SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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 June 30, 1997, 15,372,288 shares of the Registrant's common stock,
par value $.01 per share, were outstanding.
<PAGE>
INDEX TO FORM 10-Q
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996...... 1
Consolidated Statements of Income for the three months and six months
ended June 30, 1997 and June 30, 1996...................................... 2
Consolidated Statements of Cash Flows for the six months ended
June 30, 1997 and June 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..........................................15
PART II - OTHER INFORMATION
Other Information..........................................................21
Signatures.................................................................22
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PART I - FINANCIAL INFORMATION
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DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Assets
Cash and interest bearing deposits ................. $ 21,872,678 $ 18,741,182
Accounts receivable ................................ 10,795,947 8,654,885
Loans held for sale ................................ 83,492,121 83,677,017
Accrued interest and late charges receivable ....... 25,513,436 20,158,812
Capitalized mortgage servicing rights .............. 16,027,032 11,411,634
Equipment, net ..................................... 5,329,018 2,836,360
Cash held for advance payments ..................... 2,527,388 2,488,218
Real estate owned .................................. 134,750 134,750
Interest-only and residual certificates ............ 121,615,964 83,072,777
Prepaid and other assets ........................... 1,562,249 1,560,578
Goodwill ........................................... 5,885,931 --
------------ ------------
$294,756,514 $232,736,213
============ ============
Liabilities and Stockholders' Equity
Bank payable ....................................... 7,713,250 2,294,742
Warehouse financing and other borrowings ........... 133,770,591 95,481,627
Accounts payable and accrued expenses .............. 7,515,647 7,201,674
Investor payable ................................... 26,155,493 22,568,730
Advance payment by borrowers for taxes and insurance 2,294,318 2,255,045
Income taxes payable ............................... 7,058,309 9,416,784
------------ ------------
184,507,608 139,218,602
============ ============
Stockholders' equity
Common stock, $.01 par value. Authorized
49,000,000 shares; 15,372,288 issued and
outstanding at June 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 .................................. 16,626,639 2,412,344
------------ ------------
Total stockholders' equity ................ 110,248,906 93,517,611
------------ ------------
$294,756,514 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Net gain on sale of
mortgage loans ........................................... $18,454,662 $17,697,047 $35,768,514 $17,800,438
Interest ................................................... 6,338,629 3,894,739 11,897,518 7,861,311
Servicing fees ............................................. 1,899,416 1,309,389 3,291,049 2,324,684
Other....................................................... 3,773,807 2,125,664 6,814,293 2,344,754
----------- ----------- ----------- -----------
30,466,514 25,026,839 57,771,374 30,331,187
----------- ----------- ----------- -----------
Expenses:
Payroll and related costs .................................. 8,586,515 5,312,075 16,082,506 6,685,160
Interest expense ........................................... 3,920,281 3,521,230 7,090,506 5,922,152
General and administrative ................................. 5,341,473 3,470,274 9,739,883 5,312,139
----------- ----------- ----------- -----------
17,848,269 12,303,579 32,912,895 17,919,451
----------- ----------- ----------- -----------
Income before provision for income
taxes and extraordinary item ........................... 12,618,245 12,723,260 24,858,479 12,411,736
Provision for income taxes ................................. 5,393,581 274,717 10,644,184 319,049
----------- ----------- ----------- -----------
Income before extraordinary item ........................... 7,224,664 12,448,543 14,214,295 12,092,687
Extraordinary item:
Gain on extinguishment of debt ......................... -- 3,167,828 -- 3,167,828
----------- ----------- ----------- -----------
Net income .......................................... $ 7,224,664 $15,616,371 $14,214,295 $15,260,515
=========== =========== =========== ===========
Pro forma information:
Provision for pro forma income taxes
before extraordinary item ............................. n/a 5,471,002 n/a 5,337,046
=========== ===========
Pro forma income before
extraordinary item .................................... n/a 7,252,258 n/a 7,074,690
=========== ===========
Pro forma income per share of
common stock .......................................... n/a $ 0.57 n/a $ 0.56
=========== ===========
Pro forma weighted average no.
