SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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: 1-12109
DELTA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-3336165
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 WOODBURY ROAD, SUITE 200,
WOODBURY, NEW YORK 11797
(Address of registrant's principal executive offices including ZIP Code)
(516) 364 - 8500
(Registrant's telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and 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 [ ]
As of September 30, 1997, 15,372,288 shares of the Registrant's common
stock, par value $.01 per share, were outstanding.
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INDEX TO FORM 10-Q
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996.......................................................... 1
Consolidated Statements of Income for the three months and nine months
ended September 30, 1997 and September 30, 1996............................ 2
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and September 30, 1996.................................. 3
Notes to Consolidated Financial Statements................................. 4
Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 6
Certain Accounting Considerations..........................................16
PART II - OTHER INFORMATION
Other Information..........................................................22
Signatures.................................................................23
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PART I - FINANCIAL INFORMATION
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DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Assets
Cash and interest bearing deposits ................. $ 21,578,518 $ 18,741,182
Accounts receivable ................................ 12,324,990 8,654,885
Loans held for sale ................................ 85,763,109 83,677,017
Accrued interest and late charges receivable ....... 30,126,717 20,158,812
Capitalized mortgage servicing rights .............. 19,385,550 11,411,634
Equipment, net ..................................... 7,389,524 2,836,360
Cash held for advance payments ..................... 5,950,211 2,488,218
Real estate owned .................................. -- 134,750
Interest-only and residual certificates ............ 144,049,760 83,072,777
Prepaid and other assets ........................... 6,252,301 1,560,578
Goodwill ........................................... 6,131,246 --
------------ ------------
$338,951,926 $232,736,213
============ ============
Liabilities and Stockholders' Equity
Bank payable ....................................... 1,297,729 2,294,742
Warehouse financing and other borrowings ........... 15,292,851 95,481,627
Senior Notes Due 2004 .............................. 149,287,996 --
Accounts payable and accrued expenses .............. 10,009,761 7,201,674
Investor payable ................................... 32,307,128 22,568,730
Advance payment by borrowers for taxes and insurance 5,404,180 2,255,045
Income taxes payable ............................... 7,219,321 9,416,784
------------ ------------
220,818,966 139,218,602
============ ============
Stockholders' equity
Common stock, $.01 par value. Authorized
49,000,000 shares; 15,372,288 issued and
outstanding at September 30, 1997 and
15,253,000 at December 31, 1996 .................... 153,723 152,530
Additional paid-in capital ......................... 93,468,544 90,952,737
Retained earnings .................................. 24,510,693 2,412,344
------------ ------------
Total stockholders' equity ......................... 118,132,960 93,517,611
------------ ------------
$338,951,926 $232,736,213
============ ============
See accompanying notes to consolidated financial statements.
1
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DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Net gain on sale of
mortgage loans ........................................... $24,733,186 $13,701,876 $60,501,700 $31,502,314
Interest ................................................... 5,246,327 4,093,545 17,143,845 11,954,856
Servicing fees ............................................. 1,957,857 1,445,988 5,248,906 3,770,672
Other ...................................................... 5,476,902 1,475,377 12,291,195 3,820,131
----------- ----------- ----------- -----------
37,414,272 20,716,786 95,185,646 51,047,973
----------- ----------- ----------- -----------
Expenses:
Payroll and related costs .................................. 10,971,802 4,603,828 27,054,308 11,288,988
Interest expense ........................................... 5,670,520 2,606,701 12,761,027 8,528,853
General and administrative ................................. 7,091,919 3,577,418 16,831,802 8,889,557
----------- ----------- ----------- -----------
23,734,241 10,787,947 56,647,137 28,707,398
----------- ----------- ----------- -----------
Income before provision for income
taxes and extraordinary item ........................... 13,680,031 9,928,839 38,538,509 22,340,575
Provision for income taxes ................................. 5,795,977 (103,000) 16,440,160 216,049
----------- ----------- ----------- -----------
Income before extraordinary item ........................... 7,884,054 10,031,839 22,098,349 22,124,526
Extraordinary item:
Gain on extinguishment of debt ......................... -- -- -- 3,167,828
----------- ----------- ----------- -----------
Net income .......................................... $ 7,884,054 $10,031,839 $22,098,349 $25,292,354
=========== =========== =========== ===========
Pro forma information:
Provision for pro forma income taxes
before extraordinary item ............................. n/a 4,269,401 n/a 9,606,447
=========== ===========
Pro forma income before
extraordinary item .................................... n/a 5,659,438 n/a 12,734,128
=========== ===========
Pro forma income per share of
common stock ........................................... n/a $ 0.45 n/a $ 1.01
=========== ===========
Pro forma weighted average number
of shares outstanding .................................. n/a 12,629,182 n/a 12,629,182
=========== ===========
Per share data:
Earnings per share ........................................ $ 0.51 n/a $ 1.44 n/a
=========== ===========
Weighted average number
of shares outstanding .................................. 15,424,464 n/a 15,390,669 n/a
=========== ===========
See accompanying notes to consolidated financial statements.
2
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DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................................................... $ 22,098,349 $ 25,292,353
Adjustments to reconcile net income to net cash used in
operating activities:
Provision for loan losses ....................................................... 74,997 74,820
Depreciation and amortization ................................................... 1,777,436 589,765
Capitalized mortgage servicing rights,
net of amortization .......................................................... (7,973,916) (4,986,851)
Deferred origination fees ....................................................... (405,922) (722,357)
Interest-only and residual certificates received in
securitization transactions, net ............................................. (60,976,983) (35,195,393)
Changes in operating assets and liabilities:
Increase in accounts receivable, net ............................................ (3,639,311) (906,858)
(Increase) decrease in loans held for sale, net ................................. (1,755,167) 17,123,438
Increase in accrued interest and
late charges receivable ...................................................... (9,967,905) (1,209,438)
(Increase) decrease in cash held for advance payments ........................... (3,461,993) 763,537
Decrease in real estate owned ................................................... 134,750 115,000
Increase in prepaid and other assets ............................................ (4,657,884) (942,229)
Decrease in due from stockholders ............................................... -- 990,000
Increase in accounts payable and accrued expenses .............................. 2,729,757 2,914,052
Increase in investor payable .................................................... 9,738,398 4,398,706
Increase (decrease) in advance payments by
borrowers for taxes and insurance ............................................ 3,136,475 (661,405)
Decrease in income taxes payable ................................................ (2,153,386) --
------------- -------------
Net cash used in operating activities ............................................... (55,302,305) 7,637,140
------------- -------------
Cash flows from investing activities:
Acquisition of Fidelity Mortgage ................................................ (4,149,845) --
Purchase of equipment ........................................................... (5,529,151) (1,745,095)
------------- -------------
Net cash used in investing activities ............................................... (9,678,996) (1,745,095)
------------- -------------
Cash flows from financing activities:
Payments of warehouse financing and
other borrowings, net.......................................................... (80,420,664) (8,925,247)
Proceeds from issuance of Senior Notes ........................................... 149,287,996 --
Decrease in bank payable, net .................................................... (1,048,695) (297,642)
Distributions .................................................................... -- (540,000)
------------- -------------
Net cash provided by financing activities ........................................... 67,818,637 (9,762,889)
------------- -------------
Net increase (decrease) in cash ..................................................... 2,837,336 (3,870,844)
Cash at beginning of period ......................................................... 18,741,182 16,635,135
------------- -------------
Cash at end of period ............................................................... $ 21,578,518 $ 12,764,291
============= =============
See accompanying notes to consolidated financial statements.
