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, 2000
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 1179
(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, 2000, 15,883,749 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
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999................................................. 1
Consolidated Statements of Operations for the three months and
nine months ended September 30, 2000 and September 30, 1999....... 2
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and September 30, 1999......................... 3
Notes to Consolidated Financial Statements........................ 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk........27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 28
Item 2. Changes in Securities and Use of Proceeds........................31
Item 3. Defaults Upon Senior Securities..................................31
Item 4. Submission of Matters to a Vote of Security Holders..............31
Item 5. Other Information................................................31
Item 6. Exhibits and Current Reports on Form 8-K........................ 31
Signatures...................................................................32
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
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DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA) 2000 1999
------------ -----------
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ASSETS
Cash and interest-bearing deposits $ 53,792 $ 69,557
Accounts receivable 33,437 32,367
Loans held for sale, net 53,845 89,036
Accrued interest receivable 14,136 63,309
Capitalized mortgage servicing rights 40,077 45,927
Interest-only and residual certificates 239,132 224,659
Equipment, net 16,226 21,721
Prepaid and other assets 22,520 5,428
Deferred tax asset 12,071 --
Goodwill 1,938 4,831
----------- ----------
Total assets $ 487,174 $ 556,835
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Bank payable $ 527 $ 1,195
Warehouse financing and other borrowings 82,094 109,019
Senior Notes 149,545 149,474
Accounts payable and accrued expenses 45,899 43,607
Investor payable 60,942 82,204
Advance payment by borrowers for taxes and insurance 13,933 13,784
Deferred tax liability -- 10,411
----------- -----------
Total liabilities 352,940 409,694
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value. Authorized 49,000,000 shares;
16,000,549 shares issued and 15,883,749 shares outstanding
at September 30, 2000 and December 31, 1999 160 160
Additional paid-in capital 99,472 99,472
Retained earnings 35,920 48,827
Treasury stock, at cost (116,800 shares) (1,318) (1,318)
----------- ----------
Total stockholders' equity 134,234 147,141
----------- ----------
Total liabilities and stockholders' equity $ 487,174 $ 556,835
=========== ==========
See accompanying notes to consolidated financial statements.
1
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DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 2000 1999
-------- -------- ------- -------
<S> <C> <C> <C> <C>
REVENUES
Net gain on sale of mortgage loans $ 14,570 $ 9,911 $ 40,498 $ 57,915
Interest 2,721 8,619 20,825 24,732
Servicing fees 2,959 4,219 10,763 11,575
Origination and other fees 7,375 6,937 20,428 22,426
-------- -------- -------- --------
Total revenues 27,625 29,686 92,514 116,648
-------- -------- -------- --------
EXPENSES
Payroll and related costs 13,534 16,123 44,794 49,709
Interest expense 7,450 6,205 23,781 18,454
General and administrative (Note 3) 12,261 17,516 32,467 45,510
Debt modification charges 3,088 - 3,088 -
Restructuring charges 6,677 - 6,677 -
-------- -------- -------- --------
Total expenses 43,010 39,844 110,807 113,673
-------- -------- -------- --------
(Loss) income before income
tax (benefit) expense (15,385) (10,158) (18,293) 2,975
Income taxes (benefit) expense (4,179) (4,063) (5,386) 1,111
--------- -------- -------- ---------
Net (loss) income $ (11,206) $ (6,095) $ (12,907) $ 1,864
========= ======== ======== =========
PER SHARE DATA
Net (loss) income per common
share - basic and diluted $ (0.70) $ (0.39) $ (0.81) $ 0.12
======== ======== ======== =========
Weighted-average number
of shares outstanding 15,920,869 15,438,640 15,920,869 15,385,672
=========== =========== =========== ===========
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,
(DOLLARS IN THOUSANDS) 2000 1999
-------- --------
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Cash flows from operating activities:
Net (loss) income $ (12,907) $ 1,864
Adjustments to reconcile net income to net cash used in
operating activities:
Provision for loan and recourse losses 614 76
Depreciation and amortization 9,717 4,196
Settlement issuance of common stock to the Trust - 4,777
Deferred tax benefit (22,482) (8,640)
Capitalized mortgage servicing rights, net of amortization 5,850 (2,881)
Deferred origination costs 653 (48)
Interest-only and residual certificates received in
Securitization transactions, net (14,473) (18,870)
Changes in operating assets and liabilities:
Increase in accounts receivable (1,070) (7,208)
Decrease (increase) in loans held for sale, net 34,533 (14,742)
Decrease (increase) in accrued interest receivable 49,173 (11,300)
(Increase) decrease in prepaid and other assets (17,689) 358
Increase in accounts payable and accrued expenses 2,280 16,677
(Decrease) increase in investor payable (21,262) 7,551
Increase in advance payments by borrowers for taxes and insurance 149 4,087
-------- --------
Net cash provided by(used in) operating activities 13,086 (24,103)
-------- --------
Cash flows from investing activities:
Purchase of equipment (1,258) (6,506)
-------- --------
Net cash used in investing activities (1,258) (6,506)
-------- --------
Cash flows from financing activities:
(Repayments) proceeds from warehouse financing and other borrowing (26,925) 40,352
(Decrease) increase in bank payable, net (668) 83
-------- --------
Net cash (used in) provided by financing activities (27,593) 40,435
-------- --------
Net (decrease) increase in cash and interest-bearing deposits (15,765) 9,826
Cash and interest-bearing deposits at beginning of period 69,557 59,183
-------- --------
Cash and interest-bearing deposits at end of period $ 53,792 $ 69,009
======== ========
Supplemental Information:
Cash paid during the period for:
Interest $ 26,512 $ 29,901
======== ========
Income taxes $ 2,133 $ 9,750
======== ========
See accompanying notes to consolidated financial statements.
3
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DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Delta Financial Corporation (the "Company" or "Delta") is a Delaware
corporation, which was organized in August 1996.
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.
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 unaudited 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 audited consolidated financial statements and related notes of the
Company for the year ended December 31, 1999. The results of operations for the
three- and nine-month periods ended September 30, 2000 are not necessarily
indicative of the results that will be expected for the entire year.
All adjustments that 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. Certain prior
period amounts in the financial statements have been reclassified to conform
with the current year presentation.
(2) RESTRUCTURING AND DEBT MODIFICATION CHARGES
In August 2000, Delta announced a corporate restructuring (the
"Restructuring") in its continuing efforts to improve operating efficiencies and
to address its negative cash flow from operations. The Company reduced its
workforce by approximately 17%, consolidated some of its regional offices, and
reduced the base salaries of its senior management (by approximately 13%), and
certain members of its general staff. The Company recorded a $6.7 million
pre-tax charge for the Restructuring. After cash payment for personnel related
costs, the balance of the restructuring liability at September 30, 2000 was
$1.7 million.
In August 2000, the Company also announced an agreement to modify its
outstanding $150 million aggregate principal amount of 9 1/2% senior notes due
2004 (the "Senior Notes")(the "Debt Modification"). With the consent of greater
than fifty percent of its Senior Note holders, a negative pledge in the Senior
Notes Indenture has been modified, which previously prevented the Company from
selling or otherwise obtaining financing against any of its interest-only or
residual certifications ("Residual Assets"). In consideration for the Senior
Note holders' consent, the Company has agreed to offer current Senior Note
holders the option of exchanging their existing securities ("the "Old Notes")
for new senior notes (the "New Notes") through an exchange offering (the
"Exchange Offering") which is expected to be consummated in the fourth
4
quarter of 2000. The New Notes will be secured by at least $165 million of
the Company's residual certificates. The New Notes will have the same coupon,
face amount and maturity date as the Old Notes. In addition, the New Note
holders will receive ten-year warrants to buy approximately 1.6 million shares
of Common Stock, at an initial exercise price of $9.10 per share, subject to
upward or downward adjustment in certain circumstances. All of the other terms
of the New Notes will be substantially similar to the Old Notes. The Company
recorded a $3.1 million pre-tax charge in the third quarter of 2000 related to
professional fees for the Debt Modification.
(3) SUMMARY OF REGULATORY SETTLEMENTS
In September 1999, the Company settled allegations by the New York State
Banking Department (the "NYSBD") and a lawsuit by the New York State Office of
the Attorney General ("NYSOAG") alleging that Delta had violated various state
and federal lending laws. The global settlement was evidenced by (a) Remediation
Agreement by and between Delta Funding and the NYSBD, dated as of September 17,
1999 and (b) Stipulated Order on Consent by and among Delta Funding, Delta
Financial and the NYOAG, dated as of September 17, 1999. As part of the
Settlement, Delta, among other things, implemented agreed upon changes to its
lending practices; agreed to provide reduced loan payments aggregating $7.25
million to certain borrowers identified by the NYSBD; and created a fund of
approximately $4.75 million financed by the grant of 525,000 shares of Delta
Financial's common stock valued at a constant assumed price of $9.10 per share,
which approximated book value. The proceeds of the fund will be used, for among
other things, payments to borrowers, and to pay for a variety of consumer
educational and counseling programs.
