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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
October 20, 1998
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(Date of earliest event reported)
Hawthorne Financial Corporation
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(Exact name of registrant as specified in its charter)
Delaware 0-1100 95-2085671
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
2381 Rosecrans Avenue, El Segundo, California 90245
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(Address of principal executive offices) (Zip Code)
(310) 725-5000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
Page 1 of 3
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ITEM 5. OTHER EVENTS
On October 20, 1998, Hawthorne Financial Corporation issued the press
release which is included as Exhibit 99(a) hereto.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS
(a) Not applicable.
(b) Not applicable.
(c) The following exhibit is included with this Report:
Exhibit 99(a) Press Release, dated October 20, 1998
2
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SIGNATURES
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
Date: November 11, 1998 By: /s/ Scott A. Braly
---------------------------------------
Scott A. Braly
President and Chief Executive Officer
3
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Exhibit 99(a)
[HAWTHORNE LOGO]
HAWTHORNE FINANCIAL CORPORATION
PRESS RELEASE
OCTOBER 20, 1998
IMMEDIATE RELEASE
Contact: Mr. Scott Braly, President and Chief Executive Officer (310) 725-5600
Mr. Norman Morales, Chief Financial Officer (310) 725-5631
HAWTHORNE FINANCIAL REPORTS RESULTS FOR THIRD QUARTER
(NASDAQ:HTHR) (El Segundo, CA) Hawthorne Financial Corporation (the
"Company"), parent company of Hawthorne Savings, F.S.B. (the "Bank"),
today announced the following results from operations.
1998 THIRD QUARTER HIGHLIGHTS
- Net earnings for the quarter were $3.5 million, or
$0.45 per diluted share
- Year-to-date net earnings were $8.5 million, or $1.33
per diluted share
- The 1998 results included income tax provisions of
$1.6 million (3rd quarter) and $3.5 million
(year-to-date); by comparison, the 1997 results
included no income tax provision (3rd quarter) and an
income tax benefit of $1.6 million (year-to-date)
- Return on average equity reached 22% during the third
quarter and 21% for the nine months ended September
30, 1998 (including the impact of the Company's
secondary offering completed in July 1998)
- The Company's pretax core earnings for the quarter
and year-to-date rose by 90% and 86%, respectively,
over the pretax core earnings realized during the
comparable periods in 1997
- The Bank's effective interest rate margin (before
recurring loan loss provisions) increased to 4.29%
during the 3rd quarter of 1998, an increase to the
Bank's effective interest margin of 4.03% generated
during the 3rd quarter of 1997
- Net new loan commitments rose to $272 million for the
quarter, and to $713 million year-to-date; by
comparison, net new loan commitments during 1997 were
$137 million (3rd quarter) and $325 million
(year-to-date)
- The estimated, annualized yield on 1998 net new loan
commitment volume remained above 10.00% during the
3rd quarter
- Total assets reached $1.4 billion at September 30,
1998, rising over 50% from their level at the end of
1997
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The Company earned $3.5 million, or $0.45 per diluted share, for the quarter
ended September 30, 1998. These results compare with net earnings of $3.2
million, or $0.47 per diluted share, for the quarter ended September 30, 1997.
Earnings for the September 1998 quarter were driven by a 58% increase, to $13.6
million, in the Bank's net interest income before credit loss provisions as
compared with the 1997 3rd quarter, which was only partially offset by higher
general and administrative costs, a higher income tax provision, and higher
interest expense associated with the Company's Senior Notes.
For the nine months ended September 30, 1998, net earnings were $8.5 million,
or $1.33 per diluted share, as compared with net earnings of $8.0 million, or
$1.20 per diluted share, for the nine months ended September 30, 1997. The
1997 period was substantially aided by an income tax benefit of $1.6 million
(versus an income tax provision of $3.5 million for the corresponding 1998
period).
At September 30, 1998, total assets were $1.4 billion, an increase from total
assets of $928 million at December 31, 1997, and $891 million at September 30,
1997. As of these respective dates, net loans and total deposits were $1.2
billion and $995 million (September 30, 1998), $838 million and $800 million
(December 31, 1997), and $767 million and $776 million (September 30, 1997).
