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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-Q
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X QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarter ended June 30, 1998
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
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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
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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
5,187,596 shares of Common Stock, $0.01 par value per share outstanding, as of
July 31, 1998.
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HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY
FORM 10-Q INDEX
FOR THE QUARTER ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C> <C>
ITEM 1. Financial Statements
Consolidated Statements of Financial Condition
at June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations
for the Three Months and Six Months Ended June 30, 1998 and 1997 4
Consolidated Statement of Stockholders' Equity
for the Six Months Ended June 30, 1998 5
Consolidated Statements of Cash Flows
for the Three Months and Six Months Ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 31
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, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <S> <C>
ASSETS
Cash and cash equivalents $ 67,962 $ 51,620
Investment securities available-for-sale, at market 595 578
Loans receivable (net of allowance for estimated credit losses
of $14,541 in 1998 and $13,274 in 1997) 1,093,316 838,251
Real estate owned (net of allowance for estimated losses
of $12 in 1998 and $2,563 in 1997) 3,791 9,859
Investment in capital stock of Federal Home Loan Bank - at cost 10,855 7,213
Office property and equipment - at cost, net 6,259 4,200
Accrued interest receivable 7,071 5,298
Deferred tax asset, net 5,055 6,820
Other assets 6,427 4,358
----------- ---------
$ 1,201,331 $ 928,197
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 891,475 $ 799,501
FHLB advances 215,000 40,000
Senior notes 40,000 40,000
Accounts payable and other liabilities 7,119 6,377
----------- ---------
1,153,594 885,878
Stockholders' equity
Preferred stock - $0.01 par value; authorized 10,000,000 shares;
none issued and outstanding - -
Common stock - $0.01 par value; authorized, 20,000,000
shares; issued and outstanding, 3,175,696 shares in 1998 and
3,095,996 shares in 1997 32 31
Capital in excess of par value - common stock 10,803 10,402
Accumulated other comprehensive income - unrealized gain
on available-for-sale securities, net 5 6
Retained earnings 37,025 32,020
----------- ---------
47,865 42,459
Less
Treasury stock, at cost - 5,400 shares (48) (48)
Loan to Employee Stock Ownership Plan (80) (92)
----------- ---------
47,737 42,319
----------- ---------
$ 1,201,331 $ 928,197
=========== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts are in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ----------------------------
1998 1997 1998 1997
------------ -------------- ------------- ------------
<S> <C> <C> <C> <C>
Interest revenues
Loans, net of nonaccrual income $ 24,475 $ 17,175 $ 45,636 $ 32,681
Cash and investment securities 622 1,573 1,455 3,074
------------ -------------- ------------- ------------
Total interest revenues 25,097 18,748 47,091 35,755
------------ -------------- ------------- ------------
Interest costs
Deposits 11,374 9,386 22,111 18,278
FHLB advances 1,873 944 2,790 1,724
Senior notes 1,250 496 2,514 979
------------ -------------- ------------- ------------
Total interest costs 14,497 10,826 27,415 20,981
------------ -------------- ------------- ------------
Net interest income 10,600 7,922 19,676 14,774
Provision for estimated credit losses on loans 1,750 1,019 3,235 2,239
------------ -------------- ------------- ------------
Net interest income after provision for credit losses 8,850 6,903 16,441 12,535
Noninterest revenues, net 1,452 832 2,165 1,551
Noninterest expenses
General and administrative costs
Employee 3,388 2,543 6,625 5,312
Operating 1,681 1,121 3,306 2,302
Occupancy 988 743 1,851 1,497
Professional 503 354 833 702
SAIF premium and OTS assessment 231 483 456 855
------------ -------------- ------------- ------------
Total general and administrative costs 6,791 5,244 13,071 10,668
(Income) loss from real estate owned, net (1,031) 2 (1,364) 262
------------ -------------- ------------- ------------
Total noninterest expenses 5,760 5,246 11,707 10,930
------------ -------------- ------------- ------------
Net earnings before income taxes 4,542 2,489 6,899 3,156
Income tax provision (benefit) 1,370 (935) 1,894 (1,627)
------------ -------------- ------------- ------------
Net earnings $ 3,172 $ 3,424 $ 5,005 $ 4,783
============ ============== ============= ============
Net earnings available for Common Stock (NOTE 3) $ 3,172 $ 2,815 $ 5,005 $ 3,565
============ ============== ============= ============
Basic earnings per share (NOTE 3) $ 1.00 $ 1.02 $ 1.58 $ 1.31
============ ============== ============= ============
Diluted earnings per share (NOTE 3) $ 0.56 $ 0.57 $ 0.88 $ 0.73
============ ============== ============= ============
Weighted average basic shares outstanding (NOTE 3) 3,168 2,767 3,163 2,692
============ ============== ============= ============
Weighted average diluted shares outstanding (NOTE 3) 5,663 4,959 5,672 4,876
============ ============== ============= ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
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HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars are in thousands)
<TABLE>
<CAPTION>
COMPREHENSIVE INCOME
-------------------------
BALANCE AT EXERCISED CHANGE IN BALANCE AT
DECEMBER 31, STOCK UNREALIZED NET JUNE 30,
1997 OPTIONS GAINS EARNINGS REPAYMENTS 1998
-------------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Common stock $ 31 $ 1 $ - $ - $ - $ 32
Capital in excess of par value
Common stock 10,402 401 - - - 10,803
Accumulated other comprehensive income -
unrealized gain on available-for-sale
securities 6 - (1) - - 5
Retained earnings 32,020 - - 5,005 - 37,025
Treasury stock (48) - - - - (48)
Loan to employee stock ownership plan (92) - - - 12 (80)
-------------- ------------ ------------ ----------- ----------- -----------
Total stockholders' equity $ 42,319 $ 402 $ (1) $ 5,005 $ 12 $ 47,737
============== ============ ============ =========== =========== ===========
Comprehensive income $ (1) $ 5,005 $ 5,004
============ =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 6
HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars are in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 3,172 $ 3,424 $ 5,005 $ 4,783
Adjustments
Provision (benefit) for income taxes 1,370 (935) 1,894 (1,627)
Provision for estimated credit losses on loans 1,750 1,019 3,235 2,239
Provision for estimated credit losses on real
estate owned - 481 15 761
Net recoveries from sales of real estate owned (1,095) (443) (1,394) (467)
Loan fee and discount accretion (1,589) (918) (2,953) (1,823)
Depreciation and amortization 376 459 777 904
FHLB dividends (104) (94) (209) (204)
(Increase) decrease in:
Accrued interest receivable (870) (1,822) (1,815) (1,742)
Other assets (2,608) 1,329 (2,303) (1,011)
Decrease in other liabilities (1,389) (491) 742 (15,856)
Other, net 50 8 (25) (35)
------------ ------------ ------------ ------------
Net cash (used) provided by operating activities (937) 2,017 2,969 (14,078)
------------ ------------ ------------ ------------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Investment securities
Purchases (9) (553) (17) (40,553)
Maturities - 795 - 795
Sales proceeds - 2,414 - 2,414
Loans
New loans funded (115,062) (55,354) (225,735) (99,345)
Construction disbursements (106,791) (29,159) (168,342) (47,109)
Advances on lines of credit (18,752) (1,572) (39,243) (5,059)
Payoffs 86,070 51,787 148,540 80,981
Principal amortization and paydowns 10,411 3,648 26,828 7,984
Other, net 735 (2,909) 2,315 (1,684)
Real estate owned
Sale proceeds 4,662 10,211 8,237 15,939
Capitalized costs (325) (1,636) (578) (3,892)
Other, net (8) - 51 -
Purchase of FHLB stock (3,433) - (3,433) -
Net change in office property and equipment (1,877) (100) (2,638) (211)
------------ ------------ ------------ ------------
Net cash used by investing activities (144,379) (22,428) (254,015) (89,740)
------------ ------------ ------------ ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE> 7
HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars are in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET CASH FLOWS FROM FINANCING ACTIVITIES
Deposit activity, net $42,605 $46,276 $91,974 $36,580
Net change in FHLB advances 110,000 (25,000) 175,000 (10,000)
Net proceeds from exercise of options 33 109 402 251
Collection of ESOP loan 4 7 12 14
------------ ------------ ------------ ------------
Net cash provided by financing activities 152,642 21,392 267,388 26,845
------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 7,326 981 16,342 (76,973)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 60,636 16,024 51,620 93,978
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 67,962 $ 17,005 $ 67,962 $ 17,005
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 15,780 $ 11,129 $ 26,982 $ 20,932
Income taxes 129 45 75 174
Non-cash investing and financing activities
Real estate acquired in settlement of loans 1,305 6,827 3,075 13,546
Loans originated to finance sales of real estate owned 358 355 1,970 2,547
Net change in unrealized gains (losses) on
available-for-sale securities (1) 546 (1) (151)
Loan activity
Total commitments and permanent fundings $ 246,428 $ 114,476 $ 439,404 $ 188,555
Less:
Change in undisbursed funds on construction
commitments (24,217) (15,255) (43,357) (17,213)
Loans originated to finance sales of real estate owned (358) (355) (1,970) (2,547)
Non-cash portion of refinanced loans - - - (6,300)
Undisbursed portion of new lines of credit - (14,353) - (16,041)
------------ ------------ ------------ ------------
Net construction disbursements and loans funded $ 221,853 $ 84,513 $ 394,077 $ 146,454
============ ============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
7
<PAGE> 8
HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(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"), which are collectively referred to herein 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
June 30, 1998 and December 31, 1997, and the results of its operations and its
cash flows for the three and six months ended June 30, 1998 and 1997. Operating
results for the three and six months ended June 30, 1998, are not necessarily
indicative of the results that may be expected for any other interim period or
the full year ending December 31, 1998.
