<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 September 30, 1997
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number
1-11785
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SOUTHERN PACIFIC FUNDING CORPORATION
(Exact name of registrant as specified in its charter)
California 33-0636924
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Centerpointe Drive, Suite 500, Lake Oswego, OR 97035
- -------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(503) 684-4700
--------------
(Registrant's telephone number, including area code)
(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.
(X) Yes (_) No
APPLICABLE ONLY TO CORPORATE ISSUERS;
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 6, 1997: 20,760,150 shares.
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
FORM 10-Q
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
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PART I FINANCIAL INFORMATION
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Item 1 - Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets
at September 30, 1997 and December 31, 1996 2
Condensed Consolidated Statements of Earnings for
the three month periods ended September 30, 1997
and 1996 and for the nine month periods ended
September 30, 1997 and 1996 3
Condensed Consolidated Statements of Cash Flows
for the nine month periods ended September 30,
1997 and 1996 4
Notes to Condensed Consolidated Financial Statements 5-6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7- 15
PART II OTHER INFORMATION
- -------------------------
Item 6 - Exhibits and Reports on Form 8-K 16-17
Signatures 18
</TABLE>
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL INFORMATION
SOUTHERN PACIFIC FUNDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1997 1996
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(UNAUDITED)
<S> <C> <C>
ASSETS
Cash $ 27,732,088 $ 14,175,566
Loans held for sale 213,915,174 223,059,102
Interest-only and residual certificates, net 216,179,202 87,016,900
Accrued interest receivable 3,395,796 3,181,449
Premises and equipment, net 7,059,786 3,036,388
Goodwill 6,848,623 4,742,571
Other assets 21,203,552 5,165,048
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Total assets $496,334,221 $340,377,024
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Borrowings under warehouse lines of credit 192,595,674 152,680,395
Notes payable 32,760,310 -
Deferred tax liability 41,098,277 18,445,495
Convertible subordinated debentures 75,000,000 75,000,000
Other liabilities 29,589,981 9,164,901
------------------ -------------------
Total liabilities 371,044,242 255,290,791
Shareholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized; none issued or
outstanding at September 30, 1997
and December 31, 1996 - -
Common stock, no par value,
75,000,000 shares authorized; 20,760,150
issued and outstanding at September 30, 1997
and 20,737,500 at December 31, 1996 54,098,931 53,798,099
Contributed capital 247,500 247,500
Translation adjustment (15,287) -
Retained earnings 70,958,835 31,040,634
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Total shareholders' equity 125,289,979 85,086,233
------------------ -------------------
------------------ -------------------
Total liabilities and shareholders' equity $496,334,221 $340,377,024
================== ===================
</TABLE>
See accompanying notes to financial statements.
2
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SOUTHERN PACIFIC FUNDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three month periods ended Nine month periods ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Gains on sales of loans $39,647,780 $15,245,040 $101,586,159 $34,130,738
Interest income 11,282,263 3,358,564 27,709,293 8,326,360
Securities valuation and other income (828,860) 2,393,869 469,108 4,295,679
----------- ----------- ------------ -----------
Total revenue 50,101,183 20,997,473 129,764,560 46,752,777
----------- ----------- ------------ -----------
Expenses:
Interest on borrowings 8,593,881 1,390,511 17,989,275 4,755,742
Personnel and commission expense 10,955,539 3,292,858 27,419,411 7,397,915
General and administrative expense 6,885,303 2,020,151 16,119,632 3,955,273
----------- ----------- ------------ -----------
Total expenses 26,434,723 6,703,520 61,528,318 16,108,930
----------- ----------- ------------ -----------
Income before taxes 23,666,460 14,293,953 68,236,242 30,643,847
Income taxes 9,821,581 6,074,964 28,318,041 13,029,394
----------- ----------- ------------ -----------
Net earnings $13,844,879 $ 8,218,989 $ 39,918,201 $17,614,453
=========== =========== ============ ===========
NET INCOME PER SHARE:
Primary $ 0.62 $ 0.37 $ 1.79 $ 0.93
=========== =========== ============ ===========
Fully Diluted $ 0.57 $ 0.37 $ 1.65 $ 0.93
=========== =========== ============ ===========
