 24 months
payments in
last 12 months
for 90%
Revolving Credit........ Maximum two No more than No more than No more than Sporadic
30-day late 30 days late 60 days late 90 days late payment
payments in in last 12 on any account on any account patterns;
the last 12 months, in last 12 in last 12 apparent
months; isolated 60- months; months; disregard
maximum three day late isolated minor isolated late toward timely
30-day late payment 90-day late payment over payments or
payments in allowed with payment 90 days credit
last 24 compensating allowed with allowed with standing
months; no 30 factors; compensating compensating
days late maximum 25% of factors factors
payments in credit
last 24 months accounts
for 90% delinquent in
last 24 months
Bankruptcy Filings...... No bankruptcy No bankruptcy No bankruptcy No bankruptcy Discharged
in last 36 in last 24 within last 18 in last 12 within 12
months, none months months months months
in last 7 preceding
years for 90% application;
LTV current
Chapter 13 or
foreclosure
acceptable
when paid in
full or cured
from loan
proceeds
Minimum Credit Score.... 670/650 620 550 500 less than 500
- -------
(1) Purchase or rate term only, A+ credit required, credit score minimum of
670; all others maximum LTV at 80%.
10
PORTFOLIO SERIES
"A+" RISK "AX" RISK "A-" RISK
-------------- -------------- --------------
Loan-to-Value Ratio:
100% Second Mortgage............ 100% 100% 100%
125% Second Mortgage............ 125% 135% 135%
100% Home Equity Line of Credit. 100% 100% 100%
Debt Service to Income Ratio: 45-50% 45-50% 45-50%
100% Second Mortgage............
125% Second Mortgage............ 45-50% 45-50% 45-50%
100% Home Equity Line of Credit. 45-50% 45-50% 45-50%
Mortgage History:
100% Second Mortgage............ No 30-day late No 30-day late No 30-day late
payments in payments in payments in
last 36 months last 36 months last 12
months; one
30-day late
payment in
last 24 months
125% Second Mortgage............ No 30-day late No 30-day late No 30-day late
payments in payments in payments in
last 36 months last 36 months last 24 months
100% Home Equity Line of Credit. No 30-day late No 30-day late No 30-day late
payments in payments in payments in
last 36 months last 36 months last 12
months; one
30-day late
payment in
last 24 months
Bankruptcy Filings:
100% Second Mortgage............ None in last 5 None in last 5 None in last 3
years years years
125% Second Mortgage............ None in last 5 None in last 5 None in last 3
years years years
100% Home Equity Line of Credit. None in last 5 None in last 5 None in last 3
years years years
Minimum Credit Score:
100% Second Mortgage............ 700 670 640
125% Second Mortgage............ 700 670 640
100% Home Equity Line of Credit. 700 670 640
11
Loan Production by Borrower Risk Classification. The Company classifies
borrowers according to credit risk from A+ to Cx; however, the predominant
amount of its lending is to borrowers in categories A- or higher. The
following table sets forth information concerning the Company's principal
balance of fixed rate and adjustable rate loan production by borrower risk
classification for the periods shown:
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
--------------------------------- ---------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE WEIGHTED
PRODUCT/RISK % OF INTEREST AVERAGE % OF INTEREST AVERAGE
CLASSIFICATIONS VOLUME TOTAL RATE(1) MARGIN(2) VOLUME TOTAL RATE(1) MARGIN(2)
--------------- ------- ----- -------- --------- ------- ----- -------- ---------
(DOLLARS IN THOUSANDS)
Liberator Series (Full
documentation)
Ax...................... $18,925 48.0% 9.94% 5.24% $17,159 43.3% 9.35% 5.11%
A-...................... 8,790 22.3 10.16 5.52 9,241 23.3 9.85 5.52
------- ----- ------- -----
Total A- or better.... 27,715 70.3 -- -- 26,400 66.6 -- --
------- ----- ------- -----
B....................... 6,806 17.2 10.26 5.33 7,992 20.2 9.39 4.91
C....................... 2,026 5.1 11.16 5.68 2,555 6.4 10.98 5.77
Cx...................... 2,918 7.4 13.07 7.06 2,682 6.8 11.74 6.62
------- ----- ------- -----
Total................. $39,465 100.0% 10.34 5.46 $39,629 100.0% 9.74 5.31
======= ===== ======= =====
Portfolio Series
A+...................... $ 2,669 9.0% 13.58 2.50 $ 9,980 20.4% 13.22 1.74
Ax...................... 14,452 48.7 13.87 2.18 18,733 38.2 13.53 1.83
A-...................... 9,866 33.2 14.35 3.24 15,193 31.0 14.05 3.27
------- ----- ------- -----
Total A- or better.... 26,987 90.9 -- -- 43,906 89.6 -- --
------- ----- ------- -----
B+...................... 2,708 9.1 14.10 3.73 5,104 10.4 14.07 2.70
------- ----- ------- -----
Total................. $29,695 100.0% 14.03 2.74 $49,010 100.0% 13.68 2.32
======= ===== ======= =====
(Continued on following page.)
12
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, 1997 SEPTEMBER 30, 1997 DECEMBER 31, 1997
--------------------------------- ---------------------------------- ----------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED
PRODUCT/RISK % OF INTEREST AVERAGE % OF INTEREST AVERAGE % OF INTEREST AVERAGE
CLASSIFICATIONS VOLUME TOTAL RATE(1) MARGIN(2) VOLUME TOTAL RATE(1) MARGIN(2) VOLUME TOTAL RATE(1) MARGIN(2)
--------------- ------- ----- -------- --------- -------- ----- -------- --------- -------- ----- -------- ---------
(DOLLARS IN THOUSANDS)
Liberator Series
(Full
documentation)
A+............... $ 47 0.1% 12.38% 7.00% $ 120 0.3% 9.67% 4.63% $ 797 1.3% 9.07% 5.13%
Ax............... 18,778 47.4 9.88 5.47 15,797 35.5 9.48 5.77 29,972 47.4 9.26 2.82
A-............... 9,663 24.4 10.03 6.05 16,059 36.1 9.76 6.17 17,525 27.7 9.59 3.79
------- ----- -------- ----- -------- -----
Total A- or
better.......... 28,488 71.9 -- -- 31,976 71.9 -- -- 48,294 76.4 -- --
------- ----- -------- ----- -------- -----
B+............... 119 0.3 9.75 -- 24 0.1 13.75 -- -- -- -- --
B................ 4,303 10.9 10.82 6.06 5,911 13.3 10.31 6.32 7,217 11.4 10.31 3.22
C................ 2,776 7.0 11.48 6.53 3,297 7.4 10.64 6.41 2,601 4.1 10.98 3.57
Cx............... 3,903 9.9 12.59 8.15 3,276 7.3 12.18 7.28 5,150 8.1 12.50 5.66
------- ----- -------- ----- -------- -----
Totals.......... $39,589 100.0% 10.40 6.08 $ 44,484 100.0% 9.98 6.14 $ 63,262 100.0% 9.81 3.42
======= ===== ======== ===== ======== =====
Liberator Series
(NINA)(3)
Ax............... $ 3,772 48.3% 9.56 5.33 $ 13,789 64.4% 9.20 5.54 $ 20,843 78.0 9.14 5.44
A-............... 2,325 29.8 10.14 6.05 3,188 14.9 9.81 6.30 2,947 11.0 9.89 6.14
------- ----- -------- ----- -------- -----
Total A- or
better.......... 6,097 78.1 -- -- 16,977 79.3 -- -- 23,790 89.0 -- --
------- ----- -------- ----- -------- -----
B................ 1,102 14.1 11.78 6.35 2,088 9.7 10.20 5.97 1,135 4.3 10.71 6.72
C................ 332 4.3 12.27 6.83 592 2.8 11.09 7.07 985 3.7 11.20 6.86
Cx............... 272 3.5 12.49 6.92 1,753 8.2 12.72 6.43 809 3.0 12.23 7.66
------- ----- -------- ----- -------- -----
Totals.......... $ 7,803 100.0% 10.27 5.82 $ 21,410 100.0% 9.73 5.77 $ 26,719 100.0% 9.46 5.63
======= ===== ======== ===== ======== =====
Portfolio Series
A+............... $19,086 21.7% 13.30 8.02 $ 23,250 22.3% 12.98 5.79 $ 49,461 21.3 13.03 4.12
Ax............... 27,954 31.8 13.85 6.50 31,914 30.6 13.49 6.50 92,605 40.0 13.79 5.15
A-............... 31,234 35.6 14.28 7.22 38,521 37.0 14.00 6.99 76,164 32.9 14.37 5.97
------- ----- -------- ----- -------- -----
Total A- or
better.......... 78,274 89.1 -- -- 93,685 89.9 -- -- 218,230 94.2 -- --
------- ----- -------- ----- -------- -----
B+............... 9,435 10.8 14.69 7.18 10,472 10.0 14.38 7.51 13,156 5.7 14.11 6.40
B................ 106 0.1 13.99 -- 86 0.1 12.27 6.88 202 0.1 11.50 3.38
------- ----- -------- ----- -------- -----
Total........... $87,815 100.0% 13.98 7.38 $104,243 100.0% 13.66 6.64 $231,588 100.0% 13.84 5.31
======= ===== ======== ===== ======== =====
- ----
(1) Weighted average interest rate includes both ARM loan products and fixed
rate loan products.
(2) Weighted average margin is based solely on ARM products.
(3) The Company did not originate a material amount of Liberator Series (NINA)
loans during the three months ended December 31, 1996 and March 31, 1997.
13
Appraisal. All mortgaged properties relating to mortgage loans where
collateral assessment is an integral part of the evaluation process are
appraised by state licensed or certified appraisers. All of the appraisals are
either performed or reviewed by appraisers or appraisal firms approved by the
Company's senior management. These appraisers are screened and actively
reviewed on a regular basis. Each approved appraiser must have a minimum of
$1.0 million of errors and omissions insurance. All appraisers are required to
assess the valuation of the property pursuant to U.S. Government Property
Analysis guidelines and conduct an economic analysis of the geographic region
in which the property is located. Once a loan application file is complete,
the file is reviewed to determine whether the property securing the loan
should undergo a desk or field review. This determination is made based on the
loan-to-value ratio of the underlying property and the type of loan or loan
program. If after the initial desk review, the underwriter requires additional
information with regard to the appraised value of the property, a field review
may also be conducted. The Company requires the appraiser to address
neighborhood conditions, site and zoning status and the condition and
valuation of improvements. Following each appraisal, the appraiser prepares a
report which (when appropriate) includes a reproduction cost analysis based on
the current cost of constructing a similar building and a market value
analysis based on recent sales of comparable homes in the area. Title
insurance policies are required on all first mortgage liens and second liens
$100,000 and over, with a limited judgment lien report required on all second
lien loans under $100,000.
For Liberator Series loans, because of the sub-prime creditworthiness of the
borrowers, the evaluation of the value of the property securing the loans and
the ratio of loans secured by such property to its value become of greater
importance in the underwriting process. The specific procedures and criteria
utilized in the appraisal process range from a desk review, a field review, to
a second appraisal, depending on the size of the loan and its loan-to-value
ratio.
The value of the mortgaged property has lesser importance with respect to
the Portfolio Series loans in light of their high loan-to-value ratios. As a
result, Portfolio Series loans generally have little or no equity in the
mortgaged property available to repay the loan if it is in default. For
Portfolio Series loans, the Company accepts the homeowner/mortgagee's "as
stated" value on loans to $35,000. On loans in excess of $35,000 to a maximum
of $50,000, the Company requires a current tax assessment, a statistical
appraisal or a HUD-1 conformed closing statement where purchase of the subject
property has occurred within the previous 12 months. For loans in excess of
$50,000, a drive-by appraisal including comparable analysis on a FHLMC Form
704 is required.
Qualified property inspection firms are also utilized for annual property
inspections on all properties 45 days or more delinquent. Property inspections
are intended to provide updated information concerning occupancy, maintenance
and changes in market conditions.
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies of the Company and delegates authority and responsibility
for loan approvals to the Loan Committee and specified officers of the
Company. All real estate loans must be approved by a quorum of the designated
committee or by the designated individual or individuals.
14
All loans underwritten by the Company require the approval and signature of
two underwriters. Where there are exceptions to the Company's underwriting
criteria, the loan must be unanimously approved by the underwriter,
supervisory underwriter and the Senior Vice President of the Company or, if
not unanimously approved, by the Company's President and Chief Executive
Officer. It has been the Bank's policy to adhere strictly to its underwriting
standards with few exceptions. Additionally, the following committees, groups
of officers and individual officers are granted the authority to approve and
commit the Company to the funding of the following categories of loans:
LEVEL OF APPROVAL
-----------------------------------------------------------
LOAN COMMITTEE
ONE STAFF TWO STAFF LOAN AND BOARD OF
TYPE OF LOAN UNDERWRITER UNDERWRITERS COMMITTEE DIRECTORS
------------ -------------- -------------- -------------- --------------
Mortgage loans held for
sale................... -- $1.0 million -- More than $1.0
or less(1) million
Mortgage loans held for
investment............. -- $250,000 or More than $550,000 or
less $250,000 more
but less than
$550,000
Other loans............. Personal loans All other All other All other
secured by loans $25,000 loans more loans in
Bank deposits or less than $25,000 excess of
but less than $50,000
$50,000
- --------
(1) Loans in excess of $500,000 require approval by an executive officer in
addition to approval by two underwriters.
The Bank will not make loans-to-one borrower that are in excess of
regulatory limits. Pursuant to Office of Thrift Supervision ("OTS")
regulations, loans-to-one borrower cannot exceed 15% of the Bank's unimpaired
capital and surplus. At December 31, 1997, the Bank's loans to one borrower
limit equaled $3.6 million. See "--Regulation--Federal Savings Institution
Regulation--Loans-to-One Borrower."
LOAN SALES AND ASSET SECURITIZATIONS
Loans are sold by the Company through securitizations and whole loan sales.
With the exception of customary provisions relating to breaches of
representations and warranties, loans securitized or sold by the Company are
sold without recourse to the Company and generally are sold with servicing
retained. For the years ended December 31, 1997, 1996 and 1995, the Company
sold $94.4 million, $154.6 million, and $126.9 million in loans, respectively.
For the years ended December 31, 1997 and 1996, the Company securitized $415.4
million and $51.9 million, respectively. No loans were securitized for the
year ended December 31, 1995.
In a securitization, the Company will generally transfer a pool of loans to
a trust with the Company retaining the excess cash flows, known as residuals,
from the securitization which consist of the difference between the interest
rate of the mortgages and the coupon rate of the securities after adjustment
for servicing and other costs such as trustee fees and credit enhancement
fees. The cash generally will be used to repay advances on lines of credit
used to finance the pool of loans that were acquired by the Company.
Generally, the holders of the securities from the asset securitization are
entitled to receive scheduled principal collected on the pool of securitized
loans and interest at the pass-through interest rate on the certificate
balance. The residual asset represents the subordinated right to receive cash
flows from the pool of securitized loans after payment of the required amounts
to the holders of the securities and the costs associated with the
securitization. The Company recognizes gain on sale of the loans in the
securitization, which represents the excess of the estimated fair value of the
residuals, net of closing and underwriting costs, less the allocated cost
basis of the loans sold in the fiscal quarter in which such loans are sold.
Management believes that it has made reasonable estimates of the fair value of
the residual interests on its balance sheets. Concurrent with recognizing such
gain on sale, the Company records the residual interests as assets on its
balance sheet. The recorded value of these residual interests are amortized as
cash distributions are received from the trust holding the respective loan
pool and are marked to market on a quarterly basis. The fair values of such
residuals are based in part on market interest rates
15
and projected loan prepayment and credit loss rates. Increases in interest
rates or higher than anticipated rates of loan prepayments or credit losses of
these or similar securities may require the Company to write down the value of
such residuals and result in a material adverse effect on the Company's
results of operations and financial condition. During the year ended December
31, 1997, the Company revalued the 1997-1A residual and recorded a pre-tax
unrealized loss of $2.1 million due to higher-than-expected prepayment speeds.
The Company is not aware of an active market for the residuals. No assurance
can be given that the residuals could in fact be sold at their carrying value,
if at all.
The Company may arrange for credit enhancement for a transaction to achieve
an improved credit rating on the securities issued if this improves the level
of profitability or cash flow generated by such transaction. This credit
enhancement may take the form of an insurance and indemnity policy, insuring
the holders of the securities of timely payment of the scheduled pass-through
of interest and principal. In addition, the pooling and servicing agreements
that govern the distribution of cash flows from the loan pool included in a
transaction typically require over-collateralization as an additional means of
credit enhancement. Over-collateralization may in some cases also require an
initial deposit, the sale of loans at less than par or retention in the trust
of collections from the pool until a specified over-collateralization amount
has been attained. In the case of the Company's securitizations to date, the
over-collateralization has been in the form of a cash deposit. The purpose of
the over-collateralization is to provide a source of payment to investors in
the event of certain shortfalls in amounts due to investors. These amounts are
subject to increase up to a reserve level as specified in the related
securitization documents. Cash amounts on deposit are invested in certain
instruments as permitted by the related securitization documents. To the
extent amounts on deposit exceed specified levels, distributions are made to
the holders of the residual interest; and at the termination of the related
trust, any remaining amounts on deposit are distributed to the holders of the
residual interest. Losses resulting from defaults by borrowers on the payment
of principal or interest on the loans in a securitization will reduce the
over-collateralization to the extent that funds are available and may result
in a reduction in the value of the residual interest.
16
The Company has completed four securitizations, one during the fourth
quarter of 1996, one during the first quarter of 1997, one during the third
quarter of 1997 and one during the fourth quarter of 1997. The characteristics
and results of these securitizations are as follows:
1996-1 1997-1A 1997-1B
--------------------------- ------------------------ -------------------------------------
Type of loan
securitized..... Fixed Rate Liberator Adjustable Rate Fixed Rate Liberator
Series and Portfolio Series Liberator Series Series and Portfolio Series
Weighted average
coupon.......... 13.32% 9.45% 13.02%
Amount of
certificates
issued.......... $55.0 million $38.5 million $61.5 million
Pass-through
rate............ 6.95% 1 month LIBOR plus 21 bp 7.49%
Amount of loans
securitized(1).. $51.9 million $33.6 million $46.5 million
Credit
enhancement..... MBIA Insurance MBIA Insurance MBIA Insurance
Corporation Corporation Corporation
Initial funding
of reserve
accounts........ $1.6 million $941,000 $3.1 million
Required reserve
level to be
funded.......... 9.0% of original 5.5% of original 10.6% of original
outstanding balance of outstanding balance of outstanding balance of
loans loans loans
Gain on sale of
loans........... $4.3 million $5.7 million(2) $5.7 million(2)
Gain on sale of
loans as a
percent of loans
sold............ 8.29% 7.12%(2) 7.12%(2)
Estimated
prepayment
speed........... 17.0% H.E.P. (3) 25.0% C.P.R. (3)(4) 17.0% H.E.P.
Discount factor. 13.5% 13.5% 13.5%
Annual estimated
loss assumption. 1.5% 0.5% 0.5% of Liberator Series
loans; 1.5% of Portfolio Series loans
Servicing fees.. 0.50% for the first six 0.65% for the first 1.00% on fixed rate loans sold
months and 1.00% thereafter twelve months and 1.00%
thereafter
Rating.......... AAA/Aaa (S&P/Moody's) AAA/Aaa (S&P/Moody's) AAA/Aaa (S&P/Moody's)
1997-2 1997-3
-------------------------- --------------------------
Type of loan
securitized..... Fixed Rate Portfolio Fixed Rate
Series Portfolio Series
Weighted average
coupon.......... 13.64% 13.86%
Amount of
certificates
issued.......... $123.8 million $250.0 million
Pass-through
rate............ 7.12%(5) 7.62%
Amount of loans
securitized(1).. $100.9 million $187.4 million
Credit
enhancement..... Loan overcollateralization Loan overcollateralization
Initial funding
of reserve
accounts........ $1.3 million None
Required reserve
level to be
funded.......... 7.0% of original 6.3% of original
outstanding outstanding
balance of loans balance of loans
Gain on sale of
loans........... $9.4 million $10.7 million
Gain on sale of
loans as a
percent of loans
sold............ 9.33% 5.69%
Estimated
prepayment
speed........... 12.0% H.E.P. 14.0% H.E.P.
Discount factor. 13.5% 13.5%
Annual estimated
loss assumption. 2.0% 2.5%
Servicing fees.. 1.00% 1.00%
Rating.......... (6) (7)
- ----
(1) For 1996-1, an additional $3.1 million was funded during quarter ended
March 31, 1997 which created a gain on sale of loans of $267,000. For 1997-
1A, $4.9 million was funded in April 1997. For 1997-1B, $15.0 million was
funded in April 1997. All of these prefunded amounts were sold under the same
terms and conditions as set forth in the table above.
(2) The combined gain on sales of loans for 1997-1A and 1997-1B was $5.7
million. The percentages are based on the combined 1997-1A and 1997-1B
securitizations.
(3) Home Equity Prepayment ("H.E.P.") and Constant Prepayment Rate ("C.P.R.")
are methods of estimating prepayment speeds.
(4) This prepayment assumption was revised during the third quarter of 1997
resulting in an unrealized loss to the Company of $787,000.
(5) Weighted average rate.
(6) Each of the Senior Notes were rated AAA/Aaa (Fitch/Moody's), the Class M-1
Notes were rated AA/A2, the Class M-2 Notes were rated A/A2 and the Class
B notes were rated BBB/Baa3.
(7) Each of the Senior Notes were rated AAA/Aaa (Fitch/Moody's), the Class M-1
Notes were rated AA/Aa2, the Class M-2 Notes were rated A/A2 and the Class
B Notes were rated BBB/Baa2.
17
The following table presents the actual loss and prepayment history as of
December 31, 1997 for the securitizations conducted by the Company, except for
the 1997-3 securitization, which was completed during December 1997 and for
which meaningful data was not available as of that date:
1996-1 1997-1A 1997-1B 1997-2
------ ------- ------- ------
Lifetime actual loss percentage............... 0.75% -- % 0.43% 0.08%
Lifetime prepayments as a percentage of loans
securitized annualized....................... 14.45 43.72 8.18 5.53
The actual loss and prepayment history information provided above are not
necessarily indicative of loss and prepayment results that may be experienced
over the duration of the securitization.
Although the Company will continue to sell whole loans, it plans to sell a
significant portion of its loans in the future through securitizations.
Securitizations are expected to increase the Company's cash flow thereby
allowing the Company to increase its loan acquisition and origination volume.
Securitizations are also expected to reduce the risks associated with interest
rate fluctuations and provide access to longer term funding sources. The
Company currently intends to conduct regular securitizations either through
private placements or in public offerings. There can be no assurance that the
Company will be able to successfully implement this strategy in the future.
To the extent that loans are not sold in securitizations, whole loans will
be sold pursuant to purchase, sale and servicing agreements negotiated with
Loan Purchasers to purchase loans meeting the Company's underwriting criteria.
At December 31, 1997 there were outstanding commitments to deliver mortgage
loans in the amount of $62.6 million. The Company retains the servicing rights
on the majority of loans sold. However, the Company also sells loans on a
servicing released basis and may continue to subservice the loans for a fee
for a period of time. The Company sells loans to a number of different
investors with which it does business. As such, management believes that no
one relationship with a Loan Purchaser constitutes the predominant source of
sales for the Company and the Company does not rely on any specific entities
for sales of its loans.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY REAL ESTATE LENDING
Consistent with its strategy of developing niche lending markets, the
Company has begun to increase its efforts to originate and purchase multi-
family and commercial real estate loans both in its primary market area and
throughout the United States. Specifically, the Company has begun to target
the market for borrowers seeking loans in the range of $50,000 to $1.5
million, subject to the Bank's loans-to-one borrower limit, currently $3.6
million, which are secured by multi-family properties or properties used for
commercial business purposes such as small office buildings, light industrial
or retail facilities. Since the Company has been able to acquire such loans at
a discount and expects to be able to continue to acquire such loans at a
discount or low premium, management believes that the origination and
subsequent sale of commercial and multi-family real estate loans will increase
the Company's cash flow. The Company has streamlined and standardized its
processing of commercial and multi-family real estate loans with a view to
sale in the secondary market or securitization. Since 1994, substantially all
commercial and multi-family real estate loans originated by the Company have
been sold in the secondary market without recourse. Although there can be no
assurances in this regard, management intends to gradually expand these
operations, thereby adding a source of revenue for the Company as well as
providing loans for future securitizations. There can be no assurances,
however, that any such securitization will be completed in the future.
Securitization of commercial and multi-family real estate loans is
significantly less standardized and streamlined than securitization of one- to
four-family residential mortgage loans.
Management believes that it has the infrastructure in place to safely
diversify its product line into this niche market. Two of the Company's senior
executive officers, Daniel L. Perl and Joseph R. L. Passerino, have combined
experience of approximately 27 years in commercial and multi-family real
estate lending and have developed substantial relationships with commercial
and multi-family real estate originators throughout the United States. In
addition, the Company works primarily with a select group of approximately 100
mortgage
18
brokers nationwide with specifically delineated credentials. The Company also
works with four correspondents and expects to expand that number of approved
correspondents to 15 in the near future. Commercial and multi-family real
estate loan correspondents in the Company's network must have a net worth of
at least $1.0 million, a two to three year history of funding and servicing
multi-family and commercial real estate loans and errors and omissions
insurance of at least $1.0 million. In addition, an on-site inspection of the
facilities of each of these correspondents is conducted by the Bank's Senior
Vice President. Where loans are originated by other than this pre-approved
group of correspondents, the Company will underwrite the loan. The Company
also works with a contract appraiser with nationwide experience in appraising
commercial and multi-family real estate loans who appraises or reviews the
appraisals on all such properties.
The Company's policy is to not make commercial or multi-family real estate
loans to borrowers who are in bankruptcy, foreclosure, have loans more than 30
days delinquent or other combinations of credit weaknesses unacceptable to the
Company. The Company targets high to medium credit quality borrowers. The
Company's underwriting procedures provide that commercial real estate loans
may be made in amounts up to 70% of the appraised value of the property
depending on the borrower's creditworthiness. Multi-family real estate loans
may be made in amounts up to 75% of the appraised value of the property.
Commercial real estate loans and multi-family real estate loans may be either
fixed rate or adjustable rate loans. These loans include prepayment penalties
if repaid within the first three to five years. When evaluating a commercial
or multi-family real estate loan, the Company considers the net operating
income of the property and the borrower's expertise, credit history and
personal cash flows. The Company has generally required that the properties
securing commercial real estate and multi-family real estate loans have debt
service coverage ratios (the ratio of net operating income to debt service) of
at least 120%. The largest commercial real estate loan in the Company's held
for sale portfolio at December 31, 1997 was $776,000 and is secured by a five-
unit office building in Venice, California while the largest multi-family real
estate loan in the Company's held for sale portfolio at December 31, 1997 was
$1.2 million secured by a 39 unit multi-family property located in Yucaipa,
California. At December 31, 1997 the Company's commercial real estate
portfolio was $16.8 million, or 5.36% of total gross loans, $10.7 million of
which were held for sale. The Company's multi-family real estate portfolio at
that same date was $10.7 million, or 3.41% of total gross loans, $8.6 million
of which were held for sale.
