SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[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
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
1-14074
(Commission File Number)
ContiFinancial Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-3852588
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
277 Park Avenue
New York, New York 10172
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 207-2800
no change
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether 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 ___
The Company had 46,749,435 shares of common stock outstanding as of August 7,
1998.
<PAGE>
ContiFinancial Corporation
Table of Contents
PART I
Page
----
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets ....................................... 3
Consolidated Statements of Income ................................. 4
Condensed Consolidated Statements of Cash Flows ................... 5
Notes to Unaudited Condensed Consolidated Financial Statements .... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General ........................................................... 8
Selected Financial Data ........................................... 10
Results of Operations ............................................. 12
Gain on Sale of Receivables and Excess Spread Receivables ......... 15
Liquidity and Capital Resources ................................... 18
Year 2000 ......................................................... 20
Forward-looking Statements ........................................ 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 22
PART II
Item 5. Other Information ................................................. 23
Item 6. Exhibits and Reports on Form 8-K .................................. 23
Signatures ................................................................ 24
2
<PAGE>
CONTIFINANCIAL CORPORATION
Consolidated Balance Sheets
as of June 30, 1998 and March 31, 1998
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
----------- -----------
<S> <C> <C>
Assets
Cash and cash equivalents ............................................................ $ 76,691 $ 173,588
Restricted cash ...................................................................... 1,391 1,147
Securities purchased under agreements to resell ...................................... 1,497,668 857,649
Trade receivables:
Receivables held for sale ......................................................... 857,012 726,990
Other receivables ................................................................. 126,602 117,678
Due from affiliates ............................................................... 45,638 46,922
Allowance for loan losses ......................................................... (3,321) (2,685)
----------- -----------
Total trade receivables, net ......................................................... 1,025,931 888,905
----------- -----------
Interest-only and residual certificates .............................................. 698,188 648,785
Capitalized servicing rights ......................................................... 87,209 74,292
Premises and equipment, net of accumulated depreciation of $9,337
and $7,951 as of June 30, 1998 and March 31, 1998, respectively ................... 21,456 18,887
Cost in excess of equity acquired .................................................... 80,124 55,738
Equity investments in unconsolidated subsidiaries .................................... 55,035 53,660
Other assets ......................................................................... 43,423 35,928
----------- -----------
Total assets ................................................................ $ 3,587,116 $ 2,808,579
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable ..................................................................... $ 89,302 $ 91,179
Securities sold but not yet purchased ................................................ 1,476,789 847,470
Trade receivables sold under agreements to repurchase ................................ 244,757 245,556
Due to affiliates .................................................................... 218 163
Short-term debt ...................................................................... 341,507 366,104
Taxes payable ........................................................................ 76,834 81,190
Long-term debt ....................................................................... 699,304 499,553
Other liabilities .................................................................... 18,870 30,427
----------- -----------
Total liabilities ........................................................... 2,947,581 2,161,642
----------- -----------
Commitments and contingencies
Minority interest in subsidiaries .................................................... 5,185 629
Stockholders' equity:
Preferred stock (par value $0.01 per share;
25,000,000 shares authorized; none issued
at June 30, 1998 and March 31, 1998) ............................................ -- --
Common stock (par value $0.01 per share;
250,000,000 shares authorized; 47,657,539
shares issued at June 30, 1998 and
March 31, 1998, respectively) .................................................... 477 477
Paid-in capital ................................................................... 400,101 399,776
Retained earnings ................................................................. 268,976 262,956
Treasury Stock (783,104 and 201,209
shares of common stock, at cost,
at June 30, 1998 and March 31, 1998,
respectively) ................................................................... (22,676) (5,794)
Deferred compensation ............................................................. (12,528) (11,107)
----------- -----------
Total stockholders' equity .................................................. 634,350 646,308
----------- -----------
Total liabilities and stockholders' equity .................................. $ 3,587,116 $ 2,808,579
=========== ===========
</TABLE>
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
3
<PAGE>
CONTIFINANCIAL CORPORATION
Consolidated Statements of Income
for the three months ended June 30, 1998 and 1997
(in thousands, except share data)
(unaudited)
Three Months
Ended June 30,
1998 1997
----------- -----------
Gross income:
Gain on sale of receivables ................. $ 37,572 $ 64,340
Interest .................................... 71,980 49,679
Net servicing income ........................ 26,720 15,973
Other income ................................ 5,844 4,031
----------- -----------
Total gross income .................... 142,116 134,023
----------- -----------
Expenses:
Compensation and benefits ................... 43,324 30,234
Interest .................................... 55,382 35,863
Provision for loan losses ................... 722 1,311
General and administrative .................. 32,511 21,070
----------- -----------
Total expenses ........................ 131,939 88,478
----------- -----------
Income before income taxes and minority
interest ................................. 10,177 45,545
Income taxes ................................... 4,101 18,641
----------- -----------
Income before minority interest ................ 6,076 26,904
Minority interest in subsidiaries .............. 56 31
----------- -----------
Net income ............................ $ 6,020 $ 26,873
=========== ===========
Basic earnings per common share ................ $ 0.13 $ 0.60
=========== ===========
Diluted earnings per common share .............. $ 0.13 $ 0.59
=========== ===========
Basic weighted average number of shares
outstanding .............................. 46,685,863 44,757,322
=========== ===========
Diluted weighted average number of shares
outstanding .............................. 47,226,533 45,588,626
=========== ===========
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
4
<PAGE>
CONTIFINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 1998 and 1997
(in thousands)
(unaudited)
Three Months Ended
June 30,
1998 1997
--------- ---------
Net cash used in operating activities ................ $(215,290) $(109,202)
--------- ---------
Cash flows from investing activities:
Acquisitions of majority owned subsidiaries
(net of cash acquired) ....................... (21,595) --
Acquisitions of minority owned subsidiaries .... (366) (5,603)
Purchase of property and equipment, net ........ (3,511) (1,945)
--------- ---------
Net cash used in investing activities ....... (25,472) (7,548)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in due to affiliates, net .. 55 (29,376)
Increase (decrease) in short-term debt ......... (24,678) 105,000
Increase in long-term debt ..................... 199,778 --
Proceeds from exercise of employee stock options -- 288
Debt issuance costs ............................ (11,658) --
Repurchase of common stock ..................... (19,632) --
Net proceeds from common stock offering ........ -- 100,778
Other, net ..................................... -- 6
--------- ---------
Net cash provided by financing activities .. 143,865 176,696
--------- ---------
Net increase (decrease) in cash and cash equivalents . (96,897) 59,946
Cash and cash equivalents at beginning of period .... 173,588 51,200
--------- ---------
Cash and cash equivalents at end of period ........... $ 76,691 $ 111,146
========= =========
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
5
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
ContiFinancial Corporation and its majority owned subsidiaries (collectively,
"ContiFinancial" or the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and, in the opinion of
management, reflect all normal recurring adjustments which are necessary for a
fair presentation of the financial position, results of operations, and cash
flows for each period shown. The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the results of operations. Actual results could
differ from these estimates. In addition, results for interim periods are not
necessarily indicative of results for the full year. These unaudited condensed
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 fiscal year ended March 31, 1998 (the "Annual
Report"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
2. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. The Company is currently evaluating the impact of SFAS 133 on its
financial position and results of operations.
