United States Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number 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, RIVERSIDE, CALIFORNIA 92505
- --------------------------------------------------------------------------------
(909) 637 - 4000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.
[X] Yes [_] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 6,555,896 shares of common
stock, par value $0.01 per share, were outstanding as of August 14, 1998.
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 Consolidated Statements of Financial Condition:
June 30, 1998 and December 31, 1997 (unaudited).............. 1
Consolidated Statements of Operations:
For the Six months ended June 30, 1998 and 1997 and for the
Three months ended June 30, 1998 and 1997 (unaudited)........ 2
Consolidated Statements of Cash Flows:
For the Six months ended June 30, 1998 and 1997 (unaudited).. 3
Notes to Consolidated Financial Statements (unaudited)....... 4
Item 2 Management's Discussion and Analysis of
Results of Operations and Financial Condition................ 7
Item 3 Quantitative and Qualitative Disclosures About Market Risk... 17
PART II OTHER INFORMATION
Item 1 Legal Proceedings............................................ 18
Item 2 Changes in Securities and Use of Proceeds.................... 18
Item 3 Defaults Upon Senior Securities.............................. 18
Item 4 Submission of Matters to a Vote of Security Holders.......... 18
Item 5 Other Information............................................ 18
Item 6 Exhibits and Reports on Form 8-K............................. 18
ii
Item 1. Financial Statements.
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
(UNAUDITED)
June 30, December 31,
1998 1997
---- ----
ASSETS
Cash and cash equivalents............................ $ 22,865 $ 11,503
Restricted cash...................................... 12,803 12,339
Securities held to maturity, estimated fair value of
$4,022 and $5,030 at June 30, 1998 and December 31,
1997................................................ 4,008 5,012
Residual assets, at fair value....................... 42,062 40,746
Loans held for sale.................................. 333,859 272,655
Loans held for investment - net of allowance for
loan losses of $1,719 and $2,573 at June 30, 1998
and December 31, 1997............................... 27,686 29,076
Warehouse financing receivable....................... 1,972 16,613
Mortgage servicing rights, - net..................... 9,313 8,526
Accrued interest receivable.......................... 2,897 2,638
Foreclosed real estate - net......................... 2,065 1,440
Premises and equipment - net......................... 6,756 4,764
Federal Home Loan Bank stock......................... 2,396 1,067
Other assets......................................... 3,755 5,406
-------- --------
TOTAL ASSETS.................................... $472,437 $411,785
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts...................................... $263,106 $211,765
Federal Home Loan Bank advances....................... - 9,000
Other borrowings...................................... 106,534 100,170
Subordinated debentures............................... 10,000 10,000
Accounts payable and other liabilities................ 33,079 26,031
-------- --------
Total liabilities................................ 412,719 356,966
COMMITMENTS AND CONTINGENCIES......................... - -
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; 6,555,896 (1998) and 6,546,716
(1997) shares issued and outstanding................. 66 65
Additional paid-in capital............................ 42,201 42,171
Retained earnings, partially restricted............... 17,451 12,583
-------- --------
Total stockholders' equity....................... 59,718 54,819
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $472,437 $411,785
======== ========
See accompanying notes to unaudited consolidated financial statements.
1
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
---- ---- ---- ----
Interest Income:
Loans $ 7,941 $ 3,313 $ 15,362 $ 5,185
Residual assets 1,438 388 2,731 561
Securities held to maturity 73 113 147 219
Other interest-earning assets 643 338 1,231 491
--------- ---------- ---------- -----------
Total interest income 10,095 4,152 19,471 6,456
--------- ---------- ---------- -----------
Interest Expense:
Deposit accounts 3,612 1,864 6,881 3,181
Federal Home Loan Bank
advances and other borrowings 1,593 247 3,322 420
Subordinated debentures 349 349 691 420
Total interest expense --------- ---------- ---------- -----------
5,554 2,460 10,894 4,021
--------- ---------- ---------- -----------
Net Interest Income Before Provision
for loan losses 4,541 1,692 8,577 2,435
Provision for loan losses -- -- 1,630 500
--------- ---------- ---------- -----------
Net Interest Income After Provision
for loan losses 4,541 1,692 6,947 1,935
Non-interest Income:
Loan servicing and other fees 1,915 75 2,967 195
Service charges on deposit accounts 34 31 73 61
Net gains from mortgage financing
operations 1,856 3,192 9,925 9,069
Other income 125 100 290 158
--------- ---------- ---------- -----------
Total non-interest income 3,930 3,398 13,255 9,483
--------- ---------- ---------- -----------
Non-interest Expense:
Compensation and benefits 2,550 1,475 5,527 3,057
Premises and occupancy 850 250 1,481 473
Data processing 344 160 648 295
Net loss on foreclosed real estate 104 6 186 69
FDIC insurance premiums 34 21 60 39
Marketing 669 54 999 122
Telephone 276 132 493 217
Professional services 517 74 811 132
Other expense 1,019 307 1,535 567
---------- ---------- ---------- -----------
Total non-interest expense 6,363 2,479 11,740 4,971
---------- ---------- ---------- -----------
Income Before Provision for tax
expense 2,108 2,611 8,462 6,447
Provision for tax expense 957 1,088 3,594 2,682
---------- ---------- ---------- -----------
Net Income $ 1,151 $ 1,523 $ 4,868 $ 3,765
========== ========== ========== ===========
Basic earnings per share $ 0.18 $ 0.47 $ 0.74 $ 1.17
========== ========== ========== ==========
Basic weighted average shares
outstanding 6,550,852 3,243,584 6,548,789 3,227,738
========== ========== ========== ==========
Diluted earnings per share $ 0.17 $ 0.47 $ 0.71 $ 1.17
========== ========== ========== ==========
Diluted weighted average shares 6,904,438 3,243,584 6,875,099 3,227,738
outstanding ========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
2
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
Six months ended
June 30,
------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,868 $ 3,765
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 779 213
Provision for estimated loan losses 1,630 500
(Accretion) amortization of deferred fees 4 (158)
Provision for estimated losses of foreclosed real estate 32 38
Loss (gain) on sale of foreclosed real estate, net 56 (27)
Gain on sale and securitization of loans held for sale (16,605) (7,205)
Unrealized gain (loss) on residual assets 3,734 (692)
Net accretion of residual assets (2,643) (1,354)