Repayment of multi-family and commercial real estate loans generally is
dependent, in large part, on sufficient income from the property to cover
operating expenses and debt service. The Company attempts to offset the risks
associated with multi-family and commercial real estate lending by primarily
lending to individuals who will be actively involved in the management of the
property and generally to individuals who have proven management experience,
and by making such loans with lower loan-to-value ratios than one- to four-
family loans.
HISTORICAL AND LOCAL LENDING PORTFOLIO
The Company's portfolio of loans held for investment (the "historical loan
portfolio") was primarily originated prior to 1994. Such loans generally
consist of adjustable rate one- to four-family loans and adjustable rate
multi-family and commercial real estate loans. The Company's gross historical
loan portfolio has decreased in size from $48.0 million at December 31, 1994
to $31.7 million at December 31, 1997. The largest loan in the Company's held
for investment portfolio at December 31, 1997 was $582,000 secured by a hotel
located in San Bernardino, California. At December 31, 1997, substantially all
of the Company's historical loan portfolio was secured by properties located
in California. For a discussion of loss experience on the historical and local
lending portfolio, see "--Lending Overview--Allowance for Loan Losses" and "--
Non-Accrual and Past Due Loans."
CONSUMER AND OTHER LENDING
The Company's consumer and other loans generally consist of overdraft lines
of credit, commercial business loans and unsecured personal loans. At December
31, 1997, the Company's consumer and other loan portfolio was $6.9 million or
2.21% of total gross loans. Of this amount, $6.3 million consisted of
unsecured home improvement loans purchased from a single originator in March
1997. These loans were purchased as part of management's evaluation of new
product lines for possible future growth.
19
LOAN SERVICING
Through December 31, 1993, the Company's loan servicing portfolio consisted
solely of loans originated directly by the Company and retained for investment
or sold, primarily as participations, to others. Commencing in January of 1994
through June of 1995, the Company purchased mortgage servicing rights on FNMA
and FHLMC loans in order to expand the size of its loan servicing department
and to further develop its loan servicing capabilities. The entire FHLMC
servicing portfolio was resold in December 1995. Effective July 1, 1995, with
the adoption of Statement of Financial Accounting Standards ("SFAS") No. 122,
which required the Company to capitalize the value of originated mortgage
servicing rights, the Company began to retain substantially all servicing
rights on loans sold. In addition, the Company intends to retain the servicing
rights to the loans it securitizes. The pooling and servicing agreements
related to the securitizations completed to date contain provisions with
respect to the maximum permitted loan delinquency rates and loan default rates
which, if exceeded, would allow the termination of the Company's right to
service the related loans. Servicing rights were $8.5 million at December 31,
1997. At December 31, 1997, the Company serviced $832.4 million of loans of
which $536.7 million were serviced for others. There can be no assurance that
the Company's estimates used to determine the fair value of mortgage servicing
rights will remain appropriate for the life of the loans sold or the
securitizations. If actual loan prepayments or delinquencies exceed the
Company's estimates, the carrying value of the Company's mortgage servicing
rights may have to be written down through a charge against earnings. The
Company cannot write up such assets to reflect slower than expected
prepayments, although slower prepayments may increase future earnings as the
Company will receive cash flows in excess of those anticipated. Fluctuations
in interest rates may also result in a write-down of the Company's mortgage
servicing rights in subsequent periods. During 1997 the Company recorded a
write-down of $1.3 million on mortgage servicing rights as a result of higher
than anticipated prepayment speeds on adjustable rate mortgage loans.
The loan servicing and collections department has increased in size from
four persons at December 31, 1994 to 28 persons at December 31, 1997. Within
this department, personnel have experience in both sub-prime lending and also
in managing the Company's non-performing loans in its historical local lending
portfolio. This experience was gained in part during the economic downturn in
Southern California and resulted in a low loss experience for the Company. See
"--Lending Overview--Allowance for Loan Losses." The head of the servicing
department has more than 24 years of experience in loan servicing and
collections, including responsibility for a $10.0 billion portfolio of
approximately 255,000 loans and a staff of 70 people. During the first quarter
of 1998, substantial space in Riverside, California has been leased for the
loan servicing and collections operations. The Company has enhanced its
telephonic systems by purchasing a power dialing system, which became
operational in the first quarter of 1998. In addition, the Company intends to
enhance its computer systems by adding document imaging, which creates an
image of each document in a loan file accessible through the Company's wide
area network. This system is expected to become operational in the second
quarter of 1998.
The Company's loan servicing activities include (i) the collection and
remittance of mortgage loan payments, (ii) accounting for principal and
interest and other collections and expenses, (iii) holding and disbursing
escrow or impounding funds for real estate taxes and insurance premiums, (iv)
inspecting properties when appropriate, (v) contacting delinquent borrowers,
and (vi) acting as fiduciary in foreclosing and disposing of collateral
properties. The Company receives a servicing fee for performing these services
for others.
While most of the Company's servicing portfolio is generated through its
origination and purchase activities, when economically attractive, the Company
has, from time to time, made bulk purchases of mortgage servicing rights from
financial institutions. The Company does not intend to make significant bulk
purchases of servicing rights in the near future but may do so depending on
market opportunities. The mortgage loans underlying the servicing rights
retained by the Company have been historically underwritten by the Company.
These servicing rights were either originated by mortgage brokers or purchased
through various programs from correspondents or junior correspondents. The
costs to acquire servicing are based on the present value of the estimated
future servicing revenues, net of the expected servicing expenses, for each
acquisition. Major factors impacting the value of servicing rights include
contractual service fee rates, projected mortgage prepayment speed, projected
20
delinquencies and foreclosures, projected escrow, agency and fiduciary funds
to be held in connection with such servicing and the projected benefit to be
realized from such funds.
In addition to weekly loan delinquency meetings which are attended by
members of senior management, the loan committee of the Board of Directors
generally performs a monthly review of all delinquent loans 90 days or more
past due. In addition, management reviews on an ongoing basis all delinquent
loans. The procedures taken by the Company with respect to delinquencies vary
depending on the nature of the loan and period of delinquency. When a borrower
fails to make a required payment on a loan, the Company takes a number of
steps to have the borrower cure the delinquency and restore the loan to
current status. The Company generally sends the borrower a written notice of
non-payment within ten days after the loan is first past due. In the event
payment is not then received, additional letters and phone calls generally are
made. If the loan is still not brought current, the Company generally sends a
notice of the intent to foreclose 25 days after the loan is first past due. If
the borrower does not cure the delinquency and it becomes necessary for the
Company to take legal action, which typically occurs after a loan is
delinquent at least 30 days or more, the Company will commence foreclosure
proceedings against any real property that secures the loan. If a loan remains
delinquent on the 45th day, a property inspection will be made to verify
occupancy, determine the condition of the property and as an attempt to
contact the borrower in person. If a foreclosure action is instituted and the
loan is not brought current, paid in full, or refinanced before the
foreclosure sale, the real property securing the loan generally is sold at
foreclosure. The Company's procedures for repossession and sale of consumer
collateral are subject to various requirements under state consumer protection
laws.
Regulation and practices in the United States regarding the liquidation of
properties (e.g., foreclosure) and the rights of the mortgagor in default vary
greatly from state to state. Loans originated or purchased by the Company are
secured by mortgages, deeds of trust, trust deeds, security deeds or deeds to
secure debt, depending upon the prevailing practice in the state in which the
property securing the loan is located. Depending on local law, foreclosure is
effected by judicial action and/or non-judicial sale, and is subject to
various notice and filing requirements. If foreclosure is effected by judicial
action, the foreclosure proceedings may take several months.
In general, the borrower, or any person having a junior encumbrance on the
real estate, may cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation during a statutorily prescribed reinstatement period. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorneys' fees, which may be recovered by a lender.
There are a number of restrictions that may limit the Company's ability to
foreclose on a property. A lender may not foreclose on the property securing a
junior mortgage loan unless it forecloses subject to each senior mortgage, in
which case the junior lender or purchaser at such a foreclosure sale will take
title to the property subject to the lien securing the amount due on the
senior mortgage. Moreover, if a borrower has filed for bankruptcy protection,
a lender may be stayed from exercising its foreclosure rights. Also, certain
states provide a homestead exemption that may restrict the ability of a lender
to foreclose on residential property.
21
Credit Quality of Servicing Portfolio. The following table illustrates the
Company's delinquency and default experience with respect to its loan
servicing portfolio:
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------------- --------------------------------------- -----------------------------
NUMBER OF % OF % OF NUMBER OF % OF % OF NUMBER OF % OF
LOANS/ LOANS PRINCIPAL SERVICING LOANS/ LOANS PRINCIPAL SERVICING LOANS/ LOANS PRINCIPAL
PROPERTIES SERVICED BALANCE PORTFOLIO PROPERTIES SERVICED BALANCE PORTFOLIO PROPERTIES SERVICED BALANCE
---------- -------- --------- --------- ---------- -------- --------- --------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
Delinquency
percentage(1)(2)
30-59 days...... 282 1.46% $ 9,356 1.12% 10 0.26% $ 860 0.36% 22 0.74% $ 2,118
60-89 days...... 148 0.76 3,664 0.44 -- -- -- -- 9 0.30 482
90 days and
over............ 333 1.72 3,128 0.38 3 0.08 143 0.06 10 0.33 762
------ ---- -------- ---- ----- ---- -------- ---- ----- ---- --------
Total
delinquency..... 763 3.94% $ 16,148 1.94% 13 0.34% $ 1,003 0.42% 41 1.37% $ 3,362
====== ==== ======== ==== ===== ==== ======== ==== ===== ==== ========
Default
percentage(3)
Foreclosure..... 52 0.27% $ 6,269 0.75% 56 1.48% $ 6,279 2.64% 7 0.23% $ 793
Bankruptcy...... 49 0.25 2,814 0.34 9 0.24 778 0.33 2 0.07 288
Real estate
owned(4)........ 33 0.17 3,509 0.42 9 0.24 1,197 0.50 8 0.27 1,221
------ ---- -------- ---- ----- ---- -------- ---- ----- ---- --------
Total default... 134 0.69% $ 12,592 1.51% 74 1.96% $ 8,254 3.47% 17 0.57% $ 2,302
====== ==== ======== ==== ===== ==== ======== ==== ===== ==== ========
Total servicing
portfolio........ 19,359 $832,393 3,781 $237,958 2,986 $253,711
====== ======== ===== ======== ===== ========
% OF
SERVICING
PORTFOLIO
---------
Delinquency
percentage(1)(2)
30-59 days...... 0.83%
60-89 days...... 0.19
90 days and
over............ 0.30
---------
Total
delinquency..... 1.32%
=========
Default
percentage(3)
Foreclosure..... 0.32%
Bankruptcy...... 0.11
Real estate
owned(4)........ 0.48
---------
Total default... 0.91%
=========
Total servicing
portfolio........
- ----
(1) The delinquency percentage represents the number and outstanding principal
balance of loans for which payments are contractually past due, exclusive
of loans in foreclosure, bankruptcy, real estate owned or forbearance.
(2) The past due period is based on the actual number of days that a payment
is contractually past due. A loan as to which a monthly payment was due
60-89 days prior to the reporting period is considered 60-89 days past
due, etc.
(3) The default percentage represents the number and outstanding principal
balance of loans in foreclosure, bankruptcy or real estate owned.
(4) An "REO Property" is a property acquired and held as a result of
foreclosure or deed in lieu of foreclosure.
22
LENDING OVERVIEW
Loan Portfolio Composition. At December 31, 1997, the Company's gross loans
outstanding totaled $312.5 million, of which $280.9 million, or 89.9%, were
held for sale and $31.7 million, or 10.1%, were held for investment. The types
of loans that the Company may originate are subject to federal and state law
and regulations. Interest rates charged by the Company on loans are affected
by the demand for such loans and the supply of money available for lending
purposes and the rates offered by competitors. These factors are, in turn,
affected by, among other things, economic conditions, monetary policies of the
federal government, including the Federal Reserve Board, and legislative tax
policies.
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
AT DECEMBER 31,
---------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ---------------- ---------------- --------------- ---------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Real estate(1):
Residential:
One- to four-family.... $278,205 89.02% $54,275 78.67% $54,007 84.04% $53,755 82.62% $55,841 83.01%
Multi-family........... 10,653 3.41 4,752 6.89 2,412 3.75 2,685 4.12 2,296 3.41
Commercial............. 16,763 5.36 9,659 14.00 7,522 11.71 8,131 12.50 8,389 12.47
Other loans:
Loans secured by
deposit accounts...... 165 0.05 177 0.25 186 0.29 213 0.33 396 0.59
Unsecured commercial
loans................. 63 0.02 67 0.10 70 0.11 197 0.30 190 0.28
Unsecured consumer
loans................. 6,675 2.14 65 0.09 63 0.10 84 0.13 162 0.24
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total gross loans.... 312,524 100.00% 68,995 100.00% 64,260 100.00% 65,065 100.00% 67,274 100.00%
-------- ====== ------- ====== ------- ====== ------- ====== ------- ======
Less (plus):
Deferred loan
origination (costs)
fees and (premiums)
discounts............. (8,393) (543) (298) 56 109
Allowance for estimated
loan losses........... 2,573 1,625 1,177 832 436
-------- ------- ------- ------- -------
Loans receivable,
net................. $318,344 $67,913 $63,381 $64,177 $66,729
======== ======= ======= ======= =======
- --------
(1) Includes second trust deeds.
23
Loan Maturity. The following table shows the contractual maturity of the
Bank's gross loans at December 31, 1997. There were $280.9 million of loans
held for sale, gross, at December 31, 1997. The table does not reflect
prepayment assumptions.
AT DECEMBER 31, 1997
----------------------------------------------
ONE- TO TOTAL
FOUR- MULTI- OTHER LOANS
FAMILY FAMILY COMMERCIAL LOANS RECEIVABLE
-------- ------- ---------- ------ ----------
(DOLLARS IN THOUSANDS)
Amounts due:
One year or less............... $ 17,675 $ -- $ 310 $ 248 $ 18,233
After one year:
More than one year to three
years........................ 1,025 61 1,359 455 2,900
More than three years to five
years........................ 475 503 4,674 2,496 8,148
More than five years to 10
years........................ 1,388 2,383 3,166 3,577 10,514
More than 10 years to 20
years........................ 63,566 2,696 1,063 -- 67,325
More than 20 years............ 194,076 5,010 6,191 127 205,404
-------- ------- ------- ------ --------
Total amount due............ 278,205 10,653 16,763 6,903 312,524
-------- ------- ------- ------ --------
Less (plus):
Unamortized discounts
(premiums), net.............. (6,813) -- -- -- (6,813)
Deferred loan origination fees
(costs)...................... (1,849) 121 148 -- (1,580)
Allowance for estimated loan
losses....................... 1,206 66 150 1,151 2,573
-------- ------- ------- ------ --------
Total loans, net............ 285,661 10,466 16,465 5,752 318,344
-------- ------- ------- ------ --------
Loans held for sale, net...... 264,954 8,513 10,601 5,200 289,268
-------- ------- ------- ------ --------
Loans held for investment,
net.......................... $ 20,707 $ 1,953 $ 5,864 $ 552 $ 29,076
======== ======= ======= ====== ========
The following table sets forth at December 31, 1997, the dollar amount of
gross loans receivable contractually due after December 31, 1998, and whether
such loans have fixed interest rates or adjustable interest rates. The
Company's adjustable-rate mortgage loans require that any payment adjustment
resulting from a change in the interest rate be made to both the interest and
payment in order to result in full amortization of the loan by the end of the
loan term, and thus, do not permit negative amortization.
DUE AFTER DECEMBER 31, 1998
----------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
(DOLLARS IN THOUSANDS)
Real estate loans:
Residential:
One- to four-family......................... $107,354 $153,176 $260,530
Multi-family................................ 9,280 1,373 10,653
Commercial................................... 6,196 10,257 16,453
Other loans.................................. 6,655 -- 6,655
-------- -------- --------
Total gross loans receivable.............. $129,485 $164,806 $294,291
======== ======== ========
24
The following tables set forth the Company's loan originations, purchases,
sales and principal repayments for the periods indicated:
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Gross loans(1):
Beginning balance............................... $ 68,995 $ 64,260 $ 65,065
Loans originated:
One- to four-family(2)........................ 341,294 100,745 38,259
Multi-family.................................. 18,019 2,976 --
Commercial.................................... 13,631 7,172 --
Other loans................................... 837 126 358
-------- -------- --------
Total loans originated...................... 373,781 111,019 38,617
Loans purchased(3)............................. 399,326 111,534 96,155
-------- -------- --------
Total loans originated and purchased.......... 773,107 222,553 134,772
-------- -------- --------
Total....................................... 842,102 286,813 199,837
Less:
Principal repayments........................... 17,597 9,184 6,719
Sales of loans................................. 94,379 154,620 126,875
Securitizations of loans....................... 415,368 51,944 --
Transfer to REO................................ 2,234 2,070 1,983
-------- -------- --------
Total loans................................. 312,524 68,995 64,260
Loans held for sale............................ 280,859 30,454 21,397
-------- -------- --------
Ending balance loans held for investment........ $ 31,665 $ 38,541 $ 42,863
======== ======== ========
- --------
(1) Gross loans includes loans held for investment and loans held for sale.
(2) Includes second trust deeds.
(3) Loans purchased consist predominantly of one- to four-family residential
Liberator Series and Portfolio Series loans.
Delinquencies and Classified Assets. Federal regulations and the Bank's
Classification of Assets Policy require that the Bank utilize an internal
asset classification system as a means of reporting problem and potential
problem assets. The Bank has incorporated the OTS internal asset
classifications as a part of its credit monitoring system. The Bank currently
classifies problem and potential problem assets as "Substandard," "Doubtful"
or "Loss" assets. An asset is considered "Substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of
the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified
as "Doubtful" have all of the weaknesses inherent in those classified
"Substandard" with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets
classified as "Loss" are those considered "uncollectible" and of such little
value that their continuance as assets without the establishment of a specific
loss allowance is not warranted. Assets which do not currently expose the
insured institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are required to be designated
"Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, under current OTS policy the Bank is
required to consider establishing a general valuation allowance in an amount
deemed prudent by management. The general valuation allowance, which is a
regulatory term, represents a loss allowance which has been established to
recognize the inherent credit risk associated with lending and investing
25
activities, but which, unlike specific allowances, has not been allocated to
particular problem assets. When an insured institution classifies one or more
assets, or portions thereof, as "Loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount.
A savings institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS
which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment
of adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation allowances. Generally, the
policy statement recommends that institutions have effective systems and
controls to identify, monitor and address asset quality problems; that
management has analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner; and that management has established
acceptable allowance evaluation processes that meet the objectives set forth
in the policy statement. As a result of the declines in local and regional
real estate market values and the significant losses experienced by many
financial institutions in prior years, there has been a greater level of
scrutiny by regulatory authorities of the loan portfolios of financial
institutions undertaken as part of the examination of institutions by the OTS
and the FDIC. While the Bank believes that it has established an adequate
allowance for estimated loan losses, there can be no assurance that
regulators, in reviewing the Bank's loan portfolio, will not request the Bank
to materially increase at that time its allowance for estimated loan losses,
thereby negatively affecting the Bank's financial condition and earnings at
that time. Although management believes that an adequate allowance for
estimated loan losses has been established, actual losses are dependent upon
future events and, as such, further additions to the level of allowances for
estimated loan losses may become necessary.
The Bank's Internal Asset Review Committee reviews and classifies the Bank's
assets quarterly and reports the results of its review to the Board of
Directors. The Bank classifies assets in accordance with the management
guidelines described above. REO is classified as Substandard. The following
table sets forth information concerning loans, REO and total assets classified
as substandard at December 31, 1997. At December 31, 1997 the Bank had $4.0
million of assets classified as Special Mention, $6.8 million of assets
classified as Substandard, $560,000 of assets classified as Doubtful and
$171,000 of assets classified as Loss. As of December 31, 1997, assets
classified as Special Mention include 61 loans totaling $4.0 million secured
by one- to four-family residential properties. At December 31, 1997, the
largest loan classified as Special Mention had a loan balance of $226,000 and
is secured by a one- to four-family residential property located in Encinitas,
California. As set forth below, as of December 31, 1997, assets classified as
Substandard, Doubtful and Loss include 334 loans totaling $5.9 million.
AT DECEMBER 31, 1997
---------------------------------------------------------------------------------------
TOTAL SUBSTANDARD, DOUBTFUL
LOANS REO AND LOSS ASSETS
---------------------------- ----------------------------- ----------------------------
GROSS NET NUMBER OF GROSS NET NUMBER OF GROSS NET NUMBER OF
BALANCE BALANCE(1) LOANS BALANCE BALANCE(1) PROPERTIES BALANCE BALANCE(1) ASSETS
------- ---------- --------- ------- ---------- ---------- ------- ---------- ---------
(DOLLARS IN THOUSANDS)
Residential:
One- to four-family.... $4,831 $4,660 45 $1,471 $1,471 16 $6,302 $6,131 61
Multi-family........... -- -- -- 48 48 1 48 48 1
Commercial.............. 131 131 1 -- -- -- 131 131 1
Other loans............. 1,084 1,084 288 -- -- -- 1,084 1,084 288
------ ------ --- ------ ------ --- ------ ------ ---
Total loans........... $6,046 $5,875 334 $1,519 $1,519 17 $7,565 $7,394 351
====== ====== === ====== ====== === ====== ====== ===
- --------
(1) Net balances are reduced for specific loss allowances established against
substandard loans and real estate.
26
Non-Accrual and Past-Due Loans. The following table sets forth information
regarding non-accrual loans, troubled-debt restructurings and REO in the
Company's loans held for investment. There was one troubled-debt restructured
loan within the meaning of SFAS 15, and 17 REO properties at December 31,
1997. Until September 30, 1996 it was the policy of the Company to cease
accruing interest on loans at the time foreclosure proceedings commenced,
which typically occurred when a loan is 45 days past due or possibly longer
depending on the circumstances, which period will not exceed 90 days past due.
Subsequent to March 31, 1996, the Company adopted a policy to cease accruing
interest on loans 90 days or more past due. For the years ended December 31,
1997, 1996, 1995, 1994 and 1993, respectively, the amount of interest income
that would have been recognized on nonaccrual loans if such loans had
continued to perform in accordance with their contractual terms was $424,000,
$179,000, $67,000, $106,000 and $117,000, none of which was recognized. For
the same periods, the amount of interest income recognized on troubled debt
restructurings was zero, $12,000, $11,000, $10,000 and $1,000.
AT DECEMBER 31,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Residential real estate:
One- to four-family.................. $3,245 $2,361 $1,305 $1,766 $1,919
Multi-family......................... -- 45 -- -- --
Commercial............................ 131 -- 82 78 197
Other loans........................... 1,750 10 10 45 62
------ ------ ------ ------ ------
Total................................ 5,126 2,416 1,397 1,889 2,178
REO, net(1)............................ 1,440 561 827 555 1,772
------ ------ ------ ------ ------
Total non-performing assets.......... $6,566 $2,977 $2,224 $2,444 $3,950
====== ====== ====== ====== ======
Restructured loans..................... $ 131 $ 131 $ 131 $ -- $ 15
Classified assets, gross............... 7,565 4,829 3,929 3,951 4,165
Allowance for estimated loan losses as
a percent of gross loans
receivable(2)......................... 0.82% 2.36% 1.83% 1.28% 0.65%
Allowance for estimated loan losses as
a percent of total non-performing
loans(3).............................. 50.20 67.26 84.25 44.04 20.02
Non-performing loans as a percent of
gross loans receivable(2)(3).......... 1.64 3.50 2.17 2.90 3.24
Non-performing assets as a percent of
total assets(3)....................... 1.59 2.86 3.00 3.42 5.05
- --------
(1) REO balances are shown net of related loss allowances.
(2) Gross loans includes loans receivable held for investment and loans
receivable held for sale.
(3) Non-performing assets consist of non-performing loans and REO. Prior to
April 1, 1996, non-performing loans consisted of all loans 45 days or more
past due and all other non-accrual loans. Following March 31, 1996, non-
performing loans consisted of all loans 90 days or more past due and all
other non-accrual loans.
27
The following table sets forth delinquencies in the Company's loan portfolio
as of the dates indicated:
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
--------------------------------- ---------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
---------------- ---------------- ---------------- ----------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
One- to four-family..... 27 $2,328 33 $3,245 3 $354 21 $2,361
Multi-family............ -- -- -- -- -- -- 1 45
Commercial.............. -- -- 1 131 -- -- -- --
Other loans............. 115 583 321 1,750 -- -- 1 10
--- ------ --- ------ --- ---- --- ------
Total.................. 142 $2,911 355 $5,126 3 $354 23 $2,416
=== ====== === ====== === ==== === ======
Delinquent loans to
total gross loans...... 0.93% 1.64% 0.51% 3.50%
====== ====== ==== ======
AT DECEMBER 31, 1995
---------------------------------
60-89 DAYS 90 DAYS OR MORE
---------------- ----------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS
------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
One- to four-family..... 8 $ 446 13 $1,286
Multi-family -- -- -- --
Commercial -- -- -- --
Other loans............. -- -- 1 10
--- ------ --- ------
Total................... 8 $ 446 14 $1,296
=== ====== === ======
Delinquent loans to
total gross loans...... 0.69% 2.01%
====== ======
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance
for loan losses is maintained at an amount management considers adequate to
cover estimated losses in loans receivable which are deemed probable and
estimable. The allowance is based upon a number of factors, including current
economic conditions, actual loss experience and industry trends. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to make additional provisions for loan losses based upon
information available at the time of the review. As of December 31, 1997, the
Company's allowance for loan losses was 0.82% of gross loans compared to 2.36%
as of December 31, 1996. The Company had non-accrual loans of $5.1 million and
$2.4 million at December 31, 1997 and December 31, 1996, respectively. The
Company will continue to monitor and modify its allowances for loan losses as
conditions dictate.
28
The following table sets forth activity in the Company's allowance for loan
losses for the periods set forth in the table.
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Balance at beginning of period... $ 1,625 $ 1,177 $ 832 $ 436 $ 308
Provision for loan losses........ 1,850 963 1,194 1,306 404
Charge-offs:
Real estate:
One- to four-family.......... 901 668 736 771 301
Multi-family................. -- 45 -- -- --
Commercial................... -- 11 111 47 --
Other loans.................... 8 10 67 95 --
-------- ------- ------- ------- -------
Total...................... 909 734 914 913 301
Recoveries....................... 7 219 65 3 25
-------- ------- ------- ------- -------
Balance at end of period......... $ 2,573 $ 1,625 $ 1,177 $ 832 $ 436
======== ======= ======= ======= =======
Average net loans outstanding.... $191,803 $72,556 $65,521 $65,566 $68,511
======== ======= ======= ======= =======
Net charge-offs to average net
loans outstanding............... 0.47% 0.71% 1.30% 1.39% 0.40%
29
The following table sets forth the amount of the Company's allowance for
loan losses, the percent of allowance for loan losses to total allowance and
the percent of gross loans to total gross loans in each of the categories
listed at the dates indicated.
