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, 1994
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 1-6868
LOMAS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-1043392
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Viceroy Drive
Dallas, Texas 75235
(Address of principal executive offices) (Zip Code)
(214) 879-4000
(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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
YES X NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the issuer's classes of common
stock as of November 10, 1994: Common Stock, $1 par value -- 20,145,731
shares.
<PAGE>
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1994
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
Page
----
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheet -- September 30, 1994 and
June 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statement of Consolidated Operations --
Quarter Ended September 30, 1994 and 1993 . . . . . . . . . . . . 4
Statement of Consolidated Cash Flows --
Quarter Ended September 30, 1994 and 1993 . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 10
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . 15
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 17
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES
(in thousands)
September 30, 1994 June 30, 1994
------------------ -------------
(Unaudited) (Note)
ASSETS
Cash and cash equivalents $ 33,120 $ 7,206
First mortgage loans held for sale 179,709 257,534
Investments 66,005 117,452
Receivables 90,606 84,155
Foreclosed real estate 8,769 8,934
--------- ----------
345,089 468,075
Less allowance for losses (9,651) (12,262)
--------- ----------
335,438 455,813
Purchased future mortgage servicing
income rights--net 362,075 382,009
Fixed assets--net 86,873 89,154
Prepaid expenses and other assets 29,704 30,133
Net assets of discontinued operations 100,294 113,258
--------- ----------
$ 947,504 $1,077,573
========= ==========
Escrow, agency and fiduciary
funds--see contra $ 639,546 $ 603,163
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 73,041 $ 71,862
Notes payable 201,243 341,047
Repurchase agreements 24,992 --
Term notes payable 379,725 383,311
Senior convertible notes payable 139,918 139,918
--------- ----------
818,919 936,138
--------- ----------
Stockholders' equity:
Common stock--20,100 shares issued and
outstanding 20,100 20,100
Other paid-in capital 309,429 309,429
Retained earnings (deficit) (200,944) (188,094)
--------- ----------
128,585 141,435
--------- ----------
$ 947,504 $1,077,573
========= ==========
Liability for escrow, agency and fiduciary
funds--see contra $ 639,546 $ 603,163
========= ==========
Note: The balance sheet at June 30, 1994 as presented is derived from the
audited financial statements at that date.
See notes to consolidated financial statements
<PAGE>
STATEMENT OF CONSOLIDATED OPERATIONS (Unaudited)
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES
(in thousands, except per share amounts)
Quarter Ended September 30
--------------------------
1994 1993
-------- --------
Revenues
Mortgage servicing $ 32,914 $ 37,831
Commissions and fees 8,131 6,578
Interest 5,768 7,800
Investment 3,666 8,541
Gain on sales 3,179 6,820
Management fees -- affiliates -- 2,852
Other -- affiliates -- 5,028
Other 463 4,614
-------- --------
54,121 80,064
-------- --------
Expenses
Interest 18,366 20,173
Personnel 15,206 20,077
Depreciation and amortization 16,202 68,565
Other operating 9,797 9,405
Provision for losses 1,900 1,542
-------- --------
61,471 119,762
-------- --------
Loss from continuing operations before federal
income tax equivalent provision (7,350) (39,698)
Federal income tax equivalent provision -- --
-------- --------
Loss from continuing operations (7,350) (39,698)
Loss from discontinued operations net of
federal income tax equivalent provision (5,500) (9,869)
-------- --------
Net loss $(12,850) $(49,567)
======== ========
Earnings (loss) per share:
Loss from continuing operations $(.37) $(1.97)
Net loss $(.64) $(2.46)
Average number of shares 20,135 20,127
Note: Reclassifications have been made to September 30, 1993 financial
statements for comparative purposes.
See notes to consolidated financial statements.
