<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 000-23725
BNC MORTGAGE, INC.
------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0661303
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1063 MCGAW AVENUE IRVINE, CALIFORNIA 92614-5532
-----------------------------------------------
(Address of principal executive offices including ZIP Code)
(949) 260-6000
--------------
(Registrants' telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of November 8, 1999, Registrant had outstanding 5,042,350 shares of Common
Stock.
<PAGE> 2
BNC MORTGAGE, INC.
TABLE OF CONTENTS
TO FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1999 and June 30, 1999.................... 3
Consolidated Statement of Income for the Three Months Ended September 30, 1999
and 1998................................................................................. 4
Consolidated Statement of Cash Flows for the Three Months Ended September 30,
1999 and 1998............................................................................ 5
Notes to the Consolidated Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................... 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 15
Item 2. Changes in Securities........................................................... 15
Item 3. Defaults Upon Senior Securities................................................. 15
Item 4. Submission of Matters to a Vote of Securities Holders........................... 15
Item 5. Other Information............................................................... 15
Item 6. Exhibits and Reports on Form 8-K................................................ 15
(a) Exhibits.............................................................. 15
(b) Reports on Form 8-K................................................... 15
Signatures............................................................................... 16
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
BNC MORTGAGE, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 JUNE 30, 1999
------------------ -------------
ASSETS
<S> <C> <C>
Cash and cash equivalents ............................ $ 30,445,000 $ 29,867,000
Restricted cash ...................................... 1,109,000 1,105,000
Mortgage loans held for sale ......................... 129,914,000 141,749,000
Property and equipment, net .......................... 1,891,000 1,882,000
Goodwill ............................................. 1,443,000 1,468,000
Deferred income taxes ................................ 2,424,000 2,424,000
Notes receivable from officers ....................... 100,000 100,000
Other assets ......................................... 3,146,000 3,384,000
------------ ------------
Total assets ............................. $170,472,000 $181,979,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse lines-of-credit ............................ $129,335,000 $142,163,000
Accounts payable and accrued liabilities ............. 4,638,000 4,955,000
Income taxes payable ................................. 2,705,000 1,945,000
------------ ------------
Total liabilities ........................ 136,678,000 149,063,000
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares -- 5,000,000
Issued and outstanding shares -- none at
September 30, 1999 and June 30, 1999 ................. -- --
Common stock, voting $0.001 par value:
Authorized Shares -- 50,000,000
Issued and outstanding shares 5,042,350 at
September 30, 1999 and 5,092,350 at June 30,
1999 ................................................. 5,000 5,000
Additional paid in capital ........................... 11,678,000 11,980,000
Retained earnings .................................... 22,111,000 20,931,000
------------ ------------
Total stockholders' equity ............... 33,794,000 32,916,000
------------ ------------
Total liabilities and stockholders' equity $170,472,000 $181,979,000
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
BNC MORTGAGE, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Gain on sale of mortgage loans .................... $ 7,504,000 $11,482,000
Loan origination income ........................... 2,660,000 1,652,000
Interest income ................................... 3,513,000 1,903,000
Other income ...................................... 344,000 374,000
----------- -----------
Total revenues ........................ 14,021,000 15,411,000
----------- -----------
Expenses:
Employees' salaries and commissions ............... 6,180,000 6,823,000
General and administrative expenses ............... 3,239,000 3,214,000
Interest expense .................................. 2,629,000 1,295,000
----------- -----------
Total expenses ........................ 12,048,000 11,332,000
----------- -----------
Income before income taxes ........................ 1,973,000 4,079,000
Income tax expense ................................ 793,000 1,628,000
----------- -----------
Net income ............................ $ 1,180,000 $ 2,451,000
=========== ===========
Basic earnings per share .......................... $ 0.23 $ 0.42
=========== ===========
Diluted earnings per share ........................ $ 0.23 $ 0.42
=========== ===========
Weighted average number of shares used in computing
Net income per share:
Basic Shares ...................................... 5,129,000 5,884,000
Diluted Shares .................................... 5,129,000 5,884,000
</TABLE>
See accompanying notes.
4
<PAGE> 5
BNC MORTGAGE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ....................................................... $ 1,180,000 $ 2,451,000
Adjustment to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation ......................................... 250,000 210,000
Amortization ......................................... 25,000 --
Origination of mortgage loans held for sale .......... (432,927,000) (283,358,000)
Sales and principal repayments of mortgage loans
held for sale ....................................... 444,339,000 282,938,000
Deferred loan origination fees ....................... 423,000 156,000
Change in accounts payable and accrued liability ..... (317,000) 1,053,000
Change in income taxes payable ....................... 760,000 1,396,000
Change in deferred income taxes ...................... -- --
Change in notes receivable from officers ............. -- --
Change in other assets ............................... 238,000 235,000
------------- -------------
Total adjustments ................................................ 12,791,000 2,630,000
Net cash provided by operating activities ........................ 13,971,000 5,081,000
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ............................................. (259,000) (411,000)
Net cash used in investing activities ............................ (259,000) (411,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in warehouse lines of credit ......................... (12,828,000) 1,229,000
Repurchase of common stock ....................................... (302,000) (1,300,000)
Change in restricted cash ........................................ (4,000) 38,000
------------- -------------
Net cash used in financing activities ............................ (13,134,000) (33,000)
------------- -------------
Net increase in cash and cash equivalents ........................ 578,000 4,637,000
Cash and cash equivalents, beginning of the year ................. 29,867,000 25,890,000
------------- -------------
Cash and cash equivalents, end of the period ..................... $ 30,445,000 $ 30,527,000
============= =============
</TABLE>
See accompanying notes.