Valuation allowance on mortgage servicing rights 381 17
Amortization of mortgage servicing rights 1,137 433
Purchase and origination of loans held for sale, net of loan fees (562,553) (158,429)
Proceeds from sales and securitization of loans held for sale 484,907 83,163
Increase in restricted cash (464) (7,888)
Decrease in warehouse financing receivable 14,641 -
Increase in accrued interest receivable (259) (539)
Increase in accounts payable and other liabilities 7,048 1,298
Federal Home Loan Bank stock dividend (32) (26)
Decrease (increase) in other assets 1,651 (146)
--------- ---------
Net cash used in operating activities (61,688) (87,037)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments on loans 28,785 6,569
Proceeds from sale of foreclosed real estate 1,004 385
Purchase of securities held to maturity - (1,000)
Proceeds from maturities of securities held to maturity 1,000 1,000
Additions to premises and equipment (2,740) (1,312)
Purchase of Federal Home Loan Bank stock (1,297) (195)
Cash (paid) received on residual assets (2,407) 1,594
--------- ---------
Net cash provided by investing activities 24,345 7,041
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 51,341 50,808
Proceeds from (repayments of) other borrowings 6,364 (3,278)
Net proceeds from issuance of common stock - 28,708
Repayment of Federal Home Loan Bank advances (9,000) -
Net proceeds from issuance of subordinated debentures - 9,644
--------- ---------
Net cash provided by financing activities 48,705 85,882
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,362 5,886
CASH AND CASH EQUIVALENTS, beginning of period 11,503 13,265
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 22,865 $ 19,151
========= =========
3
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $11,124 $3,113
======= ======
Income taxes paid $ - $3,523
======= ======
NONCASH INVESTING ACTIVITIES DURING THE PERIOD:
Transfers from loans to foreclosed real estate $ 1,730 $1,089
======= ======
Loans to facilitate sales of foreclosed real estate $ - $ 166
======= ======
See accompanying notes to unaudited consolidated financial statements.
- ----------------------------------------------------------------------
LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(UNAUDITED)
1. Basis of Presentation:
----------------------
The consolidated financial statements include the accounts of LIFE
Financial Corporation (the "Company") and its subsidiaries, LIFE Bank (formerly
Life Savings Bank, Federal Savings Bank), (the "Bank") and Life Investment
Holdings, Inc. All material intercompany accounts and transactions have been
eliminated in consolidation.
The Company 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, the Company issued 3,211,716 shares of common stock in
exchange for the 1,070,572 shares of the Bank's outstanding common stock. 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 (the "IPO"). On July 2, 1997, the Company issued 435,000 shares of
common stock to the public through the exercise of the underwriter's over-
allotment option, bringing the total shares outstanding to 6,546,716. The
consolidated financial condition and results of operations of the Company for
the periods prior to the date of Reorganization consist of those of the Bank.
Since the Reorganization and the IPO, the Company has purchased residual
assets, restricted cash and the subordinated debentures from the Bank.
The Bank is a federally chartered stock savings bank whose primary business
is the origination and sale of high loan-to-value second trust deeds, sub-prime
one-to-four family residential mortgage loans and, to a much lesser extent,
multi-family residential and commercial real estate loans. The Company's
revenues are derived from gains from mortgage financing operations and net
interest on its loans and residual assets. The primary sources of funds for the
Company have been from deposits, Federal Home Loan Bank ("FHLB") advances, $275
million in lines of credit from two major investment banks, a $40 million
residual financing line of credit, as well as from loan sales and
securitizations. As of June 30, 1998, the Bank had three depository branch
offices in San Bernardino, Riverside and Redlands, California, nine retail
lending offices in Southern California, four regional loan centers located in
Riverside, California, Jacksonville, Florida, the Boston, Massachusetts area and
the Denver, Colorado metropolitan area, a telemarketing center located in
Riverside, California and a capital markets group located in Seattle,
Washington.
4
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all necessary adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation, have been included. Certain reclassifications have been made to
the consolidated financial statements for 1997 to conform to the 1998
presentation. The results of operations for the three and six month periods
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the entire fiscal year.
2. Approved Stock Compensation Plans
---------------------------------
On November 21, 1996, the Board of Directors of the Bank adopted the Life
Bank 1996 Stock Option Plan (the "1996 Option Plan") which was approved by the
stockholders of the Bank at the Annual Meeting of Stockholders of the Bank, held
on May 21, 1997. The 1996 Option Plan authorizes the granting of options equal
to 321,600 (adjusted for the three for one exchange) 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,
non-statutory stock options and limited rights which are exercisable only upon
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 non-
employee directors are non-statutory options. All 1996 options were granted at
an exercise price of $3.33 per share (adjusted for the three for one exchange).
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. At December 31, 1997,
there were 27,540 options held by three retired directors which were
exercisable. On May 20, 1998, 9,180 options were exercised; the remaining 18,360
options are held by two retired directors as of June 30, 1998.
The Board of Directors of the Company has 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. 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. Through June 30, 1998, 201,000
shares of the 1997 Option Plan were granted at exercise prices ranging from
$11.00 to $18.50 per share. The options granted under the 1997 Option Plan will
vest at a rate of 33.3% per year, beginning on June 30, 2000. Under the 1997
Option Plan, there were 17,500 options at December 31, 1997 and June 30, 1998
held by one retired director which were exercisable.
3. Comprehensive Income
--------------------
The Company adopted Statement Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" effective with the fiscal year beginning
January 1, 1998. 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 retained earnings, paid-in capital in the equity section of the
statement of financial position. The Company has no differences between net
income and comprehensive income as of and for the six months ended June 30,
1998 and the six months ended June 30, 1997.
