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 JUNE 30, 1999
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)
California 95-4465729
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
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>
PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998
(Unaudited)
June 30, December 31,
1999 1998
------------ ------------
Assets
Cash & cash equivalents $ 20,320,000 $ 41,811,000
Restricted cash 66,000 582,000
Accounts receivable, net 447,000 132,000
Interest receivable 679,000 1,315,000
Receivables from related parties -- 215,000
Loans receivable, net (Note 7) 33,404,000 9,444,000
Loans held for sale, net 36,993,000 72,814,000
Interest-only strips receivable 120,908,000 116,628,000
Other real estate owned 658,000 219,000
Property and equipment, net 3,932,000 4,421,000
Other assets 1,865,000 2,633,000
------------ ------------
$219,272,000 $250,214,000
============ ============
Liabilities and Stockholders' Equity
Thrift certificates payable
Full-paid certificates $102,132,000 $132,618,000
Installment certificates 32,531,000 29,692,000
------------ ------------
Total thrift certificates payable 134,663,000 162,310,000
Accounts payable and accrued expenses 3,409,000 5,003,000
Accrued interest payable 4,192,000 3,303,000
Notes payable 54,173,000 52,958,000
Note payable - related party 475,000 174,000
Deferred income taxes, net 1,027,000 1,185,000
------------ ------------
197,939,000 224,933,000
------------ ------------
Stockholders' Equity 21,333,000 25,281,000
------------ ------------
$219,272,000 $250,214,000
============ ============
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
2
<PAGE>
PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For Three and Six Months Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans receivable $ 2,108,000 $ 3,429,000 $ 4,218,000 $ 6,382,000
Interest on cash equivalents 186,000 133,000 364,000 403,000
------------ ------------ ------------ ------------
Total interest income 2,294,000 3,562,000 4,582,000 6,785,000
Interest Expense:
Interest on thrift certificates greater than $100,000 11,000 33,000 18,000 84,000
Interest on other thrift certificates 1,886,000 1,797,000 3,854,000 3,593,000
Interest on notes payable 96,000 1,304,000 174,000 1,573,000
------------ ------------ ------------ ------------
Total interest expense 1,993,000 3,134,000 4,046,000 5,250,000
Net interest income 301,000 428,000 536,000 1,535,000
Provision for loan losses 1,110,000 1,840,000 1,763,000 3,231,000
------------ ------------ ------------ ------------
Net interest after provision for loan losses (809,000) (1,412,000) (1,227,000) (1,696,000)
------------ ------------ ------------ ------------
Noninterest income:
Other income 156,000 324,000 453,000 383,000
Gain on sale of loans 3,997,000 27,983,000 7,777,000 50,135,000
------------ ------------ ------------ ------------
Total noninterest income 4,153,000 28,307,000 8,230,000 50,518,000
------------ ------------ ------------ ------------
Noninterest expense:
General and administrative 3,409,000 8,586,000 7,640,000 16,079,000
Salaries, employee benefits and personnel services 4,242,000 9,641,000 8,774,000 18,458,000
Depreciation and amortization 230,000 241,000 586,000 441,000
Expenses on real estate acquired in settlement of loans 16,000 35,000 30,000 82,000
Net (gain) loss on sales of real estate acquired
in settlement of loans -- 7,000 1,000 19,000
------------ ------------ ------------ ------------
Total noninterest expense 7,897,000 18,510,000 17,031,000 35,079,000
------------ ------------ ------------ ------------
Income (loss) before tax provision (4,553,000) 8,385,000 (10,028,000) 13,743,000
Tax provision (benefit) (497,000) 3,563,000 (821,000) 5,814,000
------------ ------------ ------------ ------------
Net income (loss) $ (4,056,000) $ 4,822,000 $ (9,207,000) $ 7,929,000
============ ============ ============ ============
Basic earnings (loss) per share $ (0.78) $ 0.95 $ (1.77) $ 1.57
Diluted earnings (loss) per share $ (0.78) $ 0.90 $ (1.77) $ 1.48
</TABLE>
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
3
<PAGE>
PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
June 30, June 30,
(Increase) Decrease in Cash and Cash Equivalents 1999 1998
- ------------------------------------------------ ------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (9,207,000) $ 7,929,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 586,000 441,000
Provision for loan losses 1,763,000 3,231,000
Marked to market valuation adjustment 399,000 --
Provision for OREO losses (25,000) 95,000
Net (gain) on sales of real estate
acquired in settlement of loans (1,000) (76,000)
Proceeds from sale of loans originated for sale 144,019,000 489,834,000
Origination of loans held for sale (132,060,000) (492,163,000)
Net change in assets and liabilities
Restricted cash 516,000 --
Investments -- (52,268,000)
Accounts receivable (315,000) 2,189,000
Related party receivable 215,000 --
