<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_________ to _________
Commission file number 1-11947
FIRST ALLIANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 33-0721183
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
17305 VON KARMAN AVENUE, IRVINE, CALIFORNIA 92614
-------------------------------------------------
(Address of principal executive offices including ZIP Code)
(714) 224-8500
---------------
(Registrant's telephone number
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities 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 No. X.
-- --
As of August 31, 1996, registrant had outstanding 4,025,000 shares of Class A
Common Stock and 10,750,000 shares of Class B Common Stock, respectively.
================================================================================
<PAGE>
FIRST ALLIANCE CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited) as of
June 30, 1996 and December 31, 1995.............................. 1
Consolidated Statements of Income (Unaudited) for the quarters
and the six months ended June 30, 1996 and 1995.................. 2
Consolidated Statements of Cash Flows (Unaudited) for the
quarters and the six months ended June 30, 1996 and 1995......... 3
Notes to Consolidated Financial Statements....................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A")................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 15
Item 2. Changes in Securities............................................ 15
Item 3. Defaults Upon Senior Securities.................................. 15
Item 4. Submission of Matters to a Vote of Security Holders.............. 15
Item 5. Other Information................................................ 15
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.................................................. 16
b. Reports on Form 8-K....................................... 16
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents............... $ 8,858 $ 4,019
Receivable from trusts.................. 6,983 4,664
Loans held for sale..................... 12,718 24,744
Loans receivable held for investment.... 1,714 2,261
Residual interests in securities -- at
fair value............................. 22,354 19,705
Mortgage servicing rights............... 4,930 4,021
Real estate owned, net.................. 1,417 1,474
Property, net........................... 2,229 2,141
Prepaid expenses and other assets....... 2,977 3,882
-------- --------
Total assets............................ $64,180 $66,911
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse financing facility............ $10,493 $18,233
Accounts payable and accrued liabilities 5,117 5,234
Dividends payable....................... 3,669
Notes payable........................... 772 1,123
S distribution notes.................... 44,020
-------- --------
Total liabilities................... 64,071 24,590
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value per
share; 1,000,000 shares authorized; no
shares outstanding.....................
Class A Common Stock, $.01 par value
per share; 25,000,000 shares
authorized; no shares outstanding......
Class B Common Stock, $.01 par value
per share; 15,000,000 shares
authorized; shares issued and
outstanding: 10,750,000 at June 30,
1996, 10,642,500 at December 31, 1995.. 108 42
Additional paid in capital.............. 1,534
Retained earnings....................... 67 42,279
Deferred stock compensation............. (1,600)
-------- --------
Total stockholders' equity.............. 109 42,321
-------- --------
Total liabilities and stockholders'
equity............................. $64,180 $66,911
======== ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------- ------------------------------
1996 1995 1996 1995
------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Loan origination and sale.................................... $ 11,880 $ 12,841 $ 21,251 $ 13,927
Loan servicing and other fees................................ 2,244 2,126 4,487 4,103
Interest..................................................... 2,877 3,160 6,035 6,031
Other........................................................ 23 47 61 76
----------- ----------- ----------- -----------
Total revenue.............................................. 17,024 18,174 31,834 24,137
----------- ----------- ----------- -----------
EXPENSE:
Compensation and benefits.................................... 3,531 2,448 6,727 5,228
Professional services........................................ 282 201 551 465
Advertising.................................................. 818 1,051 1,758 2,122
Subservicing and other fees.................................. 184 321 376 587
Rents........................................................ 372 330 742 615
Supplies..................................................... 306 261 641 507
Depreciation and amortization of property.................... 178 154 317 298
Interest..................................................... 1,024 1,087 1,787 1,700
Legal........................................................ 306 357 452 563
Other........................................................ 717 618 1,317 1,006
----------- ----------- ----------- -----------
Total expense.............................................. 7,718 6,828 14,668 13,091
----------- ----------- ----------- -----------
NET INCOME BEFORE INCOME TAX PROVISION......................... 9,306 11,346 17,166 11,046
INCOME TAX PROVISION........................................... 139 171 257 166
----------- ----------- ----------- -----------
NET INCOME..................................................... $ 9,167 $ 11,175 $ 16,909 $ 10,880
=========== =========== =========== ===========
NET INCOME PER SHARE........................................... $ 0.86 $ 1.05 $ 1.59 $ 1.02
=========== =========== =========== ===========
Weighted average number of common shares outstanding........... 10,650,407 10,650,407 10,650,407 10,650,407
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- ----------------------------
1996 1995 1996 1995
-------- --------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 9,167 $ 11,175 $ 16,909 $ 10,880
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Loan origination and sale revenue, net of other fees............ (11,798) (13,575) (20,952) (14,398)
Net collections (accretion) of residual interests in
securities 109 (829) 183 (1,467)
Accretion of discounts on loan receivable....................... (80) (255) (136) (511)