CORE BUSINESS ACTIVITY
The Company originates real estate-secured loans throughout Southern
California, generally consisting of loans collateralized by very large homes,
income-producing properties and residential construction projects (principally
individual home construction). The Company funds its loans predominantly with
retail deposits and, to a lesser extent, with advances from the Federal Home
Loan Bank of San Francisco. The spreads earned by the Company from this core
business activity generally exceed the spreads available on typical real
estate-secured financings within the Company's Southern California market area.
The Company does not engage in any sub-prime lending, nor does the Company
typically provide financing which involves conventional (e.g., FNMA-conforming)
loan terms and loan pricing. The Company holds all of its loans for its own
account, rather than selling loans into the secondary mortgage markets. With
respect to its retail banking activities, the Company does not retain
receivables arising from the issuance of Bank-sponsored credit cards, nor does
the Bank provide meaningful credit extensions to customers in the form of
overdraft protection, equity credit lines, and the like.
CAPITALIZATION
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 during 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.
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HAWTHORNE FINANCIAL CORPORATION
PRESS RELEASE
OCTOBER 20, 1998
PAGE 3
CORE OPERATING RESULTS
Because of the significant changes to the Company's capital structure and
taxable status, management believes that pretax core earnings are the most
useful 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 3rd quarter of 1998, core earnings were $5.7 million, 90% greater than
the $3.0 million of core earnings produced during the 3rd quarter of 1997. For
the nine months ended September 30, 1998, core earnings were $13.8 million,
virtually double core earnings of $7.4 million realized during the first nine
months of 1997.
The substantial growth in core earnings results from the steady growth in
earning assets during the past several quarters, which has been accompanied by
a widening of the Bank's interest rate margin. The Company's and the Bank's
core results have also been modestly aided by a decline in nonperforming
assets.
The growth in earning assets results directly from the continuing successful
expansion of the Company's real estate-secured financing businesses. During
the 3rd quarter of 1998, the Company generated net new loan commitments of $272
million which, net of repayments and undisbursed loan funds, produced net
growth of nearly $100 million in the Company's retained loan portfolio during
the quarter, an annualized rate of 36%. For the nine months ended September
30, 1998, net new loan commitments totaled $713 million which, net of
repayments and undisbursed loan funds, produced net growth of $352 million in
the Company's retained loan portfolio during the first nine months of 1998, an
annualized growth rate of nearly 56%. By comparison, the Company recorded net
new loan commitments of $137 million and $325 million, respectively, for the
three-and-nine-month periods ended September 30, 1997.
The Company's diversified mix of real estate-secured financings, and its
willingness and ability to provide its customers with tailored loan terms and
highly-efficient transaction execution when necessary, contributes to its
ability to consistently produce premium yields on the incremental growth in its
retained loan portfolio. At the same time, 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 3rd
quarter of 1998, the Bank's interest margin (before interest on parent company
debt and loan loss provisions) continued its steady improvement, reaching 4.29%
of average interest-earning assets. This compares to the Bank's interest
margin of 4.03% realized during the 3rd quarter of 1997. For the nine months
ended September 30, 1998, the Bank's interest margin was 4.34%, as compared
with its interest margin of 3.92% realized during the first nine months of
1997.
Nonperforming assets ("NPAs"), which consist of the carrying value of
properties acquired through foreclosure and loan principal delinquent 90 days
or greater, stood at $16.6 million at September 30, 1998, down from their level
of $20.7 million at December 31, 1997. At the end of September 1998, the
Bank's portfolio of real estate owned totaled $2.2 million, or 13% of NPAs.
The Bank 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 being offered by the Bank.
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 to implement a plan to ensure Year 2000
compliance. These and related initiatives were expected to increase the
Company's consolidated general and administrative costs during
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HAWTHORNE FINANCIAL CORPORATION
PRESS RELEASE
OCTOBER 20, 1998
PAGE 4
1998 by about 15% as compared with 1997. During the three-and-nine-month
periods ended September 30, 1998, consolidated general and administrative costs
were $7.2 million and $20.3 million, respectively. For the corresponding
periods during 1997, consolidated general and administrative costs were $5.2
million and $15.9 million, respectively. The actual 28% growth rate in general
and administrative expenses for the first nine months of 1998 as compared with
the same period during 1997 reflects the initiatives described above plus
additional costs attributable to the Company's financial performance during the
first nine months of 1998.
