<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 June 30, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ______________
Commission file number: 001-13417
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 13-3950486
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
90 WEST STREET, SUITE 1508, NEW YORK, NY 10006
(Address of principal executive offices) (Zip Code)
(212) 732-5086
(Registrant's 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 period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The registrant had 6,468,799 shares of common stock outstanding as of
July 30, 1998.
<PAGE> 2
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
FORM 10-Q
For the Quarter Ended June 30, 1998
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations for the Three
Months Ended June 30, 1998 and for the Six Months 4
Ended June 30, 1998
Condensed Consolidated Statement of Cash Flows for the
Six Months Ended June 30, 1998 5
Notes to Condensed Consolidated Financial Statements 6-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-22
Item 3. Quantitative and Qualitative Disclosures 22
About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except as noted)
<TABLE>
<CAPTION>
ASSETS JUNE 30, DECEMBER 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Mortgage loans:
Held for sale $457,033 $160,970
Held to maturity 79,816 --
Collateral for mortgage backed bonds 97,214 --
Mortgage securities, available for sale 254,711 348,131
Cash and cash equivalents 16,300 4,022
Accrued interest receivable 7,462 3,597
Equity investment (200) 100
Notes receivable from related parties 5,354 482
Other receivables 1,646 --
Prepaid expenses and other assets 786 241
-------- --------
TOTAL ASSETS $920,122 $517,543
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Reverse repurchase agreements $743,249 $435,138
Mortgage backed bonds 92,719 --
Accrued interest payable 3,139 2,250
Dividends payable 1,358 1,035
Due to related party 181 540
Accrued expenses and other liabilities 4,893 482
-------- --------
Total liabilities 845,539 439,445
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01
authorized, 10 million shares, issued
and outstanding, -0- shares
Common stock, par value $.01
authorized, 90 million shares; 6,468,799 and
6,466,677 shares outstanding at June 30, 1998
and December 31, 1997, respectively 65 65
Additional paid-in-capital 79,454 79,411
Available for sale securities:
Unrealized (loss) on investments available for sale (2,289) (842)
Retained earnings (deficit) (2,647) (536)
-------- --------
Total stockholders' equity 74,583 78,098
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $920,122 $517,543
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1998
---- ----
<S> <C> <C>
REVENUES:
Interest income $ 11,598 $ 20,930
Interest expense 10,824 17,997
-------- --------
Net interest income 774 2,933
Loan loss provision 97 148
-------- --------
Net interest income after loan loss
provision 677 2,785
(Loss) on sale of mortgage loans (49) (49)
-------- --------
Total revenues 628 2,736
-------- --------
EXPENSES:
General and administrative expenses
Personnel 174 363
Management and administrative 168 329
Due diligence 245 420
Commissions 92 217
Legal and professional 230 371
Other 69 132
-------- --------
Total expenses 978 1,832
-------- --------
Operating income (loss) (350) 904
Equity in (loss) of unconsolidated subsidiary (294) (300)
-------- --------
NET INCOME (LOSS) $ (644) $ 604
======== ========
BASIC EARNINGS (LOSS) PER SHARE $ (0.10) $ 0.09
======== ========
DILUTED EARNINGS (LOSS) PER SHARE $ (0.10) $ 0.08
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 5
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30, 1998
-------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 604
Adjustments to reconcile net income to net cash used
in operating activities:
Amortization of net premiums 3,601
Amortization of net deferred expenses 106
Loan loss provision 147
Loss on sale of mortgage loans 49
Equity in loss of unconsolidated subsidiary 300
(Increase) in accrued interest receivable (3,865)
(Increase) in loans to related parties (4,872)
(Increase) in other receivables (1,646)
(Increase) in prepaid expenses and other assets (545)
Increase in accrued interest payable 889
(Decrease) in due to related party (359)
Increase in accrued expenses and other liabilities 4,424
--------
Net cash (used in) operating activities (1,167)
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage loans (542,653)
Purchase of mortgage securities (4,333)
Principal payments on mortgage securities 93,254
Principal payments on mortgage loans 40,551
Proceeds from sale of mortgage loans 20,118
Principal payments on collateral for mortgage backed bonds 8,038
--------
Net cash (used in) investing activities (385,025)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from reverse repurchase agreements 308,111
Net borrowings from mortgage backed bonds 92,719
Exercise of stock warrants 33
Payment of dividends (2,393)
--------
Net cash provided by investing activities 398,470
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS 12,278
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,022
---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,300
=========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
Operating activity-increase in dividends payable ($1,358)
relating to the declaration of dividends in June 1998
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 1
=========
Interest $ 16,818
=========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 6
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
GENERAL
Hanover Capital Mortgage Holdings, Inc. was incorporated in Maryland on June 10,
1997. In April 1998 Hanover Capital Mortgage Holdings, Inc. acquired 100% of the
common stock of Hanover Capital SPC, Inc. Hanover Capital Mortgage Holdings,
Inc. is a real estate investment trust ("REIT"), formed to operate as a
specialty finance company. The principal business strategy of Hanover Capital
Mortgage Holdings, Inc. and its wholly owned subsidiary, Hanover Capital SPC,
Inc. (together referred to as the "Company") is to (i) acquire primarily
single-family mortgage loans that are at least twelve months old or that were
intended to be of certain credit quality but that do not meet the originally
intended market parameters due to errors or credit deterioration, (ii)
securitize the mortgage loans and retain interests therein, (iii) originate,
hold, sell and service multifamily loans and commercial loans and (iv) acquire
multifamily loans. The Company's principal business objective is to generate
increasing earnings and dividends for distribution to its stockholders. The
Company acquires single-family mortgage loans through a network of sales
representatives targeting financial institutions throughout the United States.