5
<PAGE> 6
BNC MORTGAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
* * * * *
DESCRIPTION OF THE BUSINESS
BNC Mortgage, Inc. ("BNC" or the "Company"), is a specialty finance company
engaged in the business of originating, purchasing and selling, on a whole loan
basis for cash, non-conforming and, to a lessor extent, conforming, residential
mortgage loans secured by one-to-four family residences. The term
"non-conforming loans" as used herein means (i) subprime loans, which are loans
made to borrowers who are unable or unwilling to obtain mortgage financing from
conventional mortgage sources, whether for reasons of credit impairment, income
qualification, credit history or a desire to receive funding on an expedited
basis and (ii) non-conforming loan products for primarily high credit borrowers
whose credit scores equal or exceed levels required for the sale or exchange of
their mortgage loans through the Federal National Mortgage Association ("FNMA")
and Federal Home Loan Mortgage Corporation ("FHLMC"), but where the loan itself
fails to meet conventional mortgage guidelines, such as the principal balance
exceeds the maximum loan limit of $240,000 or the loan structure documentation
does not conform to agency requirements. The Company's loans are made primarily
to refinance existing mortgages, consolidate other debt, finance home
improvements, education and other similar needs, and, to a lesser extent, to
purchase single family residences. The Company originates and purchases loans
through its: (i) wholesale subprime operations through which it has
relationships with approximately 5,050 approved independent loan brokers and
which to date has accounted for the majority of the Company's total loan
originations and (ii) wholesale prime operations through which it originates
conforming loans that meet FNMA, FHLMC and other conventional mortgage
guidelines and non-conforming loan products which are not subprime loans.
The Company's wholesale prime operations consist of its internal wholesale prime
business which it established in 1998 and Mortgage Logic.com, Inc., its wholly
owned subsidiary, which it formed in February 1999. Through its wholesale prime
operations, the Company originates, purchases and sells mortgage loans primarily
made to high credit quality borrowers. The Company considers "high credit
quality borrowers" to be those whose credit scores equal or exceed levels
required for the sale or exchange of their mortgage loans through FNMA or FHLMC.
The wholesale prime operations originates a variety of mortgage loans including
(i) loans which qualify for inclusion in guarantee programs sponsored by FNMA or
FHLMC, (ii) non-conforming mortgage loans that do not meet agency guidelines,
such as the principal balance exceeds the maximum loan limit of $240,000, or the
loan structure or documentation does not conform to the agency's requirements,
or (iii) other niche loan products.
The Company currently sells all of its mortgage loans to institutional
purchasers such as investment banks, real estate investment trusts and other
large mortgage bankers for cash through whole loan sales.
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and in accordance with the instructions to Form 10-Q and Regulation S-X. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the results for the interim
periods have been included. The results of operations for the interim periods
are not necessarily indicative of the results to be expected for the full year.
In addition, this document should be read in conjunction with the financial
statements and footnotes included in the Company's Form 10-K for the fiscal year
ended June 30, 1999.
The consolidated financial statements of the Company include the accounts of the
Company and all of its wholly owned subsidiaries. All significant inter-company
transactions and balances are eliminated.
The preparation of the financial statements of the Company requires management
to make estimates and assumptions that affect reported amounts. These estimates
are based on information available as of the date of the financial statements.
Therefore, actual results could differ from those estimates.
2. MORTGAGE LOANS HELD FOR SALE
6
<PAGE> 7
Mortgage loans held for sale are collateralized by first and second trust deeds
on underlying real properties and are used as collateral for the Company's
borrowings. Approximately 49.8% of these properties are located in California as
of September 30, 1999. Mortgage loans held for sale include net deferred fees
and costs of $423,000 and $519,000 at September 30, 1999 and June 30, 1999,
respectively.
3. WAREHOUSE LINES OF CREDIT
The Company has entered into a warehouse line-of-credit agreement with DLJ,
which provides for borrowings up to $150.0 million with interest payable monthly
at the Federal Funds rate plus 50 basis points until March 16, 1999 and
thereafter at Federal Funds rate plus 100 basis points. At September 30, 1999
and June 30, 1999 borrowings under this line of $102.5 million and $120.0
million are collateralized by mortgage loans held for sale. This line-of-credit
matures and is subject to renewal on March 16, 2000.
