<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
---------------
FORM 10-Q
---------------
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended September 30, 1997
[ ] 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 0-1100
-------------------------------
HAWTHORNE FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-2085671
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2381 ROSECRANS AVENUE, EL SEGUNDO, CA 90245
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 725-5000
-------------------------------
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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: The Registrant had
3,088,096 shares of Common Stock, $0.01 par value per share outstanding, as of
September 30, 1997.
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<PAGE> 2
HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY
FORM 10-Q INDEX
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C> <C>
ITEM 1. Financial Statements
Consolidated Statements of Financial Condition
at September 30, 1997 (Unaudited) and December 31, 1996 3
Consolidated Statements of Operations (Unaudited)
for the Three Months and Nine Months Ended September 30, 1997 and 1996 4
Consolidated Statement of Stockholders' Equity (Unaudited)
for the Nine Months Ended September 30, 1997 5
Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements (Unaudited) 8
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 32
ITEM 2. Changes in Securities 32
ITEM 3. Defaults upon Senior Securities 32
ITEM 4. Submission of Matters to a Vote of Security Holders 33
ITEM 5. Other Information 33
ITEM 6. Exhibits and Reports on Form 8-K 33
</TABLE>
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or stockholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", "believe" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers that all
forward-looking statements are necessarily speculative and not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made, and to advise readers that various risks and uncertainties, including
regional and national economic conditions, changes in levels of market interest
rates, credit risks of lending activities, and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected. The risks highlighted herein should not be assumed to
be the only things that could affect future performance of the Company.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
2
<PAGE> 3
HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS ARE IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
(UNAUDITED) (AUDITED)
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 17,906 $ 93,978
Investment securities available-for-sale, at market 65,732 38,371
Loans receivable (net of allowance for estimated credit losses
of $13,253 in 1997 and $13,515 in 1996) 767,096 672,401
Real estate owned (net of allowance for estimated losses
of $9,122 in 1997 and $11,871 in 1996) 14,598 20,140
Investment in capital stock of Federal Home Loan Bank - at cost 7,094 6,788
Office property and equipment - at cost, net 4,174 4,729
Accrued interest receivable 5,584 4,781
Deferred tax asset, net 5,695 4,243
Other assets 3,284 1,764
--------- ---------
$ 891,163 $ 847,195
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 776,277 $ 717,809
Short-term borrowings 40,000 50,000
Senior notes 12,560 12,307
Accounts payable and other liabilities 7,461 23,157
--------- ---------
836,298 803,273
Stockholders' equity
Preferred stock - $0.01 par value; authorized 10,000,000 shares
Cumulative preferred stock, Series A: liquidation preference,
$50,000 per share; issued, and outstanding, 270 shares -- --
Common stock - $0.01 par value; authorized, 20,000,000
shares; issued and outstanding, 3,093,496 shares in 1997 and
2,604,675 shares in 1996 31 26
Capital in excess of par value - cumulative preferred stock, series A 11,592 11,592
Capital in excess of par value - common stock 12,296 7,745
Unrealized gain (loss) on available-for-sale securities, net 67 (132)
Retained earnings 31,026 24,858
--------- ---------
55,012 44,089
Less
Treasury stock, at cost - 5,400 shares (48) (48)
Loan to Employee Stock Ownership Plan (99) (119)
--------- ---------
54,865 43,922
--------- ---------
$ 891,163 $ 847,195
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS ARE IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest revenues
Loans, net of nonaccrual income $ 17,799 $ 15,437 $ 50,480 $ 43,158
Cash and investment securities 1,583 983 4,657 4,107
-------- -------- -------- --------
19,382 16,420 55,137 47,265
-------- -------- -------- --------
Interest costs
Deposits 10,188 8,072 28,467 26,304
Short-term borrowings 598 1,173 2,322 1,294
Senior notes 489 477 1,468 1,432
-------- -------- -------- --------
11,275 9,722 32,257 29,030
-------- -------- -------- --------
Net interest income 8,107 6,698 22,880 18,235
Provision for credit losses 1,500 2,569 3,739 6,234
-------- -------- -------- --------
Net interest income after provision for credit losses 6,607 4,129 19,141 12,001
Noninterest revenues, net
Operating 1,126 626 2,689 1,557
Non-operating 219 (3,829) 206 2,850
Noninterest expenses
Employee 2,511 2,303 7,818 6,752
Operating 1,264 1,160 3,572 3,590
Occupancy 752 713 2,247 2,161
Professional 468 513 1,173 1,462
SAIF premium and OTS assessment 208 450 1,063 1,629
-------- -------- -------- --------
Total operating costs 5,203 5,139 15,873 15,594
(Income) loss from real estate operations, net (490) 828 (228) 806
-------- -------- -------- --------
Total noninterest expenses 4,713 5,967 15,645 16,400
-------- -------- -------- --------
Net earnings (loss) before income taxes 3,239 (5,041) 6,391 8
Income tax (provision) benefit (25) 2,885 1,602 6,368
-------- -------- -------- --------
Net earnings (loss) $ 3,214 $ (2,156) $ 7,993 $ 6,376
======== ======== ======== ========
Net earnings (loss) available for Common (NOTE 3) $ 2,616 $ (2,764) $ 6,367 $ 5,029
======== ======== ======== ========
Net earnings (loss) per share (NOTE 3) $ 0.47 $ (1.06) $ 1.20 $ 0.98
======== ======== ======== ========
Weighted average shares (NOTE 3) 5,532 2,599 5,305 5,155
======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLARS ARE IN THOUSANDS)
<TABLE>
<CAPTION>
ACCRUED
CHANGE IN DIVIDENDS DIVIDENDS
BALANCE AT EXERCISED UNREALIZED ON PAID ON BALANCE AT
DECEMBER 31, STOCK GAINS NET PREFERRED PREFERRED SEPTEMBER 30,
1996 OPTIONS (LOSSES) EARNINGS STOCK REPAYMENTS STOCK 1997
----------- --------- ---------- --------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock $ 26 $ 1 $ -- $ -- $ -- $ -- $ 4 $ 31
Cumulative preferred stock, series A -- -- -- -- -- -- -- --
Capital in excess of par value
Common stock 7,745 282 -- -- -- -- 4,269 12,296
Cumulative preferred stock, series A 11,592 -- -- -- -- -- -- 11,592
Unrealized gain (loss) on
available-for-sale securities, net (132) -- 199 -- -- -- -- 67
Retained earnings 24,858 -- -- 7,993 (1,825) -- -- 31,026
Treasury stock (48) -- -- -- -- -- -- (48)
Loan to employee stock ownership plan (119) -- -- -- -- 20 -- (99)
-------- -------- -------- -------- -------- -------- -------- --------
Total stockholders' equity $ 43,922 $ 283 $ 199 $ 7,993 $ (1,825) $ 20 $ 4,273 $ 54,865
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 6
HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS ARE IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
----------- ------------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 7,993 $ 6,376
Adjustments
Income tax benefit (1,627) (6,543)
Provision for estimated credit losses on loans 3,739 6,234
Provision for estimated credit losses on real
estate owned 811 2,966
Net gain on sale of deposits and facilities -- (6,413)
Net loss on sale of securities 11 --
Net recoveries from sales of real estate owned (1,012) (1,557)
Net gain from sale of other assets 2 (266)
Loan fee and discount accretion (2,863) (2,418)
Depreciation and amortization 1,357 1,220
FHLB dividends (306) (281)
Goodwill amortization -- 24
Increase in
Accrued interest receivable (803) (1,464)
Other assets (1,393) (2,843)
Increase in other liabilities 2,329 6,104
Other, net 10 (98)
--------- ---------
Net cash provided by operating activities 8,248 1,041
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Investment securities
Purchases (40,562) (104,411)
Maturities 795 128,728
Sales proceeds 12,468 --
Mortgage-backed securities
Principal amortization -- 33
Loans
New loans funded (157,005) (165,191)
Construction disbursements (93,878) (43,714)
Payoffs 145,284 56,258
Sales proceeds -- 68,894
Principal amortization 15,392 15,462
Change in accounts payable related to loans (15,773) --
Other, net (17,118) (7,083)
Real estate owned
Sales proceeds 23,592 21,855
Capitalized costs (5,910) (8,322)
Other, net -- (2)
Office property and equipment
Sales proceeds 7 4,548
Additions (382) (308)
--------- ---------
Net cash used by investing activities (133,090) (33,253)
--------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE> 7
HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS ARE IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
--------- ----------
<S> <C> <C>
NET CASH FLOWS FROM FINANCING ACTIVITIES
Cash received from sale of deposits $ -- $(178,884)
Other deposit activity, net 58,468 146,771
Net change in borrowings (10,000) 100,000
Net proceeds from exercise of options 282 --
Collection of ESOP loan 20 16
--------- ---------
Net cash provided by financing activities 48,770 67,903
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (76,072) 35,615
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 93,978 14,015
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 17,906 $ 49,630
========= =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 31,632 $ 28,578
Income taxes 25 --
Non-cash investing and financing activities
Real estate acquired in settlement of loans 18,547 18,909
Loans originated to finance sales of real estate owned 4,198 15,565
Net change in unrealized gains (losses) on
available-for-sale securities 199 (87)
Accrued dividends on preferred stock 1,825 1,829
Loan activity
Total commitments and permanent fundings $ 325,200 $ 273,748
Less:
Change in undisbursed funds on construction
commitments (29,507) (34,037)
Loans originated to finance sales of real estate owned (4,198) (15,565)
Non-cash portion of refinanced loans (6,300) --
Undisbursed portion of new lines of credit (34,312) (15,241)
--------- ---------
Net construction disbursements and loans funded $ 250,883 $ 208,905
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
7
<PAGE> 8
HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
(AMOUNTS ARE IN THOUSANDS, EXCEPT FOR BOOK VALUE AND PER SHARE DATA)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Hawthorne
Financial Corporation and its wholly-owned subsidiary, Hawthorne Savings, F.S.B.