<PAGE>
STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES
(in thousands)
Quarter Ended September 30
--------------------------
1994 1993
-------- --------
Operating activities:
Loss from continuing operations $ (7,350) $(39,698)
Adjustments to reconcile loss from
continuing operations to net cash provided
by operating activities:
Depreciation and amortization 16,202 68,565
Provision for losses 1,900 1,542
Gain on sale of mortgage servicing rights (1,734) (928)
-------- --------
Cash provided by operations before
working capital changes 9,018 29,481
Net change in first mortgage loans held
for sale 88,735 (109,951)
Net change in sundry receivables, payables,
and other assets (19,114) (17,578)
Net cash used by discontinued operations (5,899) (5,975)
-------- --------
Net cash provided (used) by operating
activities 72,740 (104,023)
-------- --------
Investing activities:
Purchases of investments (1,947) (4,721)
Maturities/sales of investments 52,376 14,304
Purchases of loans from pools (3,734) (5,270)
Sales of foreclosed real estate 3,095 3,351
Net purchases of fixed assets (619) (4,770)
Purchases of future mortgage servicing
income rights (6,623) (23,866)
Sales of future mortgage servicing income
rights 15,636 213
Other 27 (52)
Net cash provided by discontinued
operations 67,897 31,459
-------- --------
Net cash provided by investing
activities 126,108 10,648
-------- --------
Financing activities:
Net borrowings (repayments) of notes
payable (141,446) 16,462
Net borrowings of repurchase agreements 24,992 115,334
Term debt repayments (1,946) (985)
Net cash used by discontinued operations (43,239) (29,403)
-------- --------
Net cash provided (used) by financing
activities (161,639) 101,408
-------- --------
<PAGE>
Net increase in cash and cash equivalents 37,209 8,033
Net change in cash of discontinued operations (11,295) (470)
Cash and cash equivalents at beginning
of period 7,206 34,368
-------- --------
Cash and cash equivalents at end of period $ 33,120 $ 41,931
======== ========
Supplemental cash flow information
Interest paid $6,826 $9,149
Federal income tax paid -- --
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1994
NOTE A -- BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements of Lomas
Financial Corporation ("LFC") and its subsidiaries (collectively, the
"Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not
include all of the information or footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation at September 30, 1994 have been
included. Operating results for the quarter ended September 30, 1994 are not
necessarily indicative of the results that may be expected for the fiscal
year ended June 30, 1995. For further information, refer to the consolidated
financial statements and footnotes thereto included in the annual report on
Form 10-K of the Company for the fiscal year ended June 30, 1994.
NOTE B -- EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share data for the quarter ended September
30, 1994 and 1993 is computed using the weighted average number of shares of
common and, when dilutive, common stock equivalents outstanding during the
period. Common stock equivalents include units and shares granted under the
Lomas Financial Corporation 1991 Long Term Incentive Plan for Nonemployee
Directors, the 1991 Stock Incentive Program and the 1993 Intermediate and
Long Term Incentive Plan. Common stock equivalents also include the assumed
exercise of dilutive stock options. Fully diluted per share data is computed
on the same basis as primary, but it also assumes (if dilutive) the
conversion of senior convertible notes with the related adjustments for
interest and federal income tax expenses. For the quarter ended September 30,
1994 and 1993, the fully diluted per share data is antidilutive.
NOTE C -- REVERSE INTEREST RATE SWAPS
The Company, through its wholly-owned subsidiary, Lomas Mortgage USA,
Inc. ("Lomas Mortgage"), enters into interest rate swap agreements as a means
of managing its exposure to changes in interest rates. Interest rate swaps
that reduce the exposure of the Company, as a whole, to changes in interest
rates are designated as hedges of the Company's fixed rate debt and treated
as a hedge of the debt. Swap agreements that do not reduce the Company's
exposure to changes in interest rates are not considered to be hedges. The
interest differential to be paid or received on swap agreements that are
treated as hedges is accrued over the life of the agreements as an adjustment
to the interest expense of the related debt. Gains or losses on early
termination of interest rate swap agreements designated as hedges are
recognized over the remaining term of the swap agreement. Interest rate swaps
that are not considered hedges are marked to market quarterly with the
unrealized gain or loss, together with the accrued interest differential,
treated as a gain or loss on such swaps. Under the terms of the swap
agreements in existence at September 30, 1994, the Company receives an annual
fixed rate of interest and pays a floating rate of interest based on the 30-
day average A1/P1 commercial paper rate. The swaps reduced the Company's net
interest expense during the quarter ended September 30, 1994 and 1993 by $0.8
million and $4.8 million, respectively.
At September 30, 1994 interest rate swaps in the aggregate notional
amount of $800 million were outstanding, all of which were designated as
hedges. The Company receives an average fixed interest rate of 4.765 percent
on these swaps. The floating interest rate, which the Company pays, at
September 30, 1994 was 5.060 percent. The Company has not entered into any
additional interest rate swap agreements since October 1993. The terms of the
swaps provide that the counterparty, under certain circumstances, can demand
collateral from the Company to protect against mark-to-market exposure
attributable to the agreements. During fiscal 1994, as a result of increases
in interest rates, the Company, at the request of the counterparty, pledged
servicing rights related to approximately $4.8 billion of mortgage loans as
collateral. According to an amended pledge agreement, the counterparty can
demand additional collateral from Lomas Mortgage of up to $2.0 billion unpaid
principal balance of mortgage loan servicing rights if unrealized swap
termination liabilities in the future exceed $80 million.
The swap agreements contain certain default and termination provisions
whereby the counterparty can terminate the agreements prior to their
maturity, including a provision which permits the counterparty to terminate,
if, in its reasonable business judgment, there has been a material adverse
change in the business, assets, operations or financial condition of Lomas
Mortgage since April 1, 1994.