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").
The 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, 1997.
In January 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
did not have a material impact on the Company's consolidated financial
statements.
NOTE 2 - RECLASSIFICATION
Certain amounts in the 1997 consolidated financial statements have been
reclassified, where practicable, to conform with classifications in 1998.
NOTE 3 - BOOK VALUE AND EARNINGS PER SHARE
The table below sets forth the Company's earnings per share
calculations for the three and six months ended June 30, 1998 and 1997. The
Diluted and Basic Methods were used for all four periods as prescribed under
GAAP. 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 thereafter, (2) Options refers to the outstanding stock options
granted under the Company's stock option plans, and (3) Preferred Stock refers
to the Cumulative Perpetual Preferred Stock issued by the Company in December
1995, and redeemed in December 1997, which carried an annual dividend equal to
18% of the face amount of the Preferred Stock.
On July 10, 1998, the Company completed an offering of 2,012,500 of its
common shares (which amount includes issuance of 262,500 shares representing
exercise by the Company's underwriters of their over-allotment option) at a
price of $15.00 per share, realizing net proceeds (after offering costs) of
approximately $27.5 million. As an additional result of the completion of the
Company's offering, the exercise price of the Company's Warrants was reduced to
$2.128, and the number of shares of Common Stock purchasable upon the exercise
of the Warrants was increased to 2,512,188.
8
<PAGE> 9
HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(AMOUNTS ARE IN THOUSANDS, EXCEPT FOR BOOK VALUE AND PER SHARE DATA)
NOTE 3 - BOOK VALUE AND EARNINGS PER SHARE - CONTINUED
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- ---------------------------------
1998 1997 1998 1997
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
SHARES OUTSTANDING
Basic 3,168 2,767 3,163 2,692
Warrants 2,376 2,376 2,376 2,376
Options 636 655 646 661
Less Treasury shares(1) (517) (839) (513) (853)
-------------- ------------- -------------- --------------
Diluted 5,663 4,959 5,672 4,876
============== ============= ============== ==============
STOCKHOLDERS' EQUITY
Basic $ 47,737 $ 39,671 $ 47,737 $ 39,671
Warrants 5,346 5,346 5,346 5,346
Options 4,629 3,443 4,629 3,443
Less Treasury shares(1) (9,986) (8,716) (10,036) (8,730)
-------------- ------------- -------------- --------------
Diluted $ 47,726 $ 39,744 $ 47,676 $ 39,730
============== ============= ============== ==============
NET EARNINGS
Net earnings for the period $ 3,172 $ 3,424 $ 5,005 $ 4,783
Preferred stock dividends - (609) - (1,218)
-------------- ------------- -------------- --------------
Net earnings available for Common stock $ 3,172 $ 2,815 $ 5,005 $ 3,565
============== ============= ============== ==============
BASIC BOOK VALUE PER SHARE $ 15.07 $ 14.34 $ 15.09 $ 14.74
============== ============= ============== ==============
BASIC EARNINGS PER SHARE $ 1.00 $ 1.02 $ 1.58 $ 1.31
============== ============= ============== ==============
DILUTED BOOK VALUE PER SHARE $ 8.43 $ 8.01 $ 8.41 $ 8.15
============== ============= ============== ==============
DILUTED EARNINGS PER SHARE $ 0.56 $ 0.57 $ 0.88 $ 0.73
============== ============= ============== ==============
</TABLE>
- ----------
(1) Under the Diluted Method, it is assumed that the Company will
use proceeds from the proforma exercise of the Warrants and
Options to acquire actual shares currently outstanding, thus
increasing Treasury shares. Treasury shares were assumed to be
repurchased at the average closing stock price for the
respective period.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company earned $3.2 million, or $0.56 per diluted share, for the
quarter ended June 30, 1998, which represented a 73% increase over the net
earnings of $1.8 million, or $0.32 per diluted share, reported for the first
quarter of 1998. Net earnings for the second quarter of 1997 were $3.4 million,
or $0.57 per diluted share, which amount included an income tax benefit of $0.9
million. Comparably tax effected, net earnings for the second quarter of 1997
would have been $1.7 million, or $0.33 per diluted share. For the six months
ended June 30, 1998, net earnings were $5.0 million, or $0.88 per diluted share,
as compared with net earnings of $4.8 million, or $0.73 per diluted share for
the same period in 1997, which amount included an income tax benefit of $1.6
million. Comparably tax effected, net earnings for the first six months of 1997
would have been $2.3 million, or $0.44 per diluted share.
CORE BUSINESS ACTIVITY
The Company originates real estate-secured loans throughout Southern
California, generally consisting of permanent loans collateralized by very large
homes and unique estates, permanent and construction loans secured by
multi-family residential and commercial real estate, and loans for the
construction of individual and tracts of single family residential homes and the
acquisition and development of land for the construction of such homes. The
Company funds its loans predominately with retail deposits and, to a lesser
extent, advances from the Federal Home Loan Bank of San Francisco ("FHLB"). The
interest spreads earned from this core business generally exceed the interest
spreads available on typical real estate-secured financings within the Company's
market area.
The Company's consolidated capital structure has changed significantly
during the past three years, initially as a result of its recapitalization in
December 1995, and then again in December 1997, due to its successful
refinancing of the securities issued in the 1995 recapitalization. Finally, in
July 1998, the Company successfully completed an offering of approximately 2.0
million of its common shares, which raised approximately $27.5 million of net
proceeds. In addition to these positive changes to the Company's capital
structure, the Company returned to taxable status during the first quarter of
1998, following several years in which it recorded substantial income tax
benefits from utilization of accumulated operating loss carryforwards. Together,
these factors make meaningful comparisons of consolidated operating results, and
related per share amounts, between the 1998 and 1997 periods somewhat difficult.
Because of the significant changes to the Company's capital structure
and taxable status, management believes that pretax core earnings are the most
relevant measure of the Company's underlying operating and earnings performance.
Core earnings are earnings before interest on parent company debt, income taxes,
real estate operations and non-operating items. For the second quarter of 1998,
core earnings were $4.8 million, nearly 50% greater than the $3.3 million of
core earnings produced during the first quarter of 1998, and nearly 60% greater
than the earnings of $3.0 million generated during the second quarter of 1997.
For the six months ended June 30, 1998, core earnings were $8.1 million, more
than 80% greater than the core earnings of $4.4 million realized during the
first six months of 1997.