INCOME TAXES
During the three-and-nine months ended September 30, 1998, the Company's
effective tax rate was 32.1% and 29.4%, respectively. During the corresponding
periods in 1997, the Company recorded no income tax provision (1997 3rd
quarter) and an income tax benefit of $1.6 million (nine months ended September
30, 1997). During the past several years, the Company has benefited from
utilization of income tax benefits, principally tax loss carryforwards,
accumulated during the early 1990's. The Company expects that these
accumulated benefits will be fully utilized during 1998.
CAPITALIZATION
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;
dividend rate of 18.00%) and Senior Notes ($13.5 million face amount; 12.00%
coupon interest rate), issued in December 1995 in connection with the
recapitalization of the Company and the Bank, were repaid in full in December
1997 with the proceeds from a single, $40.0 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 September 30, 1998, the Company had contributed 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, realizing net proceeds (after offering costs) of
approximately $27.5 million. During the 3rd quarter of 1998, the Company
contributed $5.0 million of these net proceeds to the Bank and retained
approximately $22.5 million of liquidity at that date. The Company expects to
contribute the majority of this remaining parent company liquidity to the Bank,
as may be necessary over time, to support the Bank's future business growth
while preserving the Bank's status as a well-capitalized institution.
At September 30, 1998, the Bank maintained core and risk-based capital ratios
of 6.92% and 10.90%, respectively, which compared favorably to the
well-capitalized regulatory ratios of 5.00% and 10.00%, respectively.
This press release contains forward-looking statements as referenced in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
are inherently unreliable and actual results may differ. Factors which could
cause actual results to differ from these forward-looking statements include
changes in the competitive marketplace, economic conditions in the industry and
factors discussed in the Company's filings with the Securities and Exchange
Commission. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
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HAWTHORNE FINANCIAL CORPORATION
PRESS RELEASE
OCTOBER 20, 1998
PAGE 5
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(DOLLARS AND SHARES ARE IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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SEP 30, JUN 30, MAR 31, DEC 31, SEP 30, JUN 30,
1998 1998 1998 1997 1997 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CORE OPERATIONS
Net interest income $ 13,552 $ 11,850 $ 10,340 $ 9,421 $ 8,596 $ 8,418
Provision for credit losses (1,950) (1,750) (1,485) (1,398) (1,500) (1,500)
----------- ----------- ----------- ----------- ----------- -----------
Net interest income after
provision for credit losses 11,602 10,100 8,855 8,023 7,096 6,918
Other operating revenues 1,372 1,452 709 909 1,126 832
General and administrative costs (7,240) (6,791) (6,280) (6,139) (5,203) (5,244)
----------- ----------- ----------- ----------- ----------- -----------
CORE EARNINGS 5,734 4,761 3,284 2,793 3,019 2,506
----------- ----------- ----------- ----------- ----------- -----------
OTHER ITEMS
Real estate operations, net 616 1,031 333 2 490 479
Other, net (10) 4 (105) 219
Interest on senior notes (1,250) (1,250) (1,264) (511) (489) (496)
----------- ----------- ----------- ----------- ----------- -----------
(644) (219) (927) (614) 220 (17)
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PRETAX EARNINGS 5,090 4,542 2,357 2,179 3,239 2,489
Income tax (provision)
benefit (1,632) (1,370) (524) 975 (25) 935
Extraordinary item (1,534)
----------- ----------- ----------- ----------- ----------- -----------
NET EARNINGS $ 3,458 $ 3,172 $ 1,833 $ 1,620 $ 3,214 $ 3,424
=========== =========== =========== =========== =========== ===========