of shares outstanding ................................. n/a 12,629,182 n/a 12,629,182
=========== ===========
Per share data:
Earnings per share ........................................ $ 0.47 n/a $ 0.92 n/a
=========== ===========
Weighted average number
of shares outstanding ..................................... 15,373,067 n/a 15,395,037 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)
SIX MONTHS ENDED
JUNE 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................................ $ 14,214,295 $ 15,260,515
Adjustments to reconcile net income to net cash used in
operating activities:
Provision for loan losses ...................................................... 49,998 49,882
Depreciation and amortization .................................................. 1,047,035 327,263
Capitalized mortgage servicing rights,
net of amortization ......................................................... (4,615,398) (2,842,929)
Deferred origination fees ...................................................... 113,768 (1,515,865)
Interest-only and residual certificates received in
securitization transactions, net ............................................ (38,543,187) (17,923,881)
Changes in operating assets and liabilities:
Increase in accounts receivable, net ........................................... (2,110,268) (661,554)
(Increase) decrease in loans held for sale, net ................................ 21,130 (1,584,529)
Decrease (increase) in accrued interest and
late charges receivable ..................................................... (5,354,624) 208,299
(Increase) decrease in cash held for advance payments........................... (39,170) 413,768
Decrease in real estate owned .................................................. -- 35,000
(Increase) decrease in prepaid and other assets................................. 32,168 (311,703)
Decrease in due from stockholders .............................................. -- 990,000
Increase in accounts payable and accrued expenses............................... 235,643 404,813
Increase (decrease) in investor payable ........................................ 3,586,763 (673,347)
Increase (decrease) in advance payments by
borrowers for taxes and insurance ........................................... 26,613 (351,044)
Decrease in income taxes payable ............................................... (2,314,398) --
------------- -------------
Net cash used in operating activities .............................................. (33,649,632) (8,175,312)
------------- -------------
Cash flows from investing activities:
Acquisition of Fidelity Mortgage ............................................... (3,674,845) --
Purchase of equipment .......................................................... (2,967,929) (841,565)
Net cash used in investing activities ------------- -------------
(6,642,774) (841,565)
------------- -------------
Cash flows from financing activities:
Proceeds from warehouse financing and
other borrowings, net ....................................................... 38,057,076 495,200
Increase in bank payable, net .................................................. 5,366,826 1,423,472
Distributions .................................................................. -- (360,000)
------------- -------------
Net cash provided by financing activities 43,423,902 1,558,672
------------- -------------
Net increase (decrease) in cash .................................................... 3,131,496 (7,458,205)
Cash at beginning of period ........................................................ 18,741,182 16,635,135
Cash at end of period .............................................................. ------------- -------------
$ 21,872,678 $ 9,176,930
============= =============
See accompanying notes to consolidated financial statements.
3
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<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Delta Financial Corporation and subsidiaries (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.
In the opinion of management, all adjustments consisting of normal recurring
accruals considered necessary for a fair presentation of the financial position
and results of operations for the interim periods 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 starting 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 amortized on a straight-line basis over seven years. The acquired
operations will continue to
4
operate as separate legal entities under the names Fidelity Mortgage Inc. and
Fidelity Mortgage (Florida), Inc.
<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
six months ending June 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 six months ended June 30, 1997 and June 30, 1996, the Company
paid $7.7 million and $5.9 million, respectively, for interest, and $13.0
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
On July 23, 1997, the Company completed a $150 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 option of the
Company, in whole or in part, at the redemption price set forth in the Indenture
dated July 23, 1997 plus accrued and unpaid interest to the date of redemption.
Proceeds from the debt offering were used first to pay down shorter-term
financing and the remaining proceeds will be used to fund originations growth
and securitization activities.