("Bank"), collectively referred to as the "Company". All material intercompany
transactions and accounts have been eliminated.
In the opinion of management, the unaudited consolidated financial
statements contain all adjustments (consisting solely of normal recurring
accruals) necessary to present fairly the Company's financial position as of
September 30, 1997 and the results of its operations for the three and nine
months ended September 30, 1997 and 1996, and its cash flows for the nine months
ended September 30, 1997 and 1996. For the period ended December 31, 1996,
audited consolidated financial statements contain all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's financial
position. Certain information and note disclosures normally included in
financial statements prepared in accordance with Generally Accepted Accounting
Principles ("GAAP") have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Operating results
for the three and nine months ended September 30, 1997, are not necessarily
indicative of the results that may be expected for any other interim period or
the full year ending December 31, 1997.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
NOTE 2 - RECLASSIFICATION
Certain amounts in the 1996 consolidated financial statements have been
reclassified, where practicable, to conform with classifications in 1997.
NOTE 3 - BOOK VALUE AND EARNINGS PER SHARE
The table below sets forth the Company's book value and earnings per
share calculations for the three and nine month periods ended September 30,
1997, using the Modified Treasury Stock Method as prescribed under GAAP. All
other calculations shown, using alternate methods, are for informational
purposes only. In the table below, (1) Warrants refers to the warrants issued by
the Company in December 1995, which have an exercise price of $2.25 per share
and can be exercised beginning three years from the issue date and for a period
of ten years from the issue date, and (2) Preferred Stock refers to the
Cumulative Preferred Stock Series A issued by the Company in December 1995,
which carries an annual dividend equal to 18% of the liquidation preference of
the Preferred Stock and permits dividends thereon to be paid, under certain
circumstances, in equivalent value of the Company's Common Stock.
8
<PAGE> 9
HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
(AMOUNTS ARE IN THOUSANDS, EXCEPT FOR BOOK VALUE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1997 NINE MONTHS ENDED SEPTEMBER 30, 1997
----------------------------------------------- ---------------------------------
MODIFIED MODIFIED
TREASURY ACTUAL SHARES, TREASURY ACTUAL SHARES,
STOCK ACTUAL WARRANTS STOCK ACTUAL WARRANTS
METHOD SHARES AND OPTIONS METHOD SHARES AND OPTIONS
--------------- --------- ------------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE SHARES OUTSTANDING
Common 3,058 3,058 3,058 2,814 2,814 2,814
Warrants 2,376 - 2,376 2,376 - 2,376
Options 651 - 651 658 - 658
Less Treasury shares (2) (553) - - (543) - -
--------------- -------- ------------------ --------- -------- -----------
Total 5,532 3,058 6,085 5,305 2,814 5,848
=============== ========= =================== ========= ========= ===========
STOCKHOLDERS' EQUITY
Common $ 43,273 $ 43,273 $ 43,273 $ 43,273 $ 43,273 $ 43,273
Warrants 5,346 - 5,346 5,346 - 5,346
Options 3,410 - 3,410 3,410 - 3,410
Less Treasury shares (2) (8,521) - - (8,521) - -
--------------- -------- ------------------ --------- -------- -----------
Total $ 43,508 $ 43,273 $ 52,029 $ 43,508 $ 43,273 $ 52,029
=============== ========= =================== ========= ========= ===========
NET EARNINGS
Net earnings for the period $ 3,214 $ 7,993
Partial reduction in interest
expense (1) 10 199
Preferred stock dividends (608) (1,825)
--------------- ---------
Adjusted earnings available
for Common $ 2,616 $ 6,367
=============== =========
BOOK VALUE PER SHARE $ 7.86 $ 14.15 $ 8.55 $ 8.20 $ 15.38 $ 8.90
=============== ========= =================== ========= ========= ===========
EARNINGS PER SHARE $ 0.47 $ 0.85 $ 0.43 $ 1.20 $ 2.19 $ 1.05
=============== ========= =================== ========= ========= ===========
</TABLE>
- ------------------
(1) Under the Modified Treasury Stock Method, it is assumed that the Company
will use proceeds from the proforma exercise of the Warrants and Options
to acquire up to 20% of the actual shares currently outstanding
(Treasury shares) and use any remaining assumed proceeds to reduce the
outstanding balance of the Company's Senior Notes. The partial reduction
in interest expense of $10,000 and $199,000 for the three and nine
months ended September 30, 1997, respectively, represents the proforma
reduction in interest expense as a result of the proforma reduction in
the outstanding balance of Senior Notes.
(2) Treasury shares were assumed to be repurchased at the average closing
stock price for the respective periods.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share" which specified the computation, presentation, and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock. The objective of SFAS No. 128 is to
simplify the computation of EPS and to make the U.S. standard for computing EPS
more compatible with the standards of other countries. SFAS No. 128 eliminated
both the "primary" and "fully diluted" EPS and required the computation and
disclosure of "basic" EPS and "diluted" EPS. SFAS No. 128 is effective for
financial statements for both interim and annual periods ending after December
15, 1997. The Company's analysis of SFAS No. 128 concluded that it would have no
material impact on the EPS disclosures contained above.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
For the quarter ended September 30, 1997, the Company earned $3.2
million, or $0.47 per share, compared with a net loss of $2.2 million, or $1.06
per share, for the same period in 1996. The results for the third quarter of
1996 included a pretax charge of $3.8 million for the special assessment levied
industry-wide to recapitalize the Savings Association Insurance Fund ("SAIF"),
which amount is included in non-operating noninterest revenues, and net income
tax benefits of $2.9 million.
For the first nine months of 1997, the Company earned $8.0 million, or
$1.20 per share, as compared with net earnings of $6.4 million, or $0.98 per
share, for the same period in 1996. The 1996 results included a pretax gain of
$6.4 million on the sale of the Company's San Diego deposit franchise, a pretax
charge of $3.8 million for the special assessment levied industry-wide to
recapitalize the SAIF, which amounts are included in non-operating noninterest
revenues, and net income tax benefits of $6.4 million (as compared with $1.6
million for the corresponding 1997 period). Per share results for both periods
are calculated using the Modified Treasury Stock Method.
The Bank maintained core and risk-based regulatory capital ratios of
7.41% and 11.99%, respectively, at September 30, 1997, which are in excess of
the regulatory minimums which define a "well capitalized" institution. Total
assets at September 30, 1997 were $891.2 million, as compared with $847.2
million at December 31, 1996.
Pretax earnings from the Company's core operations increased during the
three and nine month periods ended September 30, 1997 as compared with the
corresponding periods during 1996. Pretax core earnings consist of earnings
after loan loss provisions and before interest on parent company indebtedness,
income taxes, real estate operations and nonrecurring items. For the three-month
period ended September 30, 1997, pretax core earnings were $3.0 million compared
with pretax core earnings of $0.1 million during the third quarter of 1996. For
the nine months ended September 30, 1997, pretax core earnings were $7.4
million, as compared to a pretax core loss of $0.6 million for the first nine
months of 1996.
During the September 1997 quarter, the Company's net interest margin was
4.03% on average interest-earning assets of $852.2 million as compared with a
net interest margin of 3.79% on average interest-earning assets of $757.3
million during the September 1996 quarter. For the nine months ended September
30, 1997 and 1996, the Company's net interest margin and average
interest-earning assets were 3.92% and $827.9 million, and 3.47% and $755.6
million, respectively. For each period, net interest margin excludes interest on
parent company indebtedness.
Noninterest operating revenues, which consist of loan extension,
modification, prepayment and exit fees and deposit-related service fees, were
$1.1 million and $2.7 million for the quarter and nine months ended September
30, 1997, as compared with $0.6 million and $1.6 million for the quarter and
nine months ended September 30, 1996.
Noninterest operating costs, which consist of employee, operating,
occupancy and professional costs and SAIF insurance premiums, were $5.2 million
and $15.9 million for the three and nine months ended September 30, 1997,
respectively, as compared with $5.1 million and $15.6 million for the three and
nine months ended September 30, 1996, respectively.
The Company recorded total credit loss provisions of $1.5 million and
$4.5 million for the three and nine month periods ended September 30, 1997,
respectively. Total credit loss provisions for the nine month period included
$0.8 million of valuation adjustments within real estate operations. These
results compared favorably to total credit loss provisions of $3.8 million and
$9.2 million, respectively, recorded for the three and nine months periods ended
September 30, 1996. Within these provisions $1.2 million and $3.0 million,
respectively, were allocated to valuation adjustments within real estate
operations.
10
<PAGE> 11
During the three and nine months ended September 30, 1997, real estate
operations produced net revenues of $0.5 million and $0.2 million, respectively,
which were attributable to net recoveries from sales of foreclosed properties.
During the three and nine months ended September 30, 1996, real estate
operations produced net costs of $0.8 million for each period. Real estate
operations included valuation adjustments of $0.1 million and $0.8 million for
the three and nine months ended September 30, 1997, respectively, as compared to
$1.2 million and $3.0 million for the comparable periods in 1996.