Amortization of mortgage servicing rights....................... 449 137 789 244
Depreciation and amortization of property....................... 178 154 317 298
Provision for estimated losses on real estate owned............. 74
Loss on sales of real estate owned and property................. 156 6 62 6
Loans originated or purchased for sale, net of loan fees........ (72,226) (46,897) (140,638) (93,589)
Sale of regular interests in securities......................... 74,972 67,744 127,391 67,744
Proceeds from sale of loans..................................... 20,092 16,789 41,410 24,349
Changes in assets and liabilities:
Receivable from trusts......................................... 484 (241) (2,319) (541)
Prepaid expenses and other assets.............................. 874 299 905 (334)
Accounts payable and accrued liabilities....................... (238) 242 (117) (2,917)
-------- -------- --------- --------
Net cash provided by (used in) operating activities.......... 22,139 34,749 23,878 (10,236)
------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................. (453) (340) (896) (496)
Loans receivable issued.......................................... (346) (1,131)
Collections on loans receivable.................................. 515 1,410 757 1,805
Additions to real estate owned................................... (16)
Proceeds from sales of real estate owned and property............ 726 270 794 334
-------- -------- --------- --------
Net cash provided by investing activities.................... 788 994 655 496
-------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings on warehouse financing facility...... (9,522) (27,370) (7,740) 13,044
Proceeds from issuance of notes payable.......................... 18
Payments on notes payable........................................ (422) (255) (522) (319)
Cash dividends................................................... (5,331) (3,115) (11,432) (5,989)
Proceeds from issuance of notes payable to stockholder........... 1,000 4,500
Payments on notes payable to stockholder......................... (1,000) (1,000)
-------- -------- --------- --------
Net cash (used in) provided by financing activities.......... (16,275) (30,740) (19,694) 11,254
-------- -------- --------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................ 6,652 5,003 4,839 1,514
CASH AND CASH EQUIVALENTS, beginning of period................... 2,206 1,809 4,019 5,298
-------- -------- --------- --------
CASH AND CASH EQUIVALENTS, end of period......................... $ 8,858 $ 6,812 $ 8,858 $ 6,812
======== ======== ========= ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -------------------
1996 1995 1996 1995
------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
SUPPLEMENTAL INFORMATION:
Interest paid.............................................................. $ 1,041 $ 1,182 $ 1,842 $ 1,624
======= ======= ======== =======
Income taxes paid.......................................................... $ 326 $ 60 $ 326 $ 90
======= ======= ======== =======
SUPPLEMENTAL INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES:
Exchange of loans for regular and residual interests in securities......... $72,255 $67,831 $124,675 $67,831
======= ======= ======== =======
Distribution of S distribution notes....................................... $44,020 $ 44,020
======= ========
Dividends declared and unpaid.............................................. $ 9,000
========
Acquisition of real estate through foreclosure of loans.................... $ 24 $ 137
======= ========
Loan funded to facilitate sales of real estate owned....................... $ 19 $ 19
======= =======
Transfer of property to real estate owned.................................. $ 260
========
Assumption of debt through acquisition of real estate through
foreclosure............................................................... $ 26
=======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 1. GENERAL
The accompanying unaudited consolidated financial statements, which include
the accounts of First Alliance Corporation ("FACO") and its subsidiaries (the
"Company"), have been prepared in accordance with the instructions to Form 10-Q
and include all information and footnotes required for interim financial
statement presentation. All adjustments (consisting only of various normal
accruals) necessary to present fairly the Company's consolidated financial
position, results of operations and cash flows have been made. All significant
intercompany transactions and balances have been eliminated and certain
reclassifications have been made to prior periods' consolidated financial
statements to conform to the current period presentation. The results of
operations for the six months ended June 30, 1996 are not necessarily indicative
of the results of operations to be expected for the year ending December 31,
1996.
The financial information provided herein, including the information under
the heading Item 2. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" ("MD&A"), is written with the presumption that the
users of these interim consolidated financial statements have read, or have
access to, the Company's recent filing on Form S-1 which contains the latest
available audited consolidated financial statements and notes thereto, as of and
for the period ended December 31, 1995, together with the MD&A for such period.
On July 31, 1996, FACO completed an initial public offering (the "Offering")
whereby 3,500,000 shares of its Class A Common Stock were sold to the public
resulting in gross proceeds of $59.5 million. Concurrently, 10,750,000 shares of
the Class B Common Stock of FACO were issued in exchange for all of the issued
and outstanding shares of First Alliance Mortgage Company ("FAMCO") as part of a
reorganization whereby FAMCO became a wholly owned subsidiary of FACO. On August
9, 1996, the underwriters' over-allotment option to purchase 525,000 shares was
exercised resulting in additional gross proceeds of $8.9 million. The
acquisition of FAMCO has been accounted for similar to a pooling of interests.
The consolidated financial position and results of operations of the Company
substantially consist of those of FAMCO.
During the second quarter of 1996, FAMCO distributed S distribution notes of
$44.0 million to its stockholders. In July 1996, payments on the S distribution
notes of $42.5 million were made by the Company using proceeds from the
Offering.
