================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from_________ to _________
COMMISSION FILE NUMBER 0-28706
FIRST ALLIANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0721183
- ------------------------------- ---------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
17305 VON KARMAN AVENUE, IRVINE, CALIFORNIA 92614
-------------------------------------------------
(Address of principal executive offices including ZIP Code)
(714) 224-8500
--------------
(Registrant's telephone number
including area code)
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 April 30, 1998 registrant had outstanding 9,518,926 shares of Class A
Common Stock and 10,956,270 shares of Class B Common Stock, respectively.
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<PAGE>
FIRST ALLIANCE CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited) as of
March 31, 1998 and December 31, 1997 ............................ 1
Consolidated Statements of Income (Unaudited) for the quarters
ended March 31, 1998 and 1997.................................... 2
Consolidated Statements of Comprehensive Income (Unaudited)
for the quarters ended March 31, 1998 and 1997................... 3
Consolidated Statements of Cash Flows (Unaudited) for the quarters
ended March 31, 1998 and 1997.................................... 4
Notes to Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A")................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 16
Item 2. Changes in Securities............................................. 16
Item 3. Defaults Upon Senior Securities................................... 16
Item 4. Submission of Matters to a Vote of Security Holders............... 16
Item 5. Other Information................................................. 16
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits ............................................. 17
b. Reports on Form 8-K................................... 18
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
--------------- ---------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash and cash equivalents...................................................................... $ 14,032 $ 5,866
Receivable from trusts......................................................................... 3,085 4,605
Loans held for sale............................................................................ 54,872 60,817
Warehouse financing receivable................................................................. 12,324 2,766
Loans receivable held for investment........................................................... 2,082 1,938
Residual interests in securities - at fair value............................................... 50,238 52,680
Mortgage servicing rights...................................................................... 9,240 10,335
Property, net.................................................................................. 8,587 10,422
Prepaid expenses and other assets.............................................................. 3,687 3,361
--------------- ---------------
Total assets............................................................................... $ 158,147 $ 152,790
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse financing facilities................................................................. $ 57,742 $ 43,586
Accounts payable and accrued liabilities....................................................... 4,794 11,599
Income taxes payable 3,664 1,157
Deferred taxes .......................................................................... 670 5,693
--------------- ---------------
Total liabilities.......................................................................... 66,870 62,035
--------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares authorized; no
shares outstanding.........................................................................
Class A Common Stock, $.01 par value; 25,000,000 shares authorized; shares issued
and outstanding: 11,280,401 at March 31, 1998, 11,265,375 at December 31, 1997............. 112 113
Class B Common Stock, $.01 par value; 15,000,000 shares authorized; shares issued
and outstanding: 10,956,270 at March 31, 1998 and December 31, 1997....................... 110 110
Additional paid in capital..................................................................... 65,321 65,546
Retained earnings.............................................................................. 47,110 54,372
Treasury stock - at cost: 1,724,300 shares at March 31, 1998, 1,169,300 shares.................
at December 31, 1997....................................................................... (20,544) (28,649)
Deferred stock compensation.................................................................... (765) (723)
Foreign currency translation................................................................... (67) (14)
--------------- ---------------
Total stockholders' equity................................................................. 91,277 90,755
=============== ===============
Total liabilities and stockholders' equity........................................... $ 158,147 $ 152,790
=============== ===============
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
----------------------------------
1997 1998
--------------- ---------------
(UNAUDITED)
REVENUE:
<S> <C> <C>
Loan origination and sale....................................... $ 15,404 $ 17,302
Loan servicing and other fees................................... 1,944 1,702
Interest and other.............................................. 4,089 6,346
--------------- ---------------
Total revenue................................................. 21,437 25,350
--------------- ---------------
EXPENSE:
Compensation and benefits......................................... 4,276 5,890
Advertising....................................................... 1,158 1,855
Professional services and other fees ............................. 610 1,062
Facilities and insurance.......................................... 657 977
Supplies.......................................................... 430 731
Depreciation and amortization..................................... 169 412
Interest.......................................................... 312 1,801
Legal............................................................. 228 360
Travel and training............................................... 381 367
Other............................................................. 356 228
--------------- ---------------
Total expense................................................. 8,577 13,683
--------------- ---------------
INCOME BEFORE INCOME TAX PROVISION.................................... 12,860 11,667
INCOME TAX PROVISION.................................................. 5,176 4,405
--------------- ---------------
NET INCOME $ 7,684 $ 7,262
=============== ===============
NET INCOME PER SHARE:
Basic $ 0.35 $ 0.35
=============== ===============
Diluted $ 0.34 $ 0.35
=============== ===============
Weighted average number of common shares outstanding:
Basic 22,178,784 20,799,681
Diluted 22,358,357 20,925,002
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
----------------------------------
1997 1998
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
