Prepared by MERRILL CORPORATION

10-Q 1 a2063293z10-q.htm 10-Q Prepared by MERRILL CORPORATION
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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 September 30, 2001

Commission File Number 0-22193

LIFE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)		33-0743196 (I.R.S. Employer Identification No.)
10540 MAGNOLIA AVENUE, RIVERSIDE, CALIFORNIA (Address of principal executive offices)		92505 (Zip Code)

(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 filing requirements for the past 90 days. Yes /x/ 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: 1,333,572 shares of common stock, par value $0.01 per share, were outstanding as of November 9, 2001.

LIFE FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED SEPTEMBER 30, 2001

		PAGE
PART I	FINANCIAL INFORMATION
Item 1	Consolidated Statements of Financial Condition: September 30, 2001 (unaudited) and December 31, 2000	1
	Consolidated Statements of Operations (unaudited): For the Three and Nine Months ended September 30, 2001 and 2000	2
	Consolidated Statements of Stockholders' Equity and Comprehensive Loss (unaudited): For the Nine Months ended September 30, 2001	3
	Consolidated Statements of Cash Flows (unaudited): For the Nine Months ended September 30, 2001 and 2000	4
	Notes to Consolidated Financial Statements (unaudited)	5
Item 2	Management's Discussion and Analysis of Financial Condition And Results of Operations	9
Item 3	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4	Subsequent Events	20
PART II	OTHER INFORMATION
Item 1	Legal Proceedings	20
Item 2	Changes in Securities and Use of Proceeds	20
Item 3	Defaults Upon Senior Securities	20
Item 4	Submission of Matters to a Vote of Security Holders	20
Item 5	Other Information	20
Item 6	Exhibits and Reports on Form 8-K	20

Item 1. Financial Statements.

LIFE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands)

		September 30, 2001 (Unaudited)			December 31, 2000
ASSETS
Cash and due from banks		$	9,286		$	7,810
Federal funds sold			—			730

	Cash and cash equivalents		9,286			8,540
Securities held under repurchase agreements			—			25,000
Investment securities available for sale			32,138			42,370
Loans held for sale			5,924			—
Loans held for investment, net of allowance for loan losses of $4,679 in 2001 and $5,384 in 2000, respectively			207,687			316,724
Mortgage servicing rights			109			5,652
Accrued interest receivable			1,811			3,187
Foreclosed real estate			5,579			1,683
Premises and equipment			2,067			3,100
Current tax receivable			—			202
Deferred income taxes			—			901
Participation contract			4,429			4,429
Other assets			2,493			2,633

TOTAL ASSETS		$	271,523		$	414,421

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts
	Non-interest bearing	$	8,229		$	9,858
	Interest bearing		249,585			335,235
Borrowings			—			47,120
Subordinated debentures			1,500			1,500
Accrued expenses and other liabilities			2,368			6,808

Total liabilities			261,682			400,521

STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares authorized; 1,333,572 and 1,333,687 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively			13			13
Additional paid-in capital			42,628			42,629
Accumulated deficit			(32,904	)		(28,912	)
Accumulated other comprehensive income			104			170

Total stockholders' equity			9,841			13,900

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	271,523		$	414,421

Accompanying notes are an integral part of these consolidated financial statements.

LIFE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)
(UNAUDITED)

		For the Three Months Ended						For the Nine Months Ended
		September 30, 2001			September 30, 2000			September 30, 2001			September 30, 2000
INTEREST INCOME:
Loans		$	5,148		$	8,810		$	17,752		$	30,749
Other interest-earning assets			642			921			2,022			2,399

	Total interest income		5,790			9,731			19,774			33,148
INTEREST EXPENSE:
Interest-bearing deposits			3,392			6,610			12,462			19,806
Other borrowings			347			405			993			2,164
Subordinated debentures			53			53			157			158

	Total interest expense		3,792			7,068			13,612			22,128

	NET INTEREST INCOME		1,998			2,663			6,162			11,020
PROVISION FOR LOAN LOSSES			959			716			2,166			716

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			1,039			1,947			3,996			10,304
NONINTEREST INCOME (LOSS):
Loan servicing and mortgage banking fee income			333			2,351			1,572			5,890
Bank and other fee income			152			150			498			413
Net gain (loss) from loan sales			72			(5,798	)		465			(5,887	)
Net gain(loss) on investment securities			327			(1,025	)		871			(1,025	)
Other income(loss)			97			(65	)		624			159

	Total noninterest income(loss)		981			(4,387	)		4,030			(450	)
NONINTEREST EXPENSE:
Compensation and benefits			1,213			2,778			4,156			9,270
Premises and occupancy			628			1,100			1,967			3,399
Data processing			167			186			579			836
Net loss on foreclosed real estate			44			256			185			319
Other expense			1,737			2,383			4,165			6,267

	Total noninterest expense		3,789			6,703			11,052			20,091

	LOSS BEFORE INCOME TAXES		(1,769	)		(9,143	)		(3,026	)		(10,237	)
PROVISION FOR INCOME TAXES			966			2,068			966			1,623

	NET LOSS	$	(2,735	)	$	(11,211	)	$	(3,992	)	$	(11,860	)

(LOSS) PER SHARE:
	Basic (loss) per share	$	(2.05	)	$	(8.41	)	$	(2.99	)	$	(8.89	)
	Diluted (loss) per share	$	(2.05	)	$	(8.41	)	$	(2.99	)	$	(8.89	)
WEIGHTED AVERAGE SHARES OUTSTANDING:
	Basic		1,333,572			1,333,687			1,333,636			1,333,632
	Diluted		1,333,572			1,333,687			1,333,636			1,333,632

Accompanying notes are an integral part of these consolidated financial statements.