Interest receivable 636,000 (74,000)
Interest-only strips receivable 718,000 (56,531,000)
Amortization of interest-only strips receivable -- 2,214,000
Other assets 768,000 (1,594,000)
Accounts payable, accrued expenses,
interest payable, and deferred taxes payable (863,000) 5,071,000
------------- -------------
Net cash provided by (used in) operating activities 7,149,000 (91,702,000)
------------- -------------
Cash flows from investing activities:
Proceeds from sale of loans receivable 1,613,000 14,403,000
Proceeds from sale of other real estate 145,000 1,622,000
Net change in loans receivable (4,431,000) (6,595,000)
Purchases of property and equipment (97,000) (1,809,000)
------------- -------------
Net cash provided by (used in) investing activities (2,770,000) 7,621,000
------------- -------------
Cash flow from financing activities:
Net change in thrift certificates (27,647,000) 3,454,000
Proceeds from stock issuance 61,000 1,038,000
Proceeds from notes payable 1,415,000 20,316,000
Proceeds from notes payable-related party 301,000 --
------------- -------------
Net cash provided by (used in) financing activities (25,870,000) 24,808,000
------------- -------------
Net (decrease) in cash and cash equivalents (21,491,000) (59,273,000)
Cash and cash equivalents at beginning of period 41,811,000 66,090,000
------------- -------------
Cash and cash equivalents at end of period $ 20,320,000 $ 6,817,000
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
4
<PAGE>
PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1) General
The Company delayed the completion of its financial statements for the
quarter ended June 30, 1999, due to a review of the methodology used by Pacific
Thrift and Loan, the Company's primary operating subsidiary ("Pacific Thrift"),
to value its interest-only strips receivable. The review was deemed necessary by
the Company in response to certain criticisms raised by the Federal Deposit
Insurance Corporation ("FDIC") in the loss rate assumptions used to calculate
the fair value of the asset. The Company ultimately determined to continue
essentially the same discounted cash flow methodology as it has historically
used to determine the fair value of this asset, after consultation with its
independent expert. Using this methodology, the Company has determined that the
fair value of the interest-only strips receivable has increased by approximately
$890,000 at June 30, 1999 from the valuation at March 31, 1999. Users of this
financial information should be aware, however, that the FDIC continues to
disagree with the valuation methodology used by Pacific Thrift, and the FDIC
notified Pacific Thrift in October 1999 that it has determined based on their
valuation methodology under which it has found the value of Pacific Thrift's
interest-only strips receivable to be $7.1 million less than the fair value
determined by the Company. As a result of its valuation, the FDIC has determined
that Pacific Thrift is critically undercapitalized, as further discussed in this
Report under the heading Item 5. Other information. Users are urged to read Item
5. Other Information regarding the FDIC's valuation of the interest-only strips
receivable and the resulting downgrade of Pacific Thrift's capital
classification to "critically undercapitalized" as a result of such valuation.
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. On a quarterly basis,
management determines if any adjustments are necessary to the recorded fair
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
differs from the determined fair value of the receivable. 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) Adoption of New Accounting Policies
On January 1, 1999, the Company adopted Statement of Financial Accounting
Standards No. 134, Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,
(SFAS 134) which is an amendment of FASB Statement No. 65.
FASB Statement No. 65, Accounting for Certain Mortgage Banking Activities,
establishes accounting and reporting standards for certain activities of
mortgage banking enterprises and other enterprises that conduct operations that
are substantially similar to the primary operations of a mortgage banking
enterprise.
Statement No. 65, as amended by FASB Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities, and Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities, requires that after the securitization of a mortgage loan held for
sale, an entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities as a trading security. This Statement further amends
Statement No. 65 to require that after the securitization of mortgage loans held
for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interest based on its
ability and intent to sell or hold those investments. This conforms the
subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the subsequent accounting
for securities retained after the securitization of other types of assets by a
non-mortgage banking enterprise.
