Back to GetFilings.com
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[ X ] Annual Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 1999
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________ to ________________
Commission File No. 000-22474
---------
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
------------------------------------------
(Name of registrant as specified in its charter)
Delaware 87-0418807
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
111 Presidential Boulevard, Bala Cynwyd, PA 19004
-------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(610) 668-2440
--------------
(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value
$.001 per share
---------------
(Title of Class)
Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the 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. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K or
amendment to this Form 10-K. [X]
1
The aggregate market value of the 1,847,875 shares of common stock,
$.001 par value per share, held by non-affiliates of the Registrant as of
September 3, 1999 was $23.4 million.
The number of shares outstanding of the Registrant's sole class of
common stock as of September 3, 1999 was 3,587,014 shares. (The share amounts
stated above give effect to a 5% stock dividend declared on August 18, 1999 and
payable on September 27, 1999 to stockholders of record on September 3, 1999.)
DOCUMENTS INCORPORATED BY REFERENCE:
Part III - Proxy Statement for 1999 Annual Meeting of Stockholders
2
Part I
Item 1. Business
Forward Looking Statements
Some of the information in this Form 10-K or the documents incorporated
by reference in this Form 10-K may contain forward-looking statements. You can
identify these statements by the appearance of phrases such as "will likely
result," "may," "are expected to," "is anticipated," "estimate," "projected,"
"intends to" or other similar words. Forward-looking statements are subject to
certain risks and uncertainties, including but not limited to the following:
o market conditions and real estate values in our primary lending area;
o credit risk related to our borrowers;
o our dependence on securitizations;
o our ability to sustain our revenue and earnings growth;
o our ability to implement our growth strategy;
o competition;
o our dependence on debt financing to fund our operations;
o changes in interest rates;
o our ability to implement an effective hedging strategy;
o the geographic concentration of our loans;
o state and federal regulation and licensing requirements applicable to
our lending activities;
o claims by borrowers or investors;
o dependence on key personnel;
o environmental regulation; and
o risks associated with year 2000 computer systems problems.
All of the above risks could cause our actual results to differ
materially from historical earnings and those presently anticipated. When
considering forward-looking statements, you should keep these risk factors in
mind as well as the other cautionary statements in this Form 10-K. You should
not place undue reliance on any forward-looking statement. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
General
American Business Financial Services, Inc. is a diversified financial
services company operating throughout the United States. We originate loans and
leases through a retail branch network of offices. Through our principal direct
and indirect subsidiaries, we originate, service and sell:
o loans to businesses secured by real estate and other
business assets, which we refer to in this document
as business purpose loans;
3
o mortgage loans, typically to credit-impaired
borrowers, which are secured by first and second
mortgages on single-family residences and which do
not satisfy the eligibility requirements of Fannie
Mae, Freddie Mac or similar buyers which we refer to
in this document as home equity loans;
o mortgage loans to borrowers with favorable credit
histories which are secured by first mortgages on
one-to four-unit residential properties, most of
which satisfy the eligibility requirements of Fannie
Mae and Freddie Mac, which are referred to in this
document as first mortgage loans; and
o small ticket business equipment leases, which
generally involve amounts of $2,000 to $250,000.
In addition, we have entered into business arrangements with several
financial institutions pursuant to which we will purchase home equity loans that
do not meet the underwriting guidelines of the selling institution but that do
meet our underwriting criteria which is referred to in this document as the Bank
Alliance Program.
Our loan customers currently fall primarily in two categories. The
first category of customers includes credit-impaired borrowers who are generally
unable to obtain financing from banks or savings and loan associations that have
historically provided loans only to individuals with the most favorable credit
characteristics. These borrowers generally have impaired or unsubstantiated
credit characteristics and/or unverifiable income. The second category of
customers includes borrowers who would qualify for loans from traditional
lending sources but who still elect to use our products and services. Our
experience has indicated that these borrowers are attracted to our loan products
as a result of our marketing efforts, the personalized service provided by our
staff of highly trained lending officers and our timely response to loan
requests. Historically, both categories of customers have been willing to pay
our origination fees and interest rates even though they are generally higher
than those charged by traditional lending sources. Our lease customers are
typically small businesses or proprietorships with less than 100 employees and
favorable credit histories.
We were incorporated in Delaware in 1985 and we began operations in
1988, initially offering business purpose loans secured by real estate through
our subsidiary, American Business Credit. References in this document to "ABFS,"
"we," "us," and "our" refer to American Business Financial Services, Inc. and
its subsidiaries. Certain financial information contained in this document has
been adjusted to reflect a 5% stock dividend declared on August 18, 1999 and
payable on September 27, 1999.
The ongoing securitization of our loans and leases is a central part of
our current business strategy. A securitization is a financing technique often
used by originators of financial assets to raise capital. A securitization
involves the transfer of a pool of financial assets, in our case loans or
leases, to a trust in exchange for certificates, notes or other securities
issued by the trust and representing an undivided interest in the trust assets.
The transfer to the trust could involve a sale
4
or pledge of the financial assets depending on the particular transaction. A
portion of the certificates, notes or other securities are then sold to
investors for cash. Often the originator of the loans or leases retains the
right to service the assets for a fee and may also retain an interest in the
cash flows generated by the securitized assets referred to as a residual
interest which is subordinate to the regular interest sold to investors. Through
June 30, 1999, we had securitized an aggregate of $1.3 billion of loans and
leases, consisting of $201.3 million of business purpose loans, $969.8 million
of home equity loans, and $152.3 of equipment leases. We retain the servicing
rights on all securitized loans and leases. See "-- Securitizations."
In addition to securitizations, we fund our operations with
subordinated debt that we offer by means of a prospectus which was declared
effective by the SEC from our principal operating office located in Pennsylvania
and branch offices located in Florida and Arizona. We have offered this debt
without the assistance of an underwriter or dealer. At June 30, 1999, we had
$212.9 million in subordinated debt outstanding. This debt had a weighted
average interest rate of 9.35% and a weighted average maturity of 21 months as
of June 30, 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
We intend to continue to use funds generated from the securitization of
loans and leases as well as the sale of subordinated debt to increase our loan
and lease originations and investments in operations required to position us for
expansion into new geographic markets, including the development of the Internet
as a distribution channel. We also continue to explore a variety of strategic
options to broaden our product offerings and reduce our cost of funds. To
achieve these goals, we may consider the acquisition of other finance companies
or related companies, the purchase of portfolios of loans, the establishment or
purchase of a state or federally chartered financial institution or industrial
loan company, the issuance of secured credit cards, the origination and
servicing of loans insured by the Small Business Administration and the
engagement of independent NASD-registered brokers to assist in the sale of the
subordinated debt securities. We cannot assure you that we will engage in any of
the activities listed above or the impact of those activities on our financial
condition or results of operations.
Our principal executive office is located at 103 Springer Building,
3411 Silverside Road, Wilmington, Delaware 19810. The telephone number at that
address is (302) 478-6160. Our principal operating office and the executive
offices of our subsidiaries are located at Balapointe Office Centre, 111
Presidential Boulevard, Suite 215, Bala Cynwyd, PA 19004. The telephone number
at the Balapointe Office Centre is (610) 668-2440. We maintain a site on the
World Wide Web at www.abfsonline.com. The information on our web site is not and
should not be considered part of this document.
Subsidiaries
As a holding company, our activities have been limited to: (i) holding
the shares of our operating subsidiaries, and (ii) raising capital for use in
the subsidiaries' lending operations.
5
ABFS is the parent holding company of American Business Credit, Inc. and its
primary subsidiaries, HomeAmerican Credit, Inc. (doing business as Upland
Mortgage), Processing Service Center, Inc., American Business Leasing, Inc., ABC
Holdings Corporation and New Jersey Mortgage and Investment Corp. and its
subsidiary, Federal Leasing Corp.
American Business Credit, a Pennsylvania corporation incorporated in
1988 and acquired by us in 1993, originates, services and sells business purpose
loans. Home American Credit, a Pennsylvania corporation incorporated in 1991,
originates and sells home equity loans. Home American Credit acquired Upland
Mortgage Corp. in 1996 and since that time has conducted business as "Upland
Mortgage." Upland Mortgage also purchases home equity loans through the Bank
Alliance Program. Processing Service Center processes home equity loan
applications for financial institutions as part of the Bank Alliance Program.
Incorporated in 1994, American Business Leasing commenced operations in 1995 and
originates and services equipment leases.
New Jersey Mortgage and Investment Corp., a New Jersey corporation
organized in 1938 and acquired by us in October 1997, is currently engaged in
the origination and sale of home equity loans, as well as first mortgage loans.
New Jersey Mortgage originates loans secured by real estate. These loans are
originated through New Jersey Mortgage's network of branch sales offices and
three satellite offices. New Jersey Mortgage has been offering mortgage loans
since 1939. We currently sell first mortgage loans originated by American
Household Mortgage, a division of New Jersey Mortgage, in the secondary market
with servicing released. We also securitize home equity loans originated by New
Jersey Mortgage pursuant to our existing current securitization program.
New Jersey Mortgage's wholly-owned subsidiary, Federal Leasing Corp.,
is a Delaware corporation which was organized in 1974. Federal Leasing Corp.
generally originates equipment leases throughout the United States and has in
the past sold such leases through securitizations and retains the servicing
rights with respect to the leases. We intend to evaluate the continued
securitization of equipment leases based upon market and economic conditions in
the future.
ABC Holdings Corporation, a Pennsylvania corporation, was incorporated
in 1992 to hold properties acquired through foreclosure.
We also have numerous special purpose subsidiaries that were
incorporated solely to facilitate our securitizations. Some of those companies
are Delaware investment holding companies. The stock of these subsidiaries is
held by various subsidiaries of ours. As part of the acquisition of New Jersey
Mortgage and Federal Leasing Corp., we also acquired FLC Financial Corp. and FLC
II Financial Corp., the Delaware investment holding companies incorporated to
facilitate the securitization of Federal Leasing Corp.'s leases. The stock of
these companies is held by Federal Leasing Corp. None of these corporations
engage in any business activity other than holding the subordinated certificate,
if any, and the interest only and residual strips created in connection with
securitizations completed through Federal Leasing Corp. prior to its acquisition
by us. See "-- Securitizations."
6
The following chart sets forth our basic organizational structure(1).
-------------------------------------------------------------
ABFS
-------------------------------------------------------------
(Holding Company)
(Issues subordinated debt securities)
-------------------------------------------------------------
-------------------------------------------------------------
AMERICAN BUSINESS CREDIT, INC.
-------------------------------------------------------------
(Originates and services business purpose loans)
-------------------------------------------------------------
HOME AMERICAN
NEW JERSEY CREDIT, INC. PROCESSING AMERICAN ABC
MORTGAGE AND d/b/a SERVICE BUSINESS HOLDINGS
INVESTMENT CORP. UPLAND CENTER, INC. LEASING, INC. CORP.
MORTGAGE
- --------------------------------------------------------------------------------
(Originates and (Originates, (Processes bank (Originates (Holds
services first purchases and alliance and foreclosed
mortgage and services home program services real estate)
home equity equity loans)(2) home equity equipment
loans) loans) leases)
- --------------------------------------------------------------------------------
- ----------------
FEDERAL
LEASING CORP.
- ----------------
(Originates
equipment
leases)
- ----------------
- --------
(1) In addition to the corporations pictured above, we organized at least one
special purpose corporation for each of these securitizations.
(2) Loans purchased by Upland Mortgage represent loans acquired through the Bank
Alliance Program.
7
Lending and Leasing Activities
General. The following table sets forth certain information concerning
our loan and lease origination, purchase and sale activities for the years
indicated. We did not originate first mortgage loans prior to October 1997.
June 30,
------------------------------------------
1999 1998 1997
-------- -------- --------
(dollars in thousands)
Loans/Leases Originated/Purchased
(Net of refinances)
Business purpose loans ................... $ 64,818 $ 52,335 $ 38,721
Home equity loans ........................ $634,820 $328,089 $ 91,819
First mortgage loans ..................... $ 66,519 $ 33,671 --
Equipment leases ......................... $ 96,289 $ 70,480 $ 8,004
Other loans .............................. -- -- $ 39
Number of Loans/Leases Originated/Purchased
Business purpose loans ................... 806 632 498
Home equity loans ........................ 8,251 5,292 1,791
First mortgage loans ..................... 781 218 --
Equipment leases ......................... 4,138 3,350 743
Other loans .............................. -- -- 8
Average Loan/Lease Size
Business purpose loans ................... $ 80 $ 83 $ 78
Home equity loans ........................ $ 74 $ 62 $ 51
First mortgage loans ..................... $ 165 $ 154 --
Equipment leases ......................... $ 23 $ 21 $ 11
Other loans -- -- $ 5
Weighted Average Interest Rate on Loans/Leases
Originated/Purchased
Business purpose loans ................... 15.91% 15.96% 15.91%
Home equity loans ........................ 11.05% 11.95% 11.69%
First mortgage loans ..................... 7.67% 8.22% --
Equipment leases ......................... 11.40% 12.19% 15.48%
Other loans .............................. -- -- 20.83%
Weighted Average Term (in months)
Business purpose loans ................... 169 172 184
Home equity loans ........................ 261 244 218
First mortgage loans ..................... 322 340 --
Equipment leases ......................... 50 49 40
Other loans .............................. -- --
Loans/Leases Sold
Business purpose loans ................... $ 71,931 $ 54,135 $ 38,083
Home equity and First mortgage loans ..... $613,069 $322,459 $ 80,734
Equipment leases ......................... $ 92,597 $ 59,700 --
Other loans .............................. -- -- $ 58
Number of Loans/Leases Sold
Business purpose loans ................... 911 629 497
Home equity and First mortgage loans ..... 8,074 4,753 1,631
Equipment leases ......................... 4,363 3,707 --
Other loans .............................. -- -- 8
Weighted Average Rate on Loans/Leases
Originated ............................... 11.30% 11.63% 13.09%
8
The following table sets forth information regarding the average
loan-to-value ratios for loans we originated during the periods indicated. We
did not originate any first mortgage loans prior to October 1997.
Year Ended June 30,
------------------------------------
Loan Type 1999 1998 1997
---------------------------- ------ ------ ------
Business purpose loans...... 61.5% 60.5% 60.0%
Home equity loans .......... 78.0 76.6 72.0
First mortgage loans ....... 78.0 79.9 --
The following table shows the geographic distribution of our loan and
lease originations and purchases during the periods indicated.
Year Ended June 30,
--------------------------------------------------------------------------------
1999 % 1998 % 1997 % 1996 %
---------- ---------- --------- ---------
(dollars in thousands)
New Jersey................... $ 236,976 27.48% $ 128,025 26.38% $ 40,725 29.39% $20,986 29.33%
New York..................... 163,580 18.97 54,907 11.31 8,343 6.02 7,417 10.36
Pennsylvania................. 139,992 16.23 150,048 31.06 53,834 38.85 33,324 46.57
Florida...................... 61,312 7.11 23,905 4.93 3,670 2.65 674 0.94
Georgia...................... 59,395 6.89 23,084 4.76 10,092 7.28 181 0.25
Illinois..................... 27,663 3.21 -- -- -- -- -- --
California................... 20,487 2.38 12,709 2.62 -- -- -- --
Maryland..................... 19,625 2.28 11,748 2.42 5,010 3.61 4,408 6.16
Ohio......................... 17,155 1.99 -- -- -- -- -- --
Virginia..................... 17,126 1.99 13,138 2.71 5,469 3.95 104 0.15
Delaware..................... 14,254 1.65 10,823 2.23 3,117 2.25 2,724 3.81
Connecticut.................. 14,052 1.63 5,964 1.23 2,005 1.45 87 0.12
North Carolina............... 13,648 1.58 5,144 1.06 4,245 3.06 78 0.11
Texas........................ 6,631 .77 6,430 1.33 -- -- -- --
Other........................ 50,550 5.84 38,650 7.98 2,073 1.49 1,575 2.20
--------- ------ -------- ------ -------- ------ ------- -------
Total............... $ 862,446 100.00% $484,575 100.00% $138,583 100.00% $71,558 100.00%
========= ====== ======== ====== ======== ====== ======= =======
Business Purpose Loans. Through our subsidiary, American Business
Credit, we currently originate business purpose loans through a retail network
of salespeople in Connecticut, Delaware, Florida, Georgia, Maryland, New Jersey,
New York, Ohio, Pennsylvania and Virginia. We focus our marketing efforts on
small businesses who do not meet all of the credit criteria of commercial banks
and small businesses that our research indicates may be predisposed to using our
products and services.
We originate business purpose loans to corporations, partnerships, sole
proprietors and other business entities for various business purposes including,
but not limited to, working capital, business expansion, equipment acquisition
and debt-consolidation. We do not target any particular industries or trade
group and, in fact, take precautions against concentration of loans in any one
industry group. All business purpose loans are collateralized by a first or
second mortgage lien on a principal residence or some other parcel of real
property, such as office and apartment buildings and mixed use buildings, owned
by the borrower, a principal of the
9
borrower, or a guarantor of the borrower. In addition, in most cases, these
loans are further collateralized by personal guarantees, pledges of securities,
assignments of contract rights, life insurance and lease payments and liens on
business equipment and other business assets.
Our business purpose loans generally ranged from $15,000 to $500,000
and had an average loan size of approximately $80,000 for the loans originated
during the year ended June 30, 1999. Generally, our business purpose loans are
made at fixed rates and for terms ranging from five to 15 years. We generally
charge origination fees for these loans of 5.0% to 6.0% of the original
principal balance. The weighted average interest rate charged on the business
purpose loans originated by us was 15.91% for the year ended June 30, 1999 . The
business purpose loans we securitized during the past fiscal year had a weighted
average loan-to-value ratio, based solely upon the real estate collateral
securing the loans, of 61.5% at the time of securitization. See
"-- Securitizations." We originated $64.8 million of business purpose loans for
the year ended June 30, 1999.
Generally, we compute interest due on its outstanding loans using the
simple interest method. Where permitted by applicable law, we impose a
prepayment fee. Although prepayment fees imposed vary based upon applicable
state law, the prepayment fees on our business purpose loan documents generally
amount to a significant portion of the outstanding loan balance. We believe that
such prepayment terms tend to extend the average life of our loans by
discouraging prepayment which makes these loans more attractive for
securitization. Whether a prepayment fee is imposed and the amount of such fee,
if any, is negotiated between the individual borrower and American Business
Credit prior to closing of the loan.
Home Equity Loans. We originate home equity loans through Upland
Mortgage and New Jersey Mortgage primarily to credit-impaired borrowers through
retail marketing which includes telemarketing operations, direct mail, radio and
television advertisements as well as through our interactive web site. We
entered the home equity loan market in 1991. Currently, we are licensed to
originate home equity loans in 44 states across the United States.
Home equity loans originated and funded by our subsidiaries are
generally securitized. In addition, we sell home equity loans to one of several
third party lenders, at a premium and with servicing released. Currently, we
build portfolios of home equity loans for the purpose of securitizing such
loans.
Home equity loan applications are obtained from potential borrowers
over the phone, in person or over the Internet through our interactive web site.
The loan request is then processed and closed. The loan processing staff
generally provides its home equity borrowers with a loan approval within 24
hours and closes its home equity loans within approximately seven to ten days of
obtaining a loan approval.
Home equity loans generally range from $10,000 to $250,000 and had an
average loan size of approximately $74,000 for the loans originated during the
year ended June 30, 1999. During the year ended June 30, 1999, we originated
$634.8 million of home equity loans. Generally, home equity loans are made at
fixed rates of interest and for terms ranging from five
10
to 30 years. Such loans generally have origination fees of approximately 2.0% of
the aggregate loan amount. For the year ended June 30, 1999, the weighted
average interest rate received on such loans was 11.05% and the average
loan-to-value ratio was 78.0% for the loans originated by us during such period.
We attempt to maintain our interest and other charges on home equity loans
competitive with the lending rates of other finance companies and banks. Where
permitted by applicable law, a prepayment fee may be imposed and is generally
charged to the borrower on the prepayment of a home equity loan except in the
event the borrower refinances a home equity loan with us.
In fiscal 1996, through Upland Mortgage and in conjunction with
Processing Service Center, Inc., we entered into business arrangements with
several financial institutions which provide for Upland Mortgage's purchase of
home equity loans that do not meet the underlying guidelines of the selling
institutions but meet our underwriting criteria. This program is called the Bank
Alliance Program. The Bank Alliance Program is designed to provide an additional
source of home equity loans, targets traditional financial institutions, such as
banks, which because of their strict underwriting and credit guidelines have
generally provided mortgage financing only to the most credit-worthy borrowers.
This program allows these financial institutions to originate loans to
credit-impaired borrowers in order to achieve certain community reinvestment
goals and to generate fee income and subsequently sell such loans to Upland
Mortgage. We believe that the Bank Alliance Program is a unique method of
increasing our production of home equity loans.
Under this program, a borrower who fails to meet a financial
institution's underwriting guidelines will be referred to Processing Service
Center, Inc. which will process the loan application and underwrite the loan
pursuant to Upland Mortgage's underwriting guidelines. If the borrower qualifies
under Upland Mortgage's underwriting standards, the loan will be originated by
the financial institution and subsequently sold to Upland Mortgage.
Since the introduction of this program, we have entered into agreements
with twenty-two financial institutions which provide us with the opportunity to
underwrite, process and purchase loans generated by the branch networks of such
institutions which consist of in excess of 1,500 branches located in Colorado,
Delaware, Florida, Georgia, Indiana, Maryland, Michigan, Nebraska, New
Hampshire, New Jersey, Ohio, Pennsylvania and Tennessee. During fiscal 1999,
Upland Mortgage purchased in excess of $35.0 million of loans pursuant to this
program. We intend to continue to expand the Bank Alliance Program with
financial institutions across the United States.
During fiscal 1999, we launched an Internet loan distribution channel
under the name www.UplandMortgage.com. Through this interactive web site,
borrowers can calculate interest payments and submit and an application via the
Internet. The Upland Mortgage Internet platform provides borrowers with
convenient access to the mortgage loan application process, 7 days a week, 24
hours a day. We believe that the addition of this distribution channel maximizes
the efficiency of the application process and could reduce our transaction costs
in the future to the extent the volume of loan applications received via the web
page increases. Throughout the loan processing period, borrowers who submit
applications on line are supported by our staff of
11
highly trained loan officers. We intend to continue to enhance our web site in
order to permit online underwriting, approval and processing of a loan
application.
First Mortgage Loans. We began offering first mortgage loans in October
1997 in connection with our acquisition of New Jersey Mortgage. New Jersey
Mortgage has been originating mortgage loans since 1939. We originate first
mortgage loans and sell them in the secondary market with servicing released.
Our first mortgage lending market area is primarily the eastern region of the
United States. We originated $66.5 million of first mortgage loans during the
year ended June 30, 1999.
The first mortgage loans are secured by one-to four-unit residential
properties located primarily in the eastern region of the United States. These
properties are generally owner-occupied single family residences but may also
include second homes and investment properties. These loans are generally made
through American Household Mortgage, a division of New Jersey Mortgage, to
borrowers with favorable credit histories and are underwritten pursuant to
Freddie Mac or Fannie Mae standards to permit their sale in the secondary
market, however, we also originate first mortgage loans which do not meet the
Freddie Mac or Fannie Mae standards for sale in the secondary market. Certain of
these first mortgage loans have balances of $240,000 or greater and are commonly
referred to as jumbo loans.
New Jersey Mortgage typically sells such loans to third parties with
servicing released. New Jersey Mortgage also originates Federal Housing
Authority ("FHA") and Veterans Administration ("VA") loans which are
subsequently sold to third parties with servicing released. This means that we
do not generally retain the right to collect and service these loans after they
are sold. New Jersey Mortgage originates such loans for sale in the secondary
market.
Equipment Leases. Through our indirect subsidiaries American Business
Leasing and Federal Leasing Corp., we began offering equipment leases in
December 1994 to complement our business purpose lending program. We currently
originate equipment leases throughout the United States. We originate equipment
leases to corporations, partnerships, other entities and sole proprietors on
various types of business equipment including, but not limited to, computer
equipment, automotive equipment, construction equipment, commercial equipment,
medical equipment and industrial equipment. We generally do not target
credit-impaired lessees. All such lessees must meet certain specified financial
and credit criteria.
Generally, our equipment leases are of two types: (i) finance leases
which have a term of 12 to 60 months and provide a purchase option exercisable
by the lessee at $1.00 or 10% of the original equipment cost at the termination
of the lease, and (ii) fair market value or true leases which have a similar
term but provide a purchase option exercisable by the lessee at the fair market
value of the equipment at the termination of the lease. Our equipment leases
generally range in size from $2,000 to $250,000, with an average lease size of
approximately $23,000 for the leases originated during the year ended June 30,
1999. Leases in excess of $250,000 are generally sold on a non-recourse basis to
third parties. Our leases generally have maximum terms of seven years. The
weighted average interest rates received on leases for the year ended June 30,
1999 was 11.40%. During the year ended June 30, 1999, we originated $96.3
million of
12
equipment leases. Generally, the interest rates and other terms and conditions
of our equipment leases are competitive with the leasing terms of other leasing
companies in our market area.