The Company estimates that if the swap agreements had been terminated as
of September 30, 1994, Lomas Mortgage would have incurred a liability (net of
$10.7 million related deferred gains) of approximately $59.4 million.
Since its inception in July 1992 and through September 30, 1994, the
swap program has generated net cash of $43.0 million, including the $10.7
million of deferred gains which currently is being amortized as an offset to
future net interest expense at a rate of $3.3 million a year.
NOTE D -- PURCHASED FUTURE MORTGAGE SERVICING INCOME RIGHTS ("PMSRs")
Since April 1993 the Company has been using a simulation methodology to
estimate the future prepayments of the Company's servicing portfolio.
Effective July 1, 1994, the Company changed its estimates of prepayment
speeds from this simulation methodology to using published Constant
Prepayment Rates ("CPRs"). This change in estimate did not have a material
adverse effect on the financial statements of the Company as of July 1, 1994
or for the three months ended September 30, 1994.
PMSRs at September 30, 1994, consisted of the following (in thousands):
Cost of PMSRs $ 529,488
Capitalized excess servicing fees 3,046
---------
532,534
Less: Accumulated amortization (170,459)
---------
$ 362,075
=========
<PAGE>
Changes in PMSRs were as follows (in thousands):
Beginning balance at July 1, 1994 $382,009
Additions 6,381
Sales and writeoffs (12,156)
Amortization (14,159)
--------
Ending balance at September 30, 1994 $362,075
========
NOTE E -- DISCONTINUED OPERATIONS
Discontinued operations include the Company's short term lending
operations and information systems operations ("LIS").
In September 1994, the Company entered into a definitive letter of
intent with a subsidiary of an insurance company to sell substantially all
the assets of LIS and the Company recorded a provision of $33.5 million
effective June 30, 1994 related to the planned disposition of LIS to reduce
the net assets of LIS to their fair value and to cover the projected
operating losses of LIS during the first four months of fiscal 1995, as well
as expenses in connection with the sale. During the quarter ended
September 30, 1994, LIS' operating losses of $5.3 million have been charged
to these reserves leaving $4.7 million in reserves at September 30, 1994
which is to cover estimated operating losses and the costs of the sale
through December 31, 1994.
The Company is now expected to close the sale of the assets of LIS by
the end of calendar 1994 and will receive $2.5 million in cash, $8.0 million
note due five years after closing, which can be adjusted based on future cash
flow of the business sold, and 35 percent of the purchaser's revenues in
excess of $55 million per year generated during seven years ended December
31, 2001. The calculation of the present value of the estimated discounted
cash flow considerations from this transaction is approximately $40 million.
The Company will not retain operational or management control of the
successor entity. The Company believes that during the period involved, it
will recover its remaining $37.5 million of investment. The Company will
apply all subsequent receipts, related to the transaction to reduce its
remaining book basis until the entire $37.5 million is recovered. After full
recovery of the remaining basis, all subsequent revenues will be treated as
income as they are received.
The Company's discontinued short term lending operations include ST
Lending, Inc. ("STL"), Lomas Management, Inc. ("LMI"), which manages the
assets of STL, and certain other real estate operations. During the three
years ended June 30, 1994 and quarter ended September 30, 1994 the Company
provided reserves totaling $36.9 million to cover projected operating losses
through June 30, 1995 and losses to be realized on the sales of properties.
For the quarter ended September 30, 1994 and 1993, losses of $1.5 million and
$1.8 million, respectively, were charged to the reserves.
During the quarter ended September 30, 1994, STL closed a sale of 12 of
its properties and generated cash of approximately $31.1 million. STL made
principal payments of $43.0 million on its secured notes during the quarter
ended September 30, 1994 and on October 31, 1994, the remaining outstanding
balance of $19.0 million was paid in full.
<PAGE>
Net assets of discontinued short term lending operations at
September 30, 1994 were as follows (in thousands):
Assets:
Mortgage notes receivable and foreclosed real estate, net of
allowance for losses of $9,870 $ 56,504
Cash and restricted cash investments 38,455
Other assets 2,024
--------
96,983
Less:
Secured notes payable (18,984)
Accrued interest payable and other (2,735)
Future operating loss reserves (4,008)
--------
$ 71,256
========
The yield on STL's earning loans (totaling $11.0 million at
September 30, 1994) was approximately 8.81 percent and on its cash (invested
primarily in high-grade commercial paper) was approximately 4.52 percent.