In the first quarter on 1999, the Company reclassified its interest-only
strips receivable, which arose as a result of the securitization of mortgage
loans held for sale, from the trading security category to the available for
sale category.
Statement No. 134 permitted a one-time opportunity to reclassify
mortgage-backed securities and other beneficial interests from the trading
category, without regard to the restriction in paragraph 15 of Statement No.
115. That opportunity was available only on the date this Statement was
initially applied. Transfers from the trading category that result from
implementing this Statement should be accounted for in accordance with paragraph
15(a) of Statement No. 115, that is, the unrealized gain or loss at the date of
transfer will have already been recognized in earnings and should not be
reversed. Accordingly, from January 1, 1999, unrealized gains and losses for
interest-only strips receivable are excluded from earnings and reported as net
amounts in a separate component of stockholders' equity until realized.
5
<PAGE>
PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
3) Earnings Per Share
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common stock outstanding during the year. Diluted
earnings per share is computed by dividing net earnings by the weighted average
number of common stock and potential common stock outstanding during the year.
The following table presents the earnings per share data.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June30,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income (numerator):
Net income (loss) $(4,056,000) $ 4,822,000 $(9,207,000) $ 7,929,000
----------- ----------- ----------- -----------
Shares (denominator):
Weighted average common
shares outstanding for basic
earnings per share 5,229,576 5,068,250 5,198,986 5,043,347
Effect of dilutive common shares
Subscriber warrants -- 23,283 -- 28,568
Options -- 285,282 -- 278,804
----------- ----------- ----------- -----------
Diluted common shares 5,229,576 5,376,815 5,198,986 5,350,719
----------- ----------- ----------- -----------
Basic earnings (loss) per
common share $ (0.78) $ 0.95 $ (1.77) $ 1.57
----------- ----------- ----------- -----------
Diluted earnings (loss) per
common share $ (0.78) $ 0.90 $ (1.77) $ 1.48
----------- ----------- ----------- -----------
</TABLE>
6
<PAGE>
PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
4) Revenue Recognition
Gain on sale of loans 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. The allocated carrying amount 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 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
securitization.
On April 29, 1999, Pacific Thrift entered into a mandatory forward
commitment agreement with a nationally known finance lender, pursuant to which
Pacific Thrift has agreed to sell to the purchaser an aggregate of $108 to $132
million of home equity loans by November 30, 1999. As of June 30, 1999, Pacific
Thrift had sold approximately $34.6 million of loans under this agreement; by
October 31, 1999 Pacific Thrift had sold an aggregate of approximately $96.8
million of loans to this purchaser.
To the extent that the total loans sold by the expiration date are less
than $108 million, Pacific Thrift has agreed to pay a fee of 0.125% on the
difference between the undelivered balance and $108 million. The purchase price
for loans will be paid in cash on the date of sale, in an amount based upon
specified loan characteristics, using a competitive purchase price matrix that
compares favorably to bulk loan sale prices generally available in the secondary
loan market and is expected to be greater than the purchase price of individual
loan pools sold by the Company in the first quarter of 1999. All loans sold will
meet the purchaser's underwriting guidelines.
In April 1999, the FDIC requested that the Company obtain an independent
analysis of its interest-only strips receivable net of the advance intended to
be repaid from the cash flows derived from such receivables. In May 1999, the
Company obtained the new independent analysis for the first quarter ended March
31, 1999, as requested by the FDIC, which derived a value by present valuing the
future cash flows after repayment of any outstanding related residual financing.
(Users of this Report should note that the FDIC notified Pacific Thrift in
October 1999 of its disagreement with the valuation methodology used by Pacific
Thrift to value the interest-only strips receivable, as discussed in Item 5
Other Information.) This approach differs from the Company's previous practice
which arrived at a value by present valuing all future cash flows without regard
to which portion would repay the residual financing and which portion would then
be available to a willing buyer of the interest-only strips. Management believes
the net of residual financing basis more accurately matches the risks associated
with cash flow related to the residual financing and its actual repayment.
Management believes that most, if not all of the March 31, 1999 adjustment
relates to 1998 and the change in accounting practice should be accounted for as
a restatement. Accordingly, earnings in prior periods would be restated such
that the ending shareholder equity at June 30, 1999 would be the same if the
adjustment had been incurred. The valuation adjustment at June 30, 1999 was $.6
million (net of $.3 million in taxes) and was accounted for in accordance with
SFAS #134 and SFAS #115 with an entry to a separate component of stockholders'
equity.