3. STOCKHOLDERS' EQUITY
The following table presents a reconciliation of basic and diluted earnings per
common share (dollars in thousands, except per share amounts).
Three months ended June 30,
1998 1997
----------- -----------
Net income ................................. $ 6,020 $ 26,873
=========== ===========
Basic weighted average number of
shares outstanding ......................... 46,685,863 44,757,322
Adjustments for dilutive shares outstanding:
Restricted shares ....................... 55,235 150,914
Options ................................. 485,435 680,390
----------- -----------
Diluted weighted average number of
shares outstanding ......................... 47,226,533 45,588,626
=========== ===========
Earnings per common share:
Basic ................................. $ 0.13 $ 0.60
=========== ===========
Diluted ............................... $ 0.13 $ 0.59
=========== ===========
6
<PAGE>
CONTIFINANCIAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
June 30, 1998
Options to purchase 296,000 shares of common stock, at a weighted average
exercise price of $31.78 were outstanding during the three months ended June 30,
1998 but were not included in the computation of diluted earnings per share as
they were antidilutive.
In February 1998, the Company's Board of Directors authorized the purchase up to
one million shares of the Company's outstanding common stock. During the three
months ended June 30, 1998, the Company purchased 681,300 shares at an average
cost of $28.82 per share. During July 1998, the Company repurchased 125,000
shares, completing the authorized repurchase. The purchased shares are held in
treasury for use in connection with ContiFinancial's 1995 Long-Term Stock
Incentive Plan (the "Stock Plan").
4. ACQUISITION
In April 1998, the Company acquired, for approximately $18 million, a 75%
interest in Keystone Mortgage Partners L.L.C. ("Keystone"). Keystone is an
originator and servicer of commercial mortgage loans.
5. DEBT
Short-term and long-term debt at June 30, 1998 and March 31, 1998 consisted of
the following :
June 30, March 31,
1998 1998
-------- ---------
(in thousands)
Short-term debt:
Commercial paper ...................................... $271,129 $270,708
Revolving Credit Facility ............................. 70,000 95,000
Current portion of long-term debt ..................... 378 396
-------- --------
Total short-term debt .................................... $341,507 $366,104
======== ========
Long-term debt:
8 3/8% Senior Notes, $300 million face amount, due 2003 $299,321 $299,295
7 1/2% Senior Notes, $200 million face amount, due 2002 199,445 199,412
8 1/8% Senior Notes, $200 million face amount, due 2008 199,782 --
Capitalized lease ..................................... 756 846
-------- --------
Total long-term debt ..................................... $699,304 $499,553
======== ========
On April 2, 1998, the Company issued $200 million of 8 1/8% unsecured Senior
Notes due April 1, 2008. Proceeds to the Company, net of underwriting fees,
market discount and other costs were $188.0 million. Interest on these notes is
payable semi-annually on April 1 and October 1 commencing October 1, 1998. The
notes are redeemable in whole or in part, at the option of the Company, at any
time or from time to time, at a redemption price equal to the greater of (i)
100% of their principal amount or (ii) the sum of the present values
7
<PAGE>
of the remaining scheduled payments of principal and interest thereon discounted
to the date of redemption on a semiannual basis at the treasury yield plus 50
basis points, plus, in each case, accrued interest to the date of redemption.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This discussion should be read in conjunction with the accompanying unaudited
condensed consolidated financial statements and notes thereto included herein,
and the Company's audited Consolidated Financial Statements and notes thereto
included in the Company's Annual Report. Certain statements under this caption
constitute "forward-looking statements" under federal securities laws. See
"Forward-looking Statements."
General
ContiFinancial engages in the consumer and commercial finance business by
originating home equity loans, commercial real estate loans and non-prime auto
loans. ContiFinancial also provides financing and asset securitization
structuring and placement services to originators of a broad range of loans,
leases, receivables and other assets. ContiFinancial is a leading originator,
purchaser, seller and servicer of home equity loans to borrowers whose needs may
not be met by traditional financial institutions due to credit exceptions or
other factors. These loans are primarily for debt consolidation, home
improvements, education or refinancing and are secured primarily by first
mortgages on one- to four-family residential properties.
The Company, through ContiTrade Services L.L.C. ("ContiTrade"), a wholly-owned
subsidiary, provides financing and asset securitization structuring expertise,
and through ContiFinancial Services Corporation ("ContiFinancial Services"), a
wholly-owned subsidiary, provides placement services. ContiTrade's management
and execution of the Company's financing, hedging and securitization needs serve
as a model for the Company's "strategic alliances" with originators of a broad
range of consumer and commercial loans and other assets ("Strategic Alliances").
The Company offers Strategic Alliance clients complete balance sheet liability
management, including warehouse financing, interest rate hedging services and
structuring and placement of asset portfolios in the form of asset-backed
securities.