In March 2000, the Company finalized an agreement with the U.S. Department of
Justice (the "DOJ"), the Federal Trade Commission (the "FTC") and the Department
of Housing and Urban Development ("HUD"), to complete the global settlement it
had reached with the NYSBD and NYOAG. The Federal agreement mandates some
additional compliance efforts for Delta, but it does not require any additional
financial commitment by Delta.
(4) IMPACT OF NEW ACCOUNTING STANDARDS
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133." This statement amends and supersedes certain paragraphs
of SFAS No. 133. The effective date for SFAS No. 138 is for fiscal years
beginning after June 15, 2000. SFAS No. 138 and 133 apply to quarterly and
annual financial statements. The Company does not believe that there will be
a material change to the impact of its hedging strategy on its financial
condition or results of operations upon the adoption of SFAS No. 138 and 133.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
140 replaces SFAS No. 125 and revises the standards for accounting and reporting
for securitizations and other transfers of financial assets and extinguishment
of liabilities. SFAS No. 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
5
March 31, 2000. SFAS No. 140 is effective for recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 31, 2000. Management of the
Company currently believes the implementation of SFAS No. 140 will not have a
material impact on the Company's financial condition or results of operation.
(5) EARNINGS PER SHARE
The following is a reconciliation of the denominators used in the
computations of basic and diluted Earnings Per Share ("EPS"). The numerator for
calculating both basic and diluted EPS is net income.
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
(DOLLARS IN THOUSANDS, EXCEPT EPS DATA) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------
Net (loss) income $(11,206) $(6,095) $(12,907) $1,864
Weighted-average shares - basic 15,920,869 15,438,640 15,920,869 15,385,672
Basic EPS $(0.70) $(0.39) $(0.81) $0.12
Weighted-average shares - basic 15,920,869 15,438,640 15,920,869 15,385,672
Incremental shares-options --- 27,817 452 25,700
-------------------------------------------------------------------------------------------
Weighted-average shares - diluted 15,920,869 15,466,457 15,921,321 15,411,372
Diluted EPS $(0.70) $(0.39) $(0.81) $0.12
</TABLE>
6
<PAGE>
ITEM 2. 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.
GENERAL
Delta Financial Corporation (the "Company" or "Delta"), through its
wholly-owned subsidiaries, engages in the consumer finance business by
originating, acquiring, selling and servicing non-conforming home equity loans.
Throughout its 18 years of operating history, the Company has focused on lending
to individuals who generally have impaired or limited credit profiles or higher
debt-to-income ratios for such purposes as debt consolidation, home improvement,
mortgage refinancing or education.
Through its wholly-owned subsidiary, Delta Funding Corporation ("Delta
Funding"), the Company originates home equity loans indirectly through licensed
mortgage brokers and other real estate professionals who submit loan
applications on behalf of the borrower ("Brokered Loans") and also purchases
loans from mortgage bankers and smaller financial institutions that satisfy
Delta's underwriting guidelines ("Correspondent Loans"). However, in July 2000,
the Company decided to discontinue its correspondent operations to focus on its
less cash intensive broker and retail channels. Delta Funding currently
originates the majority of its loans in 24 states, through its network of
approximately 1,500 brokers.
Through its wholly-owned subsidiary, Fidelity Mortgage Inc., the Company
develops retail loan leads ("Retail Loans") primarily through its telemarketing
system and its network of 14 retail offices located in eight states. During the
nine months ended September 30, 2000, the Company closed two retail offices (in
Atlanta, Georgia and Tampa, Florida), and opened a new retail origination call
center at its office in Woodbury, New York.
In July 2000, the Company received $2 million in connection with the sale of
one of its domain names previously used as an internet address.
In August 2000, Delta announced a corporate restructuring in its continuing
efforts to improve its operating efficiencies and to address its negative cash
flow from operations (See Restructuring and Debt Modification Charges, Note 2 of
the Notes to Consolidated Financial Statements).
In August 2000, the Company also announced an agreement to modify its
outstanding $150 million aggregate principal amount of 9 1/2% senior notes duE
2004 (See Restructuring and Debt Modification Charges, Note 2 of the Notes to
Consolidated Financial Statements).
7
In August 2000, the Company entered into a residual financing agreement with
a lender to finance approximately $17 million of its Residual Assets in
accordance with its Debt Modification.
In June 1999, the Company announced a settlement in principle with the NYOAG,
which was to provide for retrospective relief to certain borrowers in the form
of reduced monthly obligations aggregating $6 million and prospective changes to
some of the Company's lending practices. The NYOAG took issue with Delta's
lending practices, specifically which loans should and should not be made by
Delta. The settlement in principle was later expanded to include the NYSBD and
the DOJ, which had raised similar concerns relating to Delta's lending
practices. In September 1999, the Company finalized its settlements with the
NYSBD and the NYOAG, but only after the NYOAG filed suit against the Company in
August 1999, as evidenced by (1) a Remediation Agreement by and between the
Company and the NYSBD, and (2) a Stipulated Order on Consent by and among the
Company and the NYOAG.
As part of the final global settlement, the Company agreed to, among other
things, implement agreed upon changes to its lending practices; provide reduced
loan payments aggregating $7.25 million to certain borrowers identified by the
NYSBD; and create a reversionary fund (the "Fund"), administered by a trustee
named by the NYSBD, financed by the grant by Delta of 525,000 shares of Delta's
common stock, valued at an assumed constant price of $9.10 per share, which
approximated the book value of the shares. All proceeds raised through the Fund
shall be used for restitution and/or to pay for a variety of educational and
counseling programs at the discretion of the NYSBD.
The Company recorded a $6.0 million pre-tax charge in the second quarter of
1999 when it reached a settlement in principle with the NYOAG. Subsequently, an
additional $6.0 million pre-tax charge was recorded in the third quarter of 1999
when the Company reached a global settlement with the NYSBD and the NYOAG. The
Company finalized its agreement with the DOJ in March 2000. The DOJ settlement,
which parallels the NYSBD and NYOAG settlement agreements, was also signed by
the FTC and HUD. See "Legal Proceedings" for a discussion of the settlement.
For the three months ended September 30, 2000, the Company originated and
purchased $198 million of loans, a decrease of 45% over the $361 million of
loans originated and purchased in the comparable period in 1999. Of these
amounts, approximately $137 million were originated through its network of
brokers, $60 million were originated through its retail network and $1 million
were purchased from its network of correspondents (although the Company closed
its correspondent division July 1, 2000, it had a previous forward commitment to
purchase these loans subsequent to July 1, 2000) during the three months ended
September 30, 2000. For the same period in 1999, comparable amounts of
originations through its broker and retail networks, and purchases from its
correspondent network, were $222 million, $80 million and $59 million,
respectively.
8
The Company originated and purchased $749 million of mortgage loans for the
nine months ended September 30, 2000, representing a 37% decrease from $1.18
billion of mortgage loans originated and purchased for the comparable period in
1999. Of these amounts, approximately $477 million were originated through its
network of brokers, $203 million were originated through its retail network and
$69 million were purchased from its network of correspondents during the nine
months ended September 30, 2000 compared to $715 million, $249 million and $216
million, respectively, for the same period in 1999. The decrease in origination
volume for the comparable three and nine month periods was the result of a
decline in correspondent purchases, which was due to the Company's decision in
July 2000 to discontinue its correspondent operations to focus exclusively on
its less cash intensive broker and retail channels and a general overall
industry decline in mortgage originations resulting from higher interest rates.
The following table sets forth information relating to the delinquency and
loss experience of the mortgage loans serviced by the Company (primarily for the
securitization trusts, as described below) for the periods indicated. The
Company is not the holder of the securitization loans, but generally retains
interest-only or residual certificates issued by the securitization trusts and
the servicing rights, of which the value of each may be adversely affected by
defaults.
9
<PAGE>
-------------------------------------
(Dollars in thousands) 9 MONTHS ENDED 6 MONTHS ENDED
SEPTEMBER 30, JUNE 30,
2000 2000
------------ ------------
Total Outstanding Principal Balance
(at period end)...................... $ 3,574,790 $ 3,816,818
Average Outstanding(1)................. $ 3,715,636 $ 3,745,443
DELINQUENCY (at period end)
30-59 Days:
Principal Balance.................... $ 235,990 $ 208,674
Percent of Delinquency(2)............ 6.60% 5.47%
60-89 Days:
Principal Balance.................... $ 106,974 $ 103,347
Percent of Delinquency(2)............ 2.99% 2.71%
90 Days or More:
Principal Balance.................... $ 69,827 $ 54,718
Percent of Delinquency(2)............ 1.95% 1.43%
Total Delinquencies:
Principal Balance.................... $ 412,791 $ 366,739
Percent of Delinquency(2)............ 11.54% 9.61%
FORECLOSURES
Principal Balance.................... $ 207,029 $ 190,059
Percent of Foreclosures by Dollar(2). 5.79% 4.98%
REO (at period end).................... $ 51,421 $ 47,098
Percent of REO...................... 1.44% 1.23%
Net Losses on Liquidated Loans......... $ (18,759) $ (11,061)
Percentage of Net Losses on Liquidated Loans
(based on Average Outstanding Balance)(3) (0.67%) (0.59%)
---------------
(1)Calculated by summing the actual outstanding principal balances at the end
of each month and dividing the total principal balance by the number of
months in the applicable period.