The Company did not record any income tax benefits during the third
quarter of 1997. By comparison, the Company recorded income tax benefits of $2.9
million for the same period in 1996. During the nine months ended September 30,
1997, the Company recognized $1.6 million of income tax benefits, as compared to
$6.4 million of income tax benefits during the nine months ended September 30,
1996.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Company's net interest income, or the difference between the
interest earned on loans and investment securities and the cost of deposits and
borrowings, is affected by several factors, including (1) the level of, and the
relationship between, the dollar amount of interest-earning assets and
interest-bearing liabilities, (2) the maturity of the Company's adjustable-rate
and fixed-rate loans and short-term investment securities and its deposits and
borrowings, (3) the relationship between market interest rates and local deposit
rates offered by competing institutions, and (4) the magnitude of the Company's
nonaccruing assets.
The following tables set forth the Company's average balance sheet, and
the related weighted average yields and costs on average interest-earning assets
(inclusive of nonaccrual loans) and interest-bearing liabilities, for the three
and nine months ended September 30, 1997 and 1996. In the tables, interest
revenues are net of interest associated with nonaccrual loans (dollars are in
thousands).
11
<PAGE> 12
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
----------------------------------------------- ------------------------------------------
WEIGHTED WEIGHTED
AVERAGE REVENUES/ AVERAGE AVERAGE REVENUES/ AVERAGE
BALANCE COSTS YIELD/COST BALANCE COSTS YIELD/COST
-------------- -------------- -------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Loans (1) (2) $ 749,531 $ 17,799 9.50% $ 687,862 $ 15,437 8.98%
Cash and cash equivalents 20,636 274 5.31% 23,759 299 5.03%
Investment securities 74,989 1,206 6.43% 39,025 576 5.90%
Investment in capital stock of
Federal Home Loan Bank 7,028 103 5.86% 6,631 108 6.51%
-------------- -------------- ------------- -------------
Total interest-earning assets 852,184 19,382 9.10% 757,277 16,420 8.67%
-------------- -------------- ------------- ------------
Noninterest-earning assets 27,332 26,576
-------------- -------------
Total assets $ 879,516 $ 783,853
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits $ 765,680 10,188 5.28% $ 638,648 8,072 5.03%
Short-term borrowings 40,000 598 5.93% 78,889 1,173 5.92%
Senior notes 12,517 489 15.63% 12,185 477 15.66%
-------------- -------------- ------------- -------------
Total interest-bearing liabilities 818,197 11,275 5.47% 729,722 9,722 5.30%
-------------- -------------- ------------- ------------
Noninterest-bearing liabilities 8,352 8,938
Stockholders' equity 52,967 45,193
-------------- -------------
Total liabilities & stockholders' equity $ 879,516 $ 783,853
============== =============
Net interest income $ 8,107 $ 6,698
============== =============
Interest rate spread 3.63% 3.37%
============== ============
Net interest margin 3.81% 3.54%
============== ============
Net interest margin excluding parent
company indebtedness 4.03% 3.79%
============== ============
</TABLE>
- ----------------
(1) Includes nonaccrual loans of $11.5 million and $25.1 million for the
three months ended September 30, 1997 and September 30, 1996,
respectively.
(2) Includes amortization of loan fees and discounts of $1.0 million and
$1.1 million for the three months ended September 30, 1997 and September
30, 1996, respectively.
12
<PAGE> 13
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
--------------------------------------- --------------------------------------
WEIGHTED WEIGHTED
AVERAGE REVENUES/ AVERAGE AVERAGE REVENUES/ AVERAGE
BALANCE COSTS YIELD/COST BALANCE COSTS YIELD/COST
------------- ------------- ---------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Loans (1) (2) $ 722,126 $ 50,480 9.32% $ 653,800 $ 43,158 8.80%
Cash and cash equivalents 32,769 1,261 5.13% 65,150 2,440 4.99%
Investment securities 66,066 3,090 6.24% 30,129 1,386 6.13%
Investment in capital stock of
Federal Home Loan Bank 6,928 306 5.89% 6,519 281 5.75%
------------- ------------- ------------- ------------
Total interest-earning assets 827,889 55,137 8.88% 755,598 47,265 8.34%
------------- ---------- ------------ ---------
Noninterest-earning assets 28,908 31,074
------------- -------------
Total assets $ 856,797 $ 786,672
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits $ 732,390 28,467 5.20% $ 696,141 26,304 5.05%
Short-term borrowings 51,433 2,322 6.04% 29,074 1,294 5.95%
Senior notes 12,431 1,468 15.79% 12,112 1,432 15.79%
------------- ------------- ------------- ------------
Total interest-bearing liabilities 796,254 32,257 5.42% 737,327 29,030 5.26%
------------- ---------- ------------ ---------
Noninterest-bearing liabilities 12,847 7,054
Stockholders' equity 47,696 42,291
------------- -------------
Total liabilities & stockholders' equity $ 856,797 $ 786,672
============= =============
Net interest income $ 22,880 $ 18,235
============= ============
Interest rate spread 3.46% 3.08%
========== =========
Net interest margin 3.68% 3.22%
========== =========
Net interest margin excluding parent
company indebtedness 3.92% 3.47%
========== =========
</TABLE>
- ----------------------
(1) Includes nonaccrual loans of $20.1 million and $24.2 million for the
nine months ended September 30, 1997 and September 30, 1996,
respectively.
(2) Includes amortization of loan fees and discounts of $2.8 million and
$2.4 million for the nine months ended September 30, 1997 and September
30, 1996, respectively.
13
<PAGE> 14
ANALYSIS OF CHANGES IN NET INTEREST INCOME AND EXPENSE
The following tables present the dollar amount of changes in interest
income and interest expense of major components of interest-earning assets and
interest-bearing liabilities due to changes in outstanding balances and changes
in interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: (i) changes in volume (i.e., changes in volume multiplied by old rate), (ii)
changes in rate (i.e., changes in rate multiplied by old volume) and (iii)
changes attributable to both rate and volume (dollars are in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
INCREASE (DECREASE) DUE TO CHANGE IN
-----------------------------------------------------
RATE AND NET
VOLUME RATE VOLUME CHANGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST REVENUES
Loans $ 1,384 $ 898 $ 80 $ 2,362
Cash and cash equivalents (39) 16 (2) (25)
Investment securities 530 52 48 630
Investment in capital stock of
Federal Home Loan Bank 7 (11) (1) (5)
---------- ---------- ---------- ----------
1,882 955 125 2,962
---------- ---------- ---------- ----------
INTEREST COSTS
Deposits 1,606 425 85 2,116
Short-term borrowings (578) 6 (3) (575)
Senior notes 13 (1) - 12
---------- ---------- ---------- ----------
1,041 430 82 1,553
---------- ---------- ---------- ----------
INCREASE IN NET INTEREST INCOME $ 841 $ 525 $ 43 $ 1,409
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
INCREASE (DECREASE) DUE TO CHANGE IN
-----------------------------------------------------
RATE AND NET
VOLUME RATE VOLUME CHANGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST REVENUES
Loans $ 4,510 $ 2,546 $ 266 $ 7,322
Cash and cash equivalents (1,213) 67 (33) (1,179)
Investment securities 1,653 23 28 1,704
Investment in capital stock of
Federal Home Loan Bank 18 7 - 25
---------- ---------- ---------- ----------
4,968 2,643 261 7,872
---------- ---------- ---------- ----------
INTEREST COSTS
Deposits 1,269 850 44 2,163
Short-term borrowings 987 23 18 1,028
Senior notes 32 4 - 36
---------- ---------- ---------- ----------
2,288 877 62 3,227
---------- ---------- ---------- ----------
INCREASE IN NET INTEREST INCOME $ 2,680 $ 1,766 $ 199 $ 4,645
========== ========== ========== ==========
</TABLE>
14
<PAGE> 15
PROVISIONS FOR ESTIMATED CREDIT LOSSES ON LOANS
For the three and nine months ended September 30, 1997, the Company
recorded loan loss provisions of $1.5 million and $3.7 million, respectively,
compared with loan loss provisions of $2.6 million and $6.2 million recorded
during the three and nine months ended September 30, 1996, respectively. The
reduced loan loss provisions recorded during 1997 reflect (1) the Company's
substantially improved asset quality measures, including lower dollar amounts of
nonperforming loans and classified assets, which have reduced charge-offs
against previously established reserves and the level of required specific and
general valuation allowances, and (2) the absence of any losses to date
associated with loans funded since 1994, when the company actively recommenced
pursuit of new financings.
Although the Company maintains its allowance for loan losses at a level
which it considers to be adequate to provide for potential losses based on
presently known conditions, there can be no assurance that such losses will not
exceed the estimated amounts, thereby adversely affecting future results of
operations. The calculation of the adequacy of the allowance for loan losses,
and therefore the requisite amount of provision for loan losses, is based on
several factors, including underlying loan collateral values, delinquency trends
and historical loan loss experience all of which can change without notice based
on market and economic conditions and other factors.