LIFE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS

(Dollars in thousands)

(UNAUDITED)

		Common Stock										Accumulated Other Comprehensive Income
		Common Stock				Additional Paid-in Capital			Accumulated Deficit						Comprehensive Loss			Total Stockholders' Equity
		Shares		Amount		Additional Paid-in Capital			Accumulated Deficit						Comprehensive Loss			Total Stockholders' Equity
Balance at December 31, 2000		1,333,687		$	13	$	42,629		$	(28,912	)	$	170					$	13,900
Comprehensive loss
	Net loss	—			—		—			(3,992	)		—		$	(3,992	)		(3,992	)
	Reversal of unrealized gains on investments, net of tax of $79	—			—		—			—			(66	)		(66	)		(66	)

Total comprehensive loss		—			—		—			—			—		$	(4,058	)		—

Common Stock Repurchase		(115	)		—		(1	)		—			—						(1	)

Balance at September 30, 2001		1,333,572		$	13	$	42,628		$	(32,904	)	$	104					$	9,841

Accompanying notes are an integral part of these consolidated financial statements

LIFE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Dollars in thousands)

			Nine Months Ended September 30,
			2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss			$	(3,992	)	$	(11,860	)
Adjustments to net loss
	Depreciation and amortization			970			1,579
	Provision for loan losses			2,166			716
	Loss on sale and provision for losses on premises and equipment			—			724
	Loss on sale, provision, and write-down of foreclosed real estate			1,350			467
	Net unrealized and realized (gains)/losses and accretion on investment securities, residual mortgage-backed securities, participation contract and related mortgage servicing rights			(151	)		1,106
	Change in allowance on mortgage servicing rights			—			(576	)
	Loss on sale and securitization of loans held for sale			—			4,639
	Gain on sale of investment securities available for sale			(871	)		—
	Purchase and origination of loans held for sale			—			(450,497	)
	Proceeds from the sales of and principal payments from loans held for sale			1,268			489,235
	Write-down of loans transferred to held for investment			(15	)		1,688
	Change in current and deferred income tax receivable			1,103			19,705
	Decrease in accrued expenses and other liabilities			(4,440	)		(17,713	)
	Federal Home Loan Bank stock dividend			(143	)		(160	)
	Decrease in other assets			1,515			5,773

		Net cash (used in) provided by operating activities		(1,240	)		44,826

CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale and principal payments on loans held for investment				123,090			45,735
Purchase and origination of loans held for investment				(31,940	)		—
Gain on sale of loans held for investment				(132	)		—
Principal payments on securities				1,112			51,691
Proceeds from sale of foreclosed real estate				3,429			1,389
Purchase of securities				(49,596	)		(64,605	)
Proceeds from sale or maturity of securities				59,830			—
Cash received on residual assets				—			356
Proceeds from sale of mortgage servicing rights				5,508			—
Decrease in securities held under repurchase agreements				25,000			—
Decrease (increase) in premises and equipment				98			(312	)
Purchase of FHLB stock				(14	)		—

		Net cash provided by investing activities		136,385			34,254

CASH FLOW FROM FINANCING ACTIVITIES
Net decrease in deposit accounts				(87,279	)		(59,932	)
Proceeds from (repayment of) other borrowings				(27,120	)		12,460
Repayment of FHLB advances				(20,000	)		—
Net proceeds from issuance of common stock				—			50

		Net cash (used in) provided by financing activities		(134,399	)		(47,422	)

NET INCREASE IN CASH AND CASH EQUIVALENTS				746			31,658
CASH AND CASH EQUIVALENTS, beginning of period				8,540			20,315

CASH AND CASH EQUIVALENTS, end of period			$	9,286		$	51,973

SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid			$	13,960		$	21,941

Income taxes paid			$	—		$	73

NONCASH INVESTING ACTIVITIES DURING THE PERIOD:
Loan Transfers-Loans held for sale to (from) held for investment			$	(9,251	)	$	253,597

Transfers from loans to foreclosed real estate			$	8,676		$	977

Accompanying notes are and integral part of these consolidated financial statements.

LIFE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2001

(UNAUDITED)

Note 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"), Life Financial Insurance Services, Inc. and Life Investment Holdings, Inc. All material intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's financial position as of September 30, 2001 and December 31, 2000, and the results of its operations and its cash flows for the three and nine months ended September 30, 2001 and 2000. Operating results for the three and nine months ended September 30, 2001, are not necessarily indicative of the results that may be expected for any other interim period or the full year ending December 31, 2001.

Certain information and note disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000.

Certain amounts reflected in the 2000 consolidated financial statements have been reclassified where practicable, to conform to the presentation for 2001.