NOTE F -- CONTINGENT LIABILITIES
On September 17, 1990 plaintiffs purporting to represent a class of
single-family mortgagors having escrow deposits computed by Lomas Mortgage
within the past ten years filed a class-action complaint in the Circuit Court
of Cook County, Illinois. The complaint alleges that Lomas Mortgage is in
breach of mortgage contracts and is assessing excessive and unlawful escrow
deposits against the plaintiff. In addition, the complaint asks for punitive
damages. On October 4, 1990 this lawsuit was removed to the United States
District Court for the Northern District of Illinois. Similar actions for
damages, fees and other relief were filed in California and Minnesota state
courts and class-action counterclaims have been filed in two pending Illinois
foreclosure actions. The state court actions were removed to federal court
and transferred to the Northern District of Illinois where they are currently
pending before the same judge as the original action. The state court
counterclaims are stayed.
On August 26, 1994, the United States District Court for the Northern
District of Illinois preliminarily approved a settlement that, if finally
approved, will result in the dismissal, with prejudice, of all claims that
were or could have been brought by the class. Pursuant to the terms of the
settlement, Lomas Mortgage has agreed to follow certain escrow servicing
procedures that result in lower escrow balances for certain of its mortgagors
and has already refunded the surplus escrow balance to its mortgagors that
resulted from the implementation of the procedure. Lomas Mortgage has also
agreed to implement certain special servicing procedures for its mortgagors
whose mortgages are written on older conventional mortgage forms. In addition
to these escrow servicing procedures, Lomas Mortgage has agreed to provide,
once the settlement is finally approved and the case dismissed, a one-time
rebate to its eligible present and former mortgagors. The total rebate is
currently estimated to be less than $600,000. Finally, Lomas Mortgage has
agreed to reimburse class counsel for their reasonable attorneys' fees and
costs. The estimated rebate and attorney's fees has been provided for by
Lomas Mortgage.
A hearing to determine whether the Court should finally approve the
settlement is currently scheduled for December 5, 1994.
The Company is also involved in a number of other lawsuits considered to
be in the normal course of business. In management's opinion, the resolution
of these other disputes will not have a material adverse effect on the
financial position of the Company.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The Company's continuing operations resulted in a net loss for the
quarter ended September 30, 1994 of $7.0 million compared to a net loss of
$49.6 million for the September 30, 1993 quarter; and its discontinued
operations lost $5.5 million in the 1994 period, down from a loss of $9.9
million in the same quarter last year. The operating results of the Company
during the quarters ended September 30, 1994 and 1993 were as follows (in
thousands):
Quarter Ended September 30
--------------------------
1994 1993
-------- --------
Operating Income (Loss)
Mortgage banking $ (862) $(39,825)
Other (754) 5,502
-------- --------
(1,616) (34,323)
Corporate Expenses
General and administrative (2,151) (2,087)
Corporate interest (3,583) (3,288)
-------- --------
Loss from continuing operations (7,350) (39,698)
Loss from discontinued operations (5,500) (9,869)
-------- --------
Net loss $(12,850) $(49,567)
======== ========
Mortgage Banking
The mortgage banking division's operations during the September 1994
quarter lost $862,000, down from a loss of $39.8 million in the same quarter
last year. The improvement reflects principally a significant decline in the
Company's servicing portfolio runoff rate from an annualized 37.8 percent in
the 1993 quarter to an annualized rate of 15.2 percent in the 1994 quarter.
As a consequence of this fundamental improvement, portfolio amortization
charges (including a $50 million special impairment provision in 1993)
declined from $66.6 million in the September 1993 quarter to $14.2 million in
the 1994 quarter. This $52 million positive variance was partially offset (i)
by the fact that the division's fund and asset management unit, which
contributed $5.8 million to net pretax results in the 1993 quarter, was
discontinued during fiscal 1993 when Capstead Mortgage Corporation
("Capstead") became totally self-administered; (ii) by the $3.8 million
decline in the net contribution of the division's production units from
$5.9 million in the 1993 quarter to $2.1 million in the 1994 quarter; and
(iii) by an increase of $2.8 million in the division's net interest expense
from $4.3 million in the 1993 period to $7.1 million in the September 1994
quarter.