The Company may also acquire multifamily mortgage loans from a taxable
subsidiary of the Company.
Hanover Capital SPC, Inc., a wholly-owned subsidiary of the Company, was
incorporated in Delaware on April 7, 1998 for the sole purpose of issuing
mortgage notes through a private placement (REMIC) offering.
CAPITALIZATION
In September 1997, the Company raised net proceeds of approximately $79 million
in its initial public offering (the "IPO"). In the IPO, the Company sold
5,750,000 units (each unit consisting of one share of common stock, par value
$.01 and one stock warrant) at $15.00 per unit including 750,000 units sold
pursuant to the underwriters' overallotment option, which was exercised in full.
Each warrant entitles the holder to purchase one share of common stock at the
original issue price - $15.00. The warrants became exercisable on March 19, 1998
and expire on September 15, 2000. On July 20, 1998 the Company filed a Post
Effective Amendment to its Registration Statement in order to allow holders of
its warrants to continue to exercise their warrants. The Company utilized
substantially all of the net proceeds of the IPO to fund leveraged purchases of
mortgage loans.
In connection with the closing of the IPO the Company acquired a 97% ownership
interest (representing a 100% ownership of the non-voting preferred stock) in
Hanover Capital Partners Ltd. and its wholly-owned subsidiaries: Hanover Capital
Mortgage Corporation and Hanover Capital Securities, Inc., in exchange for
716,667 shares of the Company's common stock. Hanover Capital Partners Ltd. and
its wholly-owned subsidiaries, offer due diligence services to buyers, sellers
and holders of mortgage loans and originate, sell and service multifamily
mortgage loans and commercial loans.
6
<PAGE> 7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of Hanover
Capital Mortgage Holdings, Inc. and its wholly-owned subsidiary, Hanover Capital
SPC, Inc. All significant intercompany accounts and transactions have been
eliminated.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by the management of the Company in accordance with generally accepted
accounting principles for interim financial information and in conformity with
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The results of operations for the three months ended June 30, 1998 and for the
six months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the full year. For further information, refer to the
audited financial statements and footnotes included in the Company's Form 10-K
for the period from June 10, 1997 (inception) to December 31, 1997.
Because Hanover Capital Mortgage Holdings, Inc. was incorporated on June 10,
1997, there is no comparable statement of operations.
METHOD OF ACCOUNTING
The condensed consolidated financial statements of the Company are prepared on
the accrual basis of accounting in accordance with generally accepted accounting
principles. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INCOME TAXES
The Company has elected to be taxed as a real estate investment trust ("REIT")
and intends to comply with the provisions of the Internal Revenue Code of 1986,
as amended (the "Code") with respect thereto. Accordingly, the Company will not
be subject to Federal income tax to the extent of its distributions to
stockholders as long as certain asset, income and stock ownership tests are met.
EARNINGS PER SHARE
In 1997 the Company adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share"("SFAS 128"). Under SFAS 128 basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock that then shared in earnings. Shares
issued during the period and shares reacquired during the period are weighted
for the period they were outstanding.
7
<PAGE> 8
Calculations for earnings (loss) per share are shown below (dollars in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
------------------ ----------------
<S> <C> <C>
Basic earnings (loss) per share:
Net income (loss) [numerator] $ (644) $ 604
=========== ===========
Average common shares
outstanding [denominator] 6,468,160 6,467,423
=========== ===========
Per share $ (0.10) $ 0.09
=========== ===========
Diluted earnings (loss) per share:
Net income (loss) [numerator] $ (644) $ 604
=========== ===========
Average common shares
outstanding 6,468,160 6,467,423
=========== ===========
Add: Incremental shares from
assumed conversion of
warrants 115,204 767,912
----------- -----------
Dilutive potential common shares 115,204 767,912
----------- -----------
Adjusted weighted average shares
[denominator] 6,583,364 7,235,335
=========== ===========
Per share $ (0.10) $ 0.08
=========== ===========
</TABLE>
3. MORTGAGE LOANS
The Company's policy is to classify each of its mortgage loans as held for sale
as they are purchased and each asset is monitored for a period of time,
generally four to nine months, prior to making a determination as to whether the
asset will be classified as held to maturity. At June 30, 1998 management has
made the determination that $457,033,000 of mortgage loans are held for sale and
$79,816,000 of mortgage loans are being held to maturity. All mortgage loans
designated as held for sale are reported at the lower of cost or market, with
unrealized losses reported as a charge to earnings in the current period. All
mortgage loans held to maturity are reported at cost.
Premiums and discounts associated with the purchase of mortgage loans are
amortized into interest income over the lives of the mortgage loans using the
effective yield method adjusted for the effects of estimated prepayments.
Mortgage loan transactions are recorded on the date the mortgage loans are
purchased or sold. Purchases of new mortgage loans are recorded when all
significant uncertainties regarding the characteristics of the mortgage loans
are removed, generally on or shortly before settlement date. Realized gains and
losses on mortgage loan transactions are determined on the specific
identification basis.