In February 1999, the Company entered into a warehouse line-of-credit with Bank
United, which provides for borrowings up to $50.0 million with a floating
interest rate based on the LIBOR rate and a commitment fee of $125,000. As of
September 30, 1999 and June 30, 1999, borrowings under this line of $10.5
million and $5.1 million are collateralized by mortgage loans held for sale with
an interest rate of 6.7%. This line-of-credit matures and is subject to renewal
on February 1, 2000.
In March 1999, the Company entered into a warehouse line-of-credit with
Residential Funding Corporation , ("RFC"), which provides for borrowings up to
$50.0 million with a floating interest rate based on the LIBOR rate and a
commitment fee of $65,000. As of September 30, 1999, and June 30, 1999,
borrowings under this line of $10.8 million and $14.7 million are collateralized
by mortgage loans held for sale with an interest rate of 6.6%. This
line-of-credit matures and is subject to renewal on March 1, 2000.
MortgageLogic.com, Inc. entered into an uncommitted master repurchase credit
agreement with Paine Webber Real Estate Securities which provides for borrowings
up to $50.0 million with a floating interest rate based on the LIBOR rate. As of
September 30, 1999, and June 30, 1999, borrowings under this line of $5.5
million and $2.4 million are collateralized by mortgage loans held for sale with
an interest rate of 6.6%.
Under the Bank United and RFC credit agreements, the Company must comply with
certain financial and other covenants, including the maintenance of a minimum
tangible net worth of $25.0 million, a debt to tangible worth ratio not to
exceed 15:1, other financial ratios, and the maintenance of a quarterly net
income not less than zero. Further, absent the consent of Bank United, such
covenants prohibit the Company from declaring or paying any dividends on any
shares of the Company's common stock. At September 30, 1999, the Company was in
compliance with the aforementioned covenants.
The weighted average interest rates on line-of-credit borrowings for the quarter
ended September 30, 1999 and the year ended June 30, 1999 were 6.8% and 6.9% ,
respectively.
4. COMMITMENTS AND CONTINGENCIES
Forward Loan Sales Commitments
In July 1999, the Company entered into a $10 million mandatory delivery
commitment to sell certain nonconforming mortgage loans at current market rates
to Impac Funding Corporation. The commitment is for a 9-month period and
provides options to increase the commitment up to $40 million. Upon expiration
of the commitment term, the Company shall pay a commitment fee equal to 0.125%
of the unused portion of the initial commitment and unused portion of any
optional commitments that were exercised. At September 30, 1999, $10.0 million
loans had been sold under this commitment.
Repurchase Obligation
The Company engages in bulk loan sales pursuant to agreements that generally
require the Company to repurchase or substitute loans in the event of a breach
of representation or warranty made by the Company to the loan purchaser, any
misrepresentation during the mortgage loan origination process or, in some
cases, upon any fraud or first payment default on such mortgage loans. A reserve
for potential repurchases of $1.2 million and $800,000 at September 30, 1999 and
1998, respectively, is included in accounts payable and accrued liabilities.
Business Acquisition
7
<PAGE> 8
On February 26, 1999, the Company acquired certain assets and the business of
America's Lender, Inc. a mortgage originator that utilizes an internet-based
wholesale mortgage lending operation that links independent mortgage brokers to
an automated underwriting and credit reporting system. The Company paid
$2,000,000 in cash and has agreed to pay up to an additional $1,000,000 based
upon net loan originations achieved during the first 12-month period. The
earn-out is $0.001 for each dollar of net origination volume of the mortgage
business that equals or exceeds $500,000,000 during the 12-month period. The
Company deposited $500,000 into an interest-bearing escrow account to
collateralize the future obligation. Should the earn-out not be earned, the
$500,000 deposit will revert back to the Company. The transaction was accounted
for a purchase and the excess of cost over fair value of the net assets acquired
is being amortized on a straight-line basis over a 15-year period. The assets of
America's Lender, Inc. is operated as the Company's wholly owned subsidiary
named MortgageLogic.com, Inc. The operations of America's Lender, Inc. are
included in the Company's consolidated statement of operations from the date of
acquisition.
5. SUBSEQUENT EVENTS
On October 6, 1999, the Company entered into a forward loan sale contract with
an investment bank under which it has committed to deliver $280.0 million in
loans originated during the period from October 1999 to January 2000. The price
received under the commitment includes adjustments for the actual weighted
average coupons, weighted average margins and prepayment terms of the loans
sold.
On October 8, 1999, the Company exercised it's option to increase the mandatory
delivery commitment with IMPAC Funding Corporation by an amount of $15 million.
6. STOCKHOLDER'S EQUITY
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders of the Company, to issue up to 5,000,000 shares of Preferred Stock
in one or more series, and to fix the designations, rights, preferences,
privileges, qualifications and restrictions thereof including dividend rights,
conversion rights, voting rights, rights and terms of redemption, liquidation
preferences and sinking fund terms, any or all of which may be greater than the
rights of the Common Stock. 570,000 shares have been designated Series A Junior
Participating Preferred Stock. The terms and conditions of the Series A Junior
Preferred Stock could have the effect of delaying, deferring or preventing a
hostile change in control of the Company.