10
<PAGE> 11
The table below isolates the principal components of the Company's core
and net earnings for the periods indicated (dollars are in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------- ----------------------------------
1998 1997 1998 1997
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net interest income $ 11,850 $ 8,418 $ 22,190 $ 15,753
Provision for credit losses 1,750 1,019 3,235 2,239
-------------- -------------- --------------- ---------------
Net interest income after provision for credit losses 10,100 7,399 18,955 13,514
Noninterest revenues 1,460 832 2,169 1,564
General and administrative costs 6,791 5,244 13,071 10,668
-------------- -------------- --------------- ---------------
CORE EARNINGS 4,769 2,987 8,053 4,410
Other items
Real estate owned, net 1,031 (2) 1,364 (262)
Other, net (8) - (4) (13)
Interest on senior notes (1,250) (496) (2,514) (979)
-------------- -------------- --------------- ---------------
(227) (498) (1,154) (1,254)
-------------- -------------- --------------- ---------------
PRETAX EARNINGS 4,542 2,489 6,899 3,156
Income tax provision (benefit) 1,370 (935) 1,894 (1,627)
-------------- -------------- --------------- ---------------
NET EARNINGS $ 3,172 $ 3,424 $ 5,005 $ 4,783
============== ============== =============== ===============
</TABLE>
The growth in earning assets results directly from the continuing
successful expansion of the Company's financing businesses. During the second
quarter of 1998, the Company generated net new permanent and construction loan
commitments of $246.4 million which, net of repayments and undisbursed funds,
produced net growth of $142.7 million in the Company's retained loan portfolio
during the quarter, an annualized rate of 60%. For the six months ended June 30,
1998, net new loan commitments totaled $439.4 million which, net of repayments
and undisbursed funds, produced net growth of $255.0 million in the Company's
retained loan portfolio during the first six months of 1998, an annualized rate
of 61%. By comparison, the Company recorded net new loan commitments of $114.5
million and $188.6 million for the three and six months ended June 30, 1997,
respectively, and net growth in the Company's retained loan portfolio
approximated $55.0 million during the first six months of 1997.
The Company's mix of financings, and its willingness and ability to
provide customers with tailored terms and highly-efficient transaction execution
when necessary, contributes to its ability to produce relatively higher yields
on the incremental growth in its loan portfolio. Concurrently, the Company has
been successful in keeping its funding costs (excluding interest on parent
company debt) virtually unchanged during the past several quarters. As a result,
during the second quarter of 1998, the Company's interest margin (before
interest on parent company debt and loan loss provisions) continued its steady
improvement, reaching 4.42% as compared with its interest margin of 4.34%
realized during the first quarter of 1998, and increasing 40 basis points over
the Company's interest margin of 4.02% realized during the second quarter of
1997. For the six months ended June 30, 1998, the Company's interest margin was
4.38%, as compared with its interest margin of 3.86% realized during the first
half of 1997, an improvement of 52 basis points or 13%.
Nonperforming assets ("NPAs"), which consist of the carrying value of
properties acquired through foreclosure and loan principal delinquent 90 days or
greater, stood at $20.4 million at June 30, 1998, down from their level of $20.7
million at December 31, 1997. Since December 31, 1997, the Company's real estate
owned portfolio has been reduced to $3.8 million (19% of NPAs) from $9.9 million
(48% of NPAs) due to sales of individual properties in the ordinary course of
business. The Company continues to experience very modest levels of foreclosures
of its collateral securing delinquent loans, with most such loans being cured by
borrowers with no concessions offered by the Company.
11
<PAGE> 12
As previously reported, in mid-1997 the Company commenced a series of
initiatives intended to enhance its management depth, to convert its technology
platform from an outsourced, host-based system to an in-house, client
server-based system, and to design and implement a plan to ensure Year 2000
compliance. These and related initiatives were expected to increase the
Company's general and administrative costs during 1998 by about 15% as compared
with 1997. During the three-and-six months ended June 30, 1998, general and
administrative costs were $6.8 million and $13.1 million, respectively, as
compared with general and administrative costs of $5.2 million and $10.7
million, respectively, for the corresponding periods during 1997. The actual 23%
growth rate in general and administrative expenses for the first six months of
1998, as compared with the same period in 1997, reflects the initiatives
described above plus additional compensation costs attributable to the Company's
financial performance during the first half of 1998.
INCOME TAXES
During the three-and-six months ended June 30, 1998, the Company's
effective tax rate was 30.2% and 27.5%, respectively. During the corresponding
periods of 1997, the Company recorded income tax benefits of $0.9 million and
$1.6 million, respectively. During the past several years, the Company has
benefited from utilization of income tax benefits, principally tax loss
carryforwards, accumulated during the early 1990s. The Company expects that
these accumulated benefits will be fully utilized during 1998.
PARENT COMPANY ITEMS
The Company's capital structure has changed significantly during the
past three years. The Company's issues of Preferred Stock ($13.5 million face
amount) and Senior Notes, due 2000 ($13.5 million face amount), issued in
December 1995 in connection with a recapitalization of the Company and the Bank,
were repaid in full in December 1997 with the proceeds from a single, $40
million issue of Senior Notes, due 2004, which carry a coupon interest rate of
12.50% and an effective cost of approximately 13.40% (after including the effect
of issue cost amortization). Through June 30, 1998, the Company had contributed
substantially all of the proceeds from its current Senior Notes issue to the
Bank, which has permitted the Bank to support its recent asset growth while
maintaining core and risk-based capital ratios well above the regulatory ratios
which define a well-capitalized institution.
In July 1998, the Company completed an offering of approximately 2.0
million of its common shares (which amount includes issuance of approximately
262,000 shares representing exercise by the Company's underwriters of their
over-allotment option), realizing net proceeds (after offering costs) of
approximately $27.5 million. The Company expects to contribute the majority of
the net proceeds from the offering to the Bank, as may be necessary over time,
to support the Bank's future asset growth while preserving the Bank's status as
a well-capitalized institution.
At June 30, 1998, the Bank maintained core and risk-based capital
ratios of 7.09% and 11.14%, respectively, which compared favorably to the
well-capitalized regulatory thresholds of 5.00% and 10.00%, respectively.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The operations of the Company are substantially dependent on its net
interest income, which is the difference between the interest income received
from its interest-earning assets and the interest expense paid on its
interest-bearing liabilities. The Company's net interest margin is its net
interest income divided by its average interest-earning assets. These percentage
measures are 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 relationship between repricing or maturity
of the Company's adjustable-rate and fixed-rate loans and short-term investment
securities and its deposits and borrowings and (3) the magnitude of the
Company's nonaccrual loans and real estate owned ("REO").
12
<PAGE> 13
The following tables set forth the Company's average balance sheets,
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 six months ended June 30, 1998 and 1997. In the tables, interest
revenues are net of interest associated with nonaccrual loans (dollars are in
thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
--------------------------------------- ------------------------------------------
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) $ 1,024,202 $ 24,475 9.56% $ 733,239 $ 17,175 9.37%
Cash and cash equivalents 38,782 509 5.25 19,399 255 5.26
Investment securities 587 9 6.13 77,402 1,224 6.33
Investment in capital stock of
Federal Home Loan Bank 7,733 104 5.38 6,948 94 5.41
------------ --------- ----------- -----------
Total interest-earning assets 1,071,304 25,097 9.37 836,988 18,748 8.96
--------- --------- ----------- -----------
Noninterest-earning assets 10,983 23,022
------------ -----------
Total assets $ 1,082,287 $ 860,010
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits $ 860,761 11,374 5.30 $ 726,201 9,386 5.18
FHLB Advances 133,928 1,873 5.61 62,365 944 6.07
Senior notes(3) 40,000 1,250 12.53 12,446 496 15.94
------------ --------- ------------ -----------
Total interest-bearing liabilities 1,034,689 14,497 5.62 801,012 10,826 5.42
--------- --------- ----------- -----------
Noninterest-bearing liabilities 1,325 11,694
Stockholders' equity 46,273 47,304
------------ ------------
Total liabilities & stockholders' equity $ 1,082,287 $ 860,010
============ ============
Net interest income $ 10,600 $ 7,922
========= ===========
Interest rate spread 3.75% 3.54%
========= ===========
Net interest margin 3.96% 3.79%
========= ===========
Net interest margin excluding senior notes 4.42% 4.02%
========= ===========
</TABLE>
- ----------
(1) Includes nonaccrual loans of $22.9 million and $19.9 million
for the three months ended June 30, 1998 and June 30, 1997,
respectively.