5
4. Earnings Per Share
------------------
The Company adopted effective December 31, 1997, 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 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 calculation 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 following table is a reconciliation of the numerators and denominators
of the basic and diluted EPS computations for the net earnings for the Company
(dollars in thousands, except share data):
For the three months ended June 30,
-----------------------------------
1998 1997
----------------------------------------- ------------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- -------------- -------- ----------- -------------- --------
Net Earnings $1,151 $1,523
====== ======
Basic EPS Earnings available
to common stockholders $1,151 6,550,852 $0.18 $1,523 3,243,584 $0.47
===== =====
Effect of Dilutive Securities
Options - 353,586 - -
------ --------- ------ ---------
Diluted EPS Earnings available
to common stockholders plus
assumed conversions $1,151 6,904,438 $0.17 $1,523 3,243,584 $0.47
====== ========= ===== ====== ========= =====
For the six months ended June 30,
---------------------------------
1998 1997
----------------------------------------- ------------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- -------------- -------- ----------- -------------- --------
Net Earnings $4,868 $3,765
====== ======
Basic EPS Earnings available
to common stockholders $4,868 6,548,789 $0.74 $3,765 3,227,738 $1.17
===== =====
Effect of Dilutive Securities
Options - 326,310 - -
------ --------- ------ ---------
Diluted EPS Earnings available
to common stockholders plus
assumed conversions $4,868 6,875,099 $0.71 $3,765 3,227,738 $1.17
====== ========= ===== ====== ========= =====
6
5. FIRSTPLUS Financial Group Merger
--------------------------------
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. This
transaction is subject to the approval of the Office of Thrift Supervision
("OTS") and certain regulatory agencies. An application for approval of the
transaction has been filed by FIRSTPLUS with the OTS and is pending. The
transaction is also subject to the approval of the stockholders of both the
Company and FIRSTPLUS. A registration statement and joint proxy is expected to
be filed with the Securities and Exchange Commission ("SEC") shortly.
6. Recent Accounting Pronouncements
--------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information".
SFAS No. 131 establishes standards of reporting by publicly held business
enterprises and requires disclosures for each segment that are similar to those
required under current 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 the fiscal years beginning after
December 15, 1997 with earlier application permitted. The Company does not
anticipate the adoption of SFAS No. 131 will have a material impact on its
financial reporting.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
adoption of this standard is not expected to have a material effect on the
Company's financial condition, results of operation and cash flows.
Item 2. Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------
Financial Condition
-------------------
This Management's Discussion and Analysis should be read in
conjunction with the Management's Discussion and Analysis contained in the
Company's Annual Report on Form 10-K, which focuses upon relevant matters
occurring during the year ended December 31, 1997. Accordingly, the ensuing
discussion focuses upon the material matters at and for the three months and six
months ended June 30, 1998.
GENERAL
- -------
The Company is involved in the origination, purchase, sale and servicing of
non-conventional mortgage loans principally secured by first and second mortgage
loans on one- to four-family residences. The Company has focused on Liberator
Series loans which are for the purchase or refinance of residential real
property by borrowers who may have had prior credit problems or who do not have
an adequate credit history, and are considered "sub-prime borrowers," or loans
which have other non-conforming features. In addition, the Company has
originated a substantial number of Portfolio Series loans which are debt
consolidation loans for borrowers whose credit history qualify for Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") loans ("Agency Qualified Borrowers"). The Company
purchases and originates mortgage loans and other real estate secured loans
through a network of approved correspondents and independent mortgage brokers
("Originators") throughout the country. The Company funds substantially all of
the loans which it originates or purchases through deposits, internally
generated funds, FHLB advances and various lines of credit. 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
7
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.
RESULTS OF OPERATIONS
- ---------------------
Net income was $1.2 million for the three months ended June 30, 1998
compared to $1.5 million for the three months ended June 30, 1997, a decrease of
$372,000. For the six months ended June 30, 1998, the Company recorded net
income of $4.9 million compared to $3.8 million for the six months ended June
30, 1997. For the three months ended June 30, 1998 and June 30, 1997, the
diluted earnings per share were $0.17 and $0.47, respectively. The diluted
earnings per share for the six months ended June 30, 1998 were $0.71 compared to
$1.17 for the six months ended June 30, 1997. The decrease in earnings per
share was primarily attributable to an increase in shares outstanding due to the
completion of the Company's IPO on June 30, 1997.
Interest Income
- ---------------
Interest income was $10.1 million for the three months ended June 30, 1998
compared to $4.2 million for the three months ended June 30, 1997 due primarily
to an increase in the average balance of interest-earning assets offset
partially by a slight decline in the yield on those assets. Average interest-
earnings assets increased to $406.3 million for the three months ended June 30,
1998 compared to $166.3 million for the three months ended June 30, 1997. The
yield on interest-earning assets decreased to 9.94% for the three months ended
June 30, 1998 compared to 9.99% for the three months ended June 30, 1997. The
largest single component of interest-earning assets was loans receivable, net,
which were $310.9 million with a yield of 10.22% for the three months ended June
30, 1998 compared to $124.9 million with a yield of 10.61% for the three months
ended June 30, 1997. The increase in average loans receivable, net was due to
an increase in loans held-for-sale. Loans held-for-sale were $333.9 million as
of June 30, 1998 compared to $99.4 million as of June 30, 1997.
Interest income for the six months ended June 30, 1998 was $19.5 million,
compared to $6.5 million for the six months ended June 30, 1997, 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 $400.2 million for the six months ended June 30, 1998 compared to
$144.1 million for the six months ended June 30, 1997. The yield on interest-
earning assets increased to 9.73% for the six months ended June 30, 1998
compared to 8.96% for the six months ended June 30, 1997. The largest single
component of interest-earning assets was loans receivable, net, which were
$309.1 million with a yield of 9.94% for the six months ended June 30, 1998,
compared to $112.0 million with a yield of 9.26% for the six months ended June
30, 1997.
Interest Expense
- ----------------
Interest expense increased to $5.6 million for the three months ended June
30, 1998 compared to $2.5 million for the three months ended June 30, 1997 due
primarily to an increase in the average interest-bearing liabilities. Reliance
on certificate accounts and an increased usage of the various lines of credit
resulted in an decrease in the average cost of interest-bearing liabilities to
6.04% for the three months ended June 30, 1998 compared to 6.05% for the three
months ended June 30, 1997. Average interest-bearing liabilities were $368.8
million for the three months ended June 30, 1998 compared to $163.2 million for
the three months ended June 30, 1997. The largest component of average
interest-bearing liabilities was certificate accounts, which averaged $234.4
million with a cost of 5.93% for the three months ended June 30, 1998, compared
to $118.6 million with a cost of 5.92% for the three months ended June 30, 1997.