<PAGE>
The mortgage banking division's revenues, expenses, and
contributions/loss from continuing operations for the quarters ended
September 30, 1994 and 1993 were derived from the following sources
(in millions):
Quarter Ended September 30
-----------------------------
1994 1993
------------- --------------
Loan administration
Primary servicing $ 30.5 $ 34.1
Master servicing 2.6 3.5
Expenses (13.3) (17.1)
Amortization (including $50 million
impairment provision in 1993) (14.2) $ 5.6 (66.6) $(46.1)
------ ------
Insurance
Agency 2.7 2.0
Mortgage plans 1.4 1.0
Expenses (1.4) 2.7 (1.1) 1.9
------ ------
Banking (including warehousing and
investment income and interest expense)
Revenues 7.8 12.5
Expenses (14.9) (7.1) (16.8) (4.3)
------ ------
Portfolio production
Revenues 6.1 12.2
Expenses (4.0) 2.1 (6.3) 5.9
------ ------
Field services
Revenues 3.0 3.7
Expenses (3.0) -- (3.3) 0.4
------ ------
Fund and asset management
Revenues -- 7.9
Expenses -- -- (2.1) 5.8
------ ------
Other departments
Revenues 0.6 0.3
Expenses (1.2) (0.6) (0.7) (0.4)
------ ------
General and administrative expense (3.6) (3.0)
----- ------
Operating income (loss) $(0.9) $(39.8)
===== ======
<PAGE>
The loan administration unit generated operating income of $5.6 million
in the quarter ended September 30, 1994 compared to income of $3.9 million
before the $50 million provision for PMSR impairment in the same quarter last
year. The increase in income in the current quarter is primarily
attributable to cost reductions. Loan administration related expenses
decreased from $17.1 million in the quarter ended September 30, 1993 to
$13.3 million in the first quarter of fiscal 1995. Related revenues decreased
from $37.6 million in the quarter ended September 30, 1993 to $33.1 million
in the quarter ended September 30, 1994 principally due to a decrease in the
division's combined primary and master servicing portfolios from
$43.9 billion at September 30, 1993 to $41.4 billion at September 30, 1994.
The following is an analysis of servicing fee income for the quarters
ended September 30, 1994 and 1993 (in thousands).
Quarter Ended September 30
--------------------------
1994 1993
------- -------
Servicing fee income:
Primary servicing portfolio $28,565 $32,831
Subservicing portfolio 1,887 1,341
------- -------
30,452 34,172
Master servicing portfolio 2,574 3,517
------- -------
Total $33,026 $37,689
======= =======
The following table sets forth certain information regarding the
Company's servicing portfolio (dollars in millions):
September 30, 1994 June 30, 1994
------------------ -------------
Portfolio principal balances:
Primary servicing portfolio $25,876 $27,126
Subservicing portfolio 7,256 6,864
------- -------
33,132 33,990
Master servicing portfolio 8,221 8,445
------- -------
$41,353 $42,435
======= =======
Portfolio loan count:
Primary servicing portfolio 461,995 474,461
Subservicing portfolio 93,061 91,070
------- -------
555,056 565,531
Master servicing portfolio 134,913 136,609
------- -------
689,969 702,140
======= =======
Weighted average interest rate 8.3% 8.3%
The banking unit of the mortgage banking division recorded net expense
of $7.1 million in the quarter ended September 30, 1994 which was
$2.8 million higher than the $4.3 million net expense reported for the
quarter ended September 30, 1993. Banking revenues decreased to $7.8 million
in September 1994 quarter from $12.5 million in the September 1993 quarter.
This decrease is attributable primarily to the fact that the principal amount
of first mortgage loans held in warehouse pending delivery to permanent
investors was substantially lower in the 1994 quarter than in the 1993
period. In addition, banking revenues for the quarter ended September 30,
1993 included a $2.3 million interest rate swap termination fee which was not
treated as hedge. Banking expenses decreased to $14.9 million in the quarter
ended September 30, 1994 from $16.8 million in the September 30, 1993
quarter. Paid-in-full ("PIF") interest, which is incurred when loans
securing payment of mortgage-backed securities in the Company's primary
servicing portfolio are prepaid prior to the end of a given month, totaled
$1.3 million in the quarter ended September 30, 1994 down from $5.8 million
in the quarter ended September 30, 1993 due to significantly lower runoff
rates during the September 30, 1994 quarter. Net interest savings from the
reverse interest rate swaps which are treated as hedges and recorded as a
reduction in interest expense decreased from $2.5 million in the first
quarter of fiscal 1994 to $800,000 in the same quarter of fiscal 1995.
The portfolio production unit of the mortgage banking division recorded
income of $2.1 million in the quarter ended September 30, 1994 which was
$3.8 million less than the $5.9 million income reported in the same quarter
last year. Portfolio production through flow acquisitions was $1.9 billion
in the quarter ended September 30, 1994 compared to $2.7 billion in the
September 1993 quarter. The first quarter of fiscal 1995 was affected by the
higher interest rates. Portfolio production revenues for the quarter ended
September 30, 1994 and 1993 included $5.9 million and $3.3 million,
respectively, of gains from sales of first mortgage loans and related
servicing income rights.
Capstead became self-administered at September 30, 1993 and the
division's fund and asset management unit concurrently was transferred to
Capstead. Accordingly the unit, which contributed $5.8 million of income in
the 1993 quarter, contributed nothing in the 1994 quarter.
Interest Rate Fluctuations and Market Factors
Lower long term interest rates normally increase new mortgage loan
production volume, which in turn increases fee income and the net interest
spread as a result of the higher average volume of mortgages held for sale.