8
<PAGE> 9
The following table summarizes the Company's single-family mortgage loan pools,
held for sale which are carried at the lower of cost or market (dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
Cost Mix Cost Mix
---- --- ---- ---
<S> <C> <C> <C> <C>
Mortgage Loans
Fixed rate $ 323,451 71.5% $106,397 67.1%
Adjustable rate 128,996 28.5% 52,392 32.9%
--------- ----- -------- -----
Subtotal 452,447 100.0% 158,789 100.0%
===== =====
Net deferred loan fees,
premiums and discounts 4,687 2,199
Loan loss reserve (101) (18)
--------- --------
Carrying value $ 457,033 $160,970
========= ========
</TABLE>
The following table summarizes certain characteristics of the Company's
single-family fixed rate and adjustable rate mortgage loans, held for sale
portfolio (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------------------------------------------------
Carrying Value Principal Weighted Weighted
of Mortgage Amount of Average Net Average
Loans Mortgage Loans Coupon Maturity (1)
----- -------------- ------ ------------
<S> <C> <C> <C> <C>
Fixed Rate $327,209 $323,451 7.864% 154
Adjustable Rate 129,824 128,996 7.500% 256
-------- -------- ----- ---
$457,033 $452,447 7.760% 183
======== ======== ====== ===
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------------------------
Carrying Value Principal Weighted Weighted
of Mortgage Amount of Average Net Average
Loans Mortgage Loans Coupon Maturity (1)
----- -------------- ------ ------------
<S> <C> <C> <C> <C>
Fixed Rate $107,953 $106,424 8.265% 242
Adjustable Rate 53,017 52,365 7.925% 319
-------- -------- ----- ----
$160,970 $158,789 8.153% 267
======== ======== ===== ====
</TABLE>
(1) Weighted average maturity reflects the number of months until maturity
9
<PAGE> 10
The following table summarizes the Company's single-family mortgage loans, held
to maturity which are carried at cost (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
Mortgage Loans
Fixed Rate $ 77,617 --
Adjustable Rate 145 --
-------- --------
Subtotal 77,762 --
Net deterred loan fees,
premiums and discounts 2,070 --
Loan loss reserve (16) --
-------- --------
Carrying value $ 79,816 --
======== =========
</TABLE>
The following table summarizes certain characteristics of the Company's
single-family fixed rate and adjustable rate mortgage loans, held to maturity
portfolio (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998
Carrying Value Principal Weighted Weighted
of Mortgage Amount of Average Net Average
Loans Mortgage Loans Coupon Maturity (1)
----- -------------- ------ ------------
<S> <C> <C> <C> <C>
Fixed Rate $79,671 $77,617 8.755% 254
Adjustable Rate 145 145 7.493% 308
------- ------- ----- ---
$79,816 $77,762 8.753% 255
======= ======= ===== ===
</TABLE>
The average effective yield for the three months ended June 30, 1998 on the
total mortgage loan portfolio, including the amortization of the net premiums
paid for the mortgage loans, was 7.371%.
An analysis of the change in the loan loss reserve for the three months ended
June 30, 1998 is as follows (dollars in thousands):
<TABLE>
<S> <C>
Balance at beginning of period $ 69
Loan loss provision 78
Less amount transferred (2) (30)
-----
Balance at June 30, 1998 $ 117
=====
</TABLE>
(1) weighted average maturity reflects the number of months remaining until
maturity
(2) amount of loan loss reserve transferred to collateral for mortgage
backed bonds
4. COLLATERAL FOR MORTGAGE BACKED BONDS
In April 1998 the Company issued its first REMIC (real estate mortgage
investment conduit) security. Approximately $102,600,000 of single family fixed
rate residential loans were assigned as collateral for the Company's mortgage
backed bond (REMIC) security. The Company has limited exposure to credit risk
retained on loans it has securitized through the issuance of collateralized
bonds. All mortgage loans held as collateral for mortgage backed bonds are
reported at cost.
Premiums, discounts and all deferred hedging costs associated with the mortgage
loans held as collateral for mortgage backed bonds are amortized into interest
income over the lives of the mortgage loans using the effective yield method
adjusted for the effects of prepayments.
10
<PAGE> 11
The following table summarizes the Company's single-family fixed rate mortgage
loan pools held as collateral for mortgage backed bonds which are carried at
cost (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
<S> <C>
Fixed rate $94,939
Net deferred loan
fees, premiums and
discounts 2,323
Loan loss reserve (48)
--------
Carrying value $97,214
=======
</TABLE>
The following table summarizes certain characteristics of the Company's
single-family fixed rate mortgage loans held as collateral for mortgage backed
bonds (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
Carrying Value Principal Amount
of Collateral for of Collateral Weighted Weighted
Mortgage Backed for Mortgage Average Average
Bonds Backed Bonds Net Coupon Maturity (1)
- ----- ------------ ---------- ------------
<S> <C> <C> <C>
$97,214 $94,939 7.890% 237
======= ======= ====== ===
</TABLE>
An analysis of the change in loan loss reserve for the three months ended June
30, 1998 is as follows (dollars in thousands):
<TABLE>
<S> <C>
Balance at beginning of period $-0-
Amount transferred (2) 30
Loan loss provision 18
--
Balance at June 30, 1998 $48
===
</TABLE>
(1) weighted average maturity reflects the number of months remaining until
maturity
(2) amount of loan loss reserve transferred from mortgage loans held for
sale portfolio
5. MORTGAGE SECURITIES
The Company's policy is to classify its mortgage securities as
available-for-sale as they are purchased and each asset is monitored for a
period of time, generally three to six months, prior to making a determination
whether the asset will be classified as held-to-maturity. All mortgage
securities designated as available-for-sale are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity.
Premiums and discounts associated with the purchase of mortgage securities are
amortized into interest income over the lives of the securities using the
effective yield method adjusted for the effects of estimated prepayments.