WARRANTS
In connection with the initial public offering, the Company issued warrants to
purchase 317,319 shares of Common Stock at an exercise price per share equal to
$10.45. The warrants are exercisable over a period of four years, commencing one
year from March 10, 1998.
COMMON STOCK REPURCHASE PLAN
The Company's Board of Directors has authorized the Company to repurchase up to
$5.0 million of the Company's common stock in open market purchases from time to
time at the discretion of the Company's management. As of September 30, 1999,
the Company had repurchased 833,629 shares of Common Stock at a cost of $4.5
million.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
consolidated financial statements and notes included in Item 1 of this 10-Q.
Except for the historical information contained herein, this Form 10-Q contains
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially. Such risks and uncertainties include, but
are not limited to, changes in the performance of the financial markets, changes
in the demand for and market acceptance of the Company's products, changes in
the mortgage lending industry or changes in general economic conditions,
including interest rates; the impact of competition; changes in the value of
real estate; the ability to maintain and increase sources of funding; and other
risks disclosed from time to time in the Company's SEC reports and filings.
Forward-looking statements used in this report can be identified by the use of
words such as: "could," "may," "will," "expects," "believes," and the negatives
or derivatives thereof, and similar expressions. Investors are encouraged to
fully examine such risks prior to making an investment decision in the Company's
securities.
GENERAL
BNC Mortgage, Inc. ("BNC" or the "Company"), is a specialty finance company
engaged in the business of originating, purchasing and selling, on a whole loan
basis for cash, non-conforming and, to a lessor extent, conforming, residential
mortgage loans secured by one-to-four family residences. The term
"non-conforming loans" as used herein means (i) subprime loans, which are loans
made to borrowers who are unable or unwilling to obtain mortgage financing from
conventional mortgage sources, whether for reasons of credit impairment, income
qualification, credit history or a desire to receive funding on an expedited
basis and (ii) non-conforming loan products for primarily high credit borrowers
whose credit scores equal or exceed levels required for the sale or exchange of
their mortgage loans through the Federal National Mortgage Association ("FNMA")
and Federal Home Loan Mortgage Corporation ("FHLMC"), but where the loan itself
fails to meet conventional mortgage guidelines, such as the principal balance
exceeds the maximum loan limit of $240,000 or the loan structure documentation
does not conform to agency requirements. The Company's loans are made primarily
to refinance existing mortgages, consolidate other debt, finance home
improvements, education and other similar needs, and, to a lesser extent, to
purchase single family residences. The Company originates and purchases loans
through its: (i) wholesale subprime operations through which it has
relationships with approximately 5,050 approved independent loan brokers and
which to date has accounted for the majority of the Company's total loan
originations and (ii) wholesale prime operations through which it originates
conforming loans that meet FNMA, FHLMC and other conventional mortgage
guidelines and non-conforming loan products which are not subprime loans.
The Company's wholesale prime operations consist of its internal wholesale prime
business which it established in 1998 and Mortgage Logic.com, Inc., its wholly
owned subsidiary, which it formed in February 1999. Through its wholesale prime
operations, the Company originates, purchases and shells mortgage loans
primarily made to high credit quality borrowers. The Company considers "high
credit quality borrowers" to be those whose credit scores equal or exceed levels
required for the sale or exchange of their mortgage loans through FNMA or FHLMC.
The wholesale prime operations originates a variety of mortgage loans that do
not meet agency guidelines, such as the principal balance exceeds the maximum
loan limit of $240,000, or the loan structure or documentation does not conform
to the agency's requirements, or (iii) other niche loan products.
Approximately 27.9% of total loan production for the three months ended
September 30, 1999 consisted of conforming loans. Substantially all of the
Company's mortgage loan originations are sold in the secondary market through
loan sales in which the Company disposes of its entire economic interest in the
loans including the related servicing rights for cash. As a result of this
strategy, the Company receives cash revenue, rather than recognizing non-cash
revenue attributable to residual interests in future loan payments on the loan,
as is the case with securitizations.
9
<PAGE> 10
The following table shows the Company's mortgage loan originations including
brokered loans, mortgage loan sales, cash gain on sale of mortgage loans and
origination locations with account executives for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage loan originations:
Subprime ................................. $312,126 $253,024
Prime .................................... 120,801 30,334
-------- --------
$432,927 $283,358
======== ========
Mortgage loan sales:
Subprime ................................. $319,334 $252,845
Prime .................................... 123,114 29,525
-------- --------
$442,448 $282,370
======== ========
Gain on sale of mortgage loans:
Subprime ................................. $ 7,180 $ 11,150
Prime .................................... 324 332
-------- --------
$ 7,504 $ 11,482
======== ========
Origination locations at end of period ..... 53 57
======== ========
</TABLE>
The major components of the Company's revenues are (i) the volume of loans
originated, (ii) the premium over principal amount received in loan sales, (iii)
origination points received or paid, (iv) origination fees received and (v) the
differential between the interest rate on borrowings under revolving warehouse
credit facilities and the interest rate of loans held for sale. Cash gain on
sale of mortgage loans is affected by, among other things, borrower credit risk
classification, loan- to-value ratio, interest rate and margin of the loans.