3
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DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Delta Financial Corporation (together with its subsidiaries, collectively
the "Company") is a Delaware corporation which was organized on August 26, 1996.
On October 31, 1996, the Company acquired all of the outstanding common stock of
Delta Funding Corporation ("Delta Funding"), a New York corporation, which had
been organized on January 8, 1982 for the purpose of originating, selling,
servicing and investing in residential first and second mortgage loans. On
November 1, 1996, the Company completed an initial public offering of 4,600,000
shares of common stock, $.01 par value.
(2) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries: Delta Funding Corporation, Fidelity Mortgage
Inc. and Fidelity Mortgage (Florida), Inc. These statements also include the
accounts of DF Special Holdings Corp., which is a wholly-owned subsidiary of
Delta Funding Corporation. All significant intercompany accounts and
transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The accompanying consolidated financial statements and the
information included under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" should be read in conjunction
with the consolidated financial statements and related notes of the Company for
the year ended December 31, 1996.
All adjustments (consisting of normal recurring accruals) which are, in
the opinion of management, considered necessary for a fair presentation of the
financial position and results of operations for the interim periods presented
have been made.
(3) ACQUISITIONS
On February 11, 1997, the Company acquired Fidelity Mortgage Inc. and
Fidelity Mortgage (Florida), Inc. (together referred to herein as "Fidelity
Mortgage") for a combination of cash and stock. These transactions were
accounted for under the purchase method of accounting. Accordingly, the results
of operations of Fidelity Mortgage from February 11, 1997 have been included in
the Company's consolidated financial statements. In connection with these
acquisitions the Company recorded goodwill of approximately $6.3 million, which
is being
4
amortized on a straight-line basis over seven years. On October 1, 1997, the
acquired operations were merged and will continue to operate as Fidelity
Mortgage Inc. going forward.
<PAGE>
(4) PRO FORMA INFORMATION
Prior to October 31, 1996, Delta Funding Corporation (a wholly-owned
subsidiary) was treated as a Subchapter S corporation for federal and state
income tax purposes. The pro forma financial information, including per share
data, included in the accompanying statement of income for the three months and
nine months ending September 30, 1996 reflects a provision for income taxes as
if the Company had always been a C corporation at an assumed tax rate of 43%.
Pro forma net income per share has been computed by dividing pro forma net
income by the 10,653,000 shares of Delta Financial Corporation common stock
received by the former shareholders of Delta Funding Corporation (the "Former
Shareholders") in exchange for their shares of Delta Funding Corporation's
common stock (the "Exchange"), and the effect of the issuance of 1,976,182
shares of common stock of Delta Financial Corporation to generate sufficient
cash to pay certain S corporation distribution notes and additional dividends
paid to the Former Shareholders in connection with the Company's initial public
offering.
(5) SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended September 30, 1997 and September 30, 1996,
the Company paid $10.8 million and $8.7 million, respectively, for interest, and
$18.6 million and $0.05 million, respectively, for taxes. In connection with the
acquisition of Fidelity Mortgage, the Company issued 119,288 shares of common
stock, valued at $2.5 million, to the former owners.
(6) RECENT DEVELOPMENTS - SENIOR NOTES DUE 2004
On July 23, 1997, the Company completed a $150.0 million offering of
Senior Notes due August 1, 2004. The Notes bear interest at a rate of 9.5% per
annum, payable semi-annually on February 1 and August 1, commencing on February
1, 1998. On or after August 1, 2001, the Notes are redeemable at the Company's
option, in whole or in part, at the redemption price set forth in the Indenture
dated July 23, 1997, plus accrued and unpaid interest through the date of
redemption. The Indenture governing the terms of the Senior Notes contains
certain financial ratios and other restrictive covenants, including a
restriction on asset sales, incurrence of additional indebtedness and incurrence
of additional liens. The proceeds from the debt offering were used first to pay
off shorter-term financing and the remaining proceeds will be used to fund
originations growth and securitization activities.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND ACCOMPANYING NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS SET FORTH THEREIN.
RECENT GROWTH
The Company has experienced significant loan origination and purchase
growth in the last few years, particularly since January 1, 1995. Management
believes that this growth is primarily attributable to the Company's (i)
geographic expansion of its operations, (ii) further penetration into its
established markets, (iii) increased access to capital and additional funding
sources through (a) the capital markets and (b) larger warehouse finance
agreements which have enabled the Company to accumulate larger pools of loans
for sales through securitizations and (iv) recent expansion of its production
channels through the acquisition of the Fidelity Mortgage operations.
In connection with its geographic expansion, the Company has continued to
focus on developing loan production from brokers and correspondents. The Company
has followed a two-pronged approach to increase the volume of loan originations
from these sources. The Company employs business development representatives to
initiate and expand relationships with brokers and correspondents. In addition,
the Company uses its loan officers and correspondent underwriters to maintain
and strengthen existing relationships. The Company is also committed to
developing and growing the Fidelity Mortgage retail origination network. There
can be no assurance that the Company will continue to grow significantly in the
future. Any future growth will be limited by, among other things, the Company's
need for continued funding sources, access to capital markets, sensitivity to
economic slowdowns, ability to attract and retain qualified personnel,
fluctuations in interest rates and competition from other consumer finance
companies and from new market entrants. To date, the Company has not experienced
any significant seasonal variations in loan originations and purchases.