In June 1996, FAMCO granted 107,500 shares of restricted common stock to an
officer of the Company. These shares, which were exchanged for 107,500 shares
of FACO Class B Common Stock in conjunction with the Offering, vest over a
period of five years or earlier upon the occurrence of certain events. A value
of $1.6 million has been ascribed to such shares by the Company. This amount
has been recorded in the accompanying financial statements as increases to Class
B Common Stock and paid in capital with an offsetting amount included in
deferred stock compensation. In July and August 1996, 27.2% of such restricted
Class B Common Stock vested as a result of the Offering.
Hedging activities
As part of its interest rate risk management strategy, the Company may from
time to time hedge its interest rate risk related to its loans held for sale and
its origination commitments. The Company classifies these transactions as
hedges of specific loans receivable and commitments. The gains and losses
derived from these transactions are deferred and included in the carrying
amounts of the related hedged items and are recognized in earnings upon sale of
the related items. There were no deferred gains or losses on hedging activities
at June 30, 1996 and December 31, 1995. Realized gains and (losses) on hedging
activities were $0.5 million for the quarter and six months ended June 30, 1996
and ($0.3) million for the quarter and six months ended June 30, 1995. Hedging
transactions during these periods were comprised solely of short sales of United
States Treasury Securities.
5
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Net Income Per Share Computation
Net income per share has been computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. In
accordance with regulations of the Securities and Exchange Commission, which
require that stock issued within a one year period prior to the initial filing
of a registration statement relating to an Initial Public Offering be treated as
outstanding for all reported periods, the weighted average number of common
shares for all periods includes the dilutive impact of the restricted stock
issued in June 1996. The dilutive impact has been computed using the treasury
stock approach, with the Offering price of $17 per share used as the repurchase
price for all periods.
Supplementary Net Income Per Share Data
Assuming that the 4,025,000 shares of Class A Common Stock issued in the
Offering, including shares issued pursuant to the underwriters' exercise of
their over-allotment option, were issued at the beginning of 1995, net income
per share would have been $0.65 and $1.18 for the quarter and six months ended
June 30, 1996, respectively, and $0.76 and $0.74 for the corresponding periods
in 1995. The computation of supplementary net income per share assumes that
proceeds from the Offering would have been used to pay the S distribution notes
at the date of their issuance in May 1996. Therefore, the interest expense
incurred on the S distribution notes, net of tax benefits, of $0.4 million was
added to net income for the second quarter of 1996 for purposes of computing
supplementary net income per share.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Overview
The Company originates, purchases, sells and services non-conventional
mortgage loans secured primarily by first mortgages on single family residences.
The Company originates loans through its retail branch network which is
comprised of one office in the United Kingdom and 19 offices in the United
States, six of which are located in California, two of which are located in each
of Illinois and Florida and one of which is located in each of Oregon,
Washington, Colorado, Utah, Arizona, New Jersey, Ohio, Georgia and Pennsylvania.
In addition, the Company purchases loans from qualified mortgage bankers and
brokers. The Company sells the majority of its loans in the secondary market
primarily through securitization and, to a lesser extent, through wholesale loan
sales in which the Company does not retain the rights to service such loans.
The Company retains the right to service loans which it securitizes.
The Company's strategy of originating, as compared to purchasing, the majority
of its loan volume results in the generation of a significant amount of loan
origination fees. This income has allowed the Company to generate positive
operating cash flow. There can be no assurance, however, that the Company's
operating cash flow will continue to be positive in the future.
Gains on servicing retained sales of loans through securitizations equals the
difference between the net proceeds to the Company in the securitizations and
the allocated cost of loans securitized. Such net proceeds received in
securitizations consist of the fair value of regular interests (determined by
the cash price for which they are then sold to the public) and the fair value of
the residual interests retained by the Company (determined as described below),
net of transaction costs. The allocated cost of the loans securitized is
determined by allocating their acquisition cost (for purchased loans) or net
carrying value (for originated loans) between the loans securitized and the
mortgage servicing rights retained with respect thereto based upon their
relative fair values.
The net proceeds of a securitization consist of the regular and residual
interests received by the Company. The regular interests are immediately sold
for cash by the Company. As the holder of the residual interests, the Company
is entitled to receive certain excess cash flows. These excess cash flows are
calculated as the difference between (a) principal and interest paid by
borrowers and (b) the sum of (i) pass-through interest and principal to be paid
to holders of the regular interests, (ii) trustee fees, (iii) third-party credit
enhancement fees, (iv) servicing fees and (v) estimated loan pool losses. The
Company's right to receive this excess cash flow begins after certain reserve
requirements have been met, which are specific to each securitization and are
used as a means of credit enhancement.
The Company's retained right to service loans entitles the Company to receive
servicing fees, prepayment penalties and other miscellaneous fees associated
with the collection of such loans.