The following table shows actual constant prepayment rates ("CPR") on each
of the following securitization pools and actual annualized losses:
POOL ACTUAL CPR(1) ASSUMED CPR(2) ACTUAL LOSSES(3)
---- ------------- ------------- ----------------
Aames 1996-D(4) 33.2% 27.2% 1.37%
Advanta 1997-1 32.3% 27.2% 0.91%
Advanta 1997-2 29.8% 27.1% 0.43%
Advanta 1997-3 27.2% 27.4% 0.57%
Advanta 1997-4 27.1% 27.5% 0.53%
Advanta 1998-1 26.6% 27.6% 0.26%
Advanta 1998-2 19.8% 27.6% 0.13%
Advanta 1998-3 17.2% 27.8% 0.09%
Advanta 1998-4 6.8% 26.9% 0.00%
Advanta 1999-1 21.2% 27.9% 0.00%
PacificAmerica 1997-1(4) 27.8% 27.8% 0.15%
PacificAmerica 1998-1 28.8% 27.7% 0.14%
PacificAmerica 1998-2 22.3% 27.4% 0.03%
(1) Annualized life-to-date actual data for all pools as of June 30, 1999.
(2) The independent valuation report assumes a CPR based on a curve.
Amounts shown are the terminal CPR's after the curve has peaked from
the maximum CPR of as high as 50% in certain pools.
(3) Annualized life-to-date actual losses for all pools as of June 30,
1999. Assumed loss rates are 0.90% in all the pools except Aames 96-D
which is 2.25%.
(4) All pools were formed in the quarter of the year in the order in which
they are numbered. Aames 1996-D was formed in December 1996.
PacificAmerica 1997-1 was formed in December, 1997.
7
<PAGE>
PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
5) Comprehensive Income (Loss)
The Company did not have other components of comprehensive income (loss)
other than the net income (loss) during the three and six months ended June 30,
1999 and 1998. The adjustment of its interest-only strips receivable at March
31, 1999 was not included in comprehensive loss since management believes that a
substantial portion of the adjustments relates to 1998 (Note 4). As a result,
comprehensive income (loss) is the same as net income (loss).
6) Reclassifications
Certain reclassifications of balances from prior years have been made to
conform to the current year's reporting format.
7) Loans Receivable
The following is a summary of Loans Receivable as of the date indicated
below:
6-30-99
-----------
Interest bearing loans $35,197,000
Deferred loan fees, net (79,000)
Allowance for loan losses (1,714,000)
-----------
Total $33,404,000
===========
The following is a summary of Allowance for Loan Losses:
Balance at 12-31-98 $ (864,000)
Additions to reserve (1,763,000)
Charge offs 913,000
-----------
Balance at 6-30-99 $(1,714,000)
===========
8
<PAGE>
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 that the Company filed with its Annual Report on Form 10-K
for the year ended December 31, 1998.
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: Pacific Thrift
has been classified as "critically undercapitalized" by the FDIC based upon the
FDIC's valuation of the interest-only strips receivable held by Pacific Thrift,
and has further been ordered by the California Department of Financial
Institutions to correct a net worth deficiency, and is subject to further
regulatory action which could be materially adverse to its business, as further
discussed in Item 5 hereof. The Company's independent accountants for the year
ended December 31, 1998 included an explanatory paragraph indicating that
certain matters raise substantial doubt about the ability of the Company to
continue as a going concern. The Company currently is unable to repay certain
existing indebtedness owed to Merrill Lynch in accordance with its terms and may
be unable to repay certain additional existing indebtedness which matures in
January 2000. The Company has a high concentration of interest-only strips
receivable and has a risk of loss on such interest-only strips receivable
resulting from differences between actual and assumed prepayments or loss
experience. See Item 5 Other Information in this Report and See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Risk Factors" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, for a more complete description of these factors.