Weighted average number of shares outstanding-
primary 22,330,683 22,132,956 22,285,648 18,986,723
=========== =========== ============ ===========
Weighted average number of shares outstanding-
fully diluted 25,481,808 22,132,956 25,436,773 18,986,723
=========== =========== ============ ===========
</TABLE>
See accompanying notes to finacial statements
3
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 39,918,201 $ 17,614,453
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 1,636,499 375,830
Translation adjustment (15,287) -
Securities valuation income (165,134) (3,652,393)
Changes in certain assets and liabilities, net of effect
of acquisitions and contribution transaction:
Loans held for sale 9,143,928 (78,527,193)
Loans held under repurchase agreement -- 12,800,565
Net change in interest only and residual
certificates (128,997,168) (43,943,571)
Accrued interest receivable (214,347) 17,480
Deferred tax liability 22,652,782 -
Other assets (15,621,433) (2,017,296)
Other liabilities 20,425,080 14,201,474
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Net cash used in operating activities (51,236,879) (83,130,651)
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Cash flows from investing activities:
Payment for acquisitions (3,800,000) -
Purchases of premises and equipment (4,383,020) (2,169,510)
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Net cash used in investing activities (8,183,020) (2,169,510)
------------- ------------
Cash flows from financing activities:
Net changes in:
Borrowings (repayments) under
warehouse lines of credit 39,915,279 44,948,298
Notes payable 32,760,310 -
Borrowings from SPTL - 322,053
Bank overdraft - (881,517)
Proceeds from issuance of common stock 300,832 53,758,259
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Net cash provided by financing activities 72,976,421 98,147,093
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Net change in cash 13,556,522 12,846,932
Cash at beginning of period 14,175,566 -
------------- ------------
Cash at end of period $ 27,732,088 $ 12,846,932
============= ============
</TABLE>
See accompanying notes to financial statements
4
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SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. It is suggested that these consolidated financial
statements be read in conjunction with the Company's December 31, 1996 audited
consolidated financial statements and notes thereto included in the Company's
Form 10-K.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997.
In preparing the condensed consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the dates of the balance sheets, contingent assets
and liabilities and revenues and expenses for the periods presented. Actual
results could differ significantly from those estimates.
NOTE B - HEDGING TRANSACTIONS
The market value of fixed-rate mortgage loans has a greater sensitivity to
changes in market interest rates than adjustable-rate mortgage loans. As the
Company's production of fixed-rate mortgage loans has increased, the Company has
begun to implement various hedging strategies to mitigate the change in market
value of fixed-rate mortgage loans held for sale between the dates of
origination and sale. Commencing in August 1995, these strategies have included
selling short and selling forward United States Treasury securities and pre-
funding loan originations in its securitizations. The Company currently hedges
its fixed-rate mortgage loans held for sale by selling forward a combination of
United States Treasury securities of various maturities whose combined change in
value due to a change in interest rates closely approximates the change in value
of the mortgage loans hedged. In the future the Company may hedge its variable-
rate mortgage loans and its interest-only and residual certificates with hedging
transactions which may include forward sales of mortgage loans or mortgage-
backed securities, interest rate caps and floors and buying and selling of
futures and options on futures. The nature and quantity of hedging transactions
are determined by the Company's management based on various factors, including
market conditions and the expected volume of mortgage loan originations and
purchases.
5
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SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company believes that it has implemented a cost-effective hedging program to
provide a level of protection against changes in market value of its fixed-rate
mortgage loans held for sale. However, an effective hedging strategy is complex
and no hedging strategy can completely insulate the Company from such changes.
In addition, hedging involves transaction and other costs, and such costs could
increase as the period covered by the hedging protection increases or in periods
of rising and fluctuating interest rates.