Lower long term rates also increase prepayment speeds of mortgages on which
PMSRs are currently held, which lowers yields realized on the Company's
investment in PMSRs. Increased prepayment speeds also accelerate PIF
interest expense owed to certain investors. PIF interest is the partial
monthly interest in the month of payoff that is not payable by the mortgagor,
but is receivable by the mortgage security holder.
Higher long term interest rates normally decrease the general volume of
new mortgage originations, decreasing the volume of mortgages held for sale.
These conditions result in reduced fee income and reduced net interest
income. However, the Company's average net yield as a percentage of the
balance held may increase if short term rates do not change by a
corresponding degree. Higher long term rates also decrease the prepayment
speed of mortgages on which PMSRs are currently held, which in turn normally
would increase the yield on and value of the Company's investment in PMSRs.
Decreased prepayment speeds also will decrease PIF interest expense due to
loans which payoff.
The value of the Company's loan servicing portfolio may be adversely
affected if mortgage interest rates decline and loan prepayments increase.
Periods of accelerated prepayments may result in future declines of income
generated from the Company's loan servicing portfolio. Conversely, if
mortgage interest rates increase, the value of the Company's loan servicing
portfolio may be positively affected.
Lower short term interest rates increased the Company's net interest
spread on mortgages held for sale and higher short term interest rates
decrease the net yield on mortgages held for sale unless there is a
corresponding increase in long term interest rates.
Other
The Company's other operations during the quarter ended September 30,
1994 generated a loss of $800,000 compared to income of $5.5 million in the
quarter ended September 30, 1993. In the September 1993 quarter, other
income included a $3.9 million gain from amendments to certain contractual
provisions related to the Company's 1991 sale of ELLCO Leasing Corporation
and a $1.4 million gain on the sale of a Conseco Note, which was received in
connection with the sale of Company's life insurance operations in fiscal
1991. For the quarter ended September 1994 and 1993, other operations also
included losses of $1.3 million and $600,000, respectively, from the
Company's image processing operations.
<PAGE>
Discontinued Operations
Information Systems. The following table presents a summary of Lomas
Information Systems ("LIS") revenues, expenses and net operating results
during the quarters ended September 30, 1994 and 1993 (in thousands):
Quarter Ended September 30
--------------------------
1994 1993
-------- --------
Revenues:
External $ 4,502 $ 3,847
Internal 4,297 5,018
-------- --------
8,799 8,865
-------- --------
Cash expenses:
Personnel and contract labor (5,929) (4,978)
Equipment/software rent and maintenance (4,542) (4,585)
Voice communications (1,156) (1,017)
General and administrative (2,387) (2,174)
-------- --------
(14,014) (12,754)
-------- --------
Net cash requirement (5,215) (3,889)
Noncash items:
Depreciation and amortization (183) (2,180)
Enhancement capitalization -- 208
Provision for losses 105 (8)
-------- --------
Net pretax loss prior to reserve application (5,293) (5,869)
Reserve application 5,293 --
-------- --------
Net pretax loss $ -- $ (5,869)
======== ========
In September 1994, the Company entered into a definitive letter of
intent with a subsidiary of an insurance company to sell substantially all
the assets of LIS and the Company recorded a provision of $33.5 million
effective June 30, 1994 related to the planned disposition of LIS to reduce
the net assets of LIS to their fair value and to cover the projected
operating losses of LIS to the date of closing, as well as expenses in
connection with the sale. During the quarter ended September 30, 1994, LIS'
operating losses of $5.3 million have been charged to these reserves and at
September 30, 1994, the Company added another $1.5 million to these
provisions. For more information, see NOTE E -- DISCONTINUED OPERATIONS on
page 7.
Short Term Lending. The Company provided reserves during the three
years ended June 30, 1994 totaling $32.9 million and $4.0 million for the
quarter ended September 30, 1994 which is to cover projected operating losses
through June 30, 1995 and estimated losses to be realized on the sales of
properties. The $4.0 million provision recorded in the September 1994 quarter
is primarily a result of the recently revised operating projections prepared
as a result of the September 30, 1994 asset sale. For the quarter ended
September 30, 1994 and 1993, losses of $1.5 million and $1.8 million,
respectively, were charged to these reserves. At September 30, 1994, the
remaining reserve balance was $4.0 million.
On September 30, 1994, STL closed a sale of 12 of its properties and
generated cash of approximately $31.1 million. STL made principal payments
of $43 million on its secured notes during the quarter ended September 30,
1994 and on October 31, 1994, the remaining outstanding balance of $19
million was paid in full.