Mortgage securities transactions are recorded on the date the mortgage
securities are purchased or sold. Purchases of new issue mortgage securities are
recorded when all significant uncertainties regarding the characteristics of the
securities are removed, generally on or shortly before settlement date. Realized
gains and losses on mortgage securities transactions are determined on the
specific identification basis.
11
<PAGE> 12
The following table summarizes the Company's amortized cost basis and fair value
of mortgage securities available for sale (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
Available Available
for Sale Mix for Sale Mix
-------- --- -------- ---
<S> <C> <C> <C> <C>
Mortgage Securities
Adjustable rate
FNMA certificates $147,149 57.2% $207,898 59.6%
FHLMC certificates 105,796 41.2% 141,075 40.4%
------- ---- -------- -----
252,945 98.4% 348,973 100.0%
Fixed rate
FNMA certificate 4,055 1.6% -- --
------- ---- ------- -----
Total amortized cost 257,000 100.0% 348,973 100.0%
======= =====
Gross unrealized (losses)
(2,289) (842)
------- --------
Fair value $254,711 $348,131
======== ========
</TABLE>
6. REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are accounted for as collateralized financing
transactions and recorded at their contractual amounts.
At June 30, 1998 the Company had a total of $600 million of mortgage loan
reverse repurchase agreement financing available pursuant to master repurchase
agreements with three lenders. At June 30, 1998 the Company had outstanding
borrowings of $495,217,000 under the above mentioned reverse repurchase
agreements with a weighted average borrowing rate of 6.391% for the second
quarter of 1998 and a weighted average remaining maturity of less than two
months. The reverse repurchase agreements at June 30, 1998 were collateralized
by mortgage loans with a cost basis of $526,406,000 (which approximates market
value). The Company also used its reverse repurchase agreement financing to
finance a portion of the collateral for mortgage backed bonds. At June 30, 1998
the Company had outstanding borrowings of $2,331,000 under the above mentioned
reverse repurchase agreements with a weighted average borrowing rate of 7.031%
for the second quarter of 1998 and a weighted average maturity of less than six
months. This reverse repurchase agreement was collateralized at June 30, 1998
with mortgage loans (held as collateral for mortgage backed bonds) with a cost
basis of $2,273,000.
At June 30, 1998, the Company had outstanding mortgage securities reverse
repurchase agreements of $245,701,000 with a weighted average borrowing rate of
5.616% and a weighted average remaining maturity of less than three months.
Information concerning the reverse repurchase agreements and the pledged
collateral at June 30, 1998 is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Collateral
Mortgage Mortgage for Mortgage
Securities Loans (2) Backed Bonds
---------- --------- ------------
<S> <C> <C> <C>
Reverse Repurchase Agreements
Average balance during the period (1) $272,176 $332,424 $1,076
Average interest rate during period (1) 5.616% 6.391% 7.031%
Maximum month - end balance during the period $288,380 $495,217 $2,331
Collateral Underlying the Agreements
Carrying Balance $254,711 $526,406 $2,273
</TABLE>
12
<PAGE> 13
(1) above table reflects the period beginning April 1, 1998 through June
30, 1998.
(2) collateral includes mortgages held for sale and mortgages held to
maturity.
7. AFFILIATED PARTY TRANSACTIONS
The Company has engaged HCP pursuant to a Management Agreement to render among
other things, due diligence, asset management and administrative services. The
statement of operations of the Company for the three months ended June 30, 1998
includes management and administrative expenses of $168,000, due diligence
expenses of $245,000 and commission expenses of $92,000 relating to billings
from HCP. At June 30, 1998 the balance sheet of the Company included an amount
due HCP of $181,000. During the three months ended June 30, 1998 the Company
recorded a loss from its investment in HCP and Subsidiaries of $294,000
(generated from revenues of $1,572,000 and expenses of $1,866,000).
In connection with the original formation transactions in September 1997, the
Company agreed to lend a maximum of $1,750,000 collectively, to four
officer/stockholders (collectively referred to as the "Principals") to enable
the Principals to pay personal income taxes on the gains they must recognize
upon contributing their HCP preferred stock to the Company for shares of the
Company's common stock. The loans are secured solely by 116,667 shares of the
Company's common stock owned by the Principals, collectively. The loans bear
interest at the lowest applicable federal tax rate during the month the loans
are made. At June 30, 1998 the Company had loaned the Principals the full
$1,750,000. The loans bear interest at 6.02% ($482,600 of loans) and 5.70%
($1,267,400 of loans).
In March 1998 the Company agreed to lend up to an additional $1,500,000 in
unsecured loans to the Principals, in lieu of incurring the costs and expenses
associated with the registration of 100,000 shares of the Company's common stock
owned by the Principals. The Company loaned the Principals an additional
$1,203,880 in April 1998. The additional loans are due and payable on March 31,
1999 and bear interest at 5.51%. No additional loans are expected to be made to
the Principals.
During 1998 the Company advanced funds to HCP pursuant to an unsecured loan
agreement. The loans to HCP bear interest at 1.00% below the prime rate. At June
30, 1998 the loans outstanding to HCP totaled $2,400,000.
8. COMMITMENTS AND CONTINGENCIES
At June 30, 1998 the Company had committed to purchase approximately $74,741,000
of fixed and adjustable rate mortgage loans.
9. ADOPTION OF FINANCIAL ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No.130"). Effective January 1, 1998 the Company adopted SFAS No. 130, which
established disclosure standards for reporting comprehensive income in a full
set of general purpose financial statements. The comprehensive loss for the
three months and six months ended June 30, 1998 was $1,261,000, and $843,000
which included an unrealized loss on investments available for sale of $617,000
and $1,447,000, respectively.