Financial Condition
Total consolidated assets of the Company decreased $30.9 million, or 12.4%
to $219.3 million at June 30, 1999 from $250.2 million at December 31, 1998. The
decrease was due primarily from a decrease in cash and cash equivalents and
loans held for sale, partially offset by an increase in loans receivable and
interest-only strips receivable. Cash and cash equivalents decreased $21.5
million, or 51.4%, to $20.3 million at June 30, 1999 from $41.8 million at
December 31, 1998. Loans receivable increased $24.0 million, or 255.3% to $33.4
million at June 30, 1999 from $9.4 million at December 31, 1998 due primarily to
a transfer of loans held for sale to loans receivable. Loans held for sale
decreased $35.8 million, or 49.2%, to $37.0 million at June 30, 1999 from $72.8
million at December 31, 1998 due primarily to transfer to loans receivable from
loans held for sale. Total interest-only strips receivable increased $4.3
million, or 3.7% to $120.9 million at June 30, 1999, from $116.6 million at
December 31, 1998, primarily due to a change in the accounting practice used to
value that portion of the estimated future cash flows from the receivable which
is anticipated to be used to pay down advances received by the Company related
to these receivables, until such time as the advances are repaid. Consistent
with an independent report obtained by the Company in May 1999 for the first
quarter ended March 31, 1999 concerning the present value calculation of the
estimated future cash flows from the interest-only strips receivable net of
repayment of advances, the Company has taken a discount rate on that portion of
the anticipated cash flows which will be used to repay advances equal to the
interest rate accrued on advances which the Company expects to repay with cash
flow from the receivables. This has resulted in a reduction of the discount rate
applied to that portion of the receivables from 15% (as used to determine the
value of the gross interest-only strips receivable at December 31, 1998) to a
discount rate on that portion of the cash flows to be used to repay advances
equal to the actual interest rates charged on those advances (ranging from LIBOR
plus 1.0% to LIBOR plus 2.5%, and a small portion which bears interest at 12.5%
per annum) and a discount rate of 15% on that portion of the cash flow which the
Company expects to receive after advances have been repaid. Management believes
the net of residual financing basis more accurately matches the risks associated
with cash flow related to the residual financing and it's actual repayment.
On a quarterly basis, management determines if any adjustments are
necessary to the recorded fair 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 differs from the determined fair value of
the receivable. Consistent with the independent valuation report received in
October 1999 for the second quarter ended June 30, 1999, the fair value of the
interest-only strips receivable increased by $.9 million. In accordance with
SFAS No. 134 and SFAS No. 115, the net of tax amount of $.6 million was recorded
to a separate component of stockholders' equity.
Total liabilities decreased $27.0 million, or 12.0%, to $197.9 million at
June 30, 1999 from $224.9 million at December 31, 1998, due to decreases in
thrift certificates outstanding partially offset by an increase in notes
payable. Thrift certificates decreased $27.6 million, or 17.0% to $134.7 million
at June 30, 1999 from $162.3 million at December 31, 1998. Management of Pacific
Thrift has sought to reduce outstanding thrift certificates to improve Pacific
Thrift's capital ratios in accordance with certain regulatory orders. See Item 5
Other Information and see the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, Item 1. "Business - Supervision and Regulation -
Regulatory Actions". Notes payable increased $1.2 million, or 2.3%, to $54.2
million at June 30, 1999 from $53.0 million at December 31, 1998.
Total stockholders' equity decreased $4.0 million, or 15.8%, to $21.3
million at June 30, 1999 from $25.3 million at December 31, 1998, reflecting
primarily the net loss from operations of $9.2 million in the first
9
<PAGE>
six months of 1999, offset by the change in value of the interest-only strips
receivable as discussed above.
Results of Operations
General
The Company reported a net loss of $4.1 million, $(0.78) basic and diluted
loss per share, for the quarter ended June 30, 1999. For the comparable period
of 1998, the Company reported net income of $4.8 million, $0.95 basic earnings
per share and $0.90 diluted earnings per share. For the six months ended June
30, 1999, the Company reported a net loss of $9.2 million, $(1.77) basic and
diluted loss per share. For the comparable six months of 1998, the Company
reported net income of $7.9 million, $1.57 basic earnings per share and $1.48
diluted earnings per share. The decrease in net income was primarily due to the
decrease in gain on sale of loans for the quarter and six months ended June 30,
1999, partially offset by a decrease in noninterest expense. Loans originated
for sale decreased $225.6 million, or 78.7%, to $61.0 million for the quarter
ended June 30, 1999 from $286.6 million for the quarter ended June 30, 1998, and
decreased $360.1 million, or 73.2%, to $132.1 million for the six months ended
June 30, 1999. These reductions were from $492.2 million for the six months
ended June 30, 1998. The decrease was primarily due to the closure of the
Company's wholesale operation in October 1998. Gain on sale of loans decreased
$24.0 million, or 85.7% to $4.0 million for the quarter ended June 30, 1999,
from $28 million for the quarter ended June 30, 1998 and decreased by $42.3, or
84.4%, to $7.8 million for the six months ended June 30, 1999, from $50.1
million for the six months ended June 30, 1998, due primarily to the reduction
in loan origination resulting from the closure of the wholesale division, the
change in the Company's secondary marketing of loans from securitization to
whole loan sales in 1999 and a general decline in whole loan sale prices which
began in the third quarter of 1998. Noninterest expense decreased $10.6 million,
or 57.3%, to $7.9 million for the quarter ended June 30, 1999 from $18.5 million
for the quarter ended June 30, 1998, and decreased by $18.1 million, or 51.6% to
$17.0 million for the six months ended June 30, 1999 from $35.1 million for the
six months ended June 30, 1998. This decrease was also due to the closure of the
Company's wholesale operation in October 1998.
