<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
---------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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 0-20897
PACIFICAMERICA MONEY CENTER, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
California 95-4465729
<S> <C>
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
</TABLE>
21031 Ventura Boulevard
Woodland Hills, California 91364
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (818) 992-8999
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 [ ].
<PAGE> 2
PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets
Cash & cash equivalents $ 22,034,000 $ 66,090,000
Accounts receivable, net 475,000 1,532,000
Note receivable -- 1,015,000
Interest receivable 362,000 1,274,000
Loans receivable, net (Note 5) 6,363,000 20,629,000
Loans held for sale 121,419,000 35,280,000
Interest-only strips receivable 113,314,000 94,424,000
Real estate acquired in settlement of loans 739,000 2,028,000
Property and equipment, net 5,626,000 3,596,000
Refundable income taxes -- 222,000
Other assets 3,645,000 1,776,000
============ ============
$273,977,000 $227,866,000
============ ============
Liabilities and Stockholders' Equity
Thrift certificates payable
Full-paid certificates $129,636,000 $113,731,000
Installment certificates 25,610,000 18,793,000
------------ ------------
Total thrift certificates payable 155,246,000 132,524,000
Accounts payable and accrued expenses 3,748,000 6,121,000
Accrued interest payable 2,582,000 370,000
Notes payable 75,992,000 28,318,000
Deferred income taxes 1,094,000 12,147,000
------------ ------------
238,662,000 179,480,000
------------ ------------
Stockholders' Equity 35,315,000 48,386,000
============ ============
$273,977,000 $227,866,000
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
2
<PAGE> 3
PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans receivable $ 5,027,000 $ 3,074,000 $ 11,408,000 $ 8,395,000
Interest on cash and cash equivalents 81,000 167,000 484,000 348,000
------------ ------------ ------------ ------------
Total interest income 5,108,000 3,241,000 11,892,000 8,743,000
Interest Expense:
Interest on thrift certificates greater than $100,000 29,000 13,000 113,000 13,000
Interest on other thrift certificates 2,138,000 1,479,000 5,731,000 3,641,000
Interest on notes payable 1,529,000 508,000 3,100,000 519,000
------------ ------------ ------------ ------------
Total interest expense 3,696,000 2,000,000 8,944,000 4,173,000
Net interest income 1,412,000 1,241,000 2,948,000 4,570,000
Provision for loan losses (531,000) 225,000 (14,000) 1,272,000
------------ ------------ ------------ ------------
Net interest after provision for loan losses 1,943,000 1,016,000 2,962,000 3,298,000
------------ ------------ ------------ ------------
Noninterest income (loss):
Other income 1,329,000 20,000 1,515,000 85,000
Gain (loss) on sale of loans (24,387,000) 22,585,000 23,233,000 54,254,000
------------ ------------ ------------ ------------
Total noninterest income (loss) (23,058,000) 22,605,000 24,748,000 54,339,000
------------ ------------ ------------ ------------
Noninterest expense:
General and administrative 8,326,000 5,599,000 24,407,000 15,117,000
Salaries, employee benefits and personnel services 9,662,000 8,180,000 28,121,000 20,022,000
Depreciation and amortization 210,000 168,000 651,000 494,000
Expenses on real estate acquired in settlement of loans 35,000 154,000 117,000 525,000
Net (gain) on sales of real estate acquired
in settlement of loans (58,000) (8,000) (39,000) (175,000)
------------ ------------ ------------ ------------
Total noninterest expense 18,175,000 14,093,000 53,257,000 35,983,000
------------ ------------ ------------ ------------
Income (loss) before tax provision (39,290,000) 9,528,000 (25,547,000) 21,654,000
Tax provision (benefit) (16,896,000) 4,002,000 (11,081,000) 9,096,000
------------ ------------ ------------ ------------
Net income (loss) $(22,394,000) $ 5,526,000 $(14,466,000) $ 12,558,000
============ ============ ============ ============
Basic earnings (loss) per share (Note 2) $ (4.35) $ 1.36 $ (2.85) $ 3.24
Diluted earnings (loss) per share (Note 2) $ (4.35) $ 1.10 $ (2.85) $ 2.62
</TABLE>
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
3
<PAGE> 4
PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
(Increase) Decrease in Cash and Cash Equivalents 1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (14,466,000) $ 12,558,000
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 651,000 494,000
Provision for loan losses (14,000) 1,272,000
Provision for OREO losses 135,000 --
Net (gain) on sales of real estate
acquired in settlement of loans (174,000) (175,000)
Proceeds from sale of loans originated for sale 739,137,000 512,720,000
Origination of loans held for sale (804,454,000) (537,833,000)
Net change in assets and liabilities:
Accounts receivable 2,072,000 395,000
Receivable for mortgage loans shipped -- 24,310,000
Interest receivable 912,000 (184,000)
Premium receivable for loans sold -- 1,195,000
Interest-only strips receivable (19,547,000) (56,729,000)
Other assets (1,647,000) (649,000)
Accounts payable, accrued expenses,
interest payable, and deferred
income taxes (11,214,000) 11,978,000