(2) Includes amortization of loan fees and discounts of $1.5
million and $0.9 million for the three months ended June 30,
1998 and June 30, 1997, respectively.
(3) Excludes issue cost amortization of $92,000 and $58,000 for
the three months ended June 30, 1998 and June 30, 1997,
respectively.
13
<PAGE> 14
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
--------------------------------------- ------------------------------------------
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) $ 958,131 $ 45,636 9.53% $ 708,458 $ 32,681 9.23%
Cash and cash equivalents 46,144 1,229 5.33 38,956 989 5.08
Investment securities 581 17 5.85 61,303 1,881 6.14
Investment in capital stock of
Federal Home Loan Bank 7,492 209 5.58 6,898 204 5.91
------------ --------- ---------- ---------
Total interest-earning assets 1,012,348 47,091 9.30 815,615 35,755 8.77
--------- ----------- --------- -----------
Noninterest-earning assets 17,479 29,616
------------ ----------
Total assets $ 1,029,827 $ 845,231
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits $ 839,945 22,111 5.31 $ 716,031 18,278 5.15
FHLB Advances 98,958 2,790 5.69 57,150 1,724 6.08
Senior notes(3) 40,000 2,514 12.67 12,395 979 15.93
------------ --------- ---------- ---------
Total interest-bearing liabilities 978,903 27,415 5.65 785,576 20,981 5.40
--------- ----------- --------- ------------
Noninterest-bearing liabilities 6,297 14,302
Stockholders' equity 44,627 45,353
------------ ----------
Total liabilities & stockholders' equity $ 1,029,827 $ 845,231
============ ==========
Net interest income $ 19,676 $ 14,774
========= =========
Interest rate spread 3.65% 3.37%
========== ==========
Net interest margin 3.89% 3.62%
========== ==========
Net interest margin excluding senior notes 4.38% 3.86%
========== ==========
</TABLE>
- ----------
(1) Includes nonaccrual loans of $22.2 million and $24.4 million
for the six months ended June 30, 1998 and June 30, 1997,
respectively.
(2) Includes amortization of loan fees and discounts of $2.9
million and $1.8 million for the six months ended June 30,
1998 and June 30, 1997, respectively.
(3) Excludes issue cost amortization of $183,000 and $117,000 for
the six months ended June 30, 1998 and June 30, 1997,
respectively.
14
<PAGE> 15
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following tables present the dollar amount of changes in interest
revenues and interest costs attributable to changes in the balances of
interest-earning assets and interest-bearing liabilities, 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 JUNE 30, 1998 AND 1997
INCREASE (DECREASE) DUE TO CHANGE IN
----------------------------------------------------------------
RATE AND NET
VOLUME RATE VOLUME CHANGE
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
INTEREST REVENUES
Loans $ 6,815 $ 347 $ 138 $ 7,300
Cash and cash equivalents 264 (5) (5) 254
Investment securities (1,215) (37) 37 (1,215)
Investment in capital stock of
Federal Home Loan Bank 11 (1) - 10
------------ ------------- ------------ ------------
5,875 304 170 6,349
------------ ------------- ------------ ------------
INTEREST COSTS
Deposits 1,739 210 39 1,988
FHLB Advances 1,083 (72) (82) 929
Senior notes 1,098 (107) (237) 754
------------ ------------- ------------ ------------
3,920 31 (280) 3,671
------------ ------------- ------------ ------------
INCREASE IN NET INTEREST INCOME $ 1,955 $ 273 $ 450 $ 2,678
============ ============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
INCREASE (DECREASE) DUE TO CHANGE IN
----------------------------------------------------------------
RATE AND NET
VOLUME RATE VOLUME CHANGE
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
INTEREST REVENUES
Loans $ 11,517 $ 1,063 $ 375 $ 12,955
Cash and cash equivalents 191 41 8 240
Investment securities (1,863) (87) 86 (1,864)
Investment in capital stock of
Federal Home Loan Bank 11 (6) - 5
------------ ------------- ------------ ------------
9,856 1,011 469 11,336
------------ ------------- ------------ ------------
INTEREST COSTS
Deposits 3,163 571 99 3,833
FHLB Advances 1,261 (113) (82) 1,066
Senior notes 2,180 (200) (445) 1,535
------------ ------------- ------------ ------------
6,604 258 (428) 6,434
------------ ------------- ------------ ------------
INCREASE IN NET INTEREST INCOME $ 3,252 $ 753 $ 897 $ 4,902
============ ============= ============ ============
</TABLE>
15
<PAGE> 16
The Company's interest income (net of interest due on nonaccrual loans)
increased by $11.3 million or 31.7% during the first six months of 1998 as
compared to the same period in 1997. This increase was primarily attributable to
increases in the average balance of loans outstanding and, to a lesser extent,
increases in the weighted average yield earned thereon.
The increase in interest income during the first six months of 1998 was
partially offset by a $6.4 million, or 30.7%, increase in interest expense, as
compared to the same period in the prior year, which was primarily due to an
increase in the average balances of the Company's deposits and borrowings and to
a lesser extent, increases in the weighted average rate paid on the Company's
deposits.
As a result of the foregoing, the Company's net interest income
increased by $4.9 million, or 33.2%, from $14.8 million during the first six
months of 1997 to $19.7 million during the comparable period in 1998, and the
Company's net interest margin (net interest income divided by average
interest-earning assets) increased by 27 basis points, or 7.5%, from 3.62% to
3.89% during the same respective periods.
PROVISIONS FOR POSSIBLE CREDIT LOSSES ON LOANS
For the three and six months ended June 30, 1998, the Company recorded
provisions for possible credit losses on loans of $1.8 million and $3.2 million,
respectively, compared with provisions for credit losses of $1.0 million and
$2.2 million, recorded during the three and six months ended June 30, 1997,
respectively. The increases in the level of provisioning for the three and six
months ended June 30, 1998, as compared to the same periods in 1997, reflects
the Company's efforts to maintain adequate levels of loan reserves given the
continuing successful expansion of the Company's financing business and growing
loan portfolio. The Company has established internal guidelines for loan loss
reserves which consider the composition and size of the loan portfolio, as well
as the composition and amount of its nonperforming loans. At June 30, 1998, the
Company's allowance for credit losses amounted to $14.5 million, of which $10.7
million was general reserves.
Although the Company maintains its allowance for credit losses at a
level which it considers to be adequate to provide for probable 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 credit losses,
and therefore the requisite amount of provision for credit 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.
16
<PAGE> 17
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------- --------------------------------------
1998 1997 CHANGE 1998 1997 CHANGE
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Loan related fees $ 1,273 $ 654 $ 619 $ 1,731 $ 1,120 $ 611
Other 179 178 1 434 431 3
----------- ----------- ----------- ----------- ----------- ------------
$ 1,452 $ 832 $ 620 $ 2,165 $ 1,551 $ 614
=========== =========== =========== =========== =========== ============
</TABLE>
Loan related fee revenues consist of prepayment, extension,
modification, escrow and exit fees collected from customers.
NONINTEREST EXPENSES - GENERAL AND ADMINISTRATIVE COSTS
The table below details the Company's general and administrative costs
for the periods indicated (dollars are in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- -------------------------------------------
1998 1997 CHANGE 1998 1997 CHANGE
------------- ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Employee $ 3,388 $ 2,543 $ 845 $ 6,625 $ 5,312 $ 1,313
Operating 1,681 1,121 560 3,306 2,302 1,004
Occupancy 988 743 245 1,851 1,497 354
Professional 503 354 149 833 702 131
SAIF insurance premium
and OTS assessment 231 483 (252) 456 855 (399)
------------- ------------ ------------- ------------ ------------ ------------
$ 6,791 $ 5,244 $ 1,547 $ 13,071 $ 10,668 $ 2,403
============= ============ ============= ============ ============ ============
</TABLE>
During the last half of 1997 and continuing into mid 1998, the Company
increased its lending staff, including retaining new senior managers for each of
its primary financing groups, in response to the substantial growth in the
volume of new business generated since the third quarter of 1997. During this
period, the Company has also hired personnel to prepare for, and to implement,
new computer-based systems during 1998. The cost of these personnel caused
employee-related costs to increase by 25% during the first six months of 1998 as
compared with the same period in 1997, which amount is also inclusive of
additional compensation costs attributable to the Company's financial
performance during the period.