(2)Percentages are expressed based upon the total outstanding principal balance
at the end of the indicated period.
(3)Annualized.
The Company believes it will continue to see a higher trend in both
delinquencies and losses on an absolute dollar and percentage basis for the
foreseeable future primarily due to a combination of (a) the continued seasoning
of the Company's servicing portfolio and (b) a continued reduction, on a
relative basis in the size of the increase in its servicing portfolio. This
latter trend is due to both a lower absolute dollar amount of loan originations
and a lower absolute dollar amount on its servicing portfolio as a result of the
sale of its servicing rights associated with the loans securitized during the
second and third quarters of 2000.
FAIR VALUE ADJUSTMENTS
The fair values of both interest-only and residual certificates and
capitalized mortgage servicing rights are significantly affected by, among other
factors, prepayments of loans and estimates of future prepayment rates. The
Company continually reviews its prepayment
10
assumptions in light of company and industry experience and makes adjustments
to those assumptions when such experience indicates.
The Company makes assumptions concerning prepayment rates and defaults based
upon the seasoning of its existing securitization loan portfolio. The most
recent adjustments to these assumptions were made in the third quarter of 2000
and the fourth quarter of 1999. The following table shows the changes to the
prepayment assumptions at each of these dates and the assumptions used prior to
the 1999 fourth quarter change.
-----------------------------------------------------------------------------
MONTH ONE SPEED PEAK SPEED
-----------------------------------------------------------------------------
LOAN TYPE 9/30/00 12/31/99 PRIOR 9/30/00 12/31/99 PRIOR
-----------------------------------------------------------------------------
Fixed Rate Loans 4.0% 4.0% 4.8% 23% 31% 31%
-----------------------------------------------------------------------------
Six-Mo. LIBOR ARMS 10.0% 10.0% 10.0% 50% 50% 50%
-----------------------------------------------------------------------------
Hybrid ARMS 4.0% 4.0% 6.0% 50% 50% 50%
-----------------------------------------------------------------------------
In the third quarter of 2000, the Company lowered its prepayment speed
assumptions mainly by reducing the peak speed on its fixed rate product, which
comprises the majority of the Company's servicing portfolio. In the fourth
quarter of 1999, the Company lowered its prepayment speed assumption along parts
of the prepayment rate vector curve while leaving the peak speeds intact. In
addition, the Company increased its loss reserve initially established for both
fixed and adjustable-rate loans sold to the securitizations trusts from 2.20% to
approximately 3.10% in the fourth quarter of 1999 and to 3.50% in the third
quarter of 2000 of the issuance amount securitized.
The prepayment rate assumption was revised primarily to reflect the Company's
actual loan performance experience over the past several quarters. Management
believes that industry consolidation and a higher interest rate environment has
and will continue to deter borrowers from refinancing their mortgage loans. The
loan loss reserve assumption was revised to reflect management's belief that (i)
slower prepayment speeds, (ii) anticipated flat to slightly moderate rise in
home values as compared to the past few years and (iii) the inability of
borrowers to refinance their mortgages to avoid default because of industry
consolidation and higher interest rates may have an adverse effect on the
Company's non-performing loans.
The Company primarily utilizes an annual discount rate of 12% in determining
the present value of cash flows from residual certificates, using the "cash-out"
method, which are the predominant form of retained interests at both September
30, 2000 and December 31, 1999. However, in the third quarter of 2000, the
Company increased the discount rate during the duration of NIM transaction on a
portion of its residual certificates to 18% (from 12%) and recorded an $8.8
million valuation adjustment. This adjustment reflects a reduction in the
present value on those residual certificates it anticipates selling in a
proposed net interest margin ("NIM') transaction in the fourth quarter of 2000.
The Company increased the discount rate on these residual certificates, during
the period that the senior NIM securities are outstanding, to account for the
potential higher risk associated with the residual cash flows the Company will
retain from a certificated interest in the NIM trust, which is subordinated to
the senior security sold in the NIM transaction. The discount rate on the
Company's remaining residual certificates (the residuals not sold in the NIM
transaction or "senior residuals") remained unchanged at 12%.
11
In the second quarter of 2000, the Company recorded a $3.7 million valuation
adjustment to its interest income for its interest only and residual
certificates in accordance with SFAS 115, due to the increase in one-month
LIBOR. Some of the Company's interest only and residual certificates are backed
by floating rate securities, which are susceptible to interest rate risk
associated with movement in short-term interest rates.
The Company uses the same prepayment assumptions in estimating the fair
value of its mortgage servicing rights.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
GENERAL
The Company's net loss for the three months ended September 30, 2000 was
$11.2 million, or $0.70 per share, compared to net loss of $6.1 million, or
$0.39 per share, for the three months ended September 30, 1999. Excluding (i)
non-recurring charges associated with a corporate restructuring and a debt
modification, (ii) a reduction in the carrying value of a portion of the
Company's residual certificates related to an increase in the discount rate of
such certificates in connection with the Company's proposed Net Interest Margin
("NIM") transaction expected to be completed in the fourth quarter of 2000, and
(iii) non-recurring income due to the sale of one of the Company's domain names
, the Company's net income for the three months ended September 30, 2000 would
have been $0.8 million, or $0.05 per share. Excluding a one-time charge related
to the remaining $6 million of the $12 million settlement entered into by the
Company with the NYSBD, NYOAG and the DOJ, the Company's net loss for the three
months ended September 30, 1999 would have been $2.5 million, or $0.16 per
share. Results for the three months ended September 30, 1999 were also
negatively impacted by the Company's decision not to execute a regular
securitization in the third quarter of 1999, resulting in a smaller than usual
net gain-on-sale of mortgage loans. Comments regarding the components of net
income are detailed in the following paragraphs.
REVENUES
Total revenues decreased $2.1 million, or 7%, to $27.6 million for the three
months ended September 30, 2000 compared to $29.7 million for the same period in
1999. The decrease in revenue was primarily attributable to a decrease in
interest income and servicing fees. This was partially offset by an increase in
net gain on sale of mortgage loans and origination and other fees.
The Company originated and purchased $198 million of mortgage loans for the
three months ended September 30, 2000, representing a 45% decrease from $361
million of mortgage loans originated and purchased for the comparable period in
1999. The Company securitized and sold $200 million in loans (and sold the
related servicing rights) during the three months ended September 30, 2000
compared to $360 million sold to a mortgage loan conduit facility in the
corresponding period in 1999, representing a 44% decrease. The Company also sold
$11.7 million of loans on a whole loan servicing released basis for the period
ended September 30, 2000. The Company did not sell whole loans for the
comparable period in 1999. The total loans
12
serviced increased 1% to $3.57 billion at September 30, 2000 from $3.52 billion
at September 30, 1999.
NET GAIN ON SALE OF MORTGAGE LOANS. Net gain on sale of mortgage loans
represents (1) the sum of (a) the fair value of the interest-only and residual
certificates retained by the Company in a securitization for each period and the
market value of the interest-only certificates sold in connection with each
securitization, (b) the fair value of retained capitalized mortgage servicing
rights associated with loans securitized in each period and the market value of
capitalized mortgage servicing rights sold in connection with each
securitization, and (c) premiums earned on the sale of whole loans on a
servicing-released basis, (2) less the (x) premiums paid to originate or acquire
mortgage loans, (y) costs associated with securitizations and (z) any hedge loss
(gain) associated with a particular securitization.
Net gain on sale of mortgage loans increased $4.7 million, or 47%, to $14.6
million for the three months ended September 30, 2000, from $9.9 million for the
comparable period in 1999. This increase was primarily due the Company's not
executing a securitization in the third quarter of 1999. The Company instead
opted to sell its loan production into a conduit facility, where the net gain on
sale was lower than if the Company would have sold its loans through
securitization. Net gain on sale of mortgage loans sold to the conduit facility
primarily reflected the interest rate risk associated with funding fixed rate
mortgage loans using a variable interest rate over the expected lives of the
mortgage loans. Net gain on sale of mortgage loans was also higher in the third
quarter of 2000 because a higher amount of gross excess spread expected to be
earned over the life of the loans as calculated by the weighted average coupon
on the pool of mortgage loans securitized less the total cost of funds on the
securitization. The increase in the weighted average coupon for the third
quarter of 2000 is primarily the result of the Company increasing the interest
rates it charges to borrowers by approximately 0.50% in the second quarter of
2000. The decrease in the total cost of funds on the securitization was
primarily attributable to lower spreads demanded by asset-backed investors who
purchased the pass-through certificates issued by the securitization trust
during the three months ended September 30, 2000. Also attributing to a higher
net gain on sale of mortgage loans in the third quarter of 2000 was lower
aggregate premiums paid to acquire loans, resulting from both a decrease in
amount of loans purchased through the correspondent channel and lower average
premiums paid to correspondents. The Company also lowered its prepayment speed
assumptions in the third quarter of 2000, while at the same time increased its
loss reserve initially established for both fixed and adjustable-rate loans sold
to the securitizations trusts (see "Fair Value Adjustments"). The changes
largely offset each other and, therefore, did not materially affect net gain on
sale of mortgage loans. The weighted average net gain on sale ratio was 6.9% for
the three months ended September 30, 2000 compared to 2.8% for the comparable
period in 1999.