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires that an entity recognize all derivatives as ether assets or liabilities in the balance sheet and measure those derivatives at fair value. The accounting for the gains or losses resulting from changes in the values of those derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. In May 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of SFAS No. 133," that amends SFAS No. 133 and defers the effective date to fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 did not have a material impact on the Company's results of operations or financial position.

In addition, in June 2001, the FASB issued SFAS No. 141 (FAS 141), Business Combinations, and SFAS No. 142 (FAS 142), Goodwill and Other Intangible Assets. FAS 141, effective June 30, 2001, requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting; the use of the pooling-of-interests method of accounting is eliminated. FAS 141 also establishes how the purchase method is to be applied for business combinations completed after June 30, 2001. This guidance is similar to previous generally accepted accounting principles (GAAP). However, FAS 141 establishes additional disclosure requirements for transactions occurring after the effective date. The adoption of this standard is not expected to have a material effect on the Company's financial condition, results of operations and cash flows.

FAS 142 eliminates amortization of goodwill associated with business combinations completed after June 30, 2001. During a transition period from July 1, 2001 through December 31, 2001, goodwill associated with business combinations completed prior to July 1, 2001 will continue to be amortized through the income statement. Effective January 1, 2002, all goodwill amortization expense will cease and goodwill be assessed (at least annually) for impairment at the reporting unit level by applying a fair-value based test. FAS 142 also provides additional guidance on acquired intangibles that should be separately recognized and amortized, which could result in the recognition of additional intangible assets, as compared with previous GAAP. The adoption of this standard is not expected to have a material effect on the Company's financial condition, results of operations and cash flows.

Note 2—Regulatory Matters

On September 25, 2000, the Company consented to the issuance of an Order to Cease and Desist (the "Order") by the Office of Thrift Supervision (the "OTS") which requires that the Company, among other things, contribute $5.2 million to the capital of the Bank, not later than December 31, 2000, subject to extension by the OTS.

Also, on September 25, 2000, the Bank entered into a Supervisory Agreement with the OTS that requires the Bank, among other things, to achieve a core capital of at least 6.0% and a total risk-based capital of at least 11.0% by March 31, 2001. In calculating these ratios, the Bank must double risk weight the amount of all loans, in excess of capital, that are secured by owner-occupied 1-4 family residential property with a loan-to-value (LTV) ratio of 90% or greater unless the loan has appropriate credit support. Additionally, the Bank must risk weight all subprime loans it holds at double the regularly prescribed risk weighting.

In March 2001, the OTS issued a Prompt Corrective Action Directive (the "PCA Directive") requiring the Bank, among other things, to raise sufficient capital through securities issuance to achieve the following capital levels by June 30, 2001: Total risk-based capital of 8.0%; Tier 1 risk-based capital of 4.0%; and Leverage ratio of 4.0%, or as an alternative, to recapitalize by merging or being acquired prior to September 30, 2001.

The additional $5.2 million capital contribution has not been raised. Since the Bank has failed to raise the capital, the OTS and the Bank have entered into a Marketing Assistance Agreement and Consent to the Appointment of a Conservator or Receiver as of October 25, 2001.

The Bank's capital amounts and ratios are presented in the following table:

	Actual				To be adequately capitalized under the Prompt Corrective Action Directive:				Individual Minimum Capital required under the Supervisory Agreement
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
At September 30, 2001
Total Capital (to risk-weighted assets)	$	13,954	5.59	%	$	19,965	8.00	%	$	27,452	11.00	%
Core Capital (to adjusted tangible assets)		10,834	4.00	%		10,836	4.00	%		16,253	6.00	%
Tangible Capital (to tangible assets)		10,834	4.00	%		N.A.	N.A.			N.A.	N.A.
Tier 1 Capital (to risk-weighted assets)		13,954	4.34	%		9,982	4.00	%		N.A.	N.A.
At December 31, 2000
Total Capital (to risk-weighted assets)	$	16,518	6.99	%	$	18,904	8.00	%	$	29,400	11.00	%
Core Capital (to adjusted tangible assets)		17,968	4.33	%		16,616	4.00	%		24,924	6.00	%
Tangible Capital (to tangible assets)		17,968	4.33	%		N.A.	N.A.			N.A.	N.A.
Tier 1 Capital (to risk-weighted assets)		13,539	5.73	%		9,452	4.00	%		N.A.	N.A.

The September 30, 2001 capital ratios are calculated using double risk weighting for certain high loan to value residential and subprime loans in accordance with the Supervisory Agreement.

Note 3—Loss Per Share

The table below sets forth the Company's loss per share calculations for the three and nine months ended September 30, 2001 and 2000.

Basic loss per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted loss per share is computed by dividing income available to common stockholders including common stock equivalents, such as outstanding stock options by the weighted-average number of common shares outstanding for the period. The computations for loss per share assuming dilution for the three months ended September 30, 2000 and 2001 were anti-dilutive. The outstanding shares for three and nine months ending September 30, 2000 have been adjusted for the one for five reverse stock split approved by the shareholders at the June 7, 2001 Annual Meeting of Stockholders.

