-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TRqcS995FsTJonhRlwqz8Q8i84lazD1/rIXaY3Hw2VkOviD6j4zVXmYsvWiZzORI 035jNtVVjLjjE+frfroMTw== 0000950150-99-000676.txt : 19990517 0000950150-99-000676.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950150-99-000676 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWTHORNE FINANCIAL CORP CENTRAL INDEX KEY: 0000046267 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 952085671 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-01100 FILM NUMBER: 99623087 BUSINESS ADDRESS: STREET 1: 2381 ROSECRANS AVE CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107255000 MAIL ADDRESS: STREET 1: 2381 ROSECRANS AVE CITY: EL SEGUNDO STATE: CA ZIP: 90245 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission File Number 0-1100 HAWTHORNE FINANCIAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-2085671 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 2381 ROSECRANS AVENUE, EL SEGUNDO, CA 90245 (Address of Principal Executive Offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (310) 725-5000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: The Registrant had 5,288,113 shares of Common Stock, $0.01 par value per share outstanding, as of April 30, 1999. ================================================================================ 2 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY FORM 10-Q INDEX FOR THE QUARTER ENDED MARCH 31, 1999
PART I - FINANCIAL INFORMATION Page ---- ITEM 1. Financial Statements Consolidated Statements of Financial Condition at March 31, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998 4 Consolidated Statement of Stockholders' Equity for the Three Months Ended March 31, 1999 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 6 Notes to Consolidated Financial Statements 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 30 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 31 ITEM 2. Changes in Securities 31 ITEM 3. Defaults upon Senior Securities 31 ITEM 4. Submission of Matters to a Vote of Security Holders 31 ITEM 5. Other Information 31 ITEM 6. Exhibits and Reports on Form 8-K 31
FORWARD-LOOKING STATEMENTS When used in this Form 10-Q or future filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project", "believe" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers that all forward-looking statements are necessarily speculative and not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various risks and uncertainties, including regional and national economic conditions, changes in levels of market interest rates, credit risks of lending activities, and competitive and regulatory factors, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. The risks highlighted herein should not be assumed to be the only things that could affect future performance of the Company. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. 2 3 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (DOLLARS ARE IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 1999 1998 ----------- ----------- ASSETS Cash and cash equivalents $ 118,407 $ 45,449 Loans receivable (net of allowance for estimated credit losses of $19,958 in 1999 and $17,111 in 1998) 1,359,964 1,326,791 Real estate owned (net of allowance for estimated losses of $90 in 1999 and $45 in 1998) 713 4,070 Investment in capital stock of Federal Home Loan Bank - at cost 17,408 13,554 Office property and equipment - at cost, net 6,308 6,513 Accrued interest receivable 8,534 8,424 Other assets 5,838 7,633 ----------- ----------- TOTAL ASSETS $ 1,517,172 $ 1,412,434 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits $ 1,038,601 $ 1,019,450 FHLB advances 344,000 264,000 Senior notes 40,000 40,000 Accounts payable and other liabilities 9,839 7,560 ----------- ----------- TOTAL LIABILITIES 1,432,440 1,331,010 Stockholders' Equity Preferred stock - $0.01 par value; authorized 10,000,000 shares; none issued and outstanding -- -- Common stock - $0.01 par value; authorized 20,000,000 shares; issued 5,273,113 shares in 1999 and 5,194,996 shares in 1998 53 52 Capital in excess of par value - common stock 40,684 40,349 Retained earnings 44,122 41,150 ----------- ----------- 84,859 81,551 Less Treasury stock, at cost - 5,400 shares (48) (48) Loan to Employee Stock Ownership Plan (79) (79) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 84,732 81,424 ----------- ----------- Total Liabilities and Stockholders' Equity $ 1,517,172 $ 1,412,434 =========== ===========
See accompanying Notes to Consolidated Financial Statements. 3 4 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS ARE IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, -------------------- 1999 1998 ------- ------- INTEREST REVENUES Loans, net of nonaccrual income $31,001 $21,161 Cash and investment securities 1,004 833 ------- ------- Total interest revenues 32,005 21,994 ------- ------- INTEREST COSTS Deposits 12,425 10,737 FHLB advances 3,860 917 Senior notes 1,250 1,264 ------- ------- Total interest costs 17,535 12,918 ------- ------- NET INTEREST INCOME 14,470 9,076 PROVISION FOR ESTIMATED CREDIT LOSSES ON LOANS 3,000 1,485 ------- ------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES ON LOANS 11,470 7,591 ------- ------- NONINTEREST REVENUES Loan related fees 1,754 458 Other 214 255 ------- ------- TOTAL NONINTEREST REVENUES 1,968 713 ------- ------- NONINTEREST EXPENSES General and administrative expenses Employee 4,165 3,263 Operating 1,540 1,269 Occupancy 993 757 Technology 560 462 Professional 320 304 SAIF premiums and OTS assessments 299 225 ------- ------- Total general and administrative expenses 7,877 6,280 ------- ------- Income from real estate operations, net 434 333 Other non-operating expense 911 -- ------- ------- Total noninterest expenses 8,354 5,947 ------- ------- NET EARNINGS BEFORE INCOME TAXES 5,084 2,357 INCOME TAX PROVISION 2,112 524 ------- ------- NET EARNINGS (NOTE 3) $ 2,972 $ 1,833 ======= ======= BASIC EARNINGS PER SHARE (NOTE 3) $ 0.57 $ 0.58 ======= ======= DILUTED EARNINGS PER SHARE (NOTE 3) $ 0.38 $ 0.32 ======= ======= WEIGHTED AVERAGE BASIC SHARES OUTSTANDING (NOTE 3) 5,224 3,157 ======= ======= WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING (NOTE 3) 7,732 5,681 ======= =======
See accompanying Notes to Consolidated Financial Statements. 4 5 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (AMOUNTS ARE IN THOUSANDS)
COMPREHENSIVE INCOME ------------- BALANCE AT EXERCISED BALANCE AT DECEMBER 31, STOCK EXERCISED NET MARCH 31, 1998 OPTIONS WARRANTS EARNINGS OTHER 1999 ----------- -------- -------- -------- -------- -------- Number of common shares 5,195 69 9 -- -- 5,273 ======== ======== ======== ======== ======== ======== Common stock $ 52 $ 1 $ -- $ -- $ -- $ 53 Capital in excess of par value- common stock 40,349 348 19 -- (32) 40,684 Retained earnings 41,150 -- -- 2,972 -- 44,122 Treasury stock (48) -- -- -- -- (48) Loan to employee stock ownership plan (79) -- -- -- -- (79) -------- -------- -------- -------- -------- -------- Total stockholders' equity $ 81,424 $ 349 $ 19 $ 2,972 $ (32) $ 84,732 ======== ======== ======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 5 6 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS ARE IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------------- 1999 1998 --------- --------- NET CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 2,972 $ 1,833 Adjustments Provision for income taxes 2,112 524 Provision for estimated credit losses on loans 3,000 1,485 Provision for estimated credit losses on real estate owned 45 15 Net recoveries from sales of real estate owned (557) (299) Net gain from sale of other assets -- (4) Loan fee and discount accretion (1,557) (1,364) Depreciation and amortization 628 401 FHLB dividends (197) (105) Increase in accrued interest receivable (110) (937) Other assets (418) 226 Decrease in other liabilities 2,278 2,131 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 8,196 3,906 --------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES Investment securities Purchases -- (8) Loans New loans funded (64,722) (102,431) Construction disbursements (97,585) (61,551) Payoffs 115,895 62,470 Principal amortization and paydowns 7,937 5,502 Lines of credit activity, net 3,994 (17,818) Other, net 1,176 1,580 Real estate owned Sale proceeds 2,579 3,575 Capitalized costs (21) (253) Other, net -- 59 Purchase of FHLB stock (3,657) -- Office property and equipment Sale proceeds 3 4 Additions (356) (765) --------- --------- NET CASH USED IN INVESTING ACTIVITIES (34,757) (109,636) --------- ---------
See accompanying Notes to Consolidated Financial Statements. 6 7 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS ARE IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------------- 1999 1998 --------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES Deposit activity, net $ 19,151 $ 49,369 New FHLB advances 80,000 65,000 Net proceeds from exercise of stock options and warrants 368 369 Collection of ESOP loan -- 8 --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 99,519 114,746 --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 72,958 9,016 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 45,449 51,620 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 118,407 $ 60,636 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID DURING THE PERIOD FOR: Interest $ 16,043 $ 11,202 Income taxes 225 54 NON-CASH INVESTING AND FINANCING ACTIVITIES Real estate acquired in settlement of loans 293 1,770 Loans originated to finance sales of real estate owned 1,500 1,612 Loans originated to refinance existing Bank loans 17,926 14,367 LOAN ACTIVITY Total commitments $ 154,975 $ 192,976 Less: Change in undisbursed funds on construction commitments 8,936 (19,140) Loans originated to finance sales of real estate owned (1,500) (1,612) Undisbursed portion of new lines of credit (104) -- New lines of credit -- (8,242) --------- --------- Net construction disbursements and loans funded $ 162,307 $ 163,982 ========= =========