In addition, the Company hedges future production of mortgage loans through a
pre-funding mechanism in connection with its securitizations. In its
securitization transactions, investors deposit cash in a pre-funded amount into
the related trust to purchase the loans the Company commits to sell on a forward
basis. Pending use, this pre-funded amount is invested in short term obligations
which pay a lower interest rate than the interest rate the trust is obligated to
pay certificate investors on the outstanding balance of the pre-funded amount.
The Company is required to deposit at the closing of the related transaction an
amount sufficient to make up the difference between these rates.
The Company regularly securitizes and sells fixed and variable-rate mortgage
loans. To offset the effects of interest rate fluctuations on the value of its
fixed-rate loans held for sale, the Company in certain cases has hedged its
interest rate risk related to loans held for sale by selling U.S. Treasury
securities short or in the forward market. The Company classifies these sales as
hedges of specific loans held for sale. The gains or losses derived from these
sales are deferred and recognized as an adjustment to gains on sale of loans
when the loans are sold or securitized.
As of September 30, 1997 and December 31, 1996, the Company had open hedge
positions of $0 million and $32.6 million, respectively, related to the sales of
United States Treasury securities in the forward market.
NOTE C - COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off balance sheet risk in
the normal course of business. These financial instruments include agreements to
fund fixed and variable-rate mortgage loans and loans in process. For agreements
to fund fixed-rate loans, the contract amounts represent exposure to loss from
market fluctuations as well as credit loss. The Company controls the credit risk
of its agreements to fund fixed and variable-rate loans through credit
approvals, limits and monitoring procedures.
Agreements to fund mortgage loans are agreements to lend to customers as long as
there is no violation of any condition established in the contracts. Such
agreements generally have fixed expiration dates or other termination clauses.
Since some agreements may expire without being drawn upon, the total agreement
amounts do not necessarily represent future cash requirements. As of September
30, 1997, the Company had agreements to fund loans of $27.0 million.
6
<PAGE>
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements included in Item 1 of the Form 10-Q.
GENERAL
The Company is engaged in the business of originating, purchasing and
selling mortgage loans secured primarily by one-to-four family residences. The
majority of the Company's loans are made to owners of single family residences
who use the loan proceeds to consolidate and refinance debt, finance home
improvements and fund educational expenses. The Company originates and purchases
loans through its Wholesale Division, its Correspondent Program, its Consumer
Loan Division and its Strategic Alliance Program.
The Company's primary source of revenue is the recognition of gains from the
sale of interests in loans through securitizations. The Company recognizes gains
from the sale of senior interests in loans to trust as the excess of the net
proceeds received on the sale and the fair value of the interest-only and
residual certificates retained by the Company over the Company's basis in such
loans. The fair value of the interest-only and residual certificates is an
estimate of the present value of the future cash flows from such certificates,
which are subject to the prepayment and loss characteristics of the underlying
loans. The Company securitized and sold senior interests in loans with principal
balances of $450.0 million and $189.4 million during the three months ended
September 30, 1997 and 1996, respectively and $1.2 billion and $422.4 million
during the nine months ended September 30, 1997 and 1996, respectively. The
Company sold loans through whole loan transactions with principal balances of
$129.1 million and $0 million during the three months ended September 30, 1997
and 1996, respectively and $150.1 million and $0 million during the nine months
ended September 30, 1997 and 1996, respectively. The Company anticipates that it
will continue to sell senior interests in a majority of its loans through
securitization transactions and will strategically sell loans in whole loan
transactions when such transactions are economically advantageous.
7
<PAGE>
FINANCIAL CONDITION
SEPTEMBER 30, 1997
Loans held for sale decreased $9.2 million or 4.1% to $213.9 million at
September 30, 1997 from $223.1 million at December 31, 1996. The decrease in
loans held for sale resulted from residential loan originations and purchases of
$1,302.4 million and commercial loan originations of $53.9 million. This was
offset by higher sales of loans into securitizations of $1,205.0 million, whole
loan sales of $150.1 million and a $10.4 million reduction in deferred loan
costs.