13
<PAGE> 14
10. SUBSEQUENT EVENTS
On July 13, 1998 a $0.21 cash dividend previously declared by the Board of
Directors was paid to stockholders of record as of June 30, 1998.
On July 31, 1998 the Board of Directors authorized the Company to initiate a
stock repurchase program to buy back up to a maximum of 646,880 shares of common
stock or 10% of the then existing common stock outstanding from time to time in
open market transactions. Any shares so purchased will become treasury shares
and will be available for general corporate and other purposes, including the
issuance of shares in connection with the exercise of stock options.
14
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Hanover Capital Mortgage Holdings, Inc. was incorporated in Maryland on June 10,
1997. In April 1998, Hanover Capital Mortgage Holdings, Inc. acquired 100% of
the common stock of Hanover Capital SPC, Inc. Hanover Capital Mortgage Holdings,
Inc. is a real estate investment trust ("REIT"), formed to operate as a
specialty finance company. The principal business strategy of Hanover Capital
Mortgage Holdings, Inc. and its wholly owned subsidiary, Hanover Capital SPC,
Inc. (together referred to as the "Company") is to (i) acquire primarily
single-family mortgage loans that are at least twelve months old or that were
intended to be of certain credit quality but that do not meet the originally
intended market parameters due to errors or credit deterioration, (ii)
securitize the mortgage loans and retain interests therein, (iii) originate,
hold, sell and service multifamily loans and commercial loans and (iv) acquire
multifamily loans. The Company's principal business objective is to generate
increasing earnings and dividends for distribution to its stockholders. The
Company acquires single-family mortgage loans through a network of sales
representatives targeting financial institutions throughout the United States.
The Company may also acquire multifamily mortgage loans through a taxable
subsidiary of the Company.
The Company's principal source of earnings is net interest income generated by
the Company's investment portfolio. As of June 30, 1998 the Company's investment
portfolio consisted of single-family mortgage loans held for sale, single-family
mortgage loans held to maturity, collateral for mortgage backed bonds and
mortgage securities available for sale. The Company funds its portfolio
investments with both borrowings and cash raised from the issuance of equity.
For the portion of the portfolio investments funded with borrowings, the Company
generates net interest income to the extent that there is a positive spread
between the yield on the interest-earning assets and the cost of borrowed funds.
In addition the Company earns net interest income from the yield generated by
the portion of the investment portfolio that is funded solely with equity. The
cost of the Company's borrowings may increase or decrease through the use of
interest rate swaps, caps or floor agreements.
The Company's generation of net income is dependent upon (i) the spread between
interest earned on its investment portfolio and the cost of borrowed funds to
finance the investment portfolio; and (ii) the aggregate amount of the
investment portfolio on the Company's balance sheet. The Company strives to
create a diversified portfolio of investments that in the aggregate generates
increasing net income in a variety of interest rate and prepayment rate
environments and preserves the equity base of the Company. The Company's
strategy for its mortgage loan investment portfolio entails (1) efficient
acquisition pricing of mortgage loans, (2) financing in the short term by
reverse repurchase agreements or lines of credit, (3) hedging in the short term
to offset potential adverse effects of changes in interest rates, (4)
stratifying and segregating mortgage loans in securitizations to replace short
term financing with collateralized mortgage obligation (CMO), real estate
mortgage investment conduit (REMIC) or other types of long term debt financing,
thereby eliminating the majority of refinancing and interest rate risk and (5)
retaining certain residual interests of the securitization resulting in
increased yields.
The Company's operating strategy for its mortgage securities investment entails
(1) the efficient acquisition of mortgage securities on a temporary basis to
effectively (a) deploy capital and (b) meet certain REIT requirements, (2)
financing through reverse repurchase agreements and (3)
15
<PAGE> 16
identifying the appropriate times to sell the mortgage securities to optimize
the investment yield to the Company and to free additional capital to fund
additional mortgage loan acquisitions.
RESULTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
Net interest income $ 774 $ 2,933
Loan (loss) provision (97) (148)
Loss on sale of mortgages (49) (49)
General and administrative
(expenses) (978) (1,832)
Equity in (loss) of
unconsolidated subsidiary (294) (300)
------- -------
Net income (loss) $ (644) $ 604
======= =======
Basic earnings (loss) per share $(0.10) $0.09
======= =====
Dividends declared per share $0.21 $0.42
===== =====
</TABLE>
Net interest income for the three months ended June 30, 1998 totaled $774,000
and net interest income for the six month period ended June 30, 1998 was
$2,933,000. The majority of the net interest income for the six month period
ended June 30, 1998 was generated by the Company's investment in mortgage loans
(94.9%). The balance of net interest income was generated from mortgage
securities, collateral for mortgage backed bonds, agency paper investments, cash
collateral on deposit with certain mortgage security lenders, a savings account,
loans to certain Principals and loans to HCP. Management anticipates that the
net interest income generated by mortgage loans will continue to reflect a
substantial percentage of total net interest income as the Company continues to
grow its mortgage loan investment portfolio. The Company's total mortgage loan
holdings including mortgages held as collateral for mortgage backed bonds
increased from $160,970,000 at December 31, 1997 to $634,063,000 at June 30,
1998.
The second quarter net interest income was severely impacted by soaring
prepayment speeds on the Company's mortgage securities portfolio. As a result of
prepayment speeds increasing by more that 42% from the first quarter of 1998 to
the second quarter of 1998, the Company reflected premium amortization expense
of $2,148,000 in the second quarter of 1998 compared to $903,000 in the first
quarter of 1998. The premium amortization is recorded as an adjustment to
interest income and accordingly reduced the net interest income on the Company's
mortgage securities portfolio from a positive $580,000 in the first quarter to a
negative $1,050,000 in the second quarter.