5
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 additional funding sources
through 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
<PAGE>
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.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996
REVENUES
Total revenues increased $27.5 million, or 91%, to $57.8 million in the
six months ended June 30, 1997, from $30.3 million in the corresponding period
of the prior year. The increase in
6
revenues was primarily attributable to the increase in loan originations
and purchases and corresponding increases in the amount of loans sold through
securitizations and the size of 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 $258.1 million, or 106% to $502.2 million during the six
months ended June 30, 1997 from $244.1 million during the six months ended June
30, 1996. The Company completed two securitizations totaling $495.0 million in
the six months ended June 30, 1997 compared to one securitization and loan sales
totaling $236.2 million in the corresponding period one year ago. Total loans
serviced increased $682.0 million, or 109% to $1,306.1 million as of June 30,
1997 as compared to $624.1 million as of June 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
<PAGE>
loans, (b) cost associated with securitizations and (c) any hedge loss (gain).
Net gain on sale of mortgage loans increased $18.0 million, or 101%, to $35.8
million in the six months ended June 30, 1997, from $17.8 million in the
corresponding period of the prior year. The increase was attributable to an
increase in the amount of loans securitized in the six months ended June 30,
1997 as compared to the amount of loans securitized or sold in the corresponding
period one year ago. During the six months ended June 30, 1997, the Company
completed two securitizations totaling $495.0 million versus completing one
securitization and loan sales of $236.2 million for the six months ended June
30, 1996. The weighted average gain on sale for the six months ended June 30,
1997 and for the six months ended June 30, 1996 were 7.22% and 7.54%,
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 $4.0 million, or 51%, to $11.9 million in the six months ended June
30, 1997, from $7.9 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 six months ended June 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-only and residual
certificates during the six months ended June 30, 1997. As of June 30, 1997, the
Company's retained interest-only and residual certificates totaled $121.6
million as compared to $43.2 million for the comparable period one year ago. The
increase in interest income was partially offset by a higher aggregate
amortization of the retained interest-only and residual certificate assets in
accordance with SFAS No. 115 in the six months ended June 30, 1997 as compared
to the corresponding period in the prior year.
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 $1.0 million, or 43%, to $3.3 million in the six
months ended June 30, 1997, from $2.3 million in the corresponding
7
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 six months ended June 30, 1997, the average
balance of mortgage loans serviced by the Company increased 107% to $1,147.1
million from $555.3 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, 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 $4.5 million, or 196%, to $6.8 million in the six months
ended June 30, 1997 from $2.3 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 June 30, 1997 and,
to a lesser extent, to an increase of $73.6 million, or 54%, in brokered loan
originations to $209.2 million in the six months ended June 30, 1997, from
<PAGE>
$135.6 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
Total expenses increased $15.0 million, or 84%, to $32.9 million for the
six months ended June 30, 1997, from $17.9 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, and (c) higher
interest expenses associated with increased borrowings under the Company's
warehouse and interest-only and residual financing credit facilities.
PAYROLL EXPENSE. Payroll expense increased $9.4 million, or 140%, to $16.1
million for the six months ended June 30, 1997, from $6.7 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 June 30, 1997, the
Company employed 722 full- and part-time persons, including 449 employees of
Delta Funding Corporation and 273 employees of Fidelity Mortgage, compared to
294 full- and part-time persons as of June 30, 1996.