See accompanying Notes to Consolidated Financial Statements. 7 8 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999 (amounts in tables are in thousands, except per share data) NOTE 1 - SUMMARY OF ACCOUNTING POLICIES The consolidated financial statements include the accounts of Hawthorne Financial Corporation and its wholly-owned subsidiary, Hawthorne Savings, F.S.B. ("Bank"), which are collectively referred to herein as the "Company". All material intercompany transactions and accounts have been eliminated. In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting solely of normal recurring accruals) necessary to present fairly the Company's financial position as of March 31, 1999 and December 31, 1998, and the results of its operations and its cash flows for the three months ended March 31, 1999 and 1998. Operating results for the three months ended March 31, 1999, are not necessarily indicative of the results that may be expected for any other interim period or the full year ending December 31, 1999. Certain information and note disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. NOTE 2 - RECLASSIFICATION Certain amounts in the 1998 consolidated financial statements have been reclassified, where practicable, to conform with classifications in 1999. NOTE 3 - BOOK VALUE AND EARNINGS PER SHARE The table below sets forth the Company's earnings per share calculations for the three months ending March 31, 1999 and 1998. In the table below, "Warrants" refers to the Warrants issued by the Company in December 1995, which are currently exercisable and which expire December 11, 2005, and "Options" refers to stock options previously granted to employees of the Company and which were outstanding at each measurement date. On July 10, 1998, the Company completed an offering of 2,012,500 of its common shares at a price of $15.00 per share, realizing net proceeds (after offering costs) of approximately $27.6 million. As a result of this offering, the exercise price of the Company's Warrants was reduced to $2.128 and the number of shares of Common Stock purchasable upon the exercise of the Warrants was increased to 2,512,188. 8 9 NOTE 3 - BOOK VALUE AND EARNINGS PER SHARE - continued (amounts in tables are in thousands, except per share data)
THREE MONTHS ENDED MARCH 31, --------------------- 1999 1998 ------- ------- Average Shares Outstanding Basic 5,224 3,157 Warrants 2,503 2,376 Options(1) 617 655 Less Treasury shares(2) (612) (507) ------- ------- Diluted 7,732 5,681 ======= ======= NET EARNINGS FOR THE PERIOD $ 2,972 $ 1,833 ======= ======= BASIC EARNINGS PER SHARE $ 0.57 $ 0.58 ======= ======= DILUTED EARNINGS PER SHARE $ 0.38 $ 0.32 ======= =======
MARCH 31, ----------------------- 1999 1998 -------- -------- PERIOD-END SHARES OUTSTANDING Basic 5,268 3,164 Warrants 2,503 2,376 Options(3) 513 648 Less Treasury shares(2) (567) (513) -------- -------- Diluted 7,717 5,675 ======== ======== STOCKHOLDERS' EQUITY $ 84,732 $ 44,529 ======== ======== BASIC BOOK VALUE PER SHARE $ 16.08 $ 14.07 ======== ======== DILUTED BOOK VALUE PER SHARE $ 10.98 $ 7.85 ======== ========
- -------------- (1) Does not include 210,000 options outstanding at March 31, 1999 for which the exercise price exceeded the average market price of the Company's common stock during the period. (2) Under the Diluted Method, it is assumed that the Company will use proceeds from the proforma exercise of the Warrants and Options to acquire actual shares currently outstanding, thus increasing Treasury shares. In this calculation, Treasury shares were assumed to be repurchased at the average closing stock price for the respective period. (3) Does not include 210,000 options outstanding at March 31, 1999 for which the exercise price exceeded the average market price of the Company's common stock at period end. NOTE 4 - COMMITMENTS AND CONTINGENCIES The Bank is a defendant in an action entitled Takaki vs. Hawthorne Savings and Loan Association, filed in the Superior Court of the State of California, Los Angeles, as Case No. YC021815. The plaintiffs were owners of real property which they sold in early 1992 to a third party. The Bank provided escrow services in connection with the transaction. A substantial portion of the consideration paid to the plaintiffs took the form of a deed of trust secured by another property then owned by an affiliate of the purchaser. The value of the collateral securing this 9 10 deed of trust ultimately proved to be inadequate. The plaintiffs alleged that the Bank knew, or should have known, that the security that the plaintiffs received as sellers was inadequate and should have so advised them. In June 1997, a jury found for the plaintiffs and awarded compensatory and punitive damages totaling $9.1 million. In July 1997, the trial judge reduced the combined award to $3.3 million. The plaintiffs accepted the reduced judgment. The Bank filed a notice of appeal from the judgment and posted an Appeal Bond with the Court to stay plaintiffs' enforcement of the judgment pending the Appellate Court's decision. In July, 1998, the Appellate Court remanded the case to the Superior Court with directions to dismiss the fraudulent concealment, misrepresentation and punitive damages claims and to conduct a new trial pertaining solely to damages arising from negligence, in particular to determine whether any negligence of the Bank contributed to the plaintiffs' injury and, if so, to apportion liability for negligence between the Bank and the plaintiffs. On March 30, 1999, the jury returned a verdict in favor of the plaintiffs in the amount of $2.6 million. The Bank intends to file a notice of appeal from this judgment. The Bank believes that there is a substantial likelihood that its position will ultimately be upheld on retrial and, accordingly, that no amounts having a materially adverse effect on the Bank's financial condition or results of operations will be paid by the Bank to the plaintiffs in this matter. There can be no assurances that this will be the case, however. In the first quarter of 1999, the Company settled two matters involving real property sold by the Company to third parties following the Company's acquisition of the properties through completed foreclosure prior to 1992. In each of these matters, the Company was alleged to have sold the properties with known construction defects which were not adequately disclosed to the purchasers. In the aggregate, these settlements involved the payment by the Company of a total of $0.6 million. The Company is involved in a variety of other litigation matters. In the opinion of management, none of these cases will have a materially adverse effect on the Bank's or the Company's financial condition or results of operations. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company earned $3.0 million, or $0.38 per diluted share, for the quarter ended March 31, 1999, which represented a 66.7% increase over the net earnings of $1.8 million, or $0.32 per diluted share, for the first quarter of 1998. Core Business Activity The Company originates real estate-secured loans throughout Southern California, generally consisting of permanent loans collateralized by one to four unit residential property, permanent and construction loans secured by multi-family residential and commercial real estate, and loans for the construction of individual and tracts of single family residential homes and the acquisition and development of land for the construction of such homes. The Company funds its loans predominately with retail deposits and, to a lesser extent, with advances from the Federal Home Loan Bank of San Francisco ("FHLB"). The Company's consolidated capital structure has changed significantly during the past three years, initially as a result of its recapitalization in December 1995, and then again in December 1997, due to its successful refinancing of the securities issued in the 1995 recapitalization through the sale of senior notes ("Senior Notes"). In July 1998, the Company completed a public offering of approximately 2.0 million of its common shares, which raised approximately $27.6 million of net proceeds. In addition to these positive changes to the Company's capital structure, the Company returned to taxable status during 1998, following several years in which it realized substantial income tax benefits from utilization of accumulated operating loss carryforwards. Together, these factors make meaningful comparisons of consolidated operating results, and related per share amounts, between the 1999 and 1998 periods somewhat difficult. Because of the significant changes to the Company's capital structure and taxable status, management believes that pretax core earnings ("Bank Core Earnings") are the most useful measure of the Company's underlying operating and earnings performance. Bank Core Earnings are earnings before interest on parent company debt, income taxes, real estate operations and non-operating items. For the first quarter of 1999, Bank Core Earnings were $6.8 million, more than double the $3.3 million of Bank Core Earnings produced during the first quarter of 1998. 11 12 The table below isolates the principal components of the Bank's Core Earnings and the Company's net earnings for the periods indicated (dollars are in thousands).