8
The second largest component of average interest-bearing liabilities is
borrowings, which increased to an average balance of $106.3 million with a cost
of 7.33% for the three months ended June 30, 1998 compared to $26.6 million with
a cost of 8.97% for the three months ended June 30, 1997. In addition to the
subordinated debentures (Debentures) which were issued during 1997, the Company
began utilizing two warehouse lines of credit and a residual financing line for
total lines of $315 million which are indexed to London Interbank Offering Rate
index ("LIBOR").
For the six months ended June 30, 1998, interest expense was $10.9 million
compared to $4.0 million for the six months ended June 30, 1997 due to an
increase in the average interest-bearing liabilities combined with an increase
in the rate paid on those liabilities. On March 14, 1997, the Company issued
$10 million in Debentures through a private placement and pursuant to a
Debenture Purchase Agreement. The Debentures mature on March 15, 2004 and bear
interest at a rate of 13.5% per annum, payable semi-annually. The Debentures
are redeemable at the option of the Company, 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. This issuance of debentures, combined with an
increased reliance on certificate accounts and other borrowings, resulted in an
increase in the average cost of interest-bearing liabilities to 6.11% for the
six months ended June 30, 1998 compared to 5.75% for the six months ended June
30, 1997. Average interest-bearing liabilities were $359.6 million for the six
months ended June 30, 1998 compared to $141.0 million for the six months ended
June 30, 1997.
The largest component of average interest-bearing liabilities was
certificate accounts, which averaged $223.9 million with a cost of 5.94% for the
six months ended June 30, 1998 compared to $102.6 million with a cost of 5.83%
for the six months ended June 30, 1997. The second largest component of average
interest-bearing liabilities is borrowings, which increased to an average
balance of $110.6 million with a cost of 7.32% for the six months ended June 30,
1998 compared to $21.0 million with a cost of 8.06% for the six months ended
June 30, 1997. This decline in the cost of borrowings is reflective of the
higher proportional average balance of the warehouse lines of credit to the
average balance of the subordinated debt during the six months ended June 30,
1998.
Net Interest Income Before Provision for Loan Losses
- ----------------------------------------------------
Net interest income before provision for loan losses for the three months
ended June 30, 1998 was $4.5 million compared to $1.7 million for the three
months ended June 30, 1997. This increase is the net effect of an increase in
average interest-earning assets and average interest-bearing liabilities as well
as an increase in the net interest margin and an increase in the ratio of
interest-earning assets to interest-bearing liabilities. Average interest-
earning assets increased to $406.3 million with a yield of 9.94% for the three
months ended June 30, 1998 compared to $166.3 million with a yield of 9.99% for
the three months ended June 30, 1997. Average interest-bearing liabilities
increased to $368.8 million with a cost of 6.04% for the three months ended June
30, 1998 compared to $163.2 million with a cost of 6.05% for the three months
ended June 30, 1997. The net interest margin increased to 4.47% for the three
months ended June 30, 1998 compared to 4.07% for the three months ended June 30,
1997. The ratio of interest-earning assets to interest-bearing liabilities was
110.16% for the three months ended June 30, 1998 compared to 101.94% for the
three months ended June 30, 1997.
Net interest income before provision for loan losses for the six months
ended June 30, 1998 was $8.6 million compared to $2.4 million for the six months
ended June 30, 1997. This increase is the net effect of an increase in average
interest-earning assets and average interest-bearing liabilities, an increase in
the net interest margin and the ratio of interest-earning assets to interest-
bearing liabilities. Average interest-earning assets increased to $400.2 million
for the six months ended June 30, 1998 compared to $144.1 million for the six
months ended June 30, 1997. Average interest-bearing liabilities increased to
$359.6 million with a cost of 6.11% for the six months ended June 30, 1998
compared to $141.0 million with a cost of 5.75% for the six months ended June
30, 1997. The net interest margin was 4.29% for the six months ended June 30,
1998 compared to 3.38% for the six months ended June 30, 1997. The ratio of
interest-earning assets to interest-bearing liabilities was 111.26% for the six
months ended June 30, 1998 compared to 102.14% for the six months ended June 30,
1997.
9
Average Balance Sheets. The following tables set forth certain information
- ----------------------
relating to the Company for the three month and six month periods ended June 30,
1998 and 1997. 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.
Three months ended Three months ended Six months ended
June 30, 1998 June 30, 1997 June 30, 1998
---------------------------- ------------------------------ -----------------------------
(Dollars in thousands)
Average Average Average Average Average Average
Balance Interest Yield/Cst Balance Interest Yield/Cst Balance Interest Yield/Cst
-------- -------- --------- -------- -------- --------- -------- -------- ---------
Assets:
Interest-earning assets:
Interest-earning deposits
and short-term investments $ 45,380 $ 618 5.46% $ 19,653 $ 325 6.63% $ 43,084 $ 1,190 5.57%
Investment securities(1) 7,111 98 5.53 9,026 126 5.60 6,599 188 5.75
Loans receivable, net(2) 310,912 7,941 10.22 124,944 3,313 10.61 309,082 15,362 9.94
Mortgage-backed securities,
net(1) 8 - 0.00 9 - 0.00 10 - 0.00
Residual assets 42,857 1,438 13.42 12,681 388 12.24 41,388 2,731 13.20
-------- ------- -------- -------- -------- -------
Total interest-earning assets 406,268 10,095 9.94 166,313 4,152 9.99 400,163 19,471 9.73
------- -------- -------
Non-interest-earning assets(3) 40,717 11,142 38,616
-------- -------- --------
Total assets(3) $446,985 $177,455 $438,779
======== ======== ========
Liabilities and Equity:
Interest-bearing liabilities:
Passbook accounts 4,067 25 2.47 $4,089 22 2.16 $4,037 48 2.40
Money market accounts 3,426 42 4.92 2,950 22 2.99 3,126 73 4.71
Checking accounts 20,691 82 1.59 10,842 70 2.59 18,028 162 1.81
Certificate accounts 234,364 3,463 59.3 118,624 1,750 5.92 223,906 6,598 5.94
-------- ------- -------- -------- -------- -------
Total deposit accounts 262,548 3,612 5.52 136,505 1,864 5.48 249,097 6,881 5.57
Borrowings 106,257 1,942 7.33 26,645 596 8.97 110,552 4,013 7.32
-------- ------- -------- -------- -------- -------
Total interest-bearing