Prior to fiscal 1998, all leases originated by American Business
Leasing were generally held in our lease portfolio. Historically, Federal
Leasing Corp. sold all leases it originated through securitizations with
servicing retained. Presently, American Business Leasing and Federal Leasing
Corp. periodically sell the equipment leases, with servicing retained, through
securitization or to Variable Funding Capital Corporation, a commercial paper
conduit underwritten by First Union Capital Market. These leases are serviced by
American Business Leasing or Federal Leasing Corp. During fiscal 1999, we sold
or securitized $92.6 million of equipment leases. During fiscal 1999, we
streamlined our leasing activities to focus solely on the origination of small
ticket business equipment leases which generally involve equipment valued at
$2,000 to $250,000, which market we believe is not adequately serviced by larger
leasing companies. In the future, we intend to evaluate the continued
securitization of our lease portfolio subject to market and economic conditions.
There are risks inherent in our leasing activities which are different
than those risks inherent in our mortgage lending activities. See "-- Risk
Factors -- Risks associated with leasing activities may reduce our future
profitability."
Marketing Strategy
We concentrate our marketing efforts primarily on two potential
customer groups. One group, based on historical profiles, has a tendency to
select our loan and lease products because of our personalized service and
timely response to loan requests. The other group is comprised of
credit-impaired borrowers who satisfy our underwriting guidelines. We also
market first mortgage loans and leases to borrowers with favorable credit
histories. See "-- Risk Factors - Lending to credit-impaired borrowers may
result in higher delinquencies in our managed portfolio which could adversely
impact our financial condition and results of operations."
Our marketing efforts for business purpose loans focus on our niche
market of selected small businesses located in our market area which generally
includes the eastern half of the United States. We target businesses which we
believe would qualify for loans from traditional lending sources but would elect
to use our products and services. Our experience has indicated that these
borrowers are attracted to us as a result of our marketing efforts, the
personalized service provided by our staff of highly trained lending officers
and our timely response to loan applications. Historically, such customers have
been willing to pay our origination fees and interest rates which are generally
higher than those charged by traditional lending sources.
We market business purpose loans through various forms of advertising,
and a direct sales force. Advertising media used includes large direct mail
campaigns and newspaper and radio advertising. Our commissioned sales staff,
which consists of full-time highly trained salespersons, is responsible for
converting advertising leads into loan applications. We use a proprietary
training program involving extensive and on-going training of our lending
officers. Our sales staff uses significant person-to-person contact to convert
direct mail advertising into
13
loan applications and maintains contact with the borrower throughout the
application process. See "-- Lending and Leasing Activities - Business Purpose
Loans."
We market home equity loans through telemarketing, direct mail
campaigns as well as television, Internet, radio and newspaper advertisements.
Our television advertising campaign is designed to complement the other forms of
advertising we used. Our integrated approach to media advertising is intended to
maximize the effect of our advertising campaigns. We also use a network of loan
brokers.
Our marketing efforts for home equity loans are concentrated in the
eastern region of the United States. In connection with the acquisition of New
Jersey Mortgage, we expanded our branch office network to include Illinois,
Ohio, Delaware, Pennsylvania and Virginia in its existing network of offices in
Georgia, Maryland, South Carolina and Florida. We intend to open additional
sales offices in other states in the future. Loan processing, underwriting,
servicing and collection procedures are performed at our main office located in
Pennsylvania. We also use the Bank Alliance Program as an additional source of
loans as well as our Internet web site. See "-- Lending and Leasing
Activities-Home Equity Loans."
We market first mortgage loans through our network of loan brokers. Our
marketing efforts for first mortgage loans are concentrated in the mid-Atlantic
region of the United States. In addition, we market first mortgage loans under
the name American Household Mortgage. See "-- Lending and Leasing Activities -
First Mortgage Loans."
Through our subsidiaries, American Business Leasing and Federal Leasing
Corp., we market equipment leases throughout the United States. During 1999, we
streamlined our leasing operations to focus our marketing efforts on the
origination of small ticket business equipment leases which we believe is not
adequately serviced by large leasing companies. Our marketing efforts in the
leasing area are focused on our niche market of distributors of small to
medium-sized office, industrial and medical equipment. American Business Leasing
and Federal Leasing Corp. primarily obtain their equipment leasing customers
through equipment manufacturers, brokers and vendors with whom they have a
relationship and through a direct sales force. See "-- Lending and Leasing
Activities - Equipment Leases."
Loan and Lease Servicing
Generally, we service the loans and leases we maintain in our portfolio
or which we securitize in accordance with our established servicing procedures.
Servicing includes collecting and transmitting payments to investors, accounting
for principal and interest, collections and foreclosure activities, and selling
the real estate or other collateral that is acquired. At June 30, 1999, our
total managed portfolio included approximately 23,000 loans and leases with an
aggregate outstanding balance of $1.2 billion. We generally receive contractual
servicing fees of 0.50% per annum based upon the outstanding balance of
securitized loans and leases serviced and the scope of our servicing
responsibilities. In addition, we receive other ancillary fees
14
related to the loans and leases serviced. Our servicing and collections
activities are centralized at our principal operating office located in Bala
Cynwyd, Pennsylvania.
In servicing loans and leases, we typically send an invoice to obligors
on a monthly basis advising them of the required payment and its due date. We
begin the collection process immediately after a borrower fails to make a
monthly payment. When a loan or lease becomes 45 to 60 days delinquent, it is
transferred to our work-out department. The work-out department tries to
reinstate a delinquent loan or lease, seek a payoff, or occasionally enter into
a modification agreement with the borrower to avoid foreclosure. All proposed
work-out arrangements are evaluated on a case-by-case basis, based upon the
borrower's past credit history, current financial status, cooperativeness,
future prospects and the reasons for the delinquency. If the loan or lease
becomes delinquent 61 days or more and a satisfactory work-out arrangement with
the borrower is not achieved or the borrower declares bankruptcy, the matter is
immediately referred to our attorneys for collection. Legal action may be
initiated prior to a loan or lease becoming delinquent over 60 days if
management determines that the circumstances warrant such action.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned until it is sold. When property
is acquired or expected to be acquired by foreclosure or deed in lieu of
foreclosure, we record it at the lower of cost or estimated fair value, less
estimated cost of disposition. After acquisition, all costs incurred in
maintaining the property are accounted for as expenses.
Our ability to foreclose on certain properties may be affected by state
and federal environmental laws. See "-- Risk Factors - Environmental laws and
regulations may restrict our ability to foreclose on loans secured by real
estate."
As the servicer of securitized loans and leases, we are obligated to
advance funds for scheduled payments that have not been received from the
borrower unless we determine that our advances will not be recoverable from
subsequent collections in respect to the related loans or leases. See
"-- Securitizations."
Underwriting Procedures and Practices
Summarized below are certain of the policies and practices which are
followed in connection with the origination of business purpose loans, home
equity loans, first mortgage loans and equipment leases. These policies and
practices may be altered, amended and supplemented as conditions warrant. We
reserve the right to make changes in our day-to-day practices and policies.
Our loan and lease underwriting standards are applied to evaluate
prospective borrowers' credit standing and repayment ability as well as the
value and adequacy of the mortgaged property or equipment as collateral.
Initially, the prospective borrower is required to fill out a detailed
application providing pertinent credit information. As part of the description
of the prospective borrower's financial condition, the borrower is required to
provide information concerning assets, liabilities,
15
income, credit, employment history and other demographic and personal
information. If the application demonstrates the prospective borrower's ability
to repay the debt as well as sufficient income and equity, loan processing
personnel obtain and review an independent credit bureau report on the credit
history of the borrower and verification of the borrower's income. Once all
applicable employment, credit and property information is obtained, a
determination is made as to whether sufficient unencumbered equity in the
property exists and whether the prospective borrower has sufficient monthly
income available to meet the prospective borrower's monthly obligations.
Generally, business purpose loans collateralized by residential real
estate must have an overall loan-to-value ratio (based solely on the independent
appraised fair market value of the real estate collateral securing the loan) on
the properties collateralizing the loans of no greater than 75%. Business
purpose loans collateralized by commercial real estate must generally have an
overall loan-to-value ratio (based solely on the independent appraised fair
market value of the real estate collateral securing the loan) of no greater than
60% percent. In addition, in substantially all instances, we also receive
additional collateral in the form of, among other things, personal guarantees,
pledges of securities, assignments of contract rights, life insurance and lease
payments and liens on business equipment and other business assets, as
available. The business purpose loans we originated had an average loan-to-value
ratio of 61.5% for the year ended June 30, 1999.
The maximum acceptable loan-to-value ratio for home equity loans held
in portfolio or securitized is generally 90%. The home equity loans we
originated had an average loan-to-value ratio of 78.0% for the year ended June
30, 1999. Occasionally, exceptions to these maximum loan-to-value ratios are
made if other collateral is available or if there are other compensating
factors. From time to time, we make loans with loan-to-value ratios in excess of
90% which are sold with servicing released. Title insurance is generally
obtained in connection with all real estate secured loans.
We generally do not lend more than 95% of the appraised value in the
case of first mortgage loans, other than Federal Housing Authority and Veterans
Administration Loans. We generally require private mortgage insurance on all
first mortgage loans with loan-to-value ratios in excess of 80% at the time of
origination in order to reduce our exposure. We obtain mortgage insurance
certificates from the FHA on all FHA loans and loan guaranty certificates from
the VA on all VA loans regardless of the loan-to-value ratio on the underlying
loan amount.
In determining whether the mortgaged property is adequate as
collateral, we have each property considered for financing appraised. The
appraisal is completed by an independent qualified appraiser and generally
includes pictures of comparable properties and pictures of the interior of the
building. With respect to business purpose loans, home equity loans and first
mortgage loans, the appraisal is completed by an independent qualified appraiser
on a Fannie Mae form.
Any material decline in real estate values reduces the ability of
borrowers to use home equity to support borrowings and increases the
loan-to-value ratios of loans previously made by
16
us, thereby weakening collateral coverage and increasing the possibility of a
loss in the event of borrower default. Further, delinquencies, foreclosures and
losses generally increase during economic slowdowns or recessions. As a result,
we cannot assure that the market value of the real estate underlying the loans
will at any time be equal to or in excess of the outstanding principal amount of
those loans. Although we have expanded the geographic area in which we originate
loans, a downturn in the economy generally or in a specific region of the
country may have an effect on our originations. See "-- Risk Factors - A decline
in value of collateral securing our loans may adversely affect our business by
reducing originations and increasing losses on foreclosure."
In leasing, while a security interest in the equipment is retained in
connection with the origination of the lease, the lease is not dependent on the
value of the equipment as the principal means of securing the lease. The
underwriting standards applicable to leases place primary emphasis on the
borrower's financial strength and their credit history. Our lease underwriting
criteria include a review of the borrower's credit reports, financial
statements, bank references and trade references, as well as the credit history
and financial statements of the principals of the borrower. In certain
situations, we may also obtain a personal guarantee on the lease.
Securitizations
Our sale of our business purpose loans, home equity loans and equipment
leases through securitization is an important financing technique. Since 1995,
we have completed approximately 14 securitization transactions. The 14 pools of
loans and leases securitized were comprised of approximately $201.3 million of
business purpose loans, approximately $969.8 million of home equity loans and
approximately $152.3 million of equipment leases. During fiscal 1999, the
Company securitized $71.9 million, $613.0 million and $92.6 million of business
purpose loans, home equity loans and equipment leases, respectively.
Securitization is a financing technique often used by originators of
financial assets to raise capital. A securitization involves the transfer of a
pool of financial assets, in our case loans or leases, to a trust in exchange
for cash and a retained interest in the securitized loans and leases which is
called a residual interest. The trust issues various classes of securities which
derive their cash flows from a pool of securitized loans and leases. These
securities which represent the remaining interest in the trust called the
regular interests, are sold to public investors. We also retain servicing on
securitized loans and leases. See "-- Loan and Lease Servicing."
As the holder of the residual interests in a securitization, we are
entitled to receive certain excess (or residual) cash flows. These cash flows
are the difference between the payments made by the borrowers and the sum of the
scheduled and prepaid principal and interest paid to the investors in the trust,
servicing fees, trustee fees and, if applicable, insurance fees.
Overcollateralization requirements, representing an excess of the aggregate
principal balances of loans and leases in a securitized pool over investor
interests, are established to provide credit enhancement for the trust
investors. In order to meet the required overcollateralization levels the trust
initially retains the excess cash flow until after the overcollateralization
requirements, which are specific to each securitization, are met.
17
We may be required either to repurchase or to replace loans or leases
which do not conform to the representations and warranties we made in the
pooling and servicing agreements entered into when the loans or leases are
pooled and sold through securitizations. As of June 30, 1999, we had not been
required to repurchase or replace any such loans or leases. When borrowers are
delinquent in making scheduled payments on loans or leases included in a
securitization trust, we are required to advance interest payments with respect
to such delinquent loans or leases to the extent that we determine that such
advances will be ultimately recoverable. These advances require funding from our
capital resources but have priority of repayment from the succeeding month's
collection.
Our securitizations often include a prefunding option where a portion
of the cash received from investors is withheld until additional loans or leases
are transferred to the trust. The loans or leases to be transferred to the trust
to satisfy the preferred option must be substantially similar in terms of
collateral, size, term, interest rate, geographic distribution and loan-to-value
ratio as the loans or leases initially transferred to the trust. To the extent
we fail to originate a sufficient number of qualifying loans or leases for the
prefunded account within the specified time period, our earnings during the
quarter in which the funding was to occur would be reduced.
The securitization of loans and leases during the years ended June 30,
1999, 1998 and 1997 generated gain on sale of loans and leases of $65.6 million,
$41.3 million and $20.0 million, respectively. These gains contributed to our
record levels of revenue and net income during these fiscal years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Certain Accounting Considerations."
Subject to market conditions, we anticipate that we will continue to
securitize business purpose loans, home equity loans and possibly equipment
leases. We believe that a securitization program provides a number of benefits
by allowing us to diversify our funding base, provide liquidity and lower our
cost of funds.
Competition
We compete for business purpose loans against many other finance
companies and financial institutions. Although many other entities originate
business purpose loans, we have focused our lending efforts on our niche market
of businesses which may qualify for loans from traditional lending sources but
who we believe are attracted to our products as a result of our marketing
efforts, responsive customer service and rapid processing and closing periods.
We have significant competition for home equity loans. Through Upland
Mortgage and New Jersey Mortgage, we compete with banks, thrift institutions,
mortgage bankers and other finance companies, which may have greater resources
and name recognition. We attempt to mitigate these factors through a highly
trained staff of professionals, rapid response to
18
prospective borrowers' requests and by maintaining a relatively short average
loan processing time. In addition, we implemented our Bank Alliance Program in
order to generate additional loan volume.
We also face significant competition for equipment leases. Through
American Business Leasing and Federal Leasing Corp., we compete with banks,
leasing and finance companies with greater resources, capitalization and name
recognition throughout their market areas. It is our intention to capitalize on
our vendor relationships and the efforts of our direct sales force to compete
with these businesses.
The various segments of our lending businesses are highly competitive.
See "Risk Factors - Competition from other lending and lessors could adversely
affect our profits."
Risk Factors
A decline in value of the collateral securing our loans may adversely
affect our business by reducing originations and increasing losses on
foreclosure.
Our business may be adversely affected by declining real estate or
other collateral values. Any significant decline in real estate values reduces
the ability of borrowers to use home equity as collateral for borrowings. This
may reduce the number of loans we are able to make, which will reduce the gain
on sale of loans and servicing and origination fees we will collect. Declining
values will also increase the loan-to-value ratios of loans we previously made,
which in turn, increases the probability of a loss in the event the borrower
defaults and we have to sell the mortgaged property. In addition, delinquencies
and foreclosures generally increase during economic slowdowns or recessions. As
a result, the market value of the real estate or other collateral underlying our
loans may not, at any given time, be sufficient to satisfy the outstanding
principal amount of the loans. See "-- Lending and Leasing Activities" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Lending to credit-impaired borrowers may result in higher delinquencies
in our managed portfolio which could adversely impact our financial
condition and results of operation.
We market a significant portion of our loans to borrowers who are
either unable or unwilling to obtain financing from traditional sources, such as
commercial banks. Loans made to these borrowers may entail a higher risk of
delinquency and loss than loans made to borrowers who use traditional financing
sources. Total delinquent loans as a percentage of our total managed portfolio
serviced were 3.19% at June 30, 1999, as compared to 3.01% at June 30, 1998.
While we use underwriting standards and collection procedures designed to
mitigate the higher credit risk associated with lending to these borrowers, our
standards and procedures may not offer adequate protection against risks of
default. In the event loans sold and serviced by us experience higher
19
delinquencies, foreclosures or losses than anticipated, our results of
operations or financial condition would be adversely affected.
We maintain an allowance for credit losses on portfolio loans to
account for loans and leases that are delinquent and are expected to be
ineligible for sale into a securitization. The allowance is calculated based
upon our estimate of the expected collectibility of loans and leases outstanding
based upon a variety of factors, including but not limited to economic
conditions and credit and collateral considerations. See "-- Lending and Leasing
Activities" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Our reliance upon the sale of our loans and leases through
securitization may result in fluctuating operating results.
In recent periods, a significant portion of our revenue and net income
represented gain on the sale of loans and leases in securitization transactions.
Gain on sale of loans and leases resulting from securitizations as a percentage
of total revenues was 69.6% for the fiscal year 1998 and 76.0% for fiscal year
1999. In addition, we rely primarily on securitizations to generate cash
proceeds for:
o repayment of our warehouse credit facilities,
o repayment of other borrowings; and
o origination of additional loans and leases.
Our ability to complete securitizations depends on several conditions,
including:
o conditions in the securities markets generally,
o conditions in the asset-backed securities markets
specifically; and
o the credit quality of our loans and lease portfolios.
Any substantial impairment of our securitization market for loans and leases
could have a material adverse effect on our results of operations and financial
condition. See "-- Securitizations" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Our revenues and net income may fluctuate as a result of the timing and
size of our securitizations.
The strategy of selling loans and leases through securitizations
requires us to build an inventory of loans and leases over time. During this
time we accrue costs and expenses. We do not recognize gain on the sale of loans
and leases until we complete a securitization which may not occur until a
subsequent fiscal quarter. Operating results for a given period can fluctuate
significantly as a result of the timing and level of securitizations. If
securitizations do not close when expected, we could experience a loss for a
period. In addition, due to the timing difference between the period when costs
are incurred in connection with the origination of loans and leases and their
subsequent sale through the securitization, we may operate on a negative cash
20
flow basis, which could adversely impact our results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
We may not be able to sustain the levels of revenue growth and earnings
growth that we experienced in the past.
During fiscal 1999 and fiscal 1998, we experienced record levels of
total revenue and net income as a result of increases in loan and lease
originations and the securitization of loans and leases. Total revenue increased
approximately $27.1 million, or 45.7%, between fiscal 1998 and 1999 while net
income increased approximately $2.6 million, or 23.0%. Our ability to sustain
the level of growth in total revenue and net income experienced during fiscal
1999 and fiscal 1998 depends upon a variety of factors outside our control,
including:
o interest rates,
o conditions in the asset-backed securities markets,
o economic conditions in our primary market area,
o competition, and
o regulatory restrictions.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our inability to continue to successfully implement our growth strategy
may have an adverse effect on profits.
Our growth strategy seeks to increase our loan and lease volume through
geographic expansion and further development of existing markets while
maintaining our customary origination fees, the spread between interest rates
and the interest rates we pay for capital and underwriting criteria.
Implementation of this strategy will depend in large part on our ability to:
o open or expand offices in markets with a sufficient
concentration of borrowers who meet our underwriting criteria;
o obtain adequate financing on favorable terms;
o profitably securitize our loans and leases in the secondary
market on a regular basis;
o hire, train and retain skilled employees;
o successfully implement our marketing campaigns; and
o continue to expand in the face of increasing competition from
other lenders.
Our failure with respect to any or all of these factors could impair our ability
to grow and successfully leverage our fixed costs and could have a material
adverse effect on our results of operations and financial condition. See
"-- Lending and Leasing Activities."
21
Competition from other lenders and lessors could adversely affect our
profits.
The lending and leasing markets that we compete in are highly
competitive. Some competing lenders have substantially greater resources,
greater experience, lower cost of funds, and a more established market presence
than we have. If our competitors increase their marketing efforts to include our
market niche of borrowers, we may be forced to reduce the rates and fees we
currently charge in order to maintain and expand our market share. Any reduction
in our rates or fees could have an adverse impact on our results of operations.
Our profitability and the profitability of other similar lenders may attract
additional competitors into this market.
As we expand into new geographic markets, we will face competition from
companies with established positions in these areas. We may not be able to
continue to compete successfully in the markets we serve or expand into new
geographic markets. See "-- Competition."
We are dependent upon the availability of financing to fund our
continuing operations.
For our ongoing operations, we are dependent upon frequent financings,
including:
o the sale of unsecured subordinated debt securities;
o warehouse credit facilities;
o lines of credit; and
o funds received from the securitization of loans and leases.
Any failure to renew or obtain adequate funding under a warehouse
credit facility, or other borrowings could hurt our profitability. To the extent
that we are not successful in maintaining or replacing existing subordinated
debt securities upon maturity, we would have to limit our loan and lease
originations or sell loans and leases earlier than intended. Limiting our
originations and our earlier sales of loans and leases could have a negative
effect on our results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
A change in market interest rates may adversely affect our profits.
Our profits are likely to be adversely affected during any period of
rapid changes, either upward or downward, in interest rates. Any future rise in
interest rates may adversely affect the following:
o customer demand for our products;
o our cost of funds;
o the spread between the rate of interest we receive on loans
and interest rates we must pay under our outstanding credit
facilities; and
o the profit we will realize in securitizations or other sales
of loans and leases.
22
Any future decrease in interest rates could also reduce the amounts
which we may earn on our newly originated loans and leases. This could reduce
the spread between the interest we earn on loans and the interest we pay under
our outstanding credit facilities and subordinated debt. A decline in interest
rates could also decrease the size of the loan portfolio we service by
increasing the level of prepayments, because borrowers tend to refinance as
interest rates fall. This would result in a reduction of the servicing fees we
earn. See "--Lending and Leasing Activities."
In addition, in connection with certain of our loan securitizations
undertaken, the securitization trusts have issued certificates with interest
rates which fluctuate based upon the LIBOR rate. The principal amount of these
certificates represents 10% to 15% of the amount of loans securitized. The
certificates are secured by fixed rate loans sold in the securitization. Our
profit on the sale of the certificates is in part the difference or spread
between the rate paid on the certificates and the rate paid on the loans
securing the certificates which are our residual interests. To the extent market
interest rates increase, causing the rate paid on the certificates to increase,
the value of our residual interests would be reduced or eliminated. This would
result in a reduction in our profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Decreasing interest rates could adversely effect our income due to the
length of maturities of our outstanding debt.
We are also subject to risks associated with changes in interest rates
to the extent that we have issued fixed rate subordinated debt securities with
scheduled maturities of one to ten years. At June 30, 1999, we had $93.6 million
of subordinated debt securities with scheduled maturities greater than one year.
If market interest rates decrease in the future, the rates paid on our long term
subordinated debt could exceed the current market rate paid for similar
instruments which could result in a reduction in our profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Interest Rate Risk Management."
Our failure to implement an effective hedging strategy could result in
losses or negatively impact earnings.
We have implemented a hedging strategy in an attempt to mitigate the
effect of changes in interest rates on our fixed-rate mortgage loan portfolio
prior to securitization that involves in part the short sale of U.S. Treasury
securities. An effective hedging strategy is complex and no strategy can
completely insulate us from interest rate risk. In fact, poorly designed
strategies or improperly executed transactions may increase rather than mitigate
interest rate risk. Hedging involves transaction and other costs, and these
costs could increase as the period covered by the hedging protection increases
or in periods of rising and fluctuating interest rates. In addition, the short
sale of U.S. Treasury securities is not an effective hedge against the risk that
the difference between the treasury rate and the rate needed to attract
potential buyers of asset backed securities may widen. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Interest Rate Risk Management."
23
An economic downturn in the eastern region of the United States could
affect our financial performance more than other businesses which are
more geographically diversified.
Although we are licensed in numerous states, we currently originate
loans primarily in the eastern region of the United States. The concentration of
loans in a specific geographic region subjects us to the risk that a downturn in
the economy in the eastern region of the country would more greatly affect us
than if our lending business were more geographically diversified. See
"--Lending and Leasing Activities" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Our securitization agreements require us to retain risk on
loans and leases that do not meet the requirements in these agreements.