NET INCOME................................................. $ 7,684 $ 7,262
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency translation adjustment.............. 38 53
--------------- ---------------
COMPREHENSIVE INCOME....................................... $ 7,722 $ 7,315
=============== ===============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
----------------------------------
1997 1998
--------------- ---------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 7,684 $ 7,262
Adjustments to reconcile net income to net cash provided by operating activities:
Capitalized residual interests and mortgage servicing rights....................... (4,975) (7,314)
Deferred income taxes.............................................................. 2,543 5,049
Net accretion of residual interests in securities.................................. 149 2,924
Amortization of mortgage servicing rights.......................................... 606 853
Depreciation and amortization ..................................................... 169 412
Deferred stock compensation........................................................ 51 42
Accretion of discounts on loans receivable......................................... (38) (11)
Foreign currency transaction loss (gain)........................................... 169 (10)
Loss on sales of property.......................................................... 33
Changes in assets and liabilities:
Receivable from trusts............................................................. (1,792) (1,520)
Loans held for sale................................................................ (990) (5,399)
Prepaid expenses and other assets.................................................. 509 331
Accounts payable and accrued liabilities........................................... 408 6,797
Income taxes payable............................................................... (515) (2,507)
--------------- ---------------
Net cash provided by operating activities..................................... 4,011 6,909
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Advances) repayments on warehouse financing receivable................................... (9,678) 9,558
Capital expenditures...................................................................... (901) (2,162)
Collections on loans receivable held for investment....................................... 335 76
--------------- ---------------
Net cash (used in) provided by investing activities........................... (10,244) 7,472
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on warehouse financing facilities............................. 117 (14,689)
Purchase of treasury stock................................................................ (8,106)
Proceeds from issuance of stock........................................................... 307 227
--------------- ---------------
Net cash provided by (used in) financing activities........................... 424 (22,568)
--------------- ---------------
Effect of exchange rate changes on cash................................................. 4 21
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................................. (5,805) (8,166)
CASH AND CASH EQUIVALENTS, beginning of period............................................ 27,414 14,032
=============== ===============
CASH AND CASH EQUIVALENTS, end of period.................................................. $ 21,609 $ 5,866
=============== ===============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(DOLLARS IN THOUSANDS)
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
----------------------------------
1997 1998
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
SUPPLEMENTAL INFORMATION:
Interest paid.......................................................................... $ 317 $ 1,818
=============== ===============
Income taxes paid...................................................................... $ 3,167 $ 1,903
=============== ===============
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERS ENDED MARCH 31, 1998 AND 1997
NOTE 1. GENERAL
The accompanying unaudited consolidated financial statements, which
include the accounts of First Alliance Corporation ("FACO") and its subsidiaries
(collectively the "Company"), have been prepared in accordance with the
instructions to Form 10-Q and include all information and footnotes required for
interim financial statement presentation. All adjustments (consisting only of
various normal accruals) necessary to present fairly the Company's consolidated
financial position, results of operations and cash flows have been made. All
significant intercompany transactions and balances have been eliminated and
certain reclassifications have been made to prior periods' consolidated
financial statements to conform to the current period presentation. The results
of operations for the three months ended March 31, 1998 are not necessarily
indicative of the results of operations to be expected for the year ending
December 31, 1998.
The financial information provided herein, including the information
under the heading Item 2 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" ("MD&A"), is written with the presumption
that the users of these interim consolidated financial statements have read, or
have access to, the Company's most recent filing on Form 10-K which contains the
latest available audited consolidated financial statements and notes thereto, as
of and for the period ended December 31, 1997, together with the MD&A for such
period.
HEDGING ACTIVITIES
The Company regularly securitizes and sells fixed and variable rate
mortgage loans. As part of its interest rate risk management strategy, the
Company hedges its interest rate risk related to its loans held for sale and
origination commitments by selling short or selling forward United States
Treasury Securities. For accounting purposes, short sales of United States
Treasury Securities are not considered to be a hedge. Therefore, when selling
short United States Treasury Securities, the Company has recognized realized and
unrealized gains and losses on hedging activities in the period in which they
occur. The Company classifies forward sales of United States Treasury Securities
as hedges of specific loans held for sale and commitments to fund loans to be
held for sale. The gains and losses derived from these transactions are deferred
and included in the carrying amounts of loans held for sale and are recognized
in earnings upon sale of loans hedged. Gains recognized on hedging activities
were $90,000 and $74,000 for the quarters ended March 31, 1998 and 1997,
respectively. The notional amount of forward sales of United States Treasury
Securities was $11.2 million at December 31, 1997 with deferred losses of
$60,000. There were no open positions or deferred gains or losses on hedging
activities at March 31, 1998.
STOCK REPURCHASE PROGRAM
In April 1997 the Board of Directors approved a share repurchase program
under which the Company is authorized to purchase up to 1.5 million shares of
its Class A Common Stock. In January 1998 the Board of Directors authorized the
purchase of an additional 2 million shares of Class A Common Stock. During the
quarter ended March 31, 1998, the Company repurchased 555,000 shares at a cost
of $8.1 million.
