<PAGE> 1
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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 EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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 1-12889
LONG BEACH FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0739843
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
1100 TOWN & COUNTRY ROAD, SUITE 1600, ORANGE, CALIFORNIA 92868
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
(714) 835-5743
(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 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 May 7, 1999, registrant had outstanding 22,609,618 shares of Common
Stock.
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<PAGE> 2
LONG BEACH FINANCIAL CORPORATION
TABLE OF CONTENTS
TO FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1999
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of March
31, 1999 (Unaudited) and December 31, 1998.................. 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 1999 and 1998 (Unaudited)................... 4
Consolidated Statements of Stockholders' Equity for the
Three Months Ended March 31, 1999 (Unaudited)............... 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (Unaudited)................... 6
Notes to the Consolidated Financial Statements for the Three
Months Ended March 31, 1999 and 1998 (Unaudited)............ 7
Item 2. Management's Discussion and Analysis of Financial Condition,
Results of Operations, Liquidity and Capital Resources...... 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 22
Item 2. Changes in Securities....................................... 22
Item 3. Defaults Upon Senior Securities............................. 22
Item 4. Submission of Matters to a Vote of Securities Holders....... 22
Item 5. Other Information........................................... 22
Item 6. Exhibits and Reports on Form 8-K............................ 22
(a) Exhibits................................................ 22
(b) Reports on Form 8-K..................................... 23
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LONG BEACH FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ 32,741 $ 24,941
Loans held for sale......................................... 61,496 59,148
Receivable from the sales of loans.......................... 193,635 186,786
Premises and equipment, net................................. 4,931 4,824
Deferred income taxes, net.................................. 31,923 32,523
Capitalized mortgage servicing rights....................... 12,744 9,806
Servicing advances.......................................... 8,646 3,546
Real estate acquired through foreclosure.................... 2,499 1,470
Prepaid expenses and other assets........................... 7,517 5,551
-------- --------
Total assets...................................... $356,132 $328,595
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse financing facility................................ $230,896 $211,787
Accounts payable and accrued liabilities.................... 14,601 17,182
Accrued income taxes payable................................ 4,523 --
-------- --------
Total liabilities................................. 250,020 228,969
Stockholders' equity:
Common stock, $.001 par value; 150.0 million shares
authorized; 25.0 million shares issued; 22.6 million
shares outstanding for 1999 and 1998...................... 25 25
Additional paid-in capital.................................. 75,375 75,360
Retained earnings........................................... 55,187 48,716
Treasury stock, at cost: 2,400,982 shares for 1999 and
1998...................................................... (24,475) (24,475)
-------- --------
Total stockholders' equity........................ 106,112 99,626
-------- --------
Total liabilities and stockholders' equity........ $356,132 $328,595
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE> 4
LONG BEACH FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- -------
<S> <C> <C>
REVENUES:
Gain on sale of loans....................................... $31,877 $23,925
Interest income, net of interest expense (Note 5)........... 1,120 1,370
Loan servicing and other fees on loans...................... 2,066 763
Amortization of mortgage servicing rights................... (1,148) (197)
------- -------
Net operating income........................................ 33,915 25,861
EXPENSES:
Compensation expense........................................ 14,349 10,372
Premises and equipment expenses............................. 3,235 2,179
Other general and administrative expenses................... 2,629 1,940
Provision for losses........................................ 1,762 1,400
Sub-servicing costs......................................... 1,064 646
------- -------
Total expenses.................................... 23,039 16,537
------- -------
Earnings before income taxes................................ 10,876 9,324
Provision for income taxes.................................. 4,405 3,914
------- -------
Net earnings................................................ $ 6,471 $ 5,410
======= =======
Basic earnings per share (Note 4)........................... $ 0.29 $ 0.22
======= =======
Diluted earnings per share (Note 4)......................... $ 0.28 $ 0.21
======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE> 5
LONG BEACH FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF ADDITIONAL
COMMON COMMON PAID-IN RETAINED TREASURY
STOCK STOCK CAPITAL EARNINGS STOCK TOTAL
---------- ------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1999:
Balance, January 1, 1999............ 22,607,218 $25 $75,360 $48,716 $(24,475) $ 99,626
Net earnings........................ -- -- -- 6,471 -- 6,471
Exercise of stock options........... 2,400 -- 15 -- -- 15
---------- --- ------- ------- -------- --------
Balance, March 31, 1999............. 22,609,618 $25 $75,375 $55,187 $(24,475) $106,112
========== === ======= ======= ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE> 6
LONG BEACH FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................ $ 6,471 $ 5,410
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization of premises, equipment and
warehouse financing facility issuance costs............ 741 507
Loans originated and purchased for sale................... (752,254) (491,058)
Proceeds from sales of loans held for sale................ 742,004 482,444
Noncash gain recognized on originated mortgage servicing
rights................................................. (4,086) (704)
Amortization of mortgage servicing rights................. 1,148 197
Changes in:
Receivable from the sales of loans..................... (6,849) 32,082
Accounts payable and accrued liabilities............... (2,581) (115)
Accrued income taxes payable........................... 5,123 (1,007)
Servicing advances..................................... (5,100) (262)
Other..................................................... 4,667 2,155
--------- ---------
Net cash (used in) provided by operating activities.... (10,716) 29,649
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of premises and equipment....................... (608) (1,311)
Maturities of investment securities available for sale.... -- 1
--------- ---------
Net cash used in investing activities.................. (608) (1,310)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in warehouse financing facility................ 19,109 (33,755)
Purchase of treasury stock................................ -- (3,000)
Proceeds from exercise of stock options................... 15 --
--------- ---------
Net cash provided by (used in) financing activities.... 19,124 (36,755)
Net increase (decrease) in cash............................. 7,800 (8,416)
Cash and cash equivalents, beginning of the period.......... 24,941 41,074
--------- ---------
Cash and cash equivalents, end of the period................ $ 32,741 $ 32,658
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest on warehouse
financing facility..................................... $ 3,069 $ 2,591
Cash paid during the period for federal and state income
taxes.................................................. 639 4,783
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE> 7
LONG BEACH FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
NOTE 1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
Long Beach Financial Corporation ("LBFC"), through its wholly-owned
subsidiary, Long Beach Mortgage Company ("LBMC"), (collectively, the "Company"),
is a specialty finance company engaged in the business of originating,
purchasing and selling subprime residential mortgage loans secured by one- to
four-unit family residences. The Company's core borrower base consists of
individuals who do not qualify for traditional "A" credit because their credit
histories, debt to income ratios or other factors do not conform to standard
agency lending criteria. The Company originates loans through independent
mortgage loan brokers, correspondents and through its retail operations.