------------- -------------
Net cash used in operating activities (108,609,000) (30,648,000)
------------- -------------
Cash flows from investing activities:
Proceeds from sale of loans receivable 21,815,000 17,063,000
Proceeds from sale of other real estate 1,813,000 903,000
Net change in loans receivable (28,842,000) 1,952,000
Purchases of property and equipment (2,681,000) (1,129,000)
------------- -------------
Net cash used in investing activities (7,895,000) 18,789,000
------------- -------------
Cash flow from financing activities:
Net increase from thrift certificates 22,722,000 19,603,000
Proceeds from stock issuance 1,395,000 3,923,000
Proceeds from notes payable 50,331,000 17,415,000
Payments on notes payable (2,000,000) (745,000)
------------- -------------
Net cash provided by financing activities 72,448,000 40,196,000
------------- -------------
Net (decrease) increase in cash and cash equivalents (44,056,000) 28,337,000
Cash and cash equivalents at beginning of period 66,090,000 8,640,000
------------- -------------
Cash and cash equivalents at end of period $ 22,034,000 $ 36,977,000
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
4
<PAGE> 5
PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) GENERAL
The unaudited financial information furnished herein, in the opinion of
management, reflects all adjustments (all of which are of a normal recurring
nature) which are necessary to fairly state the Company's financial position,
its cash flows and the results of its operations. The Company presumes that
users of the interim financial information herein have read or have access to
the audited financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the preceding fiscal year and
that the adequacy of additional disclosure needed for a fair presentation,
except in regard to material contingencies, may be determined in that context.
Accordingly, footnote and other disclosures which would substantially duplicate
the disclosure contained in the Company's most recent annual report have been
omitted. The interim financial information herein is not necessarily
representative of operations for a full year for various reasons including
changes in interest rates, volume of loans originated and loans paid off.
2) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding during the
period. Diluted earning per share is computed by dividing net income (loss) by
the weighted average number of shares of common stock and potential common stock
outstanding during the period. At September 30, 1998, 519,512 stock options were
excluded from the calculation of earnings per shares due to their anti-dilutive
effect. The following table presents the earnings per share data.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) (numerator) $(22,394,000) $ 5,526,000 $(14,466,000) $ 12,558,000
------------ ------------ ------------ ------------
Shares (denominator):
Weighted average common
Shares outstanding for
basic earnings per share 5,146,063 4,078,177 5,077,586 3,876,334
Effect of dilutive common shares
Subscriber warrants -- 83,313 -- 80,762
General partner warrants -- 532,823 -- 516,510
Options -- 332,620 -- 322,437
------------ ------------ ------------ ------------
Diluted common shares 5,146,063 5,026,933 5,077,586 4,796,043
------------ ------------ ------------ ------------
Basic earnings (loss) per common share $ (4.35) $ 1.36 $ (2.85) $ 3.24
------------ ------------ ------------ ------------
Diluted earnings (loss) per common share $ (4.35) $ 1.10 $ (2.85) $ 2.62
============ ============ ============ ============
</TABLE>
3) REVENUE RECOGNITION
For the quarter ended September 30, 1998, the Company sold its loans on
a whole loan basis where the gain on sale of loan is recognized as the cash
premium paid on the value of the loans. Prior to the third quarter the Company
sold loans for securitization, where the gain recognized represents the
difference between the proceeds (including premiums) from the sale, net of
related transaction costs, and the allocated carrying amount of the loans sold.
5
<PAGE> 6
The allocated carrying amount of loans sold for securitization is determined by
allocating the original amount of loan between the portion sold and any retained
interests (interest-only strips receivable), based on their relative fair values
at the date of transfer. In addition, gain on sale includes non-refundable fees
on loans sold and gains or losses on certain transactions structured as an
economic hedge.
Gain on sale of loans includes the recognition of an unrealized gain
that represents the initial difference between the allocated carrying amount and
the fair market value of the interest-only strips receivable at the date of
sale.
On a quarterly basis, management determines if any adjustments are
necessary to the recorded fair market value of the interest-only strips
receivable based on current market conditions, including changes in interest
rates, real property values, market conditions and other factors. Increases or
decreases in the fair value of each interest-only strip receivable will be made
quarterly if the recorded value of this receivable, less any amortization
reserve, exceeds the determined fair value of the receivable.