AT DECEMBER 31,
---------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
--------------------------- --------------------------- --------------------------- ---------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
GROSS GROSS GROSS GROSS
LOANS IN LOANS IN LOANS IN LOANS IN
PERCENT EACH PERCENT EACH PERCENT EACH PERCENT EACH
OF CATEGORY OF CATEGORY OF CATEGORY OF CATEGORY
ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL
TO TOTAL GROSS TO TOTAL GROSS TO TOTAL GROSS TO TOTAL GROSS
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- ---------- ------ --------- ---------- ------ --------- ---------- ------ --------- ----------
(DOLLARS IN THOUSANDS)
One- to four-
family.......... $1,206 46.87% 89.02% $1,462 89.97% 78.67% $1,001 85.05% 84.04% $604 72.60% 82.62%
Multi-family.... 66 2.57 3.41 20 1.23 6.89 14 1.19 3.75 10 1.20 4.12
Commercial...... 150 5.83 5.36 124 7.63 14.00 143 12.15 11.71 164 19.71 12.50
Other........... 1,151 44.73 2.21 19 1.17 0.44 19 1.61 0.50 54 6.49 0.76
------ ------ ------ ------ ------ ------ ------ ------ ------ ---- ------ ------
Total allowance
for loan losses. $2,573 100.00% 100.00% $1,625 100.00% 100.00% $1,177 100.00% 100.00% $832 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ==== ====== ======
1993
-------------------------
PERCENT
OF GROSS
LOANS IN
PERCENT EACH
OF CATEGORY
ALLOWANCE TO TOTAL
TO TOTAL GROSS
AMOUNT ALLOWANCE LOANS
------ --------- --------
One- to four-
family.......... $287 65.83% 83.01%
Multi-family.... 10 2.29 3.41
Commercial...... 98 22.48 12.47
Other........... 41 9.40 1.11
------ --------- --------
Total allowance
for loan losses. $436 100.00% 100.00%
====== ========= ========
30
REO
At December 31, 1997, the Company had $1.4 million of REO, net of
allowances. Real estate properties acquired through or in lieu of loan
foreclosure are initially recorded at the lower of fair value or the balance
of the loan at the date of foreclosure through a charge to the allowance for
estimated loan losses. After foreclosure, valuations are periodically
performed by management and an allowance for REO losses is established by a
charge to operations if the carrying value of a property exceeds its fair
value less estimated cost to sell. It is the policy of the Company to obtain
an appraisal on all REO at the time of possession and every six months
thereafter.
INVESTMENT ACTIVITIES
Federally chartered savings institutions, such as the Bank, have the
authority to invest in various types of liquid assets, including United States
Treasury obligations, securities of various federal agencies, certificates of
deposit of insured banks and savings institutions, bankers' acceptances, and
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment-
grade corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly. Additionally, the Bank must maintain minimum
levels of investments that qualify as liquid assets under OTS regulations. See
"--Regulation--Federal Savings Institution Regulation--Liquidity."
Historically, the Bank has maintained liquid assets above the minimum OTS
requirements and at a level considered to be adequate to meet its normal daily
activities.
The investment policy of the Company as established by the Board of
Directors attempts to provide and maintain liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk,
and complement the Company's lending activities. Specifically, the Company's
policies generally limit investments to government and federal agency-backed
securities and non-government guaranteed securities, including corporate debt
obligations, that are investment grade. The Company's policies provide the
authority to invest in marketable equity securities meeting the Company's
guidelines and in mortgage-backed securities guaranteed by the U.S. government
and agencies thereof and other financial institutions.
At December 31, 1997 the Company had $9,000 in its mortgage-backed
securities portfolio, all of which were insured or guaranteed by the FHLMC and
are being held-to-maturity. The Company may increase its investment in
mortgage-backed securities in the future depending on its liquidity needs and
market opportunities. Investments in mortgage-backed securities involve a risk
that actual prepayments will be greater than estimated prepayments over the
life of the security which may require adjustments to the amortization of any
premium or accretion of any discount relating to such instruments thereby
reducing the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities. In addition, the market
value of such securities may be adversely affected by changes in interest
rates.
At December 31, 1997, the residual assets, which resulted from the Company's
asset securitizations, of $40.7 million were classified as trading securities.
For regulatory reasons, the residual assets and restricted cash are held by
the Company. Future residuals and related assets generated by asset
securitizations will be held by the Bank only until they can be sold to the
Company or disposed of in some other transaction. The residual assets and any
future residuals generated by future asset securitizations and held by the
Company will be marked to market on a quarterly basis with unrealized gains
and losses recorded in operations. See "--Loan Sales and Asset
Securitizations."
31
The following table sets forth certain information regarding the carrying
and fair values of the Company's securities (excluding residual assets) at the
dates indicated. There were no securities available-for-sale at the dates
indicated:
AT DECEMBER 31,
-----------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
Securities:
Held-to-maturity:
U.S. Treasury and other
agency securities.......... $6,070 $6,088 $8,827 $8,785 $2,689 $2,689
Mortgage-backed securities. 9 9 10 10 11 11
------ ------ ------ ------ ------ ------
Total securities held-to-
maturity................. $6,079 $6,097 $8,837 $8,795 $2,700 $2,700
====== ====== ====== ====== ====== ======
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Company's securities
(excluding residual assets) as of December 31, 1997. There were no securities
available-for-sale at December 31, 1997.
AT DECEMBER 31, 1997
-----------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
YEAR TO FIVE YEARS TO TEN MORE THAN TEN
ONE YEAR OR LESS YEARS YEARS YEARS TOTAL
----------------- ----------------- ----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Securities:
Held-to-maturity:
U.S. Treasury and
other agency
securities.......... $3,004 5.71% $1,999 6.13% $-- -- $-- -- % $5,003 5.88%
Mortgage-backed
securities.......... -- -- -- -- 9 7.50 9 7.50
------ ------ ---- ---- ------
Total held-to-
maturity.......... 3,004 5.71 1,999 6.13 -- -- 9 7.50 5,012 5.88
FHLB stock.............. 1,067 5.88 -- -- -- -- -- -- 1,067 5.88
------ ------ ---- ------
Total securities
held-to-maturity.. $4,071 5.76 $1,999 6.13 $-- -- $ 9 7.50 $6,079 5.88
====== ====== ==== ==== ======
32
SOURCES OF FUNDS
General. Deposits, lines of credit, loan repayments and prepayments,
proceeds from sales and securitization of loans, cash flows generated from
operations and borrowings are the primary sources of the Company's funds for
use in lending, investing and for other general purposes.
Deposits. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposits consist of passbook savings,
checking accounts, money market savings accounts and certificates of deposit.
For the year ended December 31, 1997, certificates of deposit constituted
87.3% of total average deposits. The term of the fixed-rate certificates of
deposit offered by the Company vary from 30 days to eighteen years and the
offering rates are established by the Company on a weekly basis. Specific
terms of an individual account vary according to the type of account, the
minimum balance required, the time period funds must remain on deposit and the
interest rate, among other factors. The flow of deposits is influenced
significantly by general economic conditions, changes in money market rates,
prevailing interest rates and competition. At December 31, 1997, the Company
had $187.5 million of certificate accounts maturing in one year or less.
The Company relies primarily on customer service and long-standing
relationships with customers to attract and retain local deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect the Company's ability to attract and retain deposits. In
addition, the Company seeks to attract deposits from outside of its market
area by using nationwide advertising. In order to meet its liquidity needs for
the purchase of loans, from time to time the Company offers above market
interest rates on short term certificate accounts and may utilize brokered
deposits. At December 31, 1997, the Company had brokered deposits totaling
$4.7 million.
Although the Company has a significant portion of its deposits in shorter
term certificates of deposit, management monitors activity on the Company's
certificate of deposit accounts and, based on historical experience, and the
Company's current pricing strategy, believes that it will retain a large
portion of such accounts upon maturity. Further increases in short-term
certificate of deposit accounts, which tend to be more sensitive to movements
in market interest rates than core deposits, may result in the Company's
deposit base being less stable than if it had a large amount of core deposits
which, in turn, may result in further increases in the Company's cost of
deposits. Notwithstanding the foregoing, the Company believes that it will
continue to have access to sufficient amounts of certificates of deposit
accounts which, together with other funding sources, will provide it with the
necessary level of liquidity to continue to implement its business strategies.
The following table presents the deposit activity of the Company for the
periods indicated:
FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1997 1996 1995
-------- ------- -------
(DOLLARS IN THOUSANDS)
Net deposits (withdrawals)............................ $118,078 $15,700 $(1,329)
Interest credited on deposit accounts................. 7,976 2,476 3,175
-------- ------- -------
Total increase (decrease)
in deposit accounts................................ $126,054 $18,176 $ 1,846
======== ======= =======
33
At December 31, 1997, the Company had $52.8 million in certificate accounts
in amounts of $100,000 or more maturing as follows:
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
--------------- ------- ------------
(DOLLARS IN
THOUSANDS)
Three months or less.................................... $14,500 5.90%
Over three through 12 months............................ 23,500 6.03
Over 12 months.......................................... 14,809 5.97
-------
Total................................................. $52,809 5.98
=======
The following table sets forth the distribution of the Company's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented.
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------- -------------------------
PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
-------- -------- -------- ------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
Passbook accounts....... $ 4,003 2.72% 2.10% $ 4,401 6.03% 2.09% $ 5,090 7.53% 2.50%
Money market accounts... 2,971 2.00 2.96 4,233 5.80 2.79 5,493 8.12 2.62
Checking accounts....... 11,756 8.00 2.37 7,048 9.65 1.59 6,434 9.51 1.43
-------- ------ ------- ------ ------- ------
Total.................. 18,730 12.72 2.41 15,682 21.48 2.05 17,017 25.16 2.13
Certificate accounts:
Three months or less... 15,887 10.81 5.54 3,994 5.47 5.66 11,570 17.11 5.09
Four through 12 months. 88,129 60.00 6.01 36,519 50.01 5.23 20,762 30.71 5.44
13 through 36 months... 18,467 12.57 5.71 10,204 13.98 6.25 11,188 16.54 5.93
37 months or greater... 5,730 3.90 6.28 6,616 9.06 6.36 7,088 10.48 6.32
-------- ------ ------- ------ ------- ------
Total certificate
accounts.............. 128,213 87.28 5.92 57,333 78.52 5.57 50,608 74.84 5.59
-------- ------ ------- ------ ------- ------
Total average deposits. $146,943 100.00% 5.47% $73,015 100.00% 4.81% $67,625 100.00% 4.72%
======== ====== ======= ====== ======= ======
34
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1997.
PERIOD TO MATURITY FROM DECEMBER 31, 1997 AT DECEMBER 31,
----------------------------------------------------------------------- ---------------
OVER ONE OVER OVER OVER MORE THAN
ONE YEAR TO TWO TO THREE TO FOUR TO FIVE
OR LESS TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS YEARS TOTAL 1996 1995
-------- --------- ----------- ---------- ---------- --------- -------- ------- -------
(DOLLARS IN THOUSANDS)
Certificate accounts:
0 to 4.00%......... $ -- $ -- $ -- $-- $-- $-- $ -- $ -- $ 477
4.01 to 5.00%......... 2,060 203 6 4 1 70 2,344 3,504 5,710
5.01 to 6.00%......... 99,343 2,256 448 396 362 115 102,920 60,145 32,298
6.01 to 7.00%......... 85,880 643 373 20 15 78 87,009 3,891 10,676
7.01 to 8.00%......... 218 529 352 169 43 261 1,572 1,890 2,641
-------- ------ ------ ---- ---- ---- -------- ------- -------
Total............... $187,501 $3,631 $1,179 $589 $421 $524 $193,845 $69,430 $51,802
======== ====== ====== ==== ==== ==== ======== ======= =======
35
Borrowings. From time to time the Bank has obtained advances from the FHLB
as an alternative to retail deposit funds and internally generated funds and
may do so in the future as part of its operating strategy. FHLB advances may
also be used to acquire certain other assets as may be deemed appropriate for
investment purposes. These advances are collateralized primarily by certain of
the Bank's mortgage loans and mortgage-backed securities and secondarily by
the Bank's investment in capital stock of the FHLB. See "Regulation--Federal
Home Loan Bank System." Such advances are made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time-to-time in accordance
with the policies of the OTS and the FHLB. At December 31, 1997, the Bank had
outstanding advances in the amount of $9.0 million from the FHLB.
Both the Company and the Bank have the ability to enter into lines of credit
to finance mortgage originations and purchases or for other corporate
purposes. At December 31, 1997, the Bank's warehouse lines of credit consisted
of two separate lines of credit aggregating $250.0 million, of which $84.6
million has been drawn at December 31, 1997. The lines of credit are secured
by loans originated or purchased by the Company and range in interest rates
from LIBOR plus 50 basis points to LIBOR plus 100 basis points. The Bank is in
the process of negotiating a third warehouse line of credit in the amount of
$250.0 million. In addition, the Company has a line of credit in the amount of
$40.0 million secured by residual assets created by the Company's
securitizations of which $15.5 million has been drawn at December 31, 1997.
All of the lines of credit are uncommitted and may be terminated by the
lenders at will. These lines of credit contain affirmative, negative and
financial covenants, with which the Company was in compliance at December 31,
1997.
On March 14, 1997, the Bank issued subordinated debentures (the
"Debentures") in the aggregate principal amount of $10.0 million through the
Debenture Offering. The Debentures will mature on March 15, 2004 and bear
interest at the rate of 13.5% per annum, payable semi-annually. The Debentures
qualify as supplementary capital under regulations of the OTS which capital
may be used to satisfy the risk-based capital requirements in an amount up to
100% of the Bank's core capital. See "Regulation--Federal Savings Institution
Regulation-- Capital Requirements." By enhancing the Bank's capital position
the Debentures provide support for the Bank's current operations. The
Debentures are direct, unconditional obligations of the Bank ranking with all
other existing and future unsecured and subordinated indebtedness of the Bank.
They are subordinated on liquidation, as to principal and interest, and
premium, if any, to all claims against the Bank having the same priority as
savings account holders or any higher priority.
The Debentures are redeemable at the option of the Bank, in whole or in
part, at any time after September 15, 1998, at the aggregate principal amount
thereof, plus accrued and unpaid interest, if any. The Bank may substitute the
Company in its place as obligor on the Debentures. If such Substitution
occurs, holders of the Debentures will have the option, at September 15, 1998
or at such later time as the Substitution occurs, to require the Company to
purchase all or part of the holder's outstanding Debentures at a price equal
to 100% of the principal amount repurchased plus accrued interest through the
repurchase date. If the Substitution occurs, upon a change in control of the
Company holders of the Debentures will have the option to require the Company
to purchase all or part of the holder's outstanding Debenture at a price equal
to 101% of the principal amount repurchased plus accrued interest through the
repurchase date. Any such repurchase would have a material adverse impact on
the Company's liquidity after September 15, 1998.
36
The following table sets forth certain information regarding the Company's
borrowed funds at or for the periods ended on the dates indicated:
AT OR FOR THE YEAR
ENDED DECEMBER 31,
-------------------------
1997 1996 1995
-------- ------- ------
(DOLLARS IN THOUSANDS)
FHLB advances:
Average balance outstanding....................... $ 8,284 $ 4,259 $3,112
Maximum amount outstanding at any month-end during
the period....................................... 17,800 13,900 7,600
Balance outstanding at end of period.............. 9,000 -- --
Weighted average interest rate during the period.. 5.82% 5.93% 6.55%
Debentures:
Average balance outstanding....................... $ 7,997 -- --
Maximum amount outstanding at any month-end during
the period....................................... 10,000 -- --
Balance outstanding at end of period.............. 10,000 -- --
Weighted average interest rate during the period.. 14.09% -- --
Lines of credit:
Average balance outstanding....................... $ 48,765 -- --
Maximum amount outstanding at any month-end during
the period....................................... 226,846 -- --
Balance outstanding at end of period.............. 100,170 -- --
Weighted average interest rate during the period.. 6.53% -- --
Total borrowings:
Average balance outstanding....................... $ 65,046 $ 4,259 $3,112
Maximum amount outstanding at any month-end during
the period....................................... 254,646 13,900 7,600
Balance outstanding at end of period.............. 119,170 -- --
Weighted average interest rate during the period.. 7.37% 5.93% 6.55%
Asset Securitizations. The Company has completed four asset securitizations,
one during the fourth quarter of 1996, one during the first quarter of 1997,
one during the third quarter of 1997, and one during the fourth quarter of
1997. Net cash proceeds to the Company from these asset securitizations
aggregated $411.3 million. As the Company anticipates that it will conduct
regular asset securitizations in the future, it is expected that gain on sale
of loans securitized will constitute a substantial source of cash flow for the
Company's future loan originations, although there can be no assurance in this
regard.
COMPETITION
As a purchaser and originator of mortgage loans, the Company faces intense
competition, primarily from mortgage banking companies, commercial banks,
credit unions, thrift institutions, credit card issuers and finance companies.
Many of these competitors in the financial services business are substantially
larger and have more capital and other resources than the Company.
Furthermore, certain large national finance companies and conforming mortgage
originators have announced their intention to adapt their conforming
origination programs and allocate resources to the origination of non-
conforming loans. In addition, certain of these larger mortgage companies and
commercial banks have begun to offer products similar to those offered by the
Company targeting customers similar to those of the Company. The entrance of
these competitors into the Company's market could have a material adverse
effect on the Company's results of operations and financial condition.
Competition can take many forms, including convenience in obtaining a loan,
service, marketing and distribution channels and interest rates. Furthermore,
the current level of gains realized by the Company and its competitors on the
sale of the type of loans purchased and originated is attracting additional
competitors, including at least one quasi-governmental agency, into this
market with the effect of lowering the gains that may be realized by the
Company on future loan sales. Competition may be affected by fluctuations in
interest rates and general economic conditions. During periods of rising
rates, competitors which have "locked in" low borrowing costs may have a
competitive advantage. During periods of declining rates, competitors may
solicit the Company's borrowers to refinance their loans. During economic
slowdowns or recessions, the Company's borrowers may have new financial
difficulties and may be receptive to offers by the Company's competitors.
37
The Company depends largely on Originators for its purchases and
originations of new loans. The Company's competitors also seek to establish
relationships with the Company's Originators. The Company's future results may
become more exposed to fluctuations in the volume and cost of its wholesale
loans resulting from competition from other purchasers of such loans, market
conditions and other factors.
In addition, the Company faces increasing competition for deposits and other
financial products from non-bank institutions such as brokerage firms and
insurance companies in such areas as short-term money market funds, corporate
and government securities funds, mutual funds and annuities. In order to
compete with these other institutions with respect to deposits and fee
services, the Company relies principally upon local promotional activities,
personal relationships established by officers, directors and employees of the
Company and specialized services tailored to meet the individual needs of the
Company's customers.
SUBSIDIARIES
As of December 31, 1997, the Company had two subsidiaries: the Bank and Life
Investment Holdings, Inc. Life Investment Holdings, Inc. was incorporated in
Delaware in 1997 as a bankruptcy-remote entity for use in the Company's asset
securitization activities. The Bank had no subsidiaries at December 31, 1997.
PERSONNEL
As of December 31, 1997, the Company had 268 full-time employees and 7 part-
time employees. The employees are not represented by a collective bargaining
unit and the Company considers its relationship with its employees to be good.
YEAR 2000 COMPLIANCE
As the year 2000 approaches, a critical business issue has emerged regarding
how existing application software programs and operating systems can
accommodate this date value. In brief, many existing application software
products were designed to only accommodate a two digit position which
represents the year (e.g., 95 is stored on the systems and represents the year
1995). The Company has implemented a program designed to ensure that all
software used in connection with the Company's business will manage and
manipulate data involving the transition from 1999 to 2000 without functional
or data abnormality and without inaccurate results related to such data. The
Company will utilize internal resources to monitor and test for year 2000
compliance. However, there can be no assurances that such program will be
effective. To the extent the Company's systems are not fully year 2000
compliant, there can be no assurance that potential systems interruptions or
the cost necessary to update software would not have a material adverse effect
on the Company's business, financial condition, results of operations and
business prospects. In addition, the Company has limited information
concerning the compliance status of its suppliers and customers. In the event
that any of the Company's significant suppliers do not successfully and timely
achieve year 2000 compliance, the Company's business or operations could be
adversely affected. The costs associated with compliance efforts are not
expected to have a significant impact on the Company's ongoing results of
operations.
REGULATION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of
the OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition,
the activities of savings institutions, such as the Bank, are governed by the
HOLA and the Federal Deposit Insurance Act ("FDI Act").
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its primary federal regulator, and the FDIC, as the deposit
insurer. The Bank is a member of the Federal Home Loan Bank
38
("FHLB") System and its deposit accounts are insured up to applicable limits
by the SAIF managed by the FDIC. The Bank must file reports with the OTS and
the FDIC concerning its activities and financial condition in addition to
obtaining regulatory approvals prior to entering into certain transactions
such as mergers with, or acquisitions of, other savings institutions. The OTS
and/or the FDIC conduct periodic examinations to test the Bank's safety and
soundness and compliance with various regulatory requirements. This regulation
and supervision establishes a comprehensive framework of activities in which
an institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Company, the Bank and
their operations. Certain of the regulatory requirements applicable to the
Bank and to the Company are referred to below or elsewhere herein. The
description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in this Form 10-K does not
purport to be a complete description of such statutes and regulations and
their effects on the Bank and the Company.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Bank continues
to be a qualified thrift lender ("QTL"). See "Federal Savings Institution
Regulation--QTL Test." Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the QTL test and is
deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"),
subject to the prior approval of the OTS, and certain activities authorized by
OTS regulation, and no multiple savings and loan holding company may acquire
more than 5% the voting stock of a company engaged in impermissible
activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5%
of the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS or acquiring or retaining control of
a depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS
must consider the financial and managerial resources and future prospects of
the company and institution involved, the effect of the acquisition on the
risk to the insurance funds, the convenience and needs of the community and
competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on
subsidiary savings institutions as described below. The Bank must notify the
OTS 30 days before declaring any dividend to the Company. In addition, the
financial impact of a holding company on its subsidiary institution is a
matter that is evaluated by the OTS and the agency has authority to order
cessation of activities or divestiture of subsidiaries deemed to pose a threat
to the safety and soundness of the institution.
39
FEDERAL SAVINGS INSTITUTION REGULATION
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio.
In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
(core) capital ratio (3% for institutions receiving the highest rating on the
CAMELS financial institution rating system), and, together with the risk-based
capital standard itself, a 4% Tier I risk-based capital standard. Core capital
is defined as common stockholders' equity (including retained earnings),
certain noncumulative perpetual preferred stock and related surplus, and
minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The OTS regulations also require that, in meeting the tangible,
leverage (core) and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core
capital and supplementary capital) to risk-weighted assets of at least 4% and
8%, respectively. In determining the amount of risk-weighted assets, all
assets, including certain off-balance sheet assets, are multiplied by a risk-
weight factor of 0% to 100%, as assigned by the OTS capital regulation based
on the risks OTS believes are inherent in the type of asset. The components of
Tier I (core) capital are equivalent to those discussed earlier. The
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and the allowance for loan
and lease losses limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of
its assets (i.e., the difference between incoming and outgoing discounted cash
flows from assets, liabilities and off-balance sheet contracts) that would
result from a hypothetical 200 basis point increase or decrease in market
interest rates divided by the estimated economic value of the institution's
assets. In calculating its total capital under the risk-based capital rule, a
savings institution whose measured interest rate risk exposure exceeds 2% must
deduct an amount equal to one-half of the difference between the institution's
measured interest rate risk and 2%, multiplied by the estimated economic value
of the institution's assets. The Director of the OTS may waive or defer a
savings institution's interest rate risk component on a case-by-case basis. A
savings institution with assets of less than $300 million and risk-based
capital ratios in excess of 12% is not subject to the interest rate risk
component, unless the OTS determines otherwise. For the present time, the OTS
has deferred implementation of the interest rate risk component. At December
31, 1997, the Bank met each of its capital requirements and it is anticipated
that the Bank will not be subject to the interest rate risk component.
The following table presents the Bank's capital position at December 31,
1997.
CAPITAL RATIOS
----------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
------- -------- ------- ------ --------
(DOLLARS IN THOUSANDS)
Tangible.......................... $21,545 $ 6,101 $15,444 5.30% 1.50%
Core (Leverage)................... 21,545 12,202 9,343 5.30 3.00
Risk-based........................ 33,947 26,306 7,641 10.32 8.00
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends
40
upon the institution's degree of undercapitalization. Generally, a savings
institution is considered "well capitalized" if its ratio of total capital to
risk-weighted assets is at least 10%, its ratio of Tier I (core) capital to
risk-weighted assets is at least 6%, its ratio of core capital to total assets
is at least 5%, and it is not subject to any order or directive by the OTS to
meet a specific capital level. A savings institution generally is considered
"adequately capitalized" if its ratio of total capital to risk-weighted assets
is at least 8%, its ratio of Tier I (core) capital to risk-weighted assets is
at least 4%, and its ratio of core capital to total assets is at least 4% (3%
if the institution receives the highest CAMELS rating). A savings institution
that has a ratio of total capital to risk weighted assets of less than 8%, a
ratio of Tier I (core) capital to risk-weighted assets of less than 4% or a
ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and
a savings institution that has a tangible capital to assets ratio equal to or
less than 2% is deemed to be "critically undercapitalized." Subject to a
narrow exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with
the OTS within 45 days of the date a savings institution receives notice that
it is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The OTS could also take any one of a
number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently insured by
the SAIF. On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 (the "Funds Act") which, among other things,
imposed a special one-time assessment on SAIF member institutions, including
the Bank, to recapitalize the SAIF. The SAIF was undercapitalized due
primarily to a statutory requirement that SAIF members make payments on bonds
issued in the late 1980s by the Financing Corporation ("FICO") to recapitalize
the predecessor to the SAIF. As required by the Funds Act, the FDIC imposed a
special assessment of 65.7 basis points on SAIF assessable deposits held as of
March 31, 1995, payable November 27, 1996 (the "SAIF Special Assessment"). The
SAIF Special Assessment was recognized by the Bank as an expense in the
quarter ended September 30, 1996 and was generally tax deductible. The SAIF
Special Assessment recorded by the Bank amounted to $448,000 on a pre-tax
basis and $263,000 on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and Bank Insurance Fund ("BIF") members. The BIF is the fund
which primarily insures commercial bank deposits. Beginning on January 1,
1997, BIF deposits were assessed for a FICO payment of approximately 1.3 basis
points, while SAIF deposits pay approximately 6.4 basis points. Full pro rata
sharing of the FICO payments between BIF and SAIF members will occur on the
earlier of January 1, 2000 or the date the BIF and SAIF are merged. The Funds
Act specifies that the BIF and SAIF will be merged on January 1, 1999,
provided no savings associations remain as of that time.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable
to that of BIF members. SAIF members will also continue to make the FICO
payments described above. Management cannot predict the level of FDIC
insurance assessments on an on-going basis, whether the savings association
charter will be eliminated or whether the BIF and SAIF will eventually be
merged.
The Bank's assessment rate for fiscal 1997 ranged from 9.3 to 9.5 basis
points and the premium paid for this period was $102,000. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has
41
violated any applicable law, regulation, rule, order or condition imposed by
the FDIC or the OTS. The management of the Bank does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations
as of that date. Various proposals to eliminate the federal thrift charter,
create a uniform financial institutions charter and abolish the OTS have been
introduced in Congress. Some bills would require federal savings institutions
to convert to a national bank or some type of state charter by a specified
date under some bills, or they would automatically become national banks.