The Company has followed a strategy of selling substantially all of its
loan originations in the secondary market through whole loan sales for cash.
Prior to each fiscal quarter, the Company historically has obtained a purchase
commitment from one or more loan purchasers for the volume of loans expected to
be originated during such quarter. The Company has continued to evaluate and
execute sales strategies that produce the highest quality of earnings.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and include all
information and footnotes required for interim financial statement presentation.
In the opinion of the Company, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ materially from those estimated. All significant intercompany
transactions and balances have been eliminated and certain reclassifications
have been made to prior periods' consolidated financial statements to conform to
current period presentation. The results of operations for the three months
ended March 31, 1999 are not necessarily indicative of the results of operations
to be expected for the year ending December 31, 1999.
The consolidated financial statements and notes to the consolidated
financial statements, along with management's discussion and analysis of
financial condition, results of operations, liquidity and capital resources
should be read in conjunction with the Company's 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, 1998.
NOTE 2. AGREEMENTS WITH RELATED PARTIES
Loan Sub-servicing Agreement -- On April 28, 1997, the Company and
Ameriquest Mortgage Company ("AMC") entered into a three-year loan sub-servicing
agreement pursuant to which AMC agreed to sub-service mortgage loans originated
or purchased by the Company. Sub-servicing activities include collecting and
remitting loan payments, accounting for principal and interest, holding escrow
or impound funds for payment of taxes and insurance, if applicable, making
required inspections of the mortgaged property, contacting delinquent borrowers,
and supervising foreclosures and property dispositions. The agreement provides
that either party has the right to terminate the agreement effective at any time
after November 2, 1998, upon six months prior written notice to the other party.
During the third quarter of 1998, the Company and AMC modified the loan
sub-servicing agreement to accommodate the launch of the Company's indepen-
7
<PAGE> 8
LONG BEACH FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
dent servicing operation, in November 1998. The Company has incurred charges of
$1.1 million and $646,000 during the three months ended March 31, 1999 and 1998,
respectively, pursuant to this agreement. The outstanding principal balance of
the sub-serviced loan portfolio at March 31, 1999 and 1998 totaled $380 million
and $923 million, respectively.
NOTE 3. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," which is effective for annual periods beginning after
December 15, 1997. This statement defines comprehensive income as the total of
all components of comprehensive income, including net income and other
comprehensive income. The term "other comprehensive income" refers to revenues,
expenses, gains and losses that under generally accepted accounting principles
are included in comprehensive income but excluded from net income. Other
comprehensive income items are classified separately into foreign currency
items, minimum pension liability adjustments, and unrealized gains and losses on
certain investments in debt and equity securities. All components of
comprehensive income shall be reported in the financial statements in the period
in which they are recognized; however, if there are no items of other
comprehensive income in any period presented, then comprehensive income is not
required to be reported for that period. During the three months ended March 31,
1999, and 1998, there were no items of other comprehensive income.
NOTE 4. EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in basic and
diluted EPS computations for the periods indicated follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
COMPUTATION OF BASIC EARNINGS PER SHARE
Net Earnings available to common shareholders............. $ 6,471,000 $ 5,541,000
=========== ===========
Average common shares outstanding......................... 22,608,685 24,498,375
=========== ===========
Basic earnings per share.................................. $ 0.29 $ 0.22
=========== ===========
COMPUTATION OF DILUTED EARNINGS PER SHARE
Net Earnings available to common shareholders............. $ 6,471,000 $ 5,410,000
=========== ===========
Average common shares outstanding......................... 22,608,685 24,498,375
Common stock equivalents -- stock options................. 707,604 1,175,133
----------- -----------
Average diluted common shares............................. 23,316,289 25,673,508
=========== ===========
Diluted earnings per share................................ $ 0.28 $ 0.21
=========== ===========
</TABLE>
8
<PAGE> 9
LONG BEACH FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
NOTE 5. INTEREST INCOME, NET OF INTEREST EXPENSE
The components of interest income, net of interest expense for the periods
indicated, are presented in the table that follows (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Interest on loans........................................... $ 3,810 $ 3,638
Interest on investments..................................... 390 359
------- -------
Subtotal interest income............................... 4,200 3,997
------- -------
Interest expense............................................ (3,080) (2,627)
------- -------
Interest income, net of interest expense.................... $ 1,120 $ 1,370
======= =======
</TABLE>
NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for annual periods
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
has not yet adopted SFAS 133. The adoption of this standard is not expected to
have a material effect on the Company's financial condition, results of
operations and cash flows.
NOTE 7. SEGMENT AND RELATED INFORMATION
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which changes the way a company reports
information about its operating segments. The Company has three reportable
operating segments: broker-sourced, correspondent lending and loan servicing.
9
<PAGE> 10
LONG BEACH FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
Financial information concerning the Company's reportable segments is shown
in the following table. "Other" represents corporate administration, retail
lending, and other related items and results of ancillary operations. Dollars in
thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
--------- ------------
<S> <C> <C>
Revenues:
Broker-sourced............................................ $ 27,249 $ 21,810
Correspondent............................................. 3,389 1,434
-------- --------
Subtotal Wholesale...................................... 30,638 23,244
Loan servicing............................................ 2,256 720
Other..................................................... 1,021 1,897
-------- --------
Total Revenues..................................... $ 33,915 $ 25,861
======== ========
Expenses:
Broker-sourced............................................ $ 10,415 $ 8,575
Correspondent............................................. 645 441
-------- --------
Subtotal Wholesale...................................... 11,060 9,016
Loan servicing............................................ 1,786 646
Other..................................................... 10,193 6,875
-------- --------
Total Expenses..................................... $ 23,039 $ 16,537
======== ========
Earnings (Loss) Before Income Taxes:
Broker-sourced............................................ $ 16,834 $ 13,235
Correspondent............................................. 2,744 993
-------- --------
Subtotal Wholesale...................................... 19,578 14,228
Loan servicing............................................ 470 74
Other..................................................... (9,172) (4,978)
-------- --------
Earnings before income taxes....................... $ 10,876 $ 9,324
======== ========
Net Earnings (Loss):
Broker-sourced............................................ $ 10,016 $ 7,679
Correspondent............................................. 1,633 576
-------- --------
Subtotal Wholesale...................................... 11,649 8,255
Loan servicing............................................ 280 43
Other..................................................... (5,458) (2,888)
-------- --------
Net Earnings....................................... $ 6,471 $ 5,410
======== ========
Loan Production:
Broker-sourced............................................ $639,432 $440,541
Correspondent............................................. 93,590 41,348
-------- --------
Subtotal Wholesale...................................... 733,022 481,889
Other..................................................... 19,232 9,169
-------- --------
Total Loan Production.............................. $752,254 $491,058
======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
AS OF DATES PRESENTED: 1999 1998
---------------------- --------- ------------
<S> <C> <C>
Assets:
Broker-sourced............................................ $ 56,861 $ 53,270
Correspondent............................................. 6,897 6,832
-------- --------
Subtotal Wholesale...................................... 63,758 60,102
Other*.................................................... 292,374 268,493
-------- --------
Total Assets....................................... $356,132 $328,595
======== ========
</TABLE>
- ---------------
* Includes loan servicing as the amounts are immaterial.