In September 1998, the Company made a $19.2 million (net of tax benefit
of $14.4 million) adjustment to the valuation of its interest-only strips
receivable, reflecting the adoption of more conservative prepayment assumptions
and a higher discount rate. The adjustment of the valuation in the interest-only
strips receivable is in part due, and the delay in the sale of the Company's
loans during the third quarter 1998 is primarily due, to a chain reaction of
events which caused significant and sudden changes in the securitization market
late in the quarter. These events began with the Asia economic crisis and the
substantial losses incurred by several large hedge funds, which led to a general
stock market decline, which resulted in an increased demand for U.S. Treasury
securities. Since mortgages prices are based on comparable maturity Treasuries,
yields on mortgages plummeted to lows not seen in decades, causing an increase
in prepayments. As a result, Wall Street investment banks, one of the primary
sources of funding to subprime lenders, made margin calls on loans to subprime
lenders and reduced warehouse loan funding availability. This caused a number of
asset-backed and mortgage-backed securitizors in September 1998, particularly
subprime lenders, to experience significant liquidity shortages due to their
reduced ability to obtain financing on loans and interest-only strips
receivable. In order to relieve the liquidity shortages, a number of subprime
lenders announced that they would begin selling their loans on a cash basis,
creating an increase in supply of mortgage loans being sold for cash. These
factors led to a reduced demand to purchase loans for securitization and an
oversupply of loans for sale in the secondary loan market, which has continued
in the fourth quarter of 1998. In addition, these market forces have had an
impact on the secondary market for interest-only strips receivable, which has
negatively affected the valuation of these receivables.
During the third quarter of 1998, there was a moderate change in the
performance of the Company's securitization pools, affecting primarily the
Company's three oldest pools formed during the last quarter of 1996 and the
first two quarters of 1997. That fact, coupled with the current unsettled nature
of the securitization markets in general, led the Company to determine that it
was necessary to adopt more conservative prepayment assumptions and a more
conservative discount rate in the valuation of its interest-only strips
receivable to reflect the higher risks perceived by the market for these types
of assets. There has been no significant variation from assumptions in
performance of the latter eight pools in which the Company has residual
interests, which were formed in the last two quarters of 1997 and the first
three quarters of 1998. The Company believes that the higher prepayment and
default rates in the earlier pools may be due to the lower loan-to-value ratios
and higher percentage of lower credit grade loans included in those pools than
in the later pools. Lower loan-to-value ratios can result in higher prepayment
rates as borrowers seek to refinance existing loans in order to obtain more
cash, and lower credit grade loans generally lead to higher delinquency and
default rates. Notwithstanding the fact that only three of the Company's loan
pools have experienced increases in prepayment and default rates in excess of
assumptions, the Company determined to increase the prepayment rate assumptions
on all of its pools, which accounts for a portion of the valuation adjustment on
the total interest-only strips receivable asset reflected in the September
quarter.
The other portion of the valuation adjustment is also due to recent
adverse changes in the securitization markets, which have led to a general
increase in discount rates applied in the determination of present value of
interest-only strips receivable. In the past, discount rates were determined in
the discretion of each holder of receivables, but were generally set at or near
the average interest rate on mortgage loans held in each pool. Recently,
however, discount rates have been increased in recognition of the adverse
market conditions which have reduced demand for these receivables. The Company
has increased the discount rate it uses to determine present value on its
interest-only strips receivable from 11% to 15%, which it believes to be
consistent with others in the industry at this time.
The Company has obtained an independent analysis of the interest-only
strips in all of its securitization pools, the results of which are consistent
with the Company's adjusted valuation. The valuations reported by the Company
in prior quarters were also consistent with the independent analyses performed
for those quarters.
The following table compares the Company's current assumed constant
prepayment rates ("CPR") on each of the following securitization pools with
life-to-date prepayment rates on each of those pools:
<TABLE>
<CAPTION>
CURRENT ANNUALIZED
POOL CPR (1) LIFE-TO-DATE CPR (2)
- ---- ------------- --------------------
<S> <C> <C>
Aames 1996-4 40% 25.25%
Advanta 1997-1 40% 24.55%
Advanta 1997-2 40% 22.87%
Advanta 1997-3 40% 20.10%
Advanta 1997-4 40% 17.35%
PacificAmerica 1997-1 (3) 35% 13.25%
PacificAmerica 1998-1 35% 11.90%
Advanta 1998-1 40% 13.60%
PacificAmerica 1998-2 35% 8.05%
Advanta 1998-2 40% 10.19%
</TABLE>
6
<PAGE> 7
<TABLE>
<S> <C> <C>
Advanta 1998-3 40% (4)
</TABLE>
(1) Reflects the peak CPR rates after the Company's ramp up period
of 12 months.
(2) Annualized life-to-date data for all pools is as of September
30, 1998 except for the Aames 1996-4 pool, which is as of August
31, 1998.
(3) This pool was formed in December 1997. All other pools were
formed in the quarter of the year in the order in which they are
numbered.
(4) Not available due to recent age of loans.
The Company's current cash flow model further assumes an average 75 basis point
annual loss rate on its pools (after the first six months). As of September 30,
1998 the Aames 1996-4 pool has experienced a 163 basis points loss life-to-date,
Advanta 97-1 has experienced a 49 basis points loss life-to-date, Advanta 97-2
has experienced a 23 basis points loss life-to-date, Advanta 97-3 has
experienced an 8 basis points loss life to date and no other pool has
experienced a loan loss.
4) RECLASSIFICATIONS
Certain reclassifications of balances from prior years have been made
to conform to the current year's reporting format.