Under some proposals, converted federal thrifts would generally be required to
conform their activities to those permitted for the charter selected and
divestiture of nonconforming assets would be required over a two year period,
subject to two possible one year extensions. State chartered thrifts would
become subject to the same federal regulation as applies to state commercial
banks. A more recent bill passed by the House Banking Committee would allow
savings institutions to continue to exercise activities being conducted when
they convert to a bank regardless of whether a national bank could engage in
the activity. Holding companies for savings institutions would become subject
to the same regulation as holding companies that control commercial banks,
with some limited grandfathering, including savings and loan holding company
activities. The grandfathering would be lost under certain circumstances such
as a change in control of the Company. The Bank is unable to predict whether
such legislation would be enacted or the extent to which the legislation would
restrict or disrupt its operations.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. An additional amount may be lent, equal to 10% of
unimpaired capital and surplus, if such loan is secured by readily-marketable
collateral, which is defined to include certain financial instruments and
bullion. At December 31, 1997, the Bank's limit on loans to one borrower was
$3.6 million. At December 31, 1997, the Bank's largest aggregate outstanding
balance of loans to one borrower was $1.2 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings and loan association is either must qualify as a
"domestic building and loan association" as defined in the Internal Revenue
Code or required to maintain at least 65% of its "portfolio assets" (total
assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangibles, including goodwill; and (iii) the value of property used to
conduct business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-
backed securities) in at least 9 months out of each 12 month period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
December 31, 1997, the Bank maintained 99.9% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test. Recent
legislation has expanded the extent to which education loans, credit card
loans and small business loans may be considered "qualified thrift
investments."
Limitation on Capital Distributions. OTS regulations impose limitations upon
all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
institutions, which are based primarily on an institution's capital level. An
institution that exceeds all fully phased-in capital requirements before and
after a proposed capital distribution ("Tier 1 Bank") and has not been advised
by the OTS that it is in need of more than normal supervision, could, after
prior notice but without obtaining approval of the OTS, make capital
distributions during a calendar year equal to the greater of (i) 100% of its
net earnings to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the calendar year or
(ii) 75% of its net income for the previous four quarters. Any additional
capital distributions would require prior regulatory approval. In the event
the Bank's capital fell below its regulatory requirements or the OTS notified
it that it was in need of more than normal supervision, the Bank's ability to
make capital distributions could be restricted. In addition, the OTS could
prohibit a proposed capital distribution
42
by any institution, which would otherwise be permitted by the regulation, if
the OTS determines that such distribution would constitute an unsafe or
unsound practice. In December 1994, the OTS proposed amendments to its capital
distribution regulation that would generally authorize the payment of capital
distributions without OTS approval provided that the payment does not cause
the institution to be undercapitalized within the meaning of the prompt
corrective action regulation. However, institutions in a holding company
structure would still have a prior notice requirement. At December 31, 1997,
the Bank was a Tier 1 Bank.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement was 5% for fiscal 1997, but is subject
to change from time to time by the OTS to any amount within the range of 4% to
10% depending upon economic conditions and the savings flows of member
institutions. In 1997, OTS regulations also required each savings institution
to maintain an average daily balance of short-term liquid assets of at least
1% of the total of its net withdrawable deposit accounts and borrowings
payable in one year or less. Monetary penalties may be imposed for failure to
meet these liquidity requirements. The OTS has recently lowered the liquidity
requirement from 5% to 4% and eliminated the 1% short term liquid asset
requirement. The Bank's liquidity ratio for the month of December, 1997 was
6.04%, which exceeded the applicable requirements. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the OTS
to fund the agency's operations. The general assessments, paid on a semi-
annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest
quarterly thrift financial report. The assessments paid by the Bank for the
fiscal year ended December 31, 1997 totaled $102,000.
Branching. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and
23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate
amount of covered transactions with any individual affiliate to 10% of the
capital and surplus of the savings institution. The aggregate amount of
covered transactions with all affiliates is limited to 20% of the savings
institution's capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is
generally prohibited. Section 23B generally provides that certain transactions
with affiliates, including loans and asset purchases, must be on terms and
under circumstances, including credit standards, that are substantially the
same or at least as favorable to the institution as those prevailing at the
time for comparable transactions with non-affiliated companies. In addition,
savings institutions are prohibited from lending to any affiliate that is
engaged in activities that are not permissible for bank holding companies and
no savings institution may purchase the securities of any affiliate other than
a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment. Recent legislation created an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. Regulation O also places individual and
aggregate limits on the amount of loans the Bank may make to insiders based,
in part, on the Bank's capital position and requires certain board approval
procedures to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
actions against the institution and all institution-affiliated parties,
including
43
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a
particular savings institution. If action is not taken by the Director, the
FDIC has authority to take such action under certain circumstances. Federal
law also establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address
problems at insured depository institutions before capital becomes impaired.
The standards set forth in the Guidelines address internal controls and
information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; asset quality;
earnings; and compensation, fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final rule establishes deadlines for the
submission and review of such safety and soundness compliance plans when such
plans are required.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally required for most of 1997 that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$49.3 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement was 3%; and for accounts aggregating greater than $49.3
million, the reserve requirement was $1.48 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that
portion of total transaction accounts in excess of $49.3 million. The first
$4.4 million of otherwise reservable balances (subject to adjustments by the
Federal Reserve Board) were exempted from the reserve requirements. The Bank
maintained compliance with the foregoing requirements. For 1998, the Federal
Reserve Board has decreased from $49.3 to $47.8 million the amount of
transaction accounts subject to the 3% reserve requirement and to increase the
amount of exempt reservable balances from $4.4 million to $4.7 million. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the
OTS.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank report their income on a consolidated
basis and the accrual method of accounting, and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank has not been audited by the IRS . For its 1997
taxable year, the Bank is subject to a maximum federal income tax rate of
35.0%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans
44
(generally secured by interests in real property improved or to be improved)
under (i) the Percentage of Taxable Income Method (the "PTI Method") or (ii)
the Experience Method. The reserve for nonqualifying loans was computed using
the Experience Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves. The
1996 Act repeals the reserve method of accounting for bad debts effective for
tax years beginning after 1995. Thrift institutions that would be treated as
small banks are allowed to utilize the Experience Method applicable to such
institutions, while thrift institutions that are treated as large banks (those
generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts
is no longer available for any financial institution.
To the extent the allowable bad debt reserve balance using the thrift's
historical computation method exceeds the allowable bad debt reserve method
under the newly enacted provisions, such excess is required to be recaptured
into income under the provisions of Code Section 481(a). Any Section 481(a)
adjustment required to be taken into income with respect to such change
generally will be taken into income ratably over a six-taxable year period,
beginning with the first taxable year beginning after 1995, subject to the
residential loan requirement.
Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Bank's current taxable year, in which the Bank originates a
minimum of certain residential loans based upon the average of the principal
amounts of such loans made by the Bank during its six taxable years preceding
its current taxable year.
Under the 1996 Act, the Bank is permitted to use the Experience Method to
compute its allowable addition to its reserve for bad debts for the current
year. The Bank's bad debt reserve as of December 31, 1995 was computed using
the permitted Experience Method computation and was therefore not subject to
the recapture of any portion of its bad debt reserve as discussed above.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and
then from the Bank's supplemental reserve for losses on loans, to the extent
thereof, and an amount based on the amount distributed (but not in excess of
the amount of such reserves) will be included in the Bank's income. Non-
dividend distributions include distributions in excess of the Bank's current
and accumulated earnings and profits, as calculated for federal income tax
purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of the Bank's current or
accumulated earnings and profits will not be so included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if the Bank makes a non-dividend
distribution to the Company, approximately one and one-half times the amount
of such distribution (but not in excess of the amount of such reserves) would
be includable in income for federal income tax purposes, assuming a 35%
federal corporate income tax rate. The Bank does not intend to pay dividends
that would result in a recapture of any portion of its bad debt reserves.
SAIF Recapitalization Assessment. The Funds Act levied a 65.7-cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this
legislation is deductible under Section 162 of the Code in the year of
payment.
45
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the executive
officers of the Company and the Bank who are not also directors.
AGE AT POSITION WITH THE COMPANY AND BANK
NAME 12/31/97 AND PAST FIVE YEARS EXPERIENCE
---- -------- ----------------------------------
L. Bruce Mills, Jr.... 40 Executive Vice President, Secretary and Treasurer
Mary E. Darter........ 37 Executive Vice President. Joined the Bank in 1994. Previously in
charge of warehouse line of credit division and bulk acquisitions
at Imperial Credit Industries/Southern Pacific Thrift and Loan
Joseph R.L. Passerino. 43 Senior Vice President. Joined the Bank in February 1994.
Previously in charge of loan production for St. Thomas Capital
Corporation.
46
ITEM 2. PROPERTIES
As of December 31, 1997, the Company conducted its business through thirteen
offices.
NET BOOK VALUE
ORIGINAL OF PROPERTY OR
YEAR LEASEHOLD
LEASED LEASED DATE OF IMPROVEMENTS AT
OR OR LEASE DECEMBER 31,
LOCATION OWNED ACQUIRED EXPIRATION 1997
-------- ------ -------- ---------- ---------------
Corporate Headquarters and
Regional Lending Center:(1)
10540 Magnolia Avenue, Suites B & C
Riverside, CA Leased 1997 2002 $1,202,000
Regional Lending Center:
2600 South Parker Road, Suite 6-300
Aurora, CO Leased 1997 2000 71,000
Regional Lending Center:
8031 Philips Highway
Jacksonville, FL Leased 1997 2002 --
Branch Office:
1598 E. Highland Avenue
San Bernardino, CA Leased 1986 2001 218,000
Branch Office:
10530 Magnolia Avenue, Suite A
Riverside, CA Leased 1997 2002 9,000
National Servicing Center:
4110 Tigris Way
Riverside, CA Owned 1996 -- 464,000
Retail Lending Office:
1518 Huntington Drive
S. Pasadena, CA Leased 1997 2000 3,000
Retail Lending Office:
424/426 S. Citrus Ave.
Covina, CA Leased 1997 2000 5,000
Retail Lending Office:
259 E. Campbell Avenue, Suite 3
Campbell, CA Leased 1997 (1) --
Retail Lending Office:
11339 183rd Street
Cerritios, CA Leased 1997 2001 --
Retail Lending Office:
Sierra Vista Plaza
Placentia, CA Leased 1997 2000 --
Capital Markets Office:
10777 Main Street
Bellevue, WA Leased 1997 1999 --
- --------
(1) Lease is month to month
47
The Company opened five low-cost retail lending offices during the year
ended December 31, 1997. Subsequent to that date, the Company has opened three
additional retail lending offices, and intends to enter into leases for an
additional seven retail lending offices by the end of 1998, all located in
Southern California.
ITEM 3. LEGAL PROCEEDINGS
The Company and the Bank are not involved in any pending legal proceedings
other than legal proceedings occurring in the ordinary course of business.
Management believes that none of these legal proceedings, individually or in
the aggregate, will have a material adverse impact on the results of
operations or financial condition of the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
48
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has been quoted on the Nasdaq National
Market under the symbol "LFCO" since the Company's IPO on June 30, 1997. As of
March 13, 1998, there were approximately 327 holders of record of the Common
Stock. The following table summarizes the range of the high and low closing
sale prices per share of Common Stock as quoted by Nasdaq for the periods
indicated.
HIGH LOW
------ ------
QUARTER ENDED
June 30, 1997..................................................... $13.50 $13.38
September 30, 1997................................................ 19.25 13.63
December 31, 1997................................................. 21.87 11.75
ITEM 6. SELECTED FINANCIAL DATA
AT DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
SELECTED BALANCE SHEET
DATA:
Total assets............ $ 411,785 $ 104,010 $ 74,136 $ 71,402 $ 78,256
Securities held-to-
maturity and FHLB
stock.................. 6,079 8,837 2,700 2,860 3,883
Loans held for sale..... 289,268 31,018 21,688 17,070 2,348
Loans held for
investment............. 31,649 38,520 42,870 47,939 64,820
Allowance for estimated
loan losses............ 2,573 1,625 1,177 832 436
Residual assets at fair
value.................. 40,746 5,700 -- -- --
Mortgage servicing
rights................. 8,526 2,645 683 -- --
Deposit accounts........ 211,765 85,711 67,535 65,689 72,008
Borrowings.............. 119,170 3,278 -- 1,250 1,200
Stockholders' equity.... 54,819 9,273 4,268 3,748 4,419
Book value per share(1). $ 8.37 $ 2.89 $ 2.29 $ 2.01 $ 2.37
Shares outstanding(1)... 6,546,716 3,211,716 1,866,216 1,866,216 1,866,216
(Continued on the next page)
49
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
SELECTED OPERATING DATA:
Interest income......... $ 21,127 $ 6,929 $ 5,825 $ 4,824 $ 5,445
Interest expense........ 12,830 3,766 3,448 2,721 3,045
--------- --------- --------- --------- ---------
Net interest income.... 8,297 3,163 2,377 2,103 2,400
Provision for estimated
loan losses............ 1,850 963 1,194 1,306 404
--------- --------- --------- --------- ---------
Net interest income
after provision for
estimated loan losses. 6,447 2,200 1,183 797 1,996
Net gains from mortgage
financing operations... 29,785 8,352 3,575 1,428 1,144
Other non-interest
income................. 1,500 760 445 260 253
Non-interest expense:
Compensation and
benefits.............. 9,210 5,233 2,544 1,575 1,403
Net loss on foreclosed
real estate........... 126 158 53 280 228
SAIF special
assessment............ -- 448 -- -- --
Other expense.......... 6,654 2,842 1,792 1,601 1,562
--------- --------- --------- --------- ---------
Total non-interest
expense............... 15,990 8,681 4,389 3,456 3,193
--------- --------- --------- --------- ---------
Income (loss) before
income tax provision
(benefit).............. 21,742 2,631 814 (971) 200
Income tax provision
(benefit).............. 9,042 1,126 294 (300) 107
--------- --------- --------- --------- ---------
Net income (loss)....... $ 12,700 $ 1,505 $ 520 $ (671) $ 93
========= ========= ========= ========= =========
Basic earnings per
share(2)............... $ 2.60 $ 0.63 $ 0.28 $ (0.36) $ 0.05
========= ========= ========= ========= =========
Diluted earnings per
share(2)............... $ 2.49 $ 0.63 $ 0.28 $ (0.36) $ 0.05
========= ========= ========= ========= =========
Basic weighted average
shares outstanding(2).. 4,884,993 2,370,779 1,866,216 1,866,216 1,823,765
========= ========= ========= ========= =========
Diluted weighted average
shares outstanding(2).. 5,107,951 2,370,779 1,866,216 1,866,216 1,823,765
========= ========= ========= ========= =========
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL
RATIOS AND OTHER
DATA(3):
PERFORMANCE RATIOS:
Return on average
assets............... 3.61% 1.74% 0.69% (0.89)% 0.12%
Return on average
equity............... 31.20 24.99 13.64 (17.01) 2.11
Average equity to
average assets....... 11.56 6.98 5.04 5.22 5.51
Equity to total assets
at end of period..... 13.31 8.92 5.76 5.25 5.65
Average interest rate
spread(4)............ 3.02 3.76 3.09 2.79 3.02
Net interest
margin(5)............ 3.56 3.94 3.25 2.88 3.14
Average interest-
earning assets to
average interest-
bearing liabilities.. 109.89 103.90 103.50 102.27 103.08
Efficiency Ratio(6)... 40.08 69.43 67.78 83.78 78.09
LOAN ORIGINATIONS AND
PURCHASES.............. $ 773,107 $ 222,553 $ 134,772 $ 72,815 $ 82,015
BANK REGULATORY CAPITAL
RATIOS(7):
Tangible capital...... 5.30% 8.90% 5.68% 5.25% 5.65%
Core capital.......... 5.30 8.90 5.68 5.25 5.65
Risk-based capital.... 10.32 9.43 10.17 10.00 10.87
ASSET QUALITY RATIOS:
Non-performing assets
as a percent of total
assets(8)............ 1.59% 2.86% 3.00% 3.42% 5.05%
Allowance for
estimated loan losses
as a percent of non-
performing loans..... 50.20 67.26 84.25 44.04 20.02
(footnotes on next page)
50
- --------
(1) Book value per share is based upon the shares outstanding at the end of
each period, adjusted for a 100% stock dividend which occurred during
1996. Book value per share is then adjusted for the exchange of three
shares of Company Common Stock for one share of Bank common stock in the
Reorganization.
(2) Earnings per share is based upon the weighted average shares outstanding
during the period, adjusted for a 100% stock dividend which occurred
during 1996. Earnings per share is then adjusted for the exchange of three
shares of Company Common Stock for one share of Bank common stock in the
Reorganization.
(3) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average daily or average month-end balances during the indicated
periods.
(4) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) The efficiency ratio represents noninterest expense less (gain) loss on
foreclosed real estate divided by noninterest income plus net interest
income before provision for estimated loan losses.
(7) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Item 1--Business--Regulation."
(8) Non-performing assets consist of non-performing loans and REO.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUMMARY
The Company originates, purchases, sell, securitizes and services primarily
non-conventional mortgage loans principally secured by first and second
mortgages on one- to four-family residences. The Company makes Liberator
Series loans, which are for the purchase or refinance of residential real
property by sub-prime borrowers and Portfolio Series loans, which are debt
consolidation loans for Agency-Qualified Borrowers, generally with loan-to-
value ratios of up to 125%. While the Company is currently emphasizing the
origination of Portfolio Series loans, it intends to market both products as
demand permits. In addition, to a much lesser extent, the Company originates
multi-family residential and commercial loans. The Company purchases and
originates mortgage loans and other real estate secured loans through a
network of Originators throughout the country. The Company funds substantially
all of the loans which it originates or purchases through deposits, other
borrowings, internally generated funds and FHLB advances. In the immediate and
foreseeable future, the Company will also fund loans from the cash proceeds,
if any, received from securitizations. Deposit flows and cost of funds are
influenced by prevailing market rates of interest primarily on competing
investments, account maturities and the levels of savings in the Company's
market area. The Company's ability to purchase or sell loans is influenced by
the general level of product available from its correspondent relationships
and the willingness of investors to purchase the loans at an acceptable price
to the Company. Due to substantial activity in the purchase and sale of loans
in recent years, the net gains from mortgage financing operations have been
significant. The Company's results of operations are also affected by the
Company's provision for loan losses and the level of operating expenses. The
Company's operating expenses primarily consist of employee compensation and
benefits, premises and occupancy expenses, and other general expenses. The
Company's results of operations are also affected by prevailing economic
conditions, competition, government policies and actions of regulatory
agencies. See "Item 1--Business--Regulation."
51
AVERAGE BALANCE SHEETS
The following tables set forth certain information relating to the Company
at December 31, 1997 and for the years ended December 31, 1997, 1996 and 1995.
The yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown. Unless
otherwise noted, average balances are measured on a daily basis. The yields
and costs include fees which are considered adjustments to yields.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
AT DECEMBER 31,
1997 1997 1996 1995
--------------- ------------------------- ------------------------- -------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- ------ -------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS
------
Interest-earning assets:
Interest-earning depos-
its and short-term in-
vestments............... $ 14,990 5.31% $ 17,535 $ 989 5.64% $ 5,618 $ 286 5.09% $ 4,225 $ 203 4.80%
Investment securi-
ties(1)................. 6,070 5.88 8,685 495 5.70 1,912 100 5.23 3,458 188 5.44
Loans receivable,
net(2).................. 318,344 10.33 191,803 17,746 9.25 72,556 6,513 8.98 65,521 5,433 8.29
Mortgage-backed securi-
ties(1)................. 9 7.50 9 1 11.11 11 1 9.09 12 1 8.33
Residual assets......... 40,746 13.50 14,928 1,896 12.70 199 29 14.57 -- -- --
-------- -------- -------- ------- -------- ------- --------
Total interest-earning
assets.................. 380,159 10.40 232,960 21,127 9.07 80,296 6,929 8.63 73,216 5,825 7.96
-------- -------- --------
Non-interest-earning as-
sets(3)................. 31,626 119,283 6,035 2,465
-------- -------- ------- -------
Total assets(3)......... $411,785 $352,243 $86,331 $75,681
======== ======== ======= =======
LIABILITIES AND EQUITY
----------------------
Interest-bearing liabil-
ities:
Passbook accounts....... $ 3,838 2.10 $ 4,003 84 2.10 $ 4,401 92 2.09 $ 5,090 127 2.50
Money market accounts... 2,729 2.98 2,971 88 2.96 4,233 118 2.79 5,493 144 2.62
Checking accounts....... 11,353 2.99 11,756 279 2.37 7,048 112 1.59 6,434 92 1.43
Certificate accounts.... 193,845 5.94 128,213 7,587 5.92 57,333 3,192 5.57 50,608 2,829 5.59
-------- -------- -------- ------- -------- ------- --------
Total deposit accounts.. 211,765 5.68 146,943 8,038 5.47 73,015 3,514 4.81 67,625 3,192 4.72
Borrowings(4)........... 119,170 7.71 65,046 4,792 7.37 4,268 252 5.90 3,112 256 8.23
-------- -------- -------- ------- -------- ------- --------
Total interest-bearing
liabilities............. 330,935 6.41 211,989 12,830 6.05 77,283 3,766 4.87 70,737 3,448 4.87
-------- --------
Non-interest-bearing li-
abilities(3)............ 26,031 99,546 3,026 1,131
-------- -------- ------- -------
Total liabilities(3).... 356,966 311,535 80,309 71,868
Equity(3)............... 54,819 40,708 6,022 3,813
-------- -------- ------- -------
Total liabilities and
equity(3)............... $411,785 $352,243 $86,331 $75,681
======== ======== ======= =======
Net interest income be-
fore provision for esti-
mated loan losses....... $ 8,297 $ 3,163 $ 2,377
======== ======== ========
Net interest rate
spread(5)............... 3.99 3.02 3.76 3.09
Net interest margin(6).. 3.56 3.94 3.25
Ratio of interest-
earning assets to
interest-bearing
liabilities............. 114.87 109.89 103.90 103.50
(footnotes on next page)
52
- --------
(1) Includes unamortized discounts and premiums and certificates of deposit.
(2) Amount is net of deferred loan origination fees, unamortized discounts,
premiums and allowance for estimated loan losses and includes loans held
for sale and non-performing loans. See "Business--Lending Overview."
(3) Average balances are measured on a month-end basis.
(4) The average yield on borrowings for the year ending December 31, 1995
included the effects of $52,000 in interest expense on swap transactions
with a notional principal balance of $2.0 million in 1995. Without this
added expense, the average yield on borrowings for the years ending
December 31, would have been 6.56%. The yield on total interest-bearing
liabilities for the years ending December 31, 1995 would have been 4.80%.
The $2.0 million in swap contracts matured on November 7, 1995.
(5) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by average
interest-earning assets.
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Company's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the
net change. The changes attributable to the combined impact of volume and rate
have been allocated proportionately to the changes due to volume and the
changes due to rate.
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- -------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
-------------- -----------
VOLUME RATE NET VOLUME RATE NET
------- ----- ------- ------ ---- ------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Interest-earning deposits and
short-term investments........ $ 629 $ 74 $ 703 $ 93 $(10) $ 83
Investment securities, net..... 385 10 395 (81) (7) (88)
Loans receivable, net(1)....... 11,062 171 11,233 580 500 1,080
Residual assets................ 1,870 (3) 1,867 29 -- 29
Mortgage-backed securities..... -- -- -- -- -- --
------- ----- ------- ---- ---- ------
Total interest-earning
assets...................... 13,946 252 14,198 621 483 1,104
INTEREST-BEARING LIABILITIES:
Money market accounts.......... (8) -- (8) (35) 9 (26)
Passbook accounts.............. (38) 8 (30) (16) (19) (35)
Checking accounts.............. 96 71 167 9 11 20
Certificate accounts........... 4,182 213 4,395 374 (11) 363
Borrowings..................... 4,462 78 4,540 80 (84) (4)
------- ----- ------- ---- ---- ------
Total interest-bearing
liabilities................. 8,694 370 9,064 412 (94) 318
------- ----- ------- ---- ---- ------
Change in net interest income.... $ 5,252 $(118) $ 5,134 $209 $577 $ 786
======= ===== ======= ==== ==== ======
- --------
(1) Includes interest on loans held for sale.
53
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
GENERAL
For the year ended December 31, 1997 the Company recorded net income of
$12.7 million compared to $1.5 million for the year ended December 31, 1996.
The basic and diluted earnings per share for the year ended December 31, 1997
were $2.60 and $2.49, respectively, compared to $0.63 and $0.63, respectively,
for the year ended December 31, 1996. The increase in net income was due to
the expansion of the mortgage financing operations, the increase in gains with
respect to such operations, increases in net interest income and the absence
of a special SAIF assessment.
INTEREST INCOME
Interest income for the year ended December 31, 1997 was $21.1 million,
compared to $6.9 million for the year ended December 31, 1996, due to an
increase in the average balance of interest earning assets, combined with an
increase in the yield on those assets. Average interest earning assets
increased to $233.0 million for the year ended December 31, 1997 compared to
$80.3 million for the year ended December 31, 1996. The yield on interest
earning assets increased to 9.07% for the year ended December 31, 1997
compared to 8.63% for the year ended December 31, 1996. The largest single
component of interest earning assets was average loans receivable, net, which
were $191.8 million with a yield of 9.25% for the year ended December 31, 1997
compared to $72.6 million with a yield of 8.98% for the year ended December
31, 1996. The income in the average balance of loans receivable was
attributable to the continued growth of the Company's mortgage financing
operation.
INTEREST EXPENSE
For the year ended December 31, 1997, interest expense was $12.8 million,
compared to $3.8 million for the year ended December 31, 1996 due to an
increase in the average balance of interest bearing liabilities combined with
an increase in the cost of those liabilities. At the end of the quarter ended
March 31, 1997, the Company issued subordinated debentures with an interest
rate of 13.5%. This issuance of debentures, combined with an increased use of
borrowed funds as well as a heavier reliance on certificate accounts, resulted
in an increase in the average cost of interest bearing liabilities to 6.05%
for the year ended December 31, 1997 compared to 4.87% for the year ended
December 31, 1996. Average interest bearing liabilities were $212.0 million
for the year ended December 31, 1997 compared to $77.3 million for the year
ended December 31, 1996.
The largest component of average interest bearing liabilities was
certificate accounts, which averaged $128.2 million with an average cost of
5.92% compared to $57.3 million with an average cost of 5.57% for the year
ended December 31, 1996. The second largest component of interest bearing
liabilities is borrowings, which increased to an average balance of $65.0
million with an average cost of 7.37% for the year ended December 31, 1997
compared to $4.3 million with an average cost of 5.90% for the year ended
December 31, 1996. During 1997, increased borrowings include the issuance of
the subordinated debentures, as well as two warehouse lines of credit in the
amount of $250.0 million which are indexed to LIBOR. In addition, the Company
entered into a residual financing line of credit in the amount of $40.0
million, which is also indexed to LIBOR.
NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN LOSSES
Net interest income before provision for estimated loan losses for the year
ended December 31, 1997 was $8.3 million compared to $3.2 million for the year
ended December 31, 1996. This increase was the net effect of an increase in
average interest earning assets and average interest bearing liabilities, as
well as an increase in the ratio of interest earning assets to interest
bearing liabilities. Average interest earning assets increased to
$233.0 million for the year ended December 31, 1997 compared to $80.3 million
for the year ended December 31, 1996. Average interest bearing liabilities
increased to $212.0 million with an average cost of 6.05% for the year ended
December 31, 1997 compared to $77.3 million with an average cost of 4.87% for
the year ended December 31, 1996. The ratio of interest earning assets to
interest bearing liabilities was 109.89% for the year ended December 31, 1997
compared to 103.90% for the year ended December 31, 1996.