10
<PAGE> 11
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, RESULTS OF
OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Management's discussion and analysis of financial condition, results of
operations, liquidity and capital resources contained within this report on Form
10-Q is more clearly understood when read in conjunction with the Notes to the
Consolidated Financial Statements. The Notes to the Consolidated Financial
Statements define certain terms that are used throughout this discussion and
provide information on the Company and the basis of presentation used in this
report on Form 10-Q.
The primary components of the Company's revenues are gain on sales of loans
and net interest income. Gain on sales of loans consists of: (i) the excess of
the cash selling price over the outstanding principal balance of the loan (the
"Gross Cash Premium"), minus (ii) the fees and other compensation paid to
independent mortgage brokers and other lenders, plus (iii) capitalized servicing
rights, and plus (iv) points and fees received from the borrower, offset by
incremental direct loan origination costs. The Gross Cash Premium plus
capitalized servicing rights equals the "Gross Sales Premium." Gross Sales
Premiums are affected by market conditions, loan type, credit quality, interest
rate and other factors as negotiated between the Company and independent
purchasers. The recorded net gain on sale of loans, as expressed as a percentage
of loans sold, is the "Net Premium" realized for that period.
Net interest income represents the difference between the interest that is
earned on loans and other interest earning assets over the interest that is paid
under the revolving warehouse credit facility. Net interest income can be
affected by the volatility of interest rates, the level of interest earned on
interest earning assets, the cost of interest on the revolving warehouse credit
facility, the average amount of interest earning assets outstanding, and the
average amount of borrowings outstanding. The Company has adopted an investment
policy which limits its investment activities to high-quality, short-term
investments.
Expenses include general and administrative expenses, provisions for
losses, sub-servicing costs and income tax expense.
The following table presents the Company's loan originations and purchases
and loan sales for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Loan originations and purchases:
Broker-sourced............................................ $639,432 $440,541
Correspondent............................................. 93,590 41,348
-------- --------
Wholesale.............................................. 733,022 481,889
Retail-sourced............................................ 19,232 9,169
-------- --------
Total loan originations and purchases..................... $752,254 $491,058
======== ========
Loan sales.................................................. $742,004 $482,444
-------- --------
</TABLE>
The Company's primary channel of loan production is through its
relationship with a network of approved independent mortgage brokers. The
Company has established a sales force ("Account Executives") to serve as the
principal contact between the Company and the independent mortgage brokers.
Financing USA, the Company's retail division, offers loan products directly to
borrowers, which are identical to those offered to independent brokers. These
products are marketed through direct mail, telemarketing, media advertising and
the internet. The Company offers a variety of loan programs and products;
however, all loans originated by the Company are secured by first-lien mortgages
on residential properties consisting of one- to four-unit family residences.
11
<PAGE> 12
The following table presents the Company's loan production and weighted
average interest rate for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C> <C> <C>
Fixed rate loans.............................. $154,323 10.20% $104,574 10.15%
Fixed/adjustable rate loans................... 563,220 9.71% 274,658 9.70%
Six-month adjustable rate loans............... 34,711 8.61% 111,826 8.94%
-------- --------
Total loan production............... $752,254 9.76% $491,058 9.62%
======== ========
</TABLE>
During the first quarter of 1999, approximately $479.5 million or 63.7% of
the Company's loan production was made for the purpose of refinancing existing
mortgage debt or the real property collateral. In $351.3 million of these
refinancings, the respective borrowers received cash to pay-off other debts and
to be used for other purposes. The average loan-to-value ratio was 77.0% on
loans originated and purchased during the first quarter of 1999.
The Company's geographic markets are divided into various regions. Once the
Company determines that the level of current and projected business from a
region warrants creation of a local presence, the Company establishes a regional
processing center in or near the region. At March 31, 1999, the Company had 11
regional processing centers serving its 19 regional teams.
The following table presents loan production by state for the five states
with the highest volume and all others for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1999 1998
----------------- -----------------
% OF % OF
STATE AMOUNT TOTAL AMOUNT TOTAL
----- -------- ----- -------- -----
<S> <C> <C> <C> <C>
California.................................... $254,788 33.9% $163,949 33.4%
Colorado...................................... 55,080 7.3 36,808 7.5
Michigan...................................... 40,843 5.4 24,699 5.0
Texas......................................... 40,484 5.4 23,742 4.8
Florida....................................... 33,761 4.5 29,098 5.9
All others.................................... 327,298 43.5 212,762 43.4
-------- ----- -------- -----
$752,254 100.0% $491,058 100.0%
======== ===== ======== =====
</TABLE>
The Company follows the practice of periodically entering into forward
commitments to sell its loan production. These forward commitments are typically
made for the next 30 to 120 days of production. Prior to entering into a forward
commitment, the Company evaluates prospective purchasers in order to assess
their ability to fulfill the terms of the agreement. In the event the weighted
average coupon margin or other characteristics of the loans produced and
delivered to the purchaser are materially different from the terms of the
forward commitment, the sales price of the loans will be adjusted accordingly.
Additionally, in the event the Company does not deliver the contract volume of
loans, the Company may be required to pay the purchaser a pair-off fee.
Loan sales are made to institutional purchasers on a non-recourse basis
pursuant to a purchase agreement containing customary representations and
warranties regarding underwriting criteria and the origination process.