5) LOANS RECEIVABLE
The following is a summary of Loans Receivable as of the date indicated
below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------
<S> <C>
Interest bearing loans $ 9,305,000
Deferred loan fees, net (1,168,000)
Allowance for loan losses (1,774,000)
-----------
Total $ 6,363,000
===========
</TABLE>
The following is a summary of Allowance for Loan Losses:
7
<PAGE> 8
<TABLE>
<S> <C>
Balance at December 31, 1997 $ 1,438,000
Reduction of reserve (14,000)
Charge off/recoveries 350,000
-----------
Balance at September 30, 1998 $ 1,774,000
===========
</TABLE>
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The unaudited interim consolidated financial statements should be read
in conjunction with the historical consolidated financial statements and the
related notes thereto of the Company filed with its Annual Report on Form 10-K
for the year ended December 31, 1997.
FINANCIAL CONDITION
Total consolidated assets of the Company increased $46.1 million, or
20.2%, to $274.0 million at September 30, 1998 from $227.9 million at December
31, 1997. The increase resulted primarily from an increase in loans held for
sale and interest-only strips receivable, partially offset by decreases in net
loans receivable and cash and cash equivalents. Loans held for sale increased
$86.1 million, or 243.9%, to $121.4 million at September 30, 1998 from $35.3
million at December 31, 1997, due to loans originated in the third quarter
that were not sold in that quarter. Interest-only strips receivable increased
$18.9 million, or 20.0%, to $113.3 million at September 30, 1998 from $94.4
million at December 31, 1997, reflecting the Company's retained interest in
excess spread on loans sold for securitization. Net Loans Receivable decreased
$14.2 million, or 68.9%, to $6.4 at September 30, 1998 from $20.6 million at
December 31, 1997, reflecting the sale of "piggyback" loans. Cash and cash
equivalents decreased $44.1 million, or 66.7%, to $22.0 million at September 30,
1998 from $66.1 million at December 31, 1997.
Total liabilities increased $59.2 million, or 33.0%, to $238.7 million
at September 30, 1998 from $179.5 million at December 31, 1997, due to increases
in notes payable and thrift certificates payable partially offset by decreases
in deferred income taxes and accounts payable. Notes payable increased $47.7
million, or 168.6%, to $76.0 million at September 30, 1998 from $28.3 million at
December 31, 1997, reflecting the increase in residual financing received upon
completion of the 1998 securitizations and from a drawdown on a warehouse line
of credit payable to Merrill Lynch. Thrift certificates payable increased $22.7
million, or 17.1%, to $155.2 million at September 30, 1998 from $132.5 million
at December 31, 1997. Deferred income taxes decreased $11.0 million, or 90.9%,
to $1.1 at September 30, 1998 from $12.1 million at December 31, 1997 due to the
net loss on pretax income.
Total stockholders' equity decreased by $13.1 million, or 27.1%, to
$35.3 million at September 30, 1998 from $48.4 million at December 31, 1997,
reflecting primarily the net loss from operations of $14.5 million in the first
nine months of 1998.
RESULTS OF OPERATIONS
GENERAL
The Company reported a net loss of $22.4 million, $4.35 basic and
diluted loss per share, for the quarter ended September 30, 1998. For the
comparable period of 1997, the Company reported net income of $5.5 million,
$1.36 basic earnings per share and $1.10 diluted earnings per share. For the
nine months ended September 30, 1998, the Company reported net loss of $14.5
million, $2.85 basic and diluted loss per share. For the comparable nine months
of 1997, the Company reported net income of $12.6 million, $3.24 basic earnings
per share and $2.62 diluted earnings per share. These results are not
necessarily indicative of results for any other interim period or for the full
year. The change from net income for the period ending September 30, 1997 to a
net loss position for the comparable period in 1998 was primarily due to the
$19.1 million valuation adjustment (net of tax benefit of $14.4 million) of the
interest-only strips receivable at September 30, 1998. In addition to this
valuation adjustment, the Company experienced a lower gain on sale of loans in
the quarter ended September 30, 1998 due to the delay in sale of its September
loan production. The Company sold a total of $234 million of loans in the third
quarter to a major investment bank for cash at a weighted average price of
105.87% of par value. This purchaser advised the Company in mid-September that
it had determined to discontinue purchasing loans due to its excess inventory.
The Company was unable to find additional purchasers for its September loan
production by the end of the quarter, and the Company therefore held a total of
$121.4 million of loans held for sale at September 30, 1998, compared to a total
of $34.7 million of loans held for sale at June 30, 1998.
Loans originated for sale increased $119.9 million, or 62.3%, to $312.3
million for the quarter ended September 30, 1998, from $192.4 million for the
quarter ended September 30, 1997 and increased $266.7 million, or 49.6%, to
$804.5 million for the nine months ended September 30, 1998, from $537.8 million
for the nine months ended September 30, 1997. Gain on sale of loans decreased
$47.0 million, or 208.0%, to a loss of $24.4 million for the quarter ended
September 30, 1998 from a gain of $22.6 million for the quarter ended September
30, 1997. Gain on sale of loans decreased by $31.1 million, or 57.3%, to $23.2
million for the nine months ended September 30, 1998 from $54.3 million for the
nine months ended September 30, 1997. The decrease in gain on sale of loans is
primarily due to the $19.1 million valuation adjustment net of tax benefit of
$14.4 million of the interest-only strips receivable and the delay in sale of
September's loan production.