Recent Developments
In July 1996, the Company completed the Offering whereby 3,500,000 shares of
Class A Common Stock were sold to the public and, concurrently, 10,750,000
shares of Class B Common Stock were exchanged for all of the outstanding shares
of FAMCO. In August 1996, the underwriters' over-allotment option to purchase
525,000 shares of Class A Common Stock was exercised. Total gross proceeds from
these sales of Class A Common Stock were $68.4 million.
During the second quarter of 1996, FAMCO distributed S distribution notes of
$44.0 million to its stockholders. In July 1996, payments on the S distribution
notes of $42.5 million were made by the Company using proceeds from the
Offering.
7
<PAGE>
Loan Originations and Purchases
<TABLE>
<CAPTION>
AT OR FOR THE QUARTER AT OR FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ------------------------
1996 1995 1996 1995
--------- ------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan originations and purchases:
Retail branch originations............................................ $66,841 $43,643 $123,534 $ 75,941
Portfolio refinancing originations.................................... 6,027 5,777 11,613 14,822
Wholesale purchases................................................... 7,336 3,674 20,791 14,276
------- ------- -------- --------
Total originations.................................................. $80,204 $53,094 $155,938 $105,039
======= ======= ======== ========
Number of retail branches as of the end of the period
California............................................................ 6 10
Other States.......................................................... 13 4
-------- --------
Total............................................................... 19 14
======== ========
Weighted average initial interest rate.................................. 9.8% 11.1% 9.5% 10.9%
Weighted average initial combined loan-to-value ratio
Retail branch and portfolio refinancing originations.................. 62.8% 57.3% 61.7% 56.4%
Wholesale purchases................................................... 61.8% 67.9% 67.4% 65.0%
Average retail branch origination loan size............................. $ 84 $ 67 $ 82 $ 61
Weighted average loan origination and processing fees as a
percent of gross loans originated:
Retail branch originations............................................ 14.9% 15.7% 14.9% 15.9%
Portfolio refinancing originations.................................... 4.4% 14.4% 5.0% 13.7%
Combined weighted average............................................... 14.1% 15.5% 14.0% 15.5%
</TABLE>
For the quarter and six months ended June 30, 1996, originations and
purchases increased 51% and 48%, respectively, as compared to the same periods
in 1995. Retail branch originations increased 53% and 63% for the quarter and
six months ended June 30, 1996, respectively. Increased loan origination volume
is primarily from retail branches opened in 1995 and 1996.
Loan Sales
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- ------------------------
1996 1995 1996 1995
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securitizations............................................ $75,255 $67,831 $127,675 $67,831
Wholesale loan sales....................................... 19,995 11,357 41,531 14,885
Private loan sales......................................... 431 5,450 869 9,482
------- ------- -------- -------
Total.................................................. $95,681 $84,638 $170,075 $92,198
======= ======= ======== =======
</TABLE>
Loan sales, including securitizations of loans, for the quarter and six
months ended June 30, 1996, respectively, increased 13% and 84% over the same
periods in 1995. Securitization volume for the quarter and six months ended June
30, 1996 was $75.3 million and $127.7 million, respectively, as compared to
$67.8 million for the quarter and six months ended June 30, 1995. No
securitizations were completed in the first quarter of 1995. The increases in
loan sales for the six month period ended June 30, 1996 as compared to the same
period in 1995 is the result of the sale of the increased volume of originations
and purchases and a decrease in the balance of loans held for sale at the end of
the period. For the second quarter of 1996, the increase in loan sales was the
result of the sale of the increased volume of originations and purchases offset
by significant sales in the second quarter of 1995 of loans which were
originated or purchased in the prior quarter.
8
<PAGE>
Composition of Revenue and Expense
The following table summarizes certain components of the Company's
consolidated statements of income set forth as a percentage of total revenue for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
1996 1995 1996 1995
------- -------- ------- ---------
<S> <C> <C> <C> <C>
REVENUE:
Loan origination and sale:
Gain on sale of loans.................... 10.9% 19.9% 10.2% 15.0%
Net loan origination and other fees...... 58.9 50.8 56.5 42.7
Loan servicing and other fees............... 13.2 11.7 14.1 17.0
Interest.................................... 16.9 17.4 19.0 25.0
Other....................................... 0.1 0.2 0.2 0.3
------- -------- ------- ---------
Total revenue............................ 100.0 100.0 100.0 100.0
------- -------- ------- ---------
EXPENSE:
Compensation and benefits................... 20.7 13.5 21.1 21.7
Professional services....................... 1.7 1.1 1.7 1.9
Advertising................................. 4.8 5.8 5.5 8.8
Subservicing and other fees................. 1.1 1.8 1.2 2.4
Rent........................................ 2.2 1.8 2.3 2.5
Supplies.................................... 1.8 1.4 2.0 2.1
Depreciation and amortization of property... 1.0 0.8 1.0 1.2
Interest.................................... 6.0 6.0 5.6 7.0
Legal....................................... 1.8 2.0 1.4 2.3
Other....................................... 4.2 3.4 4.3 4.3
------- -------- ------- ---------
Total expense............................ 45.3 37.6 46.1 54.2
------- -------- ------- ---------
Net income before income tax provision......... 54.7 62.4 53.9 45.8
Income tax provision........................... 0.9 0.9 0.8 0.7
------- -------- ------- ---------
Net Income..................................... 53.8% 61.5% 53.1% 45.1%
======= ======== ======= =========
</TABLE>
RESULTS OF OPERATIONS
Revenue
The following table sets forth the components of the Company's revenue for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- ----------------------
1996 1995 1996 1995
----------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan origination and sale:
Gain on sale of loans (1)............. $ 1,852 $ 3,616 $ 3,256 $ 3,616
Net loan origination and other fees... 10,028 9,225 17,995 10,311
Loan servicing and other fees............ 2,244 2,126 4,487 4,103
Interest................................. 2,877 3,160 6,035 6,031
Other.................................... 23 47 61 76
----------- ---------- --------- ---------
Total revenue......................... $17,024 $18,174 $31,834 $24,137
=========== ========== ========= =========
</TABLE>
(1) Excluding net loan origination and other fees.