The Company's net interest income from mortgage loans was also negatively
impacted by the delay in closing mortgage pool purchases. Actual mortgage loan
pool closings occurred closer to the end of the quarter, which reduced the
average balance of mortgage loans outstanding during the quarter. Further, the
net weighted average coupon rate of mortgage pools purchased in the second
quarter of 1998 declined (from 8.017% to 7.524%), with a corresponding decrease
in the
16
<PAGE> 17
premiums paid for mortgage pools (average price paid for mortgage loan
pools in the first quarter of 1998 was 102.156% as compared to 100.294% in the
second quarter of 1998).
A significant portion of the Company's net loss for the second quarter of 1998
resulted from recording the Company's share (on the equity method) of the net
loss ($294,000) from its subsidiary - (Hanover Capital Partners Ltd. and
Subsidiaries). The loss generated by the subsidiary was $294,000 for the second
quarter of 1998 compared to a $6,000 loss in the first quarter of 1998. The
Company's subsidiary is a specialty finance company, whose major sources of
income are generated from due diligence on mortgage portfolios for third party
financial institutions and mortgage origination operations. In the first quarter
of 1998 the subsidiary generated sizable revenues from brokerage fees and sale
of mortgage servicing rights. No such revenues were recorded in the second
quarter of 1998.
The following table reflects the average balances for the Company's investment
portfolio as well as the Company's interest bearing liabilities with the
corresponding effective rates of interest annualized for the period April 1,
1998 through June 30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
Effective
Average Interest
Balance Rate
--------- ---------
<S> <C> <C>
Interest Earning Assets
Mortgage Loans (1) $ 370,812 7.371%
Collateral for mortgage
backed bonds (2) 91,152 7.246%
Mortgage securities 281,933 3.992%
--------- ------
$ 743,897 6.075%
========= ======
Interest bearing liabilities
Reverse repurchase borrowings
on mortgage loans $ 332,424 6.452%
Mortgage backed bonds 87,013 6.908%
Reverse repurchase borrowings
on collateral for mortgage
backed bonds 1,076 7.031%
Reverse repurchase borrowings
on mortgage securities 272,176 5.616%
--------- ------
$ 692,689 6.250%
========= ======
Net Interest Earning Assets $ 51,208
=========
Net (Negative) Interest Spread (0.175%)
======
Yield on Net Interest Earning Assets (3) 3.704%
======
</TABLE>
(1) Includes mortgage loans held for sale and mortgage loans held to maturity.
Loan loss provisions are excluded in the above calculations.
(2) Loan loss provisions are excluded in the above calculations.
(3) Yield on Net Interest Earning Assets is computed by dividing the applicable
net interest income by the average daily balance of Net Interest Earning
Assets.
The effective rate for interest earning assets has been adjusted to reflect
amortization of premiums paid or discounts received on the acquisition of
mortgage loans and mortgage securities. By engaging HCP to perform due diligence
on mortgage loans the Company acquires, management believes that premium amounts
paid for the purchase of mortgage loans are less than
17
<PAGE> 18
if they were acquired in the market. Net unamortized premiums on the Company's
mortgage loans (including both mortgage loans held for sale and mortgage loans
held to maturity), collateral for mortgage backed bonds and mortgage securities
were $5,405,000, $1,086,000 and $9,371,000 at June 30, 1998 or approximately
1.02%, 1.14% and 3.78% of the respective par value investments in total mortgage
loans, collateral for mortgage backed bonds and mortgage securities.
The Company's largest expense is the interest cost on borrowed funds. The
majority of funds to finance the investment portfolio in the second quarter of
1998 were borrowed in the form of reverse repurchase agreements, which is
indexed to LIBOR. The Company also used interest rate caps to manage its
interest rate risk in the second quarter of 1998 and may also in the future use
interest rate swaps and financial futures. The net cost of those instruments is
included in the cost of funds as a component of interest expense for the period
to which it relates.