Loss per share reconciliation is as follows (dollars in thousands, except per share data):

	For the Three Months Ended September 30,
	2001							2000
	Net Loss			Shares	Per Share Amount			Net Loss			Shares	Per Share Amount
Net Loss	$	(2,735	)					$	(11,211	)

Basic EPS Loss Available to common Stockholders	$	(2,735	)	1,333,572	$	(2.05	)	$	(11,211	)	1,333,687	$	(8.41	)
Effect of Dilutive Stock Options		—		—					—		—

Diluted EPS Loss Available to common stockholders plus assumed conversions	$	(2,735	)	1,333,572	$	(2.05	)	$	(11,211	)	1,333,687	$	(8.41	)

	For the Nine Months Ended September 30,
	2001							2000
	Net Loss			Shares	Per Share Amount			Net Loss			Shares	Per Share Amount
Net Loss	$	(3,992	)					$	(11,860	)

Basic EPS Loss Available to common Stockholders	$	(3,992	)	1,333,636	$	(2.99	)	$	(11,860	)	1,333,632	$	(8.89	)
Effect of Dilutive Stock Options		—		—		—			—

Diluted EPS Loss Available to common stockholders plus assumed conversions	$	(3,992	)	1,333,636	$	(2.99	)	$	(11,860	)	1,333,632	$	(8.89	)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

The following presents management's discussion and analysis of the consolidated financial condition and operating results of the Company for the nine and three months ended September 30, 2001 and 2000. The discussion should be read in conjunction with the Company's Management's Discussion and Analysis included in both the Quarterly Report on Form 10-Q for the quarters ended March 31, 2001 and June 30, 2001 and the 2000 Annual Report on Form 10-K, plus the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report.

The statements contained herein that are not historical facts are forward-looking statements based on management's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be the same as those anticipated by management. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve risks and uncertainties. These include, but are not limited to, the following risks: (1) Changes in the performance of the financial markets, (2) Changes in the demand for and market acceptance of the Company's products and services, (3) Changes in general economic conditions including interest rates, presence of competitors with greater financial resources, and the impact of competitive projects and pricing, (4) the effect of the Company's policies, (5) the continued availability of adequate funding sources, (6) actual prepayment rates and credit losses as compared to prepayment rates and credit losses assumed by the Company for purposes of its valuation of mortgage derivative securities (the "participation contract"), (7) the effect of changes in market interest rates on the spread between the coupon rate and the pass through rate and on the discount rate assumed by the Company in its valuation of its participation contract, and (8) various legal, regulatory and litigation risks.

GENERAL

The Company, a Delaware corporation organized in 1997, is a savings and loan holding company that owns 100% of the capital stock of the Bank, the Company's principal operating subsidiary. The Company's primary business is community retail banking and real estate lending.

The Bank was founded in 1983 as a state chartered savings and loan and became a federally chartered stock savings bank in 1991. The Bank is a member of the Federal Home Loan Bank of San Francisco ("FHLB"), which is a member bank of the Federal Home Loan Bank System. The Bank's deposit accounts are insured up to the $100,000 maximum amount currently allowable under federal laws by the Savings Association Insurance Fund ("SAIF"), which is a separate insurance fund administered by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is subject to examination and regulation by the Office of Thrift Supervision ("OTS") and the FDIC. The Bank is further subject to regulations of the Board of Governors of the Federal Reserve System ("FRB") concerning reserves required to be maintained against deposits and certain other matters.

The Bank operates five full-service branches located in our market area of San Bernardino, Riverside, and Orange Counties, California. The Bank offers a variety of products and services for consumers and small businesses, which include checking, savings and money market accounts as well as certificates of deposit. The Bank originates and purchases conforming and jumbo prime credit quality real estate secured loans through a network of approved mortgage brokers within the state of California. Additionally, the Bank originates residential construction loans on a retail basis in Southern California. The Bank funds its lending activities primarily with retail deposits obtained through its branches and advances from the FHLB of San Francisco. Advances from the FHLB need to be approved by their credit committee and are limited to overnight borrowings.

The Company's principal sources of income are the net spread between interest earned and the interest costs associated with deposits and other borrowings used to finance its loans and investment portfolio.

FINANCIAL CONDITION

Total assets of the Company were $271.5 million at September 30, 2001 compared to $414.4 million at December 31, 2000. The $142.9 million decrease in total assets from December 31, 2000 was primarily a result of a $103.1 million decrease in the loan portfolio.

Investment Securities

A summary of the Company's securities as of September 30, 2001 and December 31, 2000 is as follows (dollars in thousands):

		September 30, 2001
		Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Market Value
Securities Available for Sale:
	Mortgage-Backed Securities	$	9,896	$	113	$		$	10,009
	Mutual Funds		19,022		36		—		19,058
	Other Securities		3,071		—		—		3,071

		$	31,989	$	149	$	—	$	32,138

		December 31, 2000
		Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Market Value
Securities Available for Sale:
	Mortgage-Backed Securities	$	39,160	$	322	$	(27	)	$	39,455
	Other Securities		2,915		—		—			2,915

		$	42,075	$	322	$	(27	)	$	42,370

Loans

Loans totaled $213.6 million at September 30, 2001, including $5.9 million in loans held for sale, compared to $316.7 million at December 31, 2000, or a decrease of $103.1 million. The decrease includes loans sold of $29.3 million resulting in a gain of approximately $132,000. Additionally, the Bank originated $9.4 million in loans during the nine months ending September 30, 2001. Together with loan purchases of $11.5 million, total loan production for the nine months ending September 30, 2001 was $20.9 million with principal repayments totaling $93.5 million.