The Company, through investments and strategic acquisitions, as well as through
internal growth, has continued to expand and diversify its businesses. Within
its core home equity business, the Company has developed a significant retail
origination platform to complement its established wholesale origination
capabilities. The retail origination subsidiaries, discussed below, provide a
source of cash revenues through loan origination points and fees and whole loan
sales. Significant growth in origination volume has been accompanied by
infrastructure investments that have enhanced and expanded ContiMortgage
Corporation's ("ContiMortgage") home equity loan servicing capacity, which
represents another source of cash income to the Company. In addition to
expanding its retail origination capabilities, the Company has expanded home
equity loan originations through its broker network, which represents a lower
cost source of origination volume. Originations from direct retail operations
and brokers were $841.8 million in three months ended June 30,1998, or 38.4% of
total home equity, home improvement and other residential mortgage loan
origination volume. This compares with $409.0 million, or 29.4% of total
originations in the corresponding period of fiscal 1998.
The Company's commercial real estate activities have grown considerably. Notable
developments with respect to this business include the April 1998 acquisition of
a 75% interest in Keystone Mortgage Partners L.L.C. ("Keystone"). Total
commercial real estate loan originations were $936.7 million in the fiscal 1999
first quarter, including $218.0 million of originations by Keystone. Total
originations in the fiscal 1998 first quarter were $191.8 million.
8
<PAGE>
In fiscal 1997, the Company acquired 100% of three home equity companies,
California Lending Group, Inc., d/b/a United Lending Group ("ULG"), Resource One
Consumer Discount Company, Inc. ("Resource One"), Royal Mortgage Partners, L.P.,
d/b/a Royal MortgageBanc ("Royal") and 56% of an auto finance company, Triad
Financial Corporation ("Triad"). In fiscal 1998, the Company acquired the
remaining 44% of Triad and 100% of two additional home equity companies,
Fidelity Mortgage Decisions Corporation ("Fidelity") and Crystal Mortgage
Company, Inc. ("Crystal") along with its subsidiary Lenders M.D., Inc.
("Lenders"). These home equity and auto retail origination companies are
collectively referred to herein as the "Retail Subsidiaries". In each case, the
companies acquired were former Strategic Alliances or ContiMortgage/ContiWest
loan origination sources.
9
<PAGE>
Selected Financial Data
- -----------------------
ContiFinancial Corporation
Loan Originations, Securitizations and Sales
(dollars in thousands)
(unaudited)
For the three months ended %
June 30, Incr.
1998 1997 (Decr.)
---------- ---------- -------
Originations
- ------------
Home equity, home improvement
and other residential mortgage loans:
Wholesale:
Brokers ............................. $ 308,188 $ 207,089 48.8%
Correspondents ...................... 1,349,429 983,264 37.2%
Direct retail .......................... 533,632 201,878 164.3%
---------- ---------- -----
Total home equity, home improvement
and other residential mortgage loans . 2,191,249 1,392,231 57.4%
---------- ---------- -----
Commercial real estate mortgage loans:
Conduit (ContiMAP and affiliates) ....... 718,783 191,806 274.7%
Conforming .............................. 217,952 -- --
---------- ---------- -----
Total commercial real estate mortgage
loans ................................. 936,735 191,806 388.4%
---------- ---------- -----
Triad auto loans ........................... 70,546 38,056 85.4%
---------- ---------- -----
Total loan originations ............ $3,198,530 $1,622,093 97.2%
========== ========== =====
Securitizations and sales
- -------------------------
ContiMortgage/ContiWest
securitizations ......................... $1,750,000 $1,265,000 38.3%
Other home equity, home improvement and
other residential mortgage sales ....... 196,183 85,879 128.4%
---------- ---------- -----
Total home equity, home improvement
and other residential mortgage sales ....... 1,946,183 1,350,879 44.1%
---------- ---------- -----
Commercial real estate mortgage loans:
Conduit (ContiMAP and affiliates) ....... -- 158,816 --
Conforming .............................. 217,952 -- --
---------- ---------- -----
Total commercial real estate
mortgage loans ............................. 217,952 158,816 37.2%
---------- ---------- -----
Triad auto loans ........................... 57,667 45,881 25.7%
Strategic alliances ........................ 100,249 174,200 (42.5)%
---------- ---------- -----
Total securitizations and sales ..... $2,322,051 $1,729,776 34.2%
========== ========== =====
10
<PAGE>
ContiMortgage Corporation
Delinquencies, Defaults and Losses
(dollars in thousands)
(unaudited)
ContiMortgage June 30, March 31, June 30,
Servicing Portfolio 1998 1998 1997
------------------- -------------- -------------- --------------
(at period end)
Serviced loan portfolio ... $ 11,154,731 $ 10,135,785 $ 7,269,361
============== ============== ==============
Delinquencies:
30 - 59 days .......... 2.57% 1.50% 2.69%
60 - 89 days ......... 0.85% 0.51% 0.69%
90 days and over ...... 0.49% 0.35% 0.30%
-------------- -------------- --------------
Total delinquencies (%) 3.91% 2.36% 3.68%
-------------- -------------- --------------
Total delinquencies ($) $ 435,927 $ 239,015 $ 267,368
============== ============== ==============
Defaults:
Foreclosures .......... 2.14% 2.31% 3.24%
Bankruptcies .......... 1.54% 1.70% 1.29%
Real estate owned ..... 0.92% 0.83% 0.48%
Loss mitigation (1) ... 0.76% 0.74% 0.04%
-------------- -------------- --------------
Total defaults (%) .... 5.36% 5.58% 5.05%
-------------- -------------- --------------
Total defaults ($) .... $ 598,226 $ 565,238 $ 367,146
============== ============== ==============
(1) This category includes non-performing accounts specifically identified for
accelerated resolution under the Company's loss mitigation program. Resolution
strategies include refinances, reinstatements, and full payoffs; forbearance
plans; pre-foreclosure sales for less than full payoff; third party foreclosure
sales; deed-in-lieu (or "cash for keys"); and charge-offs.
For the three For the twelve
ContiMortgage months ended months ended
Loan Loss experience June 30, 1998 June 30, 1998
-------------------- ------------- --------------
Average serviced loan portfolio ..... $10,742,598 $ 9,163,255
=========== ===========
Net losses :
REMICs and loans held
pending securitization ...... $ 19,571 $ 52,187
Loans and properties
purchased out of REMICs ..... 2,613 18,570
----------- -----------
Total net losses ...... $ 22,184 $ 70,757
=========== ===========
Net losses as a percentage of average
amount outstanding (2):
REMICs and loans held
pending securitization ..... 0.73% 0.57%
Loans and properties
purchased out of REMICs .... 0.10% 0.20%
----------- -----------
Total net losses as a percentage of
average amount outstanding .......... 0.83% 0.77%
=========== ===========
(2) Amounts for the three months ended June 30, 1998 are annualized.