INTEREST EXPENSE. Interest expense increased $1.2 million, or 20%, to $7.1
million in the six months ended June 30, 1997, from $5.9 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
the six months ended June 30, 1997 versus 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 six months ended June 30, 1997,
resulting from increases in loan originations and purchases during the period,
and (ii) an increase in borrowings under the
8
Company's interest-only and residual financing credit facilities secured by
its residual and interest-only certificates during the six months ended June 30,
1997. The Company had residual and interest-only financings of $66.4 million as
of June 30, 1997 compared to $26.0 million as of June 30, 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses,
which consist primarily of office and administrative, rent, and health care and
insurance expenses, increased $4.4 million, or 83%, to $9.7 million in the six
months ended June 30, 1997 from $5.3 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 four 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 the 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
<PAGE>
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 the 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 income tax on its taxable income. For the six
months ended June 30, 1997, the Company recorded a tax provision of $10.6
million compared to $0.3 million in the corresponding period of the prior year.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1996
REVENUES
Total revenues increased $5.5 million, or 22%, to $30.5 million in the
three months ended June 30, 1997, from $25.0 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 June 30, 1997 versus
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 on loans held for sale. The
increase was partially offset by the Company securitizing (x) only three months
of loan production during the three months ended June 30, 1997, in contrast to
the comparable period one year ago when the Company securitized six months of
loan production, and (y) seasoned mortgage loans associated
9
with the extinguishment of a long term credit facility during the three months
ended June 30, 1996.
NET GAIN ON SALE OF MORTGAGE LOANS. Net gain on sale of mortgage loans
increased $0.8 million, or 5%, to $18.5 million in the three months ended June
30, 1997, from $17.7 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 securitizing (i) three
months of loan production during the three months ended June 30, 1997, as
compared to the comparable period one year ago where the Company securitized six
months worth of loan production (and effected loan sales from its three months
of loan production), and (ii) seasoned mortgage loans associated with the
extinguishment of a long term credit facility which carried a higher weighted
average coupon as compared to loans originated during the three months ended
June 30, 1996 because they were originated during a period when interest rates
were generally higher. The Company securitized $260.0 million, with a net gain
on sale of 7.1% during the three months ended June 30, 1997, compared to loan
sales and securitization of $229.3 million, with a net gain on sale of 7.7%,
during the three months ended June 30, 1996.
INTEREST INCOME. Interest income increased $2.4 million, or 62%, to $6.3
million in the three months ended June 30, 1997, from $3.9 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 June 30, 1997. As of June
30, 1997, the Company's retained interest-only and residual certificates totaled
<PAGE>
$121.6 million as compared to $43.2 million for the comparable period one year
ago. The increase in interest income was partially offset by a higher aggregate
amortization of the retained interest-only and residual certificate assets in
accordance with SFAS No. 115 in the three months ended June 30, 1997 as compared
to the corresponding period in the prior year.
SERVICING INCOME. Servicing income increased $0.6 million, or 46%, to $1.9
million in the three months ended June 30, 1997, from $1.3 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 June 30, 1997, the
average balance of mortgage loans serviced by the Company increased 110% to
$1,245.5 million from $593.5 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, and due to amortization of the capitalized servicing asset in
accordance with SFAS No. 125.
OTHER INCOME. Other income increased $1.7 million, or 81%, to $3.8 million
in the three months ended June 30, 1997 from $2.1 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 April 1, 1997 through June
30, 1997 and, to a lesser extent, to an increase of $34.1 million, or 49%, in
brokered loan originations to $103.3 million in the three months ended June 30,
1997,
10
from $69.2 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 $5.5 million, or 45%, to $17.8 million for the
three months ended June 30, 1997, from $12.3 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, and (c) higher
interest expenses associated with increased borrowings under the Company's
warehouse and interest-only and residual financing credit facilities.
PAYROLL EXPENSE. Payroll expense increased $3.3 million, or 62%, to $8.6
million for the three months ended June 30, 1997, from $5.3 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 June 30, 1997, the
Company employed 722 full- and part-time persons, including 449 employees of
Delta Funding Corporation and 273 employees of Fidelity Mortgage, compared to
294 full- and part-time persons as of June 30, 1996.