54
PROVISION FOR ESTIMATED LOAN LOSSES
Provision for estimated loan losses were $1.9 million for the year ended
December 31, 1997 compared to $963,000 for the year ended December 31, 1996.
The increase in provisions was based on an evaluation of the composition of
the Company's loan portfolio and an increase in non-performing consumer loans.
Charge offs net of recoveries for the year ended December 31, 1997 were
$902,000 compared to $515,000 for the year ended December 31, 1996. The
Company had non-accrual loans at December 31, 1997 of $5.1 million, compared
to $2.4 million at December 31, 1996. The increase in non-accrual loans was
largely due to an increase in non-performing consumer loans, which were $1.8
million as of December 31, 1997 compared to $10,000 as of December 31, 1996.
The increase in non-performing consumer loans relates directly to a bulk
purchase of $7.4 million in consumer loans during 1997. Management believes
that the allowance for loan losses at December 31, 1997 was adequate to absorb
known and inherent risks in the Company's loan portfolio. No assurance can be
given, however, that economic conditions which may adversely affect the
Company's or the Bank's service areas or other circumstances will not be
reflected in increased losses in the loans portfolio. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowance for loan losses. Such agencies may require the
Bank to recognize additions to the allowance or to take charge-offs
(reductions in the allowance) in anticipation of losses. See "Item 1--
Business--Lending Overview--Delinquencies and Classified Assets" and "--
Lending Overview--Allowance for Loan Losses."
NON-INTEREST INCOME
For the year ended December 31, 1997, net gains from mortgage financing
operations totaled $29.8 million compared to $8.4 million for the year ended
December 31, 1996. The net gain includes a pre-tax unrealized loss of $2.1
million, due to an adjustment to the valuation of the residual assets related
to the 1997-1A securitization, as a result of the higher-than-estimated
prepayment speeds. See "Item 1--Business-loan Sales and Asset
Securitizations." The increase in net gains from mortgage financing operations
was attributable to the increase in the level of mortgage financing
operations, with loans sold or securitized totaling $509.7 million for the
year ended December 31, 1997 compared to $206.6 million for the year ended
December 31, 1996. Net gains from mortgage financing operations as a percent
of loans sold or securitized was 5.84% for the year ended December 31, 1997
compared to 4.04% for the year ended December 31, 1996. This increase in
percentage reflected the effects of the securitization of loans compared to
whole loan sales. During the year ended December 31, 1997, loans securitized
represented 81.5% of loan sales and securitizations, while during the year
ended December 31, 1996, loans securitized represented 25.2% of loan sales and
securitizations. Loans originated and purchased totaled $773.1 million for the
year ended December 31, 1997 compared to $222.6 million for the year ended
December 31, 1996.
NON-INTEREST EXPENSE
For the year ended December 31, 1997, non-interest expense was $16.0 million
compared to $8.7 million for the year ended December 31, 1996. The increase
was due primarily to an increase in compensation and benefits and other
operating expenses resulting from the expansion of the mortgage financing
operations. New loans originated and purchased totaled $773.1 million for the
year ended December 31, 1997 compared to $222.6 million for the year ended
December 31, 1996.
For the year ended December 31, 1997, compensation and benefits were $9.2
million compared to $5.2 million for the year ended December 31, 1996. These
costs are directly related to the expansion of the mortgage financing
operations and the corresponding increase in personnel, to an average of 230
for the year ended December 31, 1997 compared to 97 for the year ended
December 31, 1996.
Premises and occupancy expenses were $1.4 million for the year ended
December 31, 1997 compared to $746,000 for the year ended December 31, 1996
due to the expansion of the mortgage financing operation and the addition of
the regional operating center in the Denver, Colorado metropolitan area, the
new corporate headquarters and regional lending center located in Riverside,
California during 1997, the relocation of the Florida regional office, the
addition of five low cost retail lending offices in California, and the
opening of one
55
new retail Bank branch in Riverside, California. The Company anticipates that
premises and occupancy expense will continue to increase as the Company adds
new retail lending and retail banking offices, as well as additional office
space for expansion of the loan servicing operations.
As a result of the expansion of the mortgage financing operations, other
operating expenses increased as well. Data processing increased to $809,000
for the year ended December 31, 1997 compared to $390,000 for the year ended
December 31, 1996. The increase in non-interest expense was partially offset
by a reduction in FDIC insurance premiums in the 1997 period. During the
quarter ended September 30, 1996, the Bank paid a one time assessment to the
FDIC of $448,000 for the recapitalization of the SAIF. Marketing, telephone,
professional services and other expenses were $301,000, $650,000, $467,000 and
$3.0 million, respectively, for the year ended December 31, 1997 compared to
$189,000, $246,000, $218,000 and $879,000 for the year ended December 31,
1996. Other expense for the year ended December 31, 1997 included a write down
of the servicing asset in the amount of $1.3 million. This write down is the
result of an increase in prepayment speeds on adjustable rate mortgage loans
which are being serviced by the Company for other investors. Management
performs a quarterly analysis of the Company's servicing assets and believes
that the servicing assets are properly valued at December 31, 1997.
INCOME TAXES
The provision for income taxes increased to $9.0 million for the year ended
December 31, 1997 compared to $1.1 million for the year ended December 31,
1996. Income before income tax provision increased to $21.7 million for the
year ended December 31, 1997 compared to $2.6 million for the year ended
December 31, 1996. The effective tax rate decreased to 41.6% for the year
ended December 31, 1997 compared to 42.8% for the year ended December 31,
1996.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets increased to $411.8 million as of December 31, 1997 compared to
$104.0 million as of December 31, 1996 due to the expansion of the mortgage
financing operations. Loans held for sale totaled $289.3 million as of
December 31, 1997 compared to $31.0 million as of December 31, 1996. This
increase was partially offset by a decrease in loans held for investment to
$29.1 million as of December 31, 1997 compared to $36.9 million as of December
31, 1996. During the year ended December 31, 1997, the Company sold or
securitized $509.7 million of loans (including $94.4 million in whole loan
sales). The increase in loans held for sale also resulted in an increase in
accrued interest receivable to $2.6 million as of December 31, 1997 compared
to $537,000 as of December 31, 1996.
As a result of the Company's loan securitization activities, residual assets
and restricted cash increased to $40.7 million and $12.3 million,
respectively, as of December 31, 1997 compared to $5.7 million, respectively,
and $1.6 million as of December 31, 1996. Mortgage servicing rights also
increased to $8.5 million as of December 31, 1997 compared to $2.6 million as
of December 31, 1996 as a result of the securitization of loans with servicing
retained.
Cash and cash equivalents were $11.5 million as of December 31, 1997
compared to $13.3 million as of December 31, 1996. During the year ended
December 31, 1997, the Company invested in leasehold improvements on the new
corporate headquarters as well as adding the Denver, Colorado regional lending
center and five low-cost retail lending offices in California increasing
premises and equipment to $4.8 million as of December 31, 1997 compared to
$1.6 million as of December 31, 1996. Real estate owned increased to
$1.4 million as of December 31, 1997 compared to $561,000 as of December 31,
1996 as part of the Company's continuing effort to resolve problem loans.
During the year ended December 31, 1997 the Company issued $10.0 million in
subordinated debentures in order to increase its risk based capital. The
additional funds, net of debt issuance costs, were used to fund loans
56
during the year ended December 31, 1997. In addition, the Company increased
its liabilities by increasing deposit accounts to $211.8 million as of
December 31, 1997 compared to $85.7 million as of December 31, 1996. The major
component of deposit accounts is certificates of deposit, which increased to
$193.8 million as of December 31, 1997 compared to $69.4 million as of
December 31, 1996. The additional funds were used to fund loans held for sale
during the year ended December 31, 1997.
The Company also increased its use of FHLB advances and other borrowings to
fund loans held for sale. During 1997, the Company has added two warehouse
lines of credit with a combined credit limit of $250.0 million. In addition,
the Company added a residual financing line of credit with a credit limit of
$40.0 million. The availability of such borrowings permits the Company to
access sufficient cash to originate and hold loans pending securitization or
sale and to thereafter repay the lines of credit following securitization or
sale of the loans. Other borrowings increased to $100.2 million as of December
31, 1997 compared to $3.3 million as of December 31, 1996, while FHLB advances
were $9.0 million as of December 31, 1997 and were zero as of December 31,
1996. The Company also issued $10.0 million in subordinated debentures during
the year ended December 31, 1997 with a coupon rate of 13.5%. Interest rates
on the warehouse lines of credit range between LIBOR plus 50 basis points to
LIBOR plus 100 basis points, while the residual financing line of credit has
an interest rate of LIBOR plus 235 basis points.
Accounts payable and other liabilities increased to $26.0 million as of
December 31, 1997 compared to $5.7 million as of December 31, 1996 due to an
increase in loans serviced for other investors and the corresponding increase
in amounts due investors between the time the borrowers make payments to the
Company and the time the Company remits payments to the investors.
Stockholders' equity increased to $54.8 million as of December 31, 1997
compared to $9.3 million as of December 31, 1996 due to the issuance of
2,900,000 shares of Company common stock to the public in the Company's
initial public offering, completed on June 30, 1997 and the issuance of an
additional 435,000 shares to the public pursuant to the exercise of the
underwriter's overallotment option. The initial offering price to the public
was $11.00 per share, which resulted in $32.8 million in net proceeds after
expenses.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
GENERAL
Net income increased by $985,000 from $520,000 for the year ended December
31, 1995 to $1.5 million for the year ended December 31, 1996. Net income for
the year ended December 31, 1996 was adversely impacted by a non-recurring
expense for compensation and benefits of $354,000 which was incurred during
the quarter ended June 30, 1996, and a non-recurring SAIF special assessment
of $448,000 which was incurred during the quarter ended September 30, 1996.
The non-recurring expense for compensation and benefits is an accrual of the
present value of a portion of the future payments due pursuant to a consulting
agreement entered into with a former officer of the Bank. Net income for the
year ended December 31, 1996 would have been $2.0 million if these charges had
not been incurred.
Net gains from mortgage financing operations for the year ended December 31,
1995 totaled $3.6 million compared to $8.4 million for the year ended December
31, 1996 due to the expansion of the mortgage financing operations and
increased marketing effort therefrom, along with the completion of the Bank's
first securitization during the quarter ended December 31, 1996. The expansion
of the mortgage financing operations resulted in an increase in loan
originations and purchases from $134.8 million for the year ended December 31,
1995 to $222.6 million for the year ended December 31, 1996. The related sales
of loans increased from $126.9 million for the year ended December 31, 1995 to
$206.6 million (including $51.9 million sold through the fourth quarter
securitization) for the year ended December 31, 1996. As a result of this
securitization, the Bank recognized a gain on sale of $4.3 million.
The Company currently intends to conduct securitizations on a regular basis
either through private placements or public offerings. There can be no
assurance, however, that the Company will be able to successfully implement
this strategy.
57
In addition, during the year ended December 31, 1996, the Bank acquired the
Riverside, California property it has been leasing by exercising its lease
purchase option at a price of $375,000. The Bank also increase its personnel
from an average of 50 for the year ended December 31, 1995 to an average of 97
for the year ended December 31, 1996. The additional staff allowed for
increased marketing, processing and underwriting efforts and the ability to
increase the number of broker and correspondent relationships, but also added
to non-interest expense for the period.
INTEREST INCOME
Interest income increased from $5.8 million for the year ended December 31,
1995 to $6.9 million for the year ended December 31, 1996, due to an increase
in the yield on interest-earning assets as well as in the average balances of
those assets. The Bank's yield on average interest-earning assets increased
from 7.96% for the year ended December 31, 1995 to 8.63% for the year ended
December 31, 1996. Total average interest-earning assets increased from $73.2
million for the year ended December 31, 1995 to $80.3 million for the year
ended December 31, 1996. The largest single component of interest-earning
assets was loans receivable, net, which increased from an average of $65.5
million for the year ended December 31, 1995 to $72.6 million for the year
ended December 31, 1996. The increase in average loans receivable, net was due
to an increase in loans held for sale from the expansion of the mortgage
financing operations. Loans held for sale increased from $21.7 million at
December 31, 1995 to $31.0 million at December 31, 1996, while loans held for
investment, net decreased from $41.7 million at December 31, 1995 compared to
$36.9 million at December 31, 1996. Generally, all loans are originated or
purchased for sale in the secondary market or through securitizations. The
yield on loans receivable increased from 8.29% for the year ended December 31,
1995 to 8.98% for the year ended December 31, 1996.
INTEREST EXPENSE
Interest expense increased from $3.4 million for the year ended December 31,
1995 to $3.8 million for the year ended December 31, 1996 due to an increase
in average interest-bearing liabilities. Average interest-bearing liabilities
increased from $70.7 million for the year ended December 31, 1995 to $77.3
million for the year ended December 31, 1996. Interest expense for the year
ended December 31, 1995 was adversely impacted by the effects of an interest
rate swap which matured on November 7, 1995 which resulted in an increase in
interest expense on borrowings of $52,000 for the year ended December 31,
1995. Without this expense, average yield on borrowings for the year ended
December 31, 1995 would have been 6.56%, and the average yield on total
interest-bearing liabilities would have been 4.80%. The increase in interest
expense also reflects a change in the composition of interest-bearing
liabilities. Average certificate accounts increased from $50.6 million for the
year ended December 31, 1995 to $57.3 million for the year ended December 31,
1996. Average borrowings increased from $3.1 million for the year ended
December 31, 1995 to $4.3 million for the year ended December 31, 1996.
NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN LOSSES
Net interest income before provision for estimated loan losses for the year
ended December 31, 1995 was $2.4 million compared to $3.2 million for the year
ended December 31, 1996. This increase was primarily due to the increase in
the net interest margin from 3.25% for the year ended December 31, 1995 to
3.94% for the year ended December 31, 1996, and an increase in the ratio of
average interest-earning assets to average interest-bearing liabilities from
103.50% for the year ended December 31, 1995 to 103.90% for the year ended
December 31, 1996.
PROVISION FOR ESTIMATED LOAN LOSSES
The provision for estimated loan losses was $963,000 for the year ended
December 31, 1996 compared to $1.2 million for the year ended December 31,
1995. The decrease in the provision resulted from the Bank's quarterly
analysis of its loan portfolio, the decrease in charge-offs of loans and the
increase in recoveries and management's belief that property values in the
southern California market had stopped deteriorating.
58
Charge-offs for the year ended December 31, 1995 were $914,000 compared to
$734,000 for the year ended December 31, 1996. For the year ended December 31,
1995, the ratio of net charge-offs to average loans outstanding was 1.30%
compared to 0.71% for the year ended December 31, 1996. Recoveries increased
from $65,000 for the year ended December 31, 1995 to $219,000 for the year
ended December 31, 1996. Non-performing assets as a percent of total assets
decreased from 3.0% at December 31, 1995 to 2.86% at December 31, 1996. At
December 31, 1995 the allowance for estimated loan losses was $1.2 million
compared to $1.6 million at December 31, 1996. The allowance for estimated
loan losses as a percent of non-performing loans was 84.25% at December 31,
1995 compared to 67.26% at December 31, 1996.
NON-INTEREST INCOME
Net gains from mortgage financing operations for the year ended December 31,
1995 were $3.6 million compared to $8.4 million for the year ended December
31, 1996. This increase was attributable to the increase in the level of
mortgage financing operations, with loans sold totaling $126.9 million for the
year ended December 31, 1995 compared to $206.6 million (including $51.9
million sold through the securitization completed in the quarter ended
December 31, 1996) for the year ended December 31, 1996. Loans originated and
purchased totalled $134.8 million for the year ended December 31, 1995
compared to $222.6 million for the year ended December 31, 1996, which also
resulted in an increase in loan servicing and other fees from $231,000 for the
year ended December 31, 1995 to $496,000 for the year ended December 31, 1996.
Net gains from mortgage financing operations as a percent of loans sold and
securitized increased from 2.82% for the year ended December 31, 1995 to 4.04%
for the year ended December 31, 1996. This increase is a direct result of the
Bank's securitization during the quarter ended December 31, 1996. As a result
of this securitization, the Bank generated a gain on sale of $4.3 million.
NON-INTEREST EXPENSE
Non-interest expense was $4.4 million for the year ended December 31, 1995
compared to $8.7 million for the year ended December 31, 1996. The increase
was due primarily to the expansion of the mortgage financing operations, a
non-recurring increase in compensation and benefits and the non-recurring SAIF
special assessment. New loans originated and purchased increased from $134.8
million for the year ended December 31, 1995 to $222.6 million for the year
ended December 31, 1996, which resulted in increased employee commissions and
bonuses.
Compensation and benefits increased from $2.5 million for the year ended
December 31, 1995 to $5.2 million for the year ended December 31, 1996. These
costs are directly related to the expansion of the mortgage financing
operations and the corresponding increase in personnel, from an average of 50
for the year ended December 31, 1995 to 97 for the year ended December 31,
1996, combined with a non-recurring expense for compensation and benefits of
$354,000 during the quarter ended June 30, 1996. The non-recurring expense for
compensation and benefits is an accrual of the present value of a portion of
the future payments due pursuant to a consulting agreement entered into with a
former officer of the Bank.
Premises and occupancy increased from $471,000 for the year ended December
31, 1995 to $746,000 for the year ended December 31, 1996 due to the addition
of the Riverside, California mortgage financing office. The financing office
is approximately 7,500 square feet, with additional space being utilized for
the increase in personnel and the expansion of the mortgage financing
operations. With the increase in loans originated and purchased, combined with
the increase in personnel, data processing expense increased from $208,000 for
the year ended December 31, 1995 to $390,000 for the year ended December 31,
1996.
As a result of the expansion of the mortgage financing operations, marketing
expense increased from $65,000 for the year ended December 31, 1995 to
$189,000 for the year ended December 31, 1996. In addition, telephone expense
increased from $143,000 for the year ended December 31, 1995 to $246,000 for
the year ended December 31, 1996, and professional services increased from
$92,000 for the year ended December 31, 1995 to $218,000 for the year ended
December 31, 1996.
59
The Bank incurred a charge of $448,000 due to the non-recurring SAIF special
assessment during the year ended December 31, 1996. No similar charge was
assessed for the year ended December 31, 1995. In addition, other expenses
also increased due to the expansion of the mortgage financing operations,
although no single item exceeded 1.0% of gross income.
INCOME TAXES
The provision for income taxes increased from $294,000 for the year ended
December 31, 1995 to $1.1 million for the year ended December 31, 1996. The
increase in income taxes is the result of the increase in income before tax,
which increased from $814,000 for the year ended December 31, 1995 to $2.6
million for the year ended December 31, 1996. The effective tax rate increased
from 36.1% for the year ended December 31, 1995 to 42.8% for the year ended
December 31, 1996. The change in effective tax rate is due to a reduction in
the deferred tax valuation allowance for state tax purposes in 1995.
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Company's interest rate risk management
function is to evaluate the interest rate risk included in certain balance
sheet accounts, determine the level of appropriate risk given the Company's
business focus, operating environment, capital and liquidity requirements and
performance objectives and manage the risk consistent with Board approved
guidelines through the establishment of prudent asset concentration
guidelines. Through such management, management of the Company seeks to reduce
the vulnerability of the Company's operations to changes in interest rates.
Management of the Company monitors its interest rate risk as such risk relates
to its operational strategies. The Company's Board of Directors reviews on a
quarterly basis the Company's asset/liability position, including simulations
of the effect on the Company's capital of various interest rate scenarios. The
extent of the movement of interest rates, higher or lower, is an uncertainty
that could have a negative impact on the earnings of the Company.
Between the time the Company originates loans and purchase commitments are
issued, the Company is exposed to both upward and downward movements in
interest rates which may have a material adverse effect on the Company. The
Board of Directors of the Company recently implemented a hedge management
policy primarily for the purpose of hedging the risks associated with loans
held for sale in the Company's mortgage pipeline. In a flat or rising interest
rate environment, this policy enables management to utilize mandatory forward
commitments to sell fixed rate assets as the primary hedging vehicles to
shorten the maturity of such assets. In a declining interest rate environment,
the policy enables management to utilize put options. The hedge management
policy also permits management to extend the maturity of its liabilities
through the use of short financial futures positions, purchase of put options,
interest rate caps or collars, and entering into "long" interest rate swap
agreements. Since this policy was implemented after March 31, 1997, the
Company has engaged in only a limited amount of hedging activities. Management
is continuing to evaluate and refine its hedging policies. No hedging
positions were outstanding at December 31, 1997.
Net Portfolio Value. The Bank's interest rate sensitivity is monitored by
management through the use of a model which estimates the change in net
portfolio value ("NPV") over a range of interest rate scenarios. NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. An NPV Ratio, in any interest rate scenario, is defined as
the NPV in that scenario divided by the market value of assets in the same
scenario. The sensitivity measure is the decline in the NPV Ratio, in basis
points, caused by a 2% increase or decrease in rates, whichever produces a
larger decline (the "Sensitivity Measure"). The higher an institution's
Sensitivity Measure is, the greater its exposure to interest rate risk is
considered to be. The Bank utilizes a market value model prepared by the OTS
(the "OTS NPV model"), which is prepared quarterly, based on the Bank's
quarterly Thrift Financial Reports filed with the OTS. The OTS NPV model
measures the Bank's interest rate risk by estimating the Bank's NPV, which is
the net present value of expected cash flows from assets, liabilities and any
off-balance sheet contracts, under various market interest rate scenarios
which range from a 400 basis
60
point increase to a 400 basis point decrease in market interest rates. The
interest rate risk policy of the Bank provides that the maximum permissible
change in NPV for a 400 basis point increase or decrease in market interest
rates is a 45% change in the net portfolio value. The OTS has incorporated an
interest rate risk component into its regulatory capital rule. Under the rule,
an institution whose Sensitivity Measure in the event of a 200 basis point
increase or decrease in interest rates exceeds 2% would be required to deduct
an interest rate risk component in calculating its total capital for purpose
of the risk-based capital requirement. See "Item 1--Business--Regulation--
Federal Savings Institution Regulation." As of December 31, 1997, the most
recent date for which the relevant data is available, the Bank's Sensitivity
Measure, as measured by the OTS, resulting from a 200 basis point increase in
interest rates was 89 basis points and would result in a $3.9 million
reduction in the NPV of the Bank. As of December 31, 1997, the Bank's
Sensitivity Measure is below the threshold at which the Bank could be required
to hold additional risk-based capital under OTS regulations. The OTS has
postponed indefinitely the date the component will first be deducted from an
institution's total capital. See "Item 1--Business--Federal Savings
Institution Regulation."
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV requires the making
of certain assumptions that may tend to oversimplify the manner in which
actual yields and costs respond to changes in market interest rates. First,
the models assume that the composition of the Bank's interest sensitive assets
and liabilities existing at the beginning of a period remains constant over
the period being measured. Second, the models assume that a particular change
in interest rates is reflected uniformly across the yield curve regardless of
the duration to maturity or repricing of specific assets and liabilities.
Third, the model does not take into account the impact of the Bank's business
or strategic plans on the structure of interest-earning assets and interest-
bearing liabilities. In particular, the Bank's core products and residual
assets, which are directly related to the Bank's core products, do not behave
in a manner which the OTS model projects. Borrowers of Portfolio Series loans
are less likely to refinance or prepay such loans because of the high cost of
obtaining a high loan to value loan. In addition, management believes that
borrowers of Liberator Series loans are less likely to refinance or prepay
such loans because of their lack of an adequate credit rating or possible
prior credit problems. Accordingly, although the NPV measurement provides an
indication of the Bank's interest rate risk exposure at a particular point in
time, such measurement is not intended to and does not provide a precise
forecast of the effect of changes in market interest rates on the Bank's net
interest income and will differ from actual results. The results of this
modeling are monitored by management and presented to the Board of Directors,
quarterly.
The following table shows the NPV and projected change in the NPV of the
Bank at December 31, 1997 assuming an instantaneous and sustained change in
market interest rates of 100, 200, 300 and 400 basis points ("bp").
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
NPV AS % OF
PORTFOLIO
NET PORTFOLIO VALUE VALUE OF ASSETS
--------------------------- ------------------
CHANGE % CHANGE
IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO (BP)
-------- -------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
+ 400 bp $21,106 $(15,411) (42)% 5.95% (383)
+ 300 bp 27,557 (8,961) (25) 7.63 (216)
+ 200 bp 32,663 (3,854) (11) 8.90 (89)
+ 100 bp 35,850 (668) (2) 9.66 (13)
Static 36,517 -- -- 9.79 --
- 100 bp 37,173 656 2 9.91 12
- 200 bp 39,974 3,456 9 10.55 76
- 300 bp 43,957 7,440 20 11.44 165
- 400 bp 48,919 12,401 34 12.53 274
61
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, FHLB advances, other
borrowings, principal and interest payments on loans, cash proceeds from the
sale of loans and securitizations, and to a lesser extent, interest payments
on investment securities and proceeds from the maturation of investment
securities. While maturities and scheduled amortization of loans are a
predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition. However, the Bank has continued to maintain the required minimum
levels of liquid assets as defined by OTS regulations. This requirement, which
may be varied at the direction of the OTS depending upon economic conditions
and deposit flows, is based upon a percentage of deposits and short-term
borrowings. The required ratio is currently 4%. The Bank's average liquidity
ratios were 10.4%, 8.5%, and 9.4% for the years ended December 31, 1997, 1996
and 1995, respectively. Management currently attempts to maintain a minimum
liquidity ratio of 5.0%.
The Company's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows used in operating activities were $315.5 million, $18.7
million and $5.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Such cash flows primarily consisted of loans originated and
purchased for sale (net of loan fees) of $796.8 million, $227.2 million and
$135.6 million, net of proceeds from the sale and securitization of loans held
for sale of $492.2 million, $212.2 million and $130.1 million for the years
ended December 31, 1997, 1996 and 1995, respectively. Net cash provided by
investing activities were $39.3 million, $3.0 million and $7.1 million for the
years ended December 31, 1997, 1996, and 1995 respectively, and consisted
primarily of principal collections on loans and proceeds from maturation of
investments, offset by investment purchases. Proceeds from the maturation of
investment securities were $5.0 million, $2.0 million and $9.2 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Net cash provided
by financing activities consisted primarily of net activity in deposit
accounts and borrowings. The net increase in deposits and borrowings was
$231.9 million, $21.5 million and $596,000 for the years ended December 31,
1997, 1996 and 1995, respectively. The Company received net proceeds from the
IPO of the Company's Common Stock of $32.8 million during the year ended
December 31, 1997. The Bank also received proceeds from the issuance of common
stock in the Private Placement of $3.5 million in August 1996 and $10.0
million from the sale of the Debentures in March 1997.
At December 31, 1997, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $21.5 million, or 5.3% of total
adjusted assets, which is above the required level of $6.1 million, or 1.50%;
core capital of $21.5 million, or 5.3% of total adjusted assets, which is
above the required level of $12.2 million, or 3.0%, and risk-based capital of
$33.9 million, or 10.3% of risk-weighted assets, which is above the required
level of $26.3 million, or 8.0%. See "Item 1--Regulation--Federal Savings
Institution Regulation--Capital Requirements."
The Company's most liquid assets are unrestricted cash and short-term
investments. The levels of these assets are dependent on the Company's
operating, financing, lending and investing activities during any given
period. At December 31, 1997, cash and short-term investments totalled $11.5
million. The Company has other sources of liquidity if a need for additional
funds arises, including the utilization of FHLB advances. At December 31,
1997, the Bank had $9.0 million in advances outstanding from the FHLB. Other
sources of liquidity include investment securities maturing within one year.