6
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERS ENDED MARCH 31, 1998 AND 1997
NET INCOME PER SHARE
A reconciliation of the numerators and denominators used in basic and
diluted net income per share are as follows for the quarters ended March 31:
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
<S> <C> <C>
Net income: Basic and diluted (dollars in thousands)............... $ 7,684 $ 7,262
=============== ===============
Weighted average number of common shares
Basic........................................................... 22,178,784 20,779,681
Effect of dilutive securities - stock options................... 179,573 145,321
--------------- ---------------
Diluted......................................................... 22,358,357 20,925,002
=============== ===============
Net income per share
Basic $ 0.35 $ 0.35
Effect of dilutive securities - stock options................... 0.01 0.00
--------------- ---------------
Diluted......................................................... $ 0.34 $ 0.35
=============== ===============
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
Beginning with the first quarter of 1998, the Company adopted Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 130 "Reporting Comprehensive Income". This statement requires that
all items that are required to be recognized under accounting standards as
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
In June of 1997, the FASB issued SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information" which is effective for annual
periods beginning after December 15, 1997. This statement established standards
for the method that public entities use to report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographical areas, and major
customers.
In February 1998, FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits" which is effective for annual and
interim periods beginning after December 15, 1997. This statement standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis and eliminates certain disclosures that are no longer useful
as they were under previous statements. The adoption of this standard had no
impact on the Company's current presentation of financial statements.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
OVERVIEW
The Company is a financial services organization principally engaged in
mortgage loan origination, purchases, sales and servicing. Loans originated by
the Company primarily consist of fixed and adjustable rate loans secured by
first mortgages on single family residences. The Company originates loans
through its retail branch network which is currently comprised of 31 offices in
the United States (eight of which are located in California, three of which are
located in New Jersey, two of which are located in each of Florida, Illinois,
Maryland, New York, and Ohio and one of which is located in each of Arizona,
Colorado, Georgia, Massachusetts, Minnesota, Oregon, Pennsylvania, Utah,
Virginia and Washington) and three offices in the United Kingdom. In addition,
the Company purchases loans from qualified mortgage originators. The Company
sells loans to wholesale purchasers or securitizes them in trusts. A significant
portion of the Company's loan production is securitized with the Company
retaining the right to service the loans
The Company's strategy of originating, as compared to purchasing, the
majority of its loan volume results in the generation of a significant amount of
loan origination fees. This income has historically allowed the Company to
generate positive operating cash flow. There can be no assurance, however, that
the Company's operating cash flow will continue to be positive in the future.
As a fundamental part of its business and financing strategy, the Company
securitizes the majority of its loans in trusts whereby the loans are exchanged
for regular and residual interests in the trusts. A significant portion of the
Company's income is associated with securitization activity.
Gains on servicing retained sales of loans through securitization
represent the difference between the net proceeds to the Company in the
securitization and the allocated cost of loans securitized. In accordance with
SFAS No. 125, the allocated cost of the loans securitized is determined by
allocating their acquisition cost (for purchased loans) or net carrying value
(for originated loans) between the loans securitized and the residual interests
and the mortgage servicing rights retained by the Company based upon their
relative fair values. At origination, the Company classifies the residual
interests as trading securities, which are carried at fair value. The difference
between the fair value of residual interests and their allocated cost is
recorded as gain on securitization and is included in loan origination and sale
revenue.
In a securitization, the Company exchanges loans for regular interests and
residual interests in trusts. The regular interests are immediately sold by the
Company to the public for cash. As the holder of the residual interest, the
Company is entitled to receive certain excess cash flows. These excess cash
flows are the difference between (a) principal and interest paid by borrowers
and (b) the sum of (i) scheduled principal and interest paid to holders of the
regular interests, (ii) trustee fees, (iii) third-party credit enhancement fees,
(iv) servicing fees and (v) loan losses. The Company begins receiving these
excess cash flows after certain overcollateralization requirements, which are
specific to each securitization and are used as a means of credit enhancement,
have been met.
RECENT DEVELOPMENTS
In the first quarter of 1998, the Company began securitizing its loans in
the form of owner's trusts. By utilizing an owner's trust, the Company's
securitization of loans will be treated as a borrowing for state and Federal tax
purposes rather than as a sale. To the extent that the gain of sale recorded on
a securitization is greater than the net interest income realized in the current
period from the loans included in the related securitization, state and Federal
taxes will be deferred. Over $5 million of state and Federal taxes were deferred
in the first quarter of 1998.
In April 1998, the Company discontinued its high loan-to-value ("LTV")
loan program because adverse changes in the secondary market for these loans
significantly reduced the profitability of this program. Since the inception of
the program in July 1997, less than $4 million of high LTV loans were originated
by the Company.
8
<PAGE>
<TABLE>
LOAN ORIGINATIONS AND PURCHASES
<CAPTION>
AT OR FOR THE QUARTERS
ENDED MARCH 31,
---------------------------------
1997 1998
--------------- ---------------
(DOLLARS IN THOUSANDS)
Loan originations and purchases:
<S> <C> <C>
Retail originations........................................... $ 89,535 $ 120,800
Wholesale purchases........................................... 15,782 28,663
=============== ==============
Total......................................................... $ 105,317 $ 149,463
=============== ==============
Number of retail branches as of the end of the period:
United States:
California.................................................. 6 7
Other states................................................ 17 23
United Kingdom................................................ 1 4
=============== ==============
Total....................................................... 24 34
=============== ==============
Weighted average initial interest rate.............................. 9.4% 9.5%
Weighted average initial combined loan-to-value ratio............... 63.8% 63.7%
Average retail origination loan size................................ $ 87 $ 91
</TABLE>
Total originations and purchases increased 42% in the first quarter of
1998 as compared to the first quarter of 1997. Retail originations increased 35%
primarily as a result of new retail branch offices opened during 1997. Wholesale
purchases increased 82% primarily due to a strategy initiated in June 1997 to
purchase low LTV loans secured by property located near the Company's retail
offices for the purpose of marketing to these homeowners for additional
borrowing needs. Purchases of low LTV loans totaled $17 million for the first
quarter of 1998.