INTEREST INCOME. Interest income primarily represents the sum of (1) the
difference between the distributions the Company receives on its interest-only
and residual certificates and the adjustments recorded to reflect changes in the
fair value of the interest-only and residual certificates, (2) the gross
interest earned on loans held for sale (other than for loans sold into the
mortgage loan conduit, in which case it is the net interest spread), (3) with
respect to loans sold into the mortgage loan conduit, the net interest margin
earned (excess servicing) between the
13
weighted average rate on the mortgage loans less the conduit's variable
funding rate plus administrative fees, and (4) interest earned on cash
collection balances.
Interest income decreased $5.9 million, or 68%, to $2.7 million for the three
months ended September 30, 2000, from $8.6 million for the comparable period in
1999. The decrease in interest income was primarily due to (i) an $8.8 million
reduction in the present value on some of the Company's residual certificates
due to a discount rate increase to 18% from 12% on a portion of the Company's
residual certificates in connection with the Company's proposed NIM transaction
expected to be completed in the fourth quarter of 2000 (see "Fair Value
Adjustment") and (ii) a decrease in the amount of loans held prior to
securitization, reflecting lower overall loan production in the three months
ended September 30, 2000. This was partially offset by (a) a higher mortgage
coupon rate of 11.9% compared to 10.6%, reflecting a higher economic interest
rate environment and (b) the accounting for loans sold through a mortgage loan
conduit (special purpose vehicle) prior to securitization in the third quarter
of 1999, in which the Company earned and recorded the net interest margin
between the interest rate earned on the pool of mortgage loans sold to the
mortgage loan conduit and the conduit financing rate, less administrative
expenses. The Company did not utilize a mortgage loan conduit in 2000.
SERVICING FEES. Servicing fees represent all contractual and ancillary
servicing revenue received by the Company less (1) the offsetting amortization
of the capitalized mortgage servicing rights, and any adjustments recorded to
reflect valuation allowances for the impairment in mortgage servicing rights and
(2) prepaid interest shortfalls.
Servicing fees decreased $1.2 million, or 30%, to $3.0 million for the three
months ended September 30, 2000, from $4.2 million for the comparable period in
1999. The decrease in servicing income is primarily due to lower ancillary fees
collected (primarily prepayment penalties as mortgage loan prepayments were
comparably lower in the third quarter of 2000) together with a higher
amortization of the capitalized mortgage servicing rights. This was partially
offset by an increase in contractual servicing income. The average balance of
the mortgage loans serviced by the Company increased 5.5% to $3.66 billion for
the three months ended September 30, 2000 from $3.47 billion for the three
months ended September 30, 1999.
ORIGINATION AND OTHER FEES. Origination fees primarily represent fees earned
on brokered and retail originated loans as well as non-related origination fees.
Origination and other fees increased $0.5 million, or 6%, to $7.4 million for
the three months ended September 30, 2000, from $6.9 million for the comparable
period in 1999. The increase is primarily due to the sale of the Company's
domain name in July 2000. This was offset by a 39% decrease in broker originated
loans and a 25% decrease in retail originated loans.
EXPENSES
Total expenses increased by $3.2 million, or 8%, to $43.0 million for the
three months ended September 30, 2000, from $39.8 million for the comparable
period in 1999. The increase was primarily the result of non-recurring charges
related to a corporate restructuring and a debt modification in addition to an
increase in interest expense. This was partially offset by a decrease in general
and administrative costs and a decrease in personnel costs attributable to the
14
Company's previously announced initiative to lower costs through a corporate
restructuring that included a workforce reduction. In the third quarter of 1999,
the Company expensed the remaining $6 million of the $12 million settlement
entered into by the Company with the NYSBD, NYOAG and DOJ.
PAYROLL AND RELATED COSTS. Payroll and related costs include salaries,
benefits and payroll taxes for all employees.
Payroll and related costs decreased by $2.6 million, or 16%, to $13.5 million
for the three months ended September 30, 2000, from $16.1 million for the
comparable period in 1999. The decrease was primarily the result of a decline in
staffing in the Company's broker and retail divisions and in commissions paid to
these employees due to a decrease in loans originated, and an overall reduction
in the Company's workforce as part of a previously announced corporate
restructuring that also included consolidating some regional offices and
reducing the compensation of senior management and certain members of the
general staff. As of September 30, 2000, the Company employed 881 full- and
part-time employees, compared to 1,190 full- and part-time employees as of
September 30, 1999.
INTEREST EXPENSE. Interest expense includes the borrowing costs to finance
loan originations and purchases, equipment financing and the Company's overall
operations under the Senior Notes and the Company's credit facilities.
Interest expense increased by $1.2 million, or 20%, to $7.4 million for the
three months ended September 30, 2000 from $6.2 million for the comparable
period in 1999. The increase was primarily attributable to the accounting for
loans sold through a mortgage loan conduit prior to the Company's securitization
during the third quarter of 1999, in which the Company earned and recorded the
net interest margin between the interest rate earned on the pool of mortgage
loans sold to the mortgage loan conduit and the conduit financing rate, less
administrative expenses. Typically, interest expense related to the Company's
other warehouse financings and borrowings are recorded directly to interest
expense. The Company did not utilize its mortgage loan conduit during the third
quarter of 2000. In addition, there was an increase in the cost of funds on the
Company's credit facilities, which were tied to one-month LIBOR. The one-month
LIBOR index increased to an average interest rate of 6.6% for the three months
ended September 30, 2000, compared to an average interest rate of 5.3% for the
comparable period in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of office rent, insurance, telephone, depreciation, goodwill
amortization, legal reserves and fees, license fees, accounting fees, travel and
entertainment expenses, advertising and promotional expenses and the provision
for loan losses on the inventory of loans held for sale and recourse loans.
General and administrative expenses decreased $5.2 million, or 30%, to $12.3
million for the three months ended September 30, 2000, from $17.5 million for
the comparable period in 1999. The decrease was primarily the result of the
remaining $6 million - of the total $12 million settlement expensed in the third
quarter of 1999 associated with Company's settlement with the NYSBD, NYOAG and
DOJ.
DEBT MODIFICATION CHARGES. During the three months ended September 30, 2000
the Company recorded $3.1 million of debt modification charges primarily related
to legal fees, and
15
senior note holder's financial advisor fees associated with the Debt
Modification and proposed Exchange Offering (see Corporate Restructuring and
Debt Modification).
RESTRUCTURING CHARGES. During the three months ended September 30, 2000 the
Company recorded $6.7 million of charges related to the restructuring of its
operations. These charges primarily relate to employee severance associated with
the layoffs, and a reduction to both goodwill and office equipment write-offs
(see- Corporate Restructuring and Debt Modification).
Income Taxes. Income taxes are accounted for under SFAS No. 109, "Accounting
for Income Taxes." Deferred tax assets and liabilities are recognized on the
income reported in the financial statements regardless of when such taxes are
paid. These deferred taxes are measured by applying current enacted tax rates.
The Company recorded a tax benefit of $4.2 million and $4.1 million for the
three months ended September 30, 2000 and 1999, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
GENERAL
The Company's net loss for the nine months ended September 30, 2000 was $12.9
million, or $0.81 per share, compared to net income of $1.9 million, or $0.12
per share, for the nine months ended September 30, 1999. Excluding non-recurring
items related to (1) restructuring and debt modification charges, (2) the
reduction in the present value on a portion of the Company's residual asset and
(3) non-recurring income associated with the sale of Company's domain name, the
Company's would have reported net income of $1.3 million, or $0.08 per share,
for the nine months ended September 30, 2000. Excluding a one-time $12 million
charge related to the settlement entered into by the Company with the NYSBD,
NYOAG and DOJ, the Company's net income for the nine months ended September 30,
1999 would have been $9.1 million, or $0.59 per share. Results for the nine
months ended September 30, 1999 were also negatively impacted by the Company's
decision not to execute a regular securitization in the third quarter of 1999,
resulting in a smaller than usual net gain-on-sale of mortgage loans. Comments
regarding the components of net income are detailed in the following paragraphs.