THREE MONTHS ENDED MARCH 31, -------------------- 1999 1998 ------- ------- Net interest income $15,720 $10,340 Less provision for estimated credit losses on loans 3,000 1,485 ------- ------- Net interest income after provision for estimated credit losses on loans 12,720 8,855 Noninterest revenues 1,968 713 Less general and administrative costs 7,877 6,280 ------- ------- BANK CORE EARNINGS 6,811 3,288 ------- ------- Income from real estate operations, net 434 333 Other expenses Other non-operating expenses, net 911 -- Interest cost on Senior Notes 1,250 1,264 ------- ------- Total other expenses, net 2,161 1,264 ------- ------- PRETAX EARNINGS 5,084 2,357 Income tax provision 2,112 524 ------- ------- NET EARNINGS $ 2,972 $ 1,833 ======= =======
The Bank's net interest income increased 52.4% during the first quarter of 1999, to $15.7 million, from the $10.3 million of net interest income generated during the first quarter of 1998. This growth in net interest income resulted from a commensurate increase in the Bank's average interest-earning assets, which rose to $1.4 billion during the three months ended March 31, 1999, from $953.4 million during the three months ended March 31, 1998. Because the Company has contributed substantially all of the net proceeds raised during 1998 from its sale of common stock, the Company and the Bank will not have excess capital during 1999 to the same extent excess capital was available during 1998. Accordingly, management does not expect that growth in the Company's assets will approach the percentage growth achieved during 1998, absent the issuance of additional debt or equity securities by the Company or the Bank. The Company and the Bank have no present intention of issuing debt or equity securities in 1999. Noninterest revenues were $2.0 million during the first quarter of 1999, as compared with $0.7 million during the three months ended March 31, 1998. The year-over-year increase in noninterest revenues results primarily from the Company's receipt of exit and release fees and prepayment penalties in connection with loans repaid during the quarter. General and administrative expenses were $7.9 million during the three months ended March 31, 1999, a 25.4% increase over operating expenses of $6.3 million incurred during the first quarter of 1998. The growth in operating expenses during the first quarter of 1999, as compared with the same quarter in 1998, resulted from significant increases to staff, in particular in the Company's lending and technology groups, to accommodate the significant expansion in each of the Company's lending businesses and in anticipation of the Company's now-completed technology platform conversion. Occupancy and operating expenses also increased year-over-year, as a direct consequence of the growth in staff. During the three months ended March 31, 1999, the Company settled two matters involving real estate owned, sold by the Company to third parties prior to 1992. In each of these matters, the Company was alleged to have sold the properties with known construction defects which were not adequately disclosed to the purchasers. In 12 13 the aggregate, these settlements involved the payment by the Company of a total of $0.6 million, which is included with other non-operating expense. Also during the first quarter of 1999, the Company accrued for the estimated remaining cost ($0.3 million) of a long-term lease in connection with one of its former branch offices, which management determined was no longer part of the Company's operating plant. INCOME TAXES During the first quarter of 1999, the Company's effective tax rate was 41.5%. During the first quarter of 1998, the Company's effective tax rate was 22.2%, which reflected continued utilization of accumulated income tax benefits, principally tax loss carryforwards. Such accumulated income tax benefits were fully utilized by December 31, 1998. PARENT COMPANY ITEMS In July 1998, the Company completed an offering of approximately 2.0 million of its common shares, realizing net proceeds (after offering costs) of approximately $27.6 million. Through March 31, 1999, the Company had contributed $22.5 million of these net proceeds to the Bank and had made its December 1998 semi-annual interest payment of approximately $2.5 million on its Senior Notes. Accordingly, approximately $2.6 million of the offering proceeds remained with the Company at March 31, 1999, which are expected to be utilized to make the June 1999 semi-annual interest payment of approximately $2.5 million on its Senior Notes. Thereafter, the Company will rely upon dividends from the Bank for its payment of interest on the Senior Notes. RESULTS OF OPERATIONS NET INTEREST INCOME The operations of the Company are substantially dependent on its net interest income, which is the difference between the interest income received from its interest-earning assets and the interest expense paid on its interest-bearing liabilities. The Company's net interest margin is its net interest income divided by its average interest-earning assets. Net interest income and net interest margin are affected by several factors, including (1) the level of, and the relationship between, the dollar amount of interest-earning assets and interest-bearing liabilities, (2) the relationship between the repricing or maturity of the Company's adjustable-rate and fixed-rate loans and short-term investment securities and its deposits and borrowings, and (3) the magnitude of the Company's noninterest-earning assets, including nonaccrual loans and real estate owned ("REO"). During the first quarter of 1999, the Bank's net interest margin rose slightly to 4.37% from its effective interest margin of 4.34% realized during the first quarter of 1998. During the first quarter of 1999, the Company received, and recorded as revenue, approximately $1.5 million of interest in connection with several loans previously on non-accrual status which were repaid in full during the quarter. Adjusted for this non-recurring revenue, the Bank's interest margin for the first quarter of 1999, was 3.92%. This tempering of the Bank's recurring effective interest margin resulted from a decline in the yield earned on the Bank's loans, which are predominantly adjustable-rate and priced off of market-sensitive indices (e.g., Prime Rate, One-year CMT, Six-month LIBOR), which was occasioned by the sharp drop in market interest rates since the middle of 1998. The lower yield on the Bank's loans was partially offset by a decline in the Bank's funding costs, which averaged 5.02% during the first quarter of 1999, as compared with 5.29% during the first quarter of 1998. 13 14 The following table sets forth the Company's average balance sheets, and the related weighted average yields and costs on average interest-earning assets (inclusive of nonaccrual loans) and interest-bearing liabilities, for the three months ended March 31, 1999 and 1998. In the tables, interest revenues are net of interest associated with nonaccrual loans (dollars are in thousands).
THREE MONTHS ENDED ---------------------------------------------------------------------------------------- MARCH 31, 1999 MARCH 31, 1998 ------------------------------------------ -------------------------------------------- WEIGHTED WEIGHTED AVERAGE REVENUES/ AVERAGE AVERAGE REVENUES/ AVERAGE BALANCE COSTS YIELD/COST BALANCE COSTS YIELD/COST ------------ ------------- ------------- ------------- ------------- ------------- ASSETS Interest-earning assets Loans(1)(2) $1,354,383 $31,001 9.16% $892,060 $21,161 9.49% Cash and cash equivalents 68,136 807 4.74% 53,506 720 5.38% Investment securities -- -- --% 574 8 5.57% Investment in capital stock of Federal Home Loan Bank 15,255 197 5.17% 7,251 105 5.79% ---------- ------- -------- ------- Total interest-earning assets 1,437,774 32,005 8.90% 953.391 21,994 9.23% ------- ----- ------- ----- Noninterest-earning assets 15,762 23,902 ---------- -------- Total assets $1,453,536 $977,293 ========== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Interest-bearing liabilities Deposits $1,015,919 12,425 4.96% $819,886 10,737 5.31% FHLB advances 300,444 3,860 5.14% 63,988 917 5.81% Senior notes 40,000 1,250 12.50% 40,000 1,264 12.64% ---------- ------- -------- ------- Total interest-bearing liabilities 1,356,363 17,535 5.24% 923,874 12,918 5.67% ------- ----- ------- ----- Noninterest-bearing liabilities 14,730 10,026 Stockholders' equity 82,443 43,393 ---------- -------- Total liabilities and stockholders' equity 1,453,536 $977,293 ========== ======== Net interest income $14,470 $ 9,076 ======= ======= INTEREST RATE SPREAD 3.66% 3.56% ===== ===== NET INTEREST MARGIN INCLUDING SENIOR NOTES 4.03% 3.81% ===== ===== NET INTEREST MARGIN EXCLUDING SENIOR NOTES 4.37% 4.34% ===== =====
- ------------- (1) Includes nonaccrual loans of $42.1 million and $21.4 million for the three months ended March 31, 1999 and March 31, 1998, respectively. (2) Includes amortization of loan fees and discounts of $1.6 million and $1.4 million for the three months ended March 31, 1999 and March 31, 1998, respectively. 14 15 The following table sets forth the dollar amount of changes in interest revenues and interest costs attributable to changes in the balances of interest-earning assets and interest-bearing liabilities, and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume (i.e., changes in volume multiplied by old rate), (2) changes in rate (i.e., changes in rate multiplied by old volume) and (3) changes attributable to both rate and volume (dollars are in thousands).