liabilities 368,805 5,554 6.04 163,150 2,460 6.05 359,649 10,894 6.11
------- -------- -------
Non-interest-bearing
liabilities(3) 19,015 1,845 21,485
-------- -------- --------
Total liabilities(3) 387,820 164,995 381,134
Equity(3) 59,165 12,460 57,645
-------- -------- --------
Total liabilities and
equity(3) $446,985 $177,455 $438,779
======== ======== ========
Net interest income before
provision for loan losses $ 4,541 $ 1,692 $ 8,577
======= ======== =======
Net interest rate spread(4) 3.90 3.94 3.62
Net interest margin(5) 4.47 4.07 4.29
Ratio of interest-earning assets
to interest-bearing liabilities 110.16% 101.94% 111.26%
Six months ended
June 30, 1997
-----------------------------
Average Average
Balance Interest Yield/Cst
-------- -------- ---------
Assets:
Interest-earning assets:
Interest-earning deposits
and short-term investments $ 14,314 $ 465 6.55%
Investment securities(1) 8,828 245 5.60
Loans receivable, net(2) 111,989 5,185 9.26
Mortgage-backed securities,
net(1) 10 - 0.00
Residual assets 8,926 561 12.57
-------- ------
Total interest-earning assets 144,067 6,456 8.96
------
Non-interest-earning assets(3) 10,475
--------
Total assets(3) 154,542
========
Liabilities and Equity:
Interest-bearing liabilities:
Passbook accounts $ 4,025 42 2.10
Money market accounts 2,987 44 2.97
Checking accounts 10,426 131 2.53
Certificate accounts 102,575 2,964 5.83
-------- ------
Total deposit accounts 120,013 3,181 5.35
Borrowings 21,029 840 8.06
-------- ------
Total interest-bearing
liabilities 141,042 4,021 5.75
------
Non-interest-bearing
liabilities(3) 2,452
--------
Total liabilities(3) 143,494
Equity(3) 11,048
--------
Total liabilities and
equity(3) 154,542
========
Net interest income before
provision for loan losses $2,435
======
Net interest rate spread(4) 3.21
Net interest margin(5) 3.38
Ratio of interest-earning assets
to interest-bearing liabilities 102.14%
_________________________
(1) Includes unamortized discounts and premiums.
(2) Amount is net of deferred loan origination fees, unamortized discounts,
premiums and allowance for loan losses and includes loans held-for-sale,
non-performing loans and warehouse financing receivable.
(3) Average balances are measured on a month-end-basis.
(4) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
10
Provision for Loan Losses
- -------------------------
The allowance for loan losses is based upon a number of factors, including
current economic conditions, actual loss experience and industry trends. The
Company's non-performing loans consist of one- to-four family residential
mortgage loans and consumer loans. Management believes that the allowance for
loan losses at June 30, 1998 and 1997 was adequate to absorb known and inherent
risks in the Company's loan portfolio. Based on management's analysis, there
were no provisions for loan losses for the three month periods ended June 30,
1998 and June 30, 1997.
Provisions for loan losses were $1.6 million for the six months ended June
30, 1998 compared to $500,000 for the six months ended June 30, 1997. The
increase in provisions was based on an estimate of charge offs for the six
months ended June 30, 1998 combined with a re-evaluation of the composition of
the Company's loan portfolio. (See "Financial Condition")
Non-Interest Income
- -------------------
Net gains from mortgage financing operations for the three months ended
June 30, 1998 totaled $1.9 million, compared to $3.2 million for the quarter
ended June 30, 1997. This decrease was attributable to a pre-tax $3.5 million
mark-to-market write down of residual assets partially offset by an increase in
the level of mortgage financing operations, with loans sold and securitized
totaling $173.1 million, all of which were whole loan sales during the three
months ended June 30, 1998, compared to loans sold and securitized totaling
$93.2 million (including $73.3 million in whole loan sales) for the three months
ended June 30, 1997. The write down of residual assets was directly the result
of a decline in interest rates and a corresponding increase in prepayments
speeds associated with the 1996-1, 1997-1A and 1B and 1997-2 securitizations
which were issued respectively in December 1996, March 1997 and September 1997.
At June 30, 1998, the Company utilized prepayment assumptions ranging from 17%
to 45%, an estimated loss factor assumption ranging from 0.50% to 2.50% and a
weighted average discount rate of 13.5% to value residual assets. Net gains from
mortgage financing operations as a percent of loans sold or securitized
(excluding the effect of the $3.5 million write down) was 3.09% for the three
months ended June 30, 1998, as compared to 3.43% for the three months ended June
30, 1997. This decrease in percentage reflected the effects of the
securitization of loans compared to whole loan sales. During the three months
ended June 30, 1998, $154.3 million of the $173.1 million (or 89.2%) of loans
was sold to FIRSTPLUS of Dallas, Texas for a gain of $4.9 million. During the
three months ended June 30, 1997, gains on loans securitized totaled $1.7
million or 8.32% of such loans sold; and gains on whole loans sold totaled $1.5
million, or 2.10% of such loans sold. The gains on whole loans include the
effect of $175,000 from a hedge position entered into by the Company for the
purpose of reducing interest rate risk on fixed-rate loans and commitments to
originate fixed-rate loans prior to sale. Loans originated and purchased totaled
$308.4 million for the three months ended June 30, 1998, compared to $64.6
million for the three months ended June 30, 1997.
For the six months ended June 30, 1998, net gains from mortgage financing
operations totaled $9.9 million compared to $9.1 million for the six months
ended June 30, 1997. This increase was attributable to the increase in the
level of mortgage financing operations, with loans sold or securitized totaling
$484.9 million (including $422.4 million in whole loans sales) during the six
months ended June 30, 1998, compared to loans sold or securitized totaling
$176.4 million (including $73.3 million in whole loans sales) for the six months
ended June 30, 1997. Net gains from mortgage financing operations as a percent
of loans sold and securitized (excluding the effect of the $3.5 million write
down of residual assets) was 2.78% for the six months ended June 30, 1998
compared to 5.14% for the six months ended June 30, 1997. This decrease in
percentage reflected the effects of the securitization of loans completed in
1997 compared to primarily whole loans sales in 1998. For the six months ended
June 30, 1998, $210.5 million of the $484.9 million (or 43.4%) was sold to
FIRSTPLUS for a gain of $6.6 million. Loans originated and purchased totaled
$562.6 million for the six months ended June 30, 1998 compared to $158.4 million
for the six months ended June 30, 1997.