11
<PAGE>
Results of Operations
The Company's development of its retail origination platform has resulted in a
change in the profile of the Consolidated Statements of Income. Retail
origination expenses focus heavily on compensation and benefits and general and
administrative expenses, whereas wholesale origination costs in the form of
origination points, are netted against gain on sale of receivables.
Consequently, the accompanying unaudited Consolidated Statements of Income
reflect increases in operating expenses, as well as higher income from
origination points.
Three Months Ended June 30, 1998 Compared with the Three Months Ended June 30,
1997
Net income decreased $20.9 million or 77.6% to $6.0 million for the three months
ended June 30, 1998 from $26.9 million for the three months ended June 30, 1997.
The Company's total gross income increased 6.0% to $142.1 million for the three
months ended June 30, 1998 from $134.0 million for the three months ended June
30, 1997. The decrease in net income was largely the result of fair value
adjustments to Excess Spread Receivables ("ESR") to reflect higher prepayment
speeds. See "Gain on Sale of Receivables and Excess Spread Receivables" for
further discussion.
On a percentage basis, the following table sets forth the composition of the
Company's results as a percentage of total gross income for the periods
indicated:
Three Months
Ended June 30,
----------------
Gross income: 1998 1997
------ ------
Gain on sale of receivables ................. 26.44% 48.00%
Interest .................................... 50.65 37.07
Net servicing income ........................ 18.80 11.92
Other income ................................ 4.11 3.01
------ ------
Total gross income ....................... 100.00% 100.00%
------ ------
Expenses:
Compensation and benefits ................... 30.48% 22.56%
Interest .................................... 38.97 26.76
Provision for loan losses ................... 0.51 0.98
General and administrative .................. 22.88 15.72
------ ------
Total expenses ............................ 92.84% 66.02%
------ ------
Income before income taxes and minority interest 7.16 33.98
Income taxes ................................... 2.88 13.91
Minority interest .............................. 0.04 0.02
------ ------
Net income ............................... 4.24% 20.05%
====== ======
12
<PAGE>
Interest Income and Expense:
In the normal course of its activities, the Company carries inventories of loans
pending sale or securitization and earns a positive spread between the interest
income earned on those loans and its cost of financing those loans. The
Company's origination, securitization and sales volume has increased
significantly, contributing to a concurrent increase in the average level of
loans held in inventory pending securitization. As a result, net interest income
increased to $16.6 million for the three months ended June 30, 1998 from $13.8
million for the three months ended June 30, 1997. Interest income also includes
accrued interest on Excess Spread Receivables ("ESR"). In addition to the cost
of financing loans pending sale or securitization, interest expense includes the
cost of financing the Company's longer term capital requirements, including the
cost of strategic acquisitions. Interest income increased $22.3 million, or
44.9%, in the first quarter of fiscal 1999 over the first quarter of fiscal
1998. Interest expense increased $19.5 million, or 54.4%, for the three months
ended June 30, 1998 over the three months ended June 30, 1997.
Net servicing Income:
Net servicing income increased $10.7 million or 67.3% for the first quarter of
fiscal 1999 over the corresponding period in fiscal 1998 due to the increase in
the size of the servicing portfolio and the volume of securitizations. The
Company's home equity loan servicing portfolio increased to $11.2 billion at
June 30, 1998 from $7.3 billion at June 30, 1997. Servicing income consists of
fee income and capitalized servicing. The fee income component (which is
realized in cash) represents income earned from Real Estate Mortgage Investment
Conduits ("REMICs") and other trusts based on the level of loans serviced. The
fee income component of servicing income was $18.5 million for the first quarter
of fiscal 1999 and $11.0 million for the corresponding period in fiscal 1998.
Capitalized servicing consists of servicing assets recorded in connection with
new securitizations (i.e., the present value of future servicing income, net of
expenses), reduced by amortization of capitalized servicing from prior
securitizations. The net capitalized servicing component of servicing income was
$8.2 million for the first quarter of fiscal 1999 compared with $5.0 for the
corresponding period in fiscal 1998.
Compensation and Benefits and General and Administrative Expenses:
The table below allocates the Company's compensation and benefits, general and
administrative expenses and headcount between the Retail Subsidiaries and all
other activities. As noted previously, the Company has significantly expanded
its retail origination platform, which in turn has resulted in a significant
increase in expenses. From the date of the acquisition of majority ownership,
expenses of the acquired subsidiaries are included in the Company's consolidated
expenses.
As demonstrated in the table below, the acquisition of the retail origination
subsidiaries has resulted in significantly higher levels of compensation and
benefits and general and administrative expenses. With respect to the Company's
activities exclusive of the Retail Subsidiaries, the expense increases are
indicative of the significant growth in ContiMortgage's origination volume, its
serviced loan portfolio and the related growth in headcount to support these
activities. Combined compensation and benefits and general and administrative
expenses for ContiMortgage (exclusive of its retail subsidiaries) increased by
$7.1 million during the first quarter of fiscal 1999. ContiMortgage's headcount
(exclusive of its retail subsidiaries) was 1,140 as of June 30, 1998 compared
with 687 as of June 30, 1997. Combined compensation and benefits and general and
administrative expenses for activities other than ContiMortgage and the Retail
Subsidiaries increased by $1.7 million for the first quarter of fiscal 1999 over
the corresponding period in fiscal 1998. This is due in part to the expansion of
the Company's commercial real estate business, including the acquisition of
Keystone.
13
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended June 30, Increase
1998 1997 Amount %
------- ------- ------- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Compensation and benefits:
Retail Subsidiaries .................... $21,276 $12,340 $ 8,936 72.4%
Operations excluding Retail Subsidiaries 22,048 17,894 4,154 23.2%
------- ------- ------- ----
Total compensation and benefits ........... $43,324 $30,234 $13,090 43.3%
======= ======= ======= ====
General and administrative:
Retail Subsidiaries ..................... $16,446 $ 9,663 $ 6,783 70.2%
Operations excluding Retail Subsidiaries 16,065 11,407 4,658 40.8%
------- ------- ------- ----
Total general and administrative .......... $32,511 $21,070 $11,441 54.3%
======= ======= ======= ====
Headcount (at period end):
Retail Subsidiaries .................... 1,813 974 839 86.1%
Headcount excluding Retail Subsidiaries 1,296 770 526 68.3%
------- ------- ------- ----
Total headcount ........................... 3,109 1,744 1,365 78.3%
======= ======= ======= ====
</TABLE>
Defaults and Losses:
(See "ContiMortgage Corporation - Delinquencies, Defaults and Losses" on page
11)
Early in the life of a securitization, realized losses are generally very low.