NONINTEREST REVENUES
The table below sets forth information concerning the Company's
noninterest revenues for the periods indicated (dollars are in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------
OPERATING 1997 1996 CHANGE 1997 1996 CHANGE
--------- ---------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Loan related fees $ 944 $ 431 $ 513 $ 2,063 $1,032 $ 1,031
Other 182 195 (13) 626 525 101
--------- ---------- --------- -------- --------- ---------
$ 1,126 $ 626 $ 500 $ 2,689 $1,557 $ 1,132
========= ========== ========= ======== ========= =========
NON-OPERATING
Disposition of deposits and
premises $ - $ - $ - $ - $6,413 $(6,413)
Other, net 219 (3,829) 4,048 206 (3,563) 3,769
--------- ---------- --------- -------- --------- ---------
$ 219 $ (3,829) $ 4,048 $ 206 $2,850 $(2,644)
========= ========== ========= ======== ========= =========
</TABLE>
Loan related fee revenues, which include prepayment, extension,
modification, escrow and exit fees collected from customers, increased in 1997
as compared with 1996 primarily because of prepayment penalties resulting from a
higher level of loan prepayments.
Other non-operating, noninterest revenues during the quarter ended
September 30, 1997, principally included the benefit from the termination of a
Company-sponsored retirement plan. For the quarter ended September 30, 1996, a
charge of $3.8 million represented the Company's share of the special assessment
to recapitalize the SAIF insurance fund. The decline in other non-operating,
noninterest revenues during the nine months ended September 30, 1997, as
compared to the same period in 1996, was primarily due to the $6.4 million of
revenue recognized during the 1996 period in connection with the sale of the
Company's San Diego deposit franchise, which was partially offset by the $3.8
million special assessment referenced above.
15
<PAGE> 16
NONINTEREST EXPENSES - OPERATING COSTS
The table below details the Company's operating costs for the periods
indicated (dollars are in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- ----------------------------------
1997 1996 CHANGE 1997 1996 CHANGE
----------- --------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Employee $ 2,511 $ 2,303 $ 208 $ 7,818 $ 6,752 $ 1,066
Operating 1,264 1,160 104 3,572 3,590 (18)
Occupancy 752 713 39 2,247 2,161 86
Professional 468 513 (45) 1,173 1,462 (289)
SAIF insurance premium
and OTS assessment 208 450 (242) 1,063 1,629 (566)
----------- --------- ----------- ---------- --------- -----------
$ 5,203 $ 5,139 $ 64 $15,873 $15,594 $ 279
=========== ========= =========== ========== ========= ===========
</TABLE>
During the last half of 1996 and continuing into the first quarter of
1997, the Company added lending personnel in response to its expanding financing
activities. Accordingly, employee-related costs for the first nine months of
1997 were higher than costs for the comparable period in 1996. Subsequent to the
September 1996 SAIF recapitalization, the Company's SAIF assessment rate
initially declined by a nominal amount, which was then followed by a more
pronounced reduction beginning with the third quarter of 1997. These rate
reductions, together with an initially lower deposit base following the sale of
the San Diego deposit franchise in June 1996, contributed to a decline in SAIF
insurance premiums during the first nine months of 1997 as compared with the
same period in 1996. Professional expenses for the first nine months of 1997
have also declined as compared to the same period in 1996, principally as a
result of reduced legal and recruitment fees.
NONINTEREST EXPENSES - REAL ESTATE OPERATIONS
The table below sets forth the revenues and costs attributable to the
Company's real estate owned for the periods indicated. The compensatory and
legal costs directly associated with the Company's property management and
disposal operations are included in the table above in NONINTEREST EXPENSES-
OPERATING COSTS (dollars are in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1996 CHANGE 1997 1996 CHANGE
-------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
EXPENSES ASSOCIATED WITH
REAL ESTATE OWNED
Property taxes $ 48 $ 87 $ (39) $ 90 $ 217 $ (127)
Repairs, maintenance
and renovation 7 21 (14) 38 120 (82)
Insurance 58 62 (4) 138 180 (42)
-------- --------- ---------- --------- --------- ---------
113 170 (57) 266 517 (251)
NET RECOVERIES FROM SALE
OF PROPERTIES (545) (275) (270) (1,013) (1,557) 544
PROPERTY OPERATIONS, NET (108) (298) 190 (292) (1,120) 828
PROVISION FOR ESTIMATED LOSSES
ON REAL ESTATE OWNED 50 1,231 (1,181) 811 2,966 (2,155)
-------- --------- ---------- --------- --------- ---------
(INCOME) LOSS FROM REAL ESTATE
OPERATIONS NET $ (490) $ 828 $ (1,318) $ (228) $ 806 $ (1,034)
======== ========= ========== ========= ========= =========
</TABLE>
16
<PAGE> 17
The costs included in the table above (and, therefore, excluded from
operating costs (see NONINTEREST EXPENSES - OPERATING COSTS)), reflect holding
costs directly attributable to the Company's portfolio of real estate owned.
Net recoveries from property sales represent the difference between the
proceeds received from property disposal and the carrying value of such
properties upon disposal. During the nine months ended September 30, 1997 and
September 30, 1996, the Company sold 123 properties generating net cash proceeds
of $23.6 million and 134 properties generating net cash proceeds of $21.9
million, respectively.
Property operations principally include the net operating income
(collected rental revenues less operating expenses and certain renovation costs)
from foreclosed apartment buildings or receipt, following foreclosure, of
similar funds held by receivers during the period the original loan was in
default. The decline in income from this source during 1997 was a result of a
decline in the number of apartment buildings held by the Company.
During the three and nine month periods ended September 30, 1996, the
Company recorded sizable provisions associated with its then remaining
foreclosed residential construction projects. At September 30, 1997, the homes
within these projects were substantially sold out.
INCOME TAXES
The Company did not record an income tax benefit for the quarter ended
September 30, 1997, as compared to a $2.9 million income tax benefit recorded
during the three months ended September 30, 1996. During the quarter ended
September 30, 1997, the Company paid an alternative minimum tax of $25,000. The
Company recorded income tax benefits of $1.6 million and $6.4 million for the
nine months ended September 30, 1997 and 1996, respectively. At September 30,
1997, the Company had approximately $5.5 million of accumulated income tax
benefits, consisting primarily of net operating loss carryforwards and future
tax deductions which had not been recognized for financial statement purposes
and are available to be utilized to shield future earnings from income taxes,
both for financial reporting and income tax reporting purposes. The recognition
of these accumulated income tax benefits is subject to limitations under GAAP
and for regulatory capital purposes. The primary factor affecting the timing and
magnitude of recognition of these accumulated income tax benefits is the current
and future profitability of the Company. Additionally, no more than 10% of the
Bank's regulatory capital can be represented by a deferred tax asset created
pursuant to anticipated future utilization of an institution's income tax
benefits. Should the Company cease to be profitable, or should the Company
record substantial operating losses in the future, all or a portion of the
deferred tax asset established to date may need to be reversed.
17
<PAGE> 18
FINANCIAL CONDITION, CAPITAL RESOURCES & LIQUIDITY AND ASSET QUALITY
ASSETS
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand, deposits at
correspondent banks and Federal funds sold. The Company maintains balances at
correspondent banks to cover daily inclearings, wire activities and other
charges. Cash and cash equivalents at September 30, 1997, were $17.9 million, a
decrease from $94.0 million at December 31, 1996. This decrease in cash balances
from year end resulted from the deployment of excess cash on hand at December
31, 1996 into securities and loans.
INVESTMENT SECURITIES
Investment securities totaled $65.7 million at September 30, 1997, an
increase of $27.3 million over the year end 1996 balance of $38.4 million. This
increase was due to the first quarter 1997 purchase of $40.0 million in U.S.
Government Agency callable bonds. Partially offsetting this increase in
investment securities was the September 1997 sale of $10.1 million in U.S.
Government securities and the June 1997 liquidation of $2.4 million in U.S.
Treasury notes.
The cost basis and estimated fair value of investment securities
available-for-sale are summarized as follows (dollars are in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED --------------------- FAIR
COST GAINS LOSSES VALUE
------------ --------- --------- -----------
<S> <C> <C> <C> <C>
U.S. Government $ 25,104 $ - $ 4 $ 25,100
U.S. Government agency 40,000 66 - 40,066
Bond fund 561 5 - 566
------------ --------- --------- -----------
$ 65,665 $ 71 $ 4 $ 65,732
============ ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED --------------------- FAIR
COST GAINS LOSSES VALUE
------------ --------- --------- -----------
<S> <C> <C> <C> <C>
U.S. Government $ 38,503 $ - $ 132 $ 38,371
============ ========= ========= ===========
</TABLE>
The cost basis and estimated fair value of investment securities
available-for-sale at September 30, 1997, are summarized by contractual maturity
as follows (dollars are in thousands):
<TABLE>
<CAPTION>
ESTIMATED WEIGHTED
FAIR AVERAGE
COST BASIS VALUE YIELD
----------- ----------- -----------
<S> <C> <C> <C>
Due in less than one year $ 25,665 $ 25,666 5.64%
Due in one year through five years 40,000 40,066 7.00%
----------- -----------
$ 65,665 $ 65,732 6.47%
=========== ===========
</TABLE>
18
<PAGE> 19
LOAN PORTFOLIO
GENERAL
The Company's loan portfolio is almost exclusively secured by real
estate concentrated in Southern California. The two tables that follow set forth
the composition of the Company's loan portfolio, and the percentage of
composition by type of collateral, delineated by the year of origination and in
total, as of the dates indicated (dollars are in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
---------------------------------------- ---------------------------------
BALANCE PERCENT BALANCE PERCENT
---------------- --------------------- -------------- ----------------
<S> <C> <C> <C> <C>
PERMANENT LOANS
Single family (1-4 units)
Estate (1) $ 142,285 16.5% $ 107,891 14.6%
Conventional 173,149 20.1 170,038 23.0
Project concentrations (2) 51,051 5.9 61,268 8.3
Multi-family (5 or more units) 223,868 25.8 220,707 29.6
Commercial real estate 108,505 12.6 60,388 8.2
Land 15,989 1.9 14,513 2.0
RESIDENTIAL CONSTRUCTION
Single family (1-4 units) 86,081 10.0 56,306 7.6
Tract development 51,443 6.0 33,791 4.6
OTHER 10,039 1.2 15,684 2.1
--------- ------ -------- ------
GROSS LOANS RECEIVABLE 862,410 100.0% 740,586 100.0%
====== ======
LESS
Participants' share (3,664) (1,413)
Undisbursed loan funds (71,733) (46,646)
Deferred loan fees and
credits, net (6,664) (6,611)
Allowance for estimated losses (13,253) (13,515)
========= =========
NET LOANS RECEIVABLE $ 767,096 $ 672,401
========= =========
</TABLE>
- ----------------
(1) Generally defined as individual loans with principal balances of more
than $1.0 million.