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 INCREASE (DECREASE) DUE TO CHANGE IN ----------------------------------------------------- RATE AND NET VOLUME RATE VOLUME CHANGE -------- -------- -------- -------- Interest Revenues Loans $ 10,967 $ (742) $ (385) $ 9,840 Cash and cash equivalents 197 (86) (24) 87 Investment securities (8) -- -- (8) Investment in capital stock of Federal Home Loan Bank 116 (11) (13) 92 -------- -------- -------- -------- 11,272 (839) (422) 10,011 -------- -------- -------- -------- INTEREST COSTS Deposits 2,568 (710) (170) 1,688 FHLB Advances 3,389 (95) (351) 2,943 Senior notes -- (14) -- (14) -------- -------- -------- -------- 5,957 (819) (521) 4,617 -------- -------- -------- -------- INCREASE IN NET INTEREST INCOME $ 5,315 $ (20) $ 99 $ 5,394 ======== ======== ======== ========
The Company's interest revenues increased by $10.0 million, or 45.5%, during the first three months of 1999 as compared to the same period in 1998. This increase was primarily attributable to an increase in the average balance of loans outstanding, which was partially offset by a decrease in the weighted average yield earned thereon. Interest costs increased by $4.6 million, or 35.7%, during the first three months of 1999, as compared to the same period during 1998, primarily due to an increase in the average balances of the Company's deposits and borrowings, which was partially offset by a decrease in the weighted average rates paid on the Company's deposits and FHLB advances. These changes in interest revenues and interest costs produced an increase of $5.4 million, or 59.4%, in the Company's net interest income during the first quarter of 1999 as compared with the same quarter during 1998. Expressed as a percentage of average interest-earning assets, the Company's effective net interest margin increased to 4.03% during the first quarter of 1999, as compared with the effective net interest margin of 3.81% produced during the first quarter of 1998. Provisions for Estimated Credit Losses on Loans For the three months ended March 31, 1999, the Company recorded provisions for estimated credit losses on loans of $3.0 million, an increase of 100.0% over provisions of $1.5 million recorded during the three months ended March 31, 1998. The sharp increase in the level of loan loss provisioning reflects management's intention to increase the ratio of the Company's general loan loss reserves to 1.50% of net loans by the end of 1999, a level deemed by management to be prudent in view of the significant growth in the Company's loan portfolio since 1997, the relative lack of seasoning of many of the Company's loans, and the significant portion of the Company's loans which are directed at financing real estate development. Although the Company maintains its allowance for credit losses at a level which it considers to be adequate to provide for potential losses based on presently known conditions, there can be no assurance that such losses will not exceed the estimated amounts, thereby adversely affecting future results of operations. The calculation of the adequacy of the allowance for credit losses, and therefore the requisite amount of provision for credit losses, is based 15 16 on several factors, including underlying loan collateral values, delinquency trends and historical loan loss experience, all of which can change without notice based on market and economic conditions and other factors. NONINTEREST REVENUES The table below sets forth information concerning the Company's noninterest revenues for the periods indicated (dollars are in thousands).
THREE MONTHS ENDED MARCH 31, --------------------------------- 1999 1998 CHANGE ------- ------- ------- OPERATING Loan related fees $ 1,754 $ 458 $ 1,296 Other 214 251 (37) ------- ------- ------- TOTAL NONINTEREST REVENUES - OPERATING 1,968 709 1,259 ------- ------- ------- NON-OPERATING Other, net -- 4 (4) ------- ------- ------- TOTAL NONINTEREST REVENUES - NON-OPERATING -- 4 (4) ------- ------- ------- TOTAL NONINTEREST REVENUES $ 1,968 $ 713 $ 1,255 ======= ======= =======
Loan-related fees primarily consist of fees collected (1) from certain borrowers for the early repayment of their loans, (2) when the Company agrees to extend the maturity of loans (predominantly short-term construction loans, with respect to which extension options are included in the original term of the Company's loan), and (3) in connection with certain loans which contain exit or release fees payable to the Company upon the maturity or repayment of the Company's loan. The significant increase in loan-related fee revenues during the first quarter of 1999, as compared with the first quarter of 1998, was occasioned by the prepayment of a larger number of loans to which prepayment penalties were attached, and the repayment of a small number of loans which possessed exit fees due upon the loans' repayment. NONINTEREST EXPENSES - GENERAL AND ADMINISTRATIVE EXPENSES The table below details the Company's general and administrative expenses for the periods indicated (dollars are in thousands).
THREE MONTHS ENDED MARCH 31, ------------------------------ 1999 1998 CHANGE ------ ------ ------ GENERAL AND ADMINISTRATIVE EXPENSES Employee $4,165 $3,263 $ 902 Operating 1,540 1,269 271 Occupancy 993 757 236 Technology 560 462 98 Professional 320 304 16 SAIF insurance premiums and OTS assessments 299 225 74 ------ ------ ------ TOTAL GENERAL AND ADMINISTRATIVE EXPENSES $7,877 $6,280 $1,597 ====== ====== ======
As the Company's business activities have grown and expanded, additional personnel have been hired into the Company's various business and staff support groups. During the first quarter of 1999, the Company employed an average of 278 full-time equivalents. By comparison, the Company employed an average of 209 full-time equivalents during the first quarter of 1998. The corresponding year-over-year growth in employee-related expenses, which consist primarily of base salaries, incentive compensation and the Company's share of benefit expenses, was substantially less than the growth in the dollar amount of the Company's net interest margin. 16 17 The year-over-year growth in operating and occupancy expenses approximates, and is directly tied to, the growth in the number of full-time equivalents employed by the Company. As previously reported, the Company completed the conversion of its computer-based systems to an in-house platform during 1998. This platform conversion was integrated into the Company's overall plan to address Year 2000 data processing issues. To date, the Company has (1) completed its own Year 2000 testing by creating a database that rolled forward systematically until the in-house computer systems processed data into what it believed was early 2000, (2) established contingency plans that will provide for alternative methods of conducting business for critical functions, (3) completed an extensive review of all of its third party service providers' Year 2000 compliance, and (4) completed its evaluation of the potential Year 2000-related risk associated with certain of its real estate loan collateral. The expense incurred and to be incurred by the Company to ensure Year 2000 compliance is substantially integrated and was included with the expense associated with the now-completed conversion of the Company's technology platform. The Company does not anticipate any material additional expenses in 1999 related to Year 2000 software or hardware. Year 2000 testing occurs on a continual basis upon receipt of all new releases of Year 2000-compliant software and hardware. NONINTEREST EXPENSES - REAL ESTATE OPERATIONS The table below sets forth the costs and revenues attributable to the Company's REO for the periods indicated. The compensatory and legal costs directly associated with the Company's property management and disposal operations are included in General and Administrative Expenses (dollars are in thousands).
THREE MONTHS ENDED MARCH 31, --------------------------- 1999 1998 CHANGE ----- ----- ----- EXPENSES ASSOCIATED WITH REAL ESTATE OPERATIONS Property taxes $ -- $ 3 $ (3) Repairs, maintenance and renovation 58 15 43 Insurance 21 30 (9) ----- ----- ----- TOTAL 79 48 31 ----- ----- ----- REVENUES ASSOCIATED WITH REAL ESTATE OPERATIONS Net recoveries from sale of REO 557 299 258 Property operations, net 1 97 (96) ----- ----- ----- TOTAL 558 396 162 ----- ----- ----- PROVISION FOR ESTIMATED LOSSES ON REAL ESTATE OWNED 45 15 30 ----- ----- ----- INCOME FROM REAL ESTATE $ 434 $ 333 $ 101 ===== ===== =====
Net recoveries from sales of REO represent the difference between the proceeds received from property disposal and the carrying value of such properties upon disposal. Property operations principally include the net operating income (collected rental revenues less operating expenses and certain renovation costs) from foreclosed income-producing properties or receipt, following foreclosure, of similar funds held by receivers during the period the original loan was in default. During the three months ended March 31, 1999, the Company sold eight properties generating net cash proceeds of $2.6 million and a net recovery of $0.6 million, as compared to sales of 17 properties generating net cash proceeds of $3.6 million and a net recovery of $0.3 million during the three months ended March 31, 1998. INCOME TAXES The Company recorded an income tax provision of $2.1 million for the three months ended March 31, 1999, as compared to an income tax provision of $0.5 million, during the same period in 1998. The Company returned to taxable status during 1998, following several years in which it realized substantial income tax benefits from 17 18 utilization of accumulated operating loss carryforwards. The Company's effective tax rate was 41.5% and 22.2%, respectively, for the three months ended March 31, 1999 and 1998. FINANCIAL CONDITION, CAPITAL RESOURCES & LIQUIDITY AND ASSET QUALITY ASSETS LOANS RECEIVABLE GENERAL The Company's loan portfolio consists almost exclusively of loans secured by real estate located in Southern California. The table below sets forth the composition of the Company's loan portfolio as of the dates indicated (dollars are in thousands).