Total revenues decreased 10% to $14.0 million for the three months ended
September 30, 1999 as compared to $15.4 million for the three months ended
September 30, 1998.
The major components of expenses are employees' salaries and commissions,
general and administrative, and interest. Employees' salaries and commissions,
for the three months ended September 30, 1999 and 1998 accounted for 51.3% and
60.2% of total expenses, respectively. Employees' salaries and commissions are
primarily related to the loan origination volume because the Company's sales
force is compensated on a commission basis in addition to salaries. Total
expenses increased to $12.0 million for the three months ended September 30,
1999, compared to $11.3 million for the three months ended September 30, 1998.
The Company's net income decreased 52% to $1.2 million for the three months
ended September 30, 1999, compared to $2.5 million for the three months ended
September 30, 1998. The decrease in net income resulted primarily from a
reduction in the cash gain on sale of mortgage loans during the period due to
secondary marketing conditions.
Increased competition in the non-conforming mortgage industry could have the
effect of (i) lowering gains that may be realized on loan sales through lower
cash premiums paid for loans or an increase in demand for yield spread premium
paid to the mortgage brokers, (ii) reducing an individual company's volume of
loan originations and sales, (iii) increasing demand for experienced personnel
increasing the likelihood such personnel will be recruited by competitors and
(iv) lowering the industry standard for non-conforming underwriting guidelines
as competitors attempt to increase or maintain market share in the face of
increased competition. In the past, certain of these factors have caused the
revenues and net income of many participants in the non-conforming mortgage
industry, including the Company, to fluctuate from quarter to quarter.
The mortgage loan industry experienced significant turmoil during the nine
months ended September 30, 1999 due to a lack of liquidity in the mortgage and
asset-backed securitization market. These developments have caused a tightening
in the pricing of whole loan sales as many mortgage securitizers have been
forced to sell their loans on a whole loan basis for cash. Average prices
offered by third parties for mortgage loans in the first quarter of 1999 have
been less than that which the Company received in the first quarter of 1998.
10
<PAGE> 11
In the event that declines in whole loan pricing continue, the Company expects
to see a decrease in its cash gain on sale of mortgage loans in future quarters.
If the Company is unable to increase its mortgage loan origination volume
commensurate with such pricing declines, the Company's net income would be
adversely affected. The Company made certain internal adjustments in response to
market conditions in the mortgage industry. The Company reduced yield spread
premiums paid to brokers and compensation paid to employees. The Company also
reduced its employees, raised interest rates and increased origination fees
charged to borrowers to boost profitability. While the Company would also expect
to receive some benefit from these and other adjustments with regard to
profitability of its mortgage loan originations, the effect of these adjustments
may have an adverse effect on future mortgage loan production.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES. The following table sets forth the components of the Company's
revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Gain on sale of mortgage loans ... $ 7,504 $11,482
Loan origination income .......... 2,660 1,652
Interest income .................. 3,513 1,903
Other income ..................... 344 374
------- -------
$14,021 $15,411
======= =======
</TABLE>
The decrease in revenues was due primarily to decrease in the cash gain on sales
of mortgage loans. Mortgage loan originations increased $149.6 million to $432.9
million for the three months ended September 30, 1999 from $283.4 million for
the three months ended September 30, 1998. There can be no assurance that the
Company will recognize comparable levels of revenues and mortgage loan
originations in future periods.
Cash gain on sale of mortgage loans decreased $4.0 million to $7.5 million for
the three months ended September 30, 1999 from $11.5 million for the three
months ended September 30, 1998. The decrease was due primarily to a decline in
the average cash premium paid for non-conforming mortgage loans. The weighted
average cash premium paid for subprime mortgage loans sold was 3.52% for the
three months ended September 30, 1999 and 5.61% for the three months ended
September 30, 1998. The Company makes yield spread premium payments to its
mortgage broker customers in the ordinary course of business. These payments
have decreased in recent periods, which offset the decline in cash premiums paid
for subprime mortgage loans for the three months ended September 30, 1999. The
weighted average yield spread premiums paid as a percentage of subprime mortgage
loans sold for the three months ended September 30, 1999 was 1.27% and for the
three months ended September 30, 1998 was 1.20%. The Company received some
benefit from recent reduction in yield spread premiums payable to brokers in the
quarter ended September 30, 1999. There can be no assurance that the Company
will recognize comparable levels of cash gain on sale of mortgage loans in
future periods or that yield spread premium payments will continue to decline.