(2) Generally defined as permanent loans within an integrated housing
development.
19
<PAGE> 20
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------------------
POST-1994 PRE-1995 TOTAL
--------------- --------------- ------------
<S> <C> <C> <C>
PERMANENT
Single family (1-4 units)
Estate $ 142,285 $ - $ 142,285
Conventional 44,066 129,083 173,149
Project concentrations 1,637 49,414 51,051
Multi-family (5 or more units) 119,317 104,551 223,868
Commercial real estate 101,428 7,077 108,505
Land 15,157 832 15,989
RESIDENTIAL CONSTRUCTION
Single family (1-4 units) 86,081 - 86,081
Tract development 51,443 - 51,443
OTHER 10,039 - 10,039
--------- --------- ---------
GROSS LOANS RECEIVABLE $ 571,453 $ 290,957 $ 862,410
========= ========= =========
</TABLE>
The table below sets forth the approximate composition of the Company's
new loan commitments for the periods indicated (dollars are in thousands).
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------------ --------------------------
TYPE OF SECURITY AMOUNT % AMOUNT %
- ------------------------------------ ---------- --------- --------- -----------
<S> <C> <C> <C> <C>
Single family (1-4 units)
Estate (1) $ 35,300 25.9% $ 66,500 20.4%
Conventional 9,900 7.2 17,700 5.4
Multi-family (5 or more units) (2) 14,400 10.5 36,400 11.2
Commercial real estate (3) 14,500 10.6 73,300 22.5
Construction and land (4) 59,000 43.2 120,200 37.1
Other 3,500 2.6 11,100 3.4
-------- ----- -------- -----
$136,600 100.0% $325,200 100.0%
======== ===== ======== =====
</TABLE>
- -------------------
(1) For the nine months ended September 30, 1997, includes unfunded
commitments under lines of credit of $3.2 million. There were no
unfunded commitments included in the three month period.
(2) Includes $0.6 million and $4.2 million of financings provided in
connection with sales of previously foreclosed properties for the three
and nine months ended September 30, 1997, respectively.
(3) For the three and nine months ended September 30, 1997, includes
unfunded commitments under lines of credit of $1.1 million and $14.0
million, respectively.
(4) For the three and nine months ended September 30, 1997, this represents
construction commitments, which are inclusive of unfunded commitments
under lines of credit of $10.0 million for both periods.
20
<PAGE> 21
ASSET QUALITY
NONACCRUAL AND TROUBLED DEBT RESTRUCTURED LOANS
The Company places loans on nonaccrual status when (1) they become one
or more payments delinquent or (2) management believes that, with respect to
performing loans, continued collection of principal and interest from the
borrower is not reasonably assured.
The following table provides information regarding the Company's
nonaccrual loans as of the dates indicated (dollars are in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C> <C>
Loans past due 90 days or more $ 5,547 $ 16,643 $ 12,930
Loans past due 30-89 days 6,533 10,082 8,994
Other nonaccrual loans 168 1,898 3,299
------------ ------------ ------------
Total nonaccrual loans (1) $ 12,248 $ 28,623 $ 25,223
============ ============ ============
Reserves to loans past due 90 days or more 238.9% 81.2% 117.4%
Reserves to total nonaccrual loans 108.2% 47.2% 60.2%
</TABLE>
- ---------------------
(1) Includes $1.5 million, $5.6 million and $3.8 million of troubled debt
restructured loans ("TDRs") at September 30, 1997, December 31, 1996 and
September 30, 1996, respectively. Excludes $29.1 million, $33.5 million
and $34.9 million of TDRs which were performing in accordance with their
modified terms.
Total nonaccrual loans were $12.2 million at September 30, 1997 compared
with $28.6 million at December 31, 1996 and $25.2 million at September 30, 1996.
Included in total loans past due 90 days or more at September 30, 1997, December
31, 1996 and September 30, 1996, are $2.8 million, $10.9 million and $12.9
million, respectively, of loans originated prior to 1995. This reduction in
pre-1995 nonaccrual loans is consistent with the Company's current and improving
asset migration measures.
At September 30, 1997, the Company's nonaccrual loans of $12.2 million
consisted of $4.3 million of loan principal originated subsequent to 1994, or
0.75% of the $571.5 million of such loan principal commitments at quarter-end.
The remaining $7.9 million of nonaccrual loans at quarter-end were represented
by loans originated prior to 1995 (with most emanating from 1991 and earlier),
and represented 2.7% of the $291.0 million of such loan principal outstanding at
September 30, 1997.
The thrift industry is exposed to economic trends and fluctuations in
real estate values. In recent periods, those trends have been recessionary in
nature, particularly in Southern California. Accordingly, the trends have
adversely affected both the delinquencies being experienced by institutions such
as the Company and the ability of such institutions to recoup principal and
accrued interest through acquisition and sale of the underlying collateral. No
assurances can be given that such trends will not continue in future periods,
creating increasing downward pressure on the earnings and capital of thrift
institutions.
21
<PAGE> 22
CLASSIFIED ASSETS
The table below sets forth information concerning the Company's
classified assets at the dates indicated. Classified assets include real estate
owned, nonaccrual loans and performing loans which have been adversely
classified pursuant to OTS regulations and guidelines ("Performing/Classified"
loans) (dollars are in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------- ------------ -------------
<S> <C>
NONPERFORMING ASSETS
Real estate owned, net of reserves $ 14,598 $ 20,140 $ 23,726
Nonperforming loans(1) 5,547 16,643 12,930
-------- -------- --------
GROSS NONPERFORMING ASSETS 20,145 36,783 36,656
OTHER CLASSIFIED LOANS
Other delinquent loans(2) 6,533 10,082 8,994
Performing loans classified Loss,
Doubtful and Substandard(3) 56,939 46,987 56,900
-------- -------- --------
GROSS CLASSIFIED ASSETS $ 83,617 $ 93,852 $102,550
======== ======== ========
GROSS CLASSIFIED LOANS(4)(5) $ 69,019 $ 73,712 $ 78,824
======== ======== ========
NET LOANS RECEIVABLE(6) $780,349 $685,916 $703,547
======== ======== ========
RESERVES ON LOANS
Specific $ 2,327 $ 2,185 $ 3,437
General 10,926 11,330 11,738
-------- -------- --------
$ 13,253 $ 13,515 $ 15,175
======== ======== ========
TOTAL RESERVES TO LOANS RECEIVABLE 1.7% 2.0% 2.2%
TOTAL RESERVES TO CLASSIFIED LOANS 19.2% 18.3% 19.3%
TOTAL RESERVES TO NONPERFORMING LOANS 238.9% 81.2% 117.4%
GROSS NONPERFORMING ASSETS TO TOTAL ASSETS 2.3% 4.3% 4.4%
GROSS CLASSIFIED ASSETS TO BANK CORE
CAPITAL AND GENERAL LOAN LOSS RESERVES 108.9% 146.3% 161.2%
</TABLE>
- -------------------------------------
(1) Loans 90 days or more past due. All such loans are on nonaccrual status.
(2) Loans 30 to 89 days past due. All such loans are on nonaccrual status.
(3) Includes $0.2 million, $1.9 million and $3.3 million of performing loans
on nonaccrual status at September 30, 1997, December 31, 1996 and
September 30, 1996, respectively.
(4) Includes $12.2 million, $28.6 million and $25.2 million of nonaccrual
loans at September 30, 1997, December 31, 1996 and September 30, 1996,
respectively.
(5) At September 30, 1997, included $36.5 million of loans originated prior
to 1995.
(6) Net loans receivable are exclusive of the allowance for loan losses.
The carrying value of nonperforming assets (i.e., real estate owned and
loans 90 days or more past due) decreased to $20.1 million, or 2.3% of total
assets, at September 30, 1997, from $36.8 million, or 4.3% of total assets, at
December 31, 1996, and $36.7 million, or 4.4% of total assets, at September 30,
1996. The carrying value of nonperforming assets peaked at $151.2 million in
December 1993.
22
<PAGE> 23
The table below sets forth information concerning the Company's gross
classified loans as of September 30, 1997 (dollars are in thousands).