MARCH 31, 1999 DECEMBER 31, 1998 ------------------------------ ----------------------------- BALANCE PERCENT BALANCE PERCENT ----------- ------------ ----------- ------------ SINGLE FAMILY $ 578,558 35.6% $ 576,032 35.9% INCOME PROPERTY Multi-family(1) 243,980 15.0 250,876 15.5 Commercial(1) 219,999 13.5 222,558 13.9 Development(2) 121,626 7.5 78,425 4.9 LAND(3) 73,289 4.5 69,581 4.3 SINGLE FAMILY CONSTRUCTION Single residence(4) 283,789 17.5 275,888 17.2 Tract 68,566 4.2 85,942 5.4 OTHER 35,351 2.2 46,615 2.9 ----------- ------------ ----------- ------------ GROSS LOANS RECEIVABLE(5) 1,625,158 100.0% 1,605,917 100.0% ============ ============ LESS Undisbursed funds (240,658) (256,096) Deferred fees and credits, net (4,578) (5,919) Allowance for estimated losses (19,958) (17,111) ----------- ------------ NET LOANS RECEIVABLE $ 1,359,964 $ 1,326,791 =========== ============
- ----------- (1) Predominantly term loans secured by improved properties, with respect to which the properties' cash flows are sufficient to service the Company's loan. (2) Predominantly loans to finance the construction of income-producing improvements. Also includes loans to finance the renovation of existing improvements. (3) The Company expects that a majority of these loans will be converted into construction loans, and the land-secured loan repaid with the proceeds of these construction loans, within 12 months. (4) Predominantly loans for the construction of individual, custom homes, and the acquisition of land for the construction of such homes. (5) The funded principal balance under recorded loan commitments, plus undisbursed funds associated with such loan commitments. 18 19 The table below sets forth the approximate composition of the Company's gross new loan commitments, net of internal refinances, for the period indicated, in dollars and as a percentage of total loans originated (dollars are in thousands).
THREE MONTHS ENDED MARCH 31, 1999 -------------------- TYPE OF COLLATERAL AMOUNT % - -------------------------- -------- ------- SINGLE FAMILY(1) $ 41,400 26.7% INCOME PROPERTY Multi-family 8,900 5.7 Commercial 14,700 9.5 Development(2) 27,300 17.6 LAND(3) 14,600 9.4 SINGLE FAMILY CONSTRUCTION Single residence(4) 47,100 30.5 OTHER 1,000 0.6 ======== ===== $155,000 100.0% ======== =====
- ------------ (1) Includes unfunded commitments under lines of credit of $0.1 million. (2) Includes unfunded commitments of $14.3 million. (3) Includes unfunded commitments of $4.5 million. (4) Includes unfunded commitments of $30.3 million. ASSET QUALITY Nonaccrual and Troubled Debt Restructured Loans The Company generally places loans on nonaccrual status when (1) they become 30 or more days delinquent or (2) management believes that, with respect to performing loans, continued collection of principal and interest from the borrower is not reasonably assured. The following table provides information regarding the Company's nonaccrual loans as of the dates indicated (dollars are in thousands).
MARCH 31, DECEMBER 31, 1999 1998 ------- ------- NONACCRUAL LOANS Loans past due 90 days or more $13,365 $13,042 Loans past due 30-89 days 9,914 20,002 Other nonaccrual loans 18,637 14,644 ======= ======= TOTAL(1) $41,916 $47,688 ======= ======= RATIO OF TOTAL NONACCRUAL LOANS TO: Total assets 2.8% 3.4% Net loans receivable 3.1% 3.6% Core capital plus General Reserves 30.9% 39.5%
- ---------- (1) Includes $4.2 million and $2.7 million of troubled debt restructured loans ("TDRs") at March 31, 1999 and December 31, 1998, respectively. Excludes $30.3 million and $31.6 million of TDRs which were performing in accordance with their modified terms at March 31, 1999 and December 31, 1998, respectively. 19 20 Nonperforming assets ("NPAs"), which consist of the carrying value of properties acquired through foreclosure and loan principal delinquent three or more payments, stood at $14.1 million at March 31, 1999 (or 0.9% of total assets). By comparison, NPAs were $17.1 million (or 1.2% of total assets) at December 31, 1998. The dollar amounts of nonaccrual and nonperforming loans have steadily declined over the past several years, reaching their current level of $41.9 million and $13.4 million, respectively, at March 31, 1999, or 2.8% and 0.9%, respectively, of total assets, their lowest level since the 1980's. Because a portion of the Company's lending involves greater potential risk than conventional lending, and because certain of the Company's loans are large relative to the Company's and the Bank's capital, management expects that the dollar amount of the Company's nonaccrual and nonperforming loans is likely to be more volatile than that of its competitors. Accordingly, the Company's earnings may be measurably affected by periodic changes in the dollar amounts of nonaccrual and nonperforming loans. Classified Assets The table below sets forth information concerning the Company's classified assets as of the dates indicated. Classified assets include REO, delinquent loans and performing loans which have been adversely classified pursuant to OTS regulations and guidelines ("Performing/Classified" loans) (dollars are in thousands).
MARCH 31, DECEMBER 31, 1999 1998 ---------- ---------- Real estate owned, net $ 713 $ 4,070 Total nonaccrual loans 41,916 47,688 ---------- ---------- GROSS NONACCRUAL ASSETS 42,629 51,758 Performing loans classified substandard or lower (1) 32,784 45,397 ---------- ---------- GROSS CLASSIFIED ASSETS $ 75,413 $ 97,155 ========== ========== GROSS CLASSIFIED LOANS $ 74,700 $ 93,085 ========== ========== GROSS LOANS RECEIVABLE $1,379,922 $1,343,902 ========== ========== CORE CAPITAL $ 120,588 $ 108,673 ========== ========== RISK-BASED CAPITAL $ 133,440 $ 119,400 ========== ========== RATIO OF CLASSIFIED ASSETS TO: Loans receivable 5.5% 7.2% ========== ========== Core capital 62.5% 89.4% ========== ========== Risk-based capital 56.5% 81.4% ========== ==========
- ------------- (1) Includes $18.1 million in loans at December 31, 1998, of which $13.1 million were past due for maturity but current with respect to interest and, if applicable, principal payments. All $18.1 million of loans were renewed, paid current or paid off during the first quarter of 1999. 20 21 The table below sets forth information concerning the Company's gross classified loans, by category, as of March 31, 1999 (dollars are in thousands).
DELINQUENT LOANS OTHER ---------------------- NONACCRUAL PERFORMING 90+ DAYS 30-89 DAYS LOANS(1) LOANS TOTAL -------- ---------- ------- ------- ------- SINGLE FAMILY $ 9,660 $ 9,911 $14,252 $11,688 $45,511 INCOME PROPERTY Multi-family 225 -- -- 1,243 1,468 Commercial 3,480 -- -- 9,367 12,847 Development -- -- -- 2,190 2,190 SINGLE FAMILY CONSTRUCTION Single residence -- -- -- 1,451 1,451 Tract -- -- 3,437 5,701 9,138 OTHER -- 3 948 1,144 2,095 ------- ------- ------- ------- ------- TOTAL $13,365 $ 9,914 $18,637 $32,784 $74,700 ======= ======= ======= ======= =======
- -------------- (1) Loans which have been restructured, such that interest payments are made from the proceeds of the Company's loan without periodic payments by the borrower. ALLOWANCE FOR ESTIMATED LOSSES Management establishes specific allowances for estimated losses on individual loans and REO when it has determined that recovery of the Company's gross investment is not probable and when the amount of loss can be reasonably determined. In making this determination, management considers (1) the status of the asset, (2) the probable future status of the asset, (3) the value of the asset or underlying collateral and (4) management's intent with respect to the asset. In quantifying the loss, if any, associated with individual loans and REO, management utilizes external sources of information (i.e., appraisals, price opinions from real estate professionals, comparable sales data and internal estimates). In establishing specific allowances, management estimates the revenues expected to be generated from disposal of the Company's collateral or owned property, less construction and renovation costs (if any), holding costs and transaction costs. For tract construction and land developments, the resulting projected cash flows are discounted utilizing a market rate of return to determine their value. The Company maintains an allowance for estimated credit losses which is not tied to individual loans or properties ("General Reserves"). General Reserves are maintained for each of the Company's principal loan segments, and supplemented by periodic additions through provisions for estimated credit losses. In measuring the adequacy of the Company's General Reserves, management considers (1) the Company's historical loss experience for each loan portfolio segment and in total, (2) the historical migration of loans within each portfolio segment and in total (i.e., from performing to nonperforming, from nonperforming to REO), (3) observable trends in the performance of each loan portfolio segment (4) observable trends in the region's economy and in its real property markets, and (5) guidelines published by the OTS for maintaining General Reserves. Because a significant majority of the Company's loans have been originated since 1994, a period during which the Southern California region has experienced substantial and sustained economic growth, and property values have risen sharply, the Company's loan portfolio lacks substantial seasoning and the Company has little historical experience to aid management in measuring the impact of a pronounced and sustained economic downturn on the performance of the Company's loan portfolio. For these reasons, and because of the generally higher risk profile and individual size of many of the Company's loans, in each instance when compared with conventional home lenders, management has determined to increase the level of General Reserves during 1999, to an amount which represents 1.50% of net loans by the end of 1999. 21 22 The table below sets forth the general and specific allowance for estimated credit losses for the Company's loan portfolio as of March 31, 1999 (dollars are in thousands).