Liquidity and Capital Resources
The outstanding capital and credit resources of the Company at
September 30, 1994 included (in millions):
Short term debt of Lomas Mortgage:
--Secured by first mortgage loans pending delivery
to permanent investors $157.1
--Secured by reverse repurchase agreements 13.9
--Secured by high quality short term investments 21.9
--Borrowings under working capital line of credit 25.0
--Other short term debt 8.3
------
226.2
------
Term debt of Lomas Mortgage:
--Notes due in 1997 150.0
--Notes due in 2002 190.0
--Other 39.7
------
379.7
------
Term notes of STL due in 1996 19.0
Convertible notes of LFC due in 2003 139.9
Stockholders' equity 128.6
------
$893.4
======
Short term debt was $226.2 million at September 30, 1994, including
$21.9 million principal amount borrowed under investment lines of credit
and $171.0 million principal amount of warehouse debt and repurchased
agreement borrowings secured by single-family mortgage loans pending
delivery to permanent investors. Investment lines of credit were secured by
high quality short term investments purchased with the proceeds of such
lines of credit. The short term notes payable and reverse repurchase
agreements are secured by single-family mortgage loans which, at that date,
were committed for sale to institutional investors. Such short term notes
(and therefore the related warehouse indebtedness) normally are self-
liquidating and require no supplemental liquidity support from LFC or any
of its subsidiaries. Commercial paper and bank certificates of deposit of
non-affiliated commercial banks are funded with proceeds from, and are
pledged as collateral for, investment lines of credit. The commercial paper
and bank certificates of deposit have fixed rates of interest and generally
mature within 31 days, at which time the investment lines of credit are
paid down. As a result, all short term indebtedness except short term
working capital debt is self-liquidating and none of it constitutes any
burden on operating cash flow.
Lomas Mortgage had outstanding at September 30, 1994 interest rate
swaps in the aggregate notional amount of $800 million, all of which were
designated as hedges. For more information on the interest rate swaps, see
NOTE C -- REVERSE INTEREST RATE SWAPS on page 6.
Coverage for the term notes payable of Lomas Mortgage is provided by
cash internally generated by that subsidiary. Lomas Mortgage's operations
during the quarter ended September 30, 1994, after paying interest on its
short term debt, generated $24.9 million in cash available for (i) payment
of interest on the subsidiary's $379.7 million term debt, (ii) investment
in portfolio maintenance and growth, (iii) intercompany advances or payment
of dividends to LFC (subject to restricted payment limitations described
below), and (iv) addition to Lomas Mortgage's working capital.
Under the terms of the warehouse agreement, servicing payment
agreement and working capital line of credit that contains the most
restrictive covenants, Lomas Mortgage is restricted from making dividend
payments to LFC if, after giving effect thereto, the aggregate amount of
such payments should exceed the sum of (i) $25 million (less any
intercompany advances); plus (ii) 50 percent of Lomas Mortgage's
accumulated consolidated income before tax since October 1, 1992; or
reduced by 100 percent of consolidated loss before income taxes; plus (iii)
(a) before November 30, 1993, the fair value of the aggregate net proceeds
received by Lomas Mortgage from the issuance or sale after October 1, 1992
of its capital stock (b) after November 30, 1993, the aggregate net cash
proceeds received from the issuance or sale by Lomas Mortgage of its
capital stock and warrants, options and rights to purchase its capital
stock. The minimum net worth requirement, as defined, under these
covenants is $175 million and Lomas Mortgage's net worth as defined at
September 30, 1994 was $194.1 million. At September 30, 1994 Lomas Mortgage
could transfer as intercompany advances to LFC approximately $12.1 million.
Coverage for interest payments on LFC's $140 million of convertible
notes due 2003 and general corporate expenses have been and in the future
are expected to be provided by (a) LFC's current cash resources, (b)
dividends (if available) and intercompany advances from Lomas Mortgage, (c)
cash dividends and interest income from other investments, (d) advances or
dividends from STL, and (e) periodic liquidations of other assets. On
September 30, 1994 STL completed the sale of 12 of its remaining properties
for approximately $31.1 million. The proceeds of the sale enabled payment
(on October 31, 1994) in full of STL's remaining secured debt of
$19.0 million and made available approximately $22.7 million of incremental
liquidity to the Company's consolidated operations. Also, because of the
pending sale of LIS, which is expected to close by the end of calendar
1994, LFC will not be required in the future to fund LIS' cash losses. The
cash loss of LIS was approximately $5.2 million in the quarter ended
September 30, 1994.