<TABLE>
LOAN SALES
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
---------------------------------
1997 1998
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Securitizations.................................................... $ 73,001 $ 110,001
Whole loan sales................................................... 31,102 41,286
--------------- ---------------
Total....................................................... $ 104,103 $ 151,287
=============== ===============
</TABLE>
Loan sales, including securitizations of loans, increased 45% for the
first quarter of 1998 as compared to the first quarter of 1997 due to the sale
of the increased volume of originations and purchases. During the first quarter
of 1998, sales of retail loans increased 23% to $109 million and sales of
purchased loans increased 174% to $43 million.
9
<PAGE>
COMPOSITION OF REVENUE AND EXPENSE
The following table summarizes certain components of the Company's
consolidated statements of income set forth as a percentage of total revenue for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
---------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
REVENUE:
Loan origination and sale:
Gain on sale of loans.................................... 23.3% 20.3%
Net loan origination and other fees...................... 48.6 48.0
Loan servicing and other fees............................... 9.1 6.7
Interest and other ......................................... 19.0 25.0
--------------- ---------------
Total revenue............................................ 100.0 100.0
--------------- ---------------
EXPENSE:
Compensation and benefits................................... 19.9 23.2
Advertising................................................. 5.4 7.3
Professional services and other fees ....................... 2.8 4.2
Facilities and insurance.................................... 3.1 3.9
Supplies.................................................... 2.0 2.9
Depreciation and amortization............................... .8 1.6
Interest.................................................... 1.5 7.1
Legal....................................................... 1.1 1.4
Travel and training......................................... 1.8 1.4
Other....................................................... 1.6 1.0
--------------- ---------------
Total expense............................................ 40.0 54.0
--------------- ---------------
Income before income tax provision.............................. 60.0 46.0
Income tax provision............................................ 24.2 17.4
--------------- ---------------
Net income...................................................... 35.8% 28.6%
=============== ===============
</TABLE>
10
<PAGE>
RESULTS OF OPERATIONS
REVENUE
The following table sets forth the components of the Company's revenue for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
---------------------------------
1997 1998
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loan origination and sale:
Gain on sale of loans (1)...............................$ 4,994 $ 5,142
Net loan origination and other fees..................... 10,410 12,160
Loan servicing and other fees.............................. 1,944 1,702
Interest and other......................................... 4,089 6,346
--------------- ---------------
Total revenue.........................................$ 21,437 $ 25,350
=============== ===============
</TABLE>
(1) Excluding net loan origination and other fees.
Total revenue increased 18% or $3.9 million for the first quarter of 1998
as compared to the first quarter of 1997 primarily due to higher loan
origination and sale revenue and higher interest income from loans held for sale
and residual interests.
Loan origination and sale revenue increased 12% to $17.3 million in the
first quarter of 1998 from $15.4 million for the first quarter of 1997 primarily
due to a 23% increase in sales of retail loans offset by a decrease in the
weighted average gain on sale of loans.
The weighted average gain on sale of loans decreased to 3.4% of loans sold
for the first quarter of 1998 as compared to 4.8% for the corresponding period
in 1997. The weighted average gain on sale of loans securitized for the first
quarter of 1998 decreased to 4.0% of loans securitized as compared to 5.1% for
the first quarter of 1997 primarily due to an increase in wholesale loan
purchase premiums. As a percentage of loans securitized, wholesale loan purchase
premiums increased to 1.7% for first quarter of 1998 as compared to 0.5% for the
first quarter of 1997 as the total amount of purchased loans included in the
securitization in the first quarter of 1998 increased to $39 million from $10
million for the first quarter of 1997. The weighted average initial interest
rate spreads (the difference between the initial weighted average interest rates
for the loans included in the securitization and the initial weighted average
pass-through rates paid to holders of the regular interests in the
securitization) in residual interests originated was 3.1% for the quarters ended
March 31, 1998 and 1997. The weighted average gain on whole loan sales for the
first quarter of 1998 decreased to 3.2% of loans sold as compared to 5.2% for
the first quarter of 1997. The Company's whole loan sales consist of bulk sales,
for which the Company receives a premium over the principal balance of the loan,
and flow sales, which represent individual loan sales for which the Company
generally recognizes no gain or loss. The decrease in the weighted average gain
on whole loan sales is primarily the result of decreases in the percentage of
whole loan sales sold through bulk sales and a decrease in the weighted average
premium received on bulk sales.
Net loan origination and other fees increased 17% during the first quarter
of 1998 due primarily to increases in the sale of retail loans.