9
<PAGE> 10
The adjustment of the valuation in the interest-only strips receivable
is in part due, and the delay in the sale of the Company's loans during the
third quarter 1998 is primarily due to a chain reaction of events which caused
significant and sudden changes in the securitization market late in the quarter.
During September 1998, a number of asset-backed and mortgage-backed securitizors
experienced significant reductions in their ability to complete securitization
transactions. In part, this may have been due to the financial difficulties of
hedge funds, some of which where significant buyers of asset-backed and
mortgage-backed investments, and which were required by their lenders to
liquidate substantial portions of their portfolios, thereby creating an
overabundance of supply and a reduced demand for new asset-backed and
mortgage-backed investments. Many subprime lenders began experiencing liquidity
shortages due to the inability to receive financing on loans or existing
interest-only strips receivable. In order to relieve the liquidity shortages, a
number of subprime lenders announced that they would begin selling their loans
on a cash basis, creating an increase in supply of mortgage loans being sold for
cash. These factors led to a reduced demand to purchase loans for securitization
and an oversupply of loans for sale in the secondary loan market, which has
continued into the fourth quarter of 1998. In addition, these market forces have
had an impact on the secondary market for interest-only strips receivable, which
has negatively affected the valuation of these receivables.
During the third quarter of 1998, there was a moderate change in the
performance of the Company's securitization pools, affecting primarily the
Company's three oldest pools formed during the last quarter of 1996 and the
first two quarters of 1997. That fact, coupled with the unsettled nature of the
securitization markets in general, led the Company to determine that it was
necessary to adopt more conservative prepayment assumptions and a more
conservative discount rate in the valuation of its interest-only strips
receivable to reflect the higher risks perceived by the market for these types
of assets. There has been no significant variation from assumptions in
performance of the latter eight pools in which the Company has residual
interests, which were formed in the last two quarters of 1997 and the first
three quarters of 1998. The Company believes that the higher prepayment and
default rates in the earlier pools may be due to the lower loan-to-value ratios
and higher percentage of lower credit grade loans in those pools than in the
later pools. Lower loan-to-value ratios an result in higher prepayment rates as
borrowers seek to refinance existing loans in order to obtain more cash, and
lower credit grade loans generally lead to higher delinquency and default rates.
Notwithstanding that only three of the Company's loan pools have experienced
increases in prepayment and default rates in excess of assumptions, the Company
determined to increase the prepayment rate assumptions on all its pools, which
accounts for a portion of the valuation adjustment on the total interest-only
strips receivable asset reflected in the September quarter.
The recent adverse changes in the securitization markets have also led
to a general increase in discount rates applied in the determination of present
value of interest-only strips receivable. In the past, discount rates were
determined at the discretion of each holder of receivables, and were generally
set at or near the average interest rate of the underlying mortgage loans held
in each pool. Recently, however, discount rates have been increased in
recognition of the adverse market conditions which have reduced demand for these
receivables. The Company has increased the discount rate it uses to determine
present value on its interest-only strips receivable from 11% to 15%, which it
believes to be consistent with others in the industry at this time.
The Company has obtained an independent analysis of the interest-only
strips in all of its securitization pools, the results of which are consistent
with the Company's adjusted valuation. The valuations reported by the Company
in prior quarters were also consistent with the independent analyses performed
for those quarters. More detailed information concerning prepayment rate, loss
rate and discount rate assumptions and pool performance data are contained in
the Notes to the Financial Statements appearing elsewhere herein.