The Company's recent and rapid growth may have a somewhat distortive
impact on certain of the Company's ratios and financial statistics and may make
period-to-period comparisons difficult. In light of the Company's growth,
historical performance of the Company's earnings may be of limited relevance in
predicting future performance. Furthermore, the Company's financial statistics
may not be indicative of the Company's results in future periods. Any credit or
other problems associated with the large number of loans originated and
purchased in the recent past may not become apparent until sometime in the
future.
6
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES
Total revenues increased $44.2 million, or 87%, to $95.2 million in the
nine months ended September 30, 1997, from $51.0 million in the corresponding
period of the prior year. The increase in revenues was attributable to the
<PAGE>
increase in loan originations and purchases and the corresponding increases in
the amount of loans sold through securitizations and size of the Company's
servicing portfolio, and the resultant increases in net gain on sale of mortgage
loans, origination fees, servicing fees, and interest income on loans held for
sale. Total loan originations and purchases increased $443.1 million, or 107%,
to $858.2 million during the nine months ended September 30, 1997 from $415.1
million during the nine months ended September 30, 1996. The Company completed
three securitizations totaling $835.0 million in the nine months ended September
30, 1997 compared to two securitizations and whole loan sales totaling $420.3
million in the corresponding period one year ago. Total loans serviced increased
$826.0 million, or 112%, to $1.565 billion as of September 30, 1997 compared to
$739.0 million at September 30, 1996.
NET GAIN ON SALE OF MORTGAGE LOANS. Net gain on sale of mortgage loans
represents the sum of (i) the present value of excess servicing of loans
securitized in each period, (ii) the present value of mortgage servicing rights
associated with loans securitized in each period and (iii) premiums earned on
whole loan sales less the (a) premiums paid to originate or acquire mortgage
loans, (b) cost associated with securitizations and (c) any hedge loss (gain).
Net gain on sale of mortgage loans increased $29.0 million, or 92%, to $60.5
million in the nine months ended September 30, 1997, from $31.5 million in the
corresponding period of the prior year. The increase was attributable to an
increase in the amount of loans securitized in the nine months ended September
30, 1997 compared to the amount of loans securitized or sold in the
corresponding period one year ago, but was partially offset by the Company's
change in prepayment assumptions on adjustable rate mortgages. During the nine
months ended September 30, 1997, the Company completed three securitizations
totaling $835.0 million compared to two securitizations and whole loan sales
totaling $420.3 million for the nine months ended September 30, 1996. The
weighted average gain on sale for the nine months ended September 30, 1997 and
for the nine months ended September 30, 1996 were 7.25% and 7.49%, respectively.
INTEREST INCOME. Interest income primarily represents the sum of (i)
interest earned on loans held for sale, (ii) interest earned on cash collection
balances and (iii) excess servicing received in each period less the
amortization of residual and interest-only certificates. Interest income
increased $5.2 million, or 44%, to $17.1 million in the nine months ended
September 30, 1997, from $11.9 million in the corresponding period of the prior
year. The increase in interest income was primarily due to (a) a higher average
balance of mortgage loans held for sale during the nine months ended September
30, 1997 resulting from the increase in loan originations and purchases and (b)
an increase in excess servicing received from the Company's retained
interest-
7
only and residual certificates during the nine months ended September 30,
1997. As of September 30, 1997, the Company's retained interest-only and
residual certificates totaled $144.0 million compared to $60.5 million for the
comparable period one year ago. The increase in interest income was partially
offset by higher aggregate amortization of the retained interest-only and
residual certificate assets in accordance with SFAS No. 115 in the nine months
ended September 30, 1997 compared to the corresponding period in the prior year.
The higher aggregate amortization was due in part to the Company's decision to
accelerate amortization of the retained interest-only and residual certificate
assets by changing the prepayment assumptions the Company uses to value these
certificates.
<PAGE>
SERVICING INCOME. Servicing income represents all contractual and
ancillary servicing revenue received by the Company less (a) the amortization of
capitalized mortgage servicing rights and (b) prepaid interest shortfalls.
Servicing income increased $1.5 million, or 41%, to $5.2 million in the nine
months ended September 30, 1997, from $3.7 million in the corresponding period
of the prior year. This increase was primarily due to a higher average loan
servicing portfolio, which resulted in increased contractual and ancillary
service fees. During the nine months ended September 30, 1997, the average
balance of mortgage loans serviced by the Company increased 108% to $1.253
billion from $603.3 million during the corresponding period of the prior year.
Servicing fees increased at a slower rate than the average balance of mortgage
loans serviced primarily because the Company reduced its contractual servicing
fee rate from 0.65% to 0.50% per annum to conform with industry standards
(commencing with its 1996-2 securitization), and due to amortization of the
capitalized servicing asset in accordance with SFAS No. 125.
OTHER INCOME. Other income primarily represents origination fees earned on
brokered and retail loans and ancillary revenue associated with loan production.
Other income increased $8.5 million, or 224%, to $12.3 million in the nine
months ended September 30, 1997 from $3.8 million in the corresponding period of
the prior year. This increase was primarily due to the addition of Fidelity
Mortgage's retail loan origination fees from February 11, 1997 through September
30, 1997 and, to a lesser extent, to an increase of $120.0 million, or 54%, in
brokered loan originations to $343.2 million in the nine months ended September
30, 1997, from $223.2 million in the same period of the prior year. The Company
did not originate any retail loans during the corresponding period in the prior
year.
EXPENSES
Total expenses increased $27.9 million, or 97%, to $56.6 million for the
nine months ended September 30, 1997, from $28.7 million in the corresponding
period of the prior year. The increase in expenses was primarily the result of
(a) higher operating expenses associated with the growth in loan originations
and purchases, (b) additional operating expenses associated with Fidelity
Mortgage's retail operation, which the Company acquired in February 1997, (c)
higher interest expenses associated with increased borrowings under the
Company's warehouse and interest-only and residual financing credit facilities,
and (d) accrued interest expense related to the $150 million aggregate principal
amount of 9.5% Senior Notes due 2004.
8
PAYROLL EXPENSE. Payroll expense increased $15.8 million, or 140%, to
$27.1 million for the nine months ended September 30, 1997, from $11.3 million
for the corresponding period of the prior year. The increase was primarily due
to increased staffing in the Company's originations area associated with
increases in loan originations and purchases, and commissions paid to the
Company's retail personnel on loans originated through Fidelity Mortgage. At
September 30, 1997, the Company employed 850 full- and part-time persons,
including 489 employees of Delta Funding Corporation and 361 employees of
Fidelity Mortgage, compared to 309 full- and part-time persons as of September
30, 1996.