REVENUES
Total revenues decreased $24.1 million, or 21%, to $92.5 million for the nine
months ended September 30, 2000, from $116.6 million for the comparable period
in 1999. The decrease in revenue was primarily attributable to a decrease in the
net gain on the sale of mortgage loans, interest income, servicing fees and
origination and other fees.
The Company originated and purchased $749 million of mortgage loans for the
nine months ended September 30, 2000, representing a 37% decrease from $1.18
billion of mortgage loans originated and purchased for the comparable period in
1999. The Company securitized $765 million in loans (and sold the related
servicing rights on its 2000 second and third quarter securitizations,
respectively) during the nine months ended September 30, 2000, representing a
36% decrease from two securitizations and a loan sale through a conduit facility
totaling $1.20
16
billion during the nine months ended September 30, 1999. The Company also
sold $11.7 million of loans on a whole loan servicing released basis for the
nine months ended September 30, 2000. The Company did not sell whole loans for
the comparable period in 1999. Total loans serviced increased 1% to $3.57
billion at September 30, 2000 from $3.52 billion at September 30, 1999.
NET GAIN ON SALE OF MORTGAGE LOANS. Net gain on sale of mortgage loans
decreased $17.4 million, or 30%, to $40.5 million for the nine months ended
September 30, 2000, from $57.9 million for the comparable period in 1999. This
decrease was primarily due to (i) a 35% decrease in the amount of loans
securitized or sold, (ii) a lower gross excess spread expected to be earned over
the life of the loans as calculated by the weighted average coupon on the pool
of mortgage loans securitized less the total cost of funds on the securitization
- the Company experienced a higher cost of funds for the first six months of
2000 compared to the same period in 1999 due to wider spreads demanded by
asset-backed investors who purchase the pass-through certificates issued by
securitization trusts, and (iii) a revision to the Company's loan loss reserve
assumption in the fourth quarter of 1999 (see "Fair Value Adjustment"). The
decrease was partially offset by (i) the Company not executing a securitization
in the third quarter of 1999 and instead opting to sell its loan production into
a conduit facility, where the net gain on sale was lower than if the Company
would have sold its loans through securitization and (ii) lower aggregate
premiums paid to acquire loans, resulting from both a decrease in amount of
loans purchased through the correspondent channel and lower average premiums
paid to correspondents. The Company also lowered its prepayment speed
assumptions in the third quarter of 2000, while at the same time increased its
loss reserve initially established for both fixed and adjustable-rate loans sold
to the securitizations trusts (see "Fair Value Adjustment"). The changes largely
offset each other and, therefore, did not materially affect net gain on sale of
mortgage loans. The weighted average net gain on sale ratio was 5.2% for the
nine months ended September 30, 2000 compared to 5.0% for the comparable period
in 1999.
INTEREST INCOME. Interest income decreased $3.9 million, or 16%, to $20.8
million for the nine months ended September 30, 2000, from $24.7 million for the
comparable period in 1999. The decrease in interest income was primarily due to
(i) a reduction in the present value on some of the Company's residual
certificates in the third quarter of 2000 due to a discount rate increase from
12% to 18% on a portion of the Company's residual certificates in connection
with the Company's proposed NIM transaction expected to be completed in the
fourth quarter of 2000 (see "Fair Value Adjustment"), (ii) a decrease in the
amount of loans held prior to securitization, reflecting lower overall loan
production in the nine months ended September 30, 2000 and (iii) a higher fair
value adjustment during the second quarter of 2000 due to an increase in one
month LIBOR (see "Fair Value Adjustment"). This was partially offset by (i) a
higher weighted average mortgage coupon rate in 2000 compared to 1999 reflecting
a higher economic interest rate environment, (ii) the accounting for loans sold
through a mortgage loan conduit (special purpose vehicle) prior to
securitization in 1999, in which the Company earns and records the net interest
margin between the interest rate earned on the pool of mortgage loans sold to
the mortgage loan conduit and the conduit financing rate, less administrative
expenses and (iii) a higher fair value adjustment during the first quarter of
1999, including a $3.8 million reduction in the Company's value of residual and
interest-only certificates related to an increase in its loan loss reserve.
17
SERVICING FEES. Servicing fees decreased $0.8 million, or 7%, to $10.8
million for the nine months ended September 30, 2000, from $11.6 million for the
comparable period in 1999. The decrease in servicing income is primarily due to
lower ancillary fees collected (primarily prepayment penalties as mortgage loan
prepayments were comparable lower in the third quarter of 2000) together with
higher amortization of capitalized mortgage servicing rights. This was partially
offset by an increase in the aggregate size of the Company's servicing
portfolio. The average balance of the mortgage loans serviced by the Company
increased 13% to $3.72 billion for the nine months ended September 30, 2000 from
$3.28 billion during the comparable period in 1999.
ORIGINATION AND OTHER FEES. Origination and other fees decreased $2.0
million, or 9%, to $20.4 million for the nine months ended September 30, 2000,
from $22.4 million for the comparable period in 1999. The decrease was primarily
the result of a 33% decrease in broker originated loans and an 18% decrease in
retail originated loans. This was partially offset by the sale of the Company's
domain name in July 2000.
EXPENSES
Total expenses decreased by $2.9 million, or 3%, to $110.8 million for the
nine months ended September 30, 2000, from $113.7 million for the comparable
period in 1999. This was primarily the result of a decrease in general and
administrative costs (primarily relating to the $12 million the Company
expensed, in the nine months ended September 30, 1999, for the settlement
entered into by the Company with the NYSBD, NYOAG and DOJ) and a decrease in
personnel costs attributable to the Company's previously announced initiative to
lower costs through a corporate restructuring in the third quarter of 2000 that
included a workforce reduction. This was partially offset by third quarter 2000
non-recurring charges related to the corporate restructuring and debt
modification, in addition to an increase in interest expense.
PAYROLL AND RELATED COSTS. Payroll and related costs decreased by $4.9
million, or 10%, to $44.8 million for the nine months ended September 30, 2000,
from $49.7 million for the comparable period in 1999. The decrease was primarily
the result of a decline in staffing in the Company's broker and retail divisions
and in commissions paid to these employees due to a decrease in loans
originated, and an overall reduction in the Company's workforce as part of a
previously announced corporate restructuring that also included consolidating
some offices and reducing the compensation of senior management and certain
members of the general staff. In addition, there was a decrease in bonuses
related to executive employees. This was partially offset by an increase in
employee fringe benefits. As of September 30, 2000, the Company employed 881
full- and part-time employees, compared to 1,190 full- and part-time employees
as of September 30, 1999.
INTEREST EXPENSE. Interest expense increased by $5.3 million, or 29%, to
$23.8 million for the nine months ended September 30, 2000 from $18.5 million
for the comparable period in 1999. The increase was primarily attributable to
the accounting for loans sold through a mortgage loan conduit prior to their
securitization during the nine months ended September 30, 1999, in which the
Company earned and recorded the net interest margin between the interest rate
earned on the pool of mortgage loans sold to the mortgage loan conduit and the
conduit financing rate, less administrative expenses. Typically, interest
expense related to the Company's other warehouse
18
financing and borrowings are recorded directly to interest expense. The
Company did not utilize its mortgage loan conduit during the nine months ended
September 30, 2000. In addition, there was an increase in the cost of funds on
the Company's credit facilities, which were tied to one-month LIBOR. The
one-month LIBOR index increased to an average interest rate of 6.3% in the nine
months ended September 30, 2000, compared to an average interest rate of 5.1%
for the comparable period in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $13.0 million, or 29%, to $32.5 million for the nine months ended
September 30, 2000, from $45.5 million for the comparable period in 1999. The
decrease was primarily the result of the $12 million settlement with the Company
and the NYSBD, NYOAG and DOJ for the nine months ended September 30, 1999.
DEBT MODIFICATION CHARGES. During the three months ended September 30, 2000
the Company recorded $3.1 million of debt modification charges primarily related
to legal fees, and senior note holder's financial advisor fees associated with
the Debt Modification and proposed Exchange Offering (see Corporate
Restructuring and Debt Modification).
RESTRUCTURING CHARGES. During the three months ended September 30, 2000 the
Company recorded $6.7 million of charges related to the restructuring of its
operations. These charges primarily relate to employee severance associated with
the layoffs, and a reduction to both goodwill and office equipment write-offs
(see- Corporate Restructuring and Debt Modification).
INCOME TAXES. The Company recorded a tax benefit of $5.4 million and a tax
provision of $1.1 million for the nine months ended September 30, 2000 and 1999,
respectively.
FINANCIAL CONDITION
SEPTEMBER 30, 2000 COMPARED TO DECEMBER 31, 1999
Cash and interest-bearing deposits decreased $15.8 million, or 23%, to $53.8
million at September 30, 2000, from $69.6 million at December 31, 1999. The
decrease was primarily the result of lower prepayments which caused a decrease
in monies held in securitization trust accounts by the Company, acting as
servicer for its ongoing securitization program.