INTEREST INCOME
Total interest income increased $1.9 million, or 59.4%, to $5.1 million
for the quarter ended September 30, 1998 from $3.2 million for the quarter ended
September 30, 1997 and increased $3.2 million, or 36.8%, to $11.9 million for
the nine months ended September 30, 1998 from $8.7 million for the nine months
ended September 30, 1997. Total interest expense increased $1.7 million, or
85.0%, to $3.7 million for the quarter ended September 30, 1998 from $2.0
million for the quarter ended September 30, 1997 and increased $4.7 million, or
111.9%, to $8.9 million for the nine months ended September 30, 1998 from $4.2
million for the nine months ended September 30, 1997, reflecting an increase in
financing on the Company's interest-only strips receivable. Net interest income
before provision for loan losses increased $0.2 million, or 16.7%, to $1.4
million for the quarter ended September 30, 1998 from $1.2 million for the
quarter ended September 30, 1997 and decreased $1.7 million, or 37.0%, to $2.9
million for the nine months ended September 30, 1998 from $4.6 million for the
nine months ended September 30, 1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased $0.7 million, or (350.0%), to
($0.5) million for the quarter ended September 30, 1998, from $0.2 million for
the quarter ended September 30, 1997 and decreased $1.3 million, or 100.0%, to
no provision for the nine months ended September 30, 1998, from $1.3 million for
the nine months ended September 30, 1997. The total allowance for loan losses
increased $0.4 million, or 28.6% to $1.8 million at September 30, 1998, from
$1.4 million at December 31, 1997. The decrease in the provision is due to the
release of the reserve from a "piggyback" loan sale. "Piggyback" loans are
small second mortgage loans made concurrently with the first mortgage loans to
the same borrower. Historically these loans are sold at book value, net of
reserves, within 60 to 90 days after they are originated. The adequacy of the
allowance for loan losses is based on a variety of factors, including the size
of the Company's loan portfolio, which does not include loans held for sale,
loan classifications and underlying loan collateral values, and is not directly
proportional to the level of nonperforming portfolio loans. The ratio of
nonaccrual portfolio loans past due 90 days or more ($1.0 million) to total
portfolio loans ($8.1 million) was 12.3% at September 30, 1998, compared to a
ratio of 8.5% of nonaccrual loans past due 90 days or more ($1.9 million) to
total portfolio loans ($22.3 million) at December 31, 1997. Total portfolio
loans decreased due to the sale of portfolio loans during the first three
quarters of 1998.
NONINTEREST INCOME (LOSS)
Total noninterest income decreased $45.7 million, or (202.2%), to a
loss of $23.1 million for the quarter ended September 30, 1998 from income of
$22.6 million for the quarter ended September 30, 1997. Total noninterest income
decreased $29.6 million, or 54.5%, to $24.7 million for the nine months ended
September 30, 1998 from $54.3 million for the nine months ended September 30,
1997. The decrease was due to the decrease in gain on sale of loans originated
for sale, which decreased $47.0 million, or (208.0%), to a loss of $24.4 million
for the quarter ended September 30, 1998 from income of $22.6 million for the
quarter ended September 30, 1997 and decreased $31.1 million, or 57.3%, to $23.2
million for the nine months ended September 30, 1998 from $54.3 million for the
nine months ended September 30, 1997, primarily due to the valuation adjustment
on the interest-only strips receivable and the delay of the sale of September
loan production, as discussed above.
NONINTEREST EXPENSE
Noninterest expense increased by $4.1 million, or 29.1%, to $18.2
million for the quarter ended September 30, 1998 from $14.1 million for the
quarter ended September 30, 1997 and increased by $17.3 million, or 48.1%, to
$53.3 million for the nine months ended September 30, 1998 from $36.0 million
for the nine months ended September 30, 1997, due primarily to increases in
salaries, employee benefits and personnel services and general and
administrative expenses. Salaries, employee benefits and personnel services
increased $1.5 million, or 18.3%, to $9.7 million for the quarter ended
September 30, 1998 from $8.2 million for the quarter ended September 30, 1997
and increased $8.1 million, or 40.5%, to $28.1 million for the nine months ended
September 30, 1998 from $20.0 million for the nine months ended September 30,
1997, due to increases in loan representative commissions and the hiring of
additional support personnel related to increased loan volume. General and
administrative expenses, which includes rent, appraisal fees, and telemarketing
and solicitation costs, increased $2.7 million, or 48.2%, to $8.3 million for
the quarter ended September 30, 1998, from $5.6 million for the quarter ended
September 30, 1997 and increased $9.3 million, or 61.6%, to $24.4 million for
the nine months ended September 30, 1998, from $15.1 million for the nine months
ended September 30, 1997. The increase is primarily due to the overall increase
in the volume of business and from telemarketing and solicitation costs which
increased $1.0 million, or 111.1%, to $1.9 million for the quarter ended
September 30, 1998 from $0.9 million for the quarter ended September 30, 1997
and increased $3.2 million, or 139.1%, to $5.5 million for the nine months ended
September 30, 1998 from $2.3 million for the nine months ended September 30,
1997 due to the Company's focus on increasing retail loan volume.
10
<PAGE> 11
PROVISION FOR INCOME TAXES
Income tax provision (benefit) decreased $20.9 million, or 522.5%, to
($16.9) million for the quarter ended September 30, 1998 from $4.0 million for
the quarter ended September 30, 1997 and decreased $20.2 million, or 222.0%, to
($11.1) million for the nine months ended September 30, 1998 from $9.1 million
for the nine months ended September 30, 1997 and is directly related to the net
loss reported for the period.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of the Company's liquidity are cash and cash
equivalents maintained by Pacific Thrift in connection with its deposit-taking
activities, proceeds from sale of loans, warehouse loan financing and
interest-only strips receivable financing. At September 30, 1998, cash and cash
equivalents totaled $22.0 million compared to $66.1 million at December 31,
1997. Under the terms of the Company's agreements with Aames, Advanta and
Merrill Lynch, the Company received an advance on its interest-only strips
receivable for each securitization pool. Advances received from Aames totaled
$1.5 million at September 30, 1998, bear interest at a rate of 12.5% per annum
and are repaid from future payments on the interest-only strip due from Aames.