9
<PAGE>
Total revenue decreased 6% or $1.2 million for the quarter ended June 30,
1996 and increased 32% or $7.7 million for the six months ended June 30, 1996 as
compared to the corresponding periods in 1995. The decrease in the second
quarter of 1996 was due primarily to lower loan origination and sale revenue.
The increase for the six months ended June 30, 1996 was primarily due to higher
loan origination and sale revenue and higher loan servicing and other fees.
Loan origination and sale revenue decreased to $11.9 million for the second
quarter of 1996 from $12.8 million for the second quarter of 1995 primarily due
to a decrease in the premium on loan sales partially offset by an increase in
loan sales. Loan origination and sale revenue increased to $21.3 million for
the six months ended June 30, 1996 as compared to $13.9 million for the six
months ended June 30, 1995 primarily due to an increase in loan sales.
Gain on sale of loans decreased to $1.9 million in the second quarter of 1996
from $3.6 million in the second quarter of 1995 primarily as a result of lower
premiums on loan sales. For the six months ended June 30, 1996, gain on sale of
loans decreased to $3.3 million from $3.6 million for the same period in 1995,
primarily as a result of lower premiums on loan sales offset by an increased
volume of loans sold. For the second quarter of 1996, the weighted average gain
on sales of loans as a percentage of loan principal balances sold decreased to
1.9% from 4.3% for the second quarter of 1995. For the six months ended June
30, 1996 the weighted average gain on sale of loans decreased to 1.9% of loans
sold from 3.9% for the corresponding period in 1995. These decreases were
primarily due to the decrease in the weighted average initial interest rate
spreads (the difference between the initial weighted average loan interest rates
for the loans included in the securitization and the initial weighted average
pass-through rates paid to holders of the regular interests of the
securitization) in residual interests originated which decreased to 2.4% for the
quarter and six months ended June 30, 1996 from 3.7% for the quarter and six
months ended June 30, 1995. These decreased spreads were partially offset by
the results of the Company's hedging activities which had realized gains of $0.5
million for the quarter and six months ended June 30, 1996 as compared to
realized losses of $0.3 million for the corresponding period in 1995.
Increasing interest rates during the first six months of 1996 as compared to
decreasing interest rates during the first six months of 1995 was the primary
reason for the decrease in interest rate spreads.
Net loan origination and other fees increased 9% and 75% during the quarter
and six months ended June 30, 1996 as compared to corresponding periods in 1995
due primarily to the increase in loan sales of 13% and 84%, respectively.
Loan servicing and other fees for the second quarter of 1996 increased to
$2.2 million from $2.1 million in the second quarter of 1995 as a result of an
increase in loan servicing fees, prepayment fees and other fees of $0.6 million
offset by increases in the amortization of mortgage servicing rights of $0.3
million and compensating interest paid by the Company as servicer with respect
to prepayments of securitized loans of $0.2 million. For the six months ended
June 30, 1996 loan servicing and other fees increased to $4.5 million from $4.1
million for the corresponding period in 1995 as a result of an increase in loan
servicing fees, prepayment fees and other fees of $1.2 million offset by
increases in the amortization of mortgage servicing rights of $0.5 million and
in compensating interest of $0.3 million. The increase in loan servicing fees,
prepayment fees and other fees was primarily due to increased prepayment of
loans and an increase in late fees related to an increased amount of delinquent
loans. The increase in the prepayment of loans also increased compensating
interest. The increase in the amortization of mortgage servicing rights was the
result of the increase in the balance of mortgage servicing rights which
increased to $4.9 million at June 30, 1996 from $1.9 million at June 30, 1995.
Such increase is primarily due to the adoption of Statement of Financial
Standards ("SFAS") No. 122, "Accounting For Mortgage Servicing Rights," which
requires the Company to capitalize the fair value of originated mortgage
servicing rights.