The Company has also experienced an increase in operating costs
primarily as a result of its efforts related to the ongoing computer systems
conversions and expenditures related to its focused efforts to expand the
Company's retail banking presence.
17
<PAGE> 18
NONINTEREST EXPENSES - REAL ESTATE OWNED
The table below sets forth the revenues and costs attributable to the
Company's REO 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 - GENERAL AND
ADMINISTRATIVE COSTS (dollars are in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------------- ---------------------------------------
1998 1997 CHANGE 1998 1997 CHANGE
------------ ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
EXPENSES ASSOCIATED WITH
REAL ESTATE OWNED
Property taxes $ - $ 21 $ (21) $ 3 $ 42 $ (39)
Repairs, maintenance
and renovation 23 17 6 38 31 7
Insurance 11 36 (25) 41 79 (38)
------------ ----------- ------------ ------------ ----------- -----------
Total 34 74 (40) 82 152 (70)
NET RECOVERIES FROM SALE OF PROPERTIES (1,095) (443) (652) (1,394) (467) (927)
PROPERTY OPERATIONS, NET 30 (110) 140 (67) (184) 117
PROVISION FOR ESTIMATED LOSSES
ON REAL ESTATE OWNED - 481 (481) 15 761 (746)
------------ ----------- ------------ ------------ ----------- -----------
(INCOME) LOSS FROM REAL ESTATE
OWNED, NET $ (1,031) $ 2 $ (1,033) $ (1,364) $ 262 $ (1,626)
============ =========== ============ ============ =========== ===========
</TABLE>
The costs included in the table above (and, therefore, excluded from
operating costs (see NONINTEREST EXPENSES - GENERAL AND ADMINISTRATIVE COSTS)),
reflect holding costs directly attributable to the Company's REO.
Net recoveries from sales of REO represent the difference between the
proceeds received from property disposal and the carrying value of such
properties upon disposal. Property operations principally include the net
operating income (collected rental revenues less operating expenses and certain
renovation costs) from foreclosed income properties or receipt, following
foreclosure, of similar funds held by receivers during the period the original
loan was in default.
INCOME TAXES
The Company recorded income tax provisions of $1.4 million and $1.9
million for the three and six months ended June 30, 1998, respectively, as
compared to tax benefits of $0.9 million and $1.6 million, recorded during the
same periods in 1997. The effective tax rate has been reduced to 30.2% and 27.5%
for the three and six months ended June 30, 1998 to reflect the benefit of the
reduction of deferred tax valuation allowance previously established. At June
30, 1998, the Company had approximately $1.5 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 which 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.
18
<PAGE> 19
FINANCIAL CONDITION, CAPITAL RESOURCES & LIQUIDITY AND ASSET QUALITY
ASSETS
CASH AND CASH EQUIVALENTS
Cash and cash equivalents at June 30, 1998 and at December 31, 1997
consisted of the following (dollars are in thousands).
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------- ---------------
<S> <C> <C>
Cash $ 67,962 $ 9,520
Federal funds sold - 42,100
-------------- ---------------
$ 67,962 $ 51,620
============== ===============
</TABLE>
INVESTMENT SECURITIES
The table below summarizes the cost basis and estimated fair value of
investment securities available-for-sale at June 30, 1998 and at December 31,
1997 (dollars are in thousands).
<TABLE>
<CAPTION>
GROSS UNREALIZED ESTIMATED
AMORTIZED -------------------------- FAIR
COST GAINS LOSSES VALUE
-------------- ----------- ----------- --------------
<S> <S> <C> <C> <C>
MUTUAL FUND
June 30, 1998 $ 590 5 - $ 595
December 31, 1997 $ 572 6 - $ 578
</TABLE>
Investment securities with both a cost basis and an estimated fair
value of $0.6 million at June 30, 1998, had a weighted average yield of 6.39%,
and were due in less than one year.
19
<PAGE> 20
LOANS RECEIVABLE
GENERAL
The Company's loan portfolio consists almost exclusively of loans
secured by real estate located in Southern California. The table below sets
forth the composition of the Company's loan portfolio as of the dates indicated
(dollars are in thousands).
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
---------------------------------- -------------------------------
BALANCE PERCENT BALANCE PERCENT
---------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
SINGLE FAMILY
Estate(1) $ 255,357 20.1% $ 173,764 18.0%
Conventional 214,501 16.9 222,865 23.0
INCOME PROPERTY
Multi-family 242,101 19.1 225,738 23.2
Commercial real estate 167,242 13.2 111,893 11.6
Construction 37,307 2.9 7,310 0.8
LAND 72,635 5.7 39,475 4.1
SINGLE FAMILY CONSTRUCTION
Individual residences 188,324 14.8 107,989 11.2
Tract development 65,666 5.2 68,653 7.1
OTHER 26,905 2.1 9,698 1.0
---------------- --------------- -------------- -------------
GROSS LOANS RECEIVABLE(2) 1,270,038 100.0% 967,385 100.0%
=============== =============
LESS
Undisbursed loan funds (155,725) (108,683)
Deferred loan fees and
credits, net (6,456) (7,177)
Reserves (14,541) (13,274)
---------------- --------------
NET LOANS RECEIVABLE $ 1,093,316 $ 838,251
================ ==============
</TABLE>
- ----------
(1) Generally defined as individual loans with principal balances
of more than $1.0 million originated since 1994.
(2) Gross loans receivable includes outstanding balance plus
undisbursed construction commitments.
20
<PAGE> 21
The table below sets forth the approximate composition of the Company's gross
new loan commitments, net of internal refinances, for the periods indicated in
dollars and as a percentage of total loans originated (dollars are in
thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30,1998 JUNE 30, 1998
--------------------------------- -----------------------------
TYPE OF SECURITY AMOUNT % AMOUNT %
- ------------------------------------- --------------- -------------- --------------- ----------
<S> <C> <C> <C> <C>
SINGLE FAMILY
Estate $ 56,281 22.8% $ 113,250 25.8%
Conventional 7,934 3.2 12,848 2.9
INCOME PROPERTY
Multi-family 16,170 6.6 29,931 6.8
Commercial real estate 38,050 15.4 61,550 14.0
Construction 35,076 14.2 36,811 8.4
LAND 18,808 7.6 40,072 9.1
SINGLE FAMILY CONSTRUCTION
Individual residences 53,077 21.5 106,841 24.3
Tract development 17,032 6.9 27,249 6.2
OTHER 4,000 1.6 10,852 2.5
--------------- -------------- --------------- ----------
$ 246,428 100.0% $ 439,404 100.0%
=============== ============== =============== ==========
</TABLE>
ASSET QUALITY
NONACCRUAL AND TROUBLED DEBT RESTRUCTURED LOANS
The Company places loans on nonaccrual status when (1) they become 30
or more days 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>
JUNE 30, DECEMBER 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Loans past due 90 days or more $ 16,639 $ 10,793
Loans past due 30-89 days 6,170 4,435
Other nonaccrual loans - 168
--------------- ---------------
Total(1) $ 22,809 $ 15,396
=============== ===============
Reserves to loans past due 90 days or more 87.4% 123.0%
Reserves to total nonaccrual loans 63.8% 86.2%
</TABLE>
- ----------
(1) Includes $3.5 million and $0.5 million of troubled debt
restructured loans ("TDRs") at June 30, 1998 and December 31,
1997, respectively. Excludes $30.6 million and $29.1 million
of TDRs which were performing in accordance with their
modified terms at June 30, 1998 and December 31, 1997,
respectively.