Losses as a percentage of average serviced loans have increased over time as the
portfolio has seasoned and annual growth has decelerated. Losses in the
portfolio are overwhelmingly attributable to the time period a loan remains in
foreclosure status and are primarily a function of interest foregone on the
loans and the deterioration of collateral value over this time. During the
course of fiscal 1998, the Company implemented an aggressive loss mitigation
program focused on this issue, with the long-term objective of a significant
reduction in the time period defaulted loans are held in the serviced portfolio.
This program, which includes purchasing loans and properties out of REMICs for
early disposition, results in a near term acceleration of losses and a longer
term mitigation of total potential losses. The Company anticipates that the
continuation of this program in fiscal 1999 will result, in aggregate, on the
order of 75 to 85 basis points as a percentage of loans serviced (on a trailing
12 month basis). However, due in part to this acceleration of losses in fiscal
1998 and 1999, the Company expects a reduction in total losses as a percentage
of serviced loans in fiscal 2000 and beyond. As of June 30, 1998, the Company
projects an average annual loss rate over remaining REMIC lives of 0.63%.
Estimated future credit losses (undiscounted) over the lives of the REMICs are
approximately $202 million. Combined historical and estimated future losses as a
percentage of original pool balances was 1.81% as of June 30, 1998.
14
<PAGE>
Gain on Sale of Receivables and Excess Spread Receivables
- ---------------------------------------------------------
Gain on Sale of Receivables:
The following table sets forth the components of gain on sale of receivables for
the three months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
Percent Percent
of of
Amount Total Amount Total
------- ----- ------- -----
Home equity/home improvement: (dollars in thousands)
<S> <C> <C> <C> <C>
ContiMortgage/ContiWest securitizations $11,493 30.6% $38,006 59.1%
Other (including whole loan sales,
origination points and fees) .......... 19,650 52.3 14,146 22.0
------- ----- ------- -----
Total home equity/home improvement ....... 31,143 82.9 52,152 81.1
Commercial real estate ................... 1,262 3.4 4,373 6.8
Auto ..................................... 4,867 13.0 7,008 10.9
Other .................................... 300 0.7 807 1.2
------- ----- ------- -----
Total ............................. $37,572 100.0% $64,340 100.0%
======= ===== ======= =====
</TABLE>
Gain on sale of receivables decreased $26.8 million or 41.6% in the first
quarter of fiscal 1999 from the corresponding quarter of fiscal 1998. The
decrease was primarily the result of lower gain on sale of receivables from
ContiMortgage/ContiWest securitizations; $11.5 million in the fiscal 1999 first
quarter, down $26.5 million from $38.0 million in the fiscal 1998 first quarter.
Gain on sale of receivables with respect to ContiMortgage/ContiWest
securitizations includes the gain recorded upon the completion of
securitizations as well as unrealized gains or losses that result from the
quarterly adjustment of ESR to fair value. The completion of the $1.75 billion
ContiMortgage Home Equity Loan Trust 1998-2 resulted in new ESR of $100 million
and a pretax gain on sale of receivables of $68.3 million. Premiums paid to
acquire loans from wholesale sources (as a percentage of loans securitized) were
more than 100 basis points lower in the fiscal 1999 first quarter than in the
comparable quarter last year. This positive development was offset in part by a
narrowing of the spread, by approximately 30 basis points, between the weighted
average interest rate on mortgage loans securitized and the pass-through rate
interest rate on securities sold. This was attributable in part to a flatter
U.S. Treasury yield curve in the 1999 quarter compared with the prior year's
quarter. The gain on sale of receivables from the ContiMortgage Home Equity Loan
Trust 1998-2 securitization was offset in part by a $56.2 million fair value
adjustment to ESR from prior ContiMortgage/ContiWest securitizations. This
adjustment was primarily attributable to higher prepayment speeds. As noted
below, the Company increased the weighted average estimated future CPR for its
ContiMortgage/ContiWest ESR portfolio from 27% at March 31, 1998 to 28% at June
30, 1998. The adjustment also includes $8.0 million attributable to yield
maintenance agreements on certain Interest-only securities sold in connection
with six ContiMortgage/ContiWest securitizations from late 1995 to early 1997.
15
<PAGE>
Excess Spread Receivables ("ESR"):
At June 30, 1998 and March 31,1998, the Company's ESR portfolio was comprised of
the following :
June 30, Percentage March 31, Percentage
1998 of Total 1998 of Total
-------- ---------- -------- ----------
(dollars in thousands)
Home equity:
ContiMortgage/ContiWest ... $605,485 86.7% $555,884 85.7%
Other servicers ........... 36,346 5.2 37,428 5.8
-------- ----- -------- -----
Total home equity ...... 641,831 91.9 593,312 91.5
Home improvement .............. 4,972 0.7 7,919 1.2
Commercial real estate ........ 7,756 1.1 8,233 1.3
Auto .......................... 33,300 4.8 28,223 4.3
Leases ........................ 8,113 1.2 8,960 1.4
Franchise ..................... 2,216 0.3 2,138 0.3
-------- ----- -------- -----
Total ESR portfolio .... $698,188 100.0% $648,785 100.0%
======== ===== ======== =====
The ESR is reported as "Interest-only and residual certificates" in the
accompanying unaudited Consolidated Balance Sheets. The ESR represents the
present value of an estimated stream of future cash flows that the Company
expects to receive over the life of a securitization, taking into consideration
estimated prepayment speeds and credit losses. These cash flows include the
excess of the weighted average coupon on the loans or other assets securitized
over the sum of the pass-through interest rate, a normal servicing fee, a
trustee fee, an insurance fee (where applicable) and the credit losses relating
to the loans or other assets securitized. At June 30, 1998, ESR totaled $698.2
million, of which $605.5 million, or 86.7% of the total, was attributable to
ContiMortgage/ContiWest securitizations.