10
<PAGE>
Interest income represents the recognition of the yield on residual interests
in securities retained by the Company, interest earned on loans originated or
purchased during the warehousing period from their origination or purchase until
their sale and interest earned on loans receivable held for investment.
Interest income from residual interests increased $0.7 million and $1.5 million
for the quarter and six months ended June 30, 1996, respectively when compared
to the corresponding periods in 1995. These increases of 42% and 50%,
respectively, are due primarily to the growth of the Company's portfolio of
residual interests which grew from an average balance of $13.4 million for the
six months ended June 30, 1995 to $20.9 million for the six months ended June
30, 1996. Interest income on loans held for sale and on loans receivable held
for investment decreased $1.0 million and $1.5 million for the quarter and six
months ended June 30, 1996, respectively, when compared to the corresponding
periods in 1995 due primarily to the decrease in the average balance of loans
held for sale and loans receivable held for investment.
Expense
The following table sets forth the components of the Company's expenses for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -------------------
1996 1995 1996 1995
--------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Compensation and benefits.............. $3,531 $2,448 $ 6,727 $ 5,228
Professional services.................. 282 201 551 465
Advertising............................ 818 1,051 1,758 2,122
Subservicing and other fees............ 184 321 376 587
Rent................................... 372 330 742 615
Supplies............................... 306 261 641 507
Depreciation and amortization of
property.............................. 178 154 317 298
Interest............................... 1,024 1,087 1,787 1,700
Legal.................................. 306 357 452 563
Other.................................. 717 618 1,317 1,006
--------- --------- -------- ---------
Total expense.......................... $7,718 $6,828 $14,668 $13,091
========= ========= ======== =========
</TABLE>
Total expense increased 13% to $7.7 million for the second quarter of 1996
from $6.8 million for the second quarter of 1995 and increased 12% to $14.7
million for the six months ended June 30, 1996 from $13.1 million for the
corresponding period in the prior year. These increases were primarily due to
increases in compensation and benefits.
Compensation and benefits increased $1.1 million and $1.5 million for the
quarter and six months ended June 30, 1996, respectively, as compared to the
corresponding periods in 1995 and advertising expenses decreased $0.2 million
and $0.4 million for same periods primarily as a result of increases in
personnel to support the Company's retail branch office expansion and the
Company's decision to reduce the use of outside telemarketing services in 1996
and increase the number of employees in its internal telemarketing operations.
Subservicing and other fees decreased 43% and 36% for the quarter and six
months ended June 30, 1996, respectively, as compared to the corresponding
periods in 1995. Effective February 1, 1996, servicing of adjustable rate
loans, previously serviced by a third party sub-servicer, was transferred to the
Company. The Company recently installed new loan servicing software which now
enables it to service such loans.
Combined, rent and supplies increased $0.3 million for the six months ended
June 30, 1996 as compared to the six months ended June 30, 1995 primarily as a
result of the opening of new retail branch offices. The number of retail branch
offices increased from 13 at December 31, 1994 to 19 at June 30, 1996.
11
<PAGE>
Interest expense represents interest on the Company's warehouse financing
facility, interest on notes payable and interest on notes payable to
stockholders, including the S distribution notes. Interest on the warehouse
financing facility decreased 20% or $0.2 million for the second quarter of 1996
as compared to the corresponding period in 1995 primarily as a result of an 18%
decrease in the weighted average interest rate on the warehouse financing
facility. This decrease was offset by an increase in the interest paid on notes
payable to stockholders. During the second quarter of 1996, the Company paid
interest on the S distribution notes of $0.4 million, a $0.2 million increase
from the $0.2 million of interest paid during the second quarter of 1995 on the
outstanding note payable to stockholder.
Other expenses increased by $0.3 million for the six months ended June 30,
1996 as compared to the six months ended June 30, 1995, primarily as a result of
expenses incurred in moving the Company's administrative offices in February of
1996 and increased travel and employee relocation expenses as the Company
continues to expand its retail branch operations.
Servicing
At June 30, 1996, total delinquent loans were 6.1% of the Company's servicing
portfolio, as compared to 6.3% at March 31, 1996 and 4.8% at June 30, 1995.
Loan losses as a percentage of the average servicing portfolio were 0.05% for
the second quarter of 1996, as compared to 0.08% for the first quarter of 1996
and 0.01% for the second quarter of 1995.