LOANS ------------------------- PERFORMING DELINQUENT TOTAL ---------- ---------- ------- Specific reserves $ 3,366 $ 1,452 $ 4,818 General reserves 14,845 295 15,140 ------- ------- ------- Total $18,211 $ 1,747 $19,958 ======= ======= ======= PERCENTAGES % of total reserves to gross loans 1.3% 7.5% 1.4% % of general reserves to net loans 1.1% 1.4% 1.1%
The table below summarizes the activity of the Company's allowance for estimated credit losses for the periods indicated (dollars are in thousands).
THREE MONTHS ENDED MARCH 31, ------------------------------ 1999 1998 ----------- ----------- LOANS Average loans outstanding $ 1,354,383 $ 892,060 =========== =========== Total allowance for estimated credit losses at beginning of period $ 17,111 $ 13,274 Provision for estimated credit losses 3,000 1,485 Charge-offs: Single family (153) (467) Income property Commercial -- (200) ----------- ----------- Total charge-offs (153) (667) ----------- ----------- Total allowance for estimated credit losses at end of period $ 19,958 $ 14,092 =========== =========== Ratio of charge-offs to average loans outstanding during the period 0.01% 0.07% REAL ESTATE OWNED Total allowance for estimated losses at beginning of period $ 45 $ 2,563 Provision for estimated losses 45 15 Charge-offs -- (1,716) ----------- ----------- Total allowance for estimated losses at end of period $ 90 $ 862 =========== ===========
22 23 Because the Company's loan portfolio is not homogeneous, but rather consists of discreet segments with different collateral and borrower risk characteristics, management separately measures reserve adequacy, and maintains an allowance for estimated credit losses, for each identifiable segment of the Company's loan portfolio. The table below summarizes the allocation of the Company's allowance for estimated credit losses for each principal loan portfolio segment (dollars are in thousands).
MARCH 31, 1999 DECEMBER 31, 1998 ------------------------ ------------------------- PERCENT OF PERCENT OF RESERVES TO RESERVES TO TOTAL LOANS(1) TOTAL LOANS(1) BALANCE BY CATEGORY BALANCE BY CATEGORY ------- ----------- ------- ----------- SINGLE FAMILY $ 7,644 1.3% $ 7,836 1.4% INCOME PROPERTY Multi-family 1,105 0.5% 1,063 0.4% Commercial 4,441 2.0% 4,334 1.9% Development 815 0.7% 354 0.5% LAND 347 0.5% 293 0.4% SINGLE FAMILY CONSTRUCTION Single residence 1,086 0.4% 789 0.3% Tract 1,776 2.6% 1,092 1.3% OTHER 2,744 7.8% 1,350 2.9% ------- ------- $19,958 1.2% $17,111 1.1% ======= =======
- ----------- (1) Percent of allowance for estimated credit losses to gross loan commitments, which include the undisbursed portion of such commitments. REAL ESTATE OWNED Real estate acquired in satisfaction of loans is transferred from loans to properties at the lower of the carrying values or the estimated fair values, less any estimated disposal costs. The difference between the fair value of the real estate collateral and the loan balance at the time of transfer is recorded as a loan charge-off. Any subsequent declines in the fair value of the properties after the date of transfer are recorded through the establishment of, or additions to, specific allowances. Recoveries and losses from the disposition of properties are also included in NONINTEREST EXPENSES - REAL ESTATE OPERATIONS. The table below summarizes the composition of the Company's REO at the dates indicated (dollars are in thousands).
MARCH 31, DECEMBER 31, 1999 1998 ------ ------ SINGLE FAMILY $ 590 $2,509 INCOME PROPERTY Multi-family 213 213 Commercial -- 1,393 ------ ------ GROSS INVESTMENT(1) 803 4,115 LESS ALLOWANCE FOR ESTIMATED LOSSES 90 45 ------ ------ NET REAL ESTATE OWNED $ 713 $4,070 ====== ======
- --------------- (1) Fair value of collateral at foreclosure, plus post-foreclosure capitalized costs. 23 24 SOURCES OF FUNDS GENERAL The Company's principal sources of funds in recent years have been deposits obtained on a retail basis through its branch offices and, to a lesser extent, advances from the FHLB. In addition, funds have been obtained from maturities and repayments of loans and securities, and sales of loans, securities and other assets, including real estate owned. DEPOSITS The table below summarizes the Company's deposit portfolio by original term, weighted average interest rates ("WAIR") and weighted average remaining maturities in months ("WARM") as of the dates indicated (dollars are in thousands).
MARCH 31, 1999 DECEMBER 31, 1998 ---------------------------------------- -------------------------------------------- PRODUCT TYPE BALANCE WAIR WARM BALANCE WAIR WARM - ----------------------------- ----------- ---------- -------- ---------- ----------- ----------- Non-interest bearing checking $ 21,131 -- -- $ 20,275 -- -- Checking/NOW 39,321 2.02% -- 35,596 2.03% -- Passbook 27,268 2.13% -- 25,723 2.10% -- Money market 143,030 4.58% -- 104,137 4.53% -- Certificates of deposit 7 day maturities 35,124 4.08% -- 36,091 4.08% -- Less than 6 months 15,616 4.71% 1 5,688 4.60% 2 6 months to 1 year 197,400 4.95% 3 207,964 5.25% 3 1 year to 2 years 519,372 5.37% 6 537,815 5.51% 7 Greater than 2 years 40,339 5.32% 17 46,161 5.40% 16 ---------- ---------- $1,038,601 4.80% 4 $1,019,450 4.98% 5 ========== ======= ====== ========== ========== ==========
FHLB ADVANCES The Company has a credit line with the FHLB with a maximum advance of up to 35% of total assets. The FHLB system functions as a source of credit to savings institutions which are members. Advances are typically secured by the Company's mortgage loans and the capital stock of the FHLB owned by the Company. Subject to the FHLB's advance policies and requirements, these advances can be requested for any business purpose in which the Company is authorized to engage. In granting advances, the FHLB considers a member's creditworthiness and other relevant factors. The table below sets forth certain information regarding the Company's FHLB advances (dollars are in thousands).
MARCH 31, 1999 DECEMBER 31, 1998 ------------------------- ------------------------ ORIGINAL TERM PRINCIPAL RATE PRINCIPAL RATE - ---------------------- --------- ----------- --------- --------- 6 Months $ 20,000 4.87% $ - - 60 Months 275,000 5.25% 215,000 5.36% 120 Months 49,000 4.36% 49,000 4.36% ========= ========= $ 344,000 5.10%(1) $ 264,000 5.18%(1) ========= =========
- -------------- (1) Weighted average The weighted average remaining term of the Company's FHLB advances was 4 years and 8 months and 5 years and 3 months as of March 31, 1999 and December 31, 1998, respectively. All of the Company's FHLB advances outstanding at March 31, 1999, with the exception of one, contain options which allow the FHLB to call the advances prior to maturity, subject to an initial non-callable period of two-to-five years from origination. 24 25 SENIOR NOTES On December 31, 1997, the Company completed the issuance of $40.0 million of Senior Notes due 2004. These Senior Notes bear an interest payable semiannually at a rate of 12.5%, and are callable after December 31, 2002. Interest is required to be paid semiannually at the stated interest rate. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL The Company's capital consists of common stockholders' equity, which at March 31, 1999 amounted to $84.7 million and which equaled 5.6% of the Company's total assets. The following table summarizes the regulatory capital requirements under the Home Owners' Loan Act ("HOLA") for the Bank as of March 31, 1999. As indicated in the table, the Bank's capital levels exceed all three of the currently applicable minimum HOLA capital requirements (dollars are in thousands).
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL ----------------------- ---------------------- ------------------------------ BALANCE % BALANCE % BALANCE % ----------- --------- ----------- -------- ----------- ------------- Stockholders' equity(1) $ 120,588 $ 120,588 $ 120,588 Adjustments General reserves -- -- 13,664 Other(2) -- -- (812) ----------- --------- ----------- -------- ----------- ------------- Regulatory capital 120,588 7.96% 120,588 7.96% 133,440 12.23% Required minimum 22,724 1.50 60,597 4.00 87,267 8.00 ----------- --------- ----------- -------- ----------- ------------- Excess capital $ 97,864 6.46% $ 59,991 3.96% $ 46,173 4.23% =========== ========= =========== ======== =========== ============= Adjusted assets(3) $ 1,514,932 $ 1,514,932 $ 1,090,842 =========== =========== ===========
- -------------- (1) Reflects capital contributions totaling $7.5 million from the parent company made during 1999. (2) Includes the portion of non-residential construction loans which exceed a loan-to-value of 80%. (3) The term "adjusted assets" refers to the term "adjusted total assets", as defined in 12 C.F.R. Section 567.1(a), for purposes of tangible and core capital requirements, and for purposes of risk-based capital requirements, refers to the term "risk-weighted assets", as defined in 12 C.F.R. Section 567.1(d). 25 26 As of March 31, 1999, the most recent notification from the OTS categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank's actual capital amounts and ratios and the capital amounts and ratios required in order for an institution to be "well capitalized" and "adequately" capitalized are presented in the table below (dollars are in thousands).