For the nine months ending September 30, 2000, the Bank originated $200.1 million in loans. The Bank's loan production total for the nine months ending September 30, 2000 was $444.0 million and included $243.9 million of purchased loans. Loan sales totaled $464.8 million for the nine months ending September 30, 2000.

The reduction in loan production is the result of ceasing the origination of loans for sale and of the Bank's stated intent to originate higher credit quality loans and to eliminate subprime originations. The reduction in loans and in new loan production was partially the result of management's efforts to comply with the Prompt Corrective Action Directive issued by the Office of Thrift Supervision on March 23, 2001.

A summary of the Company's loan originations and sales for the nine months ended September 30, 2001 and 2000 are as follows (dollars in thousands):

				For the Nine Months ended
				September 30, 2001			September 30, 2000
Beginning balance, gross				$	335,266		$	458,556
	Loans originated:
		One to four family			6,888			165,695
		Construction loans			1,557			24,338
		Other loans			1,003			10,088

			Total loans originated		9,448			200,121
		Loans purchased			11,502			243,912

		Subtotal—Production			20,950			444,033

			Total		356,216			902,589
Less:
	Principal repayments				93,508			73,756
	Charge-offs				2,871
	Sales of loans				29,343			464,791
	Transfers to REO				8,676			977

Ending balance, gross					221,818			363,065
		Loans in process, loan fees			(3,528	)		(16,934	)
		Allowance for loan losses			(4,679	)		(3,326	)

Total Loans receivable, net					213,611			342,805
Less: Loans held for sale					5,924			—

	Loans held for investment			$	207,687		$	342,805

Allowance for Loan Losses

For the nine months ended September 30, 2001, the Company made a $2.2 million provision for loan losses compared to a $716 thousand provision during the nine months ended September 30, 2000.

Allowance for loan losses totaled $4.7 million and $5.4 million at September 30, 2001 and December 31, 2000, respectively. The September 30, 2001 allowance for loan losses as a percent of total impaired loans was 26.64%, compared to 20.18% at December 31, 2000. Impaired loans, as a percent of gross loans was 7.92% at September 30, 2001, compared to 7.96% at December 31, 2000.

The Company's determination of the level of the allowance for loan losses and correspondingly, the provision for loan losses, rests upon various judgments and assumptions, including current economic conditions, loan portfolio composition, prior loan loss experience and industry trends. Given the composition of the Company's loan portfolio, the $4.7 million allowance for loan losses was considered adequate to cover losses inherent in the Company's loan portfolio at September 30, 2001. However, no assurance can be given that the Company will not, in any particular period, sustain loan losses that exceed the amount reserved, or that subsequent evaluation of the loan portfolio, in light of the prevailing factors, including economic conditions which may adversely affect the Company's or the Bank's service area or other circumstances, will not require significant increases in the loan loss allowance. 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 additional provisions to increase the allowance or take charge-offs in anticipation of future losses.

The table below summarizes the activity of the Company's allowance for loan losses for the three and nine months ended September 30, 2001 and 2000 (in thousands):

		Three Months Ended September 30,						Nine Months Ended September 30,
		2001			2000			2001			2000
Balance, beginning of period		$	4,143		$	2,710		$	5,384		$	2,749
Provision for loan losses			959			716			2,166			716
Recoveries			121			12			300			12
Charge-offs			(544	)		(112	)		(3,171	)		(151	)

	Net charge-offs		(423	)		(100	)		(2,871	)		(139	)

Balance, end of period		$	4,679		$	3,326		$	4,679		$	3,326

Composition of Impaired Assets

The table below summarizes the Company's composition of impaired assets as of the dates indicated:

		At September 30, 2001			At December 31, 2000
Impaired loans (1):
	One to four family	$	14,252		$	24,764
	Multi-family		66			67
	Construction		2,530			2,184
	Commercial		686			—
	Other loans		29			55
	Specific Allowance		(1,493	)		(386	)

	Total impaired loans		16,070			26,684
REO			5,579			1,683
Participation Contract			4,429			—

	Total impaired assets	$	26,078		$	28,367

Allowance for loan losses as a percent of gross loans			2.11	%		1.61	%
Allowance for loan losses as a percent of total impaired loans			26.64	%		20.18	%
Impaired loans as a percent of gross loans receivable			7.92	%		7.96	%
Impaired assets as a percent of total assets			9.60	%		6.84	%

(1): Impaired loans consisted of all loans 90 days past due and foreclosures in process less than 90 days past due of $1.4 million and $4.5 million at September 30, 2001 and December 31, 2000, respectively. Also included in the September 30, 2001 impaired assets are $2.1 million in construction and commercial loans that are not past due but have been deemed impaired for reasons other than delinquency.

Participation Contract

The Bank continues to carry the Participation Contract at $4.4 million, which was the value presented in the December 31, 2000 financial statement. The Bank does not believe there is an active market for this type of asset and has determined the estimated fair value utilizing a cash flow model which determines the present value of the estimated expected cash flows from this contract using a

40% discount rate which the Bank believes is commensurate with the risks involved. Additionally, the Bank is not accreting the discount, at this time, due to the significant uncertainty surrounding the asset.