The following tables provide data on loan delinquency, real estate owned
(REO) and net losses for the Company's servicing portfolio:
<TABLE>
<CAPTION>
AS OF
----------------------------------------------------------------------------------------------
JUNE 30, 1996 DECEMBER 31, 1995 JUNE 30, 1995
---------------------------- ----------------------------- -----------------------
% OF % OF % OF
(DOLLARS IN SERVICING (DOLLARS IN SERVICING (DOLLARS IN SERVICING
THOUSANDS) PORTFOLIO THOUSANDS) PORTFOLIO THOUSANDS) PORTFOLIO
----------- ----------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Servicing Portfolio.......... $603,851 100.0% $613,791 100.0% $584,972 100.0%
=========== =========== ============ =========== ========== =========
30-59 days delinquent........ $ 9,853 1.6% $ 8,339 1.4% $ 6,817 1.2%
60-89 days delinquent........ 7,257 1.2 6,538 1.0 4,939 0.8
90 days or more delinquent... 19,799 3.3 21,002 3.4 16,127 2.8
----------- ----------- ------------ ----------- ---------- ---------
Total delinquencies..... $ 36,909 6.1% $ 35,879 5.8% $ 27,883 4.8%
=========== =========== ============ =========== ========== =========
REO (1)................. $ 6,350 1.1% $ 7,854 1.3% $ 4,596 0.8%
=========== =========== ============ =========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ----------------------------
1996 1995 1996 1995
-------- ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Average service portfolio balance outstanding (2)....... $610,005 $580,477 $608,821 $570,329
Net losses (3).......................................... 321 68 786 59
Percentage of average servicing portfolio............... 0.05% 0.01% 0.13% 0.01%
</TABLE>
________________________
(1) Includes REO of the Company as well as REO of the REMIC Trusts serviced by
the Company; however, excludes private investor REO not serviced by the
Company.
(2) Average servicing portfolio balance equals the average of the servicing
portfolio balance at the beginning of the year and at the date indicated.
(3) Net losses means actual net losses realized with respect to the disposition
of REO.
Income Taxes
From May 1, 1988, and until the closing of the Offering, the Company had
elected to be treated for Federal income and certain state tax purposes as an S
corporation under Subchapter S of the Code and comparable state laws. As a
result, the Company's provisions for income taxes have in the past reflected
modest corporate level state income or franchise taxes for those states in which
the Company operates. The taxable income of the Company during such periods has
been included in the individual taxable income of its shareholders for Federal
and state income tax purposes.
12
<PAGE>
Effective upon the closing of the Offering in July 1996, the Company's S
corporation status was terminated and the Company is now fully subject to
Federal and state taxes. The Company's effective income tax rate is anticipated
to approximate the Federal and composite state income and franchise tax rates
(net of Federal benefit). If the Company had been fully subject to Federal and
state taxes in 1995 and in the first six months of 1996, net income on a pro
forma basis would have been $5.5 million and $10.1 million for the quarter and
six months ended June 30, 1996, respectively, and $6.7 million and $6.5 million
for the corresponding periods in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has generated positive cash flow. The Company's
sources of cash include loan sales, sales of regular interests in securities,
borrowings under its warehouse financing facility, distributions received from
residual interests, interest income and loan servicing income. The Company's
uses of cash include the funding of loan originations and purchases, payments of
interest, repayment of the warehouse financing facility, funding of any initial
overcollateralization requirements for securitizations, capital expenditures,
operating and administrative expenses and payment of income taxes. At
origination of a loan, the Company includes the loan origination fees in the
principal balance, and then generally borrows the principal balance of the loan
under its warehousing financing facility. As the amount funded to the borrower
is net of the loan origination fees, the Company generates cash approximating
the loan origination fees at time of funding of the loan under the warehouse
financing facility. Cash generated from the sales of loans and regular
interests in securities is then used to pay down the warehouse financing
facility. For the quarter and six months ended June 30, 1996, cash provided by
operating activities plus net borrowings (repayments) on the warehouse financing
facility increased to $12.6 million and $16.1 million, respectively, from $7.4
million and $2.8 million for the quarter and six months ended June 30, 1995,
respectively, primarily due to the increase in loan originations of 47% and 49%
for the quarter and six months ended June 30, 1996, respectively, as compared to
the corresponding periods in 1995.
The Company's ability to continue to originate and purchase loans is dependent
upon adequate credit facilities and upon its ability to sell the loans in the
secondary market in order to generate cash proceeds for new originations and
purchases. The value of and market for the Company's loans are dependent upon a
number of factors, including general economic conditions, interest rates and
governmental regulations. Adverse changes in such factors may affect the
Company's ability to sell loans for acceptable prices within a reasonable period
of time. A prolonged, substantial reduction in the size of the secondary market
for loans of the type originated or purchased by the Company may adversely
affect the Company's ability to sell loans in the secondary market with a
consequent adverse impact on the Company's results of operations, financial
condition and ability to fund future originations and purchases.
The Company's $125 million warehouse financing facility, which is secured by
loans originated or purchased by the Company and currently bears interest at the
rate of 0.875% over 30 day London Interbank Offered Rate ("LIBOR"), currently
expires on September 30, 1996. Management expects, although there can be no
assurance, that the Company will be able to maintain this warehouse financing
facility (or obtain replacement or additional financing) in the future. The
Company recently executed a letter of intent with another lender with respect to
a supplemental warehousing facility which provides for borrowings up to $25
million. Advances under this warehousing facility will bear interest at 0.80%
over 30 to 90 day LIBOR.