At June 30, 1998 the Company's mortgage loan investment portfolio comprised
68.9% of total assets in the following types of single family mortgage loans
(dollars in thousands, except average loan size):
<TABLE>
<CAPTION>
Mortgage Loan Summary Mortgages Mortgages Collateral
Held for Held to for Mortgage
Fixed Rate Mortgage Loans Sale Maturity Backed Bonds Total
- ------------------------- ---- -------- ------------ -----
<S> <C> <C> <C> <C>
Face or principal amount $323,451 $ 77,617 $ 94,939 $496,007
Carrying value $327,254 $ 79,671 $ 97,214 $504,139
Weighted average net coupon 7.86% 8.76% 7.89% 8.01%
Weighted average maturity (in months) 154 254 237 186
Number of loans 7,815 1,658 1,254 10,727
Average loan size $ 41,389 $ 46,813 $ 75,709 $ 46,239
Adjustable Rate Mortgage (ARM) Loans
- ------------------------------------
Face or principal amount $128,996 $ 145 -- $129,141
Carrying value $129,779 $ 145 -- $129,924
Weighted average net coupon 7.50% 7.49% -- 7.50%
Weighted average maturity (in months) 256 308 -- 256
Number of loans 1,489 1 -- 1,490
Average loan size $ 86,632 $145,429 -- $ 86,672
</TABLE>
18
<PAGE> 19
At June 30, 1998 the Company's mortgage securities investment portfolio
comprised 27.7% of total assets in the following categories (dollars in
thousands):
<TABLE>
<CAPTION>
Federal National Mortgage Association Adjustable Fixed
(FNMA) Securities Rate Rate Total
- ----------------- ---------- ------ ---------
<S> <C> <C> <C>
Par value at purchase date $200,524 $4,122 $204,646
June 30, 1998 adjusted principal $141,726 $3,857 $145,583
Amortized cost basis $147,149 $4,054 $151,203
Market Value $145,844 $4,018 $149,862
Weighted average net coupon 7.67% 9.00% 7.71%
Weighted average maturity (in months) 281 301 282
</TABLE>
<TABLE>
<CAPTION>
Federal Home Loan Mortgage Corp. Adjustable Fixed
(FHLMC) Securities Rate Rate Total
- ------------------ ---------- ----- ---------
<S> <C> <C>
Par value at purchase date $136,237 - $136,237
June 30, 1998 adjusted principal $102,045 - $102,045
Amortized cost basis $105,796 - $105,796
Market Value $104,849 - $104,849
Weighted average net coupon 7.85% 7.85%
Weighted average maturity (in months) 300 300
</TABLE>
General and administrative expenses (G &A expenses) amounted to $978,000 for the
second quarter of 1998. G & A expenses consist substantially of expenses
relating to the acquisition of and managing the Company's investment portfolio,
as well as various other corporate expenses. Most of the G & A expenses are
likely to remain relatively stable on a quarterly basis with the possible
exception of the following: (1) due diligence, (2) commissions and (3) legal and
professional. The due diligence acquisitions will vary based upon various
factors, including but not limited to the number of loans purchased, complexity
of documentation problems encountered, type of mortgage loans, ease of
converting data to the Company's proprietary software system, geographic
location, and creditworthiness of the borrower. Commission expense is also
directly related to mortgage loans acquired. Commissions are paid on all
mortgage loan acquisitions initiated by HCP's sales representatives. However,
certain mortgage loan acquisitions are also initiated by the Principals. No
commission expense is recorded when the mortgage loan acquisitions are
originated by the Principals. Legal and professional fees will also vary based
on the usage of various professional firms from time to time.
The Company recorded a loss from its investment in Hanover Capital Partners Ltd.
and Subsidiaries of $294,000 for the period April 1, 1998 through June 30, 1998.
Summarized operating results for Hanover Capital Partners Ltd and Subsidiaries
are shown below (dollars in thousands):
<TABLE>
<S> <C>
Revenues $1,572
Expenses 1,866
-----
Net (loss) ($294)
=====
</TABLE>
19
<PAGE> 20
The Company's net loss for the period April 1, 1998 through June 30, 1998 was
($644,000) or a negative annualized return on equity of 3.28%. The table below
highlights the Company's brief historical trends and components of annualized
return on average equity.
COMPONENTS OF ANNUALIZED RETURN ON AVERAGE EQUITY (1)
<TABLE>
<CAPTION>
Gain (Loss) on Equity in
Net Interest Sale of G & A Earnings (Loss) Annualized
For the Income/ Securities/ Expense/ of Subsidiary/ Return on
Quarter Ended Equity Equity Equity Equity Equity
------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
June 30, 1997 (2) 0.00% 0.00% 0.00% 0.00% 0.00%
September 30, 1997 (3) 4.85% 0.00% 3.59% 0.97% 2.23%
December 31, 1997 7.71% 0.18% 4.26% (1.41%) 2.22%
March 31, 1998 10.78% 0.00% 4.37% (0.03%) 6.38%
June 30, 1998 3.47% (0.25%) 5.00% (1.50%) (3.28%)
</TABLE>
(1) Average equity excludes unrealized loss on investments available for sale.
(2) Hanover Capital Mortgage Holdings, Inc. was organized on June 10, 1997, but
did not begin operations until September 19, 1997
(3) Average equity is based on equity balances at September 19, 1997 (IPO
date), and equity balances at September 30, 1997, excluding unrealized
loss on investments available for sale.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to meet its short-term and long-term liquidity requirements
generally from its existing working capital, cash flow provided by operations,
reverse repurchase agreements, and other possible sources of financing,
including CMO's and REMICs, additional equity generated by the exercise of some
or all of the Company's outstanding stock warrants and additional equity
offerings. The Company considers its ability to generate cash to be adequate to
meet operating requirements both in the short-term and long-term. However, if a
significant decline in the market value of the Company's investment portfolio
should occur, the Company's available liquidity from these other borrowings may
be reduced. As a result of such a reduction in liquidity, the Company may be
forced to sell certain investments in order to maintain liquidity. If required,
these sales could be made at prices lower than the carrying value of such
assets, which could result in losses.
Net cash used in operations for the first six months of 1998 was $1,167,000.
Actual cash proceeds generated from net income adjusted for non cash items
($4,807,000) and net increases in liabilities ($5,313,000) were offset by net
increases in operating asset accounts ($11,287,000). The most significant
operating asset increases were reflected in loans to Principals ($2,472,000),
loans to HCP ($2,400,000) and in accrued interest receivable ($3,865,000). The
increase in accrued interest receivable is primarily a result of the purchase of
mortgage loan pools during 1998.
Net cash used in investing activities amounted to $385,025,000 during the period
January 1, 1998 through June 30, 1998. The majority of the cash used in
investing activities related to the purchase of assets for the Company's
investment portfolio. Mortgage loans were purchased at an average price of
101.21% of par and mortgage securities were purchased at an average price of
20
<PAGE> 21
105.12% of par during the first half of 1998. Offsetting the cash outlay for
purchases of mortgage assets were receipts of principal proceeds from the
investment portfolio totaling $141,843,000 during the first six months of 1998.