Historically, the Company has not retained residual interests in the loans that
it sells other than servicing rights. Loans which, in the opinion of the
Company, meet the conditions of the forward sales commitment are delivered to
the purchaser and recorded as sold on a periodic basis. In the event that such
loans are subsequently determined to be in noncompliance with the terms of the
forward sales commitment or breach of a representation or a warranty, the
Company may be required to repurchase the loan or substitute a new loan. The
Company may also be required to repurchase or substitute a loan if the borrower
defaults on the first payment due after the loan is funded or if the loan
documentation contains fraudulent misrepresentations made by the borrower. The
Company realizes that such repurchases are inherent in its operations and that
the
12
<PAGE> 13
Company may realize a reduction in the previously recognized gain on sale or
sustain a loss from such repurchases. The Company provides allowances for losses
in anticipation of such events that arise in connection with originating loans
and subsequently selling them to investors.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
During the three months ended March 31, 1999, net earnings increased to
$6.5 million, an increase of $1.1 million or 19.6% over $5.4 million of net
earnings for the same period in 1998. The Company's net earnings per diluted
share was $0.28 for the quarter ended March 31, 1999, an increase of 33.3% over
the first quarter of 1998.
The primary factors that led to the improvement in net earnings and net
earnings per share recorded during the three months ended March 31, 1999, as
compared to the same period in 1998, include:
- Increased loan production. Loan production increased by $261.2 million or
53.2% to $752.3 million during the three months ended March 31, 1999, as
compared to the same period of 1998.
- Increased loan sales. Loans sold during the three months ended March 31,
1999 totaled $742.0 million, an increase of $259.6 million or 53.8% over
the same period of 1998.
- Lower effective income tax rate. The Company's provision for income taxes
declined to 40.5% as a percentage of earnings before income taxes during
the first quarter of 1999 as compared to 41.2% during the same period of
1998.
- Lower level of shares outstanding. The decline in the average number of
shares outstanding positively impacted net earnings per share. The
average number of diluted shares outstanding declined to 23.3 million for
the three months ended March 31, 1999, a decline of 2.4 million shares
from the same period of 1998. The primary reason for the decline in the
average number of shares is due to the Company repurchasing 2.4 million
shares of its common stock, pursuant to its stock repurchase program.
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicate (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Gain on sale of loans....................................... $31,877 $23,925
Interest income, net of interest expense.................... 1,120 1,370
Loan servicing and other fees on loans...................... 2,066 763
Amortization of mortgage servicing rights................... (1,148) (197)
------- -------
Total revenues.................................... $33,915 $25,861
======= =======
</TABLE>
Total revenues during the three months ended March 31, 1999 increased by
$8.1 million or 31.1%, compared to same period in 1998, primarily as a result of
an increase in gain on sales of loans of $8.0 million or 33.2% for the same
comparative periods. Such increase was partially offset by a decrease in Net
Premiums on the sale of loans to 4.3% during the three months ended March 31,
1999, from 4.96% during the same period in 1998.
13
<PAGE> 14
The table below presents the Company's revenues by reportable segment for
the periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Broker-sourced.............................................. $27,249 $21,810
Correspondent............................................... 3,389 1,434
------- -------
Subtotal Wholesale........................................ 30,638 23,244
Loan servicing.............................................. 2,256 720
Other....................................................... 1,021 1,897
------- -------
Total Revenues.................................... $33,915 $25,861
======= =======
</TABLE>
The increase in loan sales resulted from an increase in loan originations
and purchases to $752.3 million during the three months ended March 31, 1999,
from $491.1 million during the same period in 1998. This trend reflects the
Company's continued growth of its broker-sourced business through penetration in
existing markets and expansion into new geographic markets. During the three
months ended March 31, 1999, the Company originated loans in all 50 states
compared to 49 states and districts during the same period in 1998.
Additionally, the Company expanded its sales force to 325 at March 31, 1999, an
increase of 36% over the level at March 31, 1998.
Net Premiums as a percent of loans sold decreased to 4.30% during the first
quarter of 1999, as compared to 4.96% during the same period in 1998. The table
below represents the components of Net Premium (dollars in thousands and such
amounts expressed as a percentage of loan sales for the period):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------
1999 1998
--------------------- ---------------------
% OF % OF
LOAN SALES LOAN SALES
---------- ----------
<S> <C> <C> <C> <C>
Gross Sales Premiums..................... $39,213 5.28% $29,827 6.18%
Fees paid to brokers..................... (7,090) (0.95) (5,680) (1.19)
Premiums paid to correspondents.......... (1,997) (0.27) (1,144) (0.24)
Points, fees and other................... 1,751 0.24 922 0.21
------- -------
Net Premiums............................. $31,877 4.30% $23,925 4.96%
======= =======
</TABLE>
14
<PAGE> 15
The table below presents the premiums received and fees paid by reportable
segment of the Company and such amounts expressed as a percentage of loans sold
during the periods (dollars in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C> <C> <C>
BROKER-SOURCED
Gross Sales Premiums............................ $33,138 5.26% $26,769 6.15%
Fees paid to brokers............................ (7,090) (1.12)% (5,685) (1.30)%
Points, fees and other.......................... 1,201 0.18% 726 0.16%
------- -------
Net Premium..................................... $27,249 4.32% $21,810 5.01%
======= =======
CORRESPONDENT
Gross Sales Premiums............................ $ 5,381 5.83% $ 2,586 6.74%
Fees paid to correspondents..................... (1,997) (2.16)% (1,139) (2.96)%
Points, fees and other.......................... 5 -- (13) (0.04)%
------- -------
Net Premium..................................... $ 3,389 3.67% $ 1,434 3.74%
======= =======
RETAIL-SOURCED
Gross Sales Premiums............................ $ 694 3.56% $ 472 5.16%
Points, fees and other.......................... 545 2.79% 209 2.29%
------- -------
Net Premium..................................... $ 1,239 6.35% $ 681 7.45%
======= =======
</TABLE>
Loan servicing and other fees totaled $2.1 million during the three months
ended March 31, 1999. Amortization of mortgage servicing rights totaling $1.1
million and $0.2 million during the first quarter of 1999 and 1998,
respectively. The Company generally earns an annual servicing fee of 50 basis
points on the outstanding principal balance of each loan it services, and
retains the right to receive late fees and other charges in connection with the
servicing of such loans. At March 31, 1999, the outstanding balance of the
servicing portfolio totaled $2.2 billion, which includes $1.8 billion of loans
directly serviced and $380 million of loans serviced by the Company's
subservicer. The cost of the Company's loan servicing operation is a component
of general and administrative expenses and the cost of sub-servicing is
presented as a separate line item on the statement of operations.
Net interest income totaled $1.1 million during the first quarter of 1999,
a decrease of $250,000 compared to the same period in 1998. Such decrease
resulted from (i) a higher level of interest expense related to advances under
the revolving warehouse financing facility and (ii) a higher level of interest
expense related to the financing of delinquent loans held for sale.