INTEREST EXPENSE. Interest expense increased $4.3 million, or 51%, to
$12.8 million in the nine months ended September 30, 1997, from $8.5 million in
the corresponding period of the prior year. The increase in interest expense was
attributable to the interest costs associated with increased borrowings during
<PAGE>
the nine months ended September 30, 1997 compared to the comparable period one
year ago under the Company's (i) short-term warehouse credit facilities due to a
higher balance of loans held for sale during the nine months ended September 30,
1997, resulting from increases in loan originations and purchases during the
period, (ii) interest-only and residual financing credit facilities secured by
its residual and interest-only certificates during the nine months ended
September 30, 1997, and (iii) $150 million aggregate principal amount of 9.5%
Senior Notes due 2004. The Company used the net proceeds from the Senior Notes
offering to paydown amounts outstanding under warehouse and interest-only and
residual financing facilities. The increase was partially offset by a lower
average cost of funds on the Company's warehouse credit facilities during the
nine months ended September 30, 1997 compared to the corresponding period in the
prior year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses,
which consist primarily of office and administrative, rent, and health care and
insurance expenses, increased $7.9 million, or 89%, to $16.8 million in the nine
months ended September 30, 1997 from $8.9 million in the corresponding period of
the prior year. The increase in general and administrative expenses was
primarily due to expenses incurred in connection with the growth of loan
originations and purchases, increased employee benefit expenses, the addition of
Fidelity Mortgage, and the opening of six Fidelity Mortgage branch offices.
INCOME TAXES. Prior to October 31, 1996, Delta Funding Corporation (the
Company's wholly-owned subsidiary) was treated as an S corporation for federal
and state income tax purposes. As a result, the Company's historical earnings
prior to such date had been taxed directly to Delta Funding Corporation's former
shareholders and not to the Company. On October 31, 1996, in contemplation of
the Company's initial public offering, Delta Funding Corporation terminated its
status as an S corporation and the former shareholders of Delta Funding
Corporation, pursuant to the terms of a contribution agreement, contributed
their shares of common stock in Delta Funding Corporation to the Company in
exchange for 10,653,000 shares, representing all of the then-outstanding common
stock of the Company.
On or about October 31, 1996, in conjunction with the Exchange, Delta
Funding Corporation's status as an S corporation was terminated and the Company
became a C corporation for federal and state income tax purposes and, as such,
is subject to federal and state
9
income tax on its income. For the nine months ended September 30, 1997, the
Company recorded a tax provision of $16.4 million compared to $0.2 million in
the corresponding period of the prior year.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES
Total revenues increased $16.7 million, or 81%, to $37.4 million in the
three months ended September 30, 1997, from $20.7 million in the corresponding
period of the prior year. The increase in revenues was primarily due to an
increase in (a) loans sold and securitized for the three months ended September
30, 1997 compared to the comparable period one year ago, (b) the Company's
servicing portfolio and corresponding servicing fees, (c) origination fees
primarily due to Fidelity Mortgage's retail operation, and (d) interest income
<PAGE>
on loans held for sale.
NET GAIN ON SALE OF MORTGAGE LOANS. Net gain on sale of mortgage loans
increased $11.0 million, or 80%, to $24.7 million in the three months ended
September 30, 1997, from $13.7 million in the corresponding period of the prior
year. The increase was primarily attributable to an increase in loans sold
through securitization resulting from an increase in total loan originations and
purchases, but was partially offset by the Company's change in prepayment
assumptions on adjustable rate mortgages. The Company completed a $340.0 million
securitization, with a net gain on sale of 7.26% during the three months ended
September 30, 1997, compared to a securitization and loan sales totaling $184.0
million, with a net gain on sale of 7.45%, during the three months ended
September 30, 1996.
INTEREST INCOME. Interest income increased $1.1 million, or 27%, to $5.2
million in the three months ended September 30, 1997, from $4.1 million in the
corresponding period of the prior year. The increase in interest income was
primarily due to an increase in excess servicing received from interest-only and
residual certificates during the three months ended September 30, 1997. As of
September 30, 1997, the Company's retained interest-only and residual
certificates totaled $144.0 million compared to $60.5 million for the comparable
period one year ago. The increase in interest income was partially offset by
higher aggregate amortization of the retained interest-only and residual
certificate assets in accordance with SFAS No. 115 in the three months ended
September 30, 1997 compared to the corresponding period in the prior year. The
higher aggregate amortization was due in part to the Company's decision to
accelerate amortization of the retained interest-only and residual certificate
assets by changing the prepayment assumptions the Company uses to value these
certificates.
SERVICING INCOME. Servicing income increased $0.5 million, or 36%, to $1.9
million in the three months ended September 30, 1997, from $1.4 million in the
corresponding period of the prior year. This increase was primarily due to a
higher average loan servicing portfolio, which resulted in increased contractual
and ancillary service fees. During the three months ended September 30, 1997,
the average balance of mortgage loans serviced by the Company increased 110% to
$1.465 billion from $699.2 million during the corresponding period of the prior
year.
10
Servicing fees increased at a slower rate than the average balance of
mortgage loans serviced primarily because the Company reduced its contractual
servicing fee rate from 0.65% to 0.50% per annum to conform with industry
standards (commencing with its 1996-2 securitization), and due to amortization
of the capitalized servicing asset in accordance with SFAS No. 125.
OTHER INCOME. Other income increased $4.0 million, or 267%, to $5.5
million in the three months ended September 30, 1997 from $1.5 million in the
corresponding period of the prior year. This increase was primarily due to the
addition of Fidelity Mortgage's retail loan origination fees from July 1, 1997
through September 30, 1997 and, to a lesser extent, to an increase of $46.4
million, or 53%, in brokered loan originations to $134.0 million in the three
months ended September 30, 1997, from $87.6 million in the same period of the
prior year. The Company did not originate any retail loans during the
corresponding period in the prior year.
EXPENSES
<PAGE>
Total expenses increased $12.9 million, or 119%, to $23.7 million for the
three months ended September 30, 1997, from $10.8 million in the corresponding
period of the prior year. The increase in expenses was primarily the result of
(a) higher operating expenses associated with the growth in loan originations
and purchases, (b) additional operating expenses associated with Fidelity
Mortgage's retail operation, which the Company acquired in February 1997, (c)
higher interest expenses associated with increased borrowings under the
Company's warehouse credit facilities, and (d) accrued interest expense related
to the $150 million aggregate principal amount of 9.5% Senior Notes due 2004.