As of June 30, 1996 the Company had commitments to fund loans of $9.1
million. Historically, the Company has funded approximately 55% of such
commitments. Capital expenditures totaled $0.5 million and $0.9 million for the
quarter and six months ended June 30, 1996, respectively and $0.3 million and
$0.5 million in the corresponding periods in 1995.
The Company paid dividends, including amounts to be used by the stockholders
for the payment of personal income taxes on the earnings of the S corporation,
of $5.3 million and $3.1 million for the quarters ended June 30, 1996 and 1995,
respectively, and of $11.4 million and $6.0 million for the six months ended
June 30, 1996 and 1995, respectively. In addition, in the second quarter of
1996, in anticipation of the revocation of the Company's S corporation status at
the time of the Offering, the Company distributed S distribution notes to the
stockholders of the Company of $44.0 million. In July 1996, payments of $42.5
million were made on the S distribution notes with proceeds from the Offering.
The remaining proceeds from the Offering were used to pay down the Company's
warehouse financing facility and to fund current operations.
13
<PAGE>
The Company believes that cash flow from operations, the net proceeds of the
Offering, the net proceeds from securitizations and the availability of credit
under the warehouse financing facility will be sufficient to fund operating
needs, capital expenditures and payment of the S distribution notes for the
ensuing 12 months.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123
"Accounting for Stock-Based Compensation," which encourages companies to
account for stock compensation awards based on their fair value at the date the
awards are granted. SFAS No. 123 does not require the application of the fair
value method for stock compensation given to employees and allows for the
continuance of the current accounting practice, which requires accounting for
stock compensation awards based on their intrinsic value as of the grant date.
However, SFAS No. 123 requires proforma disclosure of net income and earnings
per share, as if the fair value based method of accounting defined in this
Statement had been applied. The accounting and disclosure requirements of this
statement are effective for financial statements for fiscal years beginning
after December 15, 1995, though earlier adoption is encouraged. The Company, at
this time, has not determined whether or not to adopt the recognition provisions
of SFAS No. 123 with respect to the stock incentive plan adopted in July 1996.
In June 1996, the FASB issued SFAS 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" effective for
transactions occurring after December 31, 1996. The accounting standards
included in SFAS 125 will apply to the Company's securitization of loans and
subsequent sale of the regular interests in these securitizations. The Company
does not anticipate any material effect on the consolidated results of
operations or financial condition resulting from the adoption of SFAS 125.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Prior to the date that the Company became publicly owned, its stockholders
took various actions in furtherance of the Company's formation, organization and
restructuring, all as described in the Company's Registration Statement on Form
S-1 concerning the Offering.
ITEM 5. OTHER INFORMATION
Not Applicable
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
- -------- --------------------------------------------------- -------------
<C> <S> <C>
3.1 Certificate of Incorporation of the Company *
3.2 Bylaws of the Company *
4.1 1996 Stock Incentive Plan *
4.2 Stock Certificate Specimen *
10.1 Warehouse Financing Facility *
10.2 Form of Pooling and Servicing Agreement *
10.3 Corporate Headquarters Lease (Irvine, California) *
10.4 S Distribution Notes *
10.5 Mason Employment Agreement *
10.6 Form of Directors' and Officers' Indemnity Agreement *
10.7 Mortgage Loan Master Transfer Agreement dated as of
June 30, 1995 between Nationscapital Mortgage
Corporation and the Company *
10.8 Mortgage Loan Master Transfer Agreement dated as of
June 30, 1995 between Coast Security Mortgage Inc.
and the Company *
10.9 Chisick Employment Agreement *
10.10 Reimbursement Agreement *
10.11 Agreement and Plan of Merger *
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None
* Incorporated by reference from the Company's Registration Statement on form
S-1, Commission File No. 333-3633.
16
<PAGE>
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.
FIRST ALLIANCE CORPORATION
REGISTRANT
Date: September 5, 1996 /s/ BRIAN CHISICK
-------------------------------------
Brian Chisick
President and Chief Executive Officer
Date: September 5, 1996 /s/ MARK K. MASON
-------------------------------------
Mark K. Mason
Executive Vice President
Principal Financial Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 8,858,000
<SECURITIES> 22,354,000
<RECEIVABLES> 21,415,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,536,000
<PP&E> 4,092,000
<DEPRECIATION> 1,863,000
<TOTAL-ASSETS> 64,180,000
<CURRENT-LIABILITIES> 15,610,000
<BONDS> 0
0
0
<COMMON> 1,642,000
<OTHER-SE> (1,533,000)
<TOTAL-LIABILITY-AND-EQUITY> 64,180,000
<SALES> 11,880,000
<TOTAL-REVENUES> 17,024,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,694,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,024,000
<INCOME-PRETAX> 9,306,000
<INCOME-TAX> 139,000
<INCOME-CONTINUING> 9,167,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,167,000
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0.86
</TABLE>