Loan servicing and other fees as an annualized percentage of the average
servicing portfolio decreased to 0.8% for the first quarter of 1998 as compared
to 1.2% for the first quarter of 1997. As an annualized percentage of the
average servicing portfolio, management fees decreased 0.1% for the first
quarter of 1998 and foreclosure and other fees decreased 0.1%. The Company earns
higher management fees on loans serviced for private investors and for certain
securitizations originated prior to 1996. As the proportion of loans serviced
for private investors and securitizations originated prior to 1996 have
decreased as a percentage of the total servicing portfolio and as the percentage
of loans held for sale (for which the Company earns no management fees)
increased as a percentage of the total servicing portfolio, the Company's
weighted average management fees have decreased. The decrease in foreclosure and
other fees is primarily due to the reduced levels of foreclosures and real
estate owned in the first quarter of 1998.
11
<PAGE>
Interest and other income increased $2.3 million for the first quarter of
1998 as compared to the first quarter of 1997 primarily due to a $1.5 million
increase in interest income from loans held for sale and a $0.6 million increase
in interest income from residual interests. The increases in interest income
from loans held for sale and residual interests were primarily due to increases
in the average balances of loans held for sale and residual interests during the
first quarter of 1998 as compared to the first quarter of 1997.
EXPENSE
The following table sets forth the components of the Company's expense for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
---------------------------------
1997 1998
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Compensation and benefits........................$ 4,276 $ 5,890
Advertising...................................... 1,158 1,855
Professional services and other fees ............ 610 1,062
Facilities and insurance......................... 657 977
Supplies......................................... 430 731
Depreciation and amortization................... 169 412
Interest......................................... 312 1,801
Legal............................................ 228 360
Travel and training.............................. 381 367
Other............................................ 356 228
=============== ===============
Total expense.................................$ 8,577 $ 13,683
=============== ===============
</TABLE>
Total expense increased $5.1 million to $13.7 million for the first
quarter of 1998 from $8.6 million for the first quarter of 1997 primarily due to
increases in expenses related to the growth of the Company's retail branch and
credit card operations and increases in interest expense.
Compensation and benefits increased 38% or $1.6 million for the first
quarter of 1998 as compared to the first quarter of 1997 as a result of an
increase in personnel to support the Company's retail branch and credit card
operations.
Advertising expense increased $0.7 million to $1.9 million for the first
quarter of 1998 as compared to the first quarter of 1997. This increase relates
to a $0.5 million increase in marketing activities resulting from the Company's
retail branch office expansion and $0.2 million of advertising costs related to
the credit card operations.
Professional services increased $0.5 million for the first quarter of 1998
as compared to the first quarter of 1997 primarily due to increased costs
associated with the Company's secondary marketing and servicing activities and
costs incurred for signing and recording services for the Company's real estate
secured credit card program.
Combined, facilities and insurance, supplies and depreciation and
amortization increased $0.9 million to $2.1 million for the first quarter of
1998 as compared to the first quarter of 1997 primarily due to the opening of
the Company's new centralized telemarketing facility in the first quarter of
1998 and the increase in the number of retail branch offices.
Interest expense increased $1.5 million for the first quarter of 1998 as
compared to the first quarter of 1997 primarily due to an increase in interest
expense on the warehouse financing facilities. As a result of the funding of the
increased balances of loans held for sale, including loans originated in the
United Kingdom, and as a result of cash utilized by the Company in its share
repurchase program, the average balance outstanding on the warehouse lines
increased 433%. In addition, the weighted average interest rate on the warehouse
financing facilities increased to 6.7% for the first quarter of 1998 as compared
to 6.3% for the first quarter of 1997 due to the increase in borrowings under
the Company's United Kingdom warehouse financing facility, which carries a
higher rate.
12
<PAGE>
INCOME TAXES
The Company's estimated tax rate for the quarters ended March 31, 1998 and
1997 was 37.75% and 40.25%, respectively. The lower rate in 1998 is a result of
decreases in the amount of income apportioned to the State of California.
In the first quarter of 1998, the Company's securitization was in the form
of owner's trusts. Prior to 1998, all of the Company's securitizations had been
in the form of real estate mortgage investment conduit trusts. Under an owner's
trust, the securitization of loans will be treated as a borrowing for state and
Federal tax purposes rather than as a sale. To the extent that the gain on sale
recorded on a securitization is greater than the net interest income realized in
the current period from the loans included in the related securitization, state
and Federal taxes will be deferred. These deferred taxes will be payable in
future periods as net interest income is realized for tax purposes. The company
anticipates that the use of owners' trusts in its securitizations will
significantly increase operating cash flow in 1998.