As of September 30, 1994, the Company's failure to meet certain ratio
requirements contained in the covenants of the Company's $140 million
senior convertible note indenture, while not an event of default, limits
the Company's ability to issue additional term debt.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 17, 1990 plaintiffs purporting to represent a class of
single-family mortgagors having escrow deposits computed by Lomas Mortgage
within the past ten years filed a class action complaint in the Circuit
Court of Cook County, Illinois. The complaint alleges that Lomas Mortgage
is in breach of mortgage contracts and is assessing excessive and unlawful
escrow deposits against the plaintiffs. In addition, the complaint asks for
punitive damages. On October 4, 1990 this lawsuit was removed to the United
States District Court for the Northern District of Illinois. Similar
actions for damages, fees and other relief were filed in California and
Minnesota state courts and class action counterclaims have been filed in
two pending Illinois foreclosure actions. The state court actions were
removed to federal court and transferred to the Northern District of
Illinois where they are currently pending before the same judge as the
original action. The state court counterclaims are stayed.
On August 26, 1994, the United States District Court for the Northern
District of Illinois preliminarily approved a settlement that, if finally
approved, will result in the dismissal, with prejudice, of all claims that
were or could have been brought by the class. Pursuant to the terms of the
settlement, Lomas Mortgage has agreed to follow certain escrow servicing
procedures that result in lower escrow balances for certain of its
mortgagors and has already refunded the surplus escrow balance to its
mortgagors that resulted from the implementation of this procedure. Lomas
Mortgage has also agreed to implement certain special servicing procedures
for its mortgagors whose mortgages are written on older conventional
mortgage forms. In addition to these escrow servicing procedures, Lomas
Mortgage has agreed to provide, once the settlement is finally approved and
the case dismissed, a one-time rebate to its eligible present and former
mortgagors. The total rebate is currently estimated to be less than
$600,000. Finally, Lomas Mortgage has agreed to reimburse class counsel for
their reasonable attorneys' fees and costs. The estimated rebate and
attorneys' fees has been provided for by Lomas Mortgage.
A hearing to determine whether the Court should finally approve the
settlement is currently scheduled for December 5, 1994.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1994 Annual Meeting of Stockholders was held November 1,
1994, for the purpose of electing members of the Board of Directors (the
"Board"). Proxies for the meeting were solicited pursuant to Section 14(a)
of the Securities Exchange Act of 1934 and there was no solicitation in
opposition to the Board's solicitations. All ten of the Board's nominees
for director as listed in the proxy statement were elected.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit
Number
-------
11 Computation of Earnings (Loss) Per Share.
(b) Reports on Form 8-K:
None.
<PAGE>
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.
LOMAS FINANCIAL CORPORATION
Date: November 14, 1994 By: /s/JESS HAY
------------------------------------
Jess Hay
Chairman and Chief Executive Officer
Date: November 14, 1994 By: /s/GARY WHITE
------------------------------------
Gary White
Senior Vice President and Controller
EXHIBIT 11
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(in thousands, except per share amounts)
Quarter Ended September 30
--------------------------
1994 1993
-------- --------
Primary earnings (loss) per share:
Average common shares outstanding 20,100 20,099
Common stock equivalents under Nonemployee
Directors Long Term Incentive Plan 35 28
-------- --------
Total shares 20,135 20,127
======== ========
Loss from continuing operations $ (7,350) $(39,698)
Loss from discontinued operations (5,500) (9,869)
-------- --------
Net loss $(12,850) $(49,567)
======== ========
Primary earnings (loss) per share:
Loss from continuing operations $(.37) $(1.97)
Loss from discontinued operations (.27) (.49)
----- ------
Net loss $(.64) $(2.46)
===== ======
Fully diluted earnings (loss) per share:
Average common shares outstanding 20,100 20,099
Common stock equivalents under Nonemployee
Directors Long Term Incentive Plan 35 28
-------- --------
Total shares 20,135 20,127
======== ========
Loss from continuing operations $ (7,350) $(39,698)
Loss from discontinued operations (5,500) (9,869)
-------- --------
Net loss $(12,850) $(49,567)
======== ========
Fully diluted earnings (loss) per share:
Loss from continuing operations $(.37) $(1.97)
Loss from discontinued operations (.27) (.49)
----- ------
Net loss $(.64) $(2.46)
===== ======
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000060150
<NAME> GARY WHITE
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1994
<PERIOD-START> JUL-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 33,120
<SECURITIES> 13,716
<RECEIVABLES> 90,606
<ALLOWANCES> (9,651)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 101,865
<DEPRECIATION> (14,992)
<TOTAL-ASSETS> 947,504
<CURRENT-LIABILITIES> 0
<BONDS> 519,643
<COMMON> 20,100
0
0
<OTHER-SE> 108,485
<TOTAL-LIABILITY-AND-EQUITY> 947,504
<SALES> 0
<TOTAL-REVENUES> 54,121
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 41,205
<LOSS-PROVISION> 1,900
<INTEREST-EXPENSE> 18,366
<INCOME-PRETAX> (7,350)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,350)
<DISCONTINUED> (5,500)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,850)
<EPS-PRIMARY> (.64)
<EPS-DILUTED> (.64)
</TABLE>