The weighted average cash premiums paid for prime mortgage loans sold was 0.98%
for the three months ended September 30, 1999 and 1.11% for the three months
ended September 30, 1998. The weighted average yield spread premium as a
percentage of prime mortgage loans sold was 0.72% for the three months ended
September 30, 1999, and 0.024% for the three months ended September 30, 1998.
Loan origination income increased to $2.7 million for the three months ended
September 30, 1999 from $1.7 million for the three months ended September 30,
1998. As a percentage of total revenues, loan origination income for the three
months ended September 30, 1999 increased to 19.0% as compared to 10.7% for the
three months ended September 30, 1998. This increase was primarily due to a
decrease in cash gain on sale of mortgage loans. Loan originations may be
adversely affected in future periods as a result of a decrease in yield spread
premiums payable to brokers and raised interest rates charged to borrowers.
Interest income increased $1.6 million to $3.5 million for the three months
ended September 30, 1999 from $1.9 million for the three months ended September
30, 1998. This increase is due to the increase in mortgage loan originations.
Other income, which is comprised of investment income, prepayment penalties and
late charges, decreased to $344,000 for the three months ended September 30,
1999 as compared to $374,000 for the three months ended September 30, 1998 as a
result of lower interest earned on investments.
11
<PAGE> 12
EXPENSES. The following table sets forth the components of the Company's
expenses for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Employees' salaries and commissions .... $ 6,180 $ 6,823
General and administrative expenses .... 3,239 3,214
Interest expense ....................... 2,629 1,295
------- -------
$12,048 $11,332
======= =======
</TABLE>
Total expenses increased to $12.0 million for the three months ended September
30, 1999 from $11.3 million for the three months ended September 30, 1998. This
increase is primarily related to an increase in mortgage loan originations.
Employee salaries and commissions decreased $600,000 to $6.2 million during the
three months ended September 30, 1999 from $6.8 million for the three months
ended September 30, 1998. The primary reason for the decrease was due to the
Company's efforts to reduce costs.
General and administrative expenses increased $25,000 to $3.2 million for the
three months ended September 30, 1999 compared to the same corresponding 1998
period.
Interest expense increased $1.3 to $2.6 million for the three months ended
September 30, 1999 from $1.3 million for the three months ended September 30,
1998. This increase is due to the increase in mortgage loan originations.
YEAR 2000
The Company has evaluated the internal information technology (IT) and non-IT
systems that could be affected by Year 2000 issues and also identified the
external systems that are critical to the Company's operations. An assessment of
the readiness of the Company's suppliers is ongoing. The Company's plan for Year
2000 readiness has three phases. Phase one involves identifying and remediating
the internal systems and processes that must be Year 2000 compliant. Phase one
has been completed. Phase two consists of testing both the internal and external
systems as a whole, and has been scheduled to be fully implemented by January 1,
2000. The Company intends to test its systems throughout 1999 to ensure that
system and software upgrades are fully compliant. Phase three consists of
developing a contingency plan for those external systems or suppliers that are
critical for the Company to operate, but are not yet Year 2000 compliant. The
Company will finalize these contingency plans before January 1, 2000.
The Company does not anticipate the cost of addressing all the issues
associated with becoming Year 2000 compliant will have a material impact on its
financial condition, results of operations or liquidity in any single year. The
Company's estimates are based upon the assumption that its major third party
suppliers are or become Year 2000 compliant within the time frame outlined
above. Efforts to modify the Company's IT systems have substantially been
performed internally, however, the Company does not separately track such costs.
These costs primarily relate to salaries and wages which are expensed as
incurred. The Company estimates its costs associated with becoming Y2K compliant
will be less than $100,000, exclusive of system upgrades incurred in the normal
course of business. The Company has requested that its major third party
suppliers provide details of their Year 2000 compliance program and schedule of
testing. In the event any of these vendors are unable to become compliant the
Company may incur additional costs.
Although the Company has taken steps to identify, evaluate and remediate
its Year 2000 compliance issues, it is possible that certain of its suppliers
and/or systems may not be Year 2000 compliant by January 1, 2000. These
suppliers provide the Company with computer processing systems, banking and
financial systems, and utility infrastructure. In the event that any of these
suppliers and/or systems are not Year 2000 compliant as of January 1, 2000, the
Company may be exposed to an impairment of its: (i) operations, (ii) business
processes, (iii) ability to meet its financial obligations. The impairment in
any of these areas could have a material adverse effect on the Company's
financial condition, results of operations and liquidity. The Company is
assessing these risks and is creating contingency plans intended to address such
risks, and expects to have such plans in place by January 1, 2000.
LIQUIDITY AND CAPITAL RESOURCES
12
<PAGE> 13
The Company's sources of cash flow include cash gain on sale of mortgage
loans, origination income, net interest income and borrowings. The Company sells
its mortgage loans generally on a monthly basis to generate cash for operations.