Liabilities and Stockholders' Equity

Total liabilities of the Company decreased from $400.5 million at December 31, 2000 to $261.7 million at September 30, 2001. The decrease was primarily from decreases in deposits and reduced borrowing requirements.

Total Bank deposits at September 30, 2001 was $257.8 million, compared to $345.1 million at December 31, 2000. The 25.30% decrease in deposits from December 31, 2000 is primarily due to decreases in wholesale and broker deposits. The Bank's strategy continues to focus more heavily on increasing retail deposits through the growth of both local consumer and business accounts and to reduce reliance on other borrowings. Previously the Company utilized brokered deposits, but according to the OTS' Prompt Corrective Action guidelines for undercapitalized institutions, the Bank cannot renew existing brokered deposits. At September 30, 2001, all brokered deposits have matured and the accounts have been closed.

There were no other borrowings as of September 30, 2001 compared to $47.1 million at December 31, 2000. The $47.1 million decrease is due to reduced borrowing requirements with the decrease in loans.

RESULTS OF OPERATIONS

Results for the quarter and year-to-date ended September 30, 2001 are compared to the quarter and year-to-date ended September 30, 2000 below.

Highlights for the three and nine months ended September 30, 2001 and 2000:

The Company reported a net loss of $2.7 million for the quarter ended September 30, 2001, or $2.05 loss per share, compared with net loss of $11.2 million, or $8.41 loss per share for the quarter ended September 30, 2000. Net loss year-to-date for 2001 is $4.0 million, or $2.99 loss per share, compared to net loss of $11.9 million, or $8.89 loss per share, for the nine months ended September 30, 2000.

The loss of $2.7 million for the quarter ended September 30, 2001 included a $507,000 expense accrual for various potential liabilities and a $970,000 writeoff of the Company's deferred tax asset. For the nine months ended September 30, 2001 the loss of $4.0 million included one-time gain of $871,000 from the sale of investment securities, $102,000 from the sale of servicing rights, and $132,000 from the sale of subprime loans.

For the three and nine months ended September 30, 2001, the Company's noninterest expense decreased in comparison to the three and nine months ended September 30, 2000, by $3.9 million and $9.0 million, respectively. The decrease in noninterest expense is consistent with the reduction in the scale of operations and is a result of efforts by management to gain efficiencies.

Net Interest Income:

The Company's net interest income before provision for credit losses decreased 25.0% to $2.0 million during the three months ended September 30, 2001, compared to $2.7 million for the three months ended September 30, 2000. Additionally, net interest income for the nine months ended September 30, 2001 decreased $4.9 million from September 30, 2000. The decline is primarily due to the decrease in loans outstanding and loan yield. Average loans for the nine months ending September 30, 2001 decreased $179.9 million from the same prior year period. Additionally, the average loan yield was 23 basis points lower during the nine months ended September 30, 2001 as compared to the same period in 2000.

For the three months ending September 30, 2001, the Company's net interest margin was 2.86% as compared to a net interest margin of 2.30% during the same period in 2000. The change in the Company's net interest margin was primarily due to the increase in loan yield of 37 basis points. Average interest bearing deposits cost was 5.14% for the quarter ended September 30, 2001 as compared to 6.06% for the quarter ended September 30, 2000. For the nine months ending September 30, 2001, the Company's net interest margin was 2.64% as compared to a net interest margin of 3.01% during the same period in 2000.

The following table sets forth the Company's average balance sheets (unaudited), and the related weighted average yields and costs on average interest-earning assets and interest-bearing liabilities, for the three months ended September 30, 2001 and 2000.

The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are measured on a daily basis. The yields and costs include fees that are considered adjustments to yields.

		Three Months Ended September 30, 2001						Three Months Ended September 30, 2000
		Average Balance		Interest		Average Annualized Yield/Cost		Average Balance		Interest		Average Annualized Yield/Cost
(Dollars in thousands)		(unaudited)						(unaudited)
Assets
Interest-earning assets:
	Cash and cash equivalents	$	14,814	$	152	4.10	%	$	1,406	$	54	15.36	%
	Federal funds sold		458		3	2.98	%		3,706		63	6.80	%
	Investment securities		36,745		487	5.30	%		52,642		804	6.12	%
	Loans receivable		227,547		5,148	9.05	%		405,962		8,810	8.68	%

	Total interest-earning assets		279,564		5,790	8.29	%		463,716		9,731	8.40	%
Non-interest-earning assets			19,640						48,542

	Total assets	$	299,204					$	512,258

Liabilities and Equity
Interest-bearing liabilities:
	Interest-bearing deposits	$	26,280		89	1.36	%	$	31,534	$	170	2.16	%
	Certificate accounts		237,613		3,303	5.56	%		405,110		6,440	6.36	%

	Total interest-bearing deposits		263,893		3,392	5.14	%		436,644		6,610	6.06	%
Other borrowings			19,348		347	7.18	%		24,194		405	6.68	%
Subordinated debentures			1,500		53	14.01	%		1,500		53	14.01	%

Total interest-bearing liabilities			284,741		3,792	5.33	%		462,338		7,068	6.12	%