SERVICING
The following tables provide data on loan delinquency, real estate owned
(REO) and net losses for the Company's servicing portfolio:
<TABLE>
<CAPTION>
AS OF
-----------------------------------------------------------------------------------
MARCH 31, 1997 DECEMBER 31, 1997 MARCH 31, 1998
--------------------------- --------------------------- ---------------------------
% OF % OF % OF
(Dollars in SERVICING (Dollars in SERVICING (Dollars in SERVICING
thousands) PORTFOLIO thousands) PORTFOLIO thousands) PORTFOLIO
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Servicing Portfolio..................... $ 666,157 $ 799,085 $ 840,537
============= ============= =============
30-59 days delinquent................... $ 5,729 0.9% $ 7,994 1.0% $ 9,673 1.1%
60-89 days delinquent................... 5,643 0.8 7,654 0.9 5,685 0.7
90 days or more delinquent.............. 18,206 2.7 17,378 2.2 21,131 2.5
------------- ------------- ------------- ------------- ------------- -------------
Total delinquencies................ $ 29,578 4.4% $ 33,026 4.1% $ 36,489 4.3%
============= ============= ============= ============= ============= =============
REO (1)................................. $ 4,962 0.7% $ 1,688 0.2% $ 1,950 0.2%
============= ============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
---------------------------------
1997 1998
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average servicing portfolio balance outstanding (2)..................................... $ 653,674 $ 819,811
Net losses (3).......................................................................... $ 480 $ 230
Percentage of average servicing portfolio - annualized.................................. 0.29% 0.11%
</TABLE>
(1) Includes REO of the Company as well as REO of the securitization trusts
serviced by the Company; however, excludes private investor REO not
serviced by the Company.
(2) Average servicing portfolio balance equals the quarterly average of the
servicing portfolio computed as the average of the balances at the
beginning and end of each quarter.
(3) Net losses means actual net losses realized with respect to the disposition
of REO.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has generated positive cash flow. The Company's
sources of cash include loan sales, sales of regular interests, borrowings under
its warehouse financing facilities, distributions received from residual
interests, interest income and loan servicing income. The Company's uses of cash
include the funding of loan originations and purchases, payments of interest,
repayment of its warehouse financing facilities, capital expenditures, operating
and administrative expenses and payment of income taxes.
The Company generated operating cash flow of $9.2 million and $6.4 million
in the quarters ended March 31, 1998 and 1997, respectively. The following table
shows the computation of operating cash flow and provides a reconciliation of
operating cash flow to net cash provided by operating activities as it is
included in the consolidated statements of cash flows for the quarters ended
March 31:
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net income...............................................................................$ 7,684 $ 7,262
Non-cash adjustments to reconcile net income to operating cash flow:
Capitalized residual interests and mortgage servicing rights.......................... (4,975) (7,314)
Net accretion of residual interests in securities..................................... 149 2,924
Amortization of mortgage servicing rights............................................. 606 853
Deferred income taxes................................................................. 2,543 5,049
Depreciation and amortization......................................................... 169 412
Other................................................................................. 215 21
--------------- ---------------
Operating cash flow......................................................................$ 6,391 $ 9,207
=============== ===============
Reconciliation to consolidated statements of cash flows
Operating cash flow...................................................................$ 6,391 $ 9,207
Increase in loans held for sale....................................................... (990) (5,399)
Changes in other assets and liabilities............................................... (1,390) 3,101
--------------- ---------------
Net cash provided by operating activities................................................$ 4,011 $ 6,909
=============== ===============
</TABLE>
The loan origination and processing fees charged to the borrower are
included in the principal balance of the loan originated. The Company funds such
loans out of available cash or through its warehouse financing facilities. For
loans financed through available cash, the Company receives its loan origination
and processing fees in cash upon sale of the loan. For loans financed through
the warehouse financing facilities, the Company generally receives substantially
all of the loan origination and processing fees in cash at the time of the
warehouse financing facility borrowing. The Company's warehouse financing
facilities provide, in the aggregate, up to $300 million in the United States
and up to 50 million pounds in the United Kingdom in repurchase agreements or
secured revolving lines of credit which are used to finance loan originations
and purchases.
The Company's ability to continue to originate and purchase loans is
dependent upon adequate credit facilities and upon its ability to sell the loans
in the secondary market in order to generate cash proceeds for new originations
and purchases. The value of and market for the Company's loans are dependent
upon a number of factors, including general economic conditions, interest rates
and governmental regulations. Adverse changes in such factors may affect the
Company's ability to sell loans for acceptable prices within a reasonable period
of time. A prolonged, substantial reduction in the size of the secondary market
for loans of the type originated or purchased by the Company may adversely
affect the Company's ability to sell loans in the secondary market with a
consequent adverse impact on the Company's results of operations, financial
condition and ability to fund future originations and purchases.
14
<PAGE>
The Company's warehouse financing facilities consist of three separate
agreements: a $175 million facility, a $125 million facility and a 50 million
pound facility. The Company's $175 million master repurchase agreement, which
is secured by loans originated or purchased by the Company and currently bears
interest at a rate of 0.25% over 30 day US dollar denominated London Interbank
Offered Rate ("LIBOR"), expires in October 1998. The Company's $125 million
warehouse financing facility, which is secured by loans originated or purchased
by the Company and currently bears interest at a rate of 0.80% over the 30 day
US dollar denominated LIBOR, expires in June 1998. The Company's 50 million
pound credit facility, which is secured by loans originated or purchased by the
Company in the United Kingdom and currently bears interest at a rate of 0.925%
over 30 day sterling denominated LIBOR, expires in August 1998. Management
expects, although there can be no assurance, that the Company will be able to
maintain these warehouse financing facilities (or obtain comparable replacement
or additional financing) in the future.