Expenses. The following table sets forth the components of the Company's
expenses for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Compensation expense........................................ $14,349 $10,372
Premises and equipment expenses............................. 3,235 2,179
Other general and administrative expenses................... 2,629 1,940
------- -------
Total general and administrative expenses......... 20,213 14,491
Provision for losses........................................ 1,762 1,400
Sub-servicing costs......................................... 1,064 646
------- -------
Total expenses.................................... $23,039 $16,537
======= =======
</TABLE>
15
<PAGE> 16
The following table presents certain data and statistics on the Company's
total general and administrative expenses by segment before allocation of
corporate support, for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------
1999 1998
-------------------------- --------------------------
PER UNIT OF % OF PER UNIT OF % OF
PRODUCTION PRODUCTION PRODUCTION PRODUCTION
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Broker-sourced......................... $1,734 1.57% $ 1,908 1.73%
Correspondent.......................... 801 0.64 1,124 0.92
------ ---- ------- ----
Subtotal Wholesale................... 1,627 1.45 1,847 1.66
Retail-sourced......................... 7,222 5.82 11,749 8.58
------ ---- ------- ----
Total Production............. $1,756 1.56% $ 1,998 1.79%
Loan servicing(1)...................... 108 0.10 -- --
Corporate support...................... 1,146 1.02 1,301 1.16
------ ---- ------- ----
Net general and administrative
expenses............................. $3,016 2.69% $ 3,300 2.95%
====== ==== ======= ====
</TABLE>
- ---------------
(1) The Company commenced loan servicing segment in November 1999.
Broker-sourced expenses including allocated corporate support as a
percentage of broker-sourced production totaled 2.56% during the first quarter
of 1999 as compared to 3.08% during the first quarter of 1998. Correspondent
expenses and allocated corporate support, as a percentage of correspondent
production total 0.98% during the first quarter of 1999 as compared to 1.66%
during the same period of 1998. Wholesale general and administrative expenses,
including allocated corporate support as a percentage of production was 2.37%
compared to 2.74% for the same period of 1998. The costs of loan servicing as a
percent of the average amount of outstanding principal serviced was 0.12% during
the first quarter of 1999 or $128 per average unit serviced.
The total dollar amount of general and administrative expenses increased
during the three months ended March 31, 1999, compared to the same period in
1998. Total general and administrative expenses, however, expressed as a
percentage of production decreased to 2.69%, compared to 2.95% for the three
months ended March 31, 1998.
Compensation expense increased by 38.3% during the first quarter of 1999,
compared to the same period in 1998. The primary reason for such increase is
growth in the number of employees resulting from the Company's expansion of its
loan production capabilities and additional staff related to the loan servicing.
The number of employees totaled 866 at March 31, 1999, up from 601 at March 31,
1998. The increase in compensation expense is also attributable to increases in
commissions paid to production employees. Both the growth in the number of
employees and the increased commissions are primarily related to increased loan
production during the three months ended March 31, 1999 compared to the same
period in 1998. At March 31, 1999, the Company had 43 employees assigned to the
loan servicing division.
Premises and equipment expenses increased by 48.5% during the first quarter
of 1999, compared to the same period in 1998. Such increases reflect an increase
in occupancy costs related to growth in personnel forces to support the regional
processing centers due to increased loan production, the newly formed loan
servicing division, as well as an increase in headquarters space to support the
Company.
Other general and administrative expenses increased by 35.5% during the
first quarter of 1999, compared to the same period in 1998. The increase in
other general and administrative expenses is primarily the result of increased
corporate infrastructure including the operations of the newly formed loan
servicing division and costs incurred in support of the Company's loan
production.
Provision for losses increased to $1.8 million for the three months ended
March 31, 1999, as compared to $1.4 million in 1998. The Company provides market
valuation allowances for loans held for sale and for liabilities associated with
(i) breaches of representations and warranties, (ii) first payment defaults, and
(iii) repurchases of loans recorded as sold. At March 31, 1999, the Company had
$4.4 million of market valuation allowances on loans held for sale and $2.1
million of liabilities for potential repurchases of loans.
16
<PAGE> 17
As more fully discussed in Note 2 to the Company's Consolidated Financial
Statements, the Company had entered into an agreement with AMC pursuant to which
AMC agreed to sub-service mortgage loans originated or purchased by the Company
and subsequently sold servicing-retained to an investor prior to November 1998.
The Company has agreed to pay AMC a 45 basis point annual servicing fee on the
outstanding principal balance of each loan sub-serviced. Such sub-servicing
costs for the three months ended March 31, 1999 and 1998 totaled $1.1 million
and $646,000, respectively.
The table below presents the Company's total expenses by reportable segment
for the periods indicated, (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Broker-sourced.............................................. $10,415 $ 8,575
Correspondent............................................... 645 441
------- -------
Subtotal Wholesale........................................ 11,060 9,016
Loan servicing.............................................. 1,786 646
Other....................................................... 10,193 6,875
------- -------
Total Expenses.................................... $23,039 $16,537
======= =======
</TABLE>
The Company allocates specific provisions for losses to each respective
segment. Unallocated provisions are included in Other. Sub-servicing costs are
allocated to the Loan servicing segment. Corporate support is allocated to the
Other category.
Income Taxes. During the first quarter of 1998, the Company engaged its
external tax advisors to perform a study on its state income tax filing
methodologies and to assist with the filing of its initial state income tax
returns in those states where the Company had significant operations. Prior to
the completion of this analysis, the Company estimated its combined income tax
rate to be 42%. The study was completed during the third quarter of 1998 and
indicated that the Company's actual income tax expense should be approximately
40% to 41%. Applying the lower effective annual tax rate to the Company's 1999
operations resulted in the Company's income tax expense declining to 40.5% from
41.2% of pre-tax earnings during the first quarter of 1999 compared to the same
period in 1998.
FINANCIAL CONDITION
A substantial portion of the Company's cash and cash equivalents are
maintained in an account with its warehouse lender. The Company earns interest
on these funds at a yield that approximates the 30 day reserve adjusted London
Inter-Bank Offered Rate ("LIBOR"). At March 31, 1999, cash and cash equivalents
included $13.3 million in funds which were borrowed from its warehouse lender
for the funding of loans. Such borrowings were not needed and were repaid to the
warehouse lender the following business day.