Cash flows from financing activities generated $398,470,000 for the period
January 1, 1998 through June 30, 1998. The cash flows from financing activities
resulted from net borrowing on reverse repurchase agreements ($308,111,000), net
borrowings on the mortgage backed bonds ($92,719,000) and proceeds from the
exercise of 2,112 warrants ($33,000) as reduced by dividends paid in January
($1,035,000) and April ($1,358,000).
Management anticipates that the Company will continue to purchase single-family
mortgage loan pools and will finance the purchase of the mortgage loan pools
through existing equity, reverse repurchase agreements, and other sources of
financing including CMO's and REMICs. The Company may also realize additional
liquidity if the Company's stock warrants are exercised. In order to grow its
equity base, the Company may also issue additional capital stock. Management
especially will consider Company issuance of such additional shares when it
believes existing shareholders are likely to benefit from such offerings through
higher earnings and dividends per share than as compared to the level of
earnings and dividends the Company would likely generate without such offerings.
The Company recently authorized a stock repurchase plan whereby the Company may
use a portion of its cash to purchase up to 646,880 shares of the Company's
common stock.
OTHER MATTERS
The Company calculated its Qualified REIT Assets at June 30, 1998, as defined in
the Internal Revenue Code ("Code"), to be 97.2% of the value of its total
assets, as compared to the federal tax requirement that at least 75% of the
value of its total assets must be Qualified REIT Assets. The Company also
estimates that 97.0% of its 1998 revenue will qualify for the 75% source of
income test and 99.0% of its revenue will qualify for the 95% source of income
test under the REIT rules.
The Company believes that it was in full compliance with the REIT tax rules as
of June 30, 1998 and intends to remain in compliance with all REIT tax rules and
to continue to qualify as a REIT under the provisions of the Code.
The Company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act. If the
Company were to become regulated as an investment company, then the Company's
use of leverage would be substantially reduced. The Investment Company Act
exempts entities that are "primarily engaged in the business of purchasing or
otherwise acquiring mortgages and other liens on interests in real estate"
("Qualifying Interests"). Under current interpretations of the staff of the SEC,
in order to qualify for this exemption, the Company must maintain at least 55%
of its assets directly in Qualifying Interests. As of June 30, 1998, the Company
calculates that it is in compliance with this requirement.
21
<PAGE> 22
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
The preceding section, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and other sections of this Quarterly
Report contain various "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent the Company's
expectations or beliefs concerning future events, including, without limitation,
statements containing the words "believes," "anticipates," "expects" and words
of similar import; and also including, without limitation, the following:
statements regarding the Company's continuing ability to target and acquire
mortgage loans; expected availability of the master repurchase agreements; the
sufficiency of the Company's working capital, cash flow and financing to support
the Company's future operating and capital requirements; results of operations
and overall financial performance; the expected dividend distribution rate; and
the expected tax treatment of the Company's operations. Such forward-looking
statements relate to future events and the future financial performance of the
Company and the industry and involve known and unknown risks, uncertainties and
other important factors which could cause actual results, performance or
achievements of the Company or industry to differ materially from the future
results, performance or achievements expressed or implied by such
forward-looking statements.
Investors should carefully consider the various factors identified in the
preceding section, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and elsewhere in this Quarterly Report that could
cause actual results to differ materially from the results predicted in the
forward-looking statements. Further, the Company specifically cautions investors
to consider the following important factors in conjunction with the
forward-looking statements: the possible decline in the Company's ability to
locate and acquire mortgage loans; the possible adverse effect of changing
economic conditions, including interest rate movements and changes in the real
estate market both locally and nationally; the effect of severe weather or
natural disasters; the effect of competitive pressures from other financial
institutions, including mortgage REITS; and the possible changes, if any, in the
Code REIT rules. Because of the foregoing factors, the actual results achieved
by the Company in the future may differ materially from the expected results
described in the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
22
<PAGE> 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings
During the second quarter of 1998, there have been no
material developments with respect to legal
proceedings to which the Company or any of its
affiliates have been a party.
Item 2. Changes in Securities
Not applicable
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
None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits filed with this Form 10-Q
Ex. 27 Financial Data Schedule
(b) Reports on Form 8-K
None
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
Dated: August 7, 1998 By: /s/ John A. Burchett
-------------- ---------------------------------
John A. Burchett
Chairman of the Board of Directors
Dated: August 7, 1998 By: /s/ Ralph F. Laughlin
-------------- ----------------------------------
Ralph F. Laughlin
Chief Financial Officer and
Principal Accounting Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER
CAPITAL MORTGAGE HOLDINGS, INC'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD
FROM JANUARY 1, 1998 TO JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 16,300
<SECURITIES> 888,774
<RECEIVABLES> 9,108
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 920,122
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 920,122
<CURRENT-LIABILITIES> 845,539<F1>
<BONDS> 0
0
0
<COMMON> 65
<OTHER-SE> 74,518<F2>
<TOTAL-LIABILITY-AND-EQUITY> 920,122
<SALES> 0
<TOTAL-REVENUES> 20,930
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,832
<LOSS-PROVISION> 148
<INTEREST-EXPENSE> 17,997
<INCOME-PRETAX> 604
<INCOME-TAX> 0
<INCOME-CONTINUING> 604
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 604
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.08
<FN>
<F1>As a Real Estate Investment Trust our balance sheet is not classified.
<F2>Includes Retained Earnings and Paid In Capital.
</FN>
</TABLE>