In February 1997, the Company entered into master repurchase agreements to
provide warehouse financing facilities to two mortgage banking companies
("Borrowers") that are controlled by related parties. These facilities are
secured by loans originated by the Borrowers and by personal guarantees provided
by stockholders of the Borrowers, bear interest at 10% per annum, have a
combined borrowing limit of $17 million and expire in October 1998. As of March
31, 1998, an aggregate of $2.8 million was outstanding on these lines.
In April 1997, the Board of Directors of the Company authorized the
repurchase of up to 1.5 million shares of Class A Common Stock in open market
transactions. In connection with this program, the Company repurchased 1.2
million shares of its Class A Common Stock for $20.5 million during 1997. In
January 1998, the Board of Directors authorized the repurchase of an additional
2 million shares of the Company's Class A Common Stock. During the first quarter
of 1998, the Company repurchased 555,000 shares of its Class A Common Stock for
$8.1 million.
As of March 31, 1998 the Company had commitments to fund loans of $3.8
million. Historically, approximately 55% of such commitments have ultimately
been funded. Capital expenditures totaled $2.2 million and $0.9 million for the
three months ended March 31, 1998 and 1997, respectively. In the first quarter
of 1998, the Company's new telemarketing center was opened in a 40,000 square
foot office building in Irvine, California which the Company purchased in July
1997.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
On May 12, 1998 the Company announced that Mark K. Mason, Executive Vice
President and Chief Financial Officer and a member of the Board of Directors,
would be resigning his positions as an officer and director of the Company to
rejoin his former employer, Bank Plus Corporation, as its Executive Vice
President, Chief Operating Officer and Chief Financial Officer.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--- ----------------------
3.1 Certificate of Incorporation of the Company (Incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1,
Commission File No. 333-3633)
3.2 Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1, Commission File No.
333-3633)
4.1 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-1, Commission File No.
333-3633)
4.1.1 Form of Incentive Stock Option Agreement for use with 1996 Stock
Incentive Plan (Incorporated by reference to Exhibit 4.1.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996, Commission File No. 0-28706)
4.1.2 Form of Non-qualified Stock Option Agreement for use with 1996 Stock
Incentive Plan (Incorporated by reference to Exhibit 4.1.2 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996, Commission File No. 0-28706)
10.1 Warehouse Financing Facility dated October 29, 1993 (Incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on
Form S-1, Commission File No. 333-3633)
10.2 Form of Pooling and Servicing Agreement (Incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1,
Commission File No. 333-3633)
10.3 Corporate Headquarters Lease (Incorporated by reference to Exhibit 10.3
to the Company's Registration Statement on Form S-1, Commission File No.
333-3633)
10.4 S Distribution Notes (Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, Commission File No.
333-3633)
10.5 Mason Employment Agreement (Incorporated by reference to Exhibit 10.5 to
the Company's Registration Statement on Form S1, Commission File No.
333-3633)
10.5.1 Mason Loan (Incorporated by reference to Exhibit 10.5.1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1996,
Commission File No. 0-28706)
10.6 Form of Directors' and Officers' Indemnity Agreement (Incorporated by
reference to Exhibit 10.7 to the Company's Registration Statement on
Form S-1, Commission File No. 333-3633)
10.7 Master Repurchase Agreement dated as of October 31, 1997 between
Nationscapital Mortgage Corporation and the Company (Incorporated by
reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, Commission File No. 0-28706)
10.8 Master Repurchase Agreement dated as of October 31, 1997 between Coast
Security Mortgage Inc. and the Company (Incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, Commission File No. 0-28706)
10.9 Chisick Employment Agreement (Incorporated by reference to Exhibit 10.10
to the Company's Registration Statement on Form S-1, Commission File No.
333-3633)
10.10 Reimbursement Agreement (Incorporated by reference to Exhibit 10.11 to
the Company's Registration Statement on Form S-1, Commission File No.
333-3633)
10.11 Warehouse Financing Facility dated September 5, 1996 (Incorporated by
reference to Exhibit 10.12 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1996, Commission File No.
0-28706)
10.12 Interim Warehouse and Security Agreement dated as of February 15, 1997
between Nationscapital Mortgage Corporation and the Company
(Incorporated by reference to Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1997, Commission File
No. 0-28706)
10.13 Interim Warehouse and Security Agreement dated as of February 15, 1997
between Coast Security Mortgage Inc. and the Company (Incorporated by
reference to Exhibit 10.13 to the Company's Quarterly Report on Form
10-Q for the period ended March 31, 1997, Commission File No. 0-28706)
10.14 Smith Loan (Incorporated by reference to Exhibit 10.14 to the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 1997,
Commission File No. 0-28706)
10.15 Building Purchase and Sale Agreement between Amresco Residential
Mortgage Corporation and the Company (Incorporated by reference to
Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1997, Commission File No. 0-28706)
17
<PAGE>
10.16 Warehouse Credit Facility Agreement dated August 18, 1997 between
Prudential Securities Credit Corporation and the Company (Incorporated
by reference to Exhibit 10.16 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1997, Commission File No.