INTEREST EXPENSE. Interest expense increased $0.4 million, or 11%, to $3.9
million in the three months ended June 30, 1997, from $3.5 million in the
corresponding period of the prior year. The increase in interest expense was
primarily due to an increase in residual and interest-only financings during the
three months ended June 30, 1997. The Company had residual and interest-only
<PAGE>
financings of $66.4 million as of June 30, 1997 compared to $26.0 million as of
June 30, 1996. This increase was partially offset by (i) lower interest costs
associated with a lower average balance of loans held for sale during the three
months ended June 30, 1997, as compared to the corresponding period in the prior
year, resulting from the Company's not completing a securitization during the
first quarter of 1996 and (ii) a lower average cost of funds during the three
months ended June 30, 1997 as compared to the corresponding period in the prior
year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $1.8 million, or 51%, to $5.3 million in the three months ended June
30, 1997 from $3.5 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 growth of loan originations and purchases, increased
employee benefit expenses, the addition of Fidelity Mortgage and the opening of
4 Fidelity Mortgage branch offices.
INCOME TAXES
For the three months ended June 30, 1997, the Company recorded a tax
provision of $5.4 million compared to $0.3 million in the corresponding
period of the prior year.
11
FINANCIAL CONDITION
JUNE 30, 1997 COMPARED TO DECEMBER 31, 1996
Cash and interest-bearing deposits increased $3.1 million, or 17%, to
$21.8 million at June 30, 1997 from $18.7 million at December 31, 1996. The
increase was primarily due to additional moneys held in securitization trust
accounts related to the Company's ongoing securitization program as a result of
an increased balance of loans in securitization.
Accounts receivable increased $2.1 million, or 24%, to $10.8 million at
June 30, 1997 from $8.7 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 decreased $0.2 million, or 0.2%, to $83.5 million at
June 30, 1997 from $83.7 million at December 31, 1996. This decrease was
primarily the result of the Company securitizing a larger percentage of the
loans it originated and purchased during the three months ended June 30, 1997 as
compared to the three months ended December 31, 1996.
Accrued interest and late charges receivable increased $5.3 million, or
26%, to $25.5 million at June 30, 1997 from $20.2 million at December 31, 1996.
This increase was primarily due to a higher average loan servicing portfolio
during the three months ended June 30, 1997. The Company's average servicing
portfolio increased 45% to $1,245.5 million during the second quarter of 1997
from $859.6 million during the fourth quarter of 1996.
Capitalized mortgage servicing rights increased $4.6 million, or 40%, to
$16.0 million at June 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 two new securitizations during the six
<PAGE>
months ended June 30, 1997, in accordance with SFAS No. 125.
Interest-only and residual certificates increased $38.5 million, or 46%,
to $121.6 million at June 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 and 1997-2
$260 million securitization completed in the first and second quarters of 1997,
respectively. Interest-only and residual certificates are recorded at fair value
in accordance with SFAS No. 125.
Warehouse financing and other borrowings increased $38.3 million, or 40%,
to $133.8 million at June 30, 1997 from $95.5 million at December 31, 1996,
primarily due to additional borrowings to finance loans held for sale and
additional financing secured by interest-only and residual certificates. During
the fourth quarter of 1996, the Company used $38.0 million of the net proceeds
from its initial public offering to pay down amounts outstanding on a warehouse
facility.
12
Investor payable increased $3.6 million, or 16%, to $26.2 million at June
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 $16.7 million, or 18%, to $110.2 million at
June 30, 1997 from $93.5 million at December 31, 1996. This increase is
primarily due to net income for the six month period of $14.2 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 expenses on warehouse, residual and other financing, (iv)
fees, expenses and tax payments incurred in connection with its securitization
program, and (v) ongoing administrative and other operating expenses.
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 six months ended
June 30, 1997 and June 30, 1996, used cash of approximately $33.6 million and
$8.2 million, respectively.
Historically, the Company has utilized various financing facilities and an
equity financing to offset negative operating cash flows and support the
continued growth in loan originations and purchases, securitizations and general
operating expenses. Subsequent to June 30, 1997, the Company completed a $150
<PAGE>
million 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
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
13
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 $250 million facility, $200
million facility and $100 million facility as of June 30, 1997 was $64.3
million, $0 and $0, respectively.