Although we sell substantially all of the loans and leases we originate
through securitizations, all of the securitization agreements require that we
replace or repurchase loans or leases which do not conform to the
representations and warranties made by us at the time of sale.
Additionally, when borrowers are delinquent in making monthly payments
on loans included in a securitization trust, we are required to advance interest
payments for the delinquent loans if we deem that the advances will be
ultimately recoverable. These advances require funding from our capital
resources but have priority of repayment from the succeeding month's
collections. See "--Securitizations."
Our estimation of the value of residual interests we retain when we
securitize loans could be inaccurate and could result in reduced
profits.
We generally retain residual interests in the securitization
transactions we complete. A residual interest is a retained interest in the cash
flow of securitized loans and leases. We estimate the residual interests to be
received in connection with our securitizations based upon certain prepayment
and default assumptions. Our actual prepayment and default experience may vary
materially from these estimates. As a result, the gain we recognize upon the
sale of loans and leases may be overstated because actual prepayments or losses
are greater than we originally estimated. Higher levels of future prepayments,
delinquencies and/or liquidations could result in the decreased value of
residual interests which would adversely affect our income in the period of
adjustment. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Risks associated with leasing activities may reduce our future
profitability.
There are risks associated with leasing which are different than those
associated with our mortgage lending operations. While our equipment leases are
secured by a lien on the leased equipment, the equipment is subject to the risk
of damage, destruction or obsolescence prior to the termination of the lease. In
the case of our fair market value leases, lessees may choose not to exercise
their option to purchase the equipment for its fair market value at the
termination of the lease. When this happens, we may have to sell the equipment
to third party buyers at a discount. Our financial results may be adversely
affected by losses in the value of our leased equipment. See "--Lending and
Leasing Activities."
24
Our lending business is subject to government regulation and licensing
requirements which may hinder our ability to operate profitably.
Our lending business is subject to extensive regulation, supervision
and licensing by federal, state and local governmental authorities and is
subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on all or part of our home equity and first
mortgage lending activities. Our home equity and first mortgage lending
activities are subject to regulation under various federal laws including the
following:
o Truth-in-Lending Act and Regulation Z (including the Home
Ownership and Equity Protection Act of 1994);
o the Equal Credit Opportunity Act and Regulation B, as amended;
o the Real Estate Settlement Procedures Act and Regulation X;
o the Home Mortgage Disclosure Act; and
o the Fair Debt Collection Practices Act.
We are also subject to examinations by state regulatory authorities
with respect to originating, processing, underwriting, selling and servicing
home equity loans and first mortgage loans. These rules and regulations impose
licensing obligations, prohibit discrimination, regulate collection, foreclosure
and claims handling, payment features, mandate certain disclosures and notices
to borrowers and, in some cases, fix maximum interest rates, and fees. Failure
to comply with these requirements can lead to, among other remedies, termination
or suspension of licenses, certain rights of rescission for mortgage loans,
class action lawsuits and administrative enforcement actions.
Although we believe that we have implemented systems and procedures to
facilitate compliance with the foregoing requirements and believe that we are in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, more restrictive laws, rules and regulations may be
adopted in the future that could make compliance more difficult or expensive.
See "--Regulation."
Claims by borrowers or investors could have an impact on our
operations.
In the ordinary course of our business, we are subject to claims made
against us by borrowers and private investors arising from, among other things:
o losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentation, error and
omission by our employees, officers and agents (including our
appraisers);
o incomplete documentation; and
o failure to comply with various laws and regulations applicable to our
business.
25
Although there are no material claims or legal actions currently
assessed against us, any claims asserted in the future may result in legal
expenses or liability which could have a material adverse effect on our results
of operations and financial condition. See "--Legal Proceedings."
We depend on the services of key people, and the loss of any of these
people could disrupt our operations and result in reduced revenues.
The success of our operations depends on the continued employment of
our senior level management, and most notably Anthony J. Santilli, our Chairman,
President and Chief Executive Officer. If key members of the senior level
management were for some reason unable to perform their duties or were to leave
us for any reason, we may not be able to find capable replacements. See
"Directors and Executive Officers of the Registrant."
Environmental laws and regulations may restrict our ability to
foreclose on loans secured by real estate.
In the course of our business, we have acquired, and may acquire in the
future, properties securing loans which are in default. Under various federal,
state and local environmental laws which pertain primarily to commercial
properties, a current or previous owner or operator of real property may be
required to investigate and clean up hazardous or toxic substances or chemical
releases on the property. In addition, the owner or operator may be held liable
to a governmental entity or to third parties for property damage, personal
injury, investigation and cleanup costs relating to the contaminated property.
Our ability to foreclose on the real estate collateralizing our loans,
may be limited by these environmental laws. While we would not knowingly make a
loan collateralized by real property that was contaminated, it is possible that
the environmental contamination would not be discovered until after we had made
the loan.
The costs of investigation, remediation or removal of hazardous
substances may be substantial and can easily exceed the value of the property.
The presence of hazardous substances, or the failure to properly eliminate the
substances from the property, can hurt the owner's ability to sell or rent the
property and prevent the owner from using the property as collateral for a loan.
Even people who arrange for the disposal or treatment of hazardous or toxic
substances also may be liable for the costs of removal or remediation of the
substances at the disposal or treatment facility, whether or not the facility is
owned or operated by the person who arranged for the disposal or treatment.
In addition to federal or state regulations, the owner or former owners
of a contaminated site may be subject to common law claims by third parties
based on damages and costs resulting from environmental contamination emanating
from the property. See "-Loan and Lease Servicing."
26
The amount of our common stock held by the Board of Directors and
management may enable these persons to control the outcome of actions
taken by stockholders which could discourage hostile offers to acquire
us.
The Board of Directors and management are the beneficial owners of
approximately 40.6% (excluding options) of the outstanding common stock, which
may allow this group to control actions to be taken by the stockholders,
including the election of directors to the Board of Directors. This voting
control may have the effect of discouraging hostile offers to acquire us because
the completion of any acquisition may require the consent of the current members
of the Board of Directors and management. See "Security Ownership of Certain
Beneficial Owners and Management."
Problems related to the year 2000 could cause system failures that
impair our operations.
Many currently installed computer systems and software products in the
United States and worldwide use two digits rather than four to define the
applicable year. Software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, such as a temporary inability
to process loan or other transactions, send statements or late notices, or
engage in similar routine business activities. This problem has been referred to
as the "Year 2000" issue. We are in the process of ensuring our systems
recognize the year 2000 as the year 2000 and not as the year 1900 by obtaining
certifications from vendors regarding the year 2000 compliance of their products
as well as testing our applications. We currently estimate that the costs
associated with this Year 2000 compliance program will be approximately
$500,000. Although we currently estimate that our information technology systems
will be Year 2000 compliant by the end of 1999, there can be no assurance that
unforeseen events would prevent us from meeting this deadline.
We have contacted vendors with which we do a significant amount of
business to determine whether they are Year 2000 compliant and to determine the
extent to which their computer systems are subject to Year 2000 issues. We
cannot predict the extent to which Year 2000 issues will affect these third
parties, or the extent to which we would be vulnerable to the failure of these
parties to remedy any Year 2000 issues on a timely basis. Since the failure of
our vendors to convert their systems on a timely basis may have a material
adverse effect on us, we are developing a contingency plan in the event these
vendors are not Year 2000 compliant on a timely basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Regulation
General. Our business is highly regulated by both federal and state
laws. All home equity and first mortgage loans must meet the requirements of,
among other statutes, the Truth in Lending Act, the Real Estate Settlement
Procedures Act ("RESPA"), the Equal Credit Opportunity Act of 1974, as amended
("ECOA") and their accompanying Regulations Z, X and B, respectively.
27
Truth in Lending. The Truth in Lending Act and Regulation Z issued
under the Truth in Lending Act contain disclosure requirements designed to
provide consumers with uniform, understandable information about the terms and
conditions of loans and credit transactions so that consumers may compare credit
terms. The Truth in Lending Act also guarantees consumers a three-day right to
cancel certain transactions and imposes specific loan feature restrictions on
certain loans of the type originated by us. We believe that we are in compliance
with the Truth in Lending Act in all material respects. If we were found not to
be in compliance with the Truth in Lending Act, some aggrieved borrowers could
have the right to rescind their loans and to demand, among other things, the
return of finance charges and fees paid to us. Other fines and penalties can
also be imposed under the Truth in Lending Act and Regulation Z.
Equal Credit Opportunity and Other Laws. We are also required to comply
with the Equal Credit Opportunity Act, which prohibits creditors from
discriminating against applicants on the basis of race, color, religion,
national origin, sex, age or marital status. Regulation B issued under the
Equity Credit Opportunity Act restricts creditors from obtaining certain types
of information from loan applicants. Among other things, it also requires
certain disclosures by the lender regarding consumer rights and requires lenders
to advise applicants of the reasons for any credit denial.
In instances where the applicant is denied credit or the rate of
interest for a loan increases as a result of information obtained from a
consumer credit reporting agency, the Fair Credit Reporting Act of 1970, as
amended, requires lenders to supply the applicant with the name and address of
the reporting agency whose credit report was used in determining to reject a
loan application. It also requires that lenders provide other information and
disclosures about the loan application rejection. In addition, we are subject to
the Fair Housing Act and regulations under the Fair Housing Act, which broadly
prohibit specific discriminatory practices in connection with our home equity
lending business.
We are also subject to the Real Estate Settlement Procedures Act. The
Real Estate Settlement Procedures Act imposes, limits on the amount of funds a
borrower can be required to deposit with us in any escrow account for the
payment of taxes, insurance premiums or other charges; limits on fees paid to
third parties; and various disclosure requirements.
We are subject to various other federal and state laws, rules and
regulations governing, the licensing of mortgage lenders and servicers,
procedures that must be followed by mortgage lenders and servicers, and
disclosures that must be made to consumer borrowers. Failure to comply with
these laws, as well as with the laws described above, may result in civil and
criminal liability.
Several of our subsidiaries are licensed and regulated by the
departments of banking or similar entities in the various states in which they
are licensed. The rules and regulations contain licensing and licensed entities
activities, among other things, prohibit discrimination, collection, foreclosure
and claims handling, payment features, mandate certain disclosures and notices
to borrowers and, in some cases, fix maximum interest rates, and fees. Failure
to comply with these requirements can lead to termination or suspension of
licenses, certain rights of rescission for mortgage loans, individual and class
action lawsuits and administrative enforcement actions. Upland Mortgage and New
Jersey Mortgage maintain compliance with the various federal and state laws
through its in-house counsel and outside counsel which continually review Upland
Mortgage and New Jersey Mortgage documentation and procedures and monitor and
inform Upland Mortgage and New Jersey Mortgage on various changes in the laws.
28
The previously described laws and regulations are subject to
legislative, administrative and judicial interpretation. Some of these laws and
regulations have recently been enacted. Some of these laws and regulations are
rarely challenged in or interpreted by the courts. Infrequent interpretations of
these laws and regulations or an insignificant number of interpretations of
recently enacted regulations can make it difficult for us to know what is
permitted conduct under these laws and regulations. Any ambiguity under the
regulations to which we are subject may lead to regulatory investigations or
enforcement actions and private causes of action, such as class action lawsuits,
with respect to our compliance with the applicable laws and regulations.
Although we believe that we have implemented systems and procedures to
make sure that we comply with regulatory requirements and that we are in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, if more restrictive laws, rules and regulations are
enacted or more restrictive judicial and administrative interpretations of those
laws are issued, compliance with the laws could become more expensive or
difficult.
Employees
At June 30, 1999, we employed 858 people on a full-time basis and 36
people on a part-time basis. None of our employees are covered by a collective
bargaining agreement. We consider our employee relations to be good.
Executive Officers Who Are Not Also Directors
The following is a description of the business experience of each
executive officer who is not also a director.
Beverly Santilli, age 40, is First Executive Vice President and
Secretary, positions she has held since September 1998 and our inception,
respectively. Mrs. Santilli has held a variety of positions including Executive
Vice President and Vice President. Mrs. Santilli is also the President of
American Business Credit. Mrs. Santilli is responsible for all sales, marketing
and day-to-day operation of American Business Credit. Mrs. Santilli is also
responsible for human resources of ABFS. Prior to joining American Business
Credit and from September 1984 to November 1987, Mrs. Santilli was affiliated
with PSFS initially as an Account Executive and later as a Commercial Lending
Officer with that bank's Private Banking Group. Mrs. Santilli is the wife of
Anthony J. Santilli.
29
Jeffrey M. Ruben, age 36, is Executive Vice President and General
Counsel as well as Executive Vice President and General Counsel of certain of
our subsidiaries, positions he has held since September 1998 and April 1992,
respectively. Mr. Ruben is responsible for the loan and the lease collections
departments, the asset allocation unit and the legal department. Mr. Ruben
served as Senior Vice President from April 1992 to September 1999. From June
1990 until he joined us in April 1992, Mr. Ruben was an attorney with the law
firm of Klehr, Harrison, Harvey, Branzburg & Ellers in Philadelphia,
Pennsylvania. From December 1987 until June 1990, Mr. Ruben was employed as a
credit analyst with the CIT Group Equipment Financing, Inc. Mr. Ruben is a
member of the Pennsylvania and New Jersey Bar Associations. Mr. Ruben holds both
a New Jersey Mortgage Banker License and a New Jersey Secondary Mortgage Banker
License.
Albert W. Mandia, age 51, is the Executive Vice President and Chief
Financial Officer of ABFS, positions he has held since June 1998 and October
1998, respectively. Mr. Mandia is responsible for all financial, information
systems and investor relations functions. From 1974 to 1998, Mr. Mandia was
associated with CoreStates Financial Corp. where he last held the position of
Chief Financial Officer from February 1997 to April 1998.
Item 2. Properties
Except for real estate acquired in foreclosure in the normal course of
our business, we do not presently hold title to any real estate for operating
purposes. The interests which we presently hold in real estate are in the form
of mortgages against parcels of real estate owned by our borrowers or their
affiliates and real estate acquired through foreclosure.
We presently lease office space at 111 Presidential Boulevard, Bala
Cynwyd, Pennsylvania, just outside the city limits of Philadelphia. We are
currently leasing this office space under lease with an annual rental cost of
approximately $2.2 million. The current lease term expires in July 31, 2003. We
also lease the Roseland, New Jersey office which functions as the headquarters
for New Jersey Mortgage and its subsidiaries. The Roseland office lease contains
a renewal option for an additional term of five years. The Roseland office
facility has a current annual rental cost of approximately $766,000. In
addition, we lease branch offices on a short term basis in various cities
throughout the United States. We do not believe that the leases for the branch
offices are material to our operations.
Item 3. Legal Proceedings
On October 23, 1997, a class action suit was filed in the Superior
Court of New Jersey at Docket No. L-12066-97 against New Jersey Mortgage by
Alfred G. Roscoe on behalf of himself and others similarly situated. Mr. Roscoe
sought certification that the action could be maintained as a class action. He
also sought unspecified compensatory damages and injunctive relief. In his
complaint, Mr. Roscoe alleged that New Jersey Mortgage violated New Jersey's
Mortgage Financing on Real Estate Law, N.J. Stat. Ann. 46:10A-1 et seq., by
requiring him and other borrowers to pay or reimburse New Jersey Mortgage for
attorneys' fees and costs in connection with loans made to them by New Jersey
Mortgage. Mr. Roscoe further asserted that New Jersey Mortgage's alleged actions
violated New Jersey's Consumer Fraud Act, N.J. Stat. Ann. 56:8-1, et seq. and
constituted common law fraud and deceit
30
On February 24,1998, after oral argument before the Superior Court, an
order was entered in favor of New Jersey Mortgage and against Mr. Roscoe
granting New Jersey Mortgage Motion for Summary Judgment. Mr. Roscoe appealed to
the Superior Court of New Jersey - Appellate Division. Oral argument on the
appeal was heard on January 20, 1999 before a two-judge panel of the Appellate
Division. On February 3, 1999, the panel filed a per curiam opinion affirming
the Superior Court's ruling in favor of New Jersey Mortgage.
On March 4, 1999, a Petition for Certification for review of the final
judgment of the Superior Court was filed with the Supreme Court of New Jersey.
New Jersey Mortgage filed its Brief in Opposition to the Petition for
Certification on March 16, 1999, and Mr. Roscoe filed a reply brief. To date, no
decision has been rendered by the New Jersey Supreme Court on this matter.
Pursuant to the terms of the Agreement for Purchase and Sale of Stock
of New Jersey Mortgage between us and the former shareholders of New Jersey
Mortgage, the former shareholders are required to indemnify us up to $16.0
million to the extent of any losses over $100,000 related to, caused by or
arising from New Jersey Mortgage's failure to comply with applicable law. The
former New Jersey Mortgage shareholders have agreed to defend ABFS in this suit.
Additionally, from time to time, we are involved as plaintiff or
defendant in various other legal proceedings arising in the normal course of our
business. While we cannot predict the ultimate outcome of these various legal
proceedings, it is management's opinion that the resolution of these legal
actions should not have a material effect on our financial position, results of
operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1999.
31
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
Our common stock is currently traded on the NASDAQ National Market
System under the symbol "ABFI." Our common stock began trading on the NASDAQ
National Market System on February 14, 1997. Prior to February 14, 1997, our
common stock had been traded on the Philadelphia Stock Exchange under the symbol
"AFX" since May 13, 1996. Prior to the commencement of trading on the PHLX,
there was no active trading market for our common stock.
The following table sets forth the high and low sales prices of our
common stock for the periods indicated. The stock price information appearing
below has been retroactively adjusted to reflect the effect of a 5% stock
dividend declared subsequent to June 30, 1999. On September 9, 1999, the closing
price of the common stock on the NASDAQ National Market System was $12.875.
Quarter Ended High Low
------------------------ ------------ -------------
June 30, 1997 $21.42 $17.62
September 30, 1997 22.86 18.57
December 31, 1997 26.67 19.64
March 31, 1998 26.19 19.52
June 30, 1998 24.29 20.95
September 30, 1998 20.71 11.19
December 31, 1998 13.70 5.48
March 31, 1999 14.29 11.67
June 30, 1999 18.93 10.23
As of September 9, 1999, there were 115 record holders and
approximately 1,000 beneficial holders of our common stock.
During fiscal 1999, we paid $0.165 per share in dividends on common
stock, for an aggregate dividend payment of $575,000. During fiscal 1998, we
paid dividends of $211,000. The payment of dividends in the future is in the
sole discretion of our Board of Directors and will depend, among other things,
upon earnings, capital requirements and financial condition, as well as other
relevant factors.
On August 18, 1999, our Board of Directors declared a 5% stock dividend
payable on September 27, 1999, to stockholders of record as of September 3,
1999.
As a Delaware corporation, we may not declare and pay dividends on
capital stock if the amount paid exceeds an amount equal to the excess of our
net assets over paid-in-capital or, if there is no excess, our net profits for
the current and/or immediately preceding fiscal year.
On October 27, 1997, we issued 20,240 shares of common stock to Stanley
L. Furst and Joel E. Furst as partial consideration for their 100% interest in
New Jersey Mortgage.
32
This issuance was exempt from registration in accordance with Section
4(2) of the Securities Act of 1933, as amended, because the issuance did not
involve a public offering. Therefore, the shares issued are subject to certain
transfer restrictions.
Item 6. Selected Consolidated Financial Data
Our consolidated financial information set forth below should be read
in conjunction with the more detailed consolidated financial statements, the
notes to the consolidated financial statements, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein (dollars in thousands except per share data):
Year Ended June 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- -------- ------- --------
Statement of Income Data:
Revenues:
Gain on sale of loans and leases....................... $ 65,640 $ 41,316 $ 20,043 $ 8,721 $ 1,350
Interest and fees...................................... 17,424 17,386 5,584 3,245 4,058
Other.................................................. 3,360 633 335 129 143
---------- --------- -------- ------- --------
Total revenues............................................ 86,424 59,335 25,962 12,095 5,551
Total expenses............................................ 64,573 41,445 16,960 8,974 4,657
---------- --------- -------- ------- --------
Operating income before income taxes...................... 21,851 17,890 9,002 3,121 894
Income taxes.............................................. 7,763 6,435 3,062 802 313
---------- --------- -------- ------- --------
Net income................................................ $ 14,088 $ 11,455 $ 5,940 $ 2,319 $ 581
========== ========= ======== ======= ========
Per Common Share Data:
Net income (a)......................................... $ 3.72 $ 2.98 $ 1.95 $ 0.96 $ 0.26
Cash dividends declared................................ .165 .06 .06 .03 -
(a) Amounts have been retroactively adjusted to reflect the effect of a 5%
stock dividend declared August 18, 1999 as if the shares had been
outstanding for each period presented.
June 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- -------- ------- --------
Balance Sheet Data:
Cash and cash equivalents................................. $ 22,395 $ 4,486 $ 5,014 $ 5,345 $ 4,734
Loan and lease receivables, net available for sale........ 33,776 62,382 35,712 18,003 8,669
Other..................................................... 6,863 4,096 1,144 534 328
Total assets.............................................. 396,301 226,551 103,989 46,894 22,175
Subordinated debt ........................................ 212,902 115,182 56,486 33,620 17,800
Total liabilities......................................... 338,055 183,809 73,077 42,503 20,031
Stockholders' equity...................................... 58,246 42,742 30,912 4,392 2,143
33
Year Ended June 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- -------- ------- --------
Other Data:
Originations:
Business Purpose Loans................................ $ 64,818 $ 52,335 $ 38,721 $28,872 $ 18,170
Home Equity Loans..................................... 634,820 328,089 91,819 36,479 16,963
First Mortgage Loans.................................. 66,519 33,671 - - -
Equipment Leases ..................................... 96,289 70,480 8,004 5,967 2,220
Loans and Leases sold:
Securitizations....................................... 777,598 384,700 115,000 36,506 9,777
Other................................................. 105,751 51,594 3,817 19,438 31,948
Total managed loan and lease portfolio................... 1,176,918 559,398 176,651 59,891 17,774
Average loan/lease size:
Business Purpose Loans................................ 80 83 78 78 71
Home Equity Loans..................................... 74 62 51 47 46
First Mortgage Loans.................................. 165 154 - - -
Equipment Leases...................................... 23 21 11 11 12
Weighted average interest rate on loans and leases originated:
Business Purpose Loans ............................... 15.91% 15.96% 15.91% 15.83% 16.05%
Home Equity Loans..................................... 11.05 11.95 11.69 9.94 12.68
First Mortgage Loans.................................. 7.67 8.22 - - -
Equipment Leases...................................... 11.40 12.19 15.48 17.22 15.85
At or For the Year Ended June 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- -------- ------- --------
Financial Ratios:
Return on average assets ................................ 4.56% 6.93% 7.87% 6.71% 3.37%
Return on average equity ................................ 28.10 31.10 33.65 70.96 31.36
Total delinquencies as a percentage of total portfolio
serviced, at end of period ............................ 3.19 3.01 2.15 2.30 3.84
Real estate owned as a percentage of total portfolio
serviced, at end of period............................. .85 .16 .34 1.01 4.29
Loan and lease losses as a percentage of the average total
portfolio serviced during the period................... .12 .12 .07 .33 .66
Pre-tax income as a percentage of total revenues......... 25.28 30.15 33.99 25.81 16.11
Ratio of earnings to fixed charges....................... 1.92 2.23 2.56 1.97 1.54
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following financial review and analysis of the financial condition
and results of operations, for the years ended June 30, 1999, 1998 and 1997
should be read in conjunction with the consolidated financial statements and the
accompanying notes to the consolidated financial statements, and other detailed
information appearing in this document.
34
Securitizations
The ongoing securitization of loans and leases is a central part of our
current business strategy. We sell loans and leases through securitizations with
servicing retained in order to fund growing loan and lease originations and to
provide additional sources of revenue through retained mortgage and lease
servicing rights. In fiscal 1999, we completed securitizations aggregating
$777.6 million, consisting of $71.9 million in business purpose loans, $613.0
million in home equity loans and $92.6 million in equipment leases. Such
securitizations generated gains on the sale of loans and leases of $65.6
million, $41.3 million and $20.0 million, respectively, for fiscal years ended
June 30, 1999, 1998 and 1997. Gain on sale of loans and leases resulting from
securitizations as a percentage of total revenues was 76.0%, 69.6% and 75.5% for
the years ended June 30, 1999, 1998 and 1997, respectively. We rely primarily on
securitizations to generate cash proceeds for repayment of warehouse credit
facilities and other borrowings and to originate additional loans and leases.
Several factors affect our ability to complete securitizations,
including conditions in the securities markets generally, conditions in the
asset-backed securities markets specifically and credit quality of the portfolio
of loans and leases serviced. Any substantial reduction in the size or
availability of the securitization market for loans and leases could have a
material adverse effect on our results of operations and financial condition.