Interest-only and residual certificates increased $129.2 million or 148.5%
to $216.2 million at September 30, 1997 from $87.0 million at December 31, 1996.
The majority of this increase is the result of the securitizations, increasing
the asset $129.3 million during the nine months ended September 30, 1997.
Accrued interest receivable increased $0.2 million or 6.3% to $3.4 million
at September 30, 1997 from $3.2 million at December 31, 1996. This increase
reflects the increased loan production during the nine months ended September
30, 1997 and the increased time the loans were held for sale prior to
securitization.
Premises and equipment, net increased $4.1 million or 136.7% to $7.1 million
at September 30, 1997 from $3.0 million at December 31, 1996. This growth
reflects the acquisition of computer and office equipment from the Company's
acquisition of new subsidiaries as well as increased computer and office
equipment purchased for the opening of new regional branch centers during the
nine months ended September 30, 1997.
Goodwill increased $2.1 million or 44.7% to $6.8 million at September 30,
1997 from $4.7 million at December 31, 1996. This growth reflects the company's
acquisition of new subsidiaries.
Other assets increased $16.0 million or 307.7% to $21.2 million at September
30, 1997 from $5.2 million at December 31, 1996. Other assets represent prepaid
expenses, accounts receivable, bond issuance costs and a receivable from an
affiliate of $14.3 million at September 30, 1997.
Borrowings under warehouse lines of credit increased $39.9 million or 26.1%
to $192.6 million at September 30, 1997 from $152.7 million at December 31, 1996
reflecting an increase in loan production over loan securitizations and sales of
$1.2 million and an increased use of cash for operations of $38.7 million.
8
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Notes payable increased $32.8 million or 100% to $32.8 million at September
30, 1997 from $0.0 million at December 31, 1996. $29.4 million of the increase
in notes payable reflects the Company entering into a residual financing
facility that allows the Company to obtain debt secured by interest-only and
residual certificates. At September 30, 1997, the Company had drawn upon $29.4
million of this facility.
Deferred tax liability increased $22.7 million or 123.4% to $41.1 million at
September 30, 1997 from $18.4 million at December 31, 1996. This increase is the
result of an increase in gains on sales of loans of $67.5 million during the
nine months ended September 30, 1997.
Shareholder's equity increased $40.2 million or 47.2% to $125.3 million at
September 30, 1997 from $85.1 million at December 31, 1996, due to net earnings
for the nine months ended September 30, 1997 of $39.9 million and the issuance
of common stock under the Employee Stock Option Plan.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1997 Compared to Quarter Ended September 30, 1996
Total revenues increased $29.1 million or 138.6% to $50.1 million for the
quarter ended September 30, 1997 from $21.0 million for the quarter ended
September 30, 1996. During the same period, the Company's total expenses
increased $19.7 million or 294.0% to $26.4 million from $6.7 million. As a
result, the Company's net income increased $5.6 million or 68.3% to $13.8
million in the quarter ended September 30, 1997 from $8.2 million in the quarter
ended September 30, 1996.
The increase in revenues was primarily the result of increased gain on sale
of loans and increased interest income due to higher loan originations,
securitizations and whole loan sales. Gains on sales of loans increased $24.4
million or 160.5% to $39.6 million in the quarter ended September 30, 1997 from
$15.2 million in the quarter ended September 30, 1996. This increase was
primarily the result of higher loan origination and purchase volume which
resulted in a higher level of loan securitizations and whole loan sales.