The predominant factor affecting the level of estimated future ESR cash flows is
the rate at which the underlying principal of the securitized loans is reduced.
Prepayments represent principal reductions in excess of contractually scheduled
reductions; prepayment speeds are generally expressed as an annualized
Conditional Prepayment Rate ("CPR"). In determining fair value of the
ContiMortgage/ContiWest ESR portfolio, the Company increased its weighted
average estimated future CPR from 27% as of March 31, 1998 to 28% as of June 30,
1998.
Additional factors that are considered in determining the fair value of ESR are
estimated future credit losses and the discount rate. As a credit enhancement,
the ESR is subordinate to the rights of the holders of the senior pass-through
securities. The weighted average annual credit loss provision used in the
determination of the fair value of ContiMortgage's ESR at June 30, 1998 was
0.63% compared with 0.62% as of March 31, 1998. The future cash flows estimated
as of June 30, and March 31, 1998, taking into consideration estimated
prepayment rates and credit losses, were discounted at a rate of 10% to arrive
at the fair value amounts presented in the accompanying unaudited Consolidated
Balance Sheets. If actual prepayments or credit losses are greater than
16
<PAGE>
the assumptions used to determine ESR fair value, the ESR carrying value will be
written down through a charge to earnings.
The following table presents an analysis of ESR activity during the three months
ended June 30, 1998:
Interest-only and residual certificates (in thousands):
- ---------------------------------------
Balance as of March 31, 1998 ........................ $ 648,785
New securitizations:
ContiMortgage 1998-2 ......................... 99,991
Triad 1998-2 ................................. 6,165 106,156
---------
Net cash distributions from REMICs and trusts .... (9,717)
Accruals of interest income ...................... 12,512
Fair value adjustments .......................... (59,548)
---------
Balance as of June 30, 1998 ......................... $ 698,188
=========
17
<PAGE>
Liquidity and Capital Resources
The following table summarizes the principal components of the Company's cash
flows for the twelve months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Twelve months
ended June 30,
----------------
1998 1997
------ ------
Cash component of pretax income: (in millions)
<S> <C> <C>
Cash gross income, net of interest expense (a):
Gain on sale of receivables:
CMC securitizations -
Proceeds from NIMs sales ...................... $159.7 $ 0.0
Proceeds from IO sales ........................ 100.8 69.0
Premiums paid to third-party originators ...... (255.2) (170.1)
Transaction related expenses and hedge results (30.5) (22.8)
------ ------
Total CMC securitizations - cash basis ........... (25.2) (123.9)
Other cash gain on sale (b) ...................... 112.7 52.0
------ ------
Total gain on sale of receivables ..................... 87.5 (71.9)
Interest income, net of interest expense .............. 15.1 8.0
Net servicing income .................................... 62.2 33.2
ESR cash distributions .................................. 69.7 49.9
Other income ............................................ 17.0 12.3
------ ------
Total cash gross income, net of interest expense ..... 251.5 31.5
Cash operating expenses (c) ............................... 271.6 153.3
------ ------
Pretax income - cash basis ........................... (20.1) (121.8)
------ ------
Other cash requirements:
Growth in trade receivables, net of warehouse financing (d) (273.8) (120.0)
Acquisitions and infrastructure investments ............... (82.9) (39.3)
Other cash inflows (outflows) (e) ......................... (69.8) (25.4)
------ ------
Other cash requirements .............................. (426.5) (184.7)
------ ------
Aggregate cash requirements .................................... (446.6) (306.5)
Proceeds from debt and equity issues ........................... 412.1 392.7
------ ------
Increase (decrease) in cash and cash equivalents ............... $(34.5) $ 86.2
====== ======
</TABLE>
(a) Cash gross income, net of interest expense, reflects gain on sale of
receivables on a cash basis. Consequently, it excludes ESR retained in
connection with securitizations and is reduced by premiums paid to
third-party originators. Cash gross income also excludes accrued interest
income on ESR, capitalized servicing income net of related amortization,
and undistributed earnings of less than 50% owned subsidiaries. Cash gross
income includes ESR cash flows (i.e., distributions received from trusts
and proceeds from NIMS and IO sales).
(b) Other cash gain on sale includes, among other things, gains from the sale
of commercial real estate mortgage loans, whole loan sales and origination
points and fees.
(c) Cash operating expenses exclude interest, depreciation, amortization and
deferred compensation.
18
<PAGE>
(d) Trade receivables, net of warehouse financing, are higher at month ends due
to the concentration of loan originations in the latter part of the month
and the timing difference between the date of origination and the date the
loan is financed through the Company's warehouse facilities (usually 1 to 4
days).
(e) Other cash inflows and outflows include, among other things, tax payments,
cash expended for common share repurchases, proceeds from the exercise of
employee stock options, payments of amounts due to affiliates and changes
in other receivables and liabilities.
Sources of Liquidity and Capital
The Company's primary sources of liquidity are sales of loans, leases and other
assets through securitization, the sale of loans, leases and other assets under
its asset purchase and sale facilities with certain financial institutions
("Purchase and Sale Facilities") and funding under an agreement to repurchase
(the "Repurchase Agreement"), collectively, the "Facilities"; the issuance of
shares of common stock, the issuance of long-term debt and short-term borrowed
funds.
In previous fiscal years, the Company sold ESR, with limited recourse, to
provide cash to fund the Company's securitization program. Under the recourse
provisions of the agreements, the Company is responsible for losses incurred by
the purchaser within an agreed-upon range. At June 30, 1998 $83.9 million of
these sales were outstanding. The Company's performance obligations in these
transactions are guaranteed by Continental Grain for an agreed-upon fee. Another
method of generating liquidity from the ESR is through the sale of NIMS, which
generated proceeds of $159.7 million in fiscal 1998. Although the Company
intends to continue to pursue opportunities to sell ESR, there is only a limited
market for such instruments and no assurance can be given that such
opportunities will be available in the future.