Loans held for sale, net decreased $35.2 million, or 40%, to $53.8 million at
September 30, 2000, from $89.0 million at December 31, 1999. This decrease was
primarily due to the net difference between loan originations and loans sold or
securitized during the nine months ended September 30, 2000.
Accrued interest receivable decreased $49.2 million, or 78%, to $14.1 million
at September 30, 2000, from $63.3 million at December 31, 1999. This decrease
was primarily due to the sale of its interest receivable asset through two
securitizations in the first two quarters of 2000, partially offset by an
increase in reimbursable interest advances made by the Company, acting as
servicer on its securitizations.
Capitalized mortgage servicing rights decreased $5.8 million, or 13%, to
$40.1 million at September 30, 2000, from $45.9 million at December 31, 1999.
This decrease was primarily due
19
to the normal amortization of the capitalized mortgage servicing rights,
which was not offset in the second and third quarter of 2000 with new recorded
capitalized mortgage servicing rights usually associated with a securitization.
The Company sold its contractual right to service the loans on its second and
third quarter 2000 securitizations for a cash premium.
Interest-only and residual certificates increased $14.4 million, or 6%, to
$239.1 million at September 30, 2000, from $224.7 million at December 31, 1999.
This increase is primarily attributable to the Company's receipt of residual
certificates valued and recorded at $27.0 million from loans securitized during
the nine months ended September 30, 2000. This was partially offset by valuation
adjustment related to reduction in the present value on some of the Company's
residual certificates due to a discount rate increase to 18% from 12% on a
portion of the Company's residual certificates in connection with the Company's
proposed NIM transaction expected to be completed in the fourth quarter of 2000.
Equipment, net decreased $5.5 million, or 25%, to $16.2 million at September
30, 2000, from $21.7 million at December 31, 1999. This decrease is primarily
attributable to the Company's writedown of its asset related to the previously
announced restructuring of its operations.
Prepaid and other assets increased $17.1 million, or 315%, to $22.5 million
at September 30, 2000, from $5.4 million at December 31, 1999. This increase was
primarily attributable to the Company's investment in new affiliate companies
(qualified special purpose entities used for the two interest receivable
securitizations).
The Company has a Deferred tax asset of $12.1 million at September 30,
2000. The Company did not have a Deferred tax asset at December 31, 1999.
Goodwill decreased $2.9 million, or 60%, to $1.9 million at September 30,
2000, from $4.8 million at December 31, 1999. This decrease is primarily
attributable to the Company's writedown of its asset related to the previously
announced restructuring of its operations.
Warehouse financing and other borrowings decreased $26.9 million, or 25%, to
$82.1 million at September 30, 2000, from $109.0 at December 31, 1999. This
decrease was primarily attributable to the repayment in full of the Company's
bank syndicate working capital line in June 2000, partially offset primarily by
the Company's incurrence of $17 million of residual financing.
The aggregate principal balance of the Senior Notes totaled $149.5 million at
September 30, 2000 and December 31, 1999, net of unamortized bond discount. The
Senior Notes accrued interest at a rate of 9.5% per annum, payable semi-annually
on February 1 and August 1 (See Restructuring and Debt Modification Charges,
Note 2 of the Notes to Consolidated Financial Statements).
Investor payable decreased $21.3 million, or 26%, to $60.9 million at
September 30, 2000, from $82.2 million at December 31, 1999. The decrease was
primarily the result of lower prepayments, which caused a decrease in the amount
payable to investors. Investor payable is comprised of all principal collected
on mortgage loans and accrued interest. Variability in this account is primarily
due to the principal payments collected within a given collection period.
The Company does not have a Deferred tax liability at September 30, 2000. The
Company had a Deferred tax liability of $10.4 million at December 31, 1999.
20
LIQUIDITY AND CAPITAL RESOURCES
The Company has primarily operated on a negative cash flow basis in the past
and anticipates that it will continue to have a negative operating cash flow for
the foreseeable future due primarily to (1) the monthly delinquency and
servicing advances the Company is required to make as servicer in accordance
with its underlying securitization program, and (2) lower projected aggregate
cash inflows from the Company's retained interest-only and residual
certificates. The lower projected inflows on the Company's retained
interest-only and residual certificates are due to (i) a NIM transaction
expected to be completed in the fourth quarter of 2000 that will provide the
Company with cash up-front from selling a portion of its residual asset, but as
a result reduce the cash proceeds from the residual asset in the future and (ii)
expected timing differences between the Company's retained interests in (A)
older securitization trusts generating less cash flowsper month per deal as the
related mortgage pool pays down and (b) newer securitization trusts not yet cash
flowing until initial reserve requirements are satisfied. As initial reserve
requirements on some newer deals are reached, the Company will begin to receive
additional cash inflows from its retained interest-only and residual
certificates which, coupled with (a) the Company's continued concentration on
its less cash-intensive broker and retail originations, and (b) its recent
history of utilizing securitization structures that have allowed the Company to
sell senior interest-only certificates and/or mortgage servicing rights for an
up front cash purchase price, may help offset the operating cash deficit in
future quarters. However, market conditions and various other possibilities
identified below under "Risk Factors" could impact the Company's cash flows
potentially resulting in a more significant negative cash flow.
For the nine months ended September 30, 2000, the Company had a cash deficit
of $15.8 million compared to positive cash flow of $9.8 million for the
comparable period in 1999. The decrease in cash flow was primarily attributable
to the monthly delinquency and servicing advances the Company is required to
make as servicer in accordance with its securitization program as well as a
decrease in cash flows from the Company's retained interest-only and residual
certificates, and reduction in cash received on the sale of interest only assets
at the time of securitization. These interest and servicing advances are
reimbursable to the Company as the borrowers repay their obligations over time.
As such, the exact timing of these reimbursements cannot be predicted with
certainty.
Currently, the Company's primary cash requirements include the funding of (1)
loan originations pending their pooling and sale, (2) interest expense on its
Senior Notes and warehouse and other financings, (3) fees, expenses, interest
(delinquency) advances, servicing-related advances and tax payments incurred in
connection with its securitization program, and (4) 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 service
loans. Historically, the Company has utilized various financing facilities and
an equity financing to offset negative operating cash flows and support its loan
originations, securitizations and general operating expenses. In July 1997, the
Company completed an offering of the Senior Notes. A portion of the Senior Notes
21
proceeds were used to pay down various financing facilities with the remainder
used to fund the Company's loan originations and its ongoing securitization
program. The Company's primary sources of liquidity continue to be warehouse and
other financing facilities, securitizations (of mortgage loans, interest
(delinquency) advances and servicing advances) and, subject to market
conditions, sales of whole loans, mortgage servicing rights and debt and equity
securities. The Company also anticipates, subject to market conditions,
utilizing NIM transactions and/or other financing against its residual assets,
following its modification of a negative pledge in the Senior Notes, which
permits the Company to now sell and/or obtain financing against a portion of its
residual and interest-only certificates.
To accumulate loans for securitization, the Company borrows money on a
short-term basis through warehouse lines of credit. The Company has relied upon
a few lenders to provide the primary credit facilities for its loan originations
and purchases. The Company had two warehouse facilities as of September 30, 2000
for this purpose. The first warehouse facility is a $200 million credit facility
that has a variable rate of interest and a final maturity date of September
2001. There can be no assurance that the Company will be able to renew this
warehouse facility at its maturity. The second warehouse line provides for daily
fundings with a variable rate of interest. This second warehouse line is
uncommitted and as such there can be no assurances that this line may be
available in the future. The Company is currently in the process of seeking
additional warehouse lines of credit. Again, there can be no assurances that the
Company will be successful in its attempt to secure an additional warehouse line
of credit.
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 continued availability of funds provided to the
Company under these agreements is subject to, among other conditions, the
Company's continued compliance with these covenants. Management believes that
the Company is in compliance with all such covenants under these agreements as
of September 30, 2000.
The Company purchased a total of 116,800 shares of its common stock during
the year ended December 31, 1998, under the Company's stock repurchase program,
at a total cost of $1.3 million. All of the repurchased shares were purchased in
open market transactions at then prevailing market prices. During the first nine
months of 2000, no additional shares were repurchased.
INTEREST RATE RISK
The Company's primary market risk exposure is interest rate risk.
Profitability may be directly affected by the level of, 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, which are tied
to various United States Treasury maturities, commercial paper rates and the
London Inter-Bank Offered Rate ("LIBOR"). 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 Company's ability to purchase and originate loans. A significant
decline in interest rates could increase the level of loan prepayments thereby
decreasing the size of the Company's loan servicing portfolio.
22
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. In an effort to mitigate the effect
of interest rate risk, the Company periodically reviews its various mortgage
products and identifies and modifies those that have proven historically more
susceptible to prepayments. However, there can be no assurance that such
modifications to its product line will effectively mitigate interest rate risk
in the future.
Periods of unexpected or rapid changes in interest rates, and/or other
volatility or uncertainty regarding interest rates, can also adversely affect
the Company by increasing the likelihood that asset-backed investors will demand
higher spreads than normal to offset the volatility and/or uncertainty, which
decreases the value of the residual assets received by the Company through
securitization.