The Bank also has two warehouse lines of credit available in the amount of
$250.0 million of which $84.6 million had been drawn upon at December 31,
1997. The Bank is in the process of negotiating a third warehouse line of
credit in the amount of $250.0 million to fund loan originations. The Company
has a residual financing line of credit in the amount of $40.0 million, of
which $15.5 million has been drawn upon at December 31, 1997.
The Company had no material contractual obligations or commitments for
capital expenditures at December 31, 1997. At December 31, 1997 the Company
had outstanding commitments to originate or purchase mortgage loans of $29.2
million compared to $9.2 million at December 31, 1996. The Company anticipates
that it will have sufficient funds available to meet its current and
anticipated loan origination commitments. Certificates of deposit which are
scheduled to mature in one year or less from December 31, 1997, totalled
$187.5 million. The Company expects that a substantial portion of the maturing
certificates of deposit will be retained by the Company at maturity.
62
On March 11, 1998, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") with FIRSTPLUS Financial Group, Inc. ("FIRSTPLUS"),
pursuant to which the Company will be acquired by and become a wholly-owned
subsidiary of FIRSTPLUS. The Merger Agreement is subject to the receipt of
regulatory approval and the approval of shareholders of the Company. Under the
Merger Agreement, at the effective date of the merger, each outstanding share
of common stock of the Company will be converted into the right to receive
between 0.500 and 0.667 shares of FIRSTPLUS common stock, as calculated
pursuant to the Exchange Ratio outlined in the Merger Agreement. Management
believes that the merger will enhance return to the Company's shareholders
through greater efficiencies in securitization as well as greater marketing
capabilities through a combined marketing strategy.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with Generally Accepted Accounting Principles
("GAAP"), which require the measurement of financial position and operating
results in terms of historical dollar amounts without considering the changes
in the relative purchasing power of money over time due to inflation. The
impact of inflation is reflected in the increased cost of the Company's
operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1996 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"), which was amended by SFAS
No. 127. This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that
focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Under the financial-
components approach, after a transfer of financial assets, an entity
recognizes all financial and servicing assets it controls and liabilities it
has incurred and derecognizes financial assets it no longer controls and
liabilities that have been extinguished. The financial-components approach
focuses on the assets and liabilities that exist after the transfer. Many of
these assets and liabilities are components of financial assets that existed
prior to the transfer. If a transfer does not meet the criteria for a sale,
the transfer is accounted for as a secured borrowing with pledge of
collateral. The Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996. This Statement supersedes SFAS No. 122, "Accounting for Mortgage
Servicing Rights." The adoption of SFAS No. 125 as amended by SFAS No. 127 did
not have a material impact on the Company's results of operations or financial
condition.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
net worth and additional paid-in capital in the equity section of a statement
of financial position. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company does not
anticipate that the adoption of SFAS No. 130 will have a material impact on
its financial reporting.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 requires disclosures for
each segment that are similar to those required under current
63
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. It requires limited segment data on a
quarterly basis. It also requires geographic data by country, as opposed to
broader geographic regions as permitted under current standards. SFAS No. 131
is effective for fiscal year beginning after December 15, 1997 with earlier
application permitted. The Company does not anticipate that the adoption of
SFAS No. 131 will have a material impact on its financial reporting.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table provides information regarding the Company's primary
categories of assets and liabilities which are sensitive to changes in
interest rates. The information presented reflects the expected cash flows of
the primary categories by year including the related weighted average interest
rate. The cash flows for loans and mortgage-backed securities are based on
maturity date and are adjusted for expected prepayments which are based on
historical and current market information. The loans and mortgage-backed
securities which have adjustable rate features are presented in accordance
with their next interest-repricing date. Cash flow information on interest-
bearing liabilities such as passbooks, NOW accounts and money market accounts
also is adjusted for expected decay rates which are based on historical
information. Also, for purposes of cash flow presentation, premiums or
discounts on purchased assets, mark-to-market adjustments and loans on non-
accrual are excluded from the amounts presented. Investment securities are
presented as to maturity date as are all certificates of deposit and
borrowings.
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 THEREAFTER
-------- ------- ------- ------- ------- ----------
(DOLLARS IN THOUSANDS)
SELECTED ASSETS:
Investments and Fed
Funds................ $ 4,071 $ 1,999 $ -- $ -- $ -- $ --
Average interest rate. 5.76% 6.13% 0.00% 0.00% 0.00% 0.00%
Mortgage-backed
securities--
fixed rate........... $ -- $ -- $ -- $ -- $ -- $ --
Average interest rate. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Mortgage-backed
securities--
adjustable rate........ $ 9 $ -- $ -- $ -- $ -- $ --
Average interest rate... 7.50% 0.00% 0.00% 0.00% 0.00% 0.00%
Loans--fixed rate..... $ 685 $ 495 $ 662 $ 1,449 $ 4,351 $122,528
Average interest rate. 13.02% 9.37% 13.36% 15.82% 12.27% 12.00%
Loans--adjustable
rate................. $125,892 $45,892 $10,495 $ 75 $ -- $ --
Average interest rate. 9.05% 9.95% 9.74% 10.13% 0.00% 0.00%
Residual Assets....... $ 2,855 $ 4,066 $11,992 $11,330 $10,503 $ --
Average Interest Rate. 13.50% 13.50% 13.50% 13.50% 13.50% 13.50%
Mortgage Servicing
Rights............... $ 3,568 $ 2,878 $ 2,080 $ -- $ -- $ --
Average Interest Rate. 16.00% 16.00% 16.00% 16.00% 16.00% 16.00%
SELECTED LIABILITIES:
Interest-bearing NOW
passbook and MMDA's.. $ 3,585 $ 2,867 $ 2,293 $ 1,835 $ 1,468 $ 5,872
Average interest rate. 2.80% 2.80% 2.80% 2.80% 2.80% 2.80%
Certificates of deposit. $187,501 $ 3,631 $ 1,179 $ 589 $ 421 $ 524
Average interest rate... 5.93% 6.07% 6.56% 6.40% 6.02% 6.83%
FHLB Advances......... $ 9,000
Average interest rate. 7.07% 0.00% 0.00% 0.00% 0.00% 0.00%
Warehousing lines of
credit and
subordinated
debentures........... $100,170 $ -- $ -- $ -- $ -- $ 10,000
Average interest rate. 7.19% 0.00% 0.00% 0.00% 0.00% 13.50%
The Company does not have any foreign exchange exposure nor any commodity
exposure and therefore does not have any market risk exposure for these
issues.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
64
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
LIFE Financial Corporation
Riverside, California
We have audited the accompanying consolidated statements of financial
condition of LIFE Financial Corporation and subsidiaries (the Company) as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such 1997 and 1996 consolidated financial statements present
fairly, in all material respects, the financial position of LIFE Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1995, the Company
changed its method of accounting for mortgage servicing rights to conform with
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 27, 1998 (March 11, 1998, as to Note 20)
65
INDEPENDENT AUDITORS' REPORT
Board of Directors
LIFE Financial Corporation
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of LIFE Financial Corporation (formerly Life Savings
Bank, Federal Savings Bank) for the year ended December 31, 1995. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of LIFE
Financial Corporation for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1995 the Bank changed
its method of accounting for mortgage servicing rights to conform with
Statement of Financial Accounting Standards No. 122.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Irvine, California
February 8, 1996 (except for
the "Earnings Per Share"
paragraph of Note 1, as to
which the date is June 30,
1997)
66
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1997 1996
-------- --------
ASSETS
------
Cash and cash equivalents................................... $ 11,503 $ 13,265
Restricted cash............................................. 12,339 1,636
Securities held to maturity, estimated fair value of $5,030
(1997) and $7,981 (1996)................................... 5,012 8,023
Residual assets, at fair value.............................. 40,746 5,700
Loans held for sale......................................... 289,268 31,018
Loans held for investment, net of allowance for estimated
loan losses of $2,573 (1997) and $1,625 (1996)............. 29,076 36,895
Mortgage servicing rights................................... 8,526 2,645
Accrued interest receivable................................. 2,638 537
Foreclosed real estate, net................................. 1,440 561
Premises and equipment, net................................. 4,764 1,579
Federal Home Loan Bank stock................................ 1,067 814
Other assets................................................ 5,406 1,337
-------- --------
TOTAL ASSETS................................................ $411,785 $104,010
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposit accounts.......................................... $211,765 $ 85,711
Federal Home Loan Bank advances........................... 9,000
Other borrowings.......................................... 100,170 3,278
Subordinated debentures................................... 10,000
Accounts payable and other liabilities.................... 26,031 5,748
-------- --------
Total liabilities....................................... 356,966 94,737
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares outstanding
Common stock, $.01 par value; 25,000,000 shares
authorized; 6,546,716 (1997) and 3,211,716 (1996) shares
issued and outstanding................................... 65 32
Additional paid-in capital................................ 42,171 9,358
Retained earnings (deficit), partially restricted......... 12,583 (117)
-------- --------
Total stockholders' equity.............................. 54,819 9,273
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $411,785 $104,010
======== ========
See notes to consolidated financial statements.
67
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995
------- ------ ------
INTEREST INCOME:
Loans.................................................. $17,746 $6,513 $5,433
Residual assets........................................ 1,896 29
Securities held to maturity............................ 435 56 159
Other interest-earning assets.......................... 1,050 331 233
------- ------ ------
Total interest income................................ 21,127 6,929 5,825
------- ------ ------
INTEREST EXPENSE:
Deposit accounts....................................... 8,038 3,514 3,192
Federal Home Loan Bank advances and other borrowings... 3,665 252 256
Subordinated debentures................................ 1,127
------- ------ ------
Total interest expense............................... 12,830 3,766 3,448
------- ------ ------
NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN
LOSSES.................................................. 8,297 3,163 2,377
PROVISION FOR ESTIMATED LOAN LOSSES...................... 1,850 963 1,194
------- ------ ------
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOAN
LOSSES.................................................. 6,447 2,200 1,183
NONINTEREST INCOME:
Loan servicing and other fees.......................... 959 496 231
Service charges on deposit accounts.................... 130 128 111
Net gains from mortgage financing operations........... 29,785 8,352 3,575
Other income........................................... 411 136 103
------- ------ ------
Total noninterest income............................. 31,285 9,112 4,020
See notes to consolidated financial statements.
68
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995
--------- --------- ---------
NONINTEREST EXPENSE:
Compensation and benefits....................... $ 9,210 $ 5,233 $ 2,544
Premises and occupancy.......................... 1,360 746 471
Data processing................................. 809 390 208
Net loss on foreclosed real estate.............. 126 158 53
FDIC insurance premiums......................... 102 174 184
SAIF special assessment......................... 448
Marketing....................................... 301 189 65
Telephone....................................... 650 246 143
Professional services........................... 467 218 92
Other expense................................... 2,965 879 629
--------- --------- ---------
Total noninterest expense...................... 15,990 8,681 4,389
--------- --------- ---------
INCOME BEFORE INCOME TAX PROVISION............... 21,742 2,631 814
INCOME TAX PROVISION............................. 9,042 1,126 294
--------- --------- ---------
NET INCOME....................................... $ 12,700 $ 1,505 $ 520
========= ========= =========
EARNINGS PER SHARE:
Basic earnings per share........................ $ 2.60 $ 0.63 $ 0.28
========= ========= =========
Diluted earnings per share...................... $ 2.49 $ 0.63 $ 0.28
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic earnings per share........................ 4,884,993 2,370,779 1,866,216
========= ========= =========
Diluted earnings per share...................... 5,107,951 2,370,779 1,866,216
========= ========= =========
See notes to consolidated financial statements.
69
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED TOTAL
---------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- --------- -------------
BALANCE, January 1, 1995... 933,108 $ 9 $ 3,393 $ 346 $ 3,748
Net income................. 520 520
--------- --- ------- ------- -------
BALANCE, December 31, 1995. 933,108 9 3,393 866 4,268
Stock split effected in the
form of a dividend........ 933,108 9 2,479 (2,488)
Net proceeds from issuance
of common stock........... 1,345,500 14 3,486 3,500
Net income................. 1,505 1,505
--------- --- ------- ------- -------
BALANCE, December 31, 1996. 3,211,716 32 9,358 (117) 9,273
Net proceeds from issuance
of common stock........... 3,335,000 33 32,813 32,846
Net income................. 12,700 12,700
--------- --- ------- ------- -------
BALANCE, December 31, 1997. 6,546,716 $65 $42,171 $12,583 $54,819
========= === ======= ======= =======
See notes to consolidated financial statements.
70
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 12,700 $ 1,505 $ 520
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization............. 683 301 166
Provision for estimated loan losses....... 1,850 963 1,194
Accretion of deferred fees................ (26) (41) (11)
Provision for estimated losses on
foreclosed real estate................... 108 145 104
Gain on sale of foreclosed real estate,
net...................................... (74) (41) (137)
Gain on sale and securitization of loans
held for sale............................ (29,699) (7,868) (3,549)
Gain on bulk sale of mortgage servicing
rights................................... (26)
Net unrealized gain on residual assets.... (86) (484)
Net accretion of residual assets.......... (1,896) (29)
Change in valuation allowance on mortgage
servicing rights......................... (12) 13
Direct writedown of mortgage servicing
rights................................... 1,281
Amortization of mortgage servicing rights. 958 320 268
Purchase and origination of loans held for
sale, net of loan fees................... (796,829) (227,156) (135,552)
Proceeds from sales and securitization of
loans held for sale...................... 492,218 212,226 130,086
Increase in restricted cash............... (11,062) (1,636)
Increase in accrued interest receivable... (2,101) (30) (76)
Deferred income taxes..................... 9,785 (259) (81)
Decrease in income taxes receivable....... 479
Increase in accounts payable and other
liabilities.............................. 17,855 3,415 1,618
Federal Home Loan Bank stock dividend..... (58) (34) (30)
(Increase) decrease in other assets....... (11,114) 52 (315)
--------- --------- ---------
Net cash used in operating activities... (315,507) (18,663) (5,329)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loans....................... 32,308 8,578 6,428
Proceeds from sale of foreclosed real
estate..................................... 1,034 1,471 1,097
Purchase of securities held to maturity..... (2,000) (8,013) (8,969)
Proceeds from maturities of securities held
to maturity................................ 5,000 1,975 9,241
Purchase of mortgage servicing rights....... (706)
Proceeds from bulk sales of servicing
rights..................................... 632
Additions to premises and equipment, net.... (3,814) (904) (523)
Purchase of Federal Home Loan Bank stock.... (195) (65) (82)
Cash received on residual assets............ 6,976
--------- --------- ---------
Net cash provided by investing
activities............................. 39,309 3,042 7,118
See notes to consolidated financial statements.
71
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1997 1996 1995
-------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts.................... $126,054 $18,176 $1,846
Increase (decrease) in Federal Home Loan Bank
advances........................................... 9,000 (1,250)
Net proceeds from other borrowings.................. 96,892 3,278
Net proceeds from issuance of common stock.......... 32,846 3,500
Net proceeds from issuance of subordinated
debentures......................................... 9,644
-------- ------- ------
Net cash provided by financing activities........ 274,436 24,954 596
-------- ------- ------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. (1,762) 9,333 2,385
CASH AND CASH EQUIVALENTS, beginning of year......... 13,265 3,932 1,547
-------- ------- ------
CASH AND CASH EQUIVALENTS, end of year............... $ 11,503 $13,265 $3,932
======== ======= ======
SUPPLEMENTAL CASH FLOW DISCLOSURES--
Cash paid during the year for:
Interest........................................... $ 11,298 $ 3,773 $3,418
======== ======= ======
Income taxes....................................... $ 3,616 $ 267 $ 191
======== ======= ======
NONCASH INVESTING ACTIVITIES DURING THE YEAR:
Transfers from loans held for sale to loans held for
investment......................................... $ -- $ 856 $ --
======== ======= ======
Transfers from loans to foreclosed real estate...... $ 2,234 $ 2,070 $1,983
======== ======= ======
Loans to facilitate sales of foreclosed real estate. $ 287 $ 761 $ 647
======== ======= ======
NONCASH FINANCING ACTIVITIES DURING THE YEAR--
Stock dividends paid................................ $ -- $ 2,488 $ --
======== ======= ======
See notes to consolidated financial statements.
72
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Description of Business--The consolidated
financial statements include the accounts of LIFE Financial Corporation (LIFE)
and its wholly-owned subsidiaries, Life Bank (formerly Life Savings Bank,
Federal Savings Bank) (the Bank) and Life Investment Holdings, Inc. (Life
Investment) (collectively, the Company). All significant intercompany accounts
and transactions have been eliminated in consolidation.
LIFE is a savings and loan holding company, incorporated in the State of
Delaware, that was initially organized for the purpose of acquiring all of the
capital stock of the Bank through the holding company reorganization (the
Reorganization) of the Bank, which was consummated on June 27, 1997. Pursuant
to the Reorganization, LIFE issued 3,211,716 shares of common stock in
exchange for the 1,070,572 shares of the Bank's outstanding common stock and,
accordingly, the Bank became a wholly-owned subsidiary of LIFE. Such business
combination was accounted for at historical cost in a manner similar to a
pooling of interests. On June 30, 1997, the Company completed its sale of
2,900,000 additional shares of its common stock through an initial public
offering. On July 2, 1997, the Company issued 435,000 shares of common stock
to the public through the exercise of the underwriter's overallotment option.
The consolidated financial condition and results of operations of the Company
for periods prior to the date of the Reorganization consist of those of the
Bank.
The Company originates, purchases, sells and services nonconventional
mortgage loans principally secured by first and second mortgages on one- to
four-family residences. The Company focuses on loans for the purchase or
refinance of residential real property by borrowers who, because of prior
credit problems or the absence of a credit history, are considered "subprime
borrowers." The Company also originates debt consolidation loans generally up
to 125% of the loan-to-value ratio of such loans for borrowers whose credit
history qualifies for loans under federal agency programs. The Company
purchases and originates mortgage loans and other real estate secured loans
through a network of approved correspondents and mortgage brokers on a
nationwide basis, as well as through the Company's retail lending division.
Except for a limited number of loans specifically originated for retention in
the Company's portfolio as loans held for investment, since 1994, loans
originated or purchased are generally originated for sale in the secondary
mortgage market or in asset securitizations. The Company generally retains the
majority of the servicing rights to the loans sold or securitized and may sell
servicing rights at a later date, depending on market opportunities. In
addition, the Company purchases and originates for resale in the secondary
market, smaller commercial real estate and multi-family loans. The Company
funds substantially all of the loans which it purchases or originates through
deposits from customers concentrated in the communities surrounding the Bank's
home office in San Bernardino County, internally generated funds, advances
from the Federal Home Loan Bank and other borrowings.
The Company has recently begun to focus efforts on the origination of multi-
family and commercial real estate as well as consumer-oriented loans secured
by real estate, primarily home equity lines of credit and second trust deeds.
Specifically, the Company has targeted borrowers seeking loans secured by
multi-family properties or properties used for commercial business purposes
such as small office buildings or light industrial or retail facilities. Such
loans are generally originated for sale.
Securities Held to Maturity--Investments in debt securities that management
has the positive intent and ability to hold to maturity are reported at cost,
adjusted for premiums and discounts that are recognized in interest income,
using the interest method over the period to maturity. The Company designates
securities as held to maturity upon acquisition.
Loans--The Company's real estate loan portfolio consists primarily of long-
term loans secured by first and second trust deeds on single-family
residences.
73
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
The Company primarily originates mortgage loans for sale in the secondary
market. At origination or purchase, mortgage loans are designated as held for
sale or held for investment. Loans held for sale are carried at the lower of
cost or estimated market value determined on an aggregate basis by outstanding
investor commitments or current investor requirements and include related loan
origination costs and fees, as well as premiums or discounts for purchased
loans. Net unrealized losses, if any, are recognized in a valuation allowance
by charges to operations. Any transfers of loans held for sale to the
investment portfolio are recorded at the lower of cost or estimated market
value on the transfer date. At December 31, 1997 and 1996, the principal
balance of loans held for sale consists of $255,137,000 and $25,414,000,
respectively, in single-family residential mortgage loans; $8,634,000 and
$2,628,000, respectively, in multi-family residential mortgage loans;
$10,749,000 and $2,412,000, respectively, in commercial mortgage loans; and
$6,339,000 and $0, respectively, in other loans.
Loans held for investment are carried at amortized cost and net of deferred
loan origination fees and costs and allowance for estimated loan losses. Net
deferred loan origination fees and costs on loans are amortized or accreted
using the interest method over the expected lives of the loans. Amortization
of deferred loan fees is discontinued for nonperforming loans. Loans held for
investment are not adjusted to the lower of cost or estimated market value
because it is management's intention, and the Company has the ability, to hold
these loans to maturity.
Interest on loans is credited to income as earned. Interest receivable is
accrued only if deemed collectible. Generally, allowances are established for
uncollected interest on loans on which payments are more than 90 days past
due.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan--
Income Recognition and Disclosures. SFAS No. 114 generally requires all
creditors to account for impaired loans, except those loans that are accounted
for at fair value or at the lower of cost or fair value, at the present value
of the expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or
the fair value of the collateral if the loan is collateral-dependent. SFAS No.
114 indicates that a creditor should evaluate the collectibility of both
contractual interest and contractual principal when assessing the need for a
loss accrual. The adoption of these statements did not have a material impact
on the results of operations, financial position or cash flows of the Company,
taken as a whole.
The Company considers a loan impaired when it is probable that the Company
will be unable to collect all contractual principal and interest payments
under the terms of the original loan agreement. Loans are evaluated for
impairment as part of the Company's normal internal asset review process.
However, in determining when a loan is impaired, management also considers the
loan documentation, current loan to value ratios and the borrower's current
financial position. Included as impaired loans are all loans delinquent 90
days or more and all loans that have a specific loss allowance applied to
adjust the loan to fair value. The accrual of interest on impaired loans is
discontinued after a 90-day delinquent period or when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
the interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments
are received. Where impairment is considered other than temporary, a charge-
off is recorded; where impairment is considered temporary, an allowance is
established. Impaired loans which are performing under the contractual terms
are reported as performing loans, and cash payments are allocated to principal
and interest in accordance with the terms of the loans. The Company uses the
fair value of collateral method for measuring impaired loans. The Company
applies such measurement provision to all loans in its portfolio except for
one- to four-family residential mortgage loans and unsecured consumer loans,
which are collectively evaluated for impairment.
74
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
Allowances for Estimated Loan and Real Estate Losses--It is the policy of
the Company to maintain separate allowances for estimated loan and real estate
losses at levels deemed appropriate by management to provide for known or
inherent risks in the portfolio. Specific loss allowances are established for
loans if the fair value of the loan or the collateral is estimated to be less
than the gross carrying value of the loan. In estimating losses, management
considers the estimated sales price, cost of refurbishment, payment of
delinquent taxes, cost of holding the property (if an extended period is
anticipated) and cost of disposal. Additionally, general valuation allowances
for loan and real estate losses have been established. Management's
determination of the adequacy of the loan and real estate loss allowances is
based on an evaluation of the composition of the portfolio, actual loss
experience, current and prospective economic conditions, industry trends and
other relevant factors, in the area in which the Company's lending and real
estate activities are based, which may affect the borrowers' ability to pay
and the value of the underlying collateral. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowance for loan losses. Such agencies may require the
Bank to recognize additions to the allowance based on judgments different from
those of management.
Although management uses the best information available to make these
estimates, future adjustments to the allowances may be necessary due to
economic, operating, regulatory and other conditions that may be beyond the
Company's control.
Mortgage Financing Operations--The Company sells and securitizes the
majority of loans held for sale with servicing retained. Under the servicing
agreements, the investor is paid its share of the principal collections
together with interest at an agreed-upon rate, which generally differs from
the loans' contractual interest rate.
Effective July 1, 1995, the Company adopted SFAS No. 122, Accounting for
Mortgage Servicing Rights, which amended SFAS No. 65, Accounting for Certain
Mortgage Banking Activities. SFAS No. 122 required an institution that
purchases or originates mortgage loans and sells or securitizes those loans
with servicing rights retained to allocate the total cost of the mortgage
loans to the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values. The impact of adopting
SFAS No. 122 was an increase in pretax income of $594,000, net income of
$438,000 and earnings per share of $.23 for the year ended December 31, 1995.
Effective January 1, 1997, the Company adopted SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, which was amended by SFAS No. 127. This statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguished
transfers of financial assets that are sales from transfers that are secured
borrowings. Under the financial-components approach, after a transfer of
financial assets, an entity recognizes all financial and servicing assets it
controls and liabilities its has incurred and derecognizes financial assets it
no longer controls and liabilities that have been extinguished. The financial-
components approach focuses on the assets that exist after the transfer. Many
of these assets and liabilities are components of financial assets that
existed prior to the transfer. If a transfer does not meet criteria for a
sale, the transfer is accounted for as a secured borrowing with pledge of
collateral. The statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996. SFAS No. 125 superseded SFAS No. 122. Implementation of SFAS No. 125
did not have a material impact on the Company's results of operations,
financial condition or cash flows, taken as a whole.
The Company evaluates its capitalized mortgage servicing rights (MSRs) for
impairment based on the fair value of those rights. The Company's periodic
evaluation is performed on a disaggregated basis whereby MSRs are stratified
based on type of interest rate (variable or fixed), loan type and original
loan term. Impairment is
75
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
recognized in a valuation allowance for each pool in the period of impairment.
The Company determines fair value based on the present value of estimated net
future cash flows related to servicing income. In estimating fair values at
December 31, 1997 and 1996, the Company utilized a weighted average prepayment
assumption of 21.1% and 23.0%, respectively, and a weighted average discount
rate of 16.0% and 16.5%, respectively. The cost allocated to servicing rights
is amortized in proportion to, and over the period of, estimated net future
servicing fee income.
In 1995, gains on bulk sales of mortgage loan servicing rights were
recognized when title and all risks and rewards irrevocably passed to the
buyer and there were no significant unresolved contingencies.
Residual Assets--In 1997 and 1996, the Company completed the securitization
and sale of approximately $415,350,000 and $51,900,000, respectively, in loans
in the form of mortgage pass-through certificates and recognized gains of
approximately $27,753,000 and $4,300,000, respectively. These certificates are
held in a trust independent of the Company. The Company will act as servicer
for the trust and receive a stated servicing fee. The Company has also
retained a beneficial interest in the form of an interest-only strip which
represents the subordinated right to receive cash flows from the pool of
securitized loans after payment of the required amounts to the holders of the
securities and the costs associated with the securitization. This interest-
only strip receivable is classified as a trading security and recorded at fair
value with any unrealized gains or losses recorded in the results of
operations in the period of the change in fair value. For the years ended
December 31, 1997 and 1996, net unrealized gains of $86,000 and $484,000,
respectively, resulted from changes in fair value and are included in results
of operations.