TO BE CATEGORIZED AS TO BE CATEGORIZED AS ADEQUATELY CAPITALIZED WELL CAPITALIZED UNDER PROMPT CORRECTIVE UNDER PROMPT CORRECTIVE ACTUAL ACTION PROVISIONS ACTION PROVISIONS -------------------- ----------------------- ----------------------- AMOUNT RATIOS AMOUNT RATIOS AMOUNT RATIOS -------- ----- -------- ------ -------- ------ AS OF MARCH 31, 1999 Total Capital (to Risk Weighted Assets) $133,440 12.23% $ 87,267 8.00% $109,084 10.00% Core Capital (to Adjusted Tangible Assets) 120,588 7.96% 60,597 4.00% 75,747 5.00% Tangible Capital (to Adjusted Tangible Assets) 120,588 7.96% 22,724 1.50% N/A N/A Tier 1 Capital (to Risk Weighted Assets) 120,588 11.05% N/A N/A 65,451 6.00% AS OF DECEMBER 31, 1998 Total Capital (to Risk Weighted Assets) $119,400 11.10% $ 86,090 8.00% $107,612 10.00% Core Capital (to Adjusted Tangible Assets) 108,673 7.65% 56,804 4.00% 71,005 5.00% Tangible Capital (to Adjusted Tangible Assets) 108,673 7.65% 21,302 1.50% N/A N/A Tier 1 Capital (to Risk Weighted Assets) 108,673 10.10% N/A N/A 64,567 6.00%
The OTS has authority, after an opportunity for a hearing, to downgrade an institution from "well capitalized" to "adequately capitalized" or to subject an "adequately capitalized" or "undercapitalized" institution to the supervisory actions applicable to the next lower category, if the OTS deems such action to be appropriate as a result of supervisory concerns. CAPITAL RESOURCES AND LIQUIDITY Hawthorne Financial Corporation maintained cash and cash equivalents of $3.3 million at March 31, 1999. Hawthorne Financial Corporation has no other significant assets beyond its investment in the Bank. As discussed elsewhere in this report, the Company expects to make its June 1999 semi-annual interest payment on its Senior Notes from its current liquidity. Thereafter, the Company will be dependent upon the Bank for dividends in order to make these semi-annual interest payments. The ability of the Bank to provide dividends to Hawthorne Financial Corporation is governed by applicable regulations of the OTS. Based upon these regulations, the Bank's supervisory rating, and the Bank's current and projected earnings rate, management fully expects the Bank to maintain the ability to provide dividends to Hawthorne Financial Corporation, as necessary, for the payment of interest on the Company's Senior Notes. The Company's liquidity position refers to the extent to which the Company's funding sources are sufficient to meet its current and long-term cash requirements. Federal regulations currently require a savings association to maintain a monthly average daily balance of liquid assets (including cash, certain time deposits, bankers' acceptances, and specified United States Government, state or federal agency obligations) equal to 4.0% of the average daily balance of its net withdrawable accounts and short-term borrowings during the preceding calendar quarter. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4.00% to 10.00% of such accounts and borrowings depending upon economic conditions and the deposit flows of member associations. Monetary penalties may be imposed for failure to meet this liquidity ratio requirement. The 26 27 Company's liquidity for the calculation period ended March 31, 1999 was 7.47%, which exceeded the applicable minimum requirements. The Company's current primary funding resources are deposits, principal payments on loans, FHLB advances and cash flows from operations. Other possible sources of liquidity available to the Company include whole loan sales, commercial bank lines of credit, and direct access, under certain conditions, to borrowings from the Federal Reserve System. The cash needs of the Company are principally for the payment of interest on, and withdrawals of, deposit accounts, the funding of loans and operating costs and expenses. YEAR 2000 COMPLIANCE The following constitutes a "Year 2000 Readiness" disclosure under the Year 2000 Information and Readiness Disclosure Act. The Year 2000 issue arises because many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If a bank does not resolve problems related to the Year 2000 issue, computer systems may incorrectly compute payment, interest or delinquency information. In addition, because payment and other important data systems are linked by computer, if the banks or other third parties with which the Company conducts ongoing operations do not resolve this potential problem in time, the Company may experience significant data processing delays, mistakes or failures. These delays, mistakes or failures may have a significant adverse impact on the financial condition, results of operations and cash flows of the Company. The Company has adopted, and is implementing, a plan to address the Year 2000 issue. The plan includes the assessment of all internal systems, programs and data processing applications with respect to the Company, as well as, those provided to the Company by third-party vendors. In 1998, the Company completed the process of converting from an outsourced, host-based system to an in-house client-server computer system. The Company no longer relies on any third-party provider for loan or deposit accounting. The Company has completed its own Year 2000 testing by creating a database that rolled forward systematically until the in-house computer systems processed data into what it believed was early 2000.In addition, the Company has identified the following worst case scenarios that could occur as a result of the calendar date change: (1) loss of electrical power, (2) loss of communication systems, (3) loss of water, (4) failure of a security system, (5) failure of a critical third party system and (6) large deposit account withdrawals or advances on existing lines of credit. The Company has developed contingency plans that provide for alternative methods of conducting business for critical functions in the event one or more of these circumstances occurs. These plans will be refined throughout 1999. The Company has conducted an extensive review of all of its critical third party software service providers' Year 2000 compliance efforts. In the process, the Company identified five critical core data systems that are third party supported or developed. All of these providers have asserted that their systems are compliant. The Company has also identified twenty-one critical service providers (non-data service related) of which twelve have asserted that they are Year 2000 compliant. If any of the remaining nine, who are not compliant, have not committed to a date of compliance by July 1999, then the Company will proceed under its contingency plans. While the Company has received assurances from vendors as to compliance, such assurances are not guarantees and may not be enforceable. The Company's loan portfolio consists almost entirely of real estate secured loans. While the financial condition of any borrower is susceptible to Year 2000 problems, the Company believes that its credit risk relating to Year 2000 issues is greater with commercial mortgage loans where the borrowers have an ongoing business. In September 1998, the Company began reviewing all of its commercial mortgage loans maturing after December 31, 1999 to identify those with borrowers having ongoing business operations at the property securing the Company's loans. As a result of this review, as of March 31, 1999, the Company had identified 39 borrowers with aggregate outstanding loans of approximately $150.0 million maturing after December 31, 1999, which would fit into this higher risk profile. The Company is in the process of contacting each of these borrowers in an attempt to assess their Year 2000 compliance. If the borrowers are non-compliant, the Company will have difficulty in assessing whether 27 28 such non-compliance will adversely affect the borrowers' ability to service their loans. Further, the financial condition of these borrowers (and all borrowers) may be adversely affected if their major customers or providers of critical goods and services (including telephone, gas, water and electricity) are not Year 2000 compliant. The Company installed Y2K compliant software and hardware as part of the conversion completed in 1998. The expense incurred and to be incurred by the Company to ensure Year 2000 compliance is substantially integrated and was included with the expense associated with the conversion of its computer-based systems. The Company does not anticipate any material additional expenses in 1999 related to Y2K software or hardware. Y2K testing occurs on a continual basis upon receipt of all new releases of Y2K compliant software and hardware. INTEREST RATE RISK MANAGEMENT The objective of interest rate risk management is to stabilize the Company's net interest income ("NII") while limiting the change in its net portfolio value ("NPV") from interest rate fluctuations. The Company seeks to achieve this objective by matching its interest sensitive assets and liabilities, and maintaining the maturity and repricing of these assets and liabilities at appropriate levels given the interest rate environment. When the amount of rate-sensitive liabilities exceeds rate-sensitive assets within specified periods, the NII generally will be negatively impacted by increasing interest rates and positively impacted by decreasing interest rates during such periods. Conversely, when the amount of rate-sensitive assets exceeds the amount of rate-sensitive liabilities within specified periods, net interest income generally will be positively impacted by increasing interest rates and negatively impacted by decreasing interest rates during such periods. The speed and velocity of the repricing of assets and liabilities will also contribute to the effects on NII. The Company utilizes two methods for measuring interest rate risk, gap analysis and interest rate simulations. Gap analysis focuses on measuring absolute dollar amounts subject to repricing within certain periods of time, particularly the one-year maturity horizon. Interest rate simulations provide the Company with an estimate of both the dollar amount and percentage change in NII under various interest rate scenarios. All assets and liabilities are subjected to tests of up to 400 basis points in increases and decreases in interest rates. Under each interest rate scenario, the Company projects its net interest income and the NPV of its current balance sheet. From these results, the Company can then develop alternatives to dealing with the tolerance thresholds. The Company's interest rate risk strategy emphasizes the management of asset and liability balances within repricing categories in order to limit the Bank's exposure to earnings variations as well as variations in the value of assets and liabilities due to changes in interest rates over time. The Company does not currently utilize off balance sheet hedging instruments in order to hedge its interest rate exposure. Instead, the Company utilizes interest rate floors, penalties, prepayment and exit fees on its new loans to mitigate the risk of interest margin compression. Additionally, the Company hedges such exposure internally by extending the duration of interest-bearing liabilities through the use of FHLB advances, to better match the repricing sensitivity of the interest-earning assets. 28 29 The following table sets forth information concerning sensitivity of the Company's interest-earning assets and interest-bearing liabilities as of March 31, 1999. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual maturities of the assets and liabilities, except that adjustable-rate loans are included in the period in which they are first scheduled to adjust and not in the period in which they mature. Such assets and liabilities are classified by the earlier of maturity or repricing date (dollars are in thousands).