Non-interest-bearing liabilities			2,513						17,561

	Total liabilities		287,254						479,899
Equity			11,950						32,359

	Total liabilities and equity	$	299,204					$	512,258

Net interest income				$	1,998					$	2,663

Net interest rate spread						2.96	%					2.28	%

Net interest margin						2.86	%					2.30	%

Ratio of interest-earning assets to interest-bearing liabilities						98.18	%					100.34	%

			Nine Months Ended September 30, 2001						Nine Months Ended September 30, 2000
			Average Balance		Interest		Average Annualized Yield/Cost		Average Balance		Interest		Average Annualized Yield/Cost
(Dollars in thousands)			(unaudited)						(unaudited)
Assets
Interest-earning assets:
	Cash and cash equivalents		$	25,662	$	945	4.91	%	$	2,532	$	223	11.74	%
	Federal funds sold			459		15	4,30	%		3,027		205	9.03	%
	Investment securities			24,608		1,062	5.75	%		41,837		1,971	6.28	%
	Loans receivable			261,044		17,752	9.07	%		440,900		30,749	9.30	%

	Total interest-earning assets			311,773		19,774	8.46	%		488,296		33,148	9.05	%
Non-interest-earning assets				23,346						58,595

		Total assets	$	335,119					$	546,891

Liabilities and Equity
Interest-bearing liabilities:
	Interest-bearing deposits		$	26,786		301	1.50	%	$	31,993	$	524	2.18	%
	Certificate accounts			267,412		12,161	6.06	%		419,803		19,282	6.12	%

	Total interest-bearing deposits			294,198		12,462	5.65	%		451,796		19,806	5.85	%
Other borrowings				20,715		993	6.39	%		38,668		2,164	7.46	%
Subordinated debentures				1,500		157	14.01	%		1,500		158	14.04	%

Total interest-bearing liabilities				316,413		13,612	5.74	%		491,964		22,128	6.00	%

Non-interest-bearing liabilities				5,602						20,756

	Total liabilities			322,015						512,720
Equity				13,104						34,171

	Total liabilities and equity		$	335,119					$	546,891

Net interest income					$	6,162					$	11,020

Net interest rate spread							2.72	%					3.05	%

Net interest margin							2.64	%					3.01	%

Ratio of interest-earning assets To interest-bearing liabilities							98.53	%					99.25	%

Provision for Loan Losses:

The provision for loan loss was $2.2 million for the nine months ended September 30, 2001 compared to $716 thousand for the nine months ended September 30, 2000. The increase is comprised of $2.2 million increase in charge-offs, the aforementioned $634 thousand mark-to-market adjustment, partially offset by a reduction in the provision for the decrease in loans outstanding. Additionally, the change in provision for loan loss increased the allowance for loan loss as a percentage of gross loans from 1.61% at year ended December 31, 2000 to 2.11% at nine months ended September 30, 2001.

Noninterest Income (loss)

Noninterest income was $981,000 and $4.0 million for the three and nine months ended September 30, 2001 compared to $4.4 million loss and $450,000 loss for the three and nine months ended September 30, 2000, respectively. The $4.4 million loss for the three months ended September 30, 2000 was the result of a $5.8 million loss from the sale of subprime loans, a $1.0 million writedown of the participation contract offset by $2.4 million income from loan servicing and mortgage banking fee income. The $981,000 non-interest income for the three months ended September 30, 2001 resulted from a $327,000 gain from the sale of investment securities and $333,000 of loan servicing income plus other noninterest income.

The noninterest loss for the nine months ended September 30, 2000 was the result of $5.9 million loss on the sale of subprime loans, a $1.0 million writedown of the participation contract offset by $5.9 million of income from loan servicing and mortgage banking fee income.

The $4.0 million of noninterest income included $1.6 million of servicing fee income. The $4.2 million decrease in servicing income is primarily the result of the sale of mortgage servicing rights during the first quarter of 2001. The other components of noninterest income were $500,000 of bank and other fee income, $465,000 gain on loan sales, $871,000 gain from the sale of investment securities and $624,000 of other income.

Noninterest Expense

Noninterest expense was $3.8 million for the three months ended September 30, 2001, which was $2.9 million lower than the same period in 2000. The 43.3% decrease is primarily a result of reduced compensation expense of $1.5 million related to reduction in personnel, and a $507,000 provision for the recording of assignments and reconveyances and other potential liabilities, and a $472 thousand decrease in premises and occupancy expense related to the closure of the mortgage banking offices and a retail branch location during 2000. Noninterest expense for the nine months ended September 30, 2001 was $11.1 million compared to $20.1 million for the nine months ended September 30, 2000.

LIQUIDITY

The Company's primary sources of funds are principal and interest payments on loans and deposits. 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 Bank's average liquidity ratios were 16.61% and 10.95% for the quarters ended September 30, 2001 and 2000, respectively.