Valuations at origination and at each reporting period are based on
discounted cash flow analyses. The cash flows are estimated as the excess of
the weighted average coupon on each pool of loans sold over the sum of the
pass-through interest rate, a servicing fee, a trustee fee, an insurance fee
and an estimate of annual future credit losses related to the prepayment,
default, loss and interest rate assumptions that market participants would use
for similar financial instruments subject to prepayment, credit and interest
rate risk and are discounted using an interest rate that a purchaser unrelated
to the seller of such a financial instrument would demand. At origination, the
Company utilized prepayment assumptions ranging from 12% to 25%, an estimated
loss factor assumption ranging from 0.5% to 2.5% and a weighted average
discount rate of 13.5% to value residual assets. At December 31, 1997 and
1996, the Company utilized prepayment assumptions ranging from 12% to 60%, an
estimated loss factor assumption ranging from 0.5% to 2.5% and a weighted
average discount rate of 13.5% to value residual assets. The valuation
includes consideration of characteristics of the loans including loan type and
size, interest rate, origination date, term and geographic location. The
Company also uses other available information such as externally prepared
reports on prepayment rates, collateral value, economic forecasts, and
historical default and prepayment rates of the portfolio under review. To the
Company's knowledge, there is no active market for the sale of residual
assets. The range of values attributable to the factors used in determining
fair value is broad. Accordingly, the Company's estimate of fair value is
subjective.
In connection with certain securitization transactions, the Company
initially deposited cash with a trustee and will subsequently deposit a
portion of the servicing spread collected on the related loans. Such amounts
serve as credit enhancement for the related trust. The amounts set aside are
available for distribution to investors in the event of certain shortfalls in
amounts due to investors. These amounts are subject to increase up to a
reserve level as specified in the related securitization documents. Cash
amounts on deposit are invested in certain instruments as permitted by the
related securitization documents. To the extent amounts on deposit exceed
specified levels, distributions are made to the Company; and, at the
termination of the related trust, any remaining amounts on deposit are
distributed to the Company. The amount on deposit at December 31, 1997 and
1996 is classified as restricted cash in the accompanying consolidated
statements of financial condition.
76
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
Foreclosed Real Estate--Real estate properties acquired through, or in lieu
of, loan foreclosure are initially recorded at fair value at the date of
foreclosure through a charge to the allowance for estimated loan losses. After
foreclosure, valuations are periodically performed by management and an
allowance for losses is established by a charge to operations if the carrying
value of a property exceeds its fair value less estimated cost to sell.
Revenue and expenses from operations and changes in the valuation allowance
are included in net loss on foreclosed real estate in the consolidated
statement of operations.
Premises and Equipment--Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed using both the straight-line and accelerated methods over the
estimated useful lives of the assets, which range from 31 years for buildings,
15 years for leasehold improvements, 7 years for furniture, fixtures and
equipment, and 3 years for computer equipment.
The Company accounts for impairment under SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The statement established accounting standards for the impairment of long-
lived assets that either will be held and used in operations or that will be
disposed of. Accordingly, the Company periodically evaluates the
recoverability of long-lived assets, such as premises and equipment, to ensure
the carrying value has not been impaired.
Income Taxes--The Company accounts for income taxes under SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax
returns. In estimating future tax consequences, all expected future events
other than enactments of changes in the tax law or rates are considered. If
necessary, a valuation allowance is established based on management's
determination of the likelihood of realization of deferred tax assets.
Derivative Financial Instruments--The Company has entered into various
interest rate exchange agreements (swaps) to manage exposure to changes in
interest rates. Net interest income (expense) on the swaps resulting from the
differential between exchanging floating and fixed rate interest payments is
recorded using the accrual method. No interest rate exchange agreements were
outstanding as of December 31, 1997 and 1996 (Note 14).
In the ordinary course of business, the Company has entered into other off-
balance sheet financial instruments consisting of commitments to extend
credit. Such financial instruments are recorded in the financial statements
when they are funded or related fees are incurred or received.
Earnings Per Share--The Company adopted SFAS No. 128, Earnings per Share,
effective as of December 31, 1997. The Statement establishes standards for
computing and presenting earnings per share (EPS) and applies to entities with
publicly-held common stock or potential common stock. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. The adoption of SFAS No. 128
did not have a significant impact on the Company's earnings per share.
Earnings per share has been adjusted retroactively to reflect the three-for-
one stock exchange effected pursuant to the Reorganization and the stock split
effected in the form of a dividend during 1996. The per share amounts and
weighted average shares outstanding included in the accompanying consolidated
financial statements have been restated to reflect the Reorganization and
stock split.
77
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
Presentation of Cash Flows--For purposes of reporting cash flows, cash and
cash equivalents include cash and federal funds sold. Generally, federal funds
are sold for one-day periods. At December 31, 1997 and 1996, federal funds
sold approximated $550,000 and $10,350,000, respectively.
Use of Estimates--The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Stock-Based Compensation--SFAS No. 123, Accounting for Stock-Based
Compensation, issued in 1995, encourages companies to account for stock
compensation awards based on their fair value at the date the awards are
granted. SFAS No. 123 does not require the application of the fair value
method and allows for the continuance of current accounting methods, which
require accounting for stock compensation awards based on their intrinsic
value as of the grant date. However, SFAS No. 123 requires pro forma
disclosure of net income and, if presented, earnings per share, as if the fair
value based method of accounting defined in this statement had been applied.
The Company did not adopt the fair value accounting method in SFAS No. 123
with respect to its stock option plans and continues to account for such plans
in accordance with Accounting Principles Board (APB) Opinion No. 25.
Recent Accounting Developments--In February 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 129, Disclosure of Information About
Capital Structure. The statement establishes standards for disclosing
information about an entity's capital structure. The disclosure requirements
of SFAS No. 129 are effective for periods ending after December 15, 1997. The
adoption of SFAS No. 129 did not have a significant impact on the Company's
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 131 establishes standards of reporting by
publicly-held business enterprises and disclosure of information about
operating segments in annual financial statements and, to a lesser extent, in
interim financial reports issued to shareholders. SFAS Nos. 130 and 131 are
effective for fiscal years beginning after December 15, 1997. As both SFAS
Nos. 130 and 131 deal with financial statement disclosure, the Company does
not anticipate the adoption of these new standards will have a material impact
on its financial position, results of operations or cash flows.
Reclassifications--Certain reclassifications have been made to the 1996 and
1995 consolidated financial statements to conform to the 1997 presentation.
2. REGULATORY CAPITAL REQUIREMENTS AND OTHER REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
78
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below). The Bank's primary regulatory agency, the Office of Thrift
Supervision (OTS), requires that the Bank maintain minimum ratios of tangible
capital (as defined in the regulations) of 1.5%, core capital (as defined) of
3%, and total risk-based capital (as defined) of 8%. The Bank is also subject
to prompt corrective action capital requirement regulations set forth by the
Federal Deposit Insurance Corporation (FDIC). The FDIC requires the Bank to
maintain minimum of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined) and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1997 and
1996, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1997 and 1996, the most recent notification from the OTS
categorized the Bank as well-capitalized and adequately-capitalized,
respectively, under the regulatory framework for prompt corrective action. To
be categorized as well-capitalized or adequately capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table. There are no conditions or events since
December 31, 1997 that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
TO BE WELL-
CAPITALIZED
UNDER PROMPT
CORRECTIVE
FOR CAPITAL ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
------------- ------------------- -------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ---------- -------- ------- -----
(DOLLARS IN THOUSANDS)
As of December 31, 1997:
Total Capital (to Risk-
Weighted Assets).......... $33,947 10.32% $ 26,306 8.00% $32,882 10.00%
Core Capital (to Adjusted
Tangible Assets).......... 21,545 5.30% 12,202 3.00% 20,336 5.00%
Tangible Capital (to
Tangible Assets).......... 21,545 5.30% 6,101 1.50% N/A N/A
Tier I Capital (to Risk-
Weighted Assets).......... 21,545 6.55% N/A N/A 19,729 6.00%
As of December 31, 1996:
Total Capital (to Risk-
Weighted Assets).......... 10,446 9.43% 8,865 8.00% 11,081 10.00%
Core Capital (to Adjusted
Tangible Assets).......... 9,273 8.90% 3,127 3.00% 5,211 5.00%
Tangible Capital (to
Tangible Assets).......... 9,273 8.90% 1,563 1.50% N/A N/A
Tier I Capital (to Risk-
Weighted Assets).......... 9,273 8.37% N/A N/A 6,649 6.00%
The Bank has been required by the OTS since the Bank's examination completed
August 9, 1996 to compute its regulatory capital ratios based upon the higher
of (1) the average of total assets based on month-end results or (2) total
assets as of the quarter-end.
Under the framework, the Bank's capital levels at December 31, 1996 did not
allow the Bank to accept brokered deposits without prior approval from the
regulators. The Bank had approximately $2,200,000 of brokered deposits at
December 31, 1996. This is not expected to materially impact the Bank as it
has other sources of funds. The Bank's capital levels at December 31, 1997
allow the Bank to accept brokered deposits without prior approval from the
regulators.
The OTS issued regulations which set forth the methodology for calculating
an interest rate risk component that is being incorporated into the OTS
regulatory capital rules. Under the new regulations, only savings institutions
with above-normal interest rate risk exposure are required to maintain
additional capital. This
79
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
additional capital would increase the amount of a savings institution's
otherwise required risk-based capital requirement. The final rule became
effective January 1, 1994, and implementation will not begin until the Bank
has been notified by the OTS.
Management believes that, under current regulations, the Bank will continue
to meet its minimum capital requirements in the coming year. However, events
beyond the control of the Bank, such as changing interest rates or a downturn
in the economy in the areas where the Bank has most of its loans, could
adversely affect future earnings and, consequently, the ability of the Bank to
meet its future minimum capital requirements.
At periodic intervals, both the OTS and the FDIC routinely examine the
Bank's financial statements as part of their legally prescribed oversight of
the savings and loan industry. Based on these examinations, the regulators can
direct that the Bank's financial statements be adjusted in accordance with
their findings.
The OTS concluded an examination of the Bank in November 1997. Examination
results have been reflected in the financial statements presented herein.
Future examinations by the OTS or FDIC could include a review of certain
transactions or other amounts reported in the 1997 financial statements.
Adjustments, if any, cannot presently be determined.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the Funds Act), which, among other things, imposed a
special one-time assessment on Savings Association Insurance Fund (SAIF)
member institutions, including the Bank, to recapitalize the SAIF. As required
by the Funds Act, the FDIC imposed a special assessment of 65.7 basis points
on SAIF-assessable deposits held as of March 31, 1995, payable November 27,
1996. The special assessment was recognized as an expense in the third quarter
of 1996 and is tax deductible. The Bank took a pretax charge of $448,000 as a
result of the SAIF special assessment.
The Funds Act also spreads the obligations for payment of the Financing
Corporation (FICO) bonds across all SAIF and Bank Insurance Fund (BIF)
members. Beginning on January 1, 1997, BIF deposits are assessed for FICO
payments at a rate of 20% of the rate assessed on SAIF deposits. Based on
current estimates by the FDIC, BIF deposits will be assessed a FICO payment of
1.3 basis points, while SAIF deposits will pay an estimated 6.5 basis points
on the FICO bonds. Full pro rata sharing of the FICO payments between BIF and
SAIF members will occur on the earlier of January 1, 2000 or the date the BIF
and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be
merged on January 1, 1999, provided no savings associations remain as of that
time.
As a result of the Funds Act, the FDIC lowered SAIF assessments to 0 to 27
basis points effective January 1, 1997, a range comparable to that of BIF
members. However, SAIF members will continue to make the higher FICO payments
described above. Management cannot predict the level of FDIC insurance
assessments on an ongoing basis, whether the savings association charter will
be eliminated or whether the BIF and SAIF will eventually be merged.
OTS regulations impose limitations upon all capital distributions by savings
institutions, such as cash dividends, payments to repurchase or otherwise
acquire its shares, payments to stockholders of another institution in a cash-
out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, which are based primarily on an
institution's capital level. An institution that exceeds all fully phased-in
regulatory capital requirements before and after a proposed capital
distribution and has not been advised by the OTS that it is in need of more
than normal supervision, could, after prior notice to, but without the
approval of the OTS, make capital distributions during a calendar year equal
to the greater of: (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the
80
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
excess capital over its fully phased in capital requirements) at the beginning
of the calendar year; or (ii) 75% of its net earnings for the previous four
quarters. Any additional capital distributions would require prior OTS
approval. In the event the Bank's capital fell below its capital requirements
or the OTS notified it that it was in need of more than normal supervision,
the Bank's ability to make capital distributions could be restricted. In
addition, the OTS could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the OTS
determines that such distribution would constitute an unsafe or unsound
practice.
3. SECURITIES HELD TO MATURITY
The amortized cost and estimated fair value of securities held to maturity
were as follows at December 31 (in thousands):
1997
--------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED ----------------- FAIR
COST GAINS LOSSES VALUE
--------- ------- -------- ---------
U.S. Treasury and other agency
securities......................... $5,003 $ 18 $ -- $5,021
Mortgage-backed securities.......... 9 9
------ ------- -------- ------
$5,012 $ 18 $ -- $5,030
====== ======= ======== ======
1996
----------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED ------------------ FAIR
COST GAINS LOSSES VALUE
--------- -------- -------- ---------
U.S. Treasury and other agency
securities....................... $8,013 $ -- $ (42) $7,971
Mortgage-backed securities........ 10 10
------ -------- -------- ------
$8,023 $ -- $ (42) $7,981
====== ======== ======== ======
The maturity distribution of securities held to maturity at December 31,
1997 is as follows (in thousands):
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
Due in one year or less.................................. $3,004 $3,008
Due from one to five years............................... 1,999 2,013
Mortgage-backed securities............................... 9 9
------ ------
$5,012 $5,030
====== ======
The weighted average yield on securities held to maturity was 5.88% and
5.47% at December 31, 1997 and 1996, respectively.
81
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
4. LOANS HELD FOR INVESTMENT
Loans held for investment consisted of the following at December 31 (in
thousands):
1997 1996
------- -------
Mortgage loans:
Residential:
One- to four-family...................................... $23,068 $28,861
Multi-family............................................. 2,019 2,124
Commercial and land....................................... 6,014 7,247
------- -------
31,101 38,232
Other loans:
Loans secured by deposit accounts......................... 165 177
Unsecured commercial loans................................ 63 67
Unsecured consumer loans.................................. 336 65
------- -------
564 309
------- -------
31,665 38,541
Less:
Deferred loan origination fees............................ 16 21
Allowance for estimated loan losses....................... 2,573 1,625
------- -------
2,589 1,646
------- -------
$29,076 $36,895
======= =======
Weighted average interest rate at end of period............ 8.06% 8.06%
======= =======
The Company grants residential and commercial loans held for investment to
customers located primarily in Southern California. Consequently, a borrower's
ability to repay may be impacted by economic factors in the region.
At December 31, 1997, included in loans held for investment and loans held
for sale are adjustable rate loans with principal balances of $169,063,000.
Adjustable rate loans are indexed primarily to LIBOR.
The following summarizes activity in the allowance for estimated loan losses
for the years ended December 31 (in thousands):
1997 1996 1995
------ ------ ------
Balance, beginning of year........................... $1,625 $1,177 $ 832
Provision for estimated loan losses.................. 1,850 963 1,194
Recoveries........................................... 7 219 65
Charge-offs.......................................... (909) (734) (914)
------ ------ ------
Balance, end of year................................. $2,573 $1,625 $1,177
====== ====== ======
The Company had nonaccrual loans at December 31, 1997, 1996 and 1995 of
$5,126,000, $2,416,000 and $1,397,000, respectively. If nonaccrual loans had
been performing in accordance with their original terms, the Company would
have recorded interest income of $18,170,000, $6,692,000 and $5,500,000,
respectively, instead of interest income actually recognized of $17,746,000,
$6,513,000 and $5,433,000, respectively, for the years ended December 31,
1997, 1996 and 1995.
82
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
At December 31, 1997 and 1996, the Company had impaired loans totaling
$5,518,000 and $2,878,000, respectively, with related reserves of $1,017,000
and $452,000, respectively, recognized in conformity with SFAS No. 114, as
amended by SFAS No. 118. During the years ended December 31, 1997, 1996 and
1995, the average recorded investment in impaired loans was $3,413,000,
$2,300,000 and $1,980,000, respectively. Total cash collected on impaired
loans during the years ended December 31, 1997, 1996 and 1995 was $1,498,000,
$1,339,000 and $1,079,000, respectively, of which $1,329,000, $1,249,000 and
$960,000, respectively, was credited to principal. Interest income of
$169,000, $90,000 and $119,000 on impaired loans was recognized for cash
payments received during the years ended December 31, 1997, 1996 and 1995,
respectively.
At December 31, 1997 and 1996, troubled debt restructured loans amounted to
$131,000. There were no troubled debt restructurings effected during the years
ended December 31, 1997 and 1996.
The Company is not committed to lend additional funds to debtors whose loans
have been modified.
The Bank is subject to numerous lending-related regulations. Under FIRREA,
the Bank may not make real estate loans to one borrower in excess of 15% of
its unimpaired capital and surplus except for loans not to exceed $500,000.
This 15% limitation results in a dollar limitation of approximately $3,592,000
at December 31, 1997.
Activity in loans to directors and executive officers during the year ended
December 31 are as follows (in thousands):
1997 1996 1995
----- ----- ----
Balance, beginning of year............................... $ -- $ -- $--
Originations............................................. 778 154
Loans sold servicing released............................ (365) (154)
----- ----- ----
Balance, end of year..................................... $ 413 $ -- $--
===== ===== ====
5. MORTGAGE FINANCING OPERATIONS
Loans serviced for others at December 31, 1997, 1996 and 1995 totaled
$536,726,000, $168,963,000 and $189,451,000, respectively.
In connection with mortgage servicing activities, the Company held funds in
trust for others totaling approximately $8,068,000 and $957,000 at December
31, 1997 and 1996, respectively. At December 31, 1997 and 1996, $32,000 and
$266,000, respectively, of these funds are included in deposit accounts of the
Bank (subject to FDIC insurance limits).
For the years ended December 31, 1997 and 1996, respectively, 22.7% and
34.0% of the properties securing loans funded by the Company were located in
California, 4.8% and 11.9% were located in Utah, 3.0% and 7.6% were located in
Colorado, 5.2% and 6.8% were located in Florida, 5.9% and 3.2% were located in
Virginia, 5.4% and 3.9% were located in Maryland, 5.1% and 2.4% were located
in North Carolina, and the remainder were dispersed throughout the country. At
December 31, 1997 and 1996, respectively, 35.0% and 40.0% of the loan
servicing portfolio was collateralized by real estate properties located in
California. At December 31, 1997, no other state accounted for more than 6.0%.
Although the Company sells without recourse substantially all of the
mortgage loans it originates or purchases, the Company retains some degree of
risk on substantially all of the loans it sells. In addition, during the
period of time that the loans are held for sale, the Company is subject to
various business risks associated
83
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
with the lending business, including borrower default, foreclosure and the
risk that a rapid increase in interest rates would result in a decline of the
value of loans held for sale to potential purchasers.
In connection with its securitizations, the Company is required to
repurchase or substitute loans in the event of a breach of a representation or
warranty made by the Company. While the Company may have recourse to the
sellers of loans it purchased, there can be no assurance of the sellers'
abilities to honor their respective obligations to the Company. Likewise, in
connection with its whole loan sales, the Company enters agreements which
generally require the Company to repurchase or substitute loans in the event
of a breach of a representation or warranty made by the Company to the loan
purchaser, any misrepresentation during the mortgage loan origination process
or, in some cases, upon any fraud or early default on such mortgage loans. The
remedies available to a purchaser of mortgage loans from the Company are
generally broader than those available to the Company against the sellers of
such loans, and if a loan purchaser enforces its remedies against the Company,
the Company may not be able to enforce whatever remedies the Company may have
against such sellers. If the loans were originated directly by the Company,
the Company will be solely responsible for any breaches of representations or
warranties.
In addition, borrowers, loan purchasers, monoline insurance carriers and
trustees in the Company's securitizations may make claims against the Company
arising from alleged breaches of fiduciary obligations; misrepresentations,
errors and omissions of employees, officers and agents of the Company,
including appraisers; incomplete documentation; and failure by the Company to
comply with various laws and regulations applicable to its business. Any
claims asserted in the future may result in liabilities or legal expenses that
could have a material adverse effect on the Company's results of operations,
financial condition, cash flows and business prospects.
The following is a summary of activity in mortgage servicing rights for the
years ended December 31 (in thousands):
1997 1996 1995
------ ------ ----
Balance, beginning of year............................. $2,645 $ 683 $--
Additions through originations......................... 8,120 2,270 864
Additions through purchase of servicing rights......... 706
Amortization........................................... (958) (320) (268)
Sales.................................................. (606)
Change in valuation allowance.......................... 12 (13)
Direct writedowns...................................... (1,281)
------ ------ ----
Balance, end of year................................... $8,526 $2,645 $683
====== ====== ====
The following is a summary of activity in the valuation allowance for
mortgage servicing rights for the years ended December 31 (in thousands):
1997 1996 1995
---- ---- ----
Balance, beginning of year.................................. $ 1 $ 13 $--
Additions (reductions) charged (credited) to operations..... (12) 13
--- ---- ---
Balance, end of year........................................ $ 1 $ 1 $13
=== ==== ===
84
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
Net gains from mortgage financing operations for the years ended December 31
consisted of the following (in thousands):
1997 1996 1995
------- ------ ------
Gains on sale and securitization of loans held for
sale................................................ $29,699 $7,868 $3,549
Net unrealized gain on residual assets............... 86 484
Gains on bulk sale of mortgage servicing rights...... 26
------- ------ ------
$29,785 $8,352 $3,575
======= ====== ======
6. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31 (in
thousands):
1997 1996
------- -------
Premises................................................... $ 569 $ 569
Leasehold improvements..................................... 1,930 530
Furniture, fixtures and equipment.......................... 4,116 1,787
------- -------
6,615 2,886
Less accumulated depreciation and amortization............. (1,851) (1,307)
------- -------
$ 4,764 $ 1,579
======= =======
7. FORECLOSED REAL ESTATE
Activity in the allowance for estimated real estate losses is summarized as
follows for the years ended December 31 (in thousands):
1997 1996 1995
---- ----- ----
Balance, beginning of year................................ $ 65 $ 44 $ 29
Provision for estimated real estate losses................ 108 145 104
Recoveries................................................ 2 2
Charge offs............................................... (96) (126) (89)
---- ----- ----
Balance, end of year...................................... $ 79 $ 65 $ 44
==== ===== ====
Net loss on foreclosed real estate is summarized as follows for the years
ended December 31 (in thousands):
1997 1996 1995
---- ---- -----
Net gain on sales of foreclosed real estate.............. $(74) $(41) $(137)
Net real estate operating costs.......................... 92 54 86
Provision for estimated real estate losses............... 108 145 104
---- ---- -----
Net loss on foreclosed real estate....................... $126 $158 $ 53
==== ==== =====
85
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
8. DEPOSIT ACCOUNTS
Deposit accounts consisted of the following at December 31 (in thousands):
1997 1996
---------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- ------------- ------- -------------
Checking accounts............. $ 11,353 2.99% $ 8,947 2.22%
Passbook accounts............. 3,838 2.10 4,117 2.10
Money market accounts......... 2,729 2.98 3,217 2.99
Certificate accounts:
Under $100,000............... 141,036 5.93 49,437 5.66
$100,000 and over............ 52,809 5.98 19,993 5.63
-------- -------
$211,765 5.68% $85,711 5.02%
======== =======
The aggregate annual maturities of certificate accounts at December 31 are
approximately as follows (in thousands):
1997 1996
-------- -------
Within one year............................................. $187,501 $59,438
One to two years............................................ 3,631 6,197
Two to three years.......................................... 1,179 1,700
Three to four years......................................... 589 925
Four to five years.......................................... 421 613
Thereafter.................................................. 524 557
-------- -------
$193,845 $69,430
======== =======
Interest expense on deposit accounts for the years ended December 31 is
summarized as follows (in thousands):
1997 1996 1995
------ ------ ------
Checking accounts....................................... $ 279 $ 112 $ 92
Passbook accounts....................................... 84 92 127
Money market accounts................................... 88 118 144
Certificate accounts.................................... 7,587 3,192 2,829
------ ------ ------
$8,038 $3,514 $3,192
====== ====== ======
9. ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
As of December 31, 1997 and 1996, the Company had an available line of
credit with the Federal Home Loan Bank of San Francisco (FHLB) of $17,471,000
and $17,346,000, respectively, use of which is contingent upon continued
compliance with the Advances and Security Agreement and other eligibility
requirements established by the FHLB. Advances and/or the line of credit are
collateralized by pledges of certain real estate loans and securities with an
aggregate principal balance of $21,777,000 and $20,474,000 at December 31,
1997 and 1996, respectively. At December 31, 1997, outstanding FHLB advances
totaled $9,000,000 at a weighted average interest rate of 7.07%. There were no
FHLB advances outstanding at December 31, 1996.
86
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
The following summarizes activities in advances from the FHLB for the years
ended December 31 (dollars in thousands):
1997 1996 1995
------- ------- ------
Average balance outstanding....................... $ 8,284 $ 4,259 $3,112
Maximum amount outstanding at any month-end during
the year......................................... 17,800 13,900 7,600
Weighted average interest rate during the year.... 5.82% 5.93% 6.55%
At December 31, 1997, the Company had three warehousing lines of credit
available to it from national investment banking firms. The first line allows
the Company to draw up to $50,000,000 and expires on April 30, 1998. The
second line allows the Company to draw up to $200,000,000 and expires August
20, 1998. The third line allows the Company to draw up to $40,000,000 and
maintains a revolving maturity date. An aggregate balance of $100,170,000 was
drawn on these lines as of December 31, 1997 at a weighted average interest
rate of 7.19%. These lines of credit, which were obtained during 1997, bear
interest at a variable rate based on LIBOR. Outstanding borrowings under these
lines of credit are collateralized by loans held for sale. These lines of
credit contain certain affirmative, negative and financial covenants, with
which the Company was in compliance at December 31, 1997.
The following summarizes activities in the lines of credit for the year
ended December 31, 1997 (dollars in thousands):
Average balance outstanding........................................ $ 48,765
Maximum amount outstanding at any month-end during year............ 226,846
Weighted average interest rate during the year..................... 6.53%
At December 31, 1996, the Company had a borrowing of $3,278,000 with an
interest rate of 8.43% from a financial institution. The borrowing was
collateralized by certain real estate loans with an aggregate principal
balance of $3,278,000. The borrowing was repaid on January 17, 1997.
10. SUBORDINATED DEBENTURES
On March 14, 1997, the Bank issued subordinated debentures (Debentures) in
the aggregate principal amount of $10,000,000 through a private placement and
pursuant to a Debenture Purchase Agreement. The Debentures will mature on
March 15, 2004 and bear interest at the rate of 13.5% per annum, payable semi-
annually. The Debentures qualify as supplementary capital under regulations of
the OTS, which capital may be used to satisfy the risk-based capital
requirements in an amount up to 100% of the Bank's core capital. The
Debentures are direct, unconditional obligations of the Bank ranking with all
other existing and future unsecured and subordinated indebtedness of the Bank.
They are subordinated on liquidation, as to principal and interest, and
premium, if any, to all claims against the Bank having the same priority as
savings account holders or any higher priority.
The Debentures are redeemable at the option of the Bank, in whole or in
part, at any time after September 15, 1998, at the aggregate principal amount
thereof, plus accrued and unpaid interest, if any. Following the
Reorganization, the Bank may substitute LIFE in its place as obligor on the
Debentures (the Substitution). If such Substitution occurs, holders of the
Debentures will have the option at September 15, 1998 or at such later time as
the Substitution occurs, to require LIFE to purchase all or part of the
holder's outstanding Debentures at a price equal to 100% of the principal
amount repurchased plus accrued interest through the repurchase date. If the
Substitution occurs, upon a change in control of LIFE, holders of the
Debentures will
87
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
have the option to require LIFE to purchase all or part of the holder's
outstanding Debentures at a price equal to 101% of the principal amount
repurchased plus accrued interest through the repurchase date.