Our quarterly revenues and net income have fluctuated in the past and
may fluctuate in the future principally as a result of the timing and size of
securitizations and changes in market interest rates. The strategy of selling
loans and leases through securitizations require building an inventory of loans
and leases over time, during which time costs and expenses are incurred. Since a
gain on sale is not recognized until a securitization is completed, which may
not occur until a subsequent quarter, operating results for a given quarter can
fluctuate significantly as a result of the timing and level of securitizations.
If securitizations do not close when expected, we could experience a materially
adverse effect on our results of operations for a quarter. The gain on sale of
loans and leases may be unfavorably impacted to the extent we hold fixed-rate
mortgage loans or leases in our available for sale portfolio prior to
securitization. A significant variable affecting the gain on sale of loans and
leases in a securitization is the spread between the average coupon rate on
fixed rate loans and leases, and the weighted average pass-through rate to
investors for interests issued in connection with a securitization. Although the
loan and lease coupon rate is fixed at the time the loan or lease is originated,
the pass-through rate to investors is not fixed until the pricing of the
securitization which occurs just prior the sale of the loans and leases.
Therefore, if market rates required by investors increase prior to
securitization of the loans and leases, the spread between the average coupon
rate on the loans and leases and the pass-through rate to investors may be
reduced or eliminated. In addition, due to the timing difference between the
period when costs are incurred in connection with the origination of loans and
leases and their subsequent sale through the securitization process, we may
operate on a negative cash flow basis, which could adversely impact our results
of operations and financial condition.
35
We also rely upon funds generated by the sale of subordinated debt and
other borrowings to fund our operations. At June 30, 1999, $212.9 million of
subordinated debt was outstanding and credit facilities and lines of credit
totaling $275.0 million were available, of which $51.5 million was drawn upon on
such date. In addition, we had a $100.0 million commercial paper conduit to
finance equipment lease origination of which $3.2 million was utilized at June
30, 1999. We expect to continue to rely on such borrowings to fund loans and
leases prior to securitization.
Certain Accounting Considerations
As a fundamental part of our business and financing strategy, we
securitize the majority of our loans and leases by selling them to trusts for
cash and a retained interest in the securitized loans and leases which is called
a residual interest. The trust issues multi-class securities which derive their
cash flows from a pool of securitized loans and leases. These securities which
represent the remaining interest in the trust called the regular interests, are
sold to public investors. We also retain servicing on securitized loans and
leases.
As the holder of the residual interests in a securitization, we are
entitled to receive certain excess (or residual) cash flows. These cash flows
are the difference between the payments made by the borrowers and the sum of the
scheduled and prepaid principal and interest paid to the investors in the trust,
servicing fees, trustee fees and, if applicable, insurance fees.
Overcollateralization requirements, representing an excess of the aggregate
principal balances of loans and leases in a securitized pool over investor
interests, are established to provide credit enhancement for the trust
investors. In order to meet the required overcollateralization levels the trust
initially retains the excess cash flow until after the overcollateralization
requirements, which are specific to each securitization, are met.
Gain on sale of loans and leases through securitizations represent the
difference between our net proceeds and the allocated cost of loans and leases
securitized. The allocated cost of the loans and leases securitized is
determined by allocating their net carrying value between the loans and leases
securitized, the residual interests and the mortgage servicing rights retained,
based upon their relative fair values. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", which was effective for fiscal quarters
beginning after December 15, 1998, we classified our residual interests as
available-for-sale securities. Available-for-sale securities are carried at fair
value, with subsequent adjustments to fair value recorded in stockholders'
equity and reported as a component of comprehensive income. Prior to the
adoption of SFAS No. 134, the differences between the fair value of residual
interests and their allocated costs was recorded as gain on securitization and
included in gain on sale of loans and leases. The adoption of SFAS No. 134 did
not have a material effect on our financial condition, but reduced the recorded
gain on sale by approximately $5.7 million pre-tax in the third and fourth
quarters of fiscal year 1999.
36
The calculation of the fair value of the residual interest is based
upon the present value of the future expected excess cash flows and utilizes
certain assumptions made by management at the time loans and leases are sold.
These assumptions include the discount rate used to calculate present value, the
rates of prepayment and default rates on the pool of loans. The rate of
prepayment of loans may be affected by a variety of economic and other factors,
including prevailing interest rates and the availability of alternative
financing to borrowers. The effect of those factors on loan and lease prepayment
rates may vary depending on the type of loan or lease. Estimates of prepayment
rates are made based on management's expectation of future prepayment rates,
which are based, in part, on the historical rate of repayment of the loans and
leases and other considerations. Although we believe we have made reasonable
estimates of prepayment rates and default assumptions, the actual prepayment and
default experience may materially vary from our estimates. The gain recognized
upon the sale of loans and leases will have been overstated if prepayments or
losses are greater than estimated. Additionally, certain of our securitization
trusts have issued floating rate certificates supported by fixed rate mortgages.
The fair value of the excess cash flow we will receive would be affected by any
changes in the rates paid on the floating rate certificates.
To the extent that prepayments or delinquencies differ from the
estimates made, adjustments of the gain on sale of loans and leases may be
required. Higher levels of future prepayments, delinquencies and/or liquidations
could result in a reduction in the value of residual interests which would
adversely affect income in the period of adjustment.
We also sell loans with servicing released referred to as whole loan
sales. Gains on whole loan sales equal the difference between the net proceeds
from such sales and the loans' net carrying value. The net carrying value of
loans is equal to their principal balance plus unamortized origination costs and
fees. Gains from these sales are recorded as fee income.
The timing of sales of loans and leases and the amount of loans and
leases sold will impact earnings from quarter to quarter. Subsequent to the
initial recognition of the residual interests in a securitization, ongoing
assessments are made to determine the fair value of the expected future excess
cash flows based upon current market conditions. At June 30, 1999, investments
in residual interests in securitizations totaled $178.2 million including
investments in interest-only strips of $139.6 million and investments in
overcollateralization of $38.6 million.
When loans or leases are sold through a securitization, the servicing
on the loans or leases is retained and the fair value of contractual servicing
fees net of the allocated costs of servicing is recognized as a separate asset
for accounting purposes. Fair value of servicing rights is determined by
computing the present value of projected net cash flows expected to be received
over the life of the loans or leases securitized. Such projections incorporate
assumptions, including servicing costs, prepayment rates, default rates and
discount rates. These assumptions are similar to those used to value the
residual interests retained in a securitization. Periodically, capitalized
servicing rights are evaluated for impairment, which is measured as the excess
of unamortized cost over fair value. We have generally found that non-conforming
borrowers are less sensitive to interest rates than monthly payment balances.
Therefore, interest rates are not considered as a predominant risk
characteristic for purposes of evaluating impairment. At June 30, 1999,
servicing rights totaled $43.2 million, compared to $18.5 million at June 30,
1998.
37
Results of Operations
Summary Financial Results
(in thousands, except per share data)
Percentage
Year ended June 30, Change
------------------------------------ ---------------------
1999 1998 1997 '99/'98 '98/'97
--------- -------- -------- ------- ------
Total revenues...................... $86,424 $59,335 $25,962 45.7% 128.5%
Total expenses...................... $64,573 $41,445 $16,960 55.8% 144.4%
Net income.......................... $14,088 $11,455 $ 5,940 23.0% 92.8%
Return on average equity............ 28.10% 31.10% 33.65%
Return on average assets............ 4.56% 6.93% 7.87%
Earnings per share:
Basic............................. $ 3.83 $ 3.10 $ 2.03 23.5% 52.7%
Diluted........................... $ 3.72 $ 2.98 $ 1.95 24.8% 52.8%
Dividends declared per share........ $ 0.165 $ 0.06 $ 0.06
Overview
For fiscal 1999, net income increased $2.6 million, or 23.0%, to $14.1
million from $11.5 million for fiscal 1998. Basic earnings per common share
increased 23.5% to $3.83 on average common shares of 3,682,070, compared to
$3.10 per share on average common shares of 3,692,492 for fiscal 1998. Diluted
earnings per common share increased 24.8% to $3.72 on average common shares of
3,791,204, compared to $2.98 per share on average common shares of 3,847,428 for
fiscal 1998. All average common share and earnings per common share amounts have
been retroactively adjusted to reflect the effect of a 5% stock dividend
declared August 18, 1999. See note 10 in the Consolidated Financial Statements
for further description.
The increases in net income and earnings per share primarily resulted
from the impact of increases in the volume of loans and leases securitized
during the periods and increases in the collection of fee income due to the
increase in loans and leases available for sale and securitized loans and leases
for which servicing was retained, referred to as the total managed portfolio.
In the second quarter of fiscal 1999, we increased our quarterly
dividend by 233% to $0.05 per share. Dividends of $0.165 were paid in fiscal
1999 compared to dividends of $0.06 in fiscal 1998. The common dividend payout
ratio based on diluted earnings per share was 4.2% for fiscal 1999, compared to
1.9% for fiscal 1998.
Our growth strategy is dependent upon our ability to increase loan and
lease origination volume through both geographic expansion and growth in current
markets. The implementation of this strategy will depend in large part on a
variety of factors outside of our control, including, but not limited to, the
ability to obtain adequate financing on favorable terms and profitably
securitize loans and leases on a regular basis and continue to expand in the
face of increasing competition. Our failure with respect to any of these factors
could impair our ability to successfully implement our growth strategy, which
could adversely affect our results of operations and financial condition.
38
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998
Total Revenues. Total revenues increased $27.1 million, or 45.7%, to
$86.4 million for the year ended June 30, 1999 from $59.3 million for the year
ended June 30, 1998. The increase was primarily attributable to increases in
gains on sale of loans and leases through securitizations and servicing income.
Gain on Sale of Loans and Leases. Gain on sale of loans and leases
increased $24.3 million, or 58.9%, to $65.6 million for the year ended June 30,
1999 from $41.3 million for the year ended June 30, 1998. The increase was the
result of selling $777.6 million of loans and leases through securitizations in
fiscal 1999, including $71.9 million of business purpose loans, $613.0 million
of home equity loans and $92.6 million of equipment leases, compared to $54.1
million of business purpose loans, $270.9 million of home equity loans and $59.7
million of equipment leases in fiscal 1998.
Gain on sale of loans and leases as a percentage of loans and leases
securitized was 8.44% in fiscal 1999, compared to 10.74% in fiscal 1998. Factors
impacting the year to year comparability of the gain percentage included: the
adoption of SFAS No. 134 on January 1, 1999 which reduced pre-tax gains by
approximately 0.75%; a decline in the average coupon on loans and leases
originated during fiscal 1999; and an increase in the rate required to be paid
to investors in fiscal 1999 securitizations.
Gain on sale of loans and leases securitized represents the difference
between the net proceeds received, and the allocated cost of loans and leases
securitized. The allocated cost of the loans and leases securitized is
determined by allocating their net carrying value between the loans and leases
securitized, the retained residual interests in the securitization and the
mortgage servicing rights retained, based upon their relative fair values. The
calculation of the fair value of the residual interest is based upon the present
value of the future expected excess cash flows and utilizes certain assumptions
made by management at the time loans and leases are sold. Assumptions used in
the estimation of the fair value of residual interests include the discount rate
used to calculate present value and the rates of prepayment and default on the
pool of loans. See "Interest-only Strips and Servicing Assets" for more
information regarding these assumptions.
39
The following schedule details loan and lease originations during the
fiscal years ended June 30, 1999, 1998 and 1997 (in thousands):
Year Ended June 30,
----------------------------------------------
1999 1998 1997
--------- -------- --------
Business Purpose Loans .... $ 64,818 $ 52,335 $ 38,721
Home Equity Loans ......... 701,339 361,760 91,819
Equipment Leases .......... 96,289 70,480 8,004
--------- -------- --------
$ 862,446 $484,575 $138,544
========= ======== ========
Interest and Fee Income. Interest and fee income was $17.4 million for
the year ended June 30, 1999, substantially unchanged from the year ended June
30, 1998. Interest and fee income consists primarily of income earned on loans
and leases while held in our portfolio, premiums earned on whole loan sales and
other ancillary fees collected in connection with loan and lease originations.
Interest income decreased $2.3 million, or 22.1%, to $8.2 million for
the year ended June 30, 1999 as compared to $10.5 million for the year ended
June 30, 1998. This decrease was primarily attributable to a reduction in the
duration of time portfolio loans accrued interest income prior to securitization
and a reduction in the average coupon earned on loans and leases originated,
from 11.63% in fiscal 1998 to 11.30% in fiscal 1999. The decline in the average
coupon in fiscal 1999 primarily resulted from competitive pricing in the home
equity lending market.
Fee income increased $2.3 million, or 34.2%, to $9.2 million for the
year ended June 30, 1999 from $6.9 million for the year ended June 30, 1998. The
increase in fee income was due to an increase in ancillary fees earned in
connection with increased originations and an increase in fees earned on whole
loan sales. During the year ended June 30, 1999, we completed approximately
$105.8 million of whole loan sales as compared to $51.6 million during the year
ended June 30, 1998.
Servicing Income. Servicing income is comprised of contractual and
ancillary fees collected on securitized loans and leases, less amortization of
the servicing assets recorded at the time the loans and leases are securitized.
Servicing income increased $2.8 million, or 597.7%, to $3.3 million for the year
ended June 30, 1999, from $0.5 million for the year ended June 30, 1998. This
increase resulted from the higher average total managed portfolio, which was
$915.8 million during the year ended June 30, 1999 compared to $368.0 million
during the year ended June 30, 1998. As a percentage of the average managed
portfolio, servicing income increased to 0.36% for the year ended June 30, 1999,
from 0.13% for the year ended June 30, 1998, as a result in the origination of
loans with prepayment fees and the collection of other ancillary fees.
Total Expenses. Total expenses increased $23.1 million, or 55.8%, to
$64.6 million for the year ended June 30, 1999, from $41.4 million for the year
ended June 30, 1998. As described in more detail below, this increase was
primarily a result of higher interest expense attributable to sales of
subordinated debt securities and borrowings used to fund loan and lease
originations and increases in sales and marketing, and general and
administrative expenses. These increases related to the growth in loan and lease
originations, the growth in the total managed portfolio and the continued
building of support area infrastructure to support the increases in originated
and managed portfolios.
40
Interest Expense. Interest expense increased $9.2 million, or 70.0%, to
$22.4 million for the year ended June 30, 1999 from $13.2 million for the year
ended June 30, 1998. The increase was attributable to an increase in the amount
of subordinated debt outstanding during fiscal 1999, the proceeds of which were
used to fund loan and lease originations and investments in operations required
to position us for future growth, and the costs related to greater utilization
of warehouse and credit line facilities to fund loan and lease originations.
Average subordinated debt outstanding during the year ended June 30, 1999 was
$156.6 million compared to $85.8 million during the year ended June 30, 1998.
Average interest rates paid on outstanding subordinated debt increased to 9.32%
for the year ended June 30, 1999 from 9.23% for the year ended June 30, 1998 due
to increases in the rates offered on subordinated debt in order to respond to
general increases in market rates and to attract additional funds. The average
outstanding balances under warehouse and other credit lines were $102.6 million
during the year ended June 30, 1999, compared to $57.6 million during the year
ended June 30, 1998.
Provision for Credit Losses. The provision for credit losses on
portfolio loans and leases for fiscal 1999 was $0.9 million, compared to $0.5
million for fiscal 1998. An allowance for credit losses for portfolio loans and
leases and other receivables is maintained primarily to account for loans and
leases that are delinquent and are expected to be ineligible for sale into a
future securitization. The allowance is calculated based upon management's
estimate of the expected collectibility of loans and leases outstanding based
upon a variety of factors, including but not limited to, periodic analysis of
the portfolio, economic conditions and trends, historical credit loss
experience, borrowers ability to repay, and collateral considerations. Although
we maintain an allowance for credit losses at the level we consider adequate to
provide for potential losses, there can be no assurances that actual losses will
not exceed the estimated amounts or that an additional provision will not be
required. The allowance for credit losses was $0.7 million at June 30, 1999 as
compared to $0.9 million at June 30, 1998.
In addition to the allowance for credit losses on portfolio loans and
leases, certain assumptions are made regarding the expected impact of credit
losses on the fair value of interest-only strips and residual interests created
in securitizations. See "Interest-Only Strips and Servicing Assets" for more
information regarding these credit loss assumptions.
41
The following table summarizes changes in the allowance for credit
losses for the fiscal years ended June 30, 1999, 1998 and 1997 (in thousands):
Year Ended June 30,
-------------------------------
1999 1998 1997
------- -------- ----
Balance at beginning of period.......... $ 881 $338 $330
Acquired through acquisition............ - 719 -
Provision for credit losses............. 928 491 106
Charge offs, net of recoveries.......... (1,107) (667) (98)
------- ---- ----
Balance at end of period................ $ 702 $881 $338
======= ==== ====
The following table summarizes the changes in the allowance for credit
losses by loan and lease type for the fiscal year ended June 30, 1999 (in
thousands).
Business Home
Purpose Equity Equipment
Loans Loans Leases Total
-------- ------ --------- -------
Balance at beginning of period . $ 49 $ 433 $ 399 $ 881
Provision for credit losses...... 278 296 354 928
Charge offs, net of recoveries .. (301) (486) (320) (1,107)
----- ----- ----- -------
Balance at end of period......... $ 26 $ 243 $ 433 $ 702
===== ===== ===== =======
The increase in net charge offs in fiscal 1999 primarily relates to the
maturing of the total managed portfolio. Charge offs related to loan and lease
securitizations generally have been recorded in ABFS's books if an impaired loan
is repurchased from the securitization.
Employee Related Costs. Employee related costs increased $0.3 million,
or 5.7% to $5.3 million for the year ended June 30, 1999 from $5.0 million for
the year ended June 30, 1998. The increase was primarily the result of additions
to staff in support of the increased marketing efforts, loan and lease
originations and servicing activities. Management anticipates that these
expenses will continue to increase in the future as our expansion continues and
loan and lease originations continue to increase.
Sales and Marketing Expenses. Sales and marketing expenses increased
$9.4 million, or 65.7%, to $23.6 million for the year ended June 30, 1999 from
$14.2 million for the year-end June 30, 1998. The increases were primarily
attributable to targeted television and radio advertising related to home equity
loans and advertising costs resulting from increased newspaper and direct mail
advertising related to sales of subordinated debt and loan products. During
fiscal 1999, targeted television advertising was intensified in Chicago, Florida
and Georgia. Subject to market conditions, we plan to continue to expand our
service area throughout the United States. As a result, it is anticipated that
sales and marketing expenses will continue to increase in the future.
42
General and Administrative Expenses. General and administrative
expenses increased $3.8 million, or 44.8%, to $12.3 million for the year ended
June 30, 1999 from $8.5 million for the year ended June 30, 1998. The increase
was primarily attributable to increases in rent, telephone, office expenses,
professional fees and other expenses incurred as a result of previously
discussed increases in loan and lease originations and in the volume of total
loans and leases managed during fiscal 1999 and the continued building of
support area infrastructure to support the increases in originations and the
managed portfolio.
Income Taxes. Income taxes increased $1.4 million, or 20.6%, to $7.8
million for the year ended June 30, 1999 from $6.4 million for the year ended
June 30, 1998 due to an increase in income before income taxes. The effective
tax rate for the year ended June 30, 1999 was 35.5%, compared to 36% for the
year ended June 30, 1998.
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
Total Revenues. Total revenues increased $33.4 million, or 128.5%, to
$59.3 million for the year ended June 30, 1998 from $26.0 million for the year
ended June 30, 1997. The increase was attributable to increases in gain on sale
of loans and leases through securitizations and interest and fee income and
servicing income.
Gain on Sale of Loans and Leases. Gain on sale of loans and leases
increased $21.3 million, or 106.5%, to $41.3 million for the year ended June 30,
1998 from $20.0 million for the year ended June 30, 1997. The increase was the
result of selling $384.7 million of loans and leases through securitizations,
including sales of $54.1 million of business purpose loans, $270.9 million of
home equity loans and $59.7 million of equipment leases in fiscal 1998, compared
to the sale of $38.1 million of business purpose loans and $76.9 million of home
equity loans in fiscal 1997. There were no sales of leases through
securitization during the year ended June 30, 1997.
Interest and Fee Income. Interest and fee income increased $11.8
million, or 210.7%, to $17.4 million for the year ended June 30, 1998, from $5.6
million for the year ended June 30, 1997. The increase was primarily due to
increases in the volume of loans and leases originated and retained in our
portfolio prior to securitization and an increase in fee income as a result of
an increase in whole loan sales and other ancillary fees earned in connection
with loan and lease originations.
Servicing Income. Servicing income increased $0.2 million, or 68.2%, to
$0.5 million for the year ended June 30, 1998 from $0.3 million for the year
ended June 30, 1997 as a result of an increase in the average managed portfolio
to $368.0 million during the year ended June 30, 1998 from $118.3 million during
the year ended June 30, 1997.
Total Expenses. Total expenses increased $24.5 million, or 144.4%, to
$41.4 million for the year ended June 30, 1998 from $17.0 million for the year
ended June 30, 1997. This increase was related to the increase in loan and lease
originations, costs associated with a larger managed portfolio of loans and
leases, geographic expansion of our market and the October 1, 1997 acquisition
and operation of New Jersey Mortgage and Investment Corp. and subsidiaries.
43
Interest Expense. Interest expense increased $8.0 million, or 153.8%,
to $13.2 million for the year ended June 30, 1998 from $5.2 million for the year
ended June 30, 1997. The increase was attributable to increases in the amount of
subordinated debt outstanding, greater utilization of warehouse lines of credit
to fund loans and leases and debt assumed and incurred in connection with the
acquisition of New Jersey Mortgage. Average subordinated debt outstanding was
$85.8 million during the year ended June 30, 1998 compared to $44.4 million
during the year ended June 30, 1997.
Average interest rates paid on the subordinated debt increased to 9.23%
for the year ended June 30, 1998 from 8.99% for the year ended June 30, 1997 due
to increases in the rates offered on subordinated debt in order to attract
additional funds and higher rates paid on subordinated debt assumed in the
acquisition of New Jersey Mortgage. Interest expense on lines of credit was $4.2
million for the year ended June 30, 1998 compared to $0.5 million for the year
ended June 30, 1997 due to the increase in warehouse lines to fund loan and
lease originations. In addition, approximately $14.5 million of debt was assumed
in the acquisition of New Jersey Mortgage resulting in approximately $1.1
million of additional interest expense for the year ended June 30, 1998.
Provision for Credit Losses. The allowance for credit losses was $0.9
million at June 30, 1998 as compared to $0.3 million at June 30, 1997. The
provision for credit losses increased by $0.4 million to $0.5 million for the
year ended June 30, 1998 from $0.1 million for the year ended June 30, 1997.
Employee Related Costs. Employee related costs increased $3.4 million,
or 212.5% to $5.0 million for the year ended June 30, 1998 from $1.6 million for
the year ended June 30, 1997. The increase was primarily the result of
additional staff needed to support the increased marketing efforts, loan and
lease originations and servicing activities and the addition of personnel added
upon the acquisition of New Jersey Mortgage.
Sales and Marketing Expenses. Sales and marketing expenses increased
$7.2 million, or 102.9%, to $14.2 million for the year ended June 30, 1998 from
$7.0 million for the year-end June 30, 1997. The increase was attributable to
greater usage of newspaper, direct mail and television advertising relating to
originations of home equity loans and sales of subordinated debt securities.
General and Administrative Expenses. General and administrative
expenses increased $5.4 million, or 174.4%, to $8.5 million for the year ended
June 30, 1998 from $3.1 million for the year ended June 30, 1997. The increase
was attributable to increases in rent, telephone, office expenses, professional
fees and other expenses incurred as a result of previously discussed increases
in loan and lease originations, servicing and branch operations experienced
during the year ended June 30, 1998. In addition, goodwill recorded from the
acquisition of New Jersey Mortgage was amortized on the straight-line method
over fifteen years resulting in a charge of $0.8 million for the year ended June
30, 1998.
44
Income Taxes. Income taxes increased $3.3 million, or 106.5%, to $6.4
million for the year ended June 30, 1998 from $3.1 million for the year ended
June 30, 1997 due to an increase in income before income taxes and an increase
in the effective tax rate from 34% for the year ended June 30, 1997 to 36% for
the year ended June 30, 1998.
Financial Condition
Balance Sheet Information
(in thousands, except per share data)
June 30,
-----------------------------------------------------
1999 1998 1997
--------- ----------- --------
Cash and cash equivalents.......................... $ 22,395 $ 4,486 $ 5,014
Loan and lease receivables, net:
Available for sale........................... 33,776 62,382 35,712
Other........................................ 6,863 4,096 1,144
Interest-only strips and other receivables......... 253,936 100,737 39,644
Servicing rights................................... 43,210 18,472 8,083
Total assets....................................... 396,301 226,551 103,989
Subordinated debt and notes payable................ 270,343 144,585 56,486
Total liabilities.................................. 338,055 183,809 73,077
Total stockholders' equity......................... 58,246 42,742 30,912
Book value per common share........................ $ 16.24 $ 11.55 $ 8.40
June 30, 1999 Compared to June 30, 1998
Total assets increased $169.7 million, or 74.9%, to $396.3 million at
June 30, 1999 from $226.6 million at June 30, 1998 due primarily to increases in
interest-only strips and other receivables, cash and cash equivalents and
servicing rights.