PAYROLL EXPENSE. Payroll expense increased $6.4 million, or 139%, to $11.0
million for the three months ended September 30, 1997, from $4.6 million for the
corresponding period of the prior year. The increase was primarily due to
increased staffing in the Company's originations area associated with increases
in loan originations and purchases, and commissions paid to the Company's retail
personnel on loans originated through Fidelity Mortgage. At September 30, 1997,
the Company employed 850 full- and part-time persons, including 489 employees of
Delta Funding Corporation and 361 employees of Fidelity Mortgage, compared to
309 full- and part-time persons as of September 30, 1996.
INTEREST EXPENSE. Interest expense increased $3.1 million, or 119%, to
$5.7 million in the three months ended September 30, 1997, from $2.6 million in
the corresponding period of the prior year. The increase in interest expense was
primarily due to accrued interest expense related to the $150 million aggregate
principal amount of 9.5% Senior Notes due 2004, the net proceeds of which the
Company used to paydown amounts outstanding under a warehouse credit facility
and interest-only and residual financing facilities. This increase was partially
offset by a lower average cost of funds on the Company's warehouse credit
facilities during the three months ended September 30, 1997 compared to the
corresponding period in the prior year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $3.5 million, or 97%, to $7.1 million in the three months ended
September 30, 1997 from $3.6 million in the corresponding period of the prior
year. The increase in general and administrative
11
expenses was primarily due to expenses incurred in connection with growth of
loan originations and purchases, increased employee benefit expenses, the
addition of Fidelity Mortgage and the opening of two Fidelity Mortgage branch
offices.
INCOME TAXES. For the three months ended September 30, 1997, the Company
recorded a tax provision of $5.8 million compared to a $0.1 million tax credit
in the corresponding period of the prior year.
FINANCIAL CONDITION
SEPTEMBER 30, 1997 COMPARED TO DECEMBER 31, 1996
Cash and interest-bearing deposits increased $2.9 million, or 16%, to
$21.6 million at September 30, 1997 from $18.7 million at December 31, 1996. The
increase was primarily due to additional monies held in securitization trust
accounts related to the Company's ongoing securitization program as a result of
an increased balance of loans in securitization.
<PAGE>
Accounts receivable increased $3.7 million, or 43%, to $12.3 million at
September 30, 1997 from $8.6 million at December 31, 1996. This increase was
primarily due to a higher average loan servicing portfolio, which resulted in
increased reimbursable servicing advances made by the Company, acting as
servicer on its securitizations.
Loans held for sale increased $2.1 million, or 3%, to $85.8 million at
September 30, 1997 from $83.7 million at December 31, 1996. This increase was a
result of increases in loan originations and purchases in the third quarter of
1997 compared to the fourth quarter of 1996, and a corresponding increase in the
amount of loans remaining in inventory subsequent to the Company's third quarter
1997 securitization.
Accrued interest and late charges receivable increased $10.0 million, or
50%, to $30.1 million at September 30, 1997 from $20.1 million at December 31,
1996. This increase was primarily due to a higher average loan servicing
portfolio which resulted in increased reimbursable interest advances made by the
Company, acting as servicer on its securitizations. The Company's average
servicing portfolio increased 70% to $1.465 billion during the third quarter of
1997 from $860 million during the fourth quarter of 1996.
Capitalized mortgage servicing rights increased $8.0 million, or 70%, to
$19.4 million at September 30, 1997 from $11.4 million at December 31, 1996.
This increase was primarily attributable to the Company, as servicer,
capitalizing the mortgage servicing rights on its three new securitizations
during the nine months ended September 30, 1997, in accordance with SFAS No.
125.
Interest-only and residual certificates increased $60.9 million, or 73%,
to $144.0 million at September 30, 1997 from $83.1 million at December 31, 1996.
This increase was primarily due to interest-only and residual certificates
acquired in connection with the Company's 1997-1 $235 million securitization,
1997-2 $260 million securitization and 1997-3 $340 million
12
securitization, completed during the first, second and third quarters of
1997, respectively. Interest-only and residual certificates are recorded at fair
value in accordance with SFAS No. 125. The increase was partially offset by the
Company's decision to accelerate amortization of the retained interest-only and
residual certificate assets by changing the prepayment assumptions the Company
uses to value these certificates.
Prepaid and other assets increased $4.7 million, or 294%, to $6.3 million
at September 30, 1997 from $1.6 million at December 31, 1996. The increase was
primarily due to costs related to the Company's $150 million aggregate principal
amount 9.5% Senior Note offering in the third quarter of 1997 which is being
amortized over the seven year life of the Senior Notes.
Warehouse financing and other borrowings decreased $80.2 million, or 84%,
to $15.3 million at September 30, 1997 from $95.5 million at December 31, 1996.
During the third quarter of 1997, the Company used the net proceeds from its
$150 million aggregate principal amount Senior Notes Offering to paydown
approximately $78.2 million of borrowings on a warehouse facility and $66.4
million of residual and interest-only financings.
Senior Notes due 2004 totaled $149.3 million at September 30, 1997, net of
<PAGE>
unamortized bond discount. The Notes bear interest at a rate of 9.5% per annum,
payable semi-annually on February 1 and August 1, commencing on February 1,
1998. The Company did not have any Senior Notes due 2004 outstanding prior to
July 23, 1997.
Investor payable increased $9.7 million, or 43%, to $32.3 million at
September 30, 1997 from $22.6 million at December 31, 1996. The increase was
primarily due to an increase in the amount of principal collected by the Company
acting as servicer, which must be remitted to the various trusts in the
following distribution periods. Investor payable is comprised of all principal
collected on mortgage loans, either due to principal amortization or principal
repayment, and accrued certificate interest. Variability in this account is
primarily due to the principal prepayments collected within a given collection
period.
Stockholders' equity increased $24.6 million, or 26%, to $118.1 million at
September 30, 1997 from $93.5 million at December 31, 1996. This increase is due
to net income for the nine month period of $22.1 million, as well as the
issuance of 119,288 additional shares of common stock valued at $2.5 million in
connection with the Company's acquisition of Fidelity Mortgage.
LIQUIDITY AND CAPITAL RESOURCES
The Company has operated, and expects to continue to operate, on a
negative cash flow basis due to increases in the volume of loan purchases and
originations and to the growth of its securitization program. Currently, the
Company's primary operating cash requirements include the funding of (i)
mortgage originations and purchases pending their pooling and sale, (ii) the
points and expenses paid in connection with the acquisition of correspondent
loans, (iii) interest expense on its Senior Notes due 2004 and warehouse and
other financings, (iv) fees, expenses and tax payments incurred in connection
with its securitization program, and (v) ongoing administrative and other
operating expenses.