Loans held for sale increased by $2.3 million as of March 31, 1999, as
compared to December 31, 1998, reflecting the continuing increase in loan
origination activity. As of March 31, 1999, $31.6 million of loans held for sale
were delinquent 31 days or more. Loans held for sale are valued at the lower of
their historical cost basis or market value, determined on an aggregate basis.
At March 31, 1999, the Company's market valuation allowance on loans held for
sale totaled $4.4 million.
Receivable from the sales of loans represents the proceeds from the sales
of loans that have not been received by the Company from the purchaser. At March
31, 1999, receivable from the sales of loans totaled $193.6 million compared to
$186.8 million at December 31, 1998. Such balances normally are collected within
a 30-day period from month-end. As of May 1, 1999, all proceeds related to the
receivable from the sales of loans at March 31, 1999 had been collected.
At March 31, 1999, the Company had recorded $12.7 million of capitalized
mortgage servicing rights. The Company, in its capacity as a master servicer,
has contracted with a sub-servicer, AMC, to provide loan servicing in exchange
for an annual fee of 45 basis points on the outstanding principal balance of
each loan
17
<PAGE> 18
sub-serviced. When the Company sells its loans, it typically retains
approximately 50 basis points of servicing. Additionally, the Company generally
retains the right to receive late fees and other charges in connection with the
servicing of the loans. Capitalized mortgage servicing rights are subject to
downward valuation in the event that the market value of the servicing is lower
than the recorded amounts, which typically occurs when the related loans have
higher ratios of loss (charge-offs) and/or rates of prepayment than had been
predicted at the time of sale.
Warehouse financing facility increased $19.1 million over the 1998 year-end
level as a result of an increase in the receivable from the sales of loans over
the same comparative period, and increased utilization of the facility rather
than cash.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $32.7 million in cash and cash equivalents at March 31,
1999. The Company has historically generated positive cash flow. Sources of cash
include loan sales, net interest income and borrowings. Uses of cash include the
funding of loan originations and purchases, repayment of borrowings and related
interest expenses, operating and administrative expenses, income taxes and
capital expenditures.
The Company funds its lending operations through its revolving warehouse
credit facility under which it borrows money to finance the origination and
purchase of loans. Additionally, the Company may utilize cash reserves to fund
loan production in order to maximize the return on excess liquidity. The Company
repays borrowings with the proceeds from loan sales. During the three months
ended March 31, 1999 and 1998, the Company used cash in the amount of $752.3
million and $491.1 million, respectively, for new loan originations and
purchases. During the same periods, the Company received cash proceeds from the
sale of loans of $742.0 million and $482.4 million, respectively, representing
the principal balance of loans sold. The Company received cash proceeds from the
premiums on such loans sales of $33.1 million and $28.0 million, respectively,
for the three months ended March 31, 1999 and 1998.
The Company has three primary sources of funding (i) a committed $325
million revolving warehouse facility provided by a syndicate of banks, led by
Chase Bank of Texas, (ii) $200 million of uncommitted repurchase facilities, and
(iii) the Company's excess liquidity. These facilities have a variety of
financial and compliance covenants and the Company exceeded all of these
covenants at March 31, 1999. These facilities bear interest at a specified
margin over one month LIBOR. The weighted average cost of funds for these
facilities was 6.33% at March 31, 1999. During the first quarter of 1999, the
Company increased its warehouse funding capacity by $125 million. At March 31,
1999, the Company had utilized $37.1 million of its excess liquidity to fund
loans.
The Company believes that sufficient cash from operations and borrowings
will be generated to fund operations. However, the Company's ability to continue
to originate and purchase loans is dependent in large part upon its ability to
sell the loans at a premium in order to generate cash proceeds to repay
borrowings under the warehouse financing facility, thereby creating borrowing
capacity to fund new originations and purchases. The value of and market for the
Company's loans are dependent upon a number of factors, including the
loan-to-value ratios and interest rates on the loans, general economic
conditions, interest rates and government 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.
The secondary market for subprime mortgage has declined and current market
prices for subprime loans are substantially lower than those reported by the
Company during recent quarters. Excess product and low demand has caused pricing
for loans, similar to those originated by the Company, to substantially decline.
There can be no assurance provided, that the Company will be able to sell its
loans in the secondary market at a price near recent levels. A material decline
in such prices could have a material adverse impact on the Company's results of
operations and liquidity.
18
<PAGE> 19
YEAR 2000
The Company is aware on ensuing issues involving the upcoming date change
from December 31, 1999 to January 1, 2000 ("Year 2000") and the effect of such
change on the Company's information systems. The Company established a task
force to evaluate the internal information technology ("IT") and non-IT systems
that could be affected by such date change and also identified the external
systems that are critical to the Company's operations. An assessment of the
readiness of the Company's suppliers is ongoing.
During 1998, the Company implemented and upgraded several of its core
systems in its effort to establish fully independent operations from its
predecessor company. The IT infrastructure was designed to be fully compliant
with the Year 2000 date change. The software packages selected by the Company as
part of establishing independent operations were chosen in part based on being
Year 2000 compliant. This software includes the Company's accounting, treasury,
human resources, payroll, and network management software.
The Company's plan for Year 2000 readiness has three phases. Phase one
involves identifying and remediating the internal systems and processes that
must be Year 2000 compliant. Phase one has been completed. Phase two consists of
testing both the internal and external systems. Although the Company has
completed the development of its testing facility and has completed testing on
its major systems. The Company intends to test its systems throughout the
remaining of 1999 to ensure that system and software upgrades are fully
compliant. Phase three consists of developing a contingency plan for those
external systems or suppliers that are critical for the Company to operate, but
are not yet Year 2000 compliant. The Company will finalize these contingency
plans during the second quarter of 1999.
The Company does not anticipate the cost of addressing all the issues
associated with becoming Year 2000 compliant will have a material impact on its
financial condition, results of operations or liquidity in any single year. The
Company's estimates are based upon the assumption that its major third party
suppliers are or become Year 2000 compliant within the time frame outlined
above. The Company has requested that its major third party suppliers provide
details of their Year 2000 compliance program and schedule of testing. In the
event any of these vendors are unable to become compliant the Company may incur
additional costs.
Although the Company has taken steps to identify, evaluate and remediate
its Year 2000 compliance issues, it is possible that certain of its suppliers
and/or systems may not be Year 2000 compliant by January 1, 2000. These
suppliers provide the Company with computer processing systems, banking and
financial systems, and utility infrastructure. In the event that any of these
suppliers and/or systems are not Year 2000 compliant as of January 1, 2000, the
Company may be exposed to an impairment of its (i) operations, (ii) business
processes and (iii) ability to meet its financial obligations. The impairment in
any of these areas could have a material adverse effect on the Company's
financial condition, results of operations and liquidity. The Company is
assessing these risks and is creating contingency plans intended to address such
risks, and expects to have such plans in place by the end of the second quarter
of 1999.