Within the quarter ended September 30, 1997, Wholesale Division loan
originations increased $201.4 million or 131.8% to $354.2 million compared to
$152.8 million in the comparable period in 1996, Correspondent purchases of
loans decreased $27.1 million or 35.1% to $50.1 million in the quarter ended
September 30, 1997 compared to $77.2 million in the comparable period in 1996,
Consumer Loan Division loan originations increased $45.1 million to $45.4
million in the quarter ended September 30, 1997 compared to $0.3 million in the
comparable period in 1996, Strategic Alliance loan originations increased to
$96.0 million in the quarter ended September 30, 1997 from $0.0 million in the
comparable period in 1996 and commercial loan originations increased to
9
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$32.9 million in the quarter ended September 30, 1997 from $0.0 million in the
comparable period in 1996. As a result, total residential and commercial loan
originations and purchases increased $348.3 million or 151.2% to $578.6 million
in the quarter ended September 30, 1997 from $230.3 million in the comparable
period in 1996. Total loans of $450.0 million were securitized in the quarter
ended September 30, 1997 compared to $189.4 million of loans securitized during
the comparable period in 1996, with a weighted average net gain on
securitization of 7.8% and 7.7%, respectively.
Interest income increased $7.9 million or 232.4% to $11.3 million in the
quarter ended September 30, 1997 from $3.4 million in the comparable period in
1996. The increase in interest income was primarily due to a higher average
balance of loans held for sale in 1997 resulting from the increased loan
origination and purchase volume during such period.
Securities valuation and other income decreased $3.2 million or 133.3% to
$(0.8) million in the quarter ended September 30, 1997 from $2.4 million in the
quarter ended September 30, 1996. The decrease was primarily the result of a
$3.2 million decrease in securities valuation adjustments on interest-only and
residual certificates and a $0.4 million adjustment to anticipated recourse
liability offset by a $0.4 million increase in miscellaneous income.
Interest expense increased $7.2 million or 514.3% to $8.6 million in the
quarter ended September 30, 1997 from $1.4 million in the quarter ended
September 30, 1996. The increase in interest expense was attributable to the
interest costs associated with higher borrowings resulting from increased loan
origination and purchase volume during the quarter ended September 30, 1997.
Personnel and commission expense increased $7.7 million or 233.3% to $11.0
million in the quarter ended September 30, 1997 from $3.3 million in the
comparable period in 1996. The increase in personnel and commission expense was
primarily due to new acquisitions and increased staffing levels related to the
Wholesale Division's growth and increased loan originations. As of September 30,
1997 the Company operated 39 regional and satellite offices and employed 857
persons as compared to 15 regional and satellite offices and 217 employees as of
September 30, 1996.
General and administrative expense, which consists primarily of occupancy,
supplies and other expenses, increased $4.9 million or 245.0% to $6.9 million in
the quarter ended June 30, 1997 from $2.0 million in the comparable period in
1996. The increase in general and administrative expense was primarily due to
the expenses incurred in association with the increase in the number of regional
and satellite offices and increased loan origination and purchase volume.
10
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Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Total revenues increased $83.0 million or 177.4% to $129.8 million for the
nine months ended September 30, 1997 from $46.8 million for the nine months
ended September 30, 1996. During the same period, the Company's total expenses
increased $45.4 million or 282.0% to $61.5 million for the nine months ended
September 30, 1997 from $16.1 million for the nine months ended September 30,
1996. As a result, the Company's net income increased $22.3 million or 126.7% to
$39.9 million in the nine months ended September 30, 1997 from $17.6 million in
the nine months ended September 30, 1996.
The increase in revenues was primarily the result of increased gain on sale
of loans and increased interest income due to higher loan originations,
securitizations and whole loan sales. Gains on sales of loans increased $67.5
million or 197.9% to $101.6 million in the nine months ended September 30, 1997
from $34.1 million in the nine months ended September 30, 1996. This increase
was primarily the result of higher loan origination and purchase volume which
resulted in a higher level of loan securitizations and whole loan sales.