21
<PAGE> 22
Although management of the Company has successfully reduced its nonperforming
assets in recent years, the real estate markets and the overall economy in its
market area are likely to be significant determinants of the quality of the
Company's assets in the future periods and, thus, its financial condition and
results of operations. The Company's financial condition and results of
operations may also be adversely affected to the extent the Company's newly
originated loans experience asset quality problems. In addition, in the view of
the relatively large size of many of the Company's loans, the movement of even a
few loans into the nonperforming category could have a material impact on the
Company's asset quality ratios and adversely affect its results of operations.
CLASSIFIED ASSETS
The table below sets forth information concerning the Company's
classified assets at the dates indicated. Classified assets include REO,
delinquent loans and performing loans which have been adversely classified
pursuant to OTS regulations and guidelines ("Performing/Classified" loans)
(dollars are in thousands).
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Real estate owned, net $ 3,791 $ 9,859
Nonperforming loans(1) 16,639 10,793
--------------- ---------------
GROSS NONPERFORMING ASSETS 20,430 20,652
Other delinquent loans(2) 6,170 4,435
Performing loans classified loss,
doubtful and substandard(3) 45,329 36,013
--------------- ---------------
GROSS CLASSIFIED ASSETS $ 71,929 $ 61,100
=============== ===============
CLASSIFIED LOANS(4) $ 68,138 $ 51,241
=============== ===============
LOANS RECEIVABLE(5) $ 1,107,857 $ 851,525
=============== ===============
RESERVES ON LOANS
Specific $ 3,834 $ 3,878
General 10,707 9,396
--------------- ---------------
$ 14,541 $ 13,274
=============== ===============
Total reserves to loans receivable 1.3% 1.6%
Total reserves to classified loans 21.3% 25.9%
Total reserves to nonperforming loans 87.4% 123.0%
Gross nonperforming assets to total assets 1.7% 2.2%
</TABLE>
- ----------
(1) LOANS 90 DAYS OR MORE DELINQUENT. ALL SUCH LOANS ARE ON
NONACCRUAL STATUS.
(2) LOANS 30 TO 89 DAYS DELINQUENT. ALL SUCH LOANS ARE ON
NONACCRUAL STATUS.
(3) INCLUDES $0.2 MILLION OF PERFORMING LOANS ON NONACCRUAL STATUS
AT DECEMBER 31, 1997.
(4) INCLUDES $22.8 MILLION AND $15.4 MILLION OF NONACCRUAL LOANS
AT JUNE 30, 1998, AND AT DECEMBER 31, 1997, RESPECTIVELY.
(5) LOANS RECEIVABLE ARE EXCLUSIVE OF THE ALLOWANCE FOR CREDIT
LOSSES.
The carrying value of NPA (i.e., real estate owned and loans 90 days or
more delinquent) decreased to $20.4 million, or 1.7% of total assets, at June
30, 1998, from $20.7 million, or 2.2% of total assets, at December 31, 1997.
22
<PAGE> 23
The table below sets forth information concerning the Company's total
classified loans as of June 30, 1998 (dollars are in thousands).
<TABLE>
<CAPTION>
CLASSIFIED LOANS
-------------------------------------------------------
OTHER PERFORMING
NONPERFORMING(1) DELINQUENCIES(2) LOANS TOTAL
---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C>
SINGLE FAMILY
Estate $ 11,235 $ - $ 26,339 $ 37,574
Conventional 3,500 2,072 11,873 17,445
INCOME PROPERTY
Multi-family 896 - 788 1,684
Commercial real estate - 2,000 - 2,000
LAND 43 - - 43
SINGLE FAMILY CONSTRUCTION
Individual residences 965 2,098 973 4,036
Tract development - - 4,332 4,332
OTHER - - 1,024 1,024
---------------- ----------------- ------------ ------------
Total $ 16,639 $ 6,170 $ 45,329 $ 68,138
================ ================= ============ ============
</TABLE>
- ----------
(1) Loans 90 days or more delinquent. All such loans are on
nonaccrual status.
(2) Loans 30 to 89 days delinquent. All such loans are on
nonaccrual status.
RESERVES
Management establishes specific reserves for losses on individual loans
and REO when it has determined that recovery of the Company's gross investment
is not probable and when the amount of loss can be reasonably determined. In
making this determination, management considers (1) the status of the asset, (2)
the probable future status of the asset, (3) the value of the asset or
underlying collateral and (4) management's intent with respect to the asset. In
quantifying the loss, if any, associated with individual loans and REO,
management utilizes external sources of information (i.e. appraisals, price
opinions from real estate professionals, comparable sales data and internal
estimates). In establishing specific reserves, management estimates the revenues
expected to be generated from the disposal of the Company's collateral or owned
property, less construction and renovation costs (if any), holding costs and
transaction costs. For tract construction and land developments, the resulting
projected cash flows are discounted utilizing a market rate of return to
determine their value.
Management establishes general reserves against the Company's portfolio
of loans. Generally, such general reserves are established for each segment of
the Company's loan portfolio. In establishing general reserves, management
incorporates (1) the recovery rate for similar properties previously sold by the
Company, (2) valuations of groups of similar assets, (3) the probability of
future adverse events (i.e., performing loans which became nonperforming, loans
in default which proceed through foreclosure) and (4) guidelines published by
the OTS.
23
<PAGE> 24
The table below sets forth the general and specific reserves for the
Company's loan and REO portfolios as of June 30, 1998 (dollars are in
thousands).
<TABLE>
<CAPTION>
LOANS
----------------------------- REAL ESTATE
PERFORMING DELINQUENT OWNED TOTAL
------------ ------------- --------------- -------------
<S> <C> <C> <C> <C>
Specific reserves $ 2,678 $ 1,156 $ 12 $ 3,846
General reserves 10,450 257 - 10,707
------------ ------------- --------------- -------------
Total $ 13,128 $ 1,413 $ 12 $ 14,553
============ ============= =============== =============
PERCENTAGES
% of total reserves to gross investment 1.2% 6.2% 0.3% 1.3%
% of general reserves to gross investment 1.0% 1.1% 0.0% 1.0%
</TABLE>
The table below summarizes the activity of the Company's reserves for
the periods indicated (dollars are in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
1998 1997 1998 1997
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
LOANS
Average loans outstanding $ 1,024,202 $ 733,239 $ 958,131 $ 708,458
============== ============== ============= =============
Reserve balance at beginning of period $ 14,092 $ 13,657 $ 13,274 $ 13,515
Provision for credit losses 1,750 1,019 3,235 2,239
Charge-offs:
Single family - conventional (268) (1,943) (735) (2,356)
Income property
Multi-family (1,033) (341) (1,033) (856)
Commercial real estate - (11) (200) -
Other - - - (11)
Land - - - (150)
-------------- -------------- ------------- -------------
Total charge-offs (1,301) (2,295) (1,968) (3,373)
-------------- -------------- ------------- -------------
Balance at end of period $ 14,541 $ 12,381 $ 14,541 $ 12,381
============== ============== ============= =============
Ratio of net charge-offs to average loans
outstanding during the period 0.1% 0.3% 0.2% 0.5%
REAL ESTATE OWNED
Reserve balance at beginning of period $ 862 $ 9,659 $ 2,563 $ 11,871
Provision for credit losses - 481 15 761
Charge-offs (850) (763) (2,566) (3,255)
-------------- -------------- ------------- -------------
Balance at end of period $ 12 $ 9,377 $ 12 $ 9,377
============== ============== ============= =============
</TABLE>
24
<PAGE> 25
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. The table below summarizes the allocation of the
Company's reserves by type of collateral at the dates indicated (dollars are in
thousands).