11. INCOME TAXES
Income taxes for the years ended December 31 consisted of the following (in
thousands):
1997 1996 1995
------ ------ ----
Current provision (benefit):
Federal............................................... $ (317) $1,073 $374
State................................................. (426) 312 1
------ ------ ----
(743) 1,385 375
------ ------ ----
Deferred (benefit) provision:
Federal............................................... 6,907 (235) (81)
State................................................. 2,878 (24)
------ ------ ----
9,785 (259) (81)
------ ------ ----
Total income tax provision (benefit)................. $9,042 $1,126 $294
====== ====== ====
A reconciliation from the statutory federal income tax rate to the Company's
effective income tax rate for the years ended December 31 is as follows:
1997 1996 1995
------ ------ ----
Statutory federal income tax rate...................... 35.0% 35.0% 35.0%
State taxes, net of federal income tax benefit......... 7.4 7.2
Other.................................................. (0.8) 0.6 1.1
------ ------ ----
41.6% 42.8% 36.1%
====== ====== ====
Deferred tax assets (liabilities) were comprised of the following at December
31 (in thousands):
1997 1996
-------- -----
Deferred tax assets:
Depreciation.............................................. $ 119 $ --
Accrued bonus............................................. 1,276
Net operating loss........................................ 3,423
Allowance for loan losses................................. 910 479
Capital loss carryforward................................. 60 63
Loans held for sale....................................... 1,391 115
Other..................................................... 1,245 301
-------- -----
8,424 958
-------- -----
Deferred tax liabilities:
Gain on sale of loans..................................... (16,826)
Depreciation.............................................. (61)
Originated servicing rights............................... (818) (358)
Federal Home Loan Bank stock.............................. (132) (106)
-------- -----
(17,776) (525)
-------- -----
(9,352) 433
Less valuation allowance.................................... (36) (36)
-------- -----
Net deferred tax (liability) asset.......................... $ (9,388) $ 397
======== =====
88
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
At December 31, 1997 and 1996, the net deferred tax liability and net
deferred tax asset are included in other liabilities and other assets,
respectively, in the accompanying consolidated statements of financial
condition. Also included in other assets at December 31, 1997 are refundable
income taxes of $2,428,000.
The Bank's financial statement equity includes tax bad debt deductions for
which no provision for federal income taxes has been made. If distributions to
shareholders are made in excess of current or accumulated earnings and profits
or if stock of the Bank is partially redeemed, this tax bad debt reserve,
which approximates $330,000 at December 31, 1997, will be recaptured into
income at the then-prevailing federal income tax rate. The related
unrecognized deferred tax liability is approximately $116,000. It is not
contemplated that the Bank will make any disqualifying distributions that
would result in the recapture of these reserves.
12. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK
The Company is involved in various legal proceedings associated with normal
operations. In the opinion of management, based on the advice of legal
counsel, such litigation and claims are expected to be resolved without
material effect on the financial position of the Company.
The Company leases a portion of its facilities from nonaffiliates under
operating leases expiring at various dates through 2002. The following
schedule shows the minimum annual lease payments, excluding property taxes and
other operating expenses, due under these agreements (in thousands):
Year ending December 31:
1998................................................................ $ 830
1999................................................................ 840
2000................................................................ 766
2001................................................................ 663
2002................................................................ 415
Thereafter.......................................................... 5
------
$3,519
======
Rental expense under all operating leases totaled $424,000, $232,000 and
$124,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company and the Bank have negotiated employment agreements with their
chief executive officer. These agreements provide for the payment of a base
salary, a bonus based upon performance of the Company and the payment of
severance benefits upon termination.
Lending Activities--Loans to subprime borrowers present a higher level of
risk of default than conforming loans because of the increased potential for
default by borrowers who may have had previous credit problems or who do not
have any credit history. Loans to subprime borrowers also involve additional
liquidity risks, as these loans generally have a more limited secondary market
than conventional loans. The actual rates of delinquencies, foreclosures and
losses on loans to subprime borrowers could be higher under adverse economic
conditions than those currently experienced in the mortgage lending industry
in general. While the Company believes that the underwriting procedures and
appraisal processes it employs enable it to somewhat mitigate the higher risks
inherent in loans made to these borrowers, no assurance can be given that such
procedures or processes will afford adequate protection against such risks.
89
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
The debt consolidation loans the Company originates for agency-qualified
borrowers are primarily home equity lines of credit and second deeds of trust
generally up to 125% of the appraised value of the real estate underlying the
loans. In the event of a default on such a loan by a borrower, there generally
would be insufficient collateral to pay off the balance of such loan and the
Company, as holder of a second position on the property, would likely lose a
substantial portion, if not all, of its investment. While the Company believes
that the underwriting procedures it employs enable it to somewhat mitigate the
higher risks inherent in such loans, no assurance can be given that such
procedures will afford adequate protection against such risks. Approximately
88% and 65%, respectively, of the loans included in the securitization
transactions completed in 1997 and 1996 consisted of this type of loan.
The Company has been actively involved in the origination, purchase and sale
to institutional investors of real estate secured loans and, more recently, in
asset securitizations. Generally, the profitability of such mortgage financing
operations depends on maintaining a sufficient volume of loans for sale and
the availability of purchasers. Changes in the level of interest rates and
economic factors affect the amount of loans originated or available for
purchase by the Company, and thus the amount of gains on sale of loans and
servicing fee income. Changes in the purchasing policies of institutional
investors or increases in defaults after funding could substantially reduce
the amount of loans sold to such investors or sold through asset
securitizations. Any such changes could have a material adverse effect on the
Company's results of operations, financial condition and cash flows.
The Company's ability to originate, purchase and sell loans through its
mortgage financing operations is also significantly impacted by changes in
interest rates. Increases in interest rates may also reduce the amount of loan
and commitment fees received by the Company. A significant decline in interest
rates could also decrease the size of the Company's servicing portfolio and
the related servicing income by increasing the level of prepayments. The
Company does not currently utilize any specific hedging instruments to
minimize exposure to fluctuations in the market price of loans and interest
rates with regard to loans held for sale in the secondary mortgage market.
Therefore, between the time the Company originates the loans or purchase
commitments are issued or asset securitizations are completed, the Company is
exposed to downward movements in the market price of such loans due to upward
movements in interest rates.
The Company depends largely on mortgage brokers and correspondents for its
purchases and originations of new loans. The Company's competitors also seek
to establish relationships with the Company's mortgage brokers and
correspondents. The Company's future results may become increasingly exposed
to fluctuations in the volume and cost of its wholesale loans resulting from
competition from other purchasers of such loans.
Availability of Funding Sources--The Company funds substantially all of the
loans which it originates or purchases through deposits, internally-generated
funds, FHLB advances or other borrowings. The Company competes for deposits
primarily on the basis of rates, and, as a consequence, the Company could
experience difficulties in attracting deposits to fund its operations if the
Company does not continue to offer deposit rates at levels that are
competitive with other financial institutions. The Company also uses the
proceeds generated by the Company in selling loans in the secondary market or
pools of loans in asset securitizations to fund subsequent originations or
purchases. On an ongoing basis, the Company explores opportunities to access
credit lines as an additional source of funds. To the extent that the Company
is not able to maintain its currently available funding sources or to access
new funding sources, it would have to curtail its loan production activities
or sell loans earlier than is optimal. Any such event could have a material
adverse effect on the Company's results of operations, financial condition and
cash flows.
90
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
Dependence on Securitizations--Since December 1996, the Company has
completed four loan securitization transactions. The Company derived a
significant portion of its income in 1997 and 1996 by recognizing such gains
on sale. The Company's ability to complete securitizations is affected by
several factors, including conditions in the securities markets generally and
in the asset-backed securities markets specifically, the credit quality of the
Company's loan portfolio, and the Company's ability to obtain credit
enhancements. Although the Company obtained credit enhancements in its
securitizations which facilitated an investment-grade rating for the
securitization interests, there can be no assurance that the Company will be
able to obtain future credit enhancements on acceptable terms or that future
securitizations will be similarly rated. Any substantial reduction in the
ability of the Company to complete asset securitizations could have a material
adverse effect on the Company's results of operations, financial condition and
cash flows.
13. BENEFIT PLANS
401(k) Plan--The Company maintains an Employee Savings Plan (the Plan) which
qualifies under section 401(k) of the Internal Revenue Code. Under the Plan,
employees may contribute from 1% to 15% of their compensation. The Company
will match, at its discretion, 25% of the amount contributed by the employee
up to a maximum of 8% of the employee's salary. The amount of contributions
made to the Plan by the Company were not material for the years ended December
31, 1997, 1996 and 1995.
Cash Bonus Plan--The Company adopted a cash bonus plan (the Bonus Plan)
effective February 1996. All employees except for commissioned employees and
employees with employment contracts are eligible to participate. Approximately
$1,480,000 and $100,000 in expense was recorded pursuant to the Bonus Plan
during the years ended December 31, 1997 and 1996, respectively.
Stock Option Plans--On November 21, 1996, the Board of Directors of the Bank
adopted the Life Bank 1996 Stock Option Plan (the 1996 Option Plan). The 1996
Option Plan authorizes the granting of options equal to 321,600 shares of
common stock for issuance to executives, key employees, officers and
directors. The 1996 Option Plan will be in effect for a period of ten years
from the adoption by the Board of Directors. Options granted under the 1996
Option Plan will be made at an exercise price equal to the fair market value
of the stock on the date of grant. Awards granted to officers and employees
may include incentive stock options, nonstatutory stock options and limited
rights which are exercisable only upon a change in control of the Bank, which
change in control did not include the reorganization of the Bank into the
holding company. Awards granted to nonemployee directors are nonstatutory
options. Stock options will become vested and exercisable in the manner
specified by the Board of Directors. The options granted under the 1996 Option
Plan will vest at a rate of 33.3% per year, beginning on November 21, 1999.
91
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
The components of the 1996 Option Plan as of December 31, 1997 and 1996, and
changes during the years then ended (as adjusted for the Reorganization),
consist of the following:
1997 1996
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- -------- -------- --------
Options outstanding at the beginning of
the year............................... 321,600 $3.33 -- $ --
Granted............................... 321,600 3.33
Forfeited............................. (5,400) 3.33
------- --------
Options outstanding at the end of the
year................................... 316,200 3.33 321,600 3.33
======= ========
Options exercisable at the end of the
year................................... 27,540 3.33 --
Weighted average remaining contractual
life of options outstanding at end of
year................................... 9 years 10 years
Weighted average information for options
granted during the year:
Fair value.............................. $1.69 $1.66
The fair value of options granted under the 1996 Option Plan during 1996 was
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used: no dividend yield, no
volatility, risk-free interest rate of 7% and expected lives of 10 years.
Options exercisable as of December 31, 1997 were due to the retirement of
three directors. Upon retirement, their options immediately vested. As of June
27, 1997, the date of the Reorganization, the 1996 Option Plan became the
amended and restated LIFE Financial Corporation 1996 Stock Option Plan. Stock
options with respect to shares of the Bank's common stock granted under the
1996 Option Plan and outstanding prior to completion of the Reorganization
automatically became options to purchase three shares of the Company's common
stock upon identical terms and conditions. The Company assumed all of the
Bank's obligations with respect to the 1996 Option Plan.
The Board of Directors of the Company adopted the LIFE Financial Corporation
1997 Stock Option Plan (the 1997 Option Plan), which became effective upon the
Reorganization (the 1996 Option Plan and the 1997 Option Plan will sometimes
hereinafter be referred to as the Option Plans). The Board of Directors of the
Company has reserved shares equal to 10% of the issued and outstanding shares
of the Company giving effect to the Reorganization and the public offering,
including Company options that were exchanged for Bank options pursuant to the
1996 Option Plan for issuance under the Option Plans.
After the Reorganization, the Option Plans became available to directors,
officers and employees of the Company, and to directors, officers and
employees of its direct or indirect subsidiaries. The options granted pursuant
to the 1997 Option Plan will vest at a rate of 33.3% per year, beginning on
June 30, 2000. The following is a summary of activity in the 1997 Option Plan
during 1997:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
Options granted............................................ 194,000 $11.14
Options forfeited.......................................... (1,000) $11.00
-------
Options outstanding at December 31, 1997................... 193,000 $11.14
=======
Options exercisable at December 31, 1997................... 17,500
=======
92
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
Options exercisable as of December 31, 1997 were due to the retirement of
one director. Upon retirement, the options immediately vested.
The estimated fair value of the options granted under the 1997 Option Plan
during 1997 was $8.37 per share.
The fair value of options granted under the 1997 Option Plan during 1997 was
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used: no dividend yield,
volatility rate of 55.92%, risk-free interest rate of 6.45% and expected lives
of 10 years.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Option Plans. Accordingly, no compensation cost has been
recognized for its Option Plans. Had compensation cost for the Option Plans
been determined based on the fair value at the grant date for awards under the
Plans based on the fair value method of SFAS No. 123, Accounting for Stock-
Based Compensation, the Company's net income and earnings per share for the
years ended December 31, 1997 and 1996 would have been reduced to the pro
forma amounts indicated below (dollars in thousands, except per share data):
1997 1996
------- ------
Net income to common stockholders:
As reported................................................. $12,700 $1,505
Pro forma................................................... $12,154 $1,489
Basic earnings per share:
As reported................................................. $ 2.60 $ 0.63
Pro forma................................................... $ 2.49 $ 0.63
Diluted earnings per share:
As reported................................................. $ 2.49 $ 0.63
Pro forma................................................... $ 2.38 $ 0.63
14. FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Company is a party to financial instruments with off balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit in the form
of originating loans or providing funds under existing lines of credit. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the accompanying consolidated
statements of financial condition.
During 1988, the Company entered into agreements to pay fixed rate interest
payments in exchange for the receipt of variable market indexed interest
payments (interest rate swaps). The notional principal amount of interest rate
swaps outstanding at January 1, 1995 was $2,000,000, all of which matured in
1995. The intent of these agreements was to match the maturities of certain
liabilities and convert variable rate liabilities into fixed rate. The
notional amount of interest rate swaps does not represent exposure to credit
loss. No new interest rate swap transactions were entered into during the
years ended December 31, 1997, 1996 and 1995.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
93
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates and may require payment of a
fee. Since many commitments are expected to expire, the total commitment
amounts do not necessarily represent future cash requirements. The Company
evaluates each customer's credit worthiness on a case-by-case basis. The
Company's commitments to extend credit at December 31, 1997 and 1996 totaled
$29,173,000 and $9,217,000, respectively.
The Company regularly enters into commitments to sell certain dollar amounts
of loans to third parties under specific, negotiated terms. The terms include
the minimum maturity of the loans, yield to purchaser, servicing spread to the
Company, and the maximum principal amount of the individual loans. The Company
typically satisfies these commitments from its current production of loans.
These commitments have fixed expiration dates and may require a fee. At
December 31, 1997 and 1996, the Company had outstanding commitments to sell
loans of $62,649,000 and $3,072,000, respectively.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
1997
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(IN THOUSANDS)
Assets:
Cash and cash equivalents............................... $11,503 $11,503
Restricted cash......................................... 12,339 12,339
Securities held to maturity............................. 5,012 5,030
Residual assets......................................... 40,746 40,746
Loans held for sale..................................... 289,268 295,346
Loans held for investment, net.......................... 29,076 28,493
Mortgage servicing rights............................... 8,526 9,816
FHLB stock.............................................. 1,067 1,067
Liabilities:
Deposit accounts........................................ 211,765 211,877
FHLB advances........................................... 9,000 9,000
Other borrowings........................................ 100,170 100,170
Subordinated debentures................................. 10,000 10,000
Off-balance sheet unrealized gain on commitments......... 2,702
94
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
1996
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(IN THOUSANDS)
Assets:
Cash and cash equivalents............................... $13,265 $13,265
Restricted cash......................................... 1,636 1,636
Securities held to maturity............................. 8,023 7,981
Residual asset.......................................... 5,700 5,700
Loans held for sale..................................... 31,018 31,288
Loans held for investment, net.......................... 36,895 37,475
Mortgage servicing rights............................... 2,645 2,984
FHLB stock.............................................. 814 814
Liabilities:
Deposit accounts........................................ 85,711 86,278
Other borrowings........................................ 3,278 3,278
Off-balance sheet unrealized gain on commitments......... --
The Company utilized the following methods and assumptions to estimate the
fair value of each class of financial instruments for which it is practicable
to estimate that value:
Cash and Cash Equivalents--The carrying amount approximates fair value.
Restricted Cash--The carrying amount approximates fair value.
Securities Held to Maturity--Fair values are based on quoted market
prices.
Loans Held for Sale--Fair values are based on quoted market prices or
dealer quotes.
Loans Held for Investment--The fair value of gross loans receivable has
been estimated using the present value of cash flow method, discounted
using the current rate at which similar loans would be made to borrowers
with similar credit ratings and for the same maturities, and giving
consideration to estimated prepayment risk and credit loss factors.
Residual Assets and Mortgage Servicing Rights--Fair values are estimated
using discounted cash flows based on current market values.
FHLB Stock--The fair value is based on its redemption value.
Deposit Accounts--The fair value of checking, passbook and money market
accounts is the amount payable on demand at the reporting date. The fair
value of certificate accounts is estimated using the rates currently
offered for deposits of similar remaining maturities.
FHLB Advances, Other Borrowings and Subordinated Debentures--The carrying
amount approximates fair value as the interest rate currently approximates
market.
Financial Instruments with Off-Balance Sheet Risk--As of December 31,
1997, fair values are based on quoted market prices or dealer quotes. As of
December 31, 1996, no fair value is ascribed to the Company's outstanding
commitments to fund loans since commitment fees are not significant and
predominantly all such commitments are variable rate commitments.
95
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1997 and 1996. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since that date; and, therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
16. SEGMENT INFORMATION
The Company's operations within the financial services industry principally
focus on banking and mortgage financing activities. Information about these
segments as of or for the years ended December 31, 1997, 1996 and 1995 is as
follows (dollars in thousands):
1997
---------------------------
MORTGAGE
BANKING FINANCING TOTAL
------- --------- --------
Revenue for the year............................ $ 4,897 $ 47,515 $ 52,412
Income (loss) before income tax provision for
the year....................................... (730) 22,472 21,742
Assets employed at year-end..................... 50,547 361,238 411,785
Depreciation and amortization for the year...... 92 537 629
Capital expenditures for the year............... 936 2,878 3,814
1996
---------------------------
MORTGAGE
BANKING FINANCING TOTAL
------- --------- --------
Revenue for the year............................ $ 3,898 $ 12,143 $ 16,041
Income (loss) before income tax provision for
the year....................................... (2,325) 4,956 2,631
Assets employed at year-end..................... 59,943 44,067 104,010
Depreciation and amortization for the year...... 120 501 621
Capital expenditures for the year............... 276 628 904
1995
---------------------------
MORTGAGE
BANKING FINANCING TOTAL
------- --------- --------
Revenue for the year............................ $ 4,207 $ 5,638 $ 9,845
Income (loss) before income tax provision for
the year....................................... (1,128) 1,942 814
Assets employed at year-end..................... 49,201 24,935 74,136
Depreciation and amortization for the year...... 92 342 434
Capital expenditures for the year............... 56 467 523
17. EARNINGS PER SHARE
In December 1997, the Company adopted SFAS No. 128, Earnings Per Share,
which supersedes APB Opinion No. 15, Earnings Per Share. All prior periods
presented have been restated to reflect the computation of earnings per share
under SFAS No. 128.
SFAS No. 128 requires computation of EPS using basic and diluted
methodologies. Basic EPS excludes any dilution and is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if common stock equivalents were exercised and
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
96
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
A reconciliation of the numerators and denominators used in basic and
diluted EPS computations is as follows (in thousands, except per share data):
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Year ended December 31, 1997:
Net earnings applicable to earnings
per share............................ $12,700
-------
Basic earnings per share--
Earnings available to common
stockholders......................... 12,700 4,885 $2.60
=====
Effect of dilutive securities--
Stock option plans.................... 223
------- -----
Diluted earnings per share--
Earnings available to common
stockholders plus assumed
conversions.......................... $12,700 5,108 $2.49
======= ===== =====
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Year ended December 31, 1996:
Net earnings applicable to earnings
per share............................ $ 1,505
-------
Basic and diluted earnings per share--
Earnings available to common
stockholders......................... $ 1,505 2,371 $0.63
======= ===== =====
Year ended December 31, 1995:
Net earnings applicable to earnings
per share............................ $ 520
-------
Basic and diluted earnings per share--
Earnings available to common
stockholders......................... $ 520 1,866 $0.28
======= ===== =====
97
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
18. PARENT COMPANY FINANCIAL INFORMATION
The following presents the unconsolidated financial statements of the parent
company only, LIFE Financial Corporation (Note 1) as of December 31 (in
thousands):
LIFE FINANCIAL CORPORATION (PARENT COMPANY ONLY)
1997 1996
------- ------
STATEMENTS OF FINANCIAL CONDITION
ASSETS:
Cash and cash equivalents..................................... $ 933 $ --
Restricted cash............................................... 12,339
Residual assets............................................... 40,746
Investment in subsidiaries.................................... 21,552 9,273
Other assets.................................................. 886
------- ------
TOTAL ASSETS................................................ $76,456 $9,273
======= ======
LIABILITIES:
Other borrowings.............................................. $15,537
Accounts payable and other liabilities........................ 6,100
------- ------
TOTAL LIABILITIES............................................. 21,637
------- ------
TOTAL STOCKHOLDERS' EQUITY.................................... 54,819 9,273
------- ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $76,456 $9,273
======= ======
LIFE FINANCIAL CORPORATION (PARENT COMPANY ONLY)
1997 1996 1995
------- ------ ----
STATEMENTS OF OPERATIONS
INTEREST INCOME............................................ $ 151 $ -- $--
INTEREST EXPENSE........................................... 80
------- ------ ----
Net interest income...................................... 71
NONINTEREST INCOME......................................... 12,997
NONINTEREST EXPENSE........................................ 1,308
EQUITY IN NET EARNINGS OF SUBSIDIARIES..................... 5,796 1,505 520
------- ------ ----
EARNINGS BEFORE INCOME TAX EXPENSE......................... 17,556 1,505 520
INCOME TAX EXPENSE......................................... 4,856
------- ------ ----
NET EARNINGS............................................... $12,700 $1,505 $520
======= ====== ====
98
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
LIFE FINANCIAL CORPORATION (PARENT COMPANY ONLY)
SUMMARY STATEMENT OF CASH FLOWS
1997 1996 1995
--------- ------- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings....................................... $ 12,700 $ 1,505 $ 520
Adjustments to reconcile net earnings to cash pro-
vided by operating activities:
Gain on sale and securitization of loans held for
sale............................................ (11,382)
Purchase of loans held for sale, net of loan
fees............................................ (324,795)
Proceeds from sales and securitization of loans
held for sale................................... 307,337
Net accretion of residual assets................. (1,334)
Increase in restricted cash...................... (3,071)
Net unrealized loss on residual assets........... (1,606)
Increase in accounts payable and other
liabilities..................................... 6,100
Increase in other assets......................... (886)
Equity in net earnings of subsidiaries........... (5,796) (1,505) (520)
--------- ------- -----
Net cash used in operating activities.......... (22,733)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of residual assets and restricted cash
from the Bank..................................... (23,127)
Cash received on residual assets................... 4,891
Capital contributions to subsidiaries.............. (6,481)
--------- ------- -----
Net cash used in investing activities.......... (24,717)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from other borrowings................. 15,537
Net proceeds from issuance of common stock......... 32,846
--------- ------- -----
Net cash provided by financing activities...... 48,383
--------- ------- -----
NET INCREASE IN CASH AND CASH EQUIVALENTS.......... 933
CASH AND CASH EQUIVALENTS, beginning of year.......
--------- ------- -----
CASH AND CASH EQUIVALENTS, end of year............. $ 933 $ -- $ --
========= ======= =====
99
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results for the years ended December
31:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
1997:
Interest income............................... $2,304 $4,151 $5,697 $8,975
Interest expense.............................. 1,561 2,460 3,080 5,729
Provision for estimated loan losses........... 500 400 950
Noninterest income............................ 6,085 3,398 8,702 13,100
Net earnings.................................. 2,242 1,522 3,931 5,005
Earnings per share:
Basic....................................... .70 .47 .60 .76
Diluted..................................... .70 .44 .57 .73
1996:
Interest income............................... $1,662 $1,691 $1,569 $2,007
Interest expense.............................. 929 926 844 1,067
Provision for estimated loan losses........... 68 40 251 604
Noninterest income............................ 1,040 1,432 1,791 4,849
Net earnings.................................. 105 61 2 1,337
Earnings per share:
Basic....................................... .06 .03 .00 .42
Diluted..................................... .06 .03 .00 .42
20. SUBSEQUENT EVENT
On March 11, 1998, the Company entered into an agreement and plan of merger
(Merger Agreement) with FIRSTPLUS Financial Group, Inc. (FIRSTPLUS). The
Merger Agreement provides for the merger of the Company with and into
FIRSTPLUS, with FIRSTPLUS as the surviving corporation. The Merger Agreement
is subject to the receipt of regulatory approval and the approval of the
shareholders of the Company. Under the Merger Agreement, at the effective date
of the merger, each outstanding share of Company common stock will be
converted into the right to receive between 0.500 and 0.667 share of FIRSTPLUS
common stock.
100
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 28, 1998,
which will be filed with the Securities and Exchange Commission within 120
days after the end of the Registrant's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation and directors'
compensation is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 28, 1998,
excluding the Stock Performance Graph and Compensation Report. The Proxy
Statement will be filed within 120 days after the end of the Registrant's
fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 28, 1998,
which will be filed within 120 days after the end of the Registrant's fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for
the Annual Meeting of Stockholders to be held on May 28, 1998, which will be
filed within 120 days after the end of the Registrant's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are included herein
at Item 8.
(2) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated
financial statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report:
3.1 Certificate of Incorporation of LIFE Financial Corporation*
3.2 Bylaws of LIFE Financial Corporation*
4.0 Stock Certificate of LIFE Financial Corporation*
21.0 Subsidiary information is incorporated herein by reference to "Part
I--Subsidiaries"
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Grant Thornton LLP
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None.
- --------
* Incorporated herein by reference into this document from the Exhibits to
Form S-4 Registration Statement, filed on January 27, 1997 and any
amendments thereto, Registration No. 333-20497.
101
SIGNATURES
Pursuant to the requirements of Section 13 the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
LIFE FINANCIAL CORPORATION
/s/ Daniel L. Perl
By: _________________________________
Daniel L. Perl
President and Chief Executive
Officer
DATED:
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Daniel L. Perl President and Chief March 30, 1998
____________________________________ Executive Officer
Daniel L. Perl (principal executive
officer)
/s/ L. Bruce Mills, Jr. Executive Vice President and March 30, 1998
____________________________________ Chief Financial Officer
L. Bruce Mills, Jr. (principal financial and
accounting officer)
/s/ Ronald G. Skipper Chairman of the Board March 30, 1998
____________________________________
Ronald G. Skipper
/s/ John D. Goddard Director March 30, 1998
____________________________________
John D. Goddard
/s/ Milton E. Johnson Director March 30, 1998
____________________________________
Milton E. Johnson
/s/ Robert K. Riley Director March 30, 1998
____________________________________
Robert K. Riley
102