MARCH 31, 1999 ----------------------------------------------------------------------------------------- OVER THREE OVER SIX OVER ONE THREE THROUGH THROUGH YEAR OVER MONTHS SIX TWELVE THROUGH FIVE OR LESS MONTHS MONTHS FIVE YEARS YEARS TOTAL ----------- ----------- ----------- ----------- ----------- ----------- INTEREST-EARNING ASSETS Cash and cash equivalents(1) $ 300 $ -- $ -- $ -- $ -- $ 300 Investments and FHLB Stock 17,408 -- -- -- -- 17,408 Loans(2) 666,783 239,466 313,204 46,933 118,114 1,384,500 ----------- ----------- ----------- ----------- ----------- ----------- Total interest- earning assets $ 684,491 $ 239,466 $ 313,204 $ 46,933 $ 118,114 $ 1,402,208 =========== =========== =========== =========== =========== =========== INTEREST-BEARING LIABILITIES Deposits Transaction accounts $ 230,752 $ -- $ -- $ -- $ -- $ 230,752 Certificates of deposit 267,381 239,291 248,497 52,680 -- 807,849 FHLB advances -- 20,000 -- 275,000 49,000 344,000 Senior Notes -- -- -- -- 40,000 40,000 ----------- ----------- ----------- ----------- ----------- ----------- Total interest-bearing liabilities $ 498,133 $ 259,291 $ 248,497 $ 327,680 $ 89,000 $ 1,422,601 =========== =========== =========== =========== =========== =========== Interest rate sensitivity gap $ 186,358 $ (19,825) $ 64,707 $ (280,747) $ 29,114 $ (20,393) Cumulative interest rate sensitivity gap 186,358 166,533 231,240 (49,507) (20,393) (20,393) Cumulative interest rate sensitivity gap as a percentage of total interest- earning assets 13.3% 11.9% 16.5% (3.5%) (1.5%) (1.5%)
- ------------- (1) Excludes noninterest-earning cash balances. (2) Loans include $41.9 million of nonaccrual loans, and are exclusive of loan loss reserves. 29 30 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Bank seeks to control its interest rate risk exposure in a manner that will allow for adequate levels of earnings and capital over a range of possible interest rate environments. The Bank has adopted formal policies and practices to monitor and manage interest rate risk exposure. As part of this effort, the Bank uses the market value ("MV") methodology, a type of sensitivity analysis, to gauge interest rate risk exposure. Generally, MV is the discounted present value of the difference between incoming cash flows on interest-earning assets and other assets and outgoing cash flows on interest-bearing liabilities and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the MV which would result from changes in market interest rates in theoretical increments of 100 basis points, up to 400 basis points in either direction. At December 31, 1998, according to the Bank's internal interest rate risk exposure model analysis, it was estimated that the Bank's MV would decrease 4% and 15% in the event of 200 and 400 basis point increases in market interest rates, respectively. The Bank's MV at the same date would increase 1% and 5% in the event of 200 and 400 basis point decreases in market rates, respectively. Presented below, as of March 31, 1999, is an analysis of the Bank's MV interest rate risk as measured by changes in MV for instantaneous and sustained parallel shifts of 200 and 400 basis point increments in market interest rates (dollars are in thousands).
AS A % OF PRESENT CHANGE MARKET VALUE VALUE OF ASSETS --------------------------------- --------------------- IN RATES $ AMOUNT $ CHANGE % CHANGE RATIO CHANGE - ----------- --------- --------- --------- ------- --------- +400 bp $ 84,124 $(59,231) (41.32)% 5.82% -354bp +200 bp 122,432 (20,923) (14.60)% 8.18% -118bp 0 bp 143,355 -- -- 9.36% -- - -200 bp 142,337 (1,017) (0.71)% 9.09% -27bp - -400 bp 141,271 (2,084) (1.45)% 8.84% -52bp
30 31 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings The Bank is a defendant in an action entitled Takaki vs. Hawthorne Savings and Loan Association, filed in the Superior Court of the State of California, Los Angeles, as Case No. YC021815. The plaintiffs were owners of real property which they sold in early 1992 to a third party. The Bank provided escrow services in connection with the transaction. A substantial portion of the consideration paid to the plaintiffs took the form of a deed of trust secured by another property then owned by an affiliate of the purchaser. The value of the collateral securing this deed of trust ultimately proved to be inadequate. The plaintiffs alleged that the Bank knew, or should have known, that the security that the plaintiffs received as sellers was inadequate and should have so advised them. In June 1997, a jury found for the plaintiffs and awarded compensatory and punitive damages totaling $9.1 million. In July 1997, the trial judge reduced the combined award to $3.3 million. The plaintiffs accepted the reduced judgment. The Bank filed a notice of appeal from the judgment and posted an Appeal Bond with the Court to stay plaintiffs' enforcement of the judgment pending the Appellate Court's decision. In July, 1998, the Appellate Court remanded the case to the Superior Court with directions to dismiss the fraudulent concealment, misrepresentation and punitive damages claims and to conduct a new trial pertaining solely to damages arising from negligence, in particular to determine whether any negligence of the Bank contributed to the plaintiffs' injury and, if so, to apportion liability for negligence between the Bank and the plaintiffs. On March 30, 1999, the jury returned a verdict in favor of the plaintiffs in the amount of $2.6 million. The Bank intends to file a notice of appeal from this judgment. The Bank believes that there is a substantial likelihood that its position will ultimately be upheld on retrial and, accordingly, that no amounts having a materially adverse effect on the Bank's financial condition or results of operations will be paid by the Bank to the plaintiffs in this matter. There can be no assurances that this will be the case, however. In the first quarter of 1999, the Company settled two matters involving real property sold by the Company to third parties following the Company's acquisition of the properties through completed foreclosure prior to 1992. In each of these matters, the Company was alleged to have sold the properties with known construction defects which were not adequately disclosed to the purchasers. In the aggregate, these settlements involved the payment by the Company of a total of $0.6 million. The Company is involved in a variety of other litigation matters. In the opinion of management, none of these cases will have a materially adverse effect on the Bank's or the Company's financial condition or results of operations. 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 1. Reports on Form 8-K The Company filed a Form 8-K on March 10, 1999, announcing financial results for the year ended December 31, 1998. 2. Other required exhibits - Exhibit 27.1 - Financial Data Schedule 31 32 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HAWTHORNE FINANCIAL CORPORATION Dated May 14, 1999 /s/ SCOTT A. BRALY ---------------------------------------- Scott A. Braly President and Chief Executive Officer Dated May 14, 1999 /s/ SIMONE LAGOMARSINO ---------------------------------------- Simone Lagomarsino Executive Vice President and Chief Financial Officer 32 EX-27.1 2 FINANCIAL DATA SCHEDULE
9 0000046267 HAWTHORNE FINANCIAL CORPORATION 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 118,407 300 0 0 0 0 0 1,359,964 19,958 1,517,172 1,038,601 20,000 9,839 364,000 0 0 53 84,679 1,517,172 31,001 1,004 0 32,005 12,425 17,535 14,470 3,000 0 8,354 5,084 5,084 0 0 2,972 0.57 0.38 8.90 41,916 0 30,273 32,784 17,111 153 0 19,958 19,958 0 0
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