13
The Company must be able to sell loans and obtain adequate credit
facilities and other sources of funding in order to continue to originate and
purchase loans. As a result of increased loan originations and purchases and the
increase in its securitization program, the Company, during the nine months
ended September 30, 1997, used cash of approximately $55.3 million compared to
the nine months ended September 30, 1996, in which the Company generated cash of
$7.6 million.
Historically, the Company has utilized various financing facilities and an
equity financing to offset negative operating cash flows and support its
continued growth in loan originations and purchases, securitizations and general
operating expenses. On July 23, 1997, the Company completed a $150 million
aggregate principal amount 9.5% Senior Note offering, the proceeds of which will
be used to fund growth in loan originations and purchases and its ongoing
securitization program. The Company's primary sources of liquidity continue to
be warehouse and other financing facilities, securitizations and whole loan
sales and, subject to market conditions, sales of additional debt and equity
securities.
To accumulate loans for securitization, the Company borrows money on a
short-term basis through warehouse lines of credit. The Company has three
<PAGE>
warehouse credit facilities for this purpose. One warehouse facility is a $325
million committed revolving line with a variable rate of interest and a maturity
date of February 1998. This facility was converted from an uncommitted to a
committed line during the three months ended March 31, 1997. The Company's
second warehouse facility is a $200 million committed revolving line with a
variable rate of interest and a maturity date of February 1998, which was
obtained during the three months ended March 31, 1997 and replaced a $100
million uncommitted credit facility previously maintained by the Company with
the warehouse lender. The Company's third warehouse facility is a syndicated
$100 million committed revolving line with a variable rate of interest and a
maturity date of June 1998. The outstanding balance on the $325 million
facility, $200 million facility and $100 million facility as of September 30,
1997 was $13.1 million, $0 and $0, respectively.
The Company has in the past obtained financing facilities for residual and
interest-only certificates acquired as part of its securitizations. As of
September 30, 1997, the Company did not have any indebtedness secured by
residual and interest-only certificates. In addition, the Company is limited by
the terms of the Senior Notes Indenture as to the amount of future indebtedness
secured by residual and interest-only certificates.
In addition, the Company had a $1.0 million line of credit with a
financial institution to support its daily operating requirements. The Company
elected to let this facility expire in September 1997.
The Company is required to comply with various operating and financial
covenants as provided in the agreements described above which are customary for
agreements of their type. The Company does not believe that its existing
financial covenants will restrict its operations or growth. The continued
availability of funds provided to the Company under these agreements is
14
subject to the Company's compliance with these covenants. Management believes
the Company is in compliance with all such covenants under these agreements.
HEDGING
The Company originates and purchases mortgage loans and then sells them
primarily through securitizations. At the time of securitization and delivery of
the loans, the Company recognizes gain on sale based on a number of factors
including the difference, or "spread" between the interest rate on the loans and
the interest rate on treasury securities with maturities corresponding to the
anticipated life of the loans. If interest rates rise between the time the
Company originates or purchases the loans and the time the loans are priced at
securitization, the excess spread narrows, resulting in a loss in value of the
loans. To protect against such losses, the Company currently hedges the value of
the loans through the use of treasury rate lock contracts which function similar
to the short sale of treasury securities. Prior to hedging, the Company performs
an analysis of its loans taking into account such factors as interest rates,
maturities, durations, inventory of loans and amount of loans in the pipeline to
determine the proportion of contracts to sell so that the risk to the value of
the loans is most effectively hedged. The Company will enter into treasury rate
lock contracts through one of its warehouse lenders and/or one of the investment
bankers which underwrite the Company's securitizations. These contracts are
designated as hedges in the Company's records and are closed out when the
associated loans are sold through securitization.
<PAGE>
If the value of the hedges decrease, offsetting an increase in the value
of the loans, the Company, upon settlement with its counterparty, will pay the
hedge loss in cash and realize the corresponding increase in the value of the
loans as part of its interest-only and residual certificates. Conversely, if the
value of the hedges increase, offsetting a decrease in the value of the loans,
the Company, upon settlement with its counterparty, will receive the hedge gain
in cash and realize the corresponding decrease in the value of the loans through
a reduction in the value of the corresponding interest-only and residual
certificates.
The Company believes that its current hedging strategy of using treasury
rate lock contracts is the most effective way to manage its interest rate risk
on loans prior to securitization.
INFLATION AND INTEREST RATES
Inflation affects the Company most significantly in the area of loan
originations and can have a substantial effect on interest rates. Interest rates
normally increase during periods of high inflation and decrease during periods
of low inflation. Profitability may be directly affected by the level and
fluctuation in interest rates which affect the Company's ability to earn a
spread between interest received on its loans and the costs of its borrowings.
The profitability of the Company is likely to be adversely affected during any
period of unexpected or rapid changes in interest rates. A substantial and
sustained increase in interest rates could adversely affect the ability of the
Company to purchase and originate loans and affect the mix of first and second
mortgage loan products. Generally, first mortgage production increases relative
to second mortgage production in response to low interest rates and second
mortgage production increases
15
relative to first mortgage production during periods of high interest rates.
A significant decline in interest rates could decrease the size of the
Company's loan servicing portfolio by increasing the level of loan prepayments.
Additionally, to the extent servicing rights and interest-only and residual
classes of certificates have been capitalized on the books of the Company,
higher than anticipated rates of loan prepayments or losses could require the
Company to write down the value of such servicing rights and interest-only and
residual certificates, adversely impacting earnings. Fluctuating interest rates
also may affect the net interest income earned by the Company resulting from the
difference between the yield to the Company on loans held pending sales and the
interest paid by the Company for funds borrowed under the Company's warehouse
facilities.
CERTAIN ACCOUNTING CONSIDERATIONS
INTEREST-ONLY AND RESIDUAL CERTIFICATES
The Company derives a substantial portion of its income by recognizing
gain on sale of loans sold through securitizations, represented by the
interest-only and residual certificates that the Company retains. In
securitizations, the Company sells loans that it has originated or purchased to
a trust for a cash purchase price and receives interest-only and residual
certificates. The cash purchase price is raised through an offering by the trust
of pass-through certificates representing regular interests in the REMIC trust.