Net Interest Income
Total interest income decreased $1.3 million, or 36.1%, to $2.3 million for
the quarter ended June 30, 1999 from $3.6 million for the quarter ended June 30,
1998 and decreased $2.2 million, or 32.4% to $4.6 for the six months ended June
30, 1999 from $6.8 million at June 30, 1998 due to the decrease in loan
originations. Total interest expense decreased $1.1 million, or 35.5%, to $2.0
million for the quarter ended June 30, 1999 from $3.1 million for the quarter
ended June 30, 1998, and decreased by $1.3 million, or 24.5% to $4.0 million for
the six months ended June 30, 1999 from $5.3 million for the six months ended
June 30, 1998 due the payoff in the warehouse line of credit and a reduction in
thrift deposits. Net interest income before provision for loan losses decreased
$0.1 million, or 25.0%, to $0.3 million for the quarter ended June 30, 1999 from
$0.4 million for the quarter ended June 30, 1998 and decreased by $1.0 million,
or 66.7% to $0.5 million for the six months ended June 30, 1999 from $1.5
million for the six months ended June 30, 1998.
Provision for Loan Losses
The provision for loan losses decreased $0.7 million, or 38.9%, to $1.1
million for the quarter ended June 30, 1999, from $1.8 million for the quarter
ended June 30, 1998 and decreased by $1.4 million, or 43.8% to $1.8 million for
the six months ended June 30, 1999 from $3.2 million for the six months ended
June 30, 1998. The total allowance for loan losses was $1.7 million at June 30,
1999, compared to $.9 million at December 31, 1998. 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 ($4.6 million) to total
portfolio loans ($35.2 million) was 13.1% at June 30, 1999, compared to a ratio
of 21.9% of nonaccrual loans past due 90 days or more ($2.3 million) to total
portfolio loans ($10.5 million) at December 31, 1998. The decrease in the ratio
was caused by an increase in portfolio loans partially offset by the increase in
nonaccrual loans.
10
<PAGE>
Noninterest Income
Total noninterest income decreased $24.1 million, or 85.2%, to $4.2 million
for the quarter ended June 30, 1999 from $28.3 million for the quarter ended
June 30, 1998 and decreased by $42.3 million, or 83.8% to $8.2 million for the
six months ended June 30, 1999 from $50.5 million for the six months ended June
30, 1998. The primary source of noninterest income is gain on sale of loans
originated for sale, which decreased $24.0 million, or 85.7%, to $4.0 million
for the quarter ended June 30, 1999 from $28 million for the quarter ended June
30, 1998, and decreased by $42.3 million, or 84.4% to $7.8 million for the six
months ended June 30, 1999 from $50.1 million for the six months ended June 30,
1998 due to the decrease in volume of loans sold in 1999 which was primarily due
to the closure of the Company's wholesale operation in October 1998.
Noninterest Expense
Noninterest expense decreased by $10.6 million, or 57.3%, to $7.9 million
for the quarter ended June 30, 1999 from $18.5 million for the quarter ended
June 30, 1998, and decreased by $18.1 million, or 51.6% to $17.0 million for the
six months ended June 30, 1999 from $35.1 million for the six months ended June
30, 1998 due primarily to decreases in salaries, employee benefits and personnel
services and general and administrative expenses related to the closure of the
Company's wholesale operation in October 1998. Salaries, employee benefits and
personnel services decreased $5.4 million, or 56.3%, to $4.2 million for the
quarter ended June 30, 1999 from $9.6 million for the quarter ended June 30,
1998 and decreased by $9.7 million, or 52.4% to $8.8 million for the six months
ended June 30, 1999 from $18.5 million for the six months ended June 30, 1998.