0-28706)
10.17 Master Repurchase Agreement dated as of October 27, 1997 between First
Union National Bank and the Company (Incorporated by reference to
Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, Commission File No. 0-28706)
10.18 Amendment to Warehouse Credit Facility Agreement dated August 18, 1997
between Prudential Securities Credit Corporation and the Company.*
27 Financial Data Schedule *
- ----------------
* Filed herewith.
(b) Reports on Form 8-K:
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST ALLIANCE CORPORATION
REGISTRANT
Date: 5/14/98 /s/ BRIAN CHISICK
--------------------- -----------------------------
Brian Chisick
President and Chief Executive Officer
Date: 5/14/98 /s/ MARK MASON
-------------------- -----------------------------
Mark K. Mason
Executive Vice President
Principal Financial Officer
19
<PAGE>
EXHIBIT 10.18
To: First Alliance Mortgage Company Limited
c/o First Alliance Mortgage Corporation
17305 Von Karman Avenue
Irvine
California 92714-6203
USA
For the attention of: Mark Mason
February, 1998
Dear Sirs,
25,000,000 POUND CREDIT AGREEMENT DATED 18TH AUGUST, 1997 BETWEEN FIRST
ALLIANCE MORTGAGE COMPANY LIMITED AND PRUDENTIAL SECURITIES CREDIT CORPORATION
(THE "AGREEMENT")
We refer to the Finance Documents and, in accordance with Clause 23 (Amendments
and Waivers) of the Agreement, by your countersignature to this letter it is
agreed that, from the date of this letter:
(i) the following definition shall be inserted in Clause 1 (Interpretation)
after the end of the definition of "Advance":
""AVAILABLE COMMITMENT" means the lesser of:
(i) the Commitment; and
(ii) 101,000,000 pounds less the aggregate principal amount in
sterling, calculated at the sterling spot rate of exchange
between sterling and US Dollars for the day prior to the date
of calculation which is quoted on the relevant Bloomberg page
which lists world currency rates of exchange (or such other
page as may replace that page and is nominated by the Lender),
of all the advances made by Prudential Securities Realty
Funding Corporation to the Guarantor under the US Facility
which are for the time being outstanding thereunder;";
(ii) the following definitions shall be inserted in Clause 1
(Interpretation) after the end of the definition of "Trust Receipt":
""US DOLLARS" means the lawful currency for the time being of the
United States of America;
"US FACILITY" means the interim warehouse and security agreement dated
29th October, 1993 between Prudential Securities Realty Funding
Corporation and the Guarantor, as amended from time to time;";
(iii) the definition of "COMMITMENT" in the Agreement shall be deleted and
replaced with the following definition:
""COMMITMENT" means 50,000,000 pounds to the extent not cancelled or
reduced under this Agreement;";
(iv) Clause 2.1 (The Facility) of the Agreement shall be deleted and
replaced with the following:
"2.1 Subject to the terms of this Agreement the Lender grants to
the Borrower a sterling credit facility in an aggregate
principal amount of up to 50,000,000 pounds.";
(v) Clause 2.3 (The Facility) of the Agreement shall be amended by the
addition of the word "Available" after the word "its";
(vi) Clause 5.2(c) (Completion of Requests) of the Agreement shall be
amended by the addition of the word "Available" after the word "the";
and
<PAGE>
(vii) all other references in the Finance Documents to "25,000,000 pounds"
shall be deleted and replaced WITH "up to 50,000,000 pounds".
Save as expressly defined herein, capitalised terms defined in the Agreement
shall have the same meanings in this letter as in the Agreement.
We agree that, except as otherwise provided herein, all Finance Documents remain
in full force and effect.
This letter is a Finance Document, is governed by English law and may be signed
in one or more counterparts, all of which shall constitute one document.
Yours sincerely,
.................................
For and on behalf of
PRUDENTIAL SECURITIES
CREDIT CORPORATION
We agree to the above.
.................................
For and on behalf of
FIRST ALLIANCE MORTGAGE
COMPANY LIMITED
The undersigned, as Guarantor under the Guarantee, dated as of August 18, 1997
(the "GUARANTEE"), hereby acknowledges and consents to the foregoing amendment,
notwithstanding that such acknowledgement and consent is not required by the
terms of the Guarantee and is being provided for the convenience of the parties.
FIRST ALLIANCE MORTGAGE COMPANY
as Guarantor
By: ..................................
Name:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,866
<SECURITIES> 0
<RECEIVABLES> 7,371
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 77,415
<PP&E> 10,422
<DEPRECIATION> 0
<TOTAL-ASSETS> 152,790
<CURRENT-LIABILITIES> 56,326
<BONDS> 0
0
0
<COMMON> 223
<OTHER-SE> 90,532
<TOTAL-LIABILITY-AND-EQUITY> 152,790
<SALES> 17,302
<TOTAL-REVENUES> 25,350
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,882
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,801
<INCOME-PRETAX> 11,667
<INCOME-TAX> 4,405
<INCOME-CONTINUING> 7,262
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,262
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