Cash and cash equivalents increased $17.9 million, or 399.2% to $22.4
at June 30, 1999 from $4.5 million at June 30, 1998 primarily due to receipts
from sales of subordinated debt securities.
Interest-only strips and other receivables (comprised mainly of
interest-only and residual strips created in connection with securitizations)
increased $153.2 million, or 152.1%, to $253.9 million at June 30, 1999 from
$100.7 million at June 30, 1998. During fiscal 1999 $777.6 million in loan and
lease securitizations were completed resulting in the recognition of $90.5
million of interest-only strips. At June 30, 1999, other receivables included
$66.1 million due on sold loans compared to $2.4 million at June 30, 1998.
Servicing rights increased $24.7 million, or 133.9%, to $43.2 million
at June 30, 1999 from $18.5 million at June 30, 1998 due primarily to the
recording of $30.3 million of servicing rights obtained in connection with loan
and lease securitizations, partially offset by amortization of servicing rights.
45
Loan and lease receivables - available for sale decreased $28.6
million, or 45.9%, at June 30, 1999, primarily due to the timing and size of
fourth quarter fiscal 1999 securitizations. Mortgage loans securitized in the
fourth quarter of fiscal 1999 were $220.0 million compared to $120.0 million in
the fourth quarter of fiscal 1998.
Total liabilities increased $154.3 million, or 83.9%, to $338.1 million
at June 30, 1999 from $183.8 million at June 30, 1998 due primarily to increases
in subordinated debt and notes payable. The increase in subordinated debt and
notes payable of $125.7 million, or 87.0%, was primarily attributable to $101.2
million of net sales of subordinated debt securities. Subordinated debt in the
amount of $212.9 million was outstanding at June 30, 1999. Additional borrowings
of $51.5 million, net of repayments, were obtained under warehouse and line of
credit facilities to fund lending and leasing activities. See "Liquidity and
Capital Resources" for further detail.
Accounts payable and accrued expenses increased $11.3 million, or
72.4%, to $26.8 million at June 30, 1999 from $15.6 million at June 30, 1998 due
to growth in lending and leasing activities resulting in larger accruals for
interest expense and other operating expenses. Deferred income taxes increased
$5.7 million, or 52.8%, to $16.6 million at June 30, 1999 from $10.9 million at
June 30, 1998 due to timing differences in recognition of income from
securitizations.
June 30, 1998 Compared to June 30, 1997
Total assets increased $122.6 million, or 117.9%, to $226.6 million at
June 30, 1998 from $104.0 million at June 30, 1997 due primarily to increases in
loans and leases available for sale, other receivables and other assets.
Loans and leases available for sale increased $26.7 million, or 74.7%,
to $62.4 million at June 30, 1998, from $35.7 million at June 30, 1998. The
increase was the result of increases in originations, net of sales, of $44.2
million during year ended June 30, 1998 as compared to $19.7 million for the
year ended June 30, 1997. Interest-only strips and other receivables increased
$61.1 million, or 154.1%, to $100.7 million at June 30, 1998, from $39.6 million
at June 30, 1997 and servicing rights increased $10.4 million, or 128.5%, to
$18.5 million at June 30, 1998 from $8.1 million at June 30, 1997, both due to
loan and lease securitizations during fiscal 1998. Other assets increased $15.7
million, or 152.4%, to $26.0 million at June 30, 1998 from $10.3 million at June
30, 1997 due to the recognition of $16.2 million of goodwill, net of
amortization, resulting from the acquisition of New Jersey Mortgage.
46
Total liabilities increased $110.7 million, or 151.4%, to $183.8
million at June 30, 1998 from $73.1 million at June 30, 1997 due primarily to a
net increase in subordinated debt and notes payable and to a lesser extent
increases in other liabilities. The increase in subordinated debt and notes
payable of $88.1 million was due to net sales of subordinated debt of $49.2
million during the year ended June 30, 1998, an increase in warehouse lines of
credit of $26.5 million due to growth in lending and leasing activities, and a
net increase of $12.4 million of debt assumed and incurred in the acquisition of
New Jersey Mortgage. At June 30, 1998, $115.2 million of subordinated debt was
outstanding. Accounts payable and accrued expenses increased $9.5 million, or
155.7%, to $15.6 million at June 30, 1998 due to growth in lending and leasing
activities resulting in larger accruals for interest expense and other operating
expenses. Deferred income taxes increased $6.3 million, or 137.0%, to $10.9
million at June 30, 1998 from $4.6 million at June 30, 1997 due mainly to tax
accruals on income for the year ended June 30, 1998.
Managed Portfolio Quality
Total delinquencies (loans and leases with payments past due more than
30 days) in the total managed portfolio were $37.6 million at June 30, 1999 as
compared to $16.8 million and $3.8 million, respectively, at June 30, 1998 and
1997. Total delinquent loans and leases as a percentage of the total portfolio
serviced (the "delinquency rate") was 3.19% at June 30, 1999 as compared to
3.01% and 2.15%, respectively, at June 30, 1998 and 1997. Increases in the
delinquency rates were attributable to the maturation of the total managed
portfolio, which was $1,176.9 million at June 30, 1999, compared to $559.4
million and $176.7 million, respectively, at June 30, 1998 and 1997. Delinquent
loans and leases in the available for sale portfolio were $1.8 million at June
30, 1999.
Total real estate owned ("REO"), comprising foreclosed properties and
deeds acquired in lieu of foreclosure, increased to $9.9 million, or 0.85% of
the total managed portfolio at June 30, 1999 compared to $0.9 million and $0.6
million, respectively, at June 30, 1998 and 1997. The increase in REO reflects
the seasoning of the portfolio and the results of loss mitigation initiatives of
quick repossession of collateral through accelerated foreclosure processes and
"Cash For Keys" programs. Cash for Keys is a program whereby in certain select
situations, when collateral values of loans support the action, a delinquent
borrower may be offered a monetary payment in exchange for the deed to a
property held as collateral for the loan. This process eliminates the need to
initiate a formal foreclosure process which could take many months. Included in
total REO at June 30, 1999 was $0.7 million carried on our books, and $9.2
million in loan securitization trusts.
47
The following table provides data concerning delinquency experience,
REO and loss experience for the loan and lease portfolio serviced (dollars in
thousands):
June 30,
----------------------------------------------------------------
1999 1998 1997
Delinquency by Type Amount % Amount % Amount %
- -------------------------------------------- ---------- ---- -------- ----- -------- ----
Business Purpose Loans
Total managed portfolio..................... $ 148,932 $101,250 $ 68,979
========== ======== ========
Period of delinquency.......................
31-60 days.............................. $ 1,506 1.01% $ 1,236 1.22% $ 1,879 2.72%
61-90 days.............................. 475 .32 928 .92 462 .67
Over 90 days............................ 8,612 5.78 3,562 3.52 718 1.04
---------- ---- -------- ---- -------- ----
Total delinquencies..................... $ 10,593 7.11% $ 5,726 5.66% $ 3,059 4.43%
========== ==== ======== ==== ======== ====
REO......................................... $ 2,881 $ 611 $ 605
========== ======== ========
Home Equity Loans
Total managed portfolio..................... $ 858,806 $349,685 $ 98,211
========== ======== ========
Period of delinquency.......................
31-60 days.............................. $ 4,836 .56% $ 3,726 1.08% $ 262 .27%
61-90 days.............................. 4,149 .48 1,022 .30 341 .35
Over 90 days............................ 15,346 1.79 3,541 1.02 115 .12
---------- ---- -------- ---- -------- ----
Total delinquencies..................... $ 24,331 2.83% $ 8,289 2.40% $ 718 .73%
========== ==== ======== ==== ======== ====
REO......................................... $ 7,067 $ 311 $ -
========== ======== ========
Equipment Leases
Total managed portfolio..................... $ 169,180 $108,463 $ 9,461
========== ======== ========
Period of delinquency.......................
31-60 days.............................. $ 389 .23% $ 1,000 .92% $ 29 .31%
61-90 days.............................. 425 .25 320 .30 - -
Over 90 days............................ 1,826 1.08 1,478 1.36 4 .04
---------- ---- -------- ---- -------- ----
Total delinquencies..................... $ 2,640 1.56% $ 2,798 2.58% $ 33 .35%
========== ==== ======== ==== ======== ====
Combined
- --------------------------------------------
Total managed portfolio..................... $1,176,918 $ 559,398 $176,651
========== ======== ========
Period of delinquency.......................
31-60 days.............................. $ 6,731 .57% $ 5,962 1.07% $ 2,170 1.23%
61-90 days.............................. 5,049 .43 2,270 .41 803 .45
Over 90 days............................ 25,784 2.19 8,581 1.53 837 .47
---------- ---- -------- ---- -------- ----
Total delinquencies..................... $ 37,564 3.19% $ 16,813 3.01% $ 3,810 2.15%
========== ==== ======== ==== ======== ====
REO......................................... $ 9,948 $ 922 $ 605
========== ======== ========
Losses experienced during the period(a)(b).. $ 1,137 .12% $ 667 .12% $ 98 .07%
========== ==== ======== ==== ======== ====
(a) Percentage based on average total managed portfolio.
(b) Losses recorded on our books were $1.1 million, losses absorbed by
securitization trusts were $30,000 for the year ended June 30, 1999. We recorded
all losses on our books for the years ended June 30, 1998 and 1997.
48
The following table summarizes net charge off experience by loan type
for the fiscal years ended June 30, 1999, 1998 and 1997 (in thousands):
June 30,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Business purpose loans.............. $ 301 $138 $34
Home equity loans................... 486 - -
Equipment Leases.................... 320 529 64
------- ---- ---
Total............................... $ 1,107 $667 $98
======= ==== ===
Interest Rate Risk Management
A primary market risk exposure that we face is interest rate risk.
Profitability and financial performance is sensitive to changes in U.S. Treasury
yields, LIBOR yields and the spread between the effective rate of interest
received on loans and leases available for sale or securitized (generally fixed
interest rates) and the interest rates paid pursuant to credit facilities or the
pass-through rate to investors for interests issued in connection with
securitizations. Also, a substantial and sustained increase in market interest
rates could adversely affect our ability to originate and purchase loans and
leases. The overall objective of our interest rate risk management strategy is
to mitigate the effects of changing interest rates on profitability and the fair
value of interest rate sensitive assets (primarily interest-only strips,
servicing rights and loans and leases available for sale).
49
Interest Rate Sensitivity - The following table provides information
about financial instruments that are sensitive to changes in interest rates. For
interest-only strips and servicing rights, the table presents projected
principal cash flows utilizing certain assumptions including prepayment and
default rates. For debt obligations, the table presents principal cash flows and
related average interest rates by expected maturity dates (dollars in
thousands):
Amount Maturing in Years Ending June 30,
-------------------------------------------------------------------------
There- Fair
2000 2001 2002 2003 2004 after Total Value
---- ---- ---- ---- ---- ----- ----- -----
Rate Sensitive
Assets:
Loans and leases
available for sale(a) $ 32,512 $ 14 $ 16 $ 18 $ 20 $ 1,196 $ 33,776 $ 35,152
Interest-only strips 29,611 38,091 37,921 34,987 27,900 106,082 274,592 178,217
Servicing rights 15,208 11,829 8,968 6,771 5,101 13,777 61,654 43,210
Investments held to
maturity 126 128 133 143 145 763 1,438 911
Rate Sensitive
Liabilities:
Fixed interest rate
borrowings 119,683 34,923 25,055 9,049 12,315 13,148 214,173 214,745
Average interest rate 8.71% 9.46% 10.22% 10.56% 10.64% 11.36% 9.36%
Variable interest rate
borrowings $ 56,170 $ - $ - $ - $ - $ - $ 56,170 $ 56,170
Average interest rate 6.45% 6.45%
(a)Loans and leases available for sale are generally held for less than three
months prior to securitization therefore all loans and leases which qualify
for securitization are reflected as maturing in the year ended June 30, 2000.
Loans and Leases Available for Sale - Gain on sale of loans and leases
may be unfavorably impacted to the extent fixed-rate mortgage loans or leases in
the available for sale portfolio are held prior to securitization. A significant
variable affecting the gain on sale of loans and leases in a securitization is
the spread between the average coupon rate on fixed rate loans and leases, and
the weighted average pass-through rate to investors for interests issued in
connection with the securitization. Although the average loan and lease coupon
rate is fixed at the time the loan or lease is originated, the pass-through rate
to investors is not fixed until the pricing of the securitization which occurs
just prior the sale of the loans and leases. In addition, a portion of the
certificates are based on a floating interest rate. Therefore, if market rates
required by investors increase prior to securitization of the loans and leases,
the spread between the average coupon rate on the loans and leases and the
pass-through rate to investors may be reduced or eliminated.
Hedging strategies are utilized in an attempt to mitigate the effect of
changes in interest rates on fixed-rate loan and lease portfolios between the
date of origination and the date of securitization. These strategies include the
utilization of derivative financial instruments such as futures and forward
pricing on securitizations. The nature and quality of hedging transactions are
determined based on various factors, including market conditions and the
expected volume of mortgage loan and lease originations and purchases. The gain
or loss derived from these hedging transactions is deferred and recognized as an
adjustment to the gain on sale of loans and leases when the loans and leases are
50
securitized. During fiscal 1999, net losses of approximately $2.0 million were
incurred on hedging transactions (futures contracts), which were recognized as
an offset to the gains on sale recorded on securitizations during the year. At
June 30, 1999 no such contracts were outstanding. At June 30, 1999, we were
obligated to satisfy a lease securitization prefund requirement of $9.0 million
of business equipment leases.
In the future we may expand the types of derivative financial
instruments we use to hedge interest rate risk. Such instruments could include
interest rate swaps and interest rate options or other derivative instruments.
We have implemented a hedging strategy in an attempt to mitigate the
effect of changes in market value of fixed-rate mortgage loans held for sale.
However, an effective interest rate risk management strategy is complex and no
such strategy can completely insulate us from interest rate changes. The nature
and timing of hedging transactions may impact the effectiveness of hedging
strategies. Poorly designed strategies or improperly executed transactions may
increase rather than mitigate risk. In addition, hedging involves transaction
and other costs. Such costs could increase as the period covered by the hedging
protection increases. It is expected that such loss would be offset by income
realized from the securitizations in that period or in future periods. As a
result, we may be prevented from effectively hedging fixed-rate loans held for
sale, without reducing income in current or future periods due to the costs
associated with hedging activities. See "Risk Factors - Our failure to implement
an effective hedging strategy could result in losses or negatively impact
earnings."
51
Interest-only Strips and Servicing Assets - A significant decline in
market interest rates could increase the level of loan prepayments, thereby
decreasing the size of the total managed loan and lease portfolio and the
related projected cash flows. Higher than anticipated rates of loan prepayments
could require a write down of the fair value of related interest-only strips and
servicing rights, adversely impacting earnings during the period of adjustment.
The following chart presents certain key assumptions used in the initial
valuations and June 30, 1999 revaluation of residual interests from
securitizations (interest-only strips and mortgage servicing assets):
Initial Periodic
Valuation Revaluation
---------------------------------------------------------------------------
Discount rates
Home equity loans 11.0% 11.0%
Business purpose loans 11.0% 11.0%
Business equipment leases 11.0% 11.0%
Annual prepayment rates
Home equity loans 2.0%-24.0%(a) 2.0%-24.0%(a)
Business purpose loans 3.0%-13.0%(b) 3.0%-15.0%(b)
Business equipment leases -- (c) -- (c)
Annual credit loss rates
Home equity loans 0.25% 0.25%
Business purpose loans 0.25% 0.25%
Business equipment leases 0.50% 0.50%
Actual cumulative credit losses
Home equity loans -- 0.05%
Business purpose loans -- 0.19%
Business equipment leases -- 0.71%
---------------------------------------------------------------------------
(a) Ramped over 12 to 18 months
(b) Ramped over 24 months
(c) Residual values are continuously adjusted based on actual
experience.
It is estimated that a 100 basis point (1.0%) increase in prepayment
rates would decrease the fair value of interest-only strips by approximately
$4.3 million and the fair value of servicing assets by approximately $1.0
million.
We attempt to minimize prepayment risk on interest-only strips and
servicing assets by requiring prepayment fees on business purpose loans and home
equity loans, where permitted by law. Currently, approximately 94% of business
purpose loans and 80% of home equity loans in the managed portfolio are subject
to prepayment fees. In addition, we have found that credit impaired borrowers
are less sensitive to interest rates than monthly payment balances further
reducing prepayment expectations.
Subordinated Debt - We also experience interest rate risk to the extent
that as of June 30, 1999 approximately $93.6 million of our liabilities were
comprised of subordinated debt with scheduled maturities of greater than one
year. To the extent that market interest rates demanded for subordinated debt
52
increase in the future, the rates paid on replacement debt could exceed rates
currently paid thereby increasing interest expense and reducing net income.
Liquidity and Capital Resources
Our business requires continual access to short and long-term sources
of debt financing. Our cash requirements include the funding of loan and lease
originations, payment of interest expense, funding of overcollaterization
requirements in connection with securitizations, payment of operating expenses
and funding of capital expenditures.
We continue to significantly rely on access to the asset-backed
securities market through securitizations to generate cash proceeds for the
repayment of debt and to fund ongoing operations. As a result of the terms of
the securitizations, we will receive less cash flow from the portfolios of loans
and leases securitized than we would otherwise receive absent securitizations.
Additionally, pursuant to the terms of the securitizations, we will act as the
servicer of the loans and leases and in that capacity will be obligated to
advance funds in certain circumstances which may create greater demands on our
cash flow than either selling loans with servicing released or maintaining a
portfolio of loans and leases.
A significant portion of loan originations are non-conforming mortgages
to subprime borrowers. Certain participants in the non-conforming mortgage
industry have experienced greater than anticipated losses on their
securitization residual interests due to the effects of increased credit losses
and increased prepayment rates, resulting in some competitors exiting the
business or recording valuation allowances or write downs for these conditions
in fiscal 1999. In addition, unusual movements in the capital markets in fiscal
1999 resulted in increased demand for U.S. Treasury securities which had an
adverse impact on the demand for asset-backed securities including those backed
by non-conforming mortgage loans. As a result, some participants experienced
restricted access to capital required to fund loan originations, and have been
precluded from participation in the asset-backed securitization market. However,
we have maintained our ability to obtain funding and to securitize loans and
leases. Factors that have minimized the effect of adverse market conditions on
ABFS include our ability to originate loans and leases through established
retail channels, focus on credit underwriting, assessment of prepayment fees on
loans, diversification of lending in the home equity, business loan and
equipment lease markets and the ability to raise capital through sales of
subordinated debt securities pursuant to a registered public offering.
Subject to economic, market and interest rate conditions, we intend to
continue to implement additional securitizations of our loan and lease
portfolios. Any delay or impairment in our ability to securitize loans and
leases, as a result of market conditions or otherwise, could adversely affect
the results of operations.
To a limited extent, we intend to continue to augment the interest and
fee income earned on loan and lease portfolios by selling loans and leases
either at the time of origination or from our portfolio to unrelated third
parties. These transactions also create additional liquid funds available for
lending activities.
53
We also rely on borrowings such as subordinated debt and warehouse
credit facilities to fund operations. At June 30, 1999, a total of $212.9
million of subordinated debt was outstanding, and credit facilities totaling
$375.0 million were available, of which $54.7 million was drawn upon at such
date.
During fiscal 1999, we sold $101.3 million in principal amount of
subordinated debt securities with maturities ranging between one day and ten
years. As of June 30, 1999, approximately $206.9 million of subordinated debt
was outstanding. Under a shelf registration statement declared effective by the
Securities and Exchange Commission on October 20, 1998, we registered $250.0
million of subordinated debt of which $122.0 million was available for issuance
at June 30, 1999. The proceeds from sales of subordinated debt securities will
be used to fund general operating and lending activities. We intend to meet our
obligation to repay such debt as it matures with income from operations,
including securitization or sale of loans or leases, working capital and cash
generated from additional debt financing. The utilization of funds for the
repayment of such obligations should not adversely affect operations.
The following is a description of the warehouse and line of credit
facilities that are utilized to fund origination of loans and leases prior to
securitization. All of these facilities are senior in right of payment to the
subordinated debt.
Our subsidiaries had an aggregate $100.0 million Interim Warehouse and
Security Agreements with Prudential Securities Credit Corporation expiring
August 31, 1999 to fund loan originations. The agreement was subsequently
increased to $150.0 million and extended to August 31, 2000. The obligations
under these agreements are guaranteed by ABFS. Under these agreements, the
subsidiaries may obtain advances subject to certain conditions, which extensions
of credit bear interest at a specified margin over the LIBOR rate. The
obligations under these agreements are collateralized by pledged loans. At June
30, 1999, $0.1 million of this facility was drawn upon.
We along with certain of our subsidiaries, obtained a $150.0 million
warehouse credit facility from a syndicate of banks led by Chase Bank of Texas
N.A. expiring October 1, 2000. Under this warehouse facility, advances may be
obtained, subject to certain conditions, including sublimits based upon the type
of collateral securing the advance. Interest rates on the advances are based
upon 30-day LIBOR plus a margin. Obligations under the facility are
collateralized by certain pledged loans and other collateral related thereto.
The facility also requires the obligation to meet certain financial ratios and
contains restrictive covenants, including covenants limiting loans to and
transaction with affiliates, the issuance of additional debt, and the types of
investments that can be purchased. At June 30, 1999, $42.6 million of this
facility was drawn upon.
In September 1998 our subsidiaries, American Business Leasing, Inc. and
Federal Leasing Corp, entered into a credit agreement with First Union National
Bank pursuant to which First Union committed to extend $20.0 million of credit
in the form of a warehouse line of credit to such entities to enable them to
fund eligible lease receivables. The agreement terminates in September 2000.
54
Under the First Union line of credit, American Business Leasing and Federal
Leasing may obtain advances in increments of $500,000 or greater, subject to
certain conditions, which extensions of credit shall bear interest at either the
LIBOR rate plus a margin or the prime rate set by First Union less a margin at
the borrower's option. This agreement has a term of two years unless accelerated
upon an event of default as described in the agreement. The obligation under the
First Union line of credit is collateralized by pledged leases and other
collateral related thereto. This obligation is guaranteed by us and certain of
our subsidiaries. At June 30, 1999, $3.8 million of this line of credit was
being utilized.
In October 1998, American Business Leasing and American Business Lease
Funding Corporation, a wholly-owned subsidiary of American Business Leasing,
entered into a $100.0 million commercial paper conduit underwritten by First
Union Capital Markets to finance equipment lease production. The agreement
allows for up to two sales of equipment leases per month into the conduit. The
agreement terminates on October 14, 1999 unless terminated earlier in the event
of default described therein. The cost of financing is the average interest rate
on commercial paper plus a margin. At June 30, 1999, $3.2 million of this
facility was being utilized. If we do not extend the term of this agreement, we
will utilize other lines of credit currently available to us to fund lease
production or may explore other financing arrangements.
In December 1998, we and our subsidiaries, American Business Credit,
Home American Credit and New Jersey Mortgage entered into an agreement with
Chase Bank pursuant to which Chase Bank committed to extend $5.0 million of
credit in the form of a Security Agreement against the Class R Certificate of
the ABFS Mortgage Loan Trust 1998-2. Under the Chase Bank line of credit
American Business Credit, Home American Credit and New Jersey Mortgage may
borrow up to $5.0 million, subject to certain conditions, which extensions of
credit shall bear interest at the LIBOR rate plus a margin. Such agreement has a
term of one year unless accelerated upon an event of default as described in
such agreement. At June 30, 1999, $5.0 million of this line of credit was being
utilized.
As of June 30, 1999, $175.9 million of debt was scheduled to mature
during the twelve months ending June 30, 2000 which was mainly comprised of
maturing subordinated debt, warehouse lines of credit and other debt incurred in
connection with the acquisition of New Jersey Mortgage. We currently expect to
refinance the maturing debt through extensions of maturing debt or new debt
financing and, if necessary, may retire the debt through cash flow from
operations and loan sales or securitizations. Despite the current use of
securitizations to fund loan growth, we are also dependent upon other borrowings
to fund a portion of our operations. We intend to continue to utilize debt
financing to fund operations in the future.
Any failure to renew or obtain adequate funding under a warehouse
credit facility, or other borrowings, or any substantial reduction in the size
or pricing in the markets for loans and leases, could have a material adverse
effect on our results of operations and financial condition. To the extent we
are not successful in maintaining or replacing existing financing, we may have
to curtail loan and lease production activities or sell loans and leases rather
than securitize them, thereby having a material adverse effect on our results of
operations and financial condition.