Non-Interest Expense
- --------------------
Non-interest expense was $6.4 million for the three months ended June 30,
1998 compared to $2.5 million for the three months ended June 30, 1997. For the
six months ended June 30, 1998, non-interest expense was $11.7 million compared
to $5.0 million for the six months ended June 30, 1997. The increase was due
primarily to an increase in compensation and benefits and other operating
expenses resulting from the expansion of mortgage financing operations.
11
Compensation and benefits increased to $2.6 million for the three months
ended June 30, 1998 from $1.5 million for the three months ended June 30, 1997.
For the six months ended June 30, 1998, compensation and benefits were $5.5
million compared to $3.1 million for the six months ended June 30, 1997. These
costs are directly related to the expansion of the mortgage financing operations
and the corresponding increase in personnel, to an average of 289 employees for
the three months ended June 30, 1998 compared to 164 for the three months ended
June 30, 1997. Average number of employees for the six months ended June 30,
1998 were 281 compared to 154 for the six months ended June 30, 1997.
Premises and occupancy expenses increased to $850,000 for the three months
ended June 30, 1998 compared to $250,000 for the three months ended June 30,
1997, and were $1.5 million for the six months ended June 30, 1998 compared to
$473,000 for the six months ended June 30, 1997 due to the expansion of the
mortgage financing operation and the addition of the regional operating center
in Denver, Colorado metropolitan operating area, as well as the opening of the
new Corporate Headquarters and regional lending center located in Riverside,
California, and the relocation of the Florida regional office, the addition of
nine low cost retail lending offices in California, and the opening of a retail
bank branch in Riverside, California. The Company anticipates that premises and
occupancy expense will continue to increase as the Company expands into new
retail lending and retail banking offices as evidenced by the opening of a 67
seat national telemarketing center in May, 1998 in Riverside and the Redlands,
California branch opening in June, 1998; as well as, additional office space for
the expansion of the loan servicing operations in March 1998.
As a result of the expansion noted, other operating expenses increased as
well. Data processing increased to $344,000 for the three months ended June 30,
1998 compared to $160,000 for the three months ended June 30, 1997, and was
$648,000 for the six months ended June 30, 1998 compared to $295,000 for the six
months ended June 30, 1997. Marketing increased to $669,000 for the three
months ended June 30, 1998 compared to $54,000 for the three months ended June
30, 1997, and was $999,000 for the six months ended June 30, 1998 compared to
$122,000 for the six months ended June 30, 1997. The increase in marketing
reflects an increased emphasis on radio and mail advertising in order to
increase demand for mortgage banking operations. Professional services
increased to $517,000 for the three months ended June 30, 1998 compared to
$74,000 for the three months ended June 30, 1997, and was $811,000 for the six
months ended June 30, 1998 compared to $132,000 for the six months ended June
30, 1997. The increase in professional services was partially related to the
merger-related costs incurred in conjunction with the FIRSTPLUS transaction.
Telephone and other expense increased to $276,000 and $1.0 million,
respectively, for the three months ended June 30, 1998 compared to $132,000, and
$307,000 for the three months ended June 30, 1997 and were $493,000, and $1.5
million for the six months ended June 30, 1998 compared to $217,000 and $567,000
for the six months ended June 30, 1997.
Income Taxes
- ------------
The provision for income taxes decreased to $957,000 for the three months
ended June 30, 1998 compared to $1.1 million for the three months ended June 30,
1997 due to a decrease in income before income tax provision. Income before
income tax provision decreased to $2.1 million for the three months ended June
30, 1998 from $2.6 million for the three months ended June 30, 1997. The
effective tax rate increased to 45.4% for the three months ended June 30, 1998
from 41.7% for the three months ended June 30, 1997 due to $206,000 of non-tax
deductible merger-related costs expensed during the quarter.
The provision for income taxes increased to $3.6 million for the six months
ended June 30, 1998 compared to $2.7 million for the six months ended June 30,
1997. Income before income tax provision increased to $8.5 million for the six
months ended June 30, 1998 compared to $6.4 million for the six months ended
June 30, 1997. The effective tax rate increased to 42.5% for the six months
ended June 30, 1997 compared to 41.6% for the six months ended June 30, 1997 due
to the inclusion of merger-related costs during the period.
COMPARISON OF FINANCIAL CONDITION AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
- ----------------------------------------------------------------------------
Total assets increased to $472.4 million as of June 30, 1998 compared to
$411.8 million as of December 31, 1997. This increase was attributable to the
increase in loans held-for-sale during the period ended June 30, 1998 due to
increased loan originations and purchases. Loans held-for-sale totaled $333.9
million as of June 30, 1998
12
compared to $272.7 million as of December 31, 1997. Loans held-for-investment
decreased to $27.7 million as of June 30, 1998 compared to $29.1 million as of
December 31, 1997 due primarily to normal loan payment activity.
Warehouse financing receivable decreased to $2.0 million as of June 30,
1998 compared to $16.6 million as of December 31, 1997. This decline reflects
the Company's realigning this business internally during 1998 from being
externally handled during 1997.
Residual assets and restricted cash increased slightly to $42.1 million and
$12.8 million, respectively, as of June 30, 1998 compared to $40.7 million and
$12.3 million as of December 31, 1997. This increase reflects the additional
residual from the pre-fund on the 1997-3 securitization during the first quarter
offset by the residual asset write down as described above. Mortgage
servicing rights increased as a result of the loan sales with servicing retained
to $9.3 million as of June 30, 1998 compared to $8.5 million as of December 31,
1997.
Cash and cash equivalents were $22.9 million as of June 30, 1998 compared
to $11.5 million as of December 31, 1997. Cash and cash equivalents increased
by $11.4 million as of June 30, 1998 due to the timing of loan originations and
purchases. Premises and equipment increased to $6.8 million as of June 30, 1998
compared to $4.8 million as of December 31, 1997. This increase of $2.0 million
is primarily due to the loan servicing department moving to a new location and
retrofitting their previous facility in order to house the new Call Center
operation which opened in May, 1998. Real estate owned increased to $2.1
million as of June 30, 1998 compared to $1.4 million as of December 31, 1997 as
part of the Company's continuing effort to resolve problem assets.