Advances received from Advanta totaled $28.7 million at September 30, 1998, bear
interest at rates between LIBOR plus 1% and LIBOR plus 2.0% (for an effective
rate of 6.6% at September 30, 1998) and are repaid on a pool by pool basis from
the future payments on the interest-only strips due from Advanta to the Company.
Advances received from Merrill Lynch totaled $18.4 million at September 30,
1998, bear interest at LIBOR plus 2.5% (for an effective rate of 7.8% and a
combined effective rate of 7.4% at September 30, 1998) and are due one year from
the date of each advance, or may be extended at the option of Merrill Lynch.
As indicated in the Statements of Cash Flows, the Company used $108.6
million in cash from operating activities, primarily for the origination of
loans held for sale, from January 1, 1998 through September 30, 1998. The
Company used $7.9 million for investing activities, primarily for loans
receivable, and realized $72.4 million from financing activities, primarily from
residual financing from January 1, 1998 through September 30, 1998.
The adverse changes in market conditions, and the Company's resulting
inability to sell all of its loan production in the third quarter 1998 as
originally anticipated, have also had a negative impact upon regulatory capital
ratios of Pacific Thrift and Loan, the Company's wholly-owned subsidiary. While
two of the three regulatory capital ratios are above the levels required to be
classified as "adequately capitalized," the "total risk-based" capital ratio is
now at a level classified as "significantly undercapitalized" under FDIC
regulations. This is due to the high ratio of capital required to be held by
Pacific Thrift to support its interest-only strip receivable assets under
regulatory requirements. The Company is working with the California Department
of Financial Institutions ("DFI") and the FDIC to develop an acceptable capital
plan to restore this capital ratio of Pacific Thrift to a level determined to be
"adequately capitalized." The capital plan will require approval of the FDIC and
the DFI, and there can be no assurance that such approval will be granted, or
that additional conditions or restrictions will not be imposed by the FDIC
and/or the DFI as a condition of approval of the capital plan.
Due to the various adverse market conditions which have occurred during
the third quarter as described above, the Company's liquidity has also been
adversely affected. The Company believes that its liquidity will improve during
1999 as it begins to receive cash flow from the interest-only strips receivable
it currently holds. The Company is currently in discussions with its primary
lender to restructure its debt payment obligations to levels consistent with its
anticipated cash flow. However, no assurance can be given that this lender will
agree to a restructuring of debt obligations.
YEAR 2000 COMPLIANCE INFORMATION
The Company has undertaken a full assessment of its operations to
determine all functions that will be impacted by the limitations of existing
computer programs that use only two digits to identify the year in the date
field. Substantially all of the Company's operating software systems, including
loan origination, loan servicing, financial, human resources and payroll systems
are outsourced to third party providers. The Company distributed a written
request for year 2000 compliance information to all systems providers in the
fourth quarter of 1997 and the first quarter of 1998 and has received responses
from most providers. The loan origination, financial, human resources and
payroll systems providers have represented that they will implement upgrades
that make their systems year 2000 compliant at various dates before the year
2000. The loan servicing and thrift deposit system provider has indicated that
it is currently undergoing restructuring and testing needed to become compliant
before the end of 1998. The Company's network operating system providers have
posted representations on their internet web sites that they are each year 2000
compliant. The Company has also contacted the servicers of the loan pools in
which the Company holds interest-only strips receivable to determine their year
2000 compliance, and expects that they
11
<PAGE> 12
will become compliant before the year 2000. The Company is similarly awaiting
responses from its bank, investment bank and appraisal service providers. The
Company does not expect to incur any material costs in connection with the
upgrades necessary to bring its systems or the servicer providers systems into
year 2000 compliance. If the Company and third party providers upon which it
relies are unable to address this issue in a timely manner, it could result in a
material financial risk to the Company. In order to assure that this does not
occur, the Company plans to devote all resources required to resolve any
significant year 2000 issues in a timely manner. The Company is currently
developing a contingency plan to manage any systems failure which occurs as a
result of year 2000 issues. The Company anticipates that contingency plans will
be completed by approximately mid-1999.
SUBSEQUENT EVENTS
For the months of October 1998, the Company completed the sale of $33.8 million
of loans at a weighted average price of approximately 103% of par value, a
portion of which will be paid upon completion of securitization of loans by the
purchaser. Additional sales have also been completed or are expected to be
completed during November. The Company has been actively seeking additional
purchasers for its loan production, and has received indicative bids from
several prospective purchasers. The Company has provided additional information
to some of these prospective purchasers, and currently anticipates that it will
begin selling loans to some of these purchasers in the near future. The Company
expects that the sale price for its existing and future loan production will be
lower than the price received in the third quarter, but there is some
indication that prices may increase from the lower October pricing levels.