55
We lease our corporate headquarters facilities under a five-year
operating lease expiring in January 2003 at a minimum annual rental of
approximately $2.2 million. The lease contains a renewal option for an
additional period at increased annual rental. We also leases a facility in
Roseland, New Jersey which functions as the loan production headquarters for New
Jersey Mortgage and its subsidiaries at an annual rental cost of approximately
$0.8 million. The current lease term expires on July 31, 2003 and contains a
renewal option for an additional term of five years at an increased annual
rental. In addition, branch offices are leased on a short-term basis in various
cities throughout the United States. The leases for the branch offices are not
material to operations. See Note 14 of the Notes to Consolidated Financial
Statements for information regarding lease payments.
Year 2000 Update
A Year 2000 ("Y2K") Task Force was established to assess Y2K issues and
to implement a Y2K compliance program. The Task Force, which meets weekly,
includes members of the Information Technology Department, Finance Department,
Legal Department, representatives from all business units, and an independent
consultant with Y2K expertise. The Task Force reports monthly to executive
management. The Task Force has completed an assessment of the core information
technology (IT) systems and is continuing the process of evaluating the
remainder of the non-core IT systems as well as non-IT systems. The non-IT
systems include the telecommunications systems, business machines and building
and premises systems.
The Task Force has adopted a five-phase approach to assess Y2K issues
and to address those issues that are reasonably within its control:
Phase 1 - Awareness: One of the first tasks performed by the Task Force
was to generate greater awareness of Y2K issues. The awareness process included
contacting all business units to educate management regarding the Y2K program
and to discern any potential issues. Each business unit has assigned a point of
contact to assist the Task Force in the assessment and compliance process.
Awareness efforts will continue throughout the span of the project.
Phase 2 - Assessment: An inventory has been conducted of all IT
hardware and software, including business applications, operating systems,
third-party products, and internal and external interfaces that may be at risk.
Each critical system was reviewed, rated for importance to business operations
and identified as "retain" or "retire." This process has been completed for all
core and non-core IT systems. We are in the process of replacing most core IT
systems due to strategic and growth reasons unrelated to the Y2K issue. The
process began in 1996 and completion is anticipated by September 30, 1999. All
systems acquired as part of this enhancement project must be certified by their
vendors as Y2K compliant. Non-IT systems have been evaluated, which include the
telecommunications systems, business machines, building and premises systems and
key suppliers, whose Y2K failures could have a material impact on our operation.
This part of the assessment, which was dependent on obtaining specific responses
from third parties, was completed as of June 30, 1999. The assessment phase also
includes the development of appropriate response plans, which may include
repair, conversion, replacement or elimination of affected systems.
56
Phase 3 - Renovation: This phase involves the remediation of Y2K issues
identified as a result of the assessment. With the exception of a single,
vendor-provided application, all core IT system remediation efforts were
completed on schedule (June 30, 1999). The vendor of the non-compliant
application has committed to remediate and successfully test the system,
achieving Y2K compliance by September 30, 1999 (See Phase 4 - Validation).
Phase 4 - Validation: This phase involves establishing a test
environment, performing systems tests and validating the results. The systems to
be used for testing have been acquired, and the validation process has begun.
Y2K testing and verification of all new "replacement" systems will be done as
part of their implementation process. Test plans have been written, with
verification testing projected to be completed by September 30, 1999. We have
successfully completed Y2K testing of a suite of applications currently
providing service to many of the key business units. In addition, the data
processing infrastructure which includes mainframe, network and server related
equipment, has been tested and validated as compliant.
Phase 5 - Implementation: This phase involves the deployment of the
appropriate Y2K compliant strategy based on the results of the Assessment,
Renovation and Validation phases.
Year 2000 Risks and Contingency Plans
The majority of the IT hardware and infrastructure is less than 2 years
old, minimizing exposure to Y2K issues. This inventory is being checked against
vendor provided Y2K information for validation. Also, we intend that all new
hardware and software acquisitions are represented and warranted by the vendors
as Y2K compliant and that any systems developed by in-house programmers will
continue to be created using Y2K compliant tools, platforms, and procedures.
We have contacted suppliers who provide necessary goods and services,
including banking institutions who provide financial services, to evaluate their
Y2K compliance plans. As responses are received, their responses are reviewed
and evaluated to ensure that no Y2K related event will materially impede the
ability of our suppliers to continue to provide needed goods and services as the
Year 2000 is approached and reached. We believe all responses received indicate
that these goods and services are, or will be, Year 2000 compliant. The failure
of our suppliers to address their Y2K issues on a timely basis may have a
material adverse effect on our operations.
Based upon the current status, we have targeted the end of September
1999 for completion of our Y2K compliance program. However, no assurance can be
given that we will meet this time frame. We currently estimate that the costs
directly associated with the Y2K compliance program will be approximately $0.5
million. This budgeted amount does not include the costs associated with the
"replacement" systems as referenced in Phase 2. The funds necessary to complete
the systems replacement project and the Y2K compliance program are included in
the Information Technology operating budget. Approximately $0.1 million of the
amount budgeted for costs directly associated with the Y2K compliance program
have been expended as of June 30, 1999.
57
We are in the process of developing a contingency plan that will be
used in the event that any hardware, software or other computer systems, or
those of our vendors are not Y2K compliant, based on risks identified as a
result of the assessment and testing phase of our Year 2000 compliance program.
While we fully expect that the precautions being taken will prepare us
for entering Year 2000, there is always the potential for risk. Our failure or
any of our material suppliers failure to bring their systems into Year 2000
compliance on a timely basis may have a material adverse effect on our
operations.
Fourth Quarter Results
For the fourth quarter of fiscal 1999, net income increased $0.3
million, or 6.5%, to $3.7 million from $3.4 million for the comparable period of
fiscal 1998. Basic earnings per common share increased 8.6% to $1.01 on average
common shares of 3,626,072, compared to $0.93 per share on average common shares
of 3,699,576 for the comparable period of fiscal 1998. Diluted earnings per
common share increased 11.2% to $0.99 on average common shares of 3,730,236,
compared to $0.89 per share on average common shares of 3,905,831 for the
comparable period of fiscal 1998.
The increases in net income and earnings per share primarily resulted
from the impact of increases in the volume of loans and leases securitized
during the periods and increases in the collection of fee income due to the
increase in the total managed portfolio.
Recent Accounting Pronouncements
Set forth below are recent accounting pronouncements which may have a
future effect on operations. These pronouncements should be read in conjunction
with the significant accounting policies, which have been adopted, that are set
forth in Note 1 of the Notes to the Consolidated Financial Statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities."
("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment
(fair value hedge), (b) a hedge of the exposure to variable cash flows of a
forecasted transaction (cash flow hedge), or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. At the time of issuance SFAS No. 133 was to be effective
on a prospective basis for all fiscal quarters of fiscal years beginning after
June 15, 1999. Subsequently, the effective date of the standard was delayed
until years beginning after June 15, 2000. The adoption of this standard is not
expected to have a material effect on our financial condition or results of
operations.
58
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information required to be included in this Item 7A regarding
Quantitative and Qualitative Disclosures about Market Risk is incorporated by
reference from "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Interest Rate Risk Management."
Item 8. Financial Statements
Page
Report of Independent Certified Public Accountants 60
Consolidated Balance Sheets 61
Consolidated Statements of Income 62
Consolidated Statements of Stockholders' Equity 63
Consolidated Statements of Cash Flow 64
Notes to Consolidated Financial Statements 66
59
Report of Independent Certified Public Accountants
American Business Financial Services, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheets of American
Business Financial Services, Inc. and subsidiaries as of June 30, 1999 and 1998,
and the related consolidated statements of income and stockholders' equity, and
cash flow for each of the years in the three-year period ended June 30, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Business
Financial Services, Inc. and subsidiaries as of June 30, 1999 and 1998, and the
consolidated results of their operations and their cash flow for each of the
years in the three-year period ended June 30, 1999 in conformity with generally
accepted accounting principles.
In January 1999, the Company adopted Financial Accounting Standards Board
Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise". This change is discussed in note 1 of the Notes to Consolidated
Financial Statements.
/s/ BDO Seidman, LLP
Philadelphia, Pennsylvania
September 9, 1999
60
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Balance Sheets
===============================================================================
June 30, 1999 1998
- -------------------------------------------------------------------------------
(dollar amounts in thousands)
Assets
Cash and cash equivalents $ 22,395 $ 4,486
Loan and lease receivables, net
Available for sale 33,776 62,382
Other 6,863 4,096
Interest-only strips and other receivables 253,936 100,737
Prepaid expenses 1,671 2,572
Property and equipment, net 10,671 7,785
Servicing rights 43,210 18,472
Other assets 23,779 26,021
- -------------------------------------------------------------------------------
Total assets $ 396,301 $ 226,551
===============================================================================
Liabilities and Stockholders' Equity
Liabilities
Subordinated debt and notes payable $ 270,343 $ 144,585
Accounts payable and accrued expenses 26,826 15,563
Deferred income taxes 16,604 10,864
Other liabilities 24,282 12,797
- -------------------------------------------------------------------------------
Total liabilities 338,055 183,809
- -------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, par value $.001
Authorized, 1,000,000 shares
Issued and outstanding, none -- --
Common stock, par value $.001
Authorized, 9,000,000 shares
Issued: 3,703,514 shares in 1999
(including treasury shares of 116,550
in 1999), and 3,699,576 shares in 1998 3 3
Additional paid-in capital 23,339 23,256
Accumulated other comprehensive income 3,354 --
Retained earnings 33,596 20,083
Treasury stock, 116,500 shares at cost (1,446) --
- -------------------------------------------------------------------------------
58,846 43,342
Note receivable (600) (600)
- -------------------------------------------------------------------------------
Total stockholders' equity 58,246 42,742
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 396,301 $ 226,551
===============================================================================
See accompanying notes to consolidated financial statements.
61
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Income
===============================================================================
Year ended June 30, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
(dollar amounts in thousands, except per share data)
Revenues
Gain on sale of loans and leases $65,640 $41,316 $20,043
Interest and fees 17,424 17,386 5,584
Servicing income 3,321 476 283
Other income 39 157 52
- ----------------------------------------------------------------------------------------------------
Total revenues 86,424 59,335 25,962
- ----------------------------------------------------------------------------------------------------
Expenses
Interest 22,427 13,190 5,175
Provision for credit losses 928 491 106
Employee-related costs 5,318 5,030 1,618
Sales and marketing 23,595 14,237 6,964
General and administrative 12,305 8,497 3,097
- ----------------------------------------------------------------------------------------------------
Total expenses 64,573 41,445 16,960
- ----------------------------------------------------------------------------------------------------
Income before provision for income taxes 21,851 17,890 9,002
Provision for income taxes 7,763 6,435 3,062
- ----------------------------------------------------------------------------------------------------
Net income $14,088 $11,455 $ 5,940
====================================================================================================
Earnings per common share
Basic $ 3.83 $ 3.10 $ 2.03
Diluted $ 3.72 $ 2.98 $ 1.95
====================================================================================================
Average common shares (in thousands)
Basic 3,682 3,692 2,921
Diluted 3,791 3,847 3,049
====================================================================================================
See accompanying notes to consolidated financial statements.
62
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
===============================================================================
Year ended June 30, 1999, 1998 and 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
------------------- Accumulated
Number Additional Other Total
Of Shares Paid-In Comprehensive Retained Treasury Note Stockholders'
Outstanding Amount Capital Income Earnings Stock Receivable Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(dollar amounts in thousands)
Balance, June 30, 1996 2,353 $ 2 $ 1,932 $ -- $ 3,057 $ -- $ (600) $ 4,391
Sale of common stock,
net of offering expenses of $2,261 1,150 1 20,737 -- -- -- -- 20,738
Cash dividends ($.06 per share) -- -- -- -- (158) -- -- (158)
Net income -- -- -- -- 5,940 -- -- 5,940
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 3,503 3 22,669 -- 8,839 -- (600) 30,911
Common stock issued for acquisition 20 -- 500 -- -- -- -- 500
Issuance of non-employee stock options -- -- 87 -- -- -- -- 87
Cash dividends ($.06 per share) -- -- -- -- (211) -- -- (211)
Net income -- -- -- -- 11,455 -- -- 11,455
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 3,523 3 23,256 -- 20,083 -- (600) 42,742
Comprehensive income:
Net income -- -- -- -- 14,088 -- -- 14,088
Unrealized gains on investment securities -- -- -- 3,354 -- -- -- 3,354
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- 3,354 14,088 -- -- 17,442
Issuance of non-employee stock options -- -- 73 -- -- -- -- 73
Exercise of stock options 4 -- 10 -- -- -- -- 10
Cash dividends ($0.165 per share) -- -- -- -- (575) -- -- (575)
Repurchase of treasury shares (111) -- -- -- -- (1,446) -- (1,446)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 3,416 $ 3 $ 23,339 $ 3,354 $ 33,596 $(1,446) $ (600) $ 58,246
==================================================================================================================================
See accompanying notes to consolidated financial statements
63
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
===============================================================================
Year ended June 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
(dollar amounts in thousands)
Cash flows from operating activities
Net income $ 14,088 $ 11,454 $ 5,940
Adjustments to reconcile net income to
net cash used in operating activities
Gain on sales of loans and leases (65,640) (41,316) (20,051)
Depreciation and amortization 10,826 5,340 1,992
Provision for credit losses 928 491 106
Provision for credit losses from acquired
subsidiary -- 694 --
Accounts written off, net (1,107) (667) (98)
Loans and leases originated for sale (909,372) (486,196) (136,358)
Proceeds from sale of loans and leases 819,814 418,609 117,823
(Increase) decrease in accrued interest
and fees on loan and lease receivables (2,767) 6,164 (1,288)
Decrease in interest-only strips and other
receivables 7,046 7,177 3,162
Decrease (increase) in prepaid expenses 901 (1,391) (1,266)
Increase in accounts payable and
accrued expenses 11,465 9,199 2,949
Increase in deferred income taxes 5,539 5,333 3,125
Increase in loans in process 11,484 6,455 4,001
Other, net (9,113) (12,808) (6,946)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (105,908) (71,462) (26,909)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Loan and lease payments received 9,200 19,003 4,555
Leases originated for portfolio -- -- (8,004)
Purchase of property and equipment (5,819) (4,085) (1,738)
Proceeds from sale of property and equipment 684 -- --
Decrease in securitization gain receivable -- 2,884 107
Initial overcollateralization of loans (4,825) (5,378) (3,450)
Purchase of investments -- (2,986) (5,000)
Principal receipts and maturity of investments 3,428 5,101 81
Purchase of subsidiary, net -- (9,585) --
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 2,668 4,954 (13,449)
- ----------------------------------------------------------------------------------------------------------------
64
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
===============================================================================
Year ended June 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
(dollar amounts in thousands)
Cash flows from financing activities
Financing costs incurred $ (2,986) $ (2,041) $ (1,053)
Proceeds from issuance of subordinated
debentures 168,357 73,884 33,991
Principal payments on subordinated
debentures (70,636) (25,044) (11,125)
Net borrowings on
revolving lines of credit 25,241 19,750 (2,348)
Proceeds from repurchase agreement 4,677 -- --
Principal payments on debt, other (1,566) (445) (18)
Dividends paid (575) (211) (158)
Recorded fair value of options granted 73 87 --
Exercise of employee stock options 10 -- --
Repurchase of treasury stock (1,446) -- --
Proceeds from public offering, net of related
costs -- -- 20,738
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 121,149 65,980 40,027
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents $ 17,909 $ (528) $ (331)
Cash and cash equivalents at beginning of year 4,486 5,014 5,345
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 22,395 $ 4,486 $ 5,014
==============================================================================================================
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 18,900 $ 10,647 $ 2,877
==============================================================================================================
Income taxes $ 3,750 $ 50 $ --
==============================================================================================================
Supplemental disclosure of noncash financing activity
Noncash transaction recorded in connection with
acquisition of subsidiary
Decrease in acquisition debt $ (1,001) $ (3,418) $ --
Decrease in loan and lease receivables 1,001 3,418 --
See accompanying notes to consolidated financial statements.
65
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
1. Summary of Business
Significant
Accounting American Business Financial Services, Inc.
Policies ("ABFS"), together with its subsidiaries (the
"Company"), is a diversified retail financial
service organization operating throughout the
United States. The Company originates, sells and
services loans to business secured by real estate
and other business assets, mortgage and home
equity loans, typically to credit impaired
borrowers secured by first and second mortgages
and business equipment leases. In addition the
Company sells subordinated debt securities to the
public, the proceeds of which are used to fund
loan and lease originations and the Company's
operations.
Basis of Financial Statement Presentation
The consolidated financial statements include the
accounts of ABFS and its subsidiaries (all of
which are wholly owned.) The consolidated
financial statements have been prepared in
accordance with generally accepted accounting
principles. All significant intercompany balances
and transactions have been eliminated. In
preparing the consolidated financial statements,
management is required to make estimates and
assumptions which affect the reported amounts of
assets and liabilities as of the date of the
consolidated financial statements and the reported
amounts of revenues and expenses during the
reporting period. Actual results could differ from
those estimates. These estimates include, among
other things, estimated prepayment, credit loss
and discount rates on loans and leases sold with
servicing retained, estimated servicing revenues
and costs, valuation of collateral owned and
determination of the allowance for credit losses.
Certain prior period financial statement balances
have been reclassified to conform to current
period presentation. All outstanding share,
average common share, earnings per common share
and stock option amounts have been retroactively
adjusted to reflect the effect of a 5% stock
dividend declared August 18, 1999. See note 10 for
further description.
66
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
Cash and Cash Equivalents
Cash equivalents consist of short-term investments
with an initial maturity of three months or less.
Loan and Lease Receivables
Loan and lease receivables -available for sale are
loans and leases the Company plans to sell or
securitize and are carried at the lower of
aggregate cost (principal balance, including
unamortized origination costs and fees) or market
value. Market value is determined by quality of
credit risk, types of loans originated, current
interest rates, economic conditions, and other
relevant factors.
Loan and lease receivables -other is comprised
mainly of accrued interest and fees on loans and
leases and lease equipment residuals receivable
from a third party.
Allowance for Credit Losses
The Company's allowance for credit losses on
portfolio loans and leases is maintained to
account for loans and leases that are delinquent
and are expected to be ineligible for sale into a
securitization. The allowance is calculated based
upon management's estimate of the expected
collectibility of loans and leases outstanding
based upon a variety of factors, including but not
limited to, periodic analysis of the portfolio,
economic conditions and trends, historical credit
loss experience, borrowers ability to repay, and
collateral considerations.
Additions to the allowance arise from the
provision for credit losses charged to operations
or from the recovery of amounts previously charged
off. Loan and lease charge offs reduce the
allowance.
67
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
In addition to the allowance for credit losses on
portfolio loans and leases, the Company makes
certain assumptions regarding the expected impact
of credit losses on the fair value of
interest-only strips and residual interests. See
note 4 for more information regarding these credit
loss assumptions.
Loan and Lease Origination Costs and Fees
Direct loan and lease origination costs and loan
fees such as points and other closing fees are
recorded as an adjustment to the cost basis of the
related loan and lease receivable and are
recognized in the Statement of Income as an
adjustment to the gain on sale recorded at the
time the loans and leases are securitized.
Interest-only Strips and Residual Interests
The Company sells a majority of its originated
loans and leases through securitizations. In
connection with these securitizations, the Company
retains certain residual interests in the trusts
to which the loans or leases are transferred. The
residual interests entitle the Company to receive
certain excess (or residual) cash flows which are
derived from payments made to the trust from the
securitized loans and leases after deducting
payments to investors in the securitization trust
and other miscellaneous fees. These cash flows are
projected over the life of the loans and leases
using certain prepayment and default assumptions.
Excess cash flows are retained by the trust until
certain overcollateralization levels are
established. The overcollateralization causes the
aggregate principal amount of the related
securitization pool to exceed the aggregate
balance of the investor notes. The
overcollateralization serves as credit enhancement
for the investors. The securitization trusts and
its investors have no recourse to other assets of
the Company for failure of the securitized loans
and leases to pay when due.
68
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The fair values of the excess cash flows are
estimated based on a discounted cash flow
analysis, and are recorded by the Company at the
time loans and leases are securitized. Cash flows
are discounted from the date the cash is expected
to be available to the Company (the "cash-out
method"). Cash flows are discounted using an
interest rate management believes an unrelated
purchaser would require.
Interest-only strips and residual interests are
periodically revalued by the Company based on a
discounted cash flow analysis of loans and leases
remaining in the trusts. The assumptions for
prepayment and default rates are monitored against
actual experience and adjusted if warranted.
In October 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 134,
"Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking
Enterprise." SFAS No. 134 requires that after the
securitization of a mortgage loan held for sale,
an entity classify the resulting mortgage-backed
security or other retained interests based on its
ability and intent to hold or sell those
investments. SFAS No. 134 became effective for
fiscal quarters beginning after December 15, 1998.
In accordance with the provisions of SFAS No. 134,
the Company has reclassified its retained
interests from trading securities to
available-for-sale securities. As
available-for-sale securities, subsequent
adjustments to the fair value of retained
interests are recorded in stockholders' equity and
reported as a component of comprehensive income.
Servicing Rights
Upon the securitization of loans and leases, the
Company retains servicing rights. The Company
capitalizes the costs associated with the rights
to service securitized loans and leases based on
the servicing rights' relative fair value to other
consideration received in a securitization. The
fair value of servicing rights is estimated based
on a discounted cash flow analysis which considers
69
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
contractual fees for servicing (generally 0.5% of
outstanding loans and leases serviced) and the
rights to collect ancillary servicing related fees
from the loans and leases, net of costs to service
the loans and leases. Assumptions used to value
servicing rights are consistent with assumptions
used to value residual interests in
securitizations. Servicing rights are amortized in
proportion to, and over the period of, estimated
future servicing income.
Property and Equipment
Property and equipment are stated at cost less
accumulated depreciation and amortization.
Depreciation and amortization is computed using
the straight-line method over the estimated useful
life of the assets ranging from 3 to 15 years.
Financing Costs and Amortization
Financing costs incurred in obtaining revolving
lines of credit are recorded in other assets and
are amortized using the straight-line method over
the terms of the agreements. Financing costs
incurred in connection with public offerings of
subordinated debt securities are also recorded in
other assets and are amortized over the term of
the related debt.
Investments Held to Maturity
Investments classified as held to maturity
recorded in other assets consist of asset-backed
securities that the Company has the positive
intent and ability to hold to maturity. These
investments are stated at amortized cost.
Real Estate Owned
Property acquired by foreclosure or in settlement
of loan and lease receivables is recorded in other
assets, and is carried at the lower of the cost
basis in the loan or fair value of the property
less estimated costs to sell.
70
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
Revenue Recognition
The Company derives its revenue principally from
gain on sale of loans and leases, interest and
fees on loans and leases, and servicing income.
Gains on sales of loans and leases through
securitizations represent the difference between
the net proceeds to the Company, including
retained interests in the securitization, and the
allocated cost of loans and leases securitized.
The allocated cost of loans and leases securitized
is determined by allocating their net carrying
value between the loans and leases, the residual
interests and the servicing rights retained by the
Company based upon their relative fair values.
Interest and fee income consists of interest
earned on loans and leases while held in the
Company's portfolio, premiums earned on loans sold
with servicing released and other ancillary fees
collected in connection with loan and lease
origination. Interest income is recognized based
on the interest method. Accrual of interest income
is suspended when the receivable is contractually
delinquent for 90 days or more. The accrual is
resumed when the receivable becomes contractually
current, and past-due interest income is
recognized at that time. In addition, a detailed
review will cause earlier suspension if collection
is doubtful.
Servicing income is recognized as contractual fees
and other fees for servicing loans and leases are
collected, net of amortization of servicing rights
assets.
Derivative Financial Instruments
The primary market risk exposure that the Company
faces is interest rate risk. The Company utilizes
hedging strategies to mitigate the effect of
changes in interest rates on its fixed-rate loan
and lease portfolios between the date of
origination and the date of securitization. These
strategies include the utilization of derivative
71
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
financial instruments such as futures and forward
pricing on securitizations. The nature and quality
of hedging transactions are determined by the
Company's management based on various factors,
including market conditions and the expected
volume of mortgage loan and lease originations and
purchases. The gain or loss derived from these
hedging transactions is deferred and recognized as
an adjustment to the gain on sale of loans and
leases when the loans and leases are securitized.
The Company had no contracts open at June 30, 1999
or 1998, other than an obligation to satisfy a
lease securitization prefund requirement of $9.0
million and $14.0 million, respectively, at June
30, 1999 and 1998.
Income Taxes
The Company and its subsidiaries file a
consolidated federal income tax return.
Under the asset and liability method used by the
Company to provide for income taxes, deferred tax
assets and liabilities are recognized for the
expected future tax consequences of temporary
differences between the financial statement and
tax basis carrying amounts of existing assets and
liabilities.