Following the securitizations, the purchasers of the pass-through
<PAGE>
certificates receive the principal collected and the investor pass-through
interest rate on the principal balance, while the Company receives the excess of
the interest rate payable by an obligor on a loan over the interest rate passed
through to the purchasers of the regular-interest certificates (with respect to
the interest-only and residual certificates), as well as the Company's normal
servicing fee, less other recurring fees. The interest-only and residual
certificates are capitalized on the Company's balance sheet and are reduced as
cash distributions are received. The interest-only and residual certificates are
accounted for as trading securities in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Investments," and as such they are recorded at their fair value.
Changes in fair value of the interest-only and residual certificates are
reflected in the statement of operations. Fair value of the interest-only and
residual certificates is determined based on various economic factors, including
considerations of loan type, size, date of origination, interest rate, term,
collateral value and geographic location. Higher than anticipated rates of loan
prepayments or losses would require the Company to write down the fair value of
the interest-only and residual certificates, adversely impacting earnings.
Similarly, if delinquencies, liquidations or interest rates were greater than
initially assumed by the Company, the fair value of the interest-only and
residual certificates would be negatively impacted resulting in an adverse
effect on interest income for the periods during which such events occurred. The
residual certificates held by the Company are subject to losses on liquidated
loans which flow through each securitization trust. Since the calculation of
fair value of these certificates at the
16
time of securitization included certain assumptions concerning losses, any
losses in excess of such assumptions will have an adverse effect on interest
income.
SFAS NO. 125
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. SFAS No. 125 distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings. SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996, is to be applied prospectively
and supersedes SFAS No. 122, "Accounting for Mortgage Servicing Rights." The
Company adopted SFAS No. 125 on January 1, 1997.
Securitization of a financial asset, a portion of a financial asset, or a
pool of financial assets in which the transferor surrenders control over the
assets transferred, is accounted for as a sale. If the transfer does not qualify
as a sale, the transferred assets will remain on the balance sheet and the
proceeds raised will be accounted for as a secured borrowing with no gain or
loss recognition. Because Delta's transfers of loans made in connection with its
securitizations qualify as sales under this pronouncement, the required
accounting is an allocation of basis approach.
After the securitization of mortgage loans held for sale, the
mortgage-backed security (or any retained interests in REMIC securitizations of
<PAGE>
loans held for sale, whether they are subordinate classes or interest-only or
residual certificates) shall be classified as a trading security and reported at
fair value under SFAS No. 115.
Servicing assets created in a securitization (contractually specified
servicing fees due to the servicer in exchange for servicing those assets) shall
initially be measured at their allocated carrying amount, based upon the
relative fair value at the date of securitization. Servicing assets are to be
amortized in proportion to, and over the period of, estimated net servicing
income (the excess of servicing revenues over servicing costs).
SFAS No. 125 requires mortgage banking entities that acquire or originate
loans and subsequently sell or securitize those loans and retain the mortgage
servicing rights to allocate the total cost of the loans to (i) the mortgage
servicing rights and (ii) the mortgage loans without the mortgage servicing
rights. The Company determines fair value based upon the present value of
estimated net future servicing revenues less the estimated cost that would
fairly compensate a substitute servicer to service the loans. The servicing
asset is then recorded on the balance sheet and accounted for under SFAS No. 125
using the allocation of cost relative to fair value approach. The assumptions
used to calculate fair value are the same assumptions used to determine the fair
value of the interest-only certificates. The cost allocated to the servicing
rights is amortized in proportion to and over the period of estimated net future
cash flows related to servicing income. In connection with SFAS No. 125, the
Company recognized income, recorded
17
as part of gain on sale, of $4.2 million and $10.2 million in the three and
nine months ended September 30, 1997, respectively.
SFAS No. 125 also requires impairment evaluations of all amounts
capitalized as servicing rights, including those purchased before the adoption
of SFAS No. 125, based upon the fair value of the underlying servicing rights.
The Company periodically performs these evaluations on a disaggregated basis for
the predominant risk characteristics of the underlying loans which are loan
type, term, credit quality and interest rate. The continuing effects of SFAS No.
125 on the Company's financial position and results of operations will depend on
several factors, including, among other things, the amount of acquired or
originated loans sold or securitized, the type, term and credit quality of loans
and estimates of future prepayment rates.
SFAS NO. 91
In December 1986, the FASB issued SFAS No. 91, "Accounting for
Non-Refundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases." SFAS No. 91 establishes the accounting for
non-refundable fees and costs associated with lending, committing to lend, or
purchasing a loan or a group of loans.
Under SFAS No. 91, loan origination fees and direct loan origination costs
are recognized as an adjustment of the loan's yield over the earlier of the life
of the related loan or the sale of the loan. In effect, SFAS No. 91 requires
that origination fees be offset by their related direct loan costs and that net
deferred fees be recognized over the earlier of the life of the loan or the sale
of the loan, whether the loan is sold through securitization or on a whole loan
basis.
<PAGE>
Prior to the second quarter of 1996, the Company generally sold loans
through securitization on a semiannual basis and, as such, carried a larger
inventory of loans on its books from quarter to quarter and from year to year,
which resulted in more significant SFAS No. 91 adjustments being made during
those periods. Since the second quarter of 1996, the Company has sold, and
contemplates that it will continue to sell, substantially all of its loan
originations and purchases on a quarterly basis primarily through
securitizations and, to a lesser extent, on a whole loan basis. This practice
has minimized the amount of loans being held in inventory and, therefore,
minimized the effects of SFAS No. 91 on the Company's financial statements.
SFAS NO. 123
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. Examples are stock purchase
plans, stock options, restricted stock awards, and stock appreciation rights.
This statement also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. Those transactions
must be accounted for, or at least disclosed in the case of stock options, based
on the fair
18
value of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. The accounting requirements
of SFAS No. 123 are effective for financial statements for fiscal years
beginning after December 15, 1995, or for an earlier fiscal year for which SFAS
No. 123 is initially adopted for recognizing compensation cost. The statement
permits a company to choose either a new fair value-based method or the current
APB Opinion 25 intrinsic value-based method of accounting for its stock-based
compensation arrangements. The Company applies APB Opinion No. 25 in accounting
for its stock option plan. Further, the Company provides in a footnote to its
financial statements pro forma disclosures of net earnings and earnings per
share computed as if the fair value-based method had been applied in accordance
with SFAS No. 123.
EARNINGS PER SHARE
SFAS No. 128, "Earnings per Share", specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997 and the pronouncement supersedes APB Opinion No. 15, "Earnings per Share".