AVERAGE INTEREST-
EARNING ASSETS $ 1,272,088 $ 1,071,300 $ 953,391 $ 876,500 $ 852,184 $ 836,988
=========== =========== =========== =========== =========== ===========
Net earnings available
Basic earnings per share $ 0.66 $ 1.00 $ 0.58 $ 0.32 $ 0.85 $ 1.02
Diluted earnngs per share $ 0.45 $ 0.56 $ 0.32 $ 0.18 $ 0.47 $ 0.57
YTD Diluted earnings per share $ 1.33 $ 0.88 $ 0.32 $ 1.37 $ 1.20 $ 0.73
Weighted average basic
shares outstanding 5,189 3,168 3,157 3,090 3,058 2,767
Weighted average diluted
shares outstanding 7,708 5,663 5,681 5,622 5,532 4,959
</TABLE>
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HAWTHORNE FINANCIAL CORPORATION
PRESS RELEASE
OCTOBER 20, 1998
PAGE 6
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS ARE IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
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ASSETS (UNAUDITED) (AUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents $ 166,454 $ 51,620 $ 17,906
Investment securities 578 65,732
Loans receivable (net of allowance for credit losses of $16,160
at Sep 1998, $13,274 at Dec 1997 and $13,253 at Sep 1997) 1,190,382 838,251 767,096
Real estate owned, net 2,178 9,859 14,598
Other assets 36,050 27,889 25,831
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Total Assets $ 1,395,064 $ 928,197 $ 891,163
============= ============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Deposits $ 994,932 $ 799,501 $ 776,277
FHLB advances 264,000 40,000 40,000
Senior notes 40,000 40,000 12,560
Other liabilities 17,095 6,377 7,461
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Total Liabilities 1,316,027 885,878 836,298
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Preferred Stock 11,592
Common Stock 79,037 42,319 43,273
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Total Stockholders' Equity 79,037 42,319 54,865
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Total Liabilities and Stockholders' Equity $ 1,395,064 $ 928,197 $ 891,163
============= ============= =============
<CAPTION>
SUPPLEMENTAL INFORMATION - BANK CAPITAL SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
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<S> <C> <C> <C>
Core capital $ 94,752 $ 69,900 $ 65,863
Ratio 6.92% 7.55% 7.49%
Risk-based capital $ 106,252 $ 78,454 $ 73,571
Ratio 10.90% 11.48% 11.99%
</TABLE>
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HAWTHORNE FINANCIAL CORPORATION
PRESS RELEASE
OCTOBER 20, 1998
PAGE 7
<TABLE>
<CAPTION>
SUPPLEMENTAL INFORMATION - CLASSIFIED ASSETS
(DOLLARS ARE IN THOUSANDS)
ASSET QUALITY SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
--------------- --------------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
NONPERFORMING ASSETS
Real estate owned, net $ 2,178 $ 9,859 $ 14,598
Nonperforming loans, 90 days and greater delinquent 14,446 10,793 5,547
--------------- --------------- ---------------
TOTAL NONPERFORMING ASSETS 16,624 20,652 20,145
OTHER CLASSIFIED LOANS
Other delinquent loans, 30 - 89 days 11,738 4,435 6,533
Performing loans classified
substandard 39,715 36,013 56,939
--------------- --------------- ---------------
TOTAL CLASSIFIED ASSETS $ 68,077 $ 61,100 $ 83,617
=============== =============== ===============
TOTAL CLASSIFIED LOANS $ 65,899 $ 51,241 $ 69,019
=============== =============== ===============
Net loans receivable, exclusive of reserves
on loans $ 1,222,702 $ 851,525 $ 780,349
=============== =============== ===============
RESERVES ON LOANS
Specific $ 4,527 $ 3,878 $ 2,327
General 11,633 9,396 10,926
--------------- --------------- ---------------
Total $ 16,160 $ 13,274 $ 13,253
=============== =============== ===============
SELECT ASSET QUALITY RATIOS AT PERIOD END
Total nonperforming assets to total assets 1.2% 2.2% 2.3%
Total reserves to net loans receivable 1.3% 1.6% 1.7%
Total reserves to classified loans 24.5% 25.9% 19.2%
Total reserves to nonperforming loans 111.9% 123.0% 238.9%
Total classified assets to Bank core capital and
general loan loss reserves 63.9% 77.1% 108.9%
</TABLE>