Forward looking information: Certain disclosures made by the Company in
this report and in other reports and statements released by the Company,
including the Company's recent filing on Form 10-K as of and for the period
ended December 31, 1998, are and will be forward-looking in nature, such as
comments which express the Company's opinion about trends and factors which may
impact future operating results. Disclosures which use words such as the Company
"believes," "anticipates," "expects" and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks and uncertainties which could cause actual results to differ materially
from expectations. Any forward-looking statements, whether made in this report
or elsewhere, should be considered in context with the various disclosures made
by the Company about its business.
19
<PAGE> 20
ACCOUNTING CONSIDERATIONS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is effective
for annual periods beginning after June 15, 1999. This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The adoption of this standard is not expected to have a material effect on the
Company's financial condition, results of operations and cash flows.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
--------- ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Loans originated and purchased........................... $752,254 $491,058
Loan sales............................................... 742,004 482,444
Return on average assets................................. 10.42% 13.82%
Return on average equity................................. 25.21% 23.83%
G&A as a % of originations............................... 2.69% 2.95%
Gain of sale as a % of loans sold........................ 4.30% 4.96%
Net earnings as a % of production........................ 0.86% 0.89%
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
AS OF DATES PRESENTED: 1999 1998
---------------------- --------- ------------
<S> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Cash and cash equivalents................................ $ 32,741 $ 24,941
Loans held for sale...................................... 61,496 59,148
Capitalized mortgage servicing rights.................... 12,744 9,806
Deferred income taxes.................................... 31,923 32,523
Total assets............................................. 356,132 328,595
Waterhouse financing facility............................ 230,896 211,787
Total liabilities........................................ 250,020 228,969
Stockholders' equity..................................... 106,112 99,626
OPERATING DATA:
States in which loans were originated.................... 50 48
Sales associates......................................... 325 319
Book value per share..................................... $ 4.69 $ 4.41
Equity to Asset Ratio.................................... 29.80% 30.32%
</TABLE>
20
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below presents information about the Company's financial
instruments subject to market risk at March 31, 1999 and at December 31, 1998
including market value and the interest rate of these instruments. The
contractual terms, accounting policies, and other data concerning these
instruments is disclosed in the Company's latest Form 10-K filed with the
Securities Exchange Commission. The Company's receivable from the sales of loans
and mortgage warehouse line of credit are subject to interest rate risk;
however, such obligations reprice frequently and are short-term in duration and
accordingly the risk is not material.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
MARKET RISK SENSITIVE INSTRUMENTS 1999 1998
--------------------------------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Loans held for sale
Fair value............................................. $61,496 $59,148
Weighted average interest rate......................... 10.52% 10.41%
Capitalized mortgage servicing rights
Fair value............................................. $12,744 $ 9,806
Discount rate.......................................... 14.00% 14.00%
</TABLE>
The Company does have exposure to market risk in a number of areas,
including (i) the secondary market for subprime loans; (ii) the origination
market for subprime mortgages; (iii) the market for residential one-to four-unit
single-family real estate in those geographic regions where the Company
originates loans and (iv) the interest rate environment for subprime mortgages
and the interest expense on the Company's borrowings. To manage its market risks
the Company generally enters into forward sale commitments of loans 30 to 180
days in advance of funding the loans. At the time of the forward sales
commitment, the Company estimates its expected volume of loan production and
closely monitors the level of production against the amount of the unfilled
purchase commitments. The objective of this strategy is to have a purchase
commitment for each loan at the time of origination. A discussion of these risks
is presented in Management's Discussion and Analysis of Financial Condition,
Results of Operations, Liquidity and Capital Resources in this report and in the
Company's report on Form 10-K as of December 31, 1998.
21
<PAGE> 22
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 SECURITIES HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
*3.1 Amended and Restated Certificate of Incorporation of Long
Beach Financial Corporation
*3.2 Bylaws of Long Beach Financial Corporation
*4.1 Specimen of the Common Stock of Long Beach Financial
Corporation
*10.1 Administrative Services Agreement among Long Beach Mortgage
Company, Long Beach Financial Corporation and Ameriquest
Mortgage Corporation
*10.2 Form of Master Sub-Servicing Agreement, between Long Beach
Mortgage Company and Ameriquest Mortgage Corporation
*10.3 4/97 Senior Secured Credit Agreement, among Ameriquest
Mortgage Corporation and Texas Commerce Bank National
Association, as Lender and Agent
*10.4 Form of Director/Officer Indemnification Agreement
*10.5 Contribution Agreement, between Ameriquest Capital
Corporation, Long Beach Mortgage Company, Long Beach
Financial Corporation and Ameriquest Mortgage Corporation
*10.6 1997 Stock Incentive Plan
*10.7 Employment Agreement, between Long Beach Financial
Corporation, Ameriquest Mortgage Corporation and M. Jack
Mayesh
*10.8 Employment Agreement, between Long Beach Financial
Corporation, Ameriquest Mortgage Corporation and Edward
Resendez
*10.9 Employment Agreement, between Long Beach Financial
Corporation, Ameriquest Mortgage Corporation and Frank J.
Curry
*10.10 Employment Agreement, between Long Beach Financial
Corporation, Ameriquest Mortgage Corporation and James H.
Leonetti
*10.11 Employment Agreement, between Long Beach Financial
Corporation, Ameriquest Mortgage Corporation and James J.
Sullivan
*10.12 Department of Justice Settlement Agreement
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
*10.13 Employment Agreement, between Long Beach Financial
Corporation, Long Beach Mortgage Company and William K.
Komperda.
*10.14 Form of Amendment to Employment Agreement, among Long Beach
Financial Corporation, Long Beach Mortgage Company and each
of M. Jack Mayesh, Edward Resendez, Frank J. Curry, James H.
Leonetti, and James J. Sullivan.
*10.15 4/98 Amended and Restated Senior Secured Credit Agreement,
among Long Beach Mortgage Company and Chase Bank of Texas,
as Lender and Agent.
*10.16 Amended and Restated Employment Agreement, between Long
Beach Financial Corporation, Long Beach Mortgage Company and
M. Jack Mayesh.
*10.17 Amended and Restated Employment Agreement, between Long
Beach Financial Corporation, Long Beach Mortgage Company and
Edward Resendez.