General and administrative expenses, which includes rent, appraisal fees, and
telemarketing costs, decreased $5.2 million, or 60.5%, to $3.4 million for the
quarter ended June 30, 1999, from $8.6 million for the quarter ended June 30,
1998 and decreased by $8.5 million, or 52.8% to $7.6 million for the six months
ended June 30, 1999 from $16.1 million for the six months ended June 30, 1998.
Provision for Income Taxes
For the quarter ended June 30, 1999 there was an income tax benefit of $0.5
million versus an income tax provision of $3.6 million for the quarter ended
June 30, 1998 and for the six months ended June 30, 1999 there was an income tax
benefit of $0.8 million versus an income tax expense of $5.8 million for the six
months ended June 30, 1998.
The ability to utilize an income tax benefit is dependent up in the ability
of the Company to earn net income against which to offset net operating losses.
Accordingly, the Company must have a reasonable expectation of earning a profit
in order to report income tax benefit from net operating losses. There can be no
assurance that the Company will operate at a profit or the Company will be able
to realize an income tax benefit from net operating losses. As of June 30, 1999,
the Company has a valuation reserve of $3.4 million against its deferred tax
assets.
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 and proceeds from sale of loans. At June 30, 1999, cash and cash
equivalents totaled $20.3 million compared to $41.8 million at December 31,
1998.
Management of Pacific Thrift is able to regulate the inflow of funds from
thrift certificates by adjusting interest rates to amounts slightly above or
below prevailing rates. In the second quarter of 1999, Pacific Thrift increased
the outflow of funds from thrift certificates, thereby resulting in a $27.6
million decrease in outstanding thrift certificates to $134.7 million at June
30, 1999 from $162.3 million at December 31, 1998.
Pacific Thrift is subject to certain leverage and risk-based capital
adequacy standards applicable to FDIC-insured institutions. At June 30, 1999,
Pacific Thrift was classified as critically undercapitalized under FDIC
regulations. See Item 5 Other Information in this Report.
As indicated in the Statements of Cash Flows, the Company generated $7.1
million in cash from operating activities, primarily for the proceeds from sale
of loans held for sale, from January 1, 1999 through June 30, 1999. The Company
used $2.8 million from investing activities, primarily from the increase of
loans receivable, and used $25.9 million from financing activities, primarily
from the decrease in thrift certificates, from January 1, 1999 through June 30,
1999.
Year 2000 Compliance Information
Pacific Thrift has prepared a Year 2000 Project Plan which will be used for
all computer-related systems of the Company as a whole. The plan provides for
four phases of implementation: assessment, renovation, testing and contingency
planning. The Company has completed all phases of the plan including the
contingency planning phase which was completed by September 30, 1999.
11
<PAGE>
An internal audit of the Year 2000 Project was completed in July, 1999.
The Company has budgeted a total of $40,000 to complete its Year 2000
Project Plan, and does not anticipate that total expenses necessary to become
Year 2000 compliant will be material.
On March 1, 1999, Pacific Thrift entered into a stipulation and consent to
an order issued by the FDIC related to Year 2000 readiness (the "Year 2000
Order"), the terms of which are described in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 under the heading Item 1. "Business
- --Supervision and Regulation - Regulatory Actions". The FDIC has determined that
Pacific Thrift has satisfactorily complied with the terms of the Year 2000 order
as of July 1999.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in the Company's disclosure about market
risk. See the Company's Annual Report on Form 10-K for the year ended December
31, 1998, Item 7A - "Quantitative and Qualitative Disclosures about Market
Risk."
12
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
For the quarter ended June 30, 1999, 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.