<TABLE>
<CAPTION>
CLASSIFIED LOANS
------------------------------------------------------------
OTHER PERFORMING
NONPERFORMING DELINQUENCIES LOANS TOTAL
---------------- -------------- ---------- -----------
<S> <C> <C> <C> <C>
Single family (1-4 units)
Estate $ 2,742 $ 885 $ 12,378 $ 16,005
Conventional 1,354 3,605 5,203 10,162
Project concentrations 1,408 1,109 13,783 16,300
Multi-family (5 or more units) - 934 11,767 12,701
Commercial real estate - - 7,848 7,848
Land 43 - - 43
Residential construction
Single family (1-4 units) - - 582 582
Tract development - - 2,038 2,038
Other collateralized loans - - 3,340 3,340
---------------- -------------- ---------- -----------
Gross Loans Receivable $ 5,547 $ 6,533 $ 56,939 $ 69,019
================ ============== ========== ===========
</TABLE>
The discussion below summarizes the classified assets composition within
each of the Company's principal loan portfolios.
ESTATE. At September 30, 1997, 11.2% (measured in dollars) of the
Company's estate loan portfolio was classified. Within this group of classified
loan principal, two loans ($2.7 million) were delinquent three or more payments,
one loan ($0.9 million) was one payment delinquent and two loans ($12.4 million)
were performing in accordance with their original terms and were classified
Substandard. Immediately following the close of the third quarter, one
nonperforming loan with loan principal of $1.8 million was repaid in full,
including payment of all arrearages and foreclosure related costs. In addition,
the Company owned one home previously acquired through foreclosure with a net
carrying value of $2.4 million.
CONVENTIONAL. Conventional single family loans consist of loans secured
by single family residences which are not part of an integrated development nor
included with estate loans. At September 30, 1997, 5.9% (measured in dollars) of
the Company's conventional single family loan portfolio was classified. Within
this group of classified loan principal, eight loans ($1.4 million) were
delinquent three or more payments, 20 loans ($3.6 million) were delinquent one
or two payments, and 23 loans ($5.2 million) were performing, generally in
accordance with their original terms and were classified Substandard. In
addition, the Company owned three homes previously acquired through foreclosure
with a net carrying value of $0.3 million.
PROJECT CONCENTRATIONS. Prior to 1994, the Company made permanent loans
to a large number of purchasers of individual units from developers in for-sale
housing developments with respect to which the Company financed construction. A
majority of these permanent "takeout" loans were originated during the period
1988 through 1992 and were made on terms that fell outside the parameters
normally associated with conforming or conventional single family home loans.
Historically, the performance of this portfolio has been extremely poor.
At September 30, 1997, 31.3% (measured in dollars) of the Company's
project concentration loan portfolio was classified. Within this group of
classified loan principal, 10 loans ($1.4 million) were delinquent three or more
payments, 11 loans ($1.1 million) were delinquent one or two payments, and 94
loans ($13.8 million) were generally performing in accordance with their
original terms and were classified Substandard. In addition, the Company owned
128 units previously acquired through foreclosure with a net carrying value of
$6.4 million (or approximately $50,000 per unit).
23
<PAGE> 24
MULTI-FAMILY (5 OR MORE UNITS). At September 30, 1997, 5.7% (measured in
dollars) of the Company's multi-family loans (all of which is secured by
apartment buildings) were classified. Within this group of loan principal, four
loans ($0.9 million) were delinquent two payments, and 16 loans ($11.8 million)
were performing, generally in accordance with their original terms and were
classified Substandard. In addition, the Company owned four buildings previously
acquired through foreclosure with a net carrying value of $1.5 million.
COMMERCIAL REAL ESTATE. At September 30, 1997, none of the Company's
commercial real estate-secured loan portfolio was delinquent and three loans
($7.8 million) were performing in accordance with their original terms and were
classified Substandard.
RESIDENTIAL CONSTRUCTION. At September 30, 1997, none of the Company's
residential construction loan portfolio was delinquent and two loans ($2.6
million) were performing in accordance with their original terms and were
classified Substandard. In addition, the Company retained investment in one
multiple unit, for-sale housing development with a net carrying value of $2.6
million, with principally all units in escrow to be sold.
OTHER COLLATERALIZED LOANS. At September 30, 1997, none of the Company's
other collateralized loan portfolio was delinquent and two loans ($3.3 million)
were performing in accordance with their original terms and were classified
Substandard.
CREDIT LOSS RESERVES FOR LOANS AND REAL ESTATE OWNED
The Company maintains reserves against specific assets in those
instances in which it believes that full recovery of the Company's gross
investment is unlikely. As of September 30, 1997, the Company had established
specific reserves based upon current indications of property values and the
costs associated with their respective disposition. In addition, management
establishes general valuation allowances ("GVAs") against its loan and real
estate owned portfolios when sufficient information does not exist to support
establishing specific reserves. The loss factors utilized to establish general
reserves are based upon (1) estimated migration levels for similar loans and
risk levels against the estimated loss content of the collateral securing the
loan, or (2) estimates of current liquidation values for collateral securing
performing loans for a representative sampling of each portfolio segment.
The table below sets forth the amounts and percentages of general and
specific reserves for the Company's loan and real estate owned portfolios as of
September 30, 1997 (dollars are in thousands).
<TABLE>
<CAPTION>
LOANS
----------------------- REAL ESTATE
PERFORMING DELINQUENT OWNED TOTAL
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Specific reserves $ 1,573 $ 754 $ 9,078 $ 11,405
General reserves 10,351 575 44 10,970
--------- ---------- ------------ ----------
Total $ 11,924 $ 1,329 $ 9,122 $ 22,375
========== ========== ============ ==========
</TABLE>
24
<PAGE> 25
The table below summarizes the activity of the Company's reserves for
the periods indicated (dollars are in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
LOANS
Average loans outstanding $ 749,531 $ 687,862 $ 722,126 $ 653,800
=========== =========== =========== ===========
Reserve balance at beginning of period $ 12,381 $ 15,762 $ 13,515 $ 15,192
Provision for estimated losses 1,500 2,569 3,739 6,234
Charge-offs:
Permanent loans
Single family (1-4 units) (349) (718) (2,705) (2,445)
Multi-family (5 or more units) (279) (2,438) (1,135) (3,806)
Land - - (150) -
Other - - (11) -
----------- ----------- ----------- -----------
Charge-offs (628) (3,156) (4,001) (6,251)
----------- ----------- ----------- -----------
Balance at end of period $ 13,253 $ 15,175 $ 13,253 $ 15,175
=========== =========== =========== ===========
Ratio of net charge-offs to average loans
outstanding during the period 0.1% 0.5% 0.6% 1.0%
REAL ESTATE OWNED
Reserve balance at beginning of period $ 9,377 $ 11,909 $ 11,871 $ 15,725
Provision for estimated losses 50 1,231 811 2,966
Charge-offs (305) (2,226) (3,560) (7,777)
----------- ----------- ----------- -----------
Balance at end of period $ 9,122 $ 10,914 $ 9,122 $ 10,914
=========== =========== =========== ===========
</TABLE>
Because the Company's loan portfolio is not homogeneous, but rather
consists of discreet segments with different collateral and borrower risk
characteristics, management separately measures reserve adequacy, and
establishes and maintains reserves for credit losses, for each identifiable
segment of this portfolio. However, no assurances can be made that this will
occur. The table below summarizes the allocation of the Company's credit loss
reserves by type of collateral at the dates indicated (dollars are in
thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
--------------------------------------- --------------------------------------
% OF % OF
BALANCE ASSET TYPE BALANCE ASSET TYPE
-------------- --------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
PERMANENT
Single family (1-4 units)
Estate $ 1,216 0.9% $ 279 0.3%
Conventional 1,472 0.9 1,702 1.0
Project concentrations 3,657 7.2 4,495 7.3
Multi-family (5 or more units) 3,237 1.4 5,216 2.4
Commercial real estate 2,305 2.1 1,150 1.9
Land 70 0.4 167 1.2
RESIDENTIAL CONSTRUCTION
Single family 349 0.4 168 0.3
Tract development 438 0.9 338 1.0
OTHER 509 5.1 - -
------- -------
$13,253 1.5% $13,515 1.8%
======= =======
</TABLE>
25
<PAGE> 26
REAL ESTATE OWNED
Real estate acquired in satisfaction of loans is transferred from loans
to properties at estimated fair values, less any estimated disposal costs. The
difference between the fair value of the real estate collateral and the loan
balance at the time of transfer is recorded as a loan charge-off. Any subsequent
declines in the fair value of the properties after the date of transfer are
recorded through the establishment of, or additions to, specific reserves.
Recoveries and losses from the disposition of properties are also included in
NONINTEREST EXPENSES - REAL ESTATE OPERATIONS.
The table below summarizes the composition of the Company's real estate
owned at the dates indicated (dollars are in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
-------- -------- --------
<S> <C> <C> <C>
SINGLE FAMILY (1-4 UNITS)
Estate $ 2,421 $ -- $ --
Conventional 296 2,660 3,959
Project concentrations 7,959 7,117 7,335
MULTI-FAMILY (5 OR MORE UNITS) 1,564 3,215 5,469
COMMERCIAL REAL ESTATE -- 346 346
LAND 2,359 2,517 2,877
RESIDENTIAL CONSTRUCTION (TRACT DEVELOPMENTS) 9,121 16,156 14,654
-------- -------- --------
GROSS INVESTMENT (1) 23,720 32,011 34,640
ALLOWANCE FOR ESTIMATED LOSSES (9,122) (11,871) (10,914)
-------- -------- --------
NET INVESTMENT $ 14,598 $ 20,140 $ 23,726
======== ======== ========
</TABLE>
- ----------------------
(1) Fair value of collateral at foreclosure, plus post-foreclosure
capitalized costs.