Due to the continuing uncertainty in the subprime lending industry and the
secondary market for loan sales, the Company discontinued operation of its
wholesale loan division effective October 27, 1998 as disclosed in Form 8-K
filed on November 4, 1998. Since the cost of loan production is significantly
lower in the retail loan division, the Company has determined to focus all of
its human and economic resources on the operation of the retail loan division.
Over the past several months, the wholesale loan division has produced
approximately 75% of the Company's lending volume, and the retail loan division
has produced approximately 25% of the lending volume. For the three months ended
September 30, 1998, the wholesale loan division originated $235 million of
loans, and the retail loan division originated $86 million of loans. Because of
the discontinuation of the wholesale loan division, the Company now expects that
its fourth quarter and 1999 loan production will be substantially lower than
prior quarters.
Except for historical information contained herein, statements in this Report
are forward-looking statements that involve certain risks and uncertainties that
could cause actual results to differ materially from those in the
forward-looking statements. Such risks include, among others: risk of inability
to meet loan production or cost reduction goals; risks of further required
reductions in loan production and costs necessary if market conditions
deteriorate further; risk of inability to sell loans in sufficient volume or for
a cash premium sufficient to operate on a cash flow positive basis; risk of
further valuation adjustments on interest-only strip receivables; risk of
inability to negotiate extensions of existing debt financing; and possible
regulatory enforcement actions. For more complete information concerning factors
which could affect the Company's financial results, reference is made to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, and
other reports filed with the Securities and Exchange Commission.
12
<PAGE> 13
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For the quarter ended September 30, 1998, there were no material
developments in litigation.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 10.1
Amendment No. 1 To Master Repurchase Agreement and
Supplemental Terms.
(b) On October 5, 1998 the Company filed a Report on Form 8-K with
respect to the $3 million loan from Fremont.
(c) On November 4, 1998 the Company filed a Report on Form 8-K with
respect to closing its wholesale division.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 16, 1998.
PACIFICAMERICA MONEY CENTER, INC.
(Registrant)
November 16, 1998 /s/ Joel R. Schultz
------------------------------------
Joel R. Schultz,
President
November 16, 1998 /s/ Charles J. Siegel
------------------------------------
Charles J. Siegel,
Chief Financial and Administrative
Officer
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NO. 1
TO
MASTER REPURCHASE AGREEMENT
AND SUPPLEMENTAL TERMS
Dated as of May 1, 1998
Among:
Merrill Lynch Mortgage Capital Inc.
and
Merrill Lynch Credit Corporation
and
PacificAmerica Securities, Inc.
1. APPLICABILITY. This Amendment No. 1 (the "Amendment") to the Master
Repurchase Agreement dated as of October 31, 1997 (the "Master Repurchase
Agreement") and the Supplemental Terms thereto set forth in Annex I (the
"Supplemental Terms" and collectively with the Master Repurchase Agreement, the
"Agreement") modifies the Agreement and the terms and conditions under which the
parties hereto and thereto, from time to time, enter into transactions.
2. DEFINITIONS. Capitalized terms used herein and not otherwise defined
shall have the meanings set forth in the Agreement. Capitalized terms used in
the Agreement whose definitions are modified in this Amendment shall, for
purposes of this Agreement, be deemed to have such modified definitions.
3. MAXIMUM TRANSACTION AMOUNT. Paragraph 20(a) of the Supplemental Terms is
hereby amended by deleting "$120,000,000" and substituting "$60,000,000"
therefor and the following shall be added at the end of such Paragraph 20(a):
"; provided, however, that if the aggregate outstanding
Repurchase Price for the Purchased Securities that are
Mortgage Loans shall at any time exceed $60,000,000, all
provisions of the Agreement, as amended, shall apply to the
actual amount of such aggregate outstanding Repurchase Price
as though such amount were specifically set forth in Paragraph
20(a) of the Supplemental Terms."
4. TERMINATION. Notwithstanding any provisions of the Agreement to the
contrary, the Agreement as amended hereby and all Transactions outstanding
thereunder shall terminate automatically without any requirement for notice on
the date occurring on the earlier of (i) December 31, 1998 and (ii) the written
agreement of Seller and Buyer; provided, however, that notwithstanding the
foregoing, the Agreement as amended hereby shall continue in full force and
effect until any outstanding Repurchase Price has been paid in full.
<PAGE> 2
5. GOVERNING LAW. This Amendment shall be governed by the laws of the State
of New York without given effect to the conflict of law principles thereof.
6. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original,
but all such counterparts shall together constitute but one and the same
instrument.
7. RATIFICATION AND CONFIRMATION. As amended hereby, the Agreement is
hereby in all respects ratified and construed as one and the same instrument.
MERRILL LYNCH MORTGAGE PACIFICAMERICA SECURITIES, INC.
CAPITAL INC.
By:_______________________________ By:_________________________________
Title:____________________________ Title:______________________________
Date:_____________________________ Date:_______________________________
MERRILL LYNCH CREDIT
CORPORATION
By:_______________________________
Title:____________________________
Date:_____________________________
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<ARTICLE> 9
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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