Within the nine months ended September 30, 1997, Wholesale Division loan
originations increased $490.2 million or 136.4% to $849.6 million compared to
$359.4 million in the comparable period in 1996, Correspondent purchases of
loans increased $84.3 million or 64.6% to $214.8 million in the nine months
ended September 30, 1997 compared to $130.5 million in the comparable period in
1996, Consumer Loan Division loan originations increased $75.2 million to $75.5
million in the nine months ended September 30, 1997 compared to $0.3 million in
the comparable period in 1996, Strategic Alliance loan originations increased to
$162.4 million in the nine months ended September 30, 1997 from $0.0 million in
the comparable period in 1996 and commercial loan originations increased to
$53.9 million in the nine months ended September 30, 1997 from $0.0 million in
the comparable period in 1996. As a result, total residential and commercial
loan originations and purchases increased $866.0 million or 63.9% to $1,356.2
million in the nine months ended September 30, 1997 from $490.2 million in the
comparable period in 1996. Total loans of $1,205.0 million were securitized in
the nine months ended September 30, 1997 compared to $422.4 million of loans
securitized during the comparable period in 1996, with a weighted average net
gain on securitization of 8.2% and 8.1%, respectively.
Interest income increased $19.4 million or 233.7% to $27.7 million in the
nine months ended September 30, 1997 from $8.3 million in the comparable period
in 1996. The increase in interest income was primarily due to a higher average
balance of loans held for
11
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sale in 1997 resulting from the increased loan origination and purchase volume
during such period as compared to the corresponding period in 1996.
Securities valuation and other income decreased $3.8 million or 88.4% to
$0.5 million in the nine months ended September 30, 1997 from $4.3 million in
the nine months ended September 30, 1996. The decrease was primarily the result
of a $3.5 million decrease in securities valuation adjustments on interest-only
and residual certificates and a $3.3 million adjustment to anticipated recourse
liability offset by a $3.0 million increase in miscellaneous income.
Interest expense increased $13.2 million or 275.0% to $18.0 million in the
nine months ended September 30, 1997 from $4.8 million in the nine months ended
September 30, 1996. The increase in interest expense was attributable to the
interest costs associated with higher borrowings due to a higher balance of
loans held pending sale during 1997 resulting from increased loan origination
and purchase volume during 1997 as compared to 1996.
Personnel and commission expense increased $20.0 million or 270.3% to $27.4
million in the nine months ended September 30, 1997 from $7.4 million in the
comparable period in 1996. The increase in personnel and commission expense was
primarily due to new acquisitions and increased staffing levels related to the
Wholesale Division's growth and increased loan originations. As of September 30,
1997 the Company operated 39 regional and satellite offices and employed 857
persons as compared to 15 regional and satellite offices and 217 employees as of
September 30, 1996.
General and administrative expense, which consists primarily of occupancy,
supplies and other expenses, increased $12.1 million or 302.5% to $16.1 million
in the nine months ended September 30, 1997 from $4.0 million in the comparable
period in 1996. The increase in general and administrative expense was primarily
due to the expenses incurred in association with the increase in the number of
regional and satellite offices and increased loan origination and purchase
volume.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses the cash it receives from whole loan sales, loans sold
through securitizations, pre-funding mechanisms through its securitizations,
loan origination fees, net interest income and borrowings under its warehouse
facilities to meet its working capital needs. The Company's cash requirements
include the funding of loan originations and purchases, payment of interest
expenses, funding the over-collateralization requirements for securitizations
and the payment of operating expenses, income taxes and capital expenditures.
As a result of increased loan originations and purchases and its growing
securitization program, under which the Company sells loans through
securitizations and retains interest-only and residual certificates in the loans
sold, the
12
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Company has operated, and expects to continue to operate in a manner, on a
negative cash flow basis. The Company has historically invested its entire gain
on securitization in the related interest-only and residual certificates
resulting in an insignificant net cash flow to the Company from the
securitization. The Company's sale of loans through securitizations has resulted
in the recognition of a gain on securitization by the Company. The recognition
of this gain on securitization has a negative impact on the cash flow of the
Company because, although significant costs are incurred upon closing the
transactions which give rise to such gain, the Company does not receive the cash
representing the gain until later periods as the related loans are repaid or
otherwise collected. As a result the Company relies upon short-term warehouse
facilities to fund loan originations and purchases and current working capital
obligations.