The table below summarizes credit loss reserves at the dates indicated
for each of the real estate owned segments (dollars are in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
--------------------------------- ------------------------------------
% OF % OF
PROPERTIES ASSET TYPE PROPERTIES ASSET TYPE
-------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
PERMANENT
Single family (1-4 units)
Conventional $ 7 2.4% $ 343 12.9%
Project concentrations 1,562 19.6 2,233 31.4
Multi-family (5 or more units) 42 2.7 547 17.0
Commercial real estate - 106 30.6
Land 1,016 43.1 1,242 49.3
RESIDENTIAL CONSTRUCTION
Tract development 6,495 71.2 7,400 45.8
--------- ----------
$ 9,122 38.5% $ 11,871 37.1%
========= ==========
</TABLE>
OFFICE PROPERTY AND EQUIPMENT
At September 30, 1997, the Company's office property and equipment of
$4.2 million was down from $4.7 million at December 31, 1996. The decrease was
primarily due to normal depreciation.
26
<PAGE> 27
LIABILITIES
GENERAL
The Company derives funds principally from deposits and, to a lesser
extent, from borrowings from the Federal Home Loan Bank of San Francisco
("FHLB"). In addition, recurring cash flows are generated from loan repayments
and payoffs and, since late 1993, from sales of foreclosed properties. In
addition to the Company's recurring sources of funds, the Company has generated
funds by identifying certain of its securities and seasoned real estate loans as
available-for-sale, and selling such assets in the open market.
DEPOSITS
Total deposits at September 30, 1997, were $776.3 million, an increase
from $717.8 million at December 31, 1996.
The table below summarizes the balances, weighted average interest rates
("WAIR") and weighted average remaining maturities in months ("WARM") for the
Company's deposits at the dates indicated ( dollars are in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
--------------------------------------------- -------------------------------------------------
DESCRIPTION BALANCE WAIR WARM BALANCE WAIR WARM
- ------------------------- -------------- ----------- ------------- --------------- ------------ -----------
<S> <C> <C> <C> <C>
Transaction accounts $ 97,827 2.48% - $ 70,560 1.34% -
Certificates of deposit
7 day maturities 47,188 4.50 - 58,212 4.44 -
Less than 6 months 51,709 5.61 3 58,121 5.29 3
6 months to 1 year 403,691 5.81 5 345,938 5.57 5
1 year to 2 years 160,102 5.69 8 148,886 5.80 14
Greater than 2 years 15,760 5.48 14 36,092 5.86 13
----------- ----------
Total $ 776,277 5.27% 5 $ 717,809 5.10% 6
=========== ==========
</TABLE>
BORROWINGS
A primary alternative funding source for the Company is a credit line
through the FHLB with a maximum advance of up to 35% of total assets (of which
25% may be secured by mortgage collateral and 10% may be secured by investment
securities). The FHLB system functions as a source of credit to savings
institutions which are members. Advances are typically secured by the Company's
mortgage loans and the capital stock of the FHLB owned by the Company. Subject
to the FHLB's advance policies and requirements, these advances can be requested
for any business purpose in which the Company is authorized to engage. In
granting advances, the FHLB considers a member's creditworthiness and other
relevant factors.
At September 30, 1997, the Company had one FHLB advance outstanding
totaling $40.0 million with an original and remaining term of one year and nine
months, respectively. This advance is securitized by mortgage collateral and has
a rate of 5.95%.
SENIOR NOTES
The Company has Senior Notes, which have a face amount of $13.5 million,
and an amortized book value of $12.6 million at September 30, 1997. The Senior
Notes carry an annual stated interest rate of 12.0% and have an annual effective
rate of approximately 16.0%, after the recording of original issue discount
("OID") of $1.5 million. The OID is accreted using the constant yield method
over the five year term of the Senior Notes. Interest is required to be paid
semi-annually at the stated interest.
27
<PAGE> 28
STOCKHOLDERS' EQUITY
The Company's capital structure is comprised of common stockholders'
equity and Cumulative Preferred Stock Series A ("Series A Preferred") with an
annual dividend rate of 18%. The Company recorded Series A Preferred at $11.6
million, which incorporates the corresponding OID. The redemption amount for the
Series A Preferred is $13.5 million.
In full satisfaction of its accrued dividend liability on the Series A
Preferred from issuance through September 15, 1997, the Company issued 431,121
shares of its Common Stock.
The following table summarizes the regulatory capital requirements under
the Home Owners' Loan Act ("HOLA") for the Bank at September 30, 1997. As
indicated in the table, the Bank's capital levels exceed all three of the
currently applicable minimum HOLA capital requirements (dollars are in
thousands).
<TABLE>
<CAPTION>
TANGIBLE CAPITAL (2) CORE CAPITAL (2) RISK-BASED CAPITAL
--------------------- -------------------- -----------------------
BALANCE % BALANCE % BALANCE %
------------ -------- ------------ ------- ------------ ------
<S> <C> <C> <C> <C>
Stockholders' equity (3) $ 66,090 $ 66,090 $ 66,090
Adjustments
Disallowed deferred tax asset (160) (160) (160)
General valuation allowances - - 7,708
Unrealized (gains) losses, net (67) (67) (67)
-------- ------ -------- ------ --------- ------
Regulatory capital 65,863 7.41% 65,863 7.41% 73,571 11.99%
Required minimum 13,341 1.50% 26,682 3.00% 49,073 8.00%
-------- ------ -------- ------ --------- ------
Excess capital $ 52,522 5.91% $ 39,181 4.41% $ 24,498 3.99%
======== ====== ======== ====== ========= ======
Adjusted assets (1) $889,410 $889,410 $ 613,411
======== ======== =========
</TABLE>
- -----------------
(1) The term "adjusted assets" refers to the term "adjusted total assets" as
defined in 12 C.F.R. Section 567.1(a) for purposes of tangible and core
capital requirements, and for purposes of risk-based capital
requirements, refers to the term "risk-weighted assets" as defined in 12
C.F.R. Section 567.1(bb).
(2) The tangible and core capital ratios were 6.27% at December 31, 1996.
(3) Reflects a capital contribution of $2.4 million from the parent company
made in June 1997.
28
<PAGE> 29
As of September 30, 1997, the most recent notification from the OTS
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios and the capital amounts and ratios
required in order for an institution to be "well capitalized" and "adequately"
capitalized are presented in the table below (dollars are in thousands).
<TABLE>
<CAPTION>
TO BE CATEGORIZED AS TO BE CATEGORIZED AS
ADEQUATELY CAPITALIZED WELL CAPITALIZED
UNDER PROMPT CORRECTIVE UNDER PROMPT CORRECTIVE
ACTUAL ACTION PROVISIONS ACTION PROVISIONS
------------------------ ----------------------- -----------------------
AMOUNT RATIOS AMOUNT RATIOS AMOUNT RATIOS
---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1997
Total Capital
(to Risk Weighted Assets) $73,571 11.99% $ 5,693 8.00% $63,366 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 65,863 10.74% 25,346 4.00% 38,020 6.00%
Tier 1 Capital
(to Average Assets) 65,863 7.49% 35,181 4.00% 43,976 5.00%
AS OF DECEMBER 31, 1996
Total Capital
(to Risk Weighted Assets) $59,560 11.11% $42,879 8.00% $53,599 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 52,803 9.85% 21,439 4.00% 32,159 6.00%
Tier 1 Capital
(to Average Assets) 52,803 6.55% 32,269 4.00% 40,336 5.00%
</TABLE>
The OTS has authority, after an opportunity for a hearing, to downgrade
an institution from "well capitalized" to "adequately capitalized" or to subject
an "adequately capitalized" or "undercapitalized" institution to the supervisory
actions applicable to the next lower category, if the OTS deems such action to
be appropriate as a result of supervisory concerns.
CAPITAL RESOURCES AND LIQUIDITY
The parent company had $0.6 million of cash on hand at September 30,
1997. The parent company is a holding company with no significant business
operations outside of the Bank. Its requisite obligations in relation to its
debt, preferred stock and operations are dependent upon its sole source of funds
from dividends of the Bank.
The Company's liquidity position refers to the extent to which the
Company's funding sources are sufficient to meet its current and long-term cash
requirements. Federal regulations currently require a savings institution to
maintain a monthly average daily balance of liquid and short-term liquid assets
equal to at least 5.0% and 1.0%, respectively, of the average daily balance of
its net withdrawable accounts and short-term borrowings during the preceding
calendar month. The Bank had liquidity and short-term liquidity ratios of 10.69%
and 3.68%, respectively, as of September 30, 1997, and 11.05% and 6.49%,
respectively, as of December 31, 1996.
The Company's current primary funding resources are deposit accounts,
principal payments on loans, proceeds from sales of real estate owned, advances
from the FHLB and cash flows from operations. Other possible sources of
liquidity available to the Company include reverse repurchase transactions
involving the Company's investment securities, whole loan sales, commercial bank
lines of credit, and direct access, under certain conditions, to borrowings from
the Federal Reserve System. The cash needs of the Company are principally for
the payment of interest on and withdrawals of deposit accounts, the funding of
loans, operating costs and expenses, and holding and refurbishment costs on
foreclosed real estate.