The Company increased its liabilities by increasing deposit accounts to
$263.1 million as of June 30, 1998 compared to $211.8 million as of December 31,
1997. The major component of deposit accounts is certificates of deposit, which
increased to $243.8 million as of June 30, 1998 compared to $193.8 million as of
December 31, 1997.
The Company decreased FHLB advances and borrowings from $119.2 million at
December 31, 1997 to $116.5 million at June 30, 1998 due to the increase in
deposit accounts of $51.3 million offset by the higher loan receivable balance
as of June 30, 1998 of $59.8 million.
Accounts payable and other liabilities increased to $33.1 million as of
June 30, 1998 compared to $26.0 million as of December 31, 1997 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 $59.7 million as of June 30, 1998 from
$54.8 million as of December 31, 1997 due to the quarterly earnings of $4.9
million.
13
The Company's non-performing assets increased to $9.5 million as of June
30, 1998 compared to $6.6 million as of December 31, 1997. The increase of $2.9
million is due primarily to non-accrual loans with an increase of $3.9 million
in one- to-four family residential loans offset by a decrease of $1.6 million in
consumer loans. Non-performing loans as a percent of gross loans receivable
increased to 2.12% as of June 30, 1998 from 1.76% as of December 31, 1997. Non-
performing assets as a percent of total assets decreased to 2.02% as of June 30,
1998 from 1.59% as of December 31, 1997. The following table sets forth the
non-performing assets at June 30, 1998 and December 31, 1997:
As of As of
June 30, December 31,
1998 1997
-------- ------------
(Dollars in thousands)
Non-accrual loans $7,484 $5,126
Foreclosed real estate, net (1) 2,065 1,440
------ ------
Total non-performing assets $9,549 $6,566
====== ======
Allowance for loan losses
as a percent of gross loans
receivable(2) 0.49% 0.88%
Allowance for loan losses as
a percent of total non-performing
loans(3) 22.97 50.20
Non-performing loans as a percent of
gross loans receivable(2) 2.12 1.76
Non-performing assets as a percent of
total assets(4) 2.02 1.59
_______________
(1) Foreclosed real estate balances are shown net of related loss allowances.
(2) Gross loans receivable is comprised of loans held-for-sale and loans held-
for-investment.
(3) Non-performing loans consisted of all loans 90 days or more past due and all
other non-accrual loans.
(4) Non-performing assets is comprised of non-accrual loans and foreclosed real
estate.
The Company, in consideration of the current economic environment and the
condition of the loan portfolio, has established an allowance for loan losses as
of June 30, 1998 of $1.7 million compared to $2.6 million as of December 31,
1997. The allowance is based upon a number of factors, including current
economic conditions, actual loss experience and industry trends. The Company's
non-performing loans consist of one- to-four family residential mortgage loans
and consumer loans. Management believes that the allowance for loan losses at
June 30, 1998 was adequate to absorb known and inherent risks in the Company's
loan portfolio. No assurances can be given, however, that economic conditions
which may adversely affect the Company's or the Bank's service area or other
circumstances will not be reflected in increased losses in the loan 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 of the allowance) in anticipation of losses.
The following table sets forth the activity in the Company's allowance for
loan losses for the six months ended June 30, 1998:
(Dollars in thousands)
Balance as of December 31, 1997 $2,573
Add:
Provision for loan losses 1,630
Recoveries of previous charge-offs 4
Less:
Charge-offs 2,488
------
Balance as of June 30, 1998 $1,719
======
14
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of funds are deposits, warehouse lines of
credit, FHLB advances, 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 Company has continued to maintain the required minimum levels of
liquid assets as defined by OTS regulations. This requirement, which may be
varied at the direction of the OTS depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term borrowings.
The required ratio is currently 4%. The Bank's average liquidity ratios were
10.94% and 12.68% for the six months ended June 30, 1998 and June 30, 1997,
respectively. The Bank had $40.0 million in deposits maturing within one month
as of June 30, 1998. The Bank anticipates that it will retain a portion of these
accounts.
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 $61.7 million and
$87.0 million for the six months ended June 30, 1998 and 1997, respectively.
Such cash flows primarily consisted of loans originated and purchased for sale
(net of loan fees), of $562.6 million and $158.4 million, net of proceeds from
the sale and securitization of loans held-for-sale of $484.9 million and $83.2
million for the six months ended June 30, 1998 and 1997, respectively. Net cash
provided from investing activities were $24.3 million and $7.0 million for the
six months ended June 30, 1998 and 1997, respectively, and consisted primarily
of principal collections on loans. Proceeds from the principal collections were
$28.8 million and $6.6 million for the six months ended June 30, 1998 and 1997,
respectively. Net cash provided from financing activities consisted primarily
of net activity in deposit accounts and borrowings. The net increase in deposits
and borrowings was $48.7 million and $57.2 million for the six months ended June
30, 1998 and 1997, respectively. The Company received proceeds from the lines of
credit of $6.4 million for the six months ended June 30, 1998 and repayments of
these lines of $(3.3) million for the six months ended June 30, 1997. Net
deposits increased by $51.3 million and $50.8 million for the six months ended
June 30, 1998 and 1997, respectively. During the six months ended June 30, 1998,
the Company reduced its FHLB advances by $9.0 million and had no outstanding
advances at the period end. During the quarter ended March 31, 1997, the Company
received the proceeds of $9.6 million on the issuance of subordinated
debentures. The Company received net proceeds from the IPO of the Company's
Common Stock of $28.7 million during the quarter ended June 30, 1997.
The Company's most liquid assets are unrestricted cash and short-term
investments. The levels of these assets are dependent on the Company's
operating, lending and investing activities during any given period. At June
30, 1998, cash and short-term investments totaled $22.9 million. The Company
has other sources of liquidity if a need for additional funds arises, including
the utilization of FHLB advances. 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 $275 million of which $91.0 million had been
drawn upon at June 30, 1998. The Company has a residual financing line of credit
in the amount of $40.0 million, with an outstanding balance of $15.5 million as
of June 30, 1998.