In November 1995, the Company entered into a warehouse and purchases
facility (the "First Facility"). Under the First Facility, the Company has
available a $200 million warehouse line of credit secured by the loans the
Company originates and purchases. The First Facility extends through November
24, 1997. The Company is required to comply with various operating and financial
covenants as defined in the agreement governing the First Facility. Such
covenants include restrictions on (i) changes in the Company's business that
would materially and adversely affect the Company's ability to perform its
obligations under the First Facility, (ii) selling any asset other than in the
ordinary course of business and (iii) guaranteeing the debt obligations of any
other entity. The continued availability of funds provided to the Company under
this facility is subject to the Company's continued compliance with the
operating and financial covenants contained in such agreement.
In October 1996, the Company entered into a second warehouse facility (the
"Second Facility"). Under the Second Facility, the Company has available a $400
million warehouse line of credit secured by the loans the Company originates or
purchases using the facility. The Second Facility extends through February 5,
1998. The Company is required to comply with various operating and financial
covenants as defined in the agreement governing the Second Facility. Such
covenants include restrictions on (i) changes in the Company's business that
would materially and adversely affect the Company's ability to perform its
obligations under the Second Facility, (ii) selling any assets other than in the
ordinary course of business and (iii) guaranteeing the debt obligations of any
other entity. The continued availability of funds provided to the Company under
this facility is subject to the Company's continued compliance with the
operating and financial covenants contained in such agreement.
The Company also has a $100 million, 364 day warehouse facility to finance
first mortgage loans and high LTV second mortgage loans. This facility has
covenant and operating requirements similar to the Company's other warehouse
facilities and expires August 21, 1998.
The Company also entered into a residual financing facility of $30 million
that allows the Company to obtain debt secured by interest-only and residual
certificates. The
13
<PAGE>
Company had drawn upon $29.4 million of this facility at September 30, 1997. The
facility was repaid on November 4, 1997.
Prior to January 1, 1994, the Company sold its loans to institutional
purchasers in whole loan transactions. In March 1994, the Company completed its
first securitization of loans for $44.5 million. During the nine months ended
September 30, 1997 and the years ended December 31, 1996, 1995 and 1994, the
Company securitized $1,205.0 million, $657.4 million, $164.9 million and $70.2
million, respectively. The Company expects to continue to depend on its ability
to securitize loans in the secondary market to generate cash proceeds for
repayment of its warehouse lines and to create credit availability to purchase
additional loans. Several factors affect the Company's ability to complete
securitizations of its loans, including conditions in the securities markets
generally, conditions in the asset-backed securities market specifically, the
credit quality of the Company's portfolio of loans and the Comp [SET NEW] e it
to obtain an "AAA/Aaa" rating for such interests. The Company has also relied
on credit enhancements structured within the securitization that sold portions
of the loan interests as subordinated to more senior interests in the
securitization. Any substantial reductions in the size or availability of the
securitization market for the Company's loans or the unwillingness of insurance
companies to guarantee senior interests in the Company's loan pools could have a
material adverse effect on the Company's results of operations and financial
condition.
CASH FLOWS
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Operating Activities. For the nine months ended September 30, 1997, the
Company's operating activities used cash of $129.0 from interest-only and
residual certificates. Total cash used in operating activities decreased $28.9
million to $54.2 million for the nine months ended September 30, 1997 as
compared to $83.1 for the nine months ended September 30, 1996.
Investment Activities. Net cash used in investing activities increased to
$5.2 million for the nine months ended September 30, 1997 from $2.2 million for
the nine months ended September 30, 1996. This increase was primarily caused by
the acquisition of new subsidiaries.