Acquisition
Effective October 1, 1997, the Company acquired
all of the issued and outstanding stock of New
Jersey Mortgage and Investment Corp. ("NJMIC"), a
mortgage and leasing company based in Roseland,
New Jersey. The purchase price for the stock
consisted of $11.0 million in cash, a note payable
of $5.0 million and the issuance of 20,240 shares
of the Company's common stock. The purchase
agreement included a provision for a series of
contingent payments to the former stockholders of
NJMIC totaling $4.0 million based on NJMIC's
attainment of certain performance targets over a
three year period. To date the Company has paid
$1.3 million of the total amount of potential
contingent payments.
72
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The transaction was accounted for under the
purchase method and accordingly the results of
NJMIC have been included with the Company's since
the date of acquisition. As a result of the
transaction the Company recorded approximately
$16.9 million of goodwill, which is being
amortized using the straight-line method over 15
years. Any contingent payments made will be
recorded as additional goodwill.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging
Activities." ("SFAS No. 133"). SFAS No. 133
establishes accounting and reporting standards for
derivative instruments, including certain
derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for
hedging activities. It requires that an entity
recognize all derivatives as either assets or
liabilities in the statement of financial position
and measure those instruments at fair value. If
certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the
exposure to changes in the fair value of a
recognized asset or liability or an unrecognized
firm commitment (fair value hedge), (b) a hedge of
the exposure to variable cash flows of a
forecasted transaction (cash flow hedge), or (c) a
hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security,
or a foreign-currency-denominated forecasted
transaction. At the time of issuance SFAS No. 133
was to be effective on a prospective basis for all
fiscal quarters of fiscal years beginning after
June 15, 1999. Subsequently the effective date of
the standard was delayed until years beginning
after June 15, 2000. The adoption of this standard
is not expected to have a material effect on the
Company's financial condition or results of
operations.
73
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
2. Loan and Lease
Receivables
June 30, 1999 1998
--------------------------------------------------------------
(in thousands)
Real estate secured loans $ 21,027 $ 51,196
Leases (net of unearned income
of $1,543 and $1,845) 13,451 12,067
--------------------------------------------------------------
34,478 63,263
Less allowance for credit
losses on loan and
lease receivables available for
sale 702 881
--------------------------------------------------------------
$ 33,776 $ 62,382
==============================================================
Real estate secured loans have contractual
maturities of up to 30 years.
At June 30, 1999 and 1998, the accrual of interest
income was suspended on real estate secured loans
of $85 thousand and $718 thousand respectively.
Based on its evaluation of the collateral related
to these loans, the Company expects to collect all
contractual interest and principal.
Substantially all leases originated by the Company
are direct finance-type leases whereby the lessee
has the right to purchase the leased equipment at
the lease expiration for a nominal amount.
74
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
3. Allowance for
Credit Losses Year ended June 30, 1999 1998 1997
-------------------------------------------------
(in thousands)
Balance at beginning
of year $ 881 $ 338 $330
Acquired through
acquisition -- 719 --
Provision for credit
losses 928 491 106
Charge offs, net of
recoveries (1,107) (667) (98)
-------------------------------------------------
Balance at end of
year $ 702 $ 881 $338
=================================================
4. Securitizations During fiscal 1999, the Company sold $71.9 million
of business purpose loans and $613.0 million of
home equity loans in four securitizations and
$92.6 million of equipment leases in numerous
sales to a commercial paper conduit and two
securitizations. During fiscal 1998 the Company
sold $54.1 million of business purpose loans and
$270.9 million of home equity loans in three
securitizations and $59.7 million of equipment
leases in one securitization.
In fiscal 1999, cash proceeds from the
securitizations of business purpose loans and home
equity loans were $685.0 million, with pretax
gains of $62.5 million. Cash proceeds from the
securitization of equipment leases were $91.1
million with pretax gains of $2.6 million. In
fiscal 1998, cash proceeds from the securitization
of business purpose loans and home equity loans
were $325.0 million, with pretax gains of $41.2
million. Cash proceeds from the securitization of
equipment leases were $13.7 million with pretax
gains of $0.3 million.
75
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The following chart presents certain key
assumptions used in the valuation of residual
interests from securitizations (interest-only
strips and mortgage servicing assets).
Initial Periodic
Valuation Revaluation
---------------------------------------------------------------------------------
Discount rates
Home equity loans 11.0% 11.0%
Business purpose loans 11.0% 11.0%
Business equipment leases 11.0% 11.0%
Annual prepayment rates
Home equity loans 2.0% - 24.0% (1) 2.0% - 24.0% (1)
Business purpose loans 3.0% - 13.0% (2) 3.0% - 15.0% (2)
Business equipment leases -- (3) -- (3)
Annual credit loss rates
Home equity loans 0.25% 0.25%
Business purpose loans 0.25% 0.25%
Business equipment leases 0.50% 0.50%
===================================================================================
(1) Ramped over 12 to 18 months
(2) Ramped over 24 months
(3) Residual values are continuously adjusted
based on actual experience.
5. Interest-Only Strips
and Other
Receivables
June 30, 1999 1998
------------------------------------------------------------------------
(in thousands)
Interest-only and residual strips-
Available for sale $ 172,411 $ --
Trading assets 5,806 95,913
Receivable for sold loans 66,086 2,377
Advances to securitization trusts 6,266 738
Other 3,367 1,709
------------------------------------------------------------------------
$ 253,936 $100,737
========================================================================
76
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
SFAS No. 134, which became effective January 1,
1999, requires that after the securitization of a
mortgage loan held for sale, the resulting
mortgage-backed security or other retained
interests be classified based on the Company's
ability and intent to hold or sell the
investments. As a result, retained interests
previously classified as trading assets, as
required by prior accounting principles, have been
reclassified to available-for-sale. The effect of
SFAS No. 134 on net income and net income per
share was $3.3 million and $0.88, respectively.
Interest-only strips include overcollateralized
balances that represent undivided interests in the
securitizations maintained to provide credit
enhancements to the investors. At June 30, 1999
and 1998, overcollateralized principal balances
were $38.6 million and $25.3 million,
respectively.
The activity for interest-only strip receivables
is summarized as follows (in thousands):
Year ended June 30, 1999 1998
---------------------------------------------------------------
Balance at beginning of year $ 95,913 $37,507
Initial recognition of
interest-only strips 90,480 64,379
Interest accretion and other 2,370 740
Cash receipts (13,900) (6,713)
Net adjustments to fair value 3,354 --
---------------------------------------------------------------
Balance at end of year $178,217 $95,913
===============================================================
77
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
6. Servicing Rights The serviced loan and lease portfolio, which
includes loans and leases sold to investors and
those retained by the Company, is as follows (in
thousands):
June 30, 1999 1998
-----------------------------------------------------------------------
Home equity loans $ 858,806 $349,685
Business purpose loans 148,932 101,250
Equipment leases 169,180 108,463
-----------------------------------------------------------------------
$1,176,918 $559,398
=======================================================================
The activity for the loan and lease servicing
rights asset is summarized as follows (in
thousands):
Year ended June 30, 1999 1998
-----------------------------------------------------------------------
Balance at beginning of year $ 18,472 $ 8,083
Initial recognition of
Servicing rights 30,289 12,041
Amortization (5,551) (1,652)
-----------------------------------------------------------------------
Balance at end of year $ 43,210 $ 18,472
=======================================================================
78
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
Servicing rights are periodically valued by the
Company based on a discounted cash flow analysis
of loans and leases remaining in the
securitization trusts. A review for impairment is
performed on a disaggregated basis for the
predominant risk characteristics, herein referred
to as a stratum, of the underlying loans and
leases, which consist of loan type and credit
quality. Key assumptions used in the periodic
valuation of the servicing assets are described in
note 4. The Company generally makes loans to
credit-impaired borrowers whose borrowing needs
may not be met by traditional financial
institutions due to credit exceptions. The Company
has found that credit-impaired borrowers are
payment sensitive rather than interest rate
sensitive. As such, the Company does not consider
interest rates a predominant risk characteristic
for purposes of valuation for impairments.
Impairments if they occurred would be recognized
in a valuation allowance for each impaired stratum
in the period of impairment. At June 30, 1999 and
1998, the carrying value of servicing rights
approximated fair value.
7. Property and
Equipment
June 30, 1999 1998
--------------------------------------------------------------
(in thousands)
Computer equipment and software $ 7,548 $ 5,383
Office furniture and equipment 8,271 5,527
Leasehold improvements 1,756 1,102
Transportation equipment 260 217
--------------------------------------------------------------
17,835 12,229
Less accumulated depreciation
and amortization 7,164 4,444
--------------------------------------------------------------
$10,671 $ 7,785
==============================================================
Depreciation and amortization expense for
property and equipment was $2.9 million, $1.7
million and $0.5 million for the years ended
June 30, 1999, 1998 and 1997, respectively.
79
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
8. Other Assets
June 30, 1999 1998
----------------------------------------------------------------------------
(in thousands)
Deposits $ 198 $ 146
Financing costs, debt offerings, net
of accumulated amortization of $3,903
and $2,891 4,487 2,525
Investments held to maturity
(mature July 1999 through April 2011) 1,014 5,639
Real estate owned 843 716
Goodwill, net of accumulated
amortization of $1,913 and $780 15,018 16,151
Other 2,219 844
----------------------------------------------------------------------------
$23,779 $26,021
============================================================================
80
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
9. Subordinated Debt
and Notes Payable
June 30, 1999 1998
----------------------------------------------------------------------------
(in thousands)
Subordinated debt, due July 1999 through June
2009, interest at rates ranging from 6.15% to
11.5%; subordinated to all of the Company's
senior indebtedness. $ 206,918 $ 105,652
Subordinated debt, due July 1999 through May
2003; interest rates ranging from 9.0% to
11.99%; subordinated to all of the Company's
senior indebtedness. 4,735 6,530
Note payable, $150,000 revolving line of
credit expiring October 2000; interest
rates ranging from LIBOR plus 1.375% to LIBOR
plus 2.0%; collateralized by loan and other
receivables in the amount of $42,626. 42,626 25,720
Note payable, $20,000 revolving line of credit
expiring September 2000; interest at prime
less 1.0% or LIBOR at the Company's option;
collateralized by lease receivables in the
amount of $3,764. 3,764 --
Note payable, $5,000 revolving line of credit
expiring December 1999; interest at LIBOR plus
2.0% payable monthly; collateralized by
certain residual interests in securitized
loans with a value of $17,949. 5,000 --
81
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
June 30, 1999 1998
----------------------------------------------------------------------------
(in thousands)
----------------------------------------------------------------------------
Note payable, $100,000 revolving line of
credit expiring August 2000; interest at LIBOR
plus 1.25%, payable monthly; collateralized by
loan and lease receivables in the amount of
$102. $ 102 $ 531
Repurchase agreement, due July 1999,
interest at LIBOR plus 0.5%;
collateralized by certain lease -backed
securities in the amount of $5,806. 4,677 --
Senior subordinated debt, due July 1999
through December 1999; interest at 12.0%,
payable monthly; subordinated to certain
subsidiary's senior indebtedness. 1,250 3,000
Note payable, acquisition, July 1999
through October 2000; interest at 8.0%,
payable monthly. 581 2,915
Capitalized lease, due July 1999 through
December 2001; interest at 7.7% payable
monthly; collateralized by certain office
equipment with a value of $527. 527 --
Other notes payable 163 237
----------------------------------------------------------------------------
$270,343 $144,585
============================================================================
82
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
Principal payments on debt for the next five years
are as follows: year ending June 30, 2000 - $176.0
million; 2001 - $35.0 million; 2002 - $25.0
million; 2003 - $9.0 million; and 2004 - $12.0
million.
The loan agreements provide for certain covenants
regarding net worth and financial matters. At June
30, 1999, the Company is in compliance with the
terms of the loan covenants.
10. Stockholders' On August 18, 1999, the Company's Board of
Equity Directors declared a 5% stock dividend to be paid
on September 27, 1999 to shareholders of record on
September 3, 1999. In addition the Board resolved
that all outstanding stock options would be
adjusted for the dividend. Accordingly, all
outstanding shares, earnings per common share,
average common share and stock option amounts have
been retroactively adjusted to reflect the effect
of the stock dividend.
In July 1998, the Company's Board of Directors
authorized the repurchase of up to 10% of the
outstanding shares of its common stock over a
one-year period. In May 1999, the repurchase
period was extended for an additional one year to
July 2000. As of June 30, 1999, 111,000 shares or
3% of the Company's outstanding shares were
repurchased under the July 1998 authorization at a
cost of $1.4 million.
In the second quarter of fiscal 1999, the Company
increased its quarterly dividend by 233% to $0.05
per share. Dividends of $0.165 were paid in the
year ended June 30, 1999 compared to $0.06 in each
of the years ended June 30, 1998 and 1997.
The Company has a loan receivable from an officer
of the Company for $600 thousand, which was an
advance for the exercise of stock options to
purchase 225,012 shares of the Company's common
stock. The loan is due in September 2005 (earlier
if the stock is disposed of). Interest at 6.46% is
payable annually. The loan is secured by 225,012
shares of the Company's stock, and is shown as a
reduction of stockholders' equity on the
accompanying balance sheet.
In February 1997, the Company sold 1,150,000
shares of common stock through a public offering,
resulting in net proceeds of $20.7 million.
83
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
11. Employee The Company has a 401(k) defined contribution
Benefit Plan plan, which was established in 1995, available to
all employees who have been with the Company for
six months and have reached the age of 21.
Employees may generally contribute up to 15% of
their salary each year, subject to IRS imposed
limitations. The Company, effective October 1,
1997, at its discretion, may match up to 25% of
the first 5% of salary contributed by the
employee. The Company's contribution expense was
$263 thousand and $108 thousand for the years
ended June 30, 1999 and 1998 respectively.
12. Stock Option Plans The Company has a stock option plan that provides
for the periodic granting of options to key
employees ("the Employee Plan"). The options are
generally granted at the market price of the
Company's stock on the date of grant and expire
five to ten years from date of grant. Options
either fully vest when granted or over periods of
up to five years. At June 30, 1999, substantially
no shares were available for future grant under
this plan.
84
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
A summary of stock option activity under the
Employee Plan for the years ended June 30, 1999,
1998 and 1997, retroactively adjusted for the
effect of the 5% stock dividend described in
note 10, follows:
Number of Weighted-Average
Shares Exercise Price
-----------------------------------------------------------------------------
Options outstanding, June 30, 1996 69,300 $ 3.30
Options granted 169,575 18.98
--------------------------------------------------------------------------
Options outstanding, June 30, 1997 238,875 14.43
Options granted 106,575 22.95
Options canceled (9,450) 19.51
--------------------------------------------------------------------------
Options outstanding, June 30, 1998 336,000 18.10
Options granted 14,175 17.86
Options exercised (3,937) 2.54
Options canceled (41,475) 20.48
--------------------------------------------------------------------------
Options outstanding, June 30, 1999 304,763 $ 16.74
==========================================================================
The following tables summarize information
about stock options outstanding under the
Employee Plan at June 30, 1999:
Options Outstanding
----------------------------------------------------------------------------------
Weighted
Remaining
Range of Exercise Number Contractual Weighted-Average
Prices of Options of Shares Life in Years Exercise Price
----------------------------------------------------------------------------------
$2.54-$4.76 65,363 1.0 $ 3.34
14.29-16.90 10,500 3.3 15.75
19.05 131,250 7.2 19.05
19.52-24.76 97,650 8.5 22.72
----------------------------------------------------------------------------------
304,763 6.1 $16.74
==================================================================================
85
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
Options Exercisable
----------------------------------------------------------------------------------
Weighted
Remaining
Range of Exercise Number Contractual Weighted-Average
Prices of Options of Shares Life in Years Exercise Price
----------------------------------------------------------------------------------
$2.54-$4.76 65,625 1.0 $ 3.34
14.29-16.90 10,500 3.3 15.75
19.05 59,325 6.5 19.05
19.52-24.76 23,730 8.4 22.72
----------------------------------------------------------------------------------
159,180 4.3 $12.92
==================================================================================
The Company accounts for stock options issued
under the Employee Plan using the intrinsic value
method, and, accordingly, no expense is recognized
where the exercise price equals or exceeds the
fair value of the shares at the date of grant. Had
the Company accounted for stock options granted
under the Employee Plan using the fair value
method, pro forma net income and earnings per
share would have been as follows (in thousands
except per share amounts):
June 30, 1999 1998 1997
----------------------------------------------------------------------------------
Net income
As reported $ 14,088 $ 11,455 $ 5,940
Pro forma 13,811 10,956 5,361
Earnings per share -basic
As reported $ 3.83 $ 3.10 $ 2.03
Pro forma 3.75 2.97 1.84
Earnings per share -diluted
As reported $ 3.72 $ 2.98 $ 1.95
Pro forma 3.64 2.85 1.76
===============================================================================
86
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The fair value of options granted was estimated on
the date of grant using the Black-Scholes
option-pricing model with the following
assumptions:
June 30, 1999 1998 1997
-----------------------------------------------------------------------------
Expected volatility 30% 30% 25%
Expected life 5-10 yrs. 5-10 yrs. 5 yrs.
Risk-free interest rate 4.50%-5.68% 5.39%-6.17% 6.31%-6.90%
rate
The Company also has a non-employee director stock
option plan ("the Director Plan") that provides
for the granting of options to non-employee
directors. Options are generally granted at the
market price of the stock on the date of grant,
fully vest when granted and expire three to ten
years after the date of grant.
A summary of activity under the Director Plan for
the three years ended June 30, 1999, 1998 and
1997, retroactively adjusted for the effect of the
5% stock dividend described in note 10, follows:
Number of Weighted-Average
Shares Exercise Price
------------------------------------------------------------------------------
Options outstanding, June 30, 1996 94,500 $ 4.76
Options granted 21,000 16.90
------------------------------------------------------------------------------
Options outstanding, June 30, 1997 115,500 6.97
Options granted 21,000 22.14
------------------------------------------------------------------------------
Options outstanding, June 30, 1998 136,500 9.30
Options granted 21,000 14.29
------------------------------------------------------------------------------
Options outstanding, June 30, 1999 157,500 $ 9.97
==============================================================================
The fair value of options granted under the
Director Plan is expensed on the date of grant.
The Company recognized expense of $73 thousand and
$87 thousand for the years ended June 30, 1999 and
1998, respectively.
87
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
13. Income Taxes The provision for income taxes consists of the
following (in thousands):
Year ended June 30, 1999 1998 1997
-------------------------------------------------------------------------
Current
Federal $ 1,268 $ 1,087 $ --
-------------------------------------------------------------------------
Deferred
Federal 6,495 5,348 3,062
State -- -- --
-------------------------------------------------------------------------
6,495 5,348 3,062
-------------------------------------------------------------------------
Total Provision for
income taxes $ 7,763 $ 6,435 $ 3,062
=========================================================================
The current provision for federal income taxes for
the year ended June 30, 1997 is net of the tax
benefit of approximately $0.5 million from the
utilization of net operating loss carryforwards.
There were no tax benefits from the utilization of
net operating loss carryforwards in the years
ended June 30, 1999 or 1998.
88
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The cumulative temporary differences resulted in
net deferred income tax assets or liabilities
consisting primarily of the following (in
thousands):
Year ended June 30, 1999 1998
----------------------------------------------------------------------
Deferred income tax assets
Allowance for credit losses $ 4,039 $ 1,212
Net operating loss carryforwards 11,262 5,777
Loan and lease receivables -- 659
----------------------------------------------------------------------
15,301 7,648
Less valuation allowance 6,845 5,777
----------------------------------------------------------------------
8,456 1,871
----------------------------------------------------------------------
Deferred income tax liabilities
Loan and lease origination
costs/fees, net 1,123 1,253
Book over tax basis of property
and equipment 47 741
Interest-only strips and other
receivables 19,886 8,396
Servicing rights 4,004 2,345
----------------------------------------------------------------------
25,060 12,735
----------------------------------------------------------------------
Net deferred income taxes $ 16,604 $ 10,864
======================================================================
The valuation allowance represents the income tax
effect of state net operating loss carryforwards
of the Company, which are not presently expected
to be utilized.
89
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
A reconciliation of income taxes at federal
statutory rates to the Company's tax provision is
as follows (in thousands):
Year ended June 30, 1999 1998 1997
------------------------------------------------------------------------------
Federal income tax at
statutory rates $ 7,429 $ 6,083 $ 3,062
Nondeductible items 528 349 --
Other, net (194) 3 --
------------------------------------------------------------------------------
$ 7,763 $ 6,435 $ 3,062
==============================================================================
For income tax reporting, the Company has net
operating loss carryforwards aggregating
approximately $85.5 million available to reduce
future state income taxes for various states as of
June 30, 1999. If not used, substantially all of
the carryforwards will expire at various dates
from June 30, 2000 to June 30, 2002.
14. Commitments As of June 30, 1999, the Company leases property
and under noncancelable operating leases requiring
Contingencies minimum annual rentals as follows (in thousands):
Year ending June 30, Amount
-----------------------------------------------
2000 $ 3,598
2001 3,347
2002 3,024
2003 2,041
2004 48
Thereafter --
-----------------------------------------------
$12,058
===============================================
Rent expense for leased property was $2.9 million,
$1.7 million and $0.5 million respectively, for
the years ended June 30, 1999, 1998 and 1997.
90
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
Employment Agreements
The Company entered into employment agreements, as
amended, with three executives under which they
are entitled to annual base compensation of
$800,000, collectively, adjusted for increases in
the Consumer Price Index and merit increases for
one executive. The agreements terminate upon: (a)
the earlier of the executive's death, permanent
disability, termination of employment for cause,
voluntary resignation (except that no voluntary
resignation may occur prior to February 2000) or
70th birthday; or (b) the later of the fifth
anniversary of the agreement or from three to five
years from the date of notice to the executive of
the Company's intention to terminate the
agreement.
In addition, the executives are entitled to a cash
payment equal to 299% of the last five years
average annual compensation in the event of a
"change in control," as defined in the agreement,
and two of the executives are entitled to all of
the compensation discussed above.
The Company has entered into employment agreements
with two other officers under which they are
entitled to minimum annual base compensation of
$350,000, collectively. These agreements terminate
upon the earlier of the executive's death,
permanent disability, termination for cause,
voluntary resignation or three years.
15. Legal Proceedings On October 23, 1997, a class action suit was filed
in the Superior Court of New Jersey at Docket No.
L-12066-97 against NJMIC by Alfred G. Roscoe on
behalf of himself and others similarly situated.
Mr. Roscoe sought certification that the action
could be maintained as a class action. He also
sought unspecified compensatory damages and
injunctive relief. In his complaint, Mr. Roscoe
alleged that NJMIC violated New Jersey's Mortgage
Financing on Real Estate Law, N.J. Stat. Ann.
46:10A-1 et seq., by requiring him and other
borrowers to pay or reimburse NJMIC for attorneys'
fees and costs in connection with loans made to
them by NJMIC. Mr. Roscoe further asserted that
NJMIC's alleged actions violated New Jersey's
Consumer Fraud Act, N.J. Stat. Ann. 56:8-1,
et seq. and constituted common law fraud and
deceit.
On February 24, 1998, after oral argument before
the Superior Court, an order was entered in favor
of NJMIC and against Mr. Roscoe granting NJMIC
Motion for Summary Judgment. Mr. Roscoe appealed
to the Superior Court of New Jersey - Appellate
Division. Oral argument on the appeal was heard on
January 20, 1999 before a two-judge panel of the
Appellate Division. On February 3, 1999, the panel
filed a per curiam opinion affirming the Superior
Court's ruling in favor of NJMIC.
On March 4, 1999, a Petition for Certification for
review of the final judgment of the Superior Court
was filed with the Supreme Court of New Jersey.
New Jersey Mortgage filed its Brief in Opposition
to the Petition for Certification on March 16,
1999, and Mr. Roscoe filed a reply brief. To date,
no decision has been rendered by the New Jersey
Supreme Court on this matter.
91
Pursuant to the terms of the Agreement for
Purchase and Sale of Stock of NJMIC between the
Company and the former shareholders of NJMIC, the
former shareholders are required to indemnify the
Company up to $16.0 million to the extent of any
losses over $100,000 related to, caused by or
arising from NJMIC's failure to comply with
applicable law. The former NJMIC shareholders have
agreed to defend the Company in this suit.
Additionally, from time to time, the Company is
involved as plaintiff or defendant in various
other legal proceedings arising in the normal
course of business. While the Company cannot
predict the ultimate outcome of these various
legal proceedings, it is management's opinion that
the resolution of these legal actions should not
have a material effect on the Company's financial
position, results of operations or liquidity.