The Company has obtained financing facilities for interest-only and
residual certificates acquired as part of its securitizations. These facilities
have variable interest rates and mature between October 1997 and June 2000. As
of June 30, 1997, the aggregate outstanding balance on these facilities was
$66.4 million.
In addition, the Company has a line of credit with a financial institution
to support its daily operating requirements. The facility is a one-year
renewable credit line in the amount of $1.0 million with a variable interest
rate, renewable in September 1997. The outstanding balance on the credit line
was $0 as of June 30, 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 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
<PAGE>
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.
14
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 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
<PAGE>
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.
15
Following the securitizations, the purchasers of the pass-through
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 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
<PAGE>
securitizations qualify as sales under this pronouncement, the required
accounting is an allocation of basis approach.
16
After the securitization of mortgage loans held for sale, the
mortgage-backed security (or any retained interests in REMIC securitizations of
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 the mortgage
servicing rights and 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 as part of gain on sale, of $3.2 million in the
three months ended June 30, 1997.
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
<PAGE>
of the loan, whether the loan is sold through securitization or on a whole loan
basis.
17
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 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.
18
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE
<PAGE>
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
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.
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 unanticipated expenses of assimilating newly-acquired business
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.
o 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; the ability or
inability of the Company to hedge against fluctuations in interest
rates.
o The ability or inability of the Company to continue its practice
of securitization of mortgage loans held for sale.
19
o Increased competition within the Company's markets.
The Company believes that it has the product offerings, facilities,
personnel and competitive and financial resources for continued business
success. However, future revenues, costs, margins and profits are all influenced
<PAGE>
by a number of factors, as discussed above.
20
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 numerous 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 29, 1997. At the
meeting, Richard Blass and Arnold B. Pollard were elected as Class I Directors
for a term of three years. Hugh Miller, Sidney A. Miller and Martin D. Payson
continue to serve as members of the Board of Directors.
Votes cast in favor of Mr. Blass' election totaled 14,363,632 while
12,468 votes were withheld.
Votes cast in favor of Mr. Pollard's election totaled 14,363,682
while 12,418 votes were withheld.
The stockholders also voted to ratify the appointment of KPMG Peat Marwick
LLP as the Company's independent public accountants for the fiscal year ending
December 31, 1997. Votes cast in favor of this ratification were 14,371,038,
while votes cast against were 2,914 and abstentions totaled 2,148.
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: None.
21
<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: August 20, 1997
By:/S/ HUGH MILLER
-----------------------------------
Hugh Miller
PRESIDENT & CHIEF EXECUTIVE OFFICER
By:/S/ RICHARD BLASS
-----------------------------------
Richard Blass
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
22
<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 SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
------------ ------------
<S> <C> <C>
Primary Earnings Per Share
- --------------------------
Net income $ 7,224,664 $14,214,295
============ ============
Weighted average number of common
and common equivalent shares:
-----------------------------
Average no. of shares outstanding 15,372,288 15,345,926
Net effect of dilutive stock options
based on treasury stock method 779 49,111
------------ ------------
Total average shares: 15,373,067 15,395,037
============ ============
Primary earnings per share $ 0.47 $ 0.92
============ ============
Fully Diluted Earnings Per Share
- --------------------------------
Net income $ 7,224,664 $14,214,295
============ ============
Weighted average number of common
and common equivalent shares:
-----------------------------
Average no. of shares outstanding 15,372,288 15,345,926
Net effect of dilutive stock options
based on treasury stock method 65,156 64,304
------------ ------------
Total average shares: 15,437,444 15,410,230
============ ============
Fully diluted earnings per share $ 0.47 $ 0.92
============ ============
</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 SIX
MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 21,873
<SECURITIES> 0
<RECEIVABLES> 10,796
<ALLOWANCES> 0
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0
0
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