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, even though the Company undertakes to
hedge its exposure to this risk by using treasury rate lock contracts and/or
FNMA mortgage securities. (See "--Hedging"). Fluctuating interest rates may also
affect net interest income as certain of the Company's asset-backed securities
are priced off of one-month LIBOR, but the collateral underlying such securities
are comprised of mortgage loans with either fixed interest rates or "hybrid"
interest rates - fixed for the initial 2 or 3 years, and then adjusts thereafter
every six months - which creates basis risk (See "--Fair Value Adjustments").
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 paid to asset-backed investors who purchase pass-through
certificates issued by securitization trusts. Historically, the rate paid on the
pass-through certificates generally was related to 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 sold at securitization, the excess spread
narrows, resulting in a loss in value of the loans. Historically, the Company
has generally attempted to protect against such losses and to reduce interest
rate risk on loans originated and purchased that have not yet been securitized
through a strategy that included the use of treasury rate lock contracts with
various durations (which are similar to selling a combination of United States
Treasury securities), which equate to a duration similar to the duration of the
underlying loans. The nature and quantity of hedging transactions are determined
by the Company based upon various factors including, without limitation, market
conditions and the expected volume of mortgage originations and purchases. The
Company has typically entered into treasury rate lock contracts through one of
its warehouse lenders and/or one of the investment bankers that underwrite the
Company's securitizations. These contracts are
23
designated as hedges in the Company's records and are closed out when the
associated loans are sold through securitization.
If the value of the hedges decrease, offsetting an increase in the value of
the loans, the Company, upon settlement with its hedge counterparty, will pay
the hedge loss in cash and then realize the corresponding increase in the value
of the loans as part of its net gain on sale of mortgage loans and its
corresponding 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 hedge 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.
Up to and including the second quarter of 1998, the Company believed that its
hedging strategy of using treasury rate lock contracts was the most effective
way to manage its interest rate risk on loans held prior to securitization.
However, in the third quarter of 1998, asset-backed investors, responding to
lower treasury yields and global financial market volatility, demanded
substantially wider spreads over treasuries than historically experienced for
newly issued asset-backed securities. As a result, Delta's $8.8 million hedge
loss resulting from lower interest rates was not offset by a higher gain on sale
as the Company had historically seen.
Given the Company's belief that the volatile market experienced in the third
quarter of 1998 would likely continue well into the fourth quarter, and as a
result, that the spreads demanded by asset-backed securitization investors would
be difficult to predict, as asset-backed securitization investors were more
interested in absolute yields, instead of spreads over treasuries - the Company
did not hedge any of its warehoused loans pending securitization in the fourth
quarter of 1998.
As the asset-backed securitization market improved in the first quarter of
1999, and spreads over treasuries became largely more predictable, the Company
resumed its hedging strategy of selling treasury rate-lock contracts to mitigate
its interest rate risk pending securitization. The Company has continued to
utilize treasury rate contracts through and including the nine months ending
September 30, 2000, although the second quarter of 2000 saw asset-backed
investors once again demand wider spreads over treasuries than historically
experienced, which once again negatively impacted the Company's gain on sale. In
response, and to better manage its basis risk, the Company has implemented a new
hedging strategy in fourth quarter of 2000 that involves its selling FNMA
mortgage securities, which the Company believes now more accurately correlate
with the spreads demanded in the asset-backed markets.
For the nine months ended September 30, 2000 and 1999, the Company recorded a
hedge loss of $1.4 million and a hedge gain of $3.9 million respectively, which
largely offset a change in the value of mortgage loans being hedged, as part of
its gain on sale of loans.
24
INFLATION
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. (See "--Interest Rate Risk.")
IMPACT OF NEW ACCOUNTING STANDARDS
For discussion regarding the impact of new accounting standards, refer to
Note 4 of Notes to the Consolidated Financial Statements.
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 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 The Company's ability or inability to continue to access lines of credit at
favorable terms and conditions or otherwise, including without limitation,
warehouse and other credit facilities used to finance newly originated
mortgage loans held for sale, interest and delinquency advances, residual and
other assets.
o The Company's ability or inability to continue its practice of securitization
of mortgage loans held for sale, as well as its ability to utilize optimal
securitization structures at favorable terms to the Company.
o Costs associated with litigation, compliance with the NYSBD Remediation
Agreement, NYOAG Stipulated Order on Consent and/or the DOJ/HUD/FTC
Settlement Agreement, and rapid or unforeseen escalation of the cost of
regulatory compliance, generally including but not limited to, adoption of
new, or changes in state or federal lending laws and regulations and the
application of such laws and regulations, licenses, environmental
compliance, adoption of new, or changes in accounting policies and
practices and the application of such polices and practices. Failure to
comply with various federal, state and local regulations, accounting
policies, environmental compliance, and compliance with the Remediation
Agreement and Stipulated Order on Consent can lead to loss of approved
status, certain rights of rescission for mortgage loans, class action
lawsuits and administrative enforcement action against the Company.
25
o A general economic slowdown. Periods of economic slowdown or recession
may be accompanied by decreased demand for consumer credit and declining
real estate values. Because of the Company's focus on credit-impaired
borrowers, the actual rate of delinquencies, foreclosures and losses on
loans affected by the borrowers reduced ability to use home equity to
support borrowings could be higher than those generally experienced in the
mortgage lending industry. Any sustained period of increased
delinquencies, foreclosure, losses or increased costs could adversely
affect the Company's ability to securitize or sell loans in the secondary
market.
o The effects of interest rate fluctuations and the Company's ability or
inability to hedge effectively against such fluctuations in interest rates;
the effect of changes in monetary and fiscal policies, laws and regulations,
other activities of governments, agencies, and similar organizations, social
and economic conditions, unforeseen inflationary pressures and monetary
fluctuation.
o Increased competition within the Company's markets has taken on many forms,
such as convenience in obtaining a loan, customer service, marketing and
distribution channels, loan origination fees and interest rates. The Company
is currently competing with large finance companies and conforming mortgage
originators many of whom have greater financial, technological and marketing
resources.
26
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk to which the Company is exposed is interest rate
risk, which is highly sensitive to many factors, including governmental monetary
and tax policies, domestic and international economic and political
considerations and other factors beyond the control of the Company. Changes in
the general level of interest rates between the time when the Company originates
or purchases mortgage loans and the time when the Company sells such mortgage
loans at securitization can affect the value of the Company's mortgage loans
held for sale and, consequently, the Company's net gain on sale revenue by
affecting the "excess spread" between the interest rate on the mortgage loans
and the interest rate paid to asset-backed investors who purchase pass-through
certificates issued by the securitization trusts. If interest rates rise between
the time the Company originates or purchases the loans and the time the loans
are sold at securitization, the excess spread generally narrows, resulting in a
loss in value of the loans and a lower net gain on sale reported by the Company.
A hypothetical 10 basis point increase in interest rates, which historically
has resulted in approximately a 10 basis point decrease in the excess spread,
would be expected to reduce the Company's net gain on sale by approximately 25
basis points. Many factors, however, can affect the sensitivity analysis
described above including, without limitation, the structure and credit
enhancement used in a particular securitization, the Company's prepayment, loss
and discount rate assumptions, and the spread over treasuries demanded by
asset-backed investors who purchase the Companies asset-backed securities.
To reduce its financial exposure to changes in interest rates, the Company
generally hedges its mortgage loans held for sale by entering into treasury rate
lock contracts (see "-Hedging"). The Company's hedging strategy has been for the
most part an effective tool to manage the Company's interest rate risk on loans
prior to securitization, by providing the Company with a cash gain (or loss) to
largely offset the reduced (increase) excess spread (and resultant lower (or
higher) net gain on sale) from an increase (decrease) in interest rates. A hedge
may not, however, perform its intended purpose of offsetting changes in net gain
on sale.
Changes in interest rates also could adversely affect the Company's ability
to purchase and originate loans and/or could affect the level of loan
prepayments thereby impacting the size of the Company's loan servicing portfolio
and the value of the Company's interest only and residual certificates and
capitalized mortgage servicing rights. (See "-Interest Rate Risk").