On September 15, 1999, Pacific Thrift received an order from the
California Department of Financial Institutions ("DFI") that, based
upon financial statements submitted by Pacific Thrift for the month
ended August 31, 1999, Pacific Thrift had a net capital deficiency of
approximately $1.9 million under Section 18415.3 of the California
Financial Code. On August 31, 1999, Pacific Thrift had a net worth of
approximately $6.6 million (before any regulatory adjustment of its
interest-only strips receivable) and outstanding deposits of
approximately $128 million. The DFI ordered Pacific Thrift to achieve,
by November 17, 1999, and thereafter to maintain, a net worth of not
less than 100% of the aggregate amount of its total outstanding
deposits, divided by 15 (its permitted deposit ratio). In response to
the Order, Pacific Thrift has been steadily reducing its total
outstanding balance of deposits; however, Pacific Thrift does not
currently anticipate that it will meet the terms of the order by
November 17, 1999. Pacific Thrift intends to request an extension of
time to meet the terms of the Order, but there is no assurance that it
will receive an extension of time from the DFI. Section 18415.3
provides that, if the company fails to cure the net worth deficiency
within the specified time, not to exceed 120 days, the DFI may take
possession of the company's property and business. If the deficiency
is not cured within 120 days of the order, the DFI is required to take
possession of the company's property and business.
On October 19, 1999, Pacific Thrift received notification from the
FDIC that, as a result of an adverse classification rating of certain
interest-only strips receivable made by the FDIC, Pacific Thrift's
capital classification had been downgraded to "critically
undercapitalized." The adverse classification rating is based
primarily upon the FDIC's disagreement with the valuation methodology
utilized by the Company and its independent experts. The Company
believes that all aspects of its valuation methodology are in
accordance with FASB 125, and that, based upon the analysis performed
quarterly by its independent expert, the Company's assumptions and
discount rate are substantially similar to the assumptions and
discount rate utilized by most other public companies in the subprime
lending industry. The FDIC's valuation of Pacific Thrift's
interest-only strips receivable is essentially $7.1 million less than
the Company's valuation of those assets as of March 31, 1999. The
Company disagrees with the valuation of the interest-only strips made
by the FDIC, but the FDIC is not required to accept the Company's
valuation of the interest-only strips receivable, and the capital
classification of Pacific Thrift is based upon the findings of the
FDIC. Under the prompt corrective action provisions of Section 38 of
the Federal Deposit Insurance Act, 12 U.S. C. Section 1831o, the FDIC
is required to place Pacific Thrift in receivership not later than 90
days after Pacific Thrift's receipt of the notification unless the
FDIC determines that a different action would better carry out the
purposes of the prompt corrective provisions of the Act.
On October 21, 1999, at the request of Pacific Thrift, a meeting was
held with representatives of Pacific Thrift, the FDIC and the DFI, to
discuss Pacific Thrift's plans to comply with the terms of the DFI
Order and the FDIC capital classification notification. Pacific Thrift
informed its regulators that it is seeking to enter into a transaction
with one or more investors that would result in a sale of the
interest-only strip assets by Pacific Thrift and a simultaneous
investment of approximately $10 million of new capital in Pacific
Thrift. As of the date of this report, Pacific Thrift is pursuing
discussions with potential investors, but it has not received any
commitments as of this date. There can be no assurance that Pacific
Thrift will succeed in raising additional capital within the time
required under either the DFI Order or the Act. Management of Pacific
Thrift believes that, if it has obtained a commitment from one or more
investors prior to November 17, 1999 it may receive an extension of
time from the DFI and the FDIC to allow it to complete a pending
transaction. There can be no assurance, however, that Pacific Thrift
will receive a commitment to complete a transaction, or that it will
complete a transaction, within the time required by its regulators.
The Company and Pacific Thrift have entered into an engagement letter
with Murphy Noell Capital, a private investment banking firm, to
assist them in soliciting potential investors in Pacific Thrift. If
Murphy Noell Capital is successful in completing one or more
transactions, it will be entitled to success fees equal to 6% of the
amount of capital raised for Pacific thrift, 2% of any debt financing,
or 1.25% of any assets sold by the Company or Pacific Thrift. In
addition the Company and Pacific Thrift have agreed to pay Murphy
Noell an aggregate weekly retainer of $10,000, to be credited against
any success fees in excess of $150,000. There can be no assurance that
Murphy Noell will be successful in assisting the Company or Pacific
Thrift to complete any transaction.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K. None.
13
<PAGE>
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 3, 1999.
PACIFICAMERICA MONEY CENTER, INC.
(Registrant)
November 3, 1999 JOEL R. SCHULTZ
-------------------------------
Joel R. Schultz,
President
November 3, 1999 JOHN P. THACKER
-------------------------------
John P. Thacker,
Chief Financial Officer
14
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<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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