14
<PAGE>
Financing Activities. Net cash provided by financing activities decreased
$25.1 million to $73.0 million for the nine months ended September 30, 1997 as
compared to $98.1 million for the nine months ended September 30, 1996. The
decrease in net cash provided was primarily the result of $39.9 million in
proceeds from the borrowings under warehouse lines of credit. As of September
30, 1997, total cash on hand amounted to $27.7 million as compared to $14.2
million at December 31, 1996.
RECENT DEVELOPMENTS
The Company signed a definitive agreement to purchase the loan servicing
operations of North American Mortgage Company ("NAMCO"). Under the terms of the
agreement, the Company will acquire NAMCO's servicing operation assets and
retain its experienced senior management team and loan servicing employees.
NAMCO's loan servicing operation is located in Santa Rosa, California
The Company completed a $100 million offering of senior notes with a coupon
of 11.5% and a maturity of November 1, 2004. The notes were priced at par. The
notes have been rated B2 by Moody's Investors Service, B+ by Fitch Investors
Service and B- by Standard & Poor's Rating Services.
The net proceeds will be used to repay outstanding indebtedness, to fund
future loan originations and purchases, to support securitization transactions,
for potential acquisitions of complementary companies and for general corporate
purposes.
RECENT ACCOUNTING DEVELOPMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share". This statement specifies the computation,
presentation and disclosure requirements for earnings per share for entities
with publicly held common stock or potential common stock. This Statement shall
be effective for financial statements for both interim and annual periods ending
after December 15, 1997. Earlier application is not permitted. At this time the
Company has determined that this Statement will have no significant impact on
the financial position or results of operations for 1997.
15
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 - Statement regarding computation of per share earnings
(loss)
27.1 - Financial Data Schedule (EDGAR Filing only)
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
September 30, 1997.
16
<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.
Southern Pacific Funding Corporation
------------------------------------
(Registrant)
By: /s/ Robert W. Howard
-----------------------
Robert W. Howard
Chief Executive Officer
(principal executive officer)
By: /s/ Peter F. Makowiecki
------------------------
Peter F. Makowiecki
Chief Financial Officer
(principal financial and chief
accounting officer)
Dated: November 11, 1997
17
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(UNAUDITED)
EXHIBIT 11.1
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
FULLY DILUTED NET INCOME PER SHARE:
Net income $13,844,879 $ 8,218,989 $39,918,201 $17,614,453
Add: Interest on convertible subordinated
debentures, net of tax effect) $ 756,844 $ - $ 2,138,908 $ -
Net income, as adjusted $14,601,723 $ 8,218,989 $42,057,109 $17,614,453
Weighted average number of shares outstanding 22,330,683 22,132,956 22,285,648 18,986,723
Net effect of dilutive stock options-based
treasury stock method 3,151,125 - 3,151,125 -
----------- ----------- ----------- -----------
Total average shares 25,481,808 22,132,956 25,436,773 18,986,723
Fully diluted net income per share $ 0.57 $ 0.37 $ 1.65 $ 0.93
=========== =========== =========== ===========
PRIMARY NET INCOME PER SHARE:
Net income $13,844,879 $ 8,218,989 $39,918,201 $17,614,453
Weighted average number of shares outstanding 22,330,683 22,132,956 22,285,648 18,986,723
Primary net income per share $ 0.62 $ 0.37 $ 1.79 $ 0.93
=========== =========== =========== ===========
</TABLE>
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF INCOME FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM
10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 16,254
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 473,020
<PP&E> 8,853
<DEPRECIATION> 1,793
<TOTAL-ASSETS> 496,334
<CURRENT-LIABILITIES> 371,044
<BONDS> 0
0
0
<COMMON> 54,099
<OTHER-SE> 71,191
<TOTAL-LIABILITY-AND-EQUITY> 496,334
<SALES> 129,765
<TOTAL-REVENUES> 129,765
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 43,540
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,989
<INCOME-PRETAX> 68,236
<INCOME-TAX> 28,318
<INCOME-CONTINUING> 39,918
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,918
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.65
</TABLE>