The Company had $2.8 billion of committed and $3.1 billion of uncommitted sale
capacity under the Facilities as of June 30, 1998. The Purchase and Sale
Facilities allow the Company to sell, with limited recourse, interests in
designated pools of loans and other assets. The Repurchase Agreement allows the
Company to sell receivables held for sale to a financial institution under an
agreement to repurchase the receivables. The Facilities generally have one year
renewable terms, which expire between June 1999 and December 1999. As of June
30, 1998, the Company had utilized $1.5 billion of the capacity under the
Facilities. Although the Company currently anticipates that it will be able to
renew these facilities when they expire and to obtain additional facilities,
there can be no assurance that such financing will be obtainable on as favorable
terms, if at all.
In February 1998, the Company's Board of Directors authorized the purchase up to
one million shares of the Company's outstanding common stock. This program was
completed in July 1998 at an average cost of $27.66 per share. The purchased
shares are held in treasury for use in connection with ContiFinancial's Stock
Plan.
On April 2, 1998, the Company issued $200 million of 8 1/8% unsecured Senior
Notes due April 1, 2008. Proceeds to the Company, net of underwriting fees,
market discount and other costs were $188 million. Interest on these notes is
payable semi-annually on April 1 and October 1 commencing October 1, 1998. The
notes are redeemable in whole or in part, at the option of the Company, at any
time or from time to time, at a redemption price equal to the greater of (i)
100% of their principal amount or (ii) the sum of the present values of the
remaining scheduled payments of principal and interest thereon discounted to the
date of redemption on a semiannual basis at the treasury yield plus 50 basis
points, plus, in each case, accrued interest to the date of redemption.
19
<PAGE>
In anticipation of growth in the Company's operations, additional financing will
be required. The Company currently has commitments for financing through the
unsecured revolving credit facility and, in April 1998, issued $200 million of
senior unsecured debt. However, there can be no assurance that the Company will
be successful in obtaining additional financing in the future on terms that the
Company would consider to be favorable. Furthermore, no assurance can be given
that Continental Grain will provide such financing if the Company is unable to
obtain third party financing.
The Company hedges, in part, its interest rate exposure on receivables held for
sale and loans and other assets sold, with limited recourse, through the use of
futures contracts and short sales of United States Treasury securities.
Securities purchased under agreements to resell increased from $857.6 million at
March 31, 1998 to $1.5 billion at June 30, 1998. Securities sold but not yet
purchased increased from $847.5 million at March 31, 1998 to $1.5 billion at
June 30, 1998. The increases in securities purchased under agreements to resell
and securities sold but not yet purchased, which are integral to this hedging
strategy, reflect growth in the level of loans and other assets sold with
limited recourse or held for sale.
Year 2000
The "Year 2000" issue, the ability of systems to identify dates in the 21st
century, is a critical business and operational issue being addressed by the
Company. The issue primarily encompasses computer programs and applications that
were written using two digits (instead of four) to describe the applicable year.
Failure to successfully modify such programs and applications to be Year 2000
compliant would have a material adverse impact on the Company. Exposure arises
not only from potential consequences (e.g., business interruption) of certain of
the Company's own applications not being Year 2000 compliant, but the impact of
noncompliance by certain significant counterparties, including Strategic
Alliances.
The Company has undertaken a project to bring its systems into Year 2000
compliance. This project includes an assessment to determine the anticipated
cost to remediate its systems and applications to make them Year 2000 compliant.
Project efforts are being coordinated by a Year 2000 Task Force whose members
include the Company's senior management and information technology, finance,
accounting and legal staffs, supported by external consultants. Similar task
forces have been formed by each of Company's majority owned subsidiaries. The
Year 2000 Task Force established the following five step project methodology to
address the Company's Year 2000 issues: (1) Awareness and Project Definition;
(2) Systems Inventory and Assessment; (3) Remediation; (4) Testing; and (5)
Implementation. To date, the Company has completed the Awareness and Project
Definition and Systems Inventory and Assessment phases and has begun the
Remediation and Testing phases. During the Systems Inventory and Assessment
phase, the Company completed an inventory of all hardware, software and
computerized systems and identified those which require remediation for the Year
2000. The Systems Inventory and Assessment phase also included the establishment
of criteria for prioritizing modifications, developing strategies and a process
to certify that third party products are compliant, and beginning the
development of contingency plans in the event systems are not compliant or fail
to operate properly. Implementation is expected to commence in the quarter
ending September 30, 1998 and continue through March 31, 1999, the Company's
target date for resolution of its Year 2000 issues. The Company will continue to
test its systems through the Year 2000 to ensure that compliance is maintained
as normal system updates, enhancements and modifications are made.
Based on its analysis of the data from the Systems Inventory and Assessment
phases, the Company has concluded that the greatest risk posed by the Year 2000
issue relates to the computerized loan servicing systems utilized by its home
equity, auto and commercial lending operations. If such systems fail to operate
properly as a result of the Year 2000 issue, the loan servicing process could
not be executed in a manual environment. The Company's loan servicing software
have been developed by outside vendors and are
20
<PAGE>
executed either in-house or by third parties under contract with the Company.
Conversion to new servicing software could take up to twelve months.
Accordingly, a large part of the Company's Remediation effort currently focuses
on insuring that these loan servicing systems will not be negatively impacted by
the Year 2000 issue. Information received from the Company's loan servicing
software vendors indicates that the systems should be ready for the Year 2000 by
late 1998, with additional testing during the first quarter of 1999. However,
should the software vendors be unable to correct all Year 2000 issues by the
target dates, this could have a material adverse impact on the Company.
The Company is also working to insure that its business operations are not
interrupted by the failure of its long distance telephone carrier and credit
service bureaus to adequately prepare for the Year 2000. The ability of the
Company's subsidiaries to generate new business would be severely impacted if
the Company's main long distance telephone carrier experiences Year 2000-related
difficulties. The Company's current long distance telephone carrier anticipates
that its systems will be Year 2000-compliant by late 1998. The Company's home
equity and auto lending subsidiaries also make extensive use of credit reporting
agencies to determine the creditworthiness of potential borrowers. These credit
reporting agencies in turn rely on consumer information provided to them by
third parties. Each credit reporting agency has informed the Company that it
plans to be Year 2000-compliant by late 1998. However, if the credit reporting
agencies, or the third parties upon which they rely, experience difficulties as
a result of the Year 2000, this could have an adverse impact on the Company's
business operations.