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) provided by operating activities was ($1.2) million for the nine months ended September 30, 2001, compared to $44.8 million for the nine months ended September 30, 2000. Net cash provided by investing activities was $136.4 million and $34.3 million for the nine months ended September 30, 2001 and 2000, respectively. Cash provided by investing activities during the nine months ended September 30, 2001 was a result of principal collections on loans of $92.2 million, sale of subprime loans of $30.7 million and the decrease in securities held under repurchase agreements of $25 million. Principal collections on loans of $45.7 million offset partially by the net increase in securities of $12.9 million were the primary components of cash provided by investing activities for the nine months ended September 30, 2000. Net cash used in financing activities were $134.4 million and $47.4 million for the nine months ended

September 30, 2001 and 2000, respectively. This was due to decreased deposit accounts and Federal Home Loan Bank advances.

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 September 30, 2001, cash and short-term investments totaled $9.3 million. The Company has other sources of liquidity if a need for additional funds arises including the utilization of a line of credit at the Federal Home Loan Bank (FHLB) which is limited to overnight advances with new borrowings requiring FHLB credit committee approval.

CAPITAL RESOURCES

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."

Under the Supervisory Agreement, dated September 25, 2000, between the Bank and the OTS, the OTS is requiring the Bank to achieve a minimum individual core capital ratio of 6% and a minimum individual risked-based capital ratio of 11%. In calculating these ratios, the Bank is required to double risk weight all subprime loans and all loans secured by owner-occupied 1-4 family residential property with a loan-to-value (LTV) ratio of 90% or greater unless the loan has appropriate credit support. Appropriate credit support may include mortgage insurance, government guarantee, or readily marketable collateral that reduces the LTV ratio below 90%.

Additionally, the Supervisory Agreement requires the Company to contribute to the Bank's capital $5.2 million. As of September 30, 2001, the capital infusion has not taken place. The Board of Directors has consented to the appointment of a receiver by the OTS. The basis for the consent is the Bank is significantly undercapitalized, is in violation of the Supervisory Agreement dated September 25, 2000, the Bank is in violation of a Prompt Corrective Action Directive dated March 23, 2001, and the OTS considers the Bank to be in an unsafe and unsound condition. Since the Bank has failed to raise the capital, the OTS and the Bank have entered into a Marketing Assistance Agreement and Consent to the Appointment of a Conservator or Receiver as of October 25, 2001. The Bank has requested forbearance from the appointment of a receiver from the OTS pending the proposed acquisition of the Company as described in Item 4 below. The OTS has not responded to the Bank's request.

The following table reflects the Bank's capital ratios based on ending assets at September 30, 2001 and the related OTS requirements for adequately capitalized:

Dollars in Thousands

	Actual				To be adequately capitalized under the Prompt Corrective Action Directive:				Individual Minimum Capital required under the Supervisory Agreement
	Amount		Ratio		Amount		Ratio		Amount		Ratio
					(dollars in thousands)
At September 30, 2001
Total Capital (to risk-weighted assets)	$	13,954	5.59	%	$	19,965	8.00	%	$	27,452	11.00	%
Core Capital (to adjusted tangible assets)		10,834	4.00	%		10,836	4.00	%		16,253	6.00	%
Tangible Capital (to tangible assets)		10,834	4.00	%		N.A.	N.A.			N.A.	N.A.
Tier 1 Capital (to risk-weighted assets)		13,954	4.34	%		9,982	4.00	%		N.A.	N.A.

a): As of September 30, 2001, the Bank did not meet the capital ratios required to be considered adequately capitalized.
b): The percentages and ratios to be "well-capitalized" under prompt and corrective action provisions as issued by the OTS are 5.0% core capital, 10.0% risk-based capital, 6.0% Tier 1 risk-based capital and 2.0% tangible capital.

As of September 30, 2001, the Bank had outstanding commitments to originate or purchase mortgage loans of $939,000 compared to $1.4 million as of December 31, 2000. Other than commitments to originate or purchase mortgage loans, there were no material changes to the Company's commitments or contingent liabilities as of September 30, 2001 compared to the period ended December 31, 2000 as discussed in the notes to the audited consolidated financial statements of LIFE Financial Corporation for the year ended December 31, 2000 included in the Company's Annual Report on Form 10K.

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. Pursuant to the guidelines, 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. 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. There has not been a significant change in the Company's interest rate risk during the nine months ending September 30, 2001.

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.

Item 4. Subsequent Events

The Company has entered into an agreement in principle with Vineyard National Bancorp (Vineyard) to acquire Life Financial Corporation through the exchange of Life Financial shares for newly issued Vineyard shares. The transaction is subject to Board of Director, shareholder and regulatory approval, the receipt of fairness opinions from independent financial advisors, and the execution of a definitive agreement. In the event the transaction with Vineyard is not executed, the Board of Directors has consented to the appointment of a receiver by the OTS. The basis for the consent is the Bank is significantly undercapitalized, is in violation of the Supervisory Agreement dated September 25, 2000, the Bank is in violation of a Prompt Corrective Action Directive dated March 23, 2001, and the OTS considers the Bank to be in an unsafe and unsound condition.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There were no material legal proceeding developments during the three-month period ended September 30, 2001.

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

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

Exhibits

(a): Reports on Form 8K

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
November 14, 2001 Date	By:	/s/ STEVEN R. GARDNER Steven R. Gardner President and Chief Executive Officer (principal executive officer)
November 14, 2001 Date	By:	/s/ ROY L. PAINTER Roy L. Painter Senior Vice President and Chief Financial Officer (principal financial and accounting officer)