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
---------------------------------- ---------------------------------
PERCENT OF PERCENT OF
RESERVES TO RESERVES TO
TOTAL LOANS TOTAL LOANS
BALANCE BY CATEGORY BALANCE BY CATEGORY
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
SINGLE FAMILY
Estate $ 3,047 1.2% $ 1,975 1.1%
Conventional 3,822 1.8% 4,696 2.1%
INCOME PROPERTY
Multi-family 1,253 0.5% 2,000 0.9%
Commercial real estate 2,913 1.7% 2,252 2.0%
Construction 130 0.3% 10 0.1%
LAND 352 0.5% 162 0.4%
SINGLE FAMILY CONSTRUCTION
Individual residences 606 0.3% 503 0.5%
Tract development 1,062 1.6% 807 1.2%
OTHER 649 2.4% 226 2.3%
UNALLOCATED 707 - % 643 - %
--------------- --------------
$ 14,541 1.1% $ 13,274 1.4%
=============== ==============
</TABLE>
The table below summarizes reserves at the dates indicated for each of
the REO by type of property (dollars are in thousands).
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
---------------------------------- ------------------------------------
PERCENT OF PERCENT OF
RESERVES TO RESERVES TO
TOTAL REO TOTAL REO
PROPERTIES BY CATEGORY PROPERTIES BY CATEGORY
-------------- ---------------- -------------- ------------------
<S> <C> <C> <C> <C>
SINGLE FAMILY
Conventional $ 12 0.4% $ 1,523 19.8%
INCOME PROPERTY
Multi-family - - % 18 0.8%
LAND - - % 1,022 43.2%
-------------- --------------
$ 12 0.3% $ 2,563 20.6%
============== ==============
</TABLE>
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.
25
<PAGE> 26
The table below summarizes the composition of the Company's REO at the
dates indicated (dollars are in thousands).
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------------- ---------------
<S> <C> <C>
SINGLE FAMILY
Conventional $ 2,756 $ 7,695
INCOME PROPERTY
Multi-family 391 2,362
LAND 656 2,365
--------------- ---------------
GROSS INVESTMENT(1) 3,803 12,422
ALLOWANCE FOR ESTIMATED LOSSES (12) (2,563)
--------------- ---------------
NET INVESTMENT $ 3,791 $ 9,859
=============== ===============
</TABLE>
- ----------
(1) Fair value of collateral at foreclosure, plus post-foreclosure
capitalized costs.
SOURCES OF FUNDS
GENERAL
The Company's principal sources of funds in recent years have been
deposits obtained on a retail basis through its branch offices and, to a lesser
extent, advances from the FHLB and securities sold under agreements to
repurchase ("reverse repurchase agreements"). In addition, funds have been
obtained from maturities and repayments of loans and securities, and sales of
loans, securities and other assets, including real estate owned.
DEPOSITS
Total deposits at June 30, 1998, were $891.5 million, an increase from
$799.5 million at December 31, 1997.
The table below summarizes the balances by original term, 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>
JUNE 30, 1998 DECEMBER 31, 1997
----------------------------------------- -----------------------------------------
DESCRIPTION BALANCE WAIR WARM BALANCE WAIR WARM
- --------------------------- -------------- ---------- ----------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts $ 127,811 2.80% - $ 105,812 2.44% -
Certificates of deposit
7 day maturities 38,956 4.43% - 42,907 4.43% -
Less than 6 months 124,358 5.48% 3 35,418 5.57% 2
6 months to 1 year 496,019 5.74% 5 456,072 5.80% 8
1 year to 2 years 91,184 5.85% 16 146,674 5.74% 7
Greater than 2 years 13,147 5.42% 31 12,618 5.45% 13
-------------- --------------
Total $ 891,475 5.24% 6 $ 799,501 5.26% 6
============== ==============
</TABLE>
26
<PAGE> 27
FHLB ADVANCES
The Company has a credit line with the FHLB with a maximum advance of
up to 35% of total assets. 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 June 30, 1998, the Company had six FHLB advances outstanding
totaling $215.0 million with an original and remaining weighted average term of
five years and four years and ten months, respectively. These advances are
secured by mortgage collateral and have a weighted average interest rate of
5.36%.
SENIOR NOTES
On December 31, 1997, the Company completed the issuance of $40.0
million of Senior Notes due 2004. These Notes bear an interest rate of 12.5%,
and are callable after December 31, 2002. Interest is required to be paid
semiannually at the stated interest rate.
STOCKHOLDERS' EQUITY; REGULATORY CAPITAL
The Company's capital consists of common stockholders' equity, which at
June 30, 1998, amounted to $47.7 million and represented 4.0% of the Company's
total assets.
The following table summarizes the regulatory capital requirements
under the Home Owners' Loan Act ("HOLA") for the Bank at June 30, 1998. 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 CORE CAPITAL RISK-BASED CAPITAL
------------------------ -------------------------- -------------------------
BALANCE % BALANCE % BALANCE %
---------------- ------ --------------- --------- --------------- --------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity(1) $ 85,051 $ 85,051 $ 85,051
Adjustments
General reserves - - 10,707
Unrealized (gains) losses, net (5) (5) (5)
---------------- ------ --------------- --------- --------------- --------
Regulatory capital 85,046 7.09% 85,046 7.09% 95,753 11.14%
Required minimum 17,988 1.50 35,976 3.00 68,783 8.00
---------------- ------ --------------- --------- --------------- --------
Excess capital $ 67,058 5.59% $ 49,070 4.09% $ 26,970 3.14%
================ ====== =============== ========= =============== ========
Adjusted assets(2) $ 1,199,190 $ 1,199,190 $ 859,783
================ =============== ===============
</TABLE>
- ----------
(1) Reflects capital contributions totaling $7.0 million from the
parent company made during 1998
(2) 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(d).
27
<PAGE> 28
As of June 30, 1998, 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 JUNE 30, 1998
Total Capital
(to Risk Weighted Assets) $ 95,753 11.14% $ 68,783 8.00% $ 85,978 10.00%
Core Capital
(to Adjusted Tangible Assets) 85,046 7.09% 35,976 3.00% 59,960 5.00%
Tangible Capital
(to Adjusted Tangible Assets) 85,046 7.09% 17,988 1.50% N/A N/A
Tier 1 Capital
(to Risk Weighted Assets) 85,046 9.89% N/A N/A 51,587 6.00%
AS OF DECEMBER 31, 1997
Total Capital
(to Risk Weighted Assets) $ 78,454 11.48% $ 54,679 8.00% $ 68,349 10.00%
Core Capital
(to Adjusted Tangible Assets) 69,900 7.55% 27,773 3.00% 46,289 5.00%
Tangible Capital
(to Adjusted Tangible Assets) 69,900 7.55% 13,887 1.50% N/A N/A
Tier 1 Capital
(to Risk Weighted Assets) 69,900 10.23% N/A N/A 41,009 6.00%
</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 $0.3 million of cash on hand at June 30, 1998.
The parent company is a holding company with no significant business operations
outside of the Bank. Its requisite obligations in relation to its debt and
operations are primarily dependent upon dividends from the Bank, the payment of
which is subject to the requirements of applicable laws and regulations.
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 association to
maintain a monthly average daily balance of liquid assets (including cash,
certain time deposits, bankers' acceptances, and specified United States
Government, state or federal agency obligations) equal to 4.0% of the average
daily balance of its net withdrawable accounts and short-term borrowings during
the preceding calendar quarter. This liquidity requirement may be changed from
time to time by the OTS to any amount within the range of 4.00% to 10.00% of
such accounts and borrowings depending upon economic conditions and the deposit
flows of member associations. Monetary penalties may be imposed for failure to
meet this liquidity ratio requirement. The Company's liquidity for the
calculation period ended June 30, 1998 was 5.4%, which exceeded the applicable
minimum requirements.
The Company's current primary funding resources are deposits, principal
payments on loans, FHLB advances 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
28
<PAGE> 29
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
and operating costs and expenses.
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 within
specified periods, the NII generally will be negatively impacted by increasing
interest rates and positively impacted by decreasing interest rates during such
periods. Conversely, when the amount of rate-sensitive assets exceeds the amount
of rate-sensitive liabilities within specified periods, net interest income
generally will be positively impacted by increasing interest rates and
negatively impacted by decreasing interest rates during such periods. The speed
and velocity of the repricing of assets and liabilities will also contribute to
the effects on NII.
The Company utilizes two methods for measuring interest rate risk, gap
analysis and interest rate simulations. Gap analysis focuses on measuring
absolute dollar amounts subject to repricing within certain periods of time,
particularly the one-year maturity horizon.