29
<PAGE> 30
INTEREST RATE RISK MANAGEMENT
The objective of interest rate risk management is to stabilize the
Company's net interest income ("NII") while limiting the change in its net
portfolio value ("NPV") from interest rate fluctuations. The Company seeks to
achieve this objective by matching its interest sensitive assets and
liabilities, and maintaining the maturity and repricing of these assets and
liabilities at appropriate levels given the interest rate environment. When the
amount of rate sensitive liabilities exceeds rate sensitive assets, net interest
income will generally be negatively impacted during a rising rate environment.
The speed and velocity of the repricing of assets and liabilities will also
contribute to the effects on net interest income.
The Company utilizes two methods for measuring interest rate risk. Gap
analysis is the first method, with a focus on measuring absolute dollar amounts
subject to repricing within certain periods of time, particularly the one-year
maturity horizon.
In addition to utilizing gap analysis in measuring interest rate risk,
the Company performs periodic interest rate simulations. These simulations
provide the Company with an estimate of both the dollar amount and percentage
change in NII under various interest rate scenarios. All assets and liabilities
are subjected to tests of up to 400 basis points in increases and decreases in
interest rates. Under each interest rate scenario, the Company projects its net
interest income and the NPV of its current balance sheet. From these results,
the Company can then develop alternatives to dealing with the tolerance
thresholds.
A principal mechanism used by the Company in the past for interest rate
risk management was the origination of adjustable rate mortgages tied to the
11th District Cost of Funds Index ("11th DCOFI"). The basic premise was that the
Company's actual cost of funds would parallel the 11th DCOFI and, as such, the
interest rate spread would generate the desired operating results. Almost all of
the Company's current loan originations are comprised of adjustable rate
mortgage loans. Adjustable rate mortgages represented approximately 80% of the
Company's loan portfolio at September 30, 1997. The Company currently originates
loans tied to multiple indices including London Interbank Offered Rate
("LIBOR"), Constant Maturity Treasury ("CMT"), national prime rate, and 11th
DCOFI.
ARMs tied to 11th DCOFI are slower in responding to current interest
rate environments than other types of variable rate loans because the index is a
compilation of the average rates paid by member institutions of the 11th
District of the FHLB. This index typically lags market rate changes in both
directions. If interest rates on deposit accounts increase due to market
conditions and competition, it may be anticipated that the Company will, absent
offsetting factors, experience a decline in its net interest margin. A
contributing factor would be the lag in upward pricing of the ARMs tied to the
11th DCOFI. However, the lag inherent in the 11th DCOFI will also cause the ARMs
to remain at a higher rate for a longer period after interest rates on deposits
begin to decline. The 11th DCOFI lag during a falling interest rate environment
should benefit, in the short-term, the Company's net interest margin, but the
actual dynamics of prepayments and the fact that ARMs reprice at various
intervals may alter this expected benefit.
The following table sets forth information concerning sensitivity of the
Company's interest-earning assets and interest-bearing liabilities as of
September 30, 1997 (dollars are in thousands). Such assets and liabilities are
classified by the earlier of maturity or repricing date.
30
<PAGE> 31
<TABLE>
<CAPTION>
OVER THREE OVER SIX OVER ONE
THREE THROUGH THROUGH YEAR OVER
MONTHS SIX TWELVE THROUGH FIVE
OR LESS MONTHS MONTHS FIVE YEARS YEARS TOTAL
------------- ----------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Cash and cash equivalents (1) $ 11,361 $ -- $ -- $ -- $ -- $ 11,361
Investments and FHLB Stock 7,661 -- 25,100 40,065 -- 72,826
Loans (2) 392,051 178,015 51,294 46,453 119,200 787,013
--------- --------- --------- --------- --------- ---------
Total interest-earning assets $ 411,073 $ 178,015 $ 76,394 $ 86,518 $ 119,200 $ 871,200
========= ========= ========= ========= ========= =========
INTEREST-BEARING LIABILITIES
Deposits
Transaction accounts $ 97,827 $ -- $ -- $ -- $ -- $ 97,827
Certificates of deposit 241,559 159,896 206,499 70,496 -- 678,450
FHLB advances -- -- 40,000 -- -- 40,000
Senior Notes -- -- -- 12,560 -- 12,560
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities $ 339,386 $ 159,896 $ 246,499 $ 83,056 $ -- $ 828,837
========= ========= ========= ========= ========= =========
Interest rate sensitivity gap $ 71,687 $ 18,119 $(170,105) $ 3,462 $ 119,200 $ 42,363
Cumulative interest rate
sensitivity gap 71,687 89,806 (80,299) (76,837) 42,363 42,363
Cumulative interest rate
sensitivity gap as a percentage
of total interest-earning assets 17.4% 15.2% -12.1% -10.2% 4.9% 4.9%
</TABLE>
- ----------------------
(1) Excludes noninterest-earning cash balances.
(2) Loans include $12.2 million of nonaccrual loans.
31
<PAGE> 32
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
On September 6, 1996, the Company and the Bank were named as
defendants in a class action lawsuit entitled Stanley D. Mosler and
Eileen C. Mosler vs. Hawthorne Savings and Loan Association,
Hawthorne Financial Corporation, et. al., filed in the Superior Court
of the State of California as Case No. BC154729 (the "Action"). The
plaintiffs had previously filed an individual action alleging the
same matters contained in the class action complaint. The individual
action was scheduled for trial in July 1997, but was taken off
calendar pending a ruling in the class action. Plaintiffs contend
they were entitled to a notice of availability of foreclosure
counseling, which they allege they did not receive, before the Bank
foreclosed. Plaintiffs contend that the alleged failure to provide
counseling notices and the underbidding by the Bank of the loan
amount at foreclosure resulted in damages to the purported class in
an amount in excess of $40 million. The Company has been named and
alleged to have liability based upon its relationship as trustee on
the Deed of Trust securing the Bank's loans. The Company and the Bank
filed responsive pleadings to the Action alleging that the complaint
is defective on its face and that the plaintiffs are not proper
representatives of the purported class. The court granted the Company
and Bank's motion and dismissed the plaintiffs' case. The Appellate
Court heard oral argument in July 1997 and upheld the trial court's
dismissal of the Action.
As previously reported, the Bank is a defendant in an action entitled
Takaki vs. Hawthorne Savings and Loan Association, filed in the
Superior Court of the State of California, Los Angeles, as Case No.
YC021815. The plaintiffs were owners of real property which they sold
in early 1992 to a third party. The Bank provided escrow services in
connection with the transaction. A substantial portion of the
consideration paid to the plaintiffs took the form of a deed of trust
secured by another property then owned by an affiliate of the
purchaser. The value of the collateral securing this deed of trust
ultimately proved to be inadequate. The plaintiffs alleged that the
Bank knew, or should have known, that the security for the
plaintiffs' loan was inadequate and should have so advised them. In
late June 1997, a trial jury found for the plaintiffs and awarded
compensatory and punitive damages totaling $9.1 million. In late July
1997, the trial judge reduced the combined award to $3.2 million. The
plaintiffs accepted the reduced judgment. The Bank has filed a Notice
of Appeal from the judgment and has posted an Appeal Bond with the
court to stay plaintiffs enforcement of the judgment pending the
Appellate Court's decision. Based upon its view that the law in
California is unambiguous that there is no duty which attaches to
escrow providers to advise parties to an escrow, the Bank believes
that its position will ultimately be upheld on appeal and,
accordingly, that no amounts will be paid by the Bank to the
plaintiffs in this matter. There can be no assurances that this will
be the case, however.
The Company is involved in a variety of other litigation matters. In
the opinion of management, none of these cases will have a material
adverse effect on the Bank's or the Company's financial condition or
operations.
ITEM 2. Changes in Securities - None
ITEM 3. Defaults upon Senior Securities - None
32
<PAGE> 33
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K
1. Reports on Form 8-K - None
2. Other required exhibits - None
33
<PAGE> 34
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAWTHORNE FINANCIAL CORPORATION
Dated October 31, 1997 /s/ NORMAN A. MORALES
--------------------------------
Norman A. Morales
Executive Vice President and
Chief Financial Officer
Dated October 31, 1997 /s/ JULIE A. MOODY
--------------------------------
Julie A. Moody
Vice President and
Controller
34
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,656
<INT-BEARING-DEPOSITS> 770,913
<FED-FUNDS-SOLD> 10,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
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<TOTAL-ASSETS> 891,163
<DEPOSITS> 776,277
<SHORT-TERM> 40,000
<LIABILITIES-OTHER> 7,461
<LONG-TERM> 0
0
11,592
<COMMON> 43,273
<OTHER-SE> 0
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<INTEREST-LOAN> 50,400
<INTEREST-INVEST> 4,657
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 55,137
<INTEREST-DEPOSIT> 28,467
<INTEREST-EXPENSE> 32,257
<INTEREST-INCOME-NET> 22,880
<LOAN-LOSSES> 3,739
<SECURITIES-GAINS> (11)
<EXPENSE-OTHER> 15,873
<INCOME-PRETAX> 6,391
<INCOME-PRE-EXTRAORDINARY> 6,391
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<CHANGES> 0
<NET-INCOME> 7,993
<EPS-PRIMARY> 2.19
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 8.88
<LOANS-NON> 12,248
<LOANS-PAST> 0
<LOANS-TROUBLED> 45,018
<LOANS-PROBLEM> 56,939
<ALLOWANCE-OPEN> 12,381
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<RECOVERIES> 0
<ALLOWANCE-CLOSE> 13,253
<ALLOWANCE-DOMESTIC> 13,253
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