*10.18 Amended and Restated Employment Agreement, between Long
Beach Financial Corporation, Long Beach Mortgage Company and
Frank J. Curry.
*10.19 Amended and Restated Employment Agreement, between Long
Beach Financial Corporation, Long Beach Mortgage Company and
William K. Komperda.
*10.20 Amended and Restated Employment Agreement, between Long
Beach Financial Corporation, Long Beach Mortgage Company and
James H. Leonetti.
*10.21 Amended and Restated Employment Agreement, between Long
Beach Financial Corporation, Long Beach Mortgage Company and
James J. Sullivan.
*10.22 Employment Agreement, between Long Beach Financial
Corporation, Long Beach Mortgage Company and Elizabeth A.
Wood.
*10.23 Supplement Agreement to Master Sub-Servicing Agreement
between Long Beach Mortgage Company and Ameriquest Mortgage
Company.
*10.24 Master Repurchase Agreement between Merrill Lynch Mortgage
Capital Inc., Merrill Lynch Credit Corporation and Long
Beach Mortgage Company.
*10.25 Purchase and Sale Agreement between Salomon Brothers Realty
Corp. and Long Beach Mortgage Company.
27 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
(b) Reports on Form 8-K
None.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized, in the City of Orange, State of California.
LONG BEACH FINANCIAL CORPORATION
(Registrant)
Date: May 7, 1999 By: /s/ M. JACK MAYESH
------------------------------------
M. Jack Mayesh
Chairman and Chief Executive Officer
Date: May 7, 1999 By: /s/ JAMES H. LEONETTI
------------------------------------
James H. Leonetti
Senior Vice President and Chief
Financial Officer
24
<PAGE> 25
EXHIBITS INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<S> <C> <C>
*3.1 Amended and Restated Certificate of Incorporation of Long
Beach Financial Corporation.................................
*3.2 Bylaws of Long Beach Financial Corporation..................
*4.1 Specimen of the Common Stock of Long Beach Financial
Corporation.................................................
*10.1 Administrative Services Agreement among Long Beach Mortgage
Company, Long Beach Financial Corporation and Ameriquest
Mortgage Corporation........................................
*10.2 Form of Master Sub-Servicing Agreement, between Long Beach
Mortgage Company and Ameriquest Mortgage Corporation........
*10.3 4/97 Senior Secured Credit Agreement, among Ameriquest
Mortgage Corporation and Texas Commerce Bank National
Association, as Lender and Agent............................
*10.4 Form of Director/Officer Indemnification Agreement..........
*10.5 Contribution Agreement, between Ameriquest Capital
Corporation, Long Beach Mortgage Company, Long Beach
Financial Corporation and Ameriquest Mortgage Corporation...
*10.6 1997 Stock Incentive Plan...................................
*10.7 Employment Agreement, between Long Beach Financial
Corporation, Ameriquest Mortgage Corporation and M. Jack
Mayesh......................................................
*10.8 Employment Agreement, between Long Beach Financial
Corporation, Ameriquest Mortgage Corporation and Edward
Resendez....................................................
*10.9 Employment Agreement, between Long Beach Financial
Corporation, Ameriquest Mortgage Corporation and Frank J.
Curry.......................................................
*10.10 Employment Agreement, between Long Beach Financial
Corporation, Ameriquest Mortgage Corporation and James H.
Leonetti....................................................
*10.11 Employment Agreement, between Long Beach Financial
Corporation, Ameriquest Mortgage Corporation and James J.
Sullivan....................................................
*10.12 Department of Justice Settlement Agreement..................
*10.13 Employment Agreement, between Long Beach Financial
Corporation, Long Beach Mortgage Company and William K.
Komperda....................................................
*10.14 Form of Amendment to Employment Agreement, among Long Beach
Financial Corporation, Long Beach Mortgage Company and each
of M. Jack Mayesh, Edward Resendez, Frank J. Curry, James H.
Leonetti, and James J. Sullivan.............................
*10.15 4/98 Amended and Restated Senior Secured Credit Agreement
among Long Beach Mortgage Company and Chase Bank of Texas,
as Lender and Agent.........................................
*10.16 Amended and Restated Employment Agreement, between Long
Beach Financial Corporation, Long Beach Mortgage Company and
M. Jack Mayesh..............................................
*10.17 Amended and Restated Employment Agreement, between Long
Beach Financial Corporation, Long Beach Mortgage Company and
Edward Resendez.............................................
*10.18 Amended and Restated Employment Agreement, between Long
Beach Financial Corporation, Long Beach Mortgage Company and
Frank J. Curry..............................................
*10.19 Amended and Restated Employment Agreement, between Long
Beach Financial Corporation, Long Beach Mortgage Company and
William K. Komperda.........................................
*10.20 Amended and Restated Employment Agreement, between Long
Beach Financial Corporation, Long Beach Mortgage Company and
James H. Leonetti...........................................
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<S> <C> <C>
*10.21 Amended and Restated Employment Agreement, between Long
Beach Financial Corporation, Long Beach Mortgage Company and
James J. Sullivan...........................................
*10.22 Employment Agreement, between Long Beach Financial
Corporation, Long Beach Mortgage Company and Elizabeth A.
Wood........................................................
*10.23 Supplement Agreement to Master Sub-Servicing Agreement
between Long Beach Mortgage Company and Ameriquest Mortgage
Company.....................................................
*10.24 Master Repurchase Agreement between Merrill Lynch Mortgage
Capital Inc., Merrill Lynch Credit Corporation and Long
Beach Mortgage Company......................................
*10.25 Purchase and Sale Agreement between Salomon Brothers Realty
Corp. and Long Beach Mortgage Company.......................
27 Financial Data Schedule.....................................
</TABLE>
- ---------------
* Previously filed.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 32,741
<SECURITIES> 0
<RECEIVABLES> 255,131
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 7,693
<DEPRECIATION> 2,762
<TOTAL-ASSETS> 356,132
<CURRENT-LIABILITIES> 0
<BONDS> 230,896
0
0
<COMMON> 25
<OTHER-SE> 106,087
<TOTAL-LIABILITY-AND-EQUITY> 356,132
<SALES> 0
<TOTAL-REVENUES> 36,995
<CGS> 0
<TOTAL-COSTS> 21,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,762
<INTEREST-EXPENSE> 3,080
<INCOME-PRETAX> 10,876
<INCOME-TAX> 4,405
<INCOME-CONTINUING> 6,471
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,471
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.28
</TABLE>