The Company's uses of cash in the short-term include the funding of mortgage
loan originations, payment of interest, repayment of amounts borrowed under
warehouse lines of credit, operating and administrative expenses, start-up costs
for new origination locations, income taxes and capital expenditures. Long-term
uses of cash may also include the funding of securitization activities and
selective acquisitions of other specialty finance companies or portfolios of
loan assets. The Company acquired certain assets and liabilities of America's
Lender, Inc. on February 26, 1999. In connection with the acquisition, the
Company paid $2.0 million and agreed to pay up to an additional $1.0 million due
12 months after the date of closing. There can be no assurance that any future
acquisitions will be consummated.
Capital expenditures totaled $259,000 and $411,000 for the three months
ended September 30, 1999 and 1998, respectively. Capital expenditures were
primarily comprising furniture, fixtures and equipment software and leasehold
improvements.
Cash and cash equivalents were $30.4 million at September 30, 1999. The
Company invests its cash in short-term investments maintaining flexibility for
funding of loan originations and strategic opportunities.
As of April 6, 1999, the Company's Board of Directors had authorized the
Company to purchase up to $5.0 million of the Company's common stock in open
market purchases from time to time at the discretion of the Company's
management. As of September 30, 1999, the Company had repurchased 833,629 shares
of Common Stock at a cost of $4.5 million.
The Company funds its operations through cash reserves, loan sales, net
earnings, revolving warehouse credit facilities and an uncommitted master loan
repurchase credit agreement, under which it borrows money to finance the
origination of mortgage loans. As of September 30, 1999, the Company had three
warehouse credit facilities, and one master repurchase credit agreement which
provides borrowings in the aggregate up to $300.0 million.
The Company has entered into a warehouse line of credit agreement with
DLJ, which provides for borrowings up to $150.0 million with interest payable
monthly at the Federal Funds rate plus 100 basis points. At September 30, 1999,
borrowings under this line of $120.0 million were collateralized by mortgage
loans held for sale. The interest rate is subject to increase based on the
length of time loans are held by the Company, and that DLJ receives a security
interest on all loans, and other rights in connection herewith, originated by
the Company. This line-of-credit matures and is subject to renewal on March 16,
2000.
In February 1999, the Company entered into a warehouse line of credit
with Bank United, which provides for borrowings up to $50.0 million with a
floating interest rate based on the LIBOR rate and a commitment fee of $125,000.
As of September 30, 1999, borrowings under this line were $10.5 million and the
interest rate was 6.7%. The warehouse line of credit with Bank United contains
certain financial covenants including the requirement that the Company maintain
a minimum adjusted tangible net worth of not less than $25.0 million and a debt
to adjusted tangible worth ratio not to exceed 15:1, each computed as of the end
of each calendar quarter. The Company was in compliance with these covenants as
of September 30, 1999. The warehouse line is secured by all mortgage loans used
under the line and all related rights thereto. This line of credit matures and
is subject to renewal on February 1, 2000.
In March 1999, the company entered into a warehouse line of credit with
RFC, which provides for borrowings up to $50.0 million with a floating interest
rate based on the LIBOR rate and a commitment fee of $65,000. As of September
30, 1999, borrowings under this line were $10.8 million and the interest rate
was 6.6%. The warehouse line of credit with RFC contains certain financial
covenants including the requirement that the Company maintain a minimum adjusted
tangible net worth of not less than $25.0 million, liquidity of not less than
$10.0 million, quarterly net income of not less than zero and a debt to adjusted
tangible worth ratio not to exceed 15:1. The Company was in compliance with
these covenants as of September 30, 1999. The warehouse line is secured by all
mortgage loans used under the line and all related rights thereto. This line of
credit matures and is subject to renewal on March 1, 2000.
The Company also entered into an uncommitted master repurchase credit
agreement with PWRS, which provides for borrowings up to $50.0 million with a
floating interest rate based on the LIBOR rate. As of September 30, 1999,
borrowings under this line were $5.5 million and the interest rate was 6.6%.
The Company is currently negotiating with other lenders to obtain
additional warehouse lines of credit with interest rates and terms that are
consistent with management's objectives, however there is no assurance that the
Company will consummate these lines of credit. The Company repays borrowings
with proceeds of its loan sales.
During the three months ended September 30, 1999 and 1998, the Company
used cash of $432.9 million and $283.4 million, respectively, for new loan
originations. During the same periods, the Company received cash proceeds from
the sale of loans of $444.3 million and $282.9 million, respectively,
representing the principal balance of loans sold. The Company received cash
proceeds from the premiums on such sale of loans of $7.5 million and $11.5
million, for the three months ended September 30, 1999 and 1998, respectively.
The Company's ability to continue to originate loans is dependent in
large part upon its ability to sell the mortgage loans at par or for a premium
in the secondary market in order to generate cash proceeds to repay borrowings
under the warehouse facility, thereby creating borrowing capacity to fund new
originations. The value of and market for the Company's loans are dependent upon
a number of factors, including the borrower credit risk classification,
loan-to-value ratios and interest rates, general economic conditions, warehouse
facility interest rates and governmental regulations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURE ABOUT MARKET RISK
The Company's earnings can be affected significantly by the movement of
interest rates, which is the primary component of market risk to the Company.