Interest rate 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.
The Company's interest rate risk strategy emphasizes the management of
asset and liability balances within repricing categories in order to limit the
Bank's exposure to earnings variations as well as variations in the value of
assets and liabilities due to changes in interest rates over time. The Company
does not currently utilize off balance sheet hedging instruments in order to
hedge it's interest rate exposure. Instead, the Company hedges such exposure
internally through the use of core deposit accounts and FHLB advances together
with an emphasis on investing in shorter-term or adjustable-rate assets.
29
<PAGE> 30
The following table sets forth information concerning sensitivity of
the Company's interest-earning assets and interest-bearing liabilities as of
June 30, 1998. The amounts of assets and liabilities shown within a particular
period were determined in accordance with the contractual maturities of the
assets and liabilities, except that adjustable-rate loans are included in the
period in which they are first scheduled to adjust and not in the period in
which they mature. Such assets and liabilities are classified by the earlier of
maturity or repricing date (dollars are in thousands).
<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>
INTEREST-EARNING ASSETS
Cash and cash equivalents(1) $ 554 $ - $ - $ - $ - $ 554
Investments and FHLB Stock 11,450 - - - - 11,450
Loans(2) 711,317 210,804 39,579 30,533 122,080 1,114,313
---------- ----------- ---------- ---------- --------- -----------
Total interest-earning assets $723,321 $ 210,804 $ 39,579 $ 30,533 $122,080 $ 1,126,317
========== =========== ========== ========== ========= ===========
INTEREST-BEARING LIABILITIES
Deposits
Transaction accounts $127,811 $ - $ - $ - $ - $ 127,811
Certificates of deposit 213,215 251,731 269,699 29,019 - 763,664
FHLB advances - - - 215,000 - 215,000
Senior Notes - - - - 40,000 40,000
---------- ----------- ---------- ---------- -------- -----------
Total interest-bearing liabilities $341,026 $ 251,731 $ 269,699 $ 244,019 $ 40,000 $ 1,146,475
========== =========== ========== ========== ======== ===========
Interest rate sensitivity gap $382,295 $ (40,927) $ (230,120) $ (213,486) $ 82,080 $ (20,158)
Cumulative interest rate
sensitivity gap 382,295 341,368 111,248 (102,238) (20,158) (20,158)
Cumulative interest rate
sensitivity gap as a percentage
of total interest-earning assets 33.9% 30.3% 9.9% (9.1%) (1.8%) (1.8%)
</TABLE>
- ----------
(1) Excludes noninterest-earning cash balances.
(2) Loans include $22.8 million of nonaccrual loans.
30
<PAGE> 31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank seeks to control its interest rate risk exposure in a manner
that will allow for adequate levels of earnings and capital over a range of
possible interest rate environments. The Bank has adopted formal policies and
practices to monitor and manage interest rate risk exposure. As part of this
effort, the Bank uses the market value ("MV") methodology, a type of sensitivity
analysis, to gauge interest rate risk exposure.
Generally, MV is the discounted present value of the difference between
incoming cash flows on interest-earning assets and other assets and outgoing
cash flows on interest-bearing liabilities and other liabilities. The
application of the methodology attempts to quantify interest rate risk as the
change in the MV which would result from changes in market interest rates in
theoretical increments of 100 basis points, up to 400 basis points in either
direction.
At December 31, 1997, it was estimated that the Bank's MV would
decrease 8.8% and 18.0% in the event of 200 and 400 basis point increases in
market interest rates, respectively. The Bank's MV at the same date would
increase 9.3% and 19.4% in the event of 200 and 400 basis point decreases in
market rates, respectively.
Presented below, as of March 31, 1998, is an analysis of the Bank's MV
interest rate risk as measured by changes in MV for instantaneous and sustained
parallel shifts of 200 and 400 basis point increments in market interest rates
(dollars are in thousands).
<TABLE>
<CAPTION>
MARKET VALUE
CHANGE ------------------------------------------------
IN RATES $ AMOUNT $ CHANGE % CHANGE
- ------------- --------------- -------------- ---------------
<S> <C> <C> <C>
+400 bp $ 80,749 $ (7,478) (8.48%)
+200 bp 84,861 (3,366) (3.82%)
0 bp 88,227 - - %
- -200 bp 91,771 3,544 4.02%
- -400 bp 95,553 7,326 8.30%
</TABLE>
The Bank's overall improvement in its sensitivity to changes in market
rates from the period ended December 31, 1997 to March 31, 1998, is principally
attributable to an increase in its interest-earning assets with repricing
frequencies of three months or less, which have been supported by longer term
interest-bearing liabilities. The effect of these two actions has been a
moderation in the Bank's sensitivity to significant changes in market rates.
31
<PAGE> 32
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
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 $3.3 million. The trial court's judgment was
appealed. On July 21, 1998 the Court of Appeal reversed the jury's
findings on two of the three causes of action alleged by the
Plaintiffs, upholding only the trial jury's finding that the
Bank's escrow department was negligent in failing to provide
copies of escrow amendments to the Plaintiff's real estate broker.
In rendering its opinion, the Court of Appeals also reversed the
jury's findings of compensatory and punitive damages, with
instructions to the trial court to retry the matter to determine
the amount of damages, if any, attributable to the Bank on the
sole issue of negligence. The Company believes that the amount of
damages, if any, attributable to the Bank in this matter will be
insignificant.
The Company is involved in a variety of other litigation
matters. In the opinion of management, none of these cases will
have a materially 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
The Annual Meeting of Stockholders of the Company was held on June
17, 1998. At the Annual Meeting the following six nominees were
elected until the 1999 Annual Meeting of Stockholders and their
successors have been duly elected and qualified as directors.
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
DIRECTOR FOR WITHHELD
-------- --- --------
<S> <C> <C>
Marilyn Garton Amato 2,685,144 266,033
Scott A. Braly 2,691,164 260,013
Timothy R. Chrisman 2,691,064 260,113
Anthony W. Liberati 2,690,274 260,903
Harry F. Radcliffe 2,691,164 260,013
Howard E. Ritt 2,690,009 261,168
</TABLE>
At the Annual Meeting, the proposed amendments to the 1994 Stock
Option Plan were approved as follows:
For: 1,694,094
Against: 558,652
Abstain: 39,012
ITEM 5. Other Information - No
ITEM 6. Exhibits and Reports on Form 8-K
1. Reports on Form 8-K
No current reports on Form 8-K were filed for the three
months ended June 30, 1998.
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 August 13, 1998 /s/ NORMAN A. MORALES
-----------------------------
Norman A. Morales
Executive Vice President and
Chief Financial Officer
Dated August 13, 1998 /s/ JULIE A. MOODY
-----------------------------
Julie A. Moody
Vice President and
Controller
34
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 67,962
<INT-BEARING-DEPOSITS> 879,319
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 595
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,093,316
<ALLOWANCE> 14,541
<TOTAL-ASSETS> 1,201,331
<DEPOSITS> 891,475
<SHORT-TERM> 215,000
<LIABILITIES-OTHER> 7,119
<LONG-TERM> 40,000
0
0
<COMMON> 32
<OTHER-SE> 47,705
<TOTAL-LIABILITIES-AND-EQUITY> 1,201,331
<INTEREST-LOAN> 45,636
<INTEREST-INVEST> 1,455
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 47,091
<INTEREST-DEPOSIT> 22,111
<INTEREST-EXPENSE> 27,415
<INTEREST-INCOME-NET> 19,676
<LOAN-LOSSES> 3,235
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,071
<INCOME-PRETAX> 6,899
<INCOME-PRE-EXTRAORDINARY> 5,005
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,005
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 0.88
<YIELD-ACTUAL> 9.30
<LOANS-NON> 22,809
<LOANS-PAST> 16,639
<LOANS-TROUBLED> 36,840
<LOANS-PROBLEM> 45,329
<ALLOWANCE-OPEN> 13,274
<CHARGE-OFFS> 1,968
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 14,541
<ALLOWANCE-DOMESTIC> 14,541
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