<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 various state and
federal lending laws, the Company is subject, in the normal course of business,
to numerous claims and legal proceedings. The Company's lending practices have
been the subject of several lawsuits styled as class actions and of
investigations by various regulatory agencies including the New York State
Banking Department (the "NYSBD"), the Office of the Attorney General of the
State of New York (the "NYOAG") and the United States Department of Justice (the
"DOJ"). The current status of these actions are summarized below.
o In or about November 1998, the Company received notice that it had been
named in a lawsuit filed in the United States District Court for the
Eastern District of New York. In December 1998, plaintiffs filed an
amended complaint alleging that the Company had violated the Home
Equity and Ownership Protection Act ("HOEPA"), the Truth in Lending Act
("TILA") and New York State General Business Lawss.349. The complaint
seeks (a) certification of a class of plaintiffs, (b) declaratory
judgment permitting rescission, (c) unspecified actual, statutory,
treble and punitive damages (including attorneys' fees), (d) certain
injunctive relief, and (e) declaratory judgment declaring the loan
transactions as void and unconscionable. On December 7, 1998,
plaintiff filed a motion seeking a temporary restraining order and
preliminary injunction, enjoining Delta from conducting foreclosure
sales on 11 properties. The District Court Judge ruled that in order
to consider such a motion, plaintiff must move to intervene on behalf
of these 11 borrowers. Thereafter, plaintiff moved to intervene on
behalf of 3 of these 11 borrowers and sought the injunctive relief on
their behalf. The Company opposed the motions. On December 14, 1998,
the District Court Judge granted the motion to intervene and on
December 23, 1998, the District Court Judge issued a preliminary
injunction enjoining the Company from proceeding with the foreclosure
sales of the three intervenors' properties. The Company has filed a
motion for reconsideration of the December 23, 1998 order. In January
1999, the Company filed an answer to plaintiffs' first amended
complaint. In July 1999, plaintiffs were granted leave, on consent, to
file a second amended complaint. In August 1999, plaintiffs filed a
second amended complaint that, among other things, added additional
parties but contained the same causes of action alleged in the first
amended complaint. In September 1999, the Company filed a motion to
dismiss the complaint, which was opposed by plaintiffs and, in June
2000, was denied in part and granted in part by the Court. Also in
September 1999, plaintiffs filed a motion for class certification,
which was opposed by Delta in February 2000, and is now fully briefed
and filed pending hearing. In or about October 1999, plaintiffs filed
a motion seeking an order preventing the Company, its attorneys and/or
the NYSBD from issuing notices to certain of Delta's borrowers, in
accordance with a settlement agreement entered into by and between the
Company and the NYSBD. In or about October 1999 and November 1999,
respectively, Delta and the NYSBD submitted opposition to plaintiffs'
motion. In March 2000, the Court issued an order that permits Delta to
issue an approved form of the notice. The Company believes that it has
meritorious defenses and intends to
28
defend this suit, but cannot estimate with any certainty its ultimate
legal or financial liability, if any, with respect to the alleged claims.
o In or about March 1999, the Company received notice that it had been
named in a lawsuit filed in the Supreme Court of the State of New York,
New York County, alleging that Delta had improperly charged certain
borrowers processing fees. The complaint seeks (a) certification of a
class of plaintiffs, (b) an accounting, and (c) unspecified
compensatory and punitive damages (including attorneys' fees), based
upon alleged (i) unjust enrichment, (ii) fraud, and (iii) deceptive
trade practices. In April 1999, the Company filed an answer to the
complaint. In September 1999, the Company filed a motion to dismiss the
complaint, which was opposed by plaintiffs, and in February 2000, the
Court denied the motion to dismiss. In April 1999, the Company had
filed a motion to change venue and Plaintiff's opposed the motion. In
July 1999, the Court denied the motion to change venue. The Company
appealed and in March 2000, the Appellate Court granted Delta's appeal
to change venue from New York County to Nassau County. In August 1999,
plaintiffs filed a motion for class certification, which the Company
opposed in July 2000. In September 2000, the Court granted plaintiffs'
motion for class certification. The Company believes that it has
meritorious defenses and intends to defend this suit, but cannot
estimate with any certainty its ultimate legal or financial liability,
if any, with respect to the alleged claims.
o In or about July 1999, the Company received notice that it had been
named in a lawsuit filed in the United States District Court for the
Western District of New York, alleging that amounts collected and
maintained by it in certain borrowers' tax and insurance escrow
accounts exceeded certain statutory (RESPA) and/or contractual (the
respective borrowers' mortgage agreements) ceilings. The complaint
seeks (a) certification of a class of plaintiffs, (b) declaratory
relief finding that the Company's practices violate applicable statutes
and/or the mortgage agreements, (c) injunctive relief, and (d)
unspecified compensatory and punitive damages (including attorneys'
fees). In October 1999, the Company filed a motion to dismiss the
complaint. In or about November 1999, the case was transferred to the
United States District Court for the Northern District of Illinois. In
February 2000, the plaintiff opposed the Company's motion to dismiss.
In March 2000, the Court granted the Company's motion to dismiss in
part, and denied it in part. The Company believes that it has
meritorious defenses and intends to defend this suit, but cannot
estimate with any certainty its ultimate legal or financial liability,
if any, with respect to the alleged claims.
o In or about August 1999, the NYOAG filed a lawsuit against the Company
alleging violations of (a) RESPA (by paying yield spread premiums), (b)
HOEPA and TILA, (c) ECOA, (d) New York Executive Lawss.296-a, and (e)
New York Executive Lawss. 63(12). In September 1999, Delta and the
NYOAG settled the lawsuit, as part of a global settlement by and among
Delta, the NYOAG and the NYSBD, evidenced by (a) Remediation Agreement
by and between Delta and the NYSBD, dated as of September 17, 1999 and
(b) Stipulated Order on Consent by and among Delta, Delta Financial and
29
the NYOAG, dated as of September 17, 1999. As part of the Settlement,
Delta agreed to, among other things, implement agreed upon changes to
its lending practices; provide reduced loan payments aggregating $7.25
million to certain borrowers identified by the NYSBD; and create a fund
of approximately $4.75 million financed by the grant of 525,000 shares
of Delta Financial's common stock valued at a constant assumed priced
of $9.10 per share, which approximates book value. The proceeds of the
fund will be used, for among other things, to pay borrowers and for a
variety of consumer educational and counseling programs. As a result,
the NYOAG lawsuit has been dismissed as against the Company.
The Remediation Agreement and Stipulated Order on Consent supersede the
Company's previously announced settlements with the NYSBD and NYOAG. In
March 2000, the Company finalized a settlement agreement with the United
States Department of Justice, the Federal Trade Commission (the "FTC") and
the Department of Housing and Urban Renewal ("HUD"), to complete the
global settlement it had reached with the NYSBD and NYOAG. The Federal
agreement mandates some additional compliance efforts for Delta, but it
does not require any additional financial commitment.
o In November 1999, the Company received notice that it had been named in
a lawsuit filed in the United States District Court for the Eastern
District of New York, seeking certification as a class action and
alleging violations of the federal securities laws in connection with
the Company's initial public offering in 1996 and its reports
subsequently filed with the Securities and Exchange Commission. The
complaint alleges that the scope of the violations alleged recently in
the consumer lawsuits and regulatory actions indicate a pervasive
pattern of action and risk that should have been more thoroughly
disclosed to investors in the Company's common stock. In May 2000, the
Court consolidated this case and several other lawsuits that
purportedly contain the same or similar allegations. In August 2000,
plaintiffs filed an amended consolidated complaint. In October 2000,
the Company filed a motion to dismiss. The Company believes that it has
meritorious defenses and intends to defend these suits, but cannot
estimate with any certainty its ultimate legal or financial liability,
if any, with respect to the alleged claims.
o In or about April 2000, the Company received notice that it had been
named in a lawsuit filed in the Supreme Court of the State of New York,
Nassau County, alleging that the Company has improperly charged and
collected from borrowers certain fees when they paid off their mortgage
loans with Delta. The complaint seeks (a) certification of a class of
plaintiffs, (b) declaratory relief finding that the payoff statements
used include unauthorized charges and are deceptive and unfair, (c)
injunctive relief, and (d) unspecified compensatory, statutory and
punitive damages (including legal fees), based upon alleged violations
of Real Property Law 274-a, unfair and deceptive practices, money had
and received and unjust enrichment, and conversion. The Company
answered the complaint in June 2000. The Company believes that it has
meritorious defenses and intends to defend this suit, but cannot
estimate with any certainty its ultimate legal or
30
financial liability, if any, with respect to the alleged claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None
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: 10.1 Second Supplemental Indenture by and
among the Company, its subsidiary-
guarantors and the Bank of New York, as
Indenture Trustee, dated as of
October 16, 2000
27.1 Financial Data Schedule - Nine Months
Ended September 30, 2000
(b) Reports on Form 8-K: On August 4, 2000, the Company filed a Current
Report on Form 8-K in which it reported that it
had reached an agreement to modify its
outstanding $150 million 9 1/2% senior notes
due 2004 and filed as an exhibit that certain
First Supplemental Indenture by and among the
Company, its subsidiary-guarantors and the
Bank of New York, as Indenture Trustee, dated
as of August 1, 2000
31
<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, 2000
By: /S/ HUGH MILLER
--------------------------
Hugh Miller
PRESIDENT & CHIEF EXECUTIVE OFFICER
By /S/ RICHARD BLASS
--------------------------
Richard Blass
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
32
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.1 Second Supplemental Indenture by and among the Company, its
subsidiary-guarantors and the Bank of New York, as Indenture
Trustee, dated as of October 16, 2000
27.1 Financial Data Schedule - Nine Months Ended September 30, 2000