16. Fair Value of No market exists for certain of the Company's
Financial assets and liabilities. Therefore, fair value
Instruments estimates are based on judgments regarding credit
risk, investor expectation of future economic
conditions, normal cost of administration and
other risk characteristics, including interest
rates and prepayment risk. These estimates are
subjective in nature and involve uncertainties and
matters of judgment and, therefore, cannot be
determined with precision. Changes in assumptions
could significantly affect the estimates.
92
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The following table summarizes the carrying
amounts and fair value estimates of financial
instruments recorded on the Company's financial
statements at June 30, 1999 and 1998 (in
thousands):
June 30, 1999
----------------------------------------------------------------------
Carrying Fair
Value Value
----------------------------------------------------------------------
Assets
Cash and cash equivalents $ 22,395 $ 22,395
Loan and leases available
for sale 33,776 35,152
Interest-only strips and
other residual assets 178,217 178,217
Servicing rights 43,210 43,210
Investments held to maturity 1,014 911
Liabilities
Subordinated debt and
notes payable $270,343 $270,915
======================================================================
June 30, 1998
----------------------------------------------------------------------
Carrying Fair
Value Value
----------------------------------------------------------------------
Assets
Cash and cash equivalents $ 4,486 $ 4,486
Loan and leases available
for sale 62,382 63,685
Interest-only strips and
other residual assets 95,913 95,913
Servicing rights 18,472 19,310
Investments held to
maturity 5,639 5,639
Liabilities
Subordinated debt and
notes payable $144,585 $144,585
======================================================================
93
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The methodology and assumptions utilized to
estimate the fair value of the Company's financial
instruments are as follows:
Cash and cash equivalents - For these
short-term instruments, the carrying amount
approximates fair value.
Loans and leases available for sale - Fair
value is determined by recent sales and
securitizations.
Interest-only strips - Fair value is
determined using estimated discounted future
cash flows taking into consideration
anticipated prepayment rates and credit loss
rates of the underlying loans and leases.
Servicing rights - Fair value is determined
using estimated discounted future cash flows
taking into consideration anticipated
prepayment rates and credit loss rates of the
underlying loans and leases.
Investments held to maturity - Represent
mortgage loan backed securities retained in
securitizations. Fair value is determined
using estimated discounted future cash flows
taking into consideration anticipated
prepayment rates and credit loss rates of the
underlying loans and leases.
Subordinated debt and notes payable - The
fair value of fixed debt is estimated using
the rates currently available to the Company
for debt of similar terms.
94
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The carrying value of investment securities at
June 30, 1999 were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------------
Held-to-Maturity:
Mortgage backed securities
retained in
securitizations $1,014 $-- $(103) $ 911
Available for sale:
Lease backed securities
retained in
securitizations. 4,818 253 -- 5,071
--------------------------------------------------------------------------------
Total $5,832 $253 $(103) $5,982
================================================================================
17. Reconciliation of
Basic and Diluted
Earnings Per
Common Share
Year ended June 30, 1999 1998 1997
--------------------------------------------------------------------------------
(in thousands except per share data)
(Numerator)
Net income $ 14,088 $ 11,455 $ 5,940
--------------------------------------------------------------------------------
(Denominator)
Average Common Shares
Average common 3,682 3,692 2,921
shares outstanding
Average potentially
dilutive shares 109 155 128
Average common and potentially
dilutive shares 3,791 3,847 3,049
--------------------------------------------------------------------------------
Earnings per common
share
Basic $ 3.83 $ 3.10 $ 2.03
Diluted 3.72 2.98 1.95
================================================================================
95
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
18. Segment The Company adopted the Statement of Financial
Information Accounting Standard No. 131, "Disclosures about
Segments of an Enterprise and Related Information"
as of July 1, 1998 ("SFAS No. 131"). SFAS No. 131
establishes standards for the way companies report
information about operating segments in annual
financial statements and in interim financial
reports. The adoption of SFAS No. 131 did not
affect the Company's results of operations or
financial position.
The Company has three operating segments: Loan and
Lease Origination, Servicing, and Investment Note
Services.
The Loan and Lease Origination segment originates
business purpose loans secured by real estate and
other business assets, home equity loans typically
to credit-impaired borrowers, conventional first
mortgage loans secured by one to four family
residential real estate and small ticket and
middle market business equipment leases.
The Servicing segment services the loans and
leases the Company originates both while held in
the Company's portfolio and subsequent to
securitization. Servicing activities include
billing and collecting payments from borrowers,
transmitting payments to investors, accounting for
principal and interest, collections and
foreclosure activities and disposing of real
estate owned.
The Investment Note Services segment markets the
Company's subordinated debt pursuant to a
registered public offering. The proceeds from the
sale of subordinated debt are used to fund the
Company's general operating and lending
activities.
All Other mainly represents segments that do not
meet the SFAS No. 131 quantitative or defined
thresholds for determining reportable segments,
financial assets not related to operating
segments, unallocated overhead and other expenses
of the Company unrelated to the reportable
segments identified.
96
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The accounting policies of the reportable segments
are the same as those described in the summary of
significant accounting policies.
Reconciling items represent elimination of
inter-segment income and expense items.
Loan and Investment
Year ended June 30, 1999 Lease Note Reconciling
(in thousands) Origination Services Servicing All Other Items Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
External revenues:
Gain on sale of loans and
leases $65,640 $ -- $ -- $ -- $ -- $ 65,640
Interest income 5,733 321 -- 2,120 -- 8,174
Non-interest income 5,225 88 7,265 4 -- 12,582
Inter-segment revenues -- 23,630 -- 25,080 (48,710) --
Operating expenses:
Interest expense 14,313 14,995 415 16,333 (23,630) 22,426
Non-interest expense 23,270 6,344 2,574 9,931 -- 42,119
Inter-segment expense 24,490 590 -- -- (25,080) --
Income tax expense 5,161 750 1,519 333 -- 7,763
- ------------------------------------------------------------------------------------------------------------------------------
Net income 9,364 1,360 2,757 607 -- 14,088
==============================================================================================================================
Segment assets $66,969 $28,131 $44,921 $256,280 $ -- $396,301
==============================================================================================================================
97
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required to be included in Item 10 of Part III of this
Form 10-K incorporates by reference certain information from our definitive
proxy statement, for our 1999 annual meeting of stockholders to be filed with
the SEC not later than 120 days after the end of our fiscal year covered by this
report.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act ("Section 16(a)") requires our
directors, executive officers, and persons who own more than 10% of a registered
class of our equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of our common stock and other
equity securities. Officers, directors and greater than 10% stockholders are
required by SEC regulation to furnish us with copies of all Section 16(a) forms
they file.
Our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were required,
during the fiscal year ended June 30, 1999, was that its officers, directors and
greater than 10% beneficial owners had complied with all Section 16(a) filing
requirements.
Item 11. Executive Compensation
The information required to be included in Item 11 of Part II of this
Form 10-K incorporates by reference certain information from our definitive
proxy statement, for our 1999 annual meeting of stockholders to be filed with
the SEC not later than 120 days after the end of our fiscal year covered by this
report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required to be included in Item 12 of Part II of this
Form 10-K incorporates by reference certain information from our definitive
proxy statement, for our 1999 annual meeting of stockholders to be filed with
the SEC not later than 120 days after the end of our fiscal year covered by this
report.
Item 13. Certain Relationships and Related Transactions
The information required to be included in Item 13 of Part III of this
Form 10-K incorporates by reference certain information from our definitive
proxy statement, for our 1999 annual meeting of stockholders to be filed with
the SEC not later than 120 days after the end of our fiscal year covered by this
report.
PART IV
Item 14. Exhibits and Reports on Form 8-K
(a) Exhibits:
98
Exhibit Number Description
- -------------- -----------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation (Incorporated
by reference from Exhibit 3.1 of the ABFS Annual Report on Form
10-KSB for the fiscal year ended June 30, 1996 filed on September
27, 1996, File No. 0-22472 (the "1996 Form 10-KSB")).
3.2 Bylaws of ABFS (Incorporated by reference from Exhibit 3.2 of the
Registration Statement on Form SB-2 filed December 27, 1996,
Registration Number 333-18919 (the "1996 Form SB-2")).
4.1 Form of unsecured Investment Note (Incorporated by reference from
Exhibit 4.1 of Amendment No. 1 to the Registration Statement on
Form SB-2 filed April 29, 1994, Registration Number 33-76390)).
4.2 Form of unsecured Investment Note issued pursuant to Indenture
with First Trust, National Association, a national banking
association (Incorporated by reference from Exhibit 4.5 of
Amendment No. One to the Registration Statement on Form SB-2
filed on December 14, 1995, Registration Number 33-98636 (the
"1995 Form SB-2")).
4.3 Form of Indenture by and between ABFS and First Trust, National
Association, a national banking association (Incorporated by
reference from Exhibit 4.6 of the Registration Statement on Form
SB-2 filed on October 26, 1995, Registration Number 33-98636).
4.4 Form of Indenture by and between ABFS and First Trust, National
Association, a national banking association (Incorporated by
reference from Exhibit 4.4 of the Registration Statement on Form
SB-2 filed March 28, 1997, Registration Number 333-24115 (the
"1997 Form SB-2")).
4.5 Form of unsecured Investment Note (Incorporated by reference from
Exhibit 4.5 of the 1997 Form SB-2).
4.6 Form of Indenture by and between ABFS and First Trust National
Association, a national banking association (Incorporated by
reference from Exhibit 4.4 of the Registration Statement on Form
SB-2 filed May 23, 1997, Registration Number 333-24115).
99
Exhibit Number Description
- -------------- -----------------------------------------------------------------
4.7 Form of Unsecured Investment Note (Incorporated by reference from
Exhibit 4.5 of the Registration Statement on Form SB-2 filed May
23, 1997, Registration Number 333-24115).
4.8 Form of Indenture by and between ABFS and U.S. Bank Trust,
National Association, a national banking association
(Incorporated by reference from Exhibit 4.8 of the Registration
Statement on Form S-2 filed on September 21, 1998 (the "Form
S-2")).
4.9 Form of Unsecured Investment Note (Incorporated by reference from
Exhibit 4.9 of the Form S-2).
10.1 Loan and Security Agreement between Upland Mortgage and
BankAmerica Business Credit, Inc. dated May 23, 1996
(Incorporated by reference from the 1996 Form 10-KSB).
10.2 Amended and Restated Stock Option Plan (Incorporated by reference
from Exhibit 10.2 of the ABFS Quarterly Report on Form 10-QSB
from the quarter ended September 30, 1997, File No. 0-22474).*
10.3 Stock Option Award Agreement (Incorporated by reference from
Exhibit 10.1 of the Registration Statement on Form S-11 filed on
February 26, 1993, Registration No. 33-59042 (the "Form S-11")).*
10.4 Line of Credit Agreement by and between American Business Credit,
Inc. and Eagle National Bank (Incorporated by reference from
Exhibit 10.4 of Amendment No. 1 to the Registration Statement on
Form SB-2 filed on April 29, 1993, Registration No. 33-59042 (the
A1993 Form SB-2")).
10.5 Agreement dated April 12, 1993 between American Business Credit,
Inc. and Eagle National Bank (Incorporated by reference from
Exhibit 10.5 of the 1993 Form SB-2).
10.6 1995 Stock Option Plan for Non-Employee Directors (Incorporated
by reference from Exhibit 10.6 of the Amendment No. 1 to the 1996
Form SB-2 filed on February 4, 1996 Registration No. 333-18919
(the "Amendment No. 1 to the 1997 Form SB-2")).*
100
Exhibit Number Description
- -------------- -----------------------------------------------------------------
10.7 Form of Option Award Agreement for Non-Employee Directors Plan
for Formula Awards (Incorporated by reference from Exhibit 10.13
of the 1996 Form 10-KSB).*
10.8 1997 Non-Employee Director Stock Option Plan (including form of
Option Agreement) (Incorporated by reference from Exhibit 10.1 of
the September 30, 1997 Form 10-QSB).*
10.9 Interim Warehouse and Security Agreement between Upland Mortgage
and Prudential Securities Realty Funding Corporation dated April
25, 1996 (Incorporated by reference from Exhibit 10.14 of the
1996 Form 10-KSB).
10.10 Lease dated January 7, 1994 by and between TCW Realty Fund IV
Pennsylvania Trust and ABFS (Incorporated by reference from
Exhibit 10.9 of the Registration Statement on Form SB-2 filed
March 15, 1994, File No. 33-76390).
10.11 First Amendment to Agreement of Lease by and between TCW Realty
Fund IV Pennsylvania Trust and ABFS dated October 24, 1994.
(Incorporated by reference from Exhibit 10.9 of ABFS' Annual
Report on Form 10-KSB for the fiscal year ended June 30, 1995
(the "1995 Form 10-KSB")).
10.12 Third Amendment to Lease between TCW Realty Fund IV Pennsylvania
Trust and ABFS dated July 25, 1995 (Incorporated by reference
from Exhibit 10.11 of the 1995 Form 10-KSB).
10.13 Form of Employment Agreement with Anthony J. Santilli,
Beverly Santilli and Jeffrey M. Ruben (Incorporated by reference
from Exhibit 10.15 of the Amendment No. 1 to the 1996 Form
SB-2).*
10.14 Promissory Note of Anthony J. Santilli and Stock Pledge Agreement
dated September 29, 1995 (Incorporated by reference from Exhibit
10.11 of the 1995 Form 10-KSB).
10.15 Amendment One to Anthony J. Santilli's Employment Agreement
(Incorporated by reference from Exhibit 10.3 of the September 30,
1997 Form 10-QSB).*
10.16 Amendment One to Beverly Santilli's Employment Agreement
(Incorporated by reference from Exhibit 10.4 of the September 30,
1997 Form 10-QSB).*
101
Exhibit Number Description
- -------------- -----------------------------------------------------------------
10.17 Management Incentive Plan (Incorporated by reference from Exhibit
10.16 of the 1996 Form SB-2).*
10.18 Loan and Security Agreement dated December 12, 1996 between
American Business Credit, Inc. and Finova Capital Corporation
(Incorporated by reference from Exhibit 10.17 of the 1996 Form
SB-2).
10.19 Form of Option Award Agreement for Non-Employee Directors Plan
for Non-Formula Awards (Incorporated by reference from Exhibit
10.18 of the Amendment No. 1 to the 1996 Form SB-2).*
10.20 Form of Pooling and Servicing Agreement related to ABFS loan
securitizations dated March 31, 1995, October 1, 1995, May 1,
1996, August 31, 1996, February 28, 1997, September 1, 1997,
February 1, 1998 and June 1, 1998 (Incorporated by reference from
Exhibit 4.1 of the ABFS Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1995 (the "March 31, 1995 Form 10-QSB")).
10.21 Form of Sales and Contribution Agreement related to ABFS loan
securitizations dated March 31, 1995, October 1, 1995, May 1,
1996 and September 27, 1996 (Incorporated by reference from
Exhibit 4.1 of the March 31, 1995 Form 10-QSB).
10.22 Fourth Amendment to Lease between TCW Realty Fund IV Pennsylvania
Trust and ABFS dated April 9, 1996 (Incorporated by reference
from Exhibit 10.22 to the Amendment No. 1 to the 1997 SB-2).
10.23 Fifth Amendment to Lease between TCW Realty Fund IV Pennsylvania
Trust and ABFS dated October 8, 1996 (Incorporated by reference
from Exhibit 10.23 to the Amendment No. 1 to the 1997 SB-2).
10.24 Sixth Amendment to Lease between TCW Realty Fund IV Pennsylvania
Trust and ABFS dated March 31, 1997 (Incorporated by reference
from Exhibit 10.24 to the Amendment No. 1 to the 1997 SB-2).
102
Exhibit Number Description
- -------------- -----------------------------------------------------------------
10.25 Agreement for Purchase and Sale of Stock between Stanley L.
Furst, Joel E. Furst and ABFS dated October 27, 1997
(Incorporated by reference from the ABFS Current Report on Form
8-K dated October 27, 1997, File No. 0-22474).
10.26 Credit Agreement between American Business Credit, Inc.,
HomeAmerican Credit, Inc., and American Business Leasing, Inc.,
as co-borrowers, ABFS as parent, Chase Bank of Texas, NA, as
administrative agent and certain lenders (Incorporated by
reference from Exhibit 10.24 of ABFS' Annual Report on Form
10-KSB for the fiscal year ended June 30, 1997 filed on September
29, 1997, File No. 0-22474).
10.27 Standard Form of Office Lease and Rider to Lease dated April 2,
1993 by and between 5 Becker Associates and New Jersey Mortgage
(Incorporated by reference from Exhibit 10.29 of Post-Effective
Amendment No. 1 to the Registration Statement on Form SB-2 filed
on January 22, 1998, Registration No. 333-2445).
10.28 First Amendment of Lease by and between 5 Becker Associates and
New Jersey Mortgage dated July 27, 1994 (Incorporated by
reference from Exhibit 10.30 of Post-Effective Amendment No. 1 to
the Registration Statement on Form SB-2 filed on January 22,
1998, Registration No. 333-2445).
10.29 Note Agreement and Promissory Note dated July 15, 1997 issued by
New Jersey Mortgage to N.M. Rothschild & Sons (Incorporated by
reference from Exhibit 10.32 of Post-Effective Amendment No. 1 to
the Registration Statement on Form SB-2 filed on January 22,
1998, Registration No. 333-2445).
10.30 Form of Standard Terms and Conditions of Lease Acquisition
Agreement related to New Jersey Mortgage's lease securitizations
dated May 1, 1995 and March 1, 1996 (Incorporated by reference
from Exhibit 10.34 of Post-Effective Amendment No. 1 to the
Registration Statement on Form SB-2 filed on January 22, 1998,
Registration No. 333-2445).
103
Exhibit Number Description
- -------------- -----------------------------------------------------------------
10.31 Amended and Restated Specific Terms and Conditions of Servicing
Agreement related to New Jersey Mortgage's lease securitization
dated May 1, 1995 (Incorporated by reference from Exhibit 10.35
of Post-Effective Amendment No. 1 to the Registration Statement
on Form SB-2 filed on January 22, 1998, Registration No.
333-2445).
10.32 Amended and Restated Specific Terms and Conditions of Lease
Acquisition Agreement related to New Jersey Mortgage's lease
securitization dated May 1, 1995 (Incorporated by reference from
Exhibit 10.36 of Post-Effective Amendment No. 1 to the
Registration Statement on Form SB-2 filed on January 22, 1998,
Registration No. 333-2445).
10.33 Specific Terms and Conditions of Servicing Agreement related to
New Jersey Mortgage's lease securitization dated March 1, 1996
(Incorporated by reference from Exhibit 10.37 of Post-Effective
Amendment No. 1 to the Registration Statement on Form SB-2 filed
on January 22, 1998, Registration No. 333-2445).
10.34 Specific Terms and Conditions of Lease Acquisition Agreement
related to New Jersey Mortgage's lease securitization dated March
1, 1996 (Incorporated by reference from Exhibit 10.38 of
Post-Effective Amendment No. 1 to the Registration Statement on
Form SB-2 filed on January 22, 1998, Registration No. 333-2445).
10.35 Indenture by and among ABFS Equipment Contract Trust 1998-A,
American Business Leasing, Inc. and The Chase Manhattan Bank
dated June 1, 1998 (Incorporated by reference from Exhibit 10.39
of the Form S-2).
10.36 Form of Unaffiliated Seller's Agreement related to ABFS' loan
securitizations dated March 27, 1997, September 29, 1997,
February 1, 1998, and June 1, 1998 (Incorporated by reference
from Exhibit 10.40 of the Form S-2).
10.37 First Amended and Restated Interim Warehouse and Security
Agreement among Prudential Securities Credit Corporation, as
lender, and HomeAmerican Credit Inc. and American Business
Credit, Inc., as borrowers (Incorporated by reference from
Exhibit 10.41 of the Form S-2).
104
Exhibit Number Description
- -------------- -----------------------------------------------------------------
10.38 Amendments to the First Amended and Restated Interim Warehouse
and Security Agreement among Prudential Securities Credit
Corporation, as lender, and HomeAmerican Credit Inc. and American
Business Credit, Inc., as borrowers (Incorporated by reference
from Exhibit 10.42 of the Form S-2).
10.39 Amendments to the Credit Agreement between American Business
Credit, Inc., HomeAmerican Credit, Inc., American Business
Leasing, Inc., New Jersey Mortgage and Federal Leasing Corp. as
co-borrowers, American Business Financial Services, Inc., as
parent, Chase Bank of Texas, National Association, as
administrative agent for lenders (Incorporated by reference from
Exhibit 10.43 of the Form S-2).
10.40 $100.0 Million Receivables Purchase Agreement, dated September
30, 1998 among American Business Lease Funding Corporation,
American Business Leasing, Inc. and a syndicate of financial
institutions led by First Union Capital Markets and First Union
National Bank, as liquidity agent. (Incorporated by reference
from Exhibit 10.1 of the Registrant's September 30, 1998 Form
10-Q)
10.41 Interim Warehouse and Security Agreement, dated August 3, 1998,
among Prudential Securities Credit Corporation, as lender, and
Federal Leasing, Inc. and American Business Leasing, Inc., as
borrowers, and Amendments One and Two thereto. (Incorporated by
reference from Exhibit 10.3 of the Registrant's September 30,
1998 Form 10-Q)
10.42 Amended and Restated Credit Agreement, dated October 1, 1998,
between American Business Credit, Inc., HomeAmerican Credit,
Inc., American Business Leasing, Inc., New Jersey Mortgage, as
co-borrowers, American Business Financial Services, Inc., as
parent and Chase Bank of Texas. (Incorporated by reference from
Exhibit 10.4 of the Registrant's September 30, 1998 Form 10-Q).
10.43 $5,000,000 Loan Agreement dated as of December 30, 1998, between
American Business Credit, Inc., HomeAmerican Credit, Inc., New
Jersey Mortgage as co-borrowers, and Chase Bank of Texas as
lender. (Incorporated by reference from Exhibit 10.1 of the
Registrant's December 31, 1998 Form 10-Q).
105
Exhibit Number Description
- -------------- -----------------------------------------------------------------
10.44 Amendment to the First Amended and Restated Interim Warehouse and
Security Agreement dated June 9, 1997 among Prudential Securities
Credit Corporation and Home American Credit, Inc., New Jersey
Mortgage and American Business Credit, Inc. and ABFS as
Guarantor.
10.45 Amendments to the Interim Warehouse and Security Agreement
between Upland Mortgage and Prudential Securities Realty Funding
Corporation (Incorporated by reference from Exhibit 21 of the
Amendment No. 1 to the 1997 Form SB-2 filed on May 23, 1997
Registration No. 333-24115 (the "Amendment No. 1 to the 1997
SB-2")).
10.46 Form of Debenture Note related to NJMIC's Subordinated Debt
(Incorporated by reference from Exhibit 10.31 of Post-Effective
Amendment No. 1 to the Registration Statement on Form SB-2 filed
on January 22, 1998, Registration No. 333-2445).
10.47 $20.0 Million Credit Agreement dated September 28, 1998 between
American Business Leasing, Inc., Federal Leasing Corp. and First
Union National Bank Incorporated by reference from Exhibit 10.2
of the Registrant's September 30, 1998 Form 10-Q).
11 Statement of Computation of Per Share Earnings (Included in Note
16 of the Notes to Consolidated Financial Statements).
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of ABFS.
23 Consent of BDO Seidman LLP.
27 Financial Data Schedule.
- --------------------
* Denotes a management contract or compensatory plan or arrangement.
106
(b) Reports on Form 8-K:
There were no Current Reports on Form 8-K filed during the quarter
ended June 30, 1999.
107
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
Date: September 16, 1999 By: /s/ Anthony J. Santilli
-------------------------------------------
Name: Anthony J. Santilli, Jr.
Title: Chairman, President, Chief Executive
Officer, Chief Operating Officer and
Director (Duly Authorized Officer)
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ Anthony J. Santilli /s/ Michael DeLuca
- ------------------------------------------- --------------------------------
Name: Anthony J. Santilli, Jr. Name: Michael DeLuca
Title: Chairman, President, Chief Executive Title: Director
Officer, Chief Operating Officer and
Director (Principal Executive and
Operating Officer)
Date: September 16, 1999 Date: September 16, 1999
/s/ Harold Sussman /s/ Richard Kaufman
- ------------------------------------------- --------------------------------
Name: Harold Sussman Name: Richard Kaufman
Title: Director Title: Director
Date: September 16, 1999 Date: September 16, 1999
/s/ Albert W. Mandia /s/ Leonard Becker
- ------------------------------------------- --------------------------------
Name: Albert W. Mandia Name: Leonard Becker
Title: Executive Vice President Title: Director
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: September 16, 1999 Date: September 16, 1999
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
10.43 Amendment to the First and Restated Interim Warehouse and
Security Agreement dated June 9, 1997 among Prudential
Securities Credit Corporation and Home American Credit,
Inc., New Jersey Mortgage and American Business Credit, Inc.
and ABFS as Guarantor.
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of ABFS.
23 Consent of BDO Seidman LLP
27 Financial Data Schedule.