The Company believes that through the execution of its Year 2000 project
methodology, the likelihood of a material business disruption is small. The
major risks are associated with the Year 2000 remediation efforts of third party
vendors utilized by the Company. Based on the information provided by its
vendors, the Company believes that these vendors will meet their respective
target deadlines for resolution of Year 2000 issues. The Company is in the
process of developing contingency plans that will be used in the event that any
of its hardware, software or other computerized systems, or those of a vendor,
are not ready for the Year 2000; these contingency plans should be complete by
late 1998.
At this time, the Company estimates that the cost of its Year 2000 remediation
will be approximately $5.0 million. This estimate is subject to change as the
project progresses. The Company presently believes, based on the information
obtained during the Assessment and Systems Inventory phases, that the Year 2000
issue will not have a material adverse impact on its computer systems or
operations. The Company will, however, reassess the expected cost of compliance
and the risk that the Year 2000 issue will have a material adverse impact during
the Remediation and Testing and Implementation phases of its Year 2000
conversion effort.
Forward-looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q which are not
historical fact, may be deemed to be forward-looking statements under the
federal securities laws. There are many important factors that could cause the
Company's actual results to differ materially from those indicated in the
forward-looking statements. Such factors include, but are not limited to,
general economic conditions, interest rate risk, prepayment speeds, delinquency
and default rates, loss rates, changes (legislative and otherwise) in the asset
securitization industry, demand for the Company's services, the impact of
certain covenants in loan agreements of the Company, the degree to which the
Company is leveraged, its needs for financing, the Net Interest Margin Notes
market , the Company's Year 2000 issues, and other risks identified in the
Company's Securities and Exchange Commission filings. In addition, it should be
noted that past financial and operational performance of the Company is not
necessarily indicative of future financial and operational performance.
21
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
22
<PAGE>
PART II OTHER INFORMATION
Item 5. Other Information
The Securities and Exchange Commission (the "SEC") recently amended Rule
14a-4, which governs the use by the Company of discretionary voting
authority with respect to shareholder proposals. SEC Rule 14a-4(c)(1)
provides that, if the proponent of a shareholder proposal fails to notify
the Company at least 45 days prior to the month and day of mailing the
prior year's proxy statement, the proxies of the Company's management would
be permitted to use their discretionary authority at the Company's next
annual meeting of shareholders if the proposal were raised at the meeting
without any discussion of the matter in the proxy statement. For purposes
of the Company's 1999 Annual Meeting of Shareholders, this deadline will be
June 13, 1999.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
No. Description
------- -----------
11.1 Computation of the Company's Earnings Per Common Share
12.1 Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
23
<PAGE>
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.
ContiFinancial Corporation
Date Signature Title
- ---- --------- -----
August 14, 1998 /s/ Daniel J. Willett Senior Vice President and Chief
---------------------- Financial Officer (Principal
Daniel J. Willett Financial Officer)
August 14, 1998 /s/ Dennis G. Sullivan Vice President and Controller
---------------------- (Principal Accounting Officer)
Dennis G. Sullivan
24
Exhibit 11.1
ContiFinancial Corporation
Calculation of Earnings Per Share
Basic
Net Income $6,020,000
Weighted Average Shares 46,685,863
-----------
Year-to-date Basic EPS $0.13
===========
Diluted
Net Income $6,020,000
Weighted Average Shares 47,226,533
-----------
Year-to-date Primary EPS $0.13
===========
<TABLE>
<CAPTION>
Basic
- -----
Weighted
Ave. Shares
-----------
<S> <C>
Weighted average shares outstanding:
Common stock excluding shares relating to employee incentive plans 45,949,445
Vested Restricted Shares Outstanding during the Quarter 736,418
-----------
Weighted Average Shares Outstanding 46,685,863
-----------
Quarter income $6,020,000
-----------
Basic Earnings Per Share $0.13
===========
Diluted
- -------
Weighted
Ave. Shares
-----------
Weighted average shares outstanding:
Common stock excluding shares relating to employee incentive plans 45,949,445
Incremental Shares from the Effect of Restricted Shares Considered to be Outstanding 791,653
Incremental Shares from the Effect of Options Considered to be Outstanding 485,435
-----------
Weighted Average Shares Outstanding 47,226,533
-----------
Quarter income $6,020,000
-----------
Diluted Earnings Per Share $0.13
===========
</TABLE>
ContiFinancial Corporation
Ratio of Earnings to Fixed Charges
Exhibit 12.1 of June 30, 1998 Form 10-K
<TABLE>
<CAPTION>
Three months ended
June 30, Fiscal Fiscal Fiscal Fiscal Fiscal
1998 1997 98 97 96 95 94
------ ------ ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Summary:
Earnings 63,663 81,377 385,425 297,677 197,996 77,895 42,334
Fixed Charges 55,382 35,863 165,904 120,636 74,770 29,635 12,124
------ ------ ------- ------- ------ ------ ------
Ratio 1.15 2.27 2.32 2.47 2.65 2.63 3.49
====== ====== ======= ======= ======= ====== ======
Earnings:
Income before income taxes and minority interest 10,177 45,545 224,965 177,041 126,536 56,988 35,286
Plus: Interest expense 55,382 35,863 165,904 120,636 74,770 29,635 12,124
Less: Equity income in unconsolidated subsidiaries (1,840) -- (5,444) -- -- -- --
(Less)/Plus: Minority interest (56) (31) n/a n/a (3,310) (8,728) (5,076)
------ ------ ------- ------- ------- ------ ------
Total "Earnings" 63,663 81,377 385,425 297,677 197,996 77,895 42,334
====== ====== ======= ======= ======= ====== ======
Fixed Charges:
Interest expense 55,382 35,863 165,904 120,636 74,770 29,635 12,124
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 76,691
<SECURITIES> 2,195,856
<RECEIVABLES> 1,116,461
<ALLOWANCES> (3,321)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 30,793
<DEPRECIATION> (9,337)
<TOTAL-ASSETS> 3,587,116
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 477
<OTHER-SE> 633,873
<TOTAL-LIABILITY-AND-EQUITY> 3,587,116
<SALES> 0
<TOTAL-REVENUES> 142,116
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 75,835
<LOSS-PROVISION> 722
<INTEREST-EXPENSE> 55,382
<INCOME-PRETAX> 10,177
<INCOME-TAX> 4,101
<INCOME-CONTINUING> 6,020
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,020
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