The objectives of SFAS No. 128 are to simplify the computation of earnings per
share and make financial statements more useful for investors and creditors by
increasing the international comparability of accounting standards concurrent
with improving the quality of accounting standards. The Company has not
completed its analysis of SFAS No. 128.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE
SFAS No. 129, "Disclosure of Information about Capital Structure", was
issued in February 1997 and is effective for financial statements for periods
ending after December 15, 1997. SFAS No. 129 requires disclosure of pertinent
rights and privileges of the various securities outstanding. The statement also
<PAGE>
requires disclosure of the number of shares issued upon conversion, exercise, or
satisfaction of required conditions during at least the most recent annual
fiscal period and any subsequent interim period presented. The Company has not
completed its analysis of SFAS No. 129.
SFAS 130
SFAS No. 130, "Reporting on Comprehensive Income" was issued in June 1997
and is effective for financial statements issued for periods beginning after
December 15, 1997. SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. The statement
requires all items that are required to be recognized under accounting standards
as components of comprehensive income to be reported in a financial statement
that is displayed with the same prominence as other financial statements. The
Company has not completed its analysis of this statement.
19
SFAS 131
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997 and is effective for financial statements
issued for periods beginning after December 15, 1997. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. The statement requires a public
business enterprise to report a measure of segment profit or loss, certain
specific revenue and expense items and segment assets. The Company has not
completed its analysis of this statement.
RISK FACTORS
Except for historical information contained herein, certain matters
discussed in this Form 10-Q are "forward-looking statements" as defined in the
Private Securities Litigation Reform Act (PSLRA) of 1995, which involve risk and
uncertainties that exist in the Company's operations and business environment,
and are subject to change based on various important factors. The Company wishes
to take advantage of the "safe harbor" provisions of the PSLRA by cautioning
readers that numerous important factors discussed below, among others, in some
cases have caused, and in the future could cause the Company's actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company. The following include some, but not all, of
the factors or uncertainties that could cause actual results to differ from
projections:
o A general economic slowdown.
o The effects of interest rate fluctuations and the ability or
inability of the Company to hedge against such fluctuations in
interest rates; the effects of changes in monetary and fiscal
policies, laws and regulations, other activities of governments,
agencies and similar organizations, and social and economic
conditions, unforeseen inflationary pressures and monetary
fluctuation.
o The unanticipated expenses of assimilating newly-acquired business
<PAGE>
into the Company's business structure; as well as, the impact of
unusual expenses from ongoing evaluations of business strategies,
asset valuations, acquisitions, divestitures and organizational
structures.
o Unpredictable delays or difficulties in the development of new
product programs.
o Rapid or unforeseen escalation of the cost of regulatory compliance
and/or litigation, including but not limited to, environmental
compliance, licenses, adoption of new, or changes in accounting
policies and practices and the application of such policies and
practices.
20
o The ability or inability of the Company to continue its practice
of securitization of mortgage loans held for sale.
o Increased competition within the Company's markets.
21
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Because the nature of the Company's business involves the collection of
numerous accounts, the validity of liens and compliance with state and federal
lending laws, the Company is subject to various claims and legal actions in the
ordinary course of its business. While it is impossible to estimate with
certainty the ultimate legal and financial liability with respect to such claims
and actions, the Company believes that the aggregate amount of such liabilities
will not result in monetary damages which in the aggregate would have a material
adverse effect on the financial condition or results of the Company.
ITEM 2. CHANGES IN SECURITIES.
The Indenture, dated July 23, 1997, governing the terms of the Company's
$150 million aggregate principal amount of 9.5% Senior Notes due 2004 contains a
restrictive covenant which precludes the Company from declaring or paying any
dividend or otherwise making any payment or distribution on account of the
Company's stockholders (other than dividends or distributions payable in Equity
Interests, as defined in the Indenture).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None
ITEM 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS. None
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K.
(a) Exhibits: 11.1 Statement re: Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K: On July 28, 1997, the Company filed a Current Report
on Form 8-K in which it reported the completion of
the public issuance and offering of $150,000,000
aggregate principal amount of its 9.5% Senior Notes
due 2004, and filed as exhibits various documents,
including the Underwriting Agreement, dated July 18,
1997 among the Company and the various underwriters
named therein and the Indenture dated as of July 23,
1997, among the Company, the Subsidiary Guarantors and
the Trustee relating to the Senior Note offering.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the Registrant has duly caused this report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized.
DELTA FINANCIAL CORPORATION
(Registrant)
Date: November 14, 1997
By:/S/ HUGH MILLER
-----------------------------------
Hugh Miller
PRESIDENT & CHIEF EXECUTIVE OFFICER
By:/S/ RICHARD BLASS
-----------------------------------
Richard Blass
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
23
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11.1 Statement re: Computation of Per Share Earnings.
27 Financial Data Schedule.
<TABLE>
<CAPTION>
Exhibit 11.1
DELTA FINANCIAL CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------ ------------
<S> <C> <C>
Primary Earnings Per Share
- --------------------------
Net income $ 7,884,054 $22,098,349
============ ============
Weighted average number of common
and common equivalent shares:
-----------------------------
Average no. of shares outstanding 15,372,288 15,354,810
Net effect of dilutive stock options
based on treasury stock method 52,176 35,859
------------ ------------
Total average shares: 15,424,464 15,390,669
============ ============
Primary earnings per share $ 0.51 $ 1.44
============ ============
Fully Diluted Earnings Per Share
- --------------------------------
Net income $ 7,884,054 $22,098,349
============ ============
Weighted average number of common
and common equivalent shares:
-----------------------------
Average no. of shares outstanding 15,372,288 15,354,810
Net effect of dilutive stock options
based on treasury stock method 54,026 53,061
------------ ------------
Total average shares: 15,426,314 15,407,871
============ ============
Fully diluted earnings per share $ 0.51 $ 1.43
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF INCOME FOUND IN THE COMPANY'S FORM 10-Q FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 21,579
<SECURITIES> 0
<RECEIVABLES> 12,325
<ALLOWANCES> 0
<INVENTORY> 85,763
<CURRENT-ASSETS> 0
<PP&E> 7,390
<DEPRECIATION> 0
<TOTAL-ASSETS> 338,952
<CURRENT-LIABILITIES> 0
<BONDS> 149,288
0
0
<COMMON> 154
<OTHER-SE> 117,979
<TOTAL-LIABILITY-AND-EQUITY> 338,952
<SALES> 0
<TOTAL-REVENUES> 95,186
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 43,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,761
<INCOME-PRETAX> 38,539
<INCOME-TAX> 16,440
<INCOME-CONTINUING> 22,098
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,098
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.43
</TABLE>