The OTS capital regulations require savings institutions to meet three
minimum capital requirements: a 1.5% tangible capital ratio, a 3.0% leverage
(core capital) ratio and an 8.0% risk-based capital ratio. The core capital
requirement has been effectively increased to 4.0% because the prompt corrective
action legislation provides that institutions with less than 4.0% core capital
will be deemed "undercapitalized". In addition, the OTS, under the prompt
corrective action regulation, can impose various constraints on institutions
depending on their level of capitalization ranging from well-capitalized to
critically undercapitalized. As of June 30, 1998, the Bank was considered
"adequately capitalized".
15
The Bank was in compliance with the minimum capital requirements in effect
as of June 30, 1998. The following table reflects the required ratios and the
actual capital ratios of the Bank as of June 30, 1998:
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent(a)
-------- ----------- --------- ------- ----------
(Dollars in thousands)
Tangible $27,845 $16,716 $11,129 6.66% 1.50%
Core $27,845 $16,716 $11,129 6.66% 3.00%
Risk-based $29,332 $24,556 $ 4,776 9.55% 8.00%
(a) The percentages and ratios to be well-capitalized under prompt and
corrective action provisions as issued by the OTS are 10.00% for risk-based
assets, 5% for core capital and 6% for Tier I capital. At June 30, 1998, the
Bank's ratios were 9.55%, 6.66% and 9.07%, respectively.
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 quarter-end.
Under the framework, the Bank's capital levels at June 30, 1998 do not
allow the Bank to accept brokered deposits without prior approval from the
regulators. The Bank had approximately $2.5 million of brokered deposits at June
30, 1998. This is not expected to materially impact the Bank as it has other
sources of funds.
As of June 30, 1998, the Bank had outstanding commitments to originate or
purchase mortgage loans of $54.6 million compared to $29.2 million as of
December 31, 1997 due to the expansion of the mortgage financing operations.
Other than commitments to originate or purchase mortgage loans, there were no
material changes to the Company's commitments or contingent liabilities as of
June 30, 1998 compared to the period ended December 31, 1997 as discussed in the
notes to the audited consolidated financial statements of LIFE Financial
Corporation for the year ended December 31, 1997 included in the Company's
Annual Report on Form 10K.
Year 2000 Compliance: As a financial institution operating in multiple
---------------------
states, the Company is dependent on computer systems and applications to conduct
its business. The Company has developed and is currently executing a
comprehensive risk-based plan designed to make its computer systems,
applications and facilities Year 2000 ready. The plan covers five stages
including: (i) awareness, (ii) assessment, (iii) renovation (iv) validation and
(v) implementation. The Company has completed the awareness and assessment
stages for its Company-owned systems and applications. The renovation phase is
currently in process, and the Company is utilizing internal resources to test
all major systems (deposit, loan and general ledger) which are provided by a
service bureau. The renovation process is targeted to be largely completed by
December 31, 1998 through the use of internal resources. Testing and
certification of these systems and applications are targeted for completion by
mid-1999. Year 2000 is critical to the Company. To date, the amounts incurred
and expensed for developing and implementing the plan have not had a material
effect on the Company's operations. The total remaining cost for addressing Year
2000 compliance of approximately $600,000, which is based upon management's
current estimates, is not expected to be material to the Company's operations.
All remaining Year 2000 costs will be funded through operating cash flows. The
Company is initiating communications with its critical external relationships to
determine the extent to which the Company will assess and attempt to mitigate
its risks with respect to the failure of these entities to be Year 2000 ready.
The effect, if any, on the Company's results of operations from the failure of
such parties to be Year 2000 ready, is not reasonably estimable.
16
Item 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
Management of Interest Rate Risk: The principal objective of the
--------------------------------
Company's interest rate risk management function is to evaluate the interest
rate risk included in certain balance sheet accounts, determine the level of
appropriate risk given the Company's business focus, operating environment,
capital and liquidity requirements and performance objectives and manage the
risk consistent with Board approved guidelines through the establishment of
prudent asset concentration guidelines. 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 operating 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 movement in 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 has 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 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. Management may also utilize
"short" interest rate swaps to shorten the maturity of long-term liabilities
when the net cost of funds raised by using such a strategy is attractive,
relative to short-term CD's or borrowings. Management is continuing to evaluate
and refine its hedging policies. No hedging positions were outstanding as of
June 30, 1998 or December 31, 1997.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is involved as plaintiff or defendant in various legal
actions incident to its business, none of which is believed by management to be
material to the financial condition of the Company.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On May 28, 1998, the Company held its annual meeting of stockholders for
the purpose of electing one Director to a term of three years, the approval of
Life Financial Corp. 1997 Stock Option Plan and the ratification of Deloitte &
Touche LLP as the Company's independent auditors. The number of votes cast at
the meeting as to each matter acted upon was as follows:
For Withheld
--------- --------
1. Election of Director: Milton E.
Johnson............................... 5,188,002 6,048
The Directors whose terms continued and the years their
terms expire are as follows: John Goodard (2000); Robert
Riley (2000); Ronald Skipper (1999); and Daniel Perl (1999).
Broker
For Withheld Abstains Non-votes
--------- -------- -------- ---------
2. Approval of Life Financial Corp. 1997
Stock Option Plan..................... 5,066,877 51,308 75,540 325
3. Ratification of Deloitte & Touche LLP
as the Company's independent auditors. 5,160,329 8,281 25,140 300
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibits are filed as part of this report:
3.1 Certificate of Incorporation of Life Financial Corp. *
3.2 Bylaws of Life Financial Corp. *
27.0 Financial data schedule (filed herewith).
(b) Reports on Form 8-K
None.
- -----------------
* Incorporated herein by reference to Exhibits of the same number from the
Company's Registration Statement on Form S-4 (filed initially on Form S-1),
filed on January 27, 1997, as amended on March 27, 1997, and as further amended
on May 29, 1997 and June 11, 1997 ( Registration No. 333-20497).
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIFE FINANCIAL CORPORATION
August 14, 1998 By: /s/ Daniel L. Perl
- --------------- ----------------------------------------
Date Daniel L. Perl
President and Chief
Executive Officer
(principal executive officer)
August 14, 1998 /s/ Jeff Blake
- --------------- ----------------------------------------
Date Acting Chief Financial Officer and
Treasurer
(principal financial and accounting
officer)
19