The interest rate risk affects the value of the mortgage loans held for sale,
net interest income earned on its mortgage
13
<PAGE> 14
inventory, interest income earned on idle cash, interest expense and cash gain
on sale of mortgage loans, as well as consumer demand for mortgage loan
production.
As it relates to lending activities, the Company originates mortgage
loans, which are generally presold through forward loan sales commitments.
However, between the time that the loan is originated and sold to the ultimate
investor, the Company earns interest income. The loans are funded through the
use of the warehouse lines of credit, and the interest charged by the lenders is
generally based upon short-term interest rates. Therefore, the net interest
income that is earned by the Company is generally dependent upon the spread
between long-term mortgage rates and short-term mortgage rates.
The Company currently does not maintain a trading portfolio. As a
result, the Company is not exposed to market risk as it relates to trading
activities. The majority of the Company's loan portfolio is held for sale which
requires the Company to perform quarterly market valuations of its portfolio in
order to properly record the portfolio at the lower of cost or market.
Therefore, the Company continually monitors the interest rates of its loan
portfolio as compared to prevalent interest rates in the market.
The Company currently does not enter into any hedging activities as it
currently sells its loan production on a monthly basis.
Based on the information available and the interest environment as of
September 30, 1999, the Company believes that a 100 basis point increase in
long-term interest rates over a twelve month period, with all else being
constant, would have an adverse effect on the pricing for the Company's whole
loan sales. Therefore, the Company believes that its net income could be
adversely affected in the range of $1.3 to $2.5 million. However, the Company
believes that a 100 basis point decrease in long-term interest rates over a
twelve-month period may not result in a similar increase of its net income.
These estimates are limited by the fact that they are performed at a particular
point in time and incorporate many other factors and thus should not be used as
a forecast. Therefore, there can be no assurance that the amount of such
decrease would not substantially vary from these estimates.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - The Company is a party to various routine legal
proceedings arising out of the ordinary course of its business.
Management believes that none of these actions, individually or in the
aggregate, will have a material adverse effect on the consolidated
financial condition or results of operations of the Company.
ITEM 2. Changes in Securities - See Management Discussion and Analysis of
Financial Condition and Results of Operation Liquidity and Capital
Resources for a discussion of the use of proceeds from the Company's
initial public offering.
ITEM 3. Defaults upon Senior Securities - Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders - Not Applicable
ITEM 5. Other Information - Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement regarding computation of per share earnings
27.1 Financial Statement Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
None
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the
undersigned thereunto duly authorized, in the City of Irvine, State of
California.
BNC MORTGAGE, INC.
(Registrant)
By: /s/ EVAN R. BUCKLEY November 8, 1999
----------------------------- ------------------------------------------
Evan R. Buckley Date
Chief Executive Officer and
Secretary
By: /s/ KELLY W. MONAHAN November 8, 1999
----------------------------- ------------------------------------------
Kelly W. Monahan Date
President
By: /s/ PETER R. EVANS November 8, 1999
----------------------------- ------------------------------------------
Peter R. Evans Date
Vice President and
Chief Financial Officer
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
11.1 Statement regarding computation of per share earnings
27.1 Financial Statement Data Schedule (EDGAR filing only)
</TABLE>
17
<PAGE> 1
Exhibit 11.1 - Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Basic earnings per common share
Net income for calculating basic earnings
per common share......................... $1,180,000 $2,451,000
========== ==========
Average common shares outstanding........... 5,129,000 5,884,000
---------- ----------
Basic earnings per common share............. $ 0.23 $ 0.42
========== ==========
Diluted earnings per common share
Net income for calculating basic earnings
per common share......................... $1,180,000 $2,451,000
========== ==========
Average common shares outstanding........... 5,129,000 5,884,000
Add exercise of options and warrants -- --
---------- ----------
Diluted common shares outstanding........... 5,129,000 5,884,000
========== ==========
Diluted earnings per common share........... $ 0.23 $ 0.42
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 30,445,000
<SECURITIES> 1,109,000
<RECEIVABLES> 5,670,000
<ALLOWANCES> 0
<INVENTORY> 129,914,000
<CURRENT-ASSETS> 167,138,000
<PP&E> 5,371,000
<DEPRECIATION> 2,037,000
<TOTAL-ASSETS> 170,472,000
<CURRENT-LIABILITIES> 136,678,000
<BONDS> 0
0
0
<COMMON> 5,000
<OTHER-SE> 33,789,000
<TOTAL-LIABILITY-AND-EQUITY> 170,472,000
<SALES> 14,021,000
<TOTAL-REVENUES> 14,021,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,419,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,629,000
<INCOME-PRETAX> 1,973,000
<INCOME-TAX> 793,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,180,000
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.23
</TABLE>
