UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
IXI QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
I I 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 1-9742
HARBOURTON FINANCIAL SERVICES L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1573349
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
2530 S. Parker Road, Suite 500, Aurora, CO 80014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 745-3661
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Preferred Units New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
At August 14, 1996, registrant had 41,169,558 Preferred Units
outstanding.
TABLE OF CONTENTS
Page
PART I
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996
(unaudited) and December 31, 1995 3
Consolidated Statements of Operations (unaudited) for
the three and six months ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows (unaudited) for
the six months ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II
SIGNATURES 22
<TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<S> <C> <C>
June 30, December 31,
1996 1995
ASSETS
Cash and cash equivalents $ 3,636 $ 2,273
Mortgage loans held for sale, net 267,611 232,073
Mortgage loans held for investment, net 2,446 1,507
Short-term investments 5,300 -
CMO bonds, residual interests, investment
securities and SMATs, net of accumulated
amortization of $484 and and $439,
respectively 3,312 6,306
Notes receivable - affiliates 587 587
Advances receivable, net 32,693 21,016
Mortgage servicing rights, net of
accumulated amortization of $28,523 and
$21,979, respectively and valuation
allowances of $90 and $1,132,
respectively 85,852 75,846
Deferred acquistion, transaction and
loan costs, net of accumulated
amortization of $1,431 and $1,271,
respectively 2,816 2,676
Property, equipment and leasehold
improvements, net of accumulated
amortization of $3,777 and $3,283,
respectively 5,669 4,176
Due from affiliates 105 3,632
Excess cost over identifiable tangible
and intangible assets acquired, net of
accumulated amortization of $470 and
$464, respectively 2,739 2,726
Other Assets 10,716 3,277
Total Assets $417,898 $356,095
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Installment purchase obligations
- servicing $ 4,765 $ 9,740
Foreclosure reserves 8,490 8,142
Lines of credit 258,855 232,144
Term loans 41,328 37,215
Notes payable - affiliates 34,315 581
Due to affiliates 1,033 -
Accounts payable and other liabilities 11,716 13,766
Total Liabilities 360,502 301,588
Partners' Capital 57,396 54,507
Total Liabilities and Partners' Capital $417,898 $356,095
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
</TABLE>
<TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) (in thousands)
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
REVENUES
Loan servicing fees $ 6,373 $ 4,959 $12,661 $9,347
Ancillary income 1,889 1,512 3,824 2,881
Gain on sale of defaulted
loans to affiiates 229 159 511 316
Investment income net of
interest expense on escrows 2,686 1,371 4,466 2,321
Total servicing revenue 11,177 8,001 21,462 14,865
Gain on sale of mortgage loans
and related mortgage servicing
rights 4,697 2,732 9,663 4,599
Interest income, net of related
warehouse interest expense 1,556 314 4,482 463
Other production income 3,772 2,312 7,512 2,768
Total production income
- gross 10,025 5,358 19,657 7,830
Other investment and interest
income 3,093 (4) 3,653 40
Total Revenue 24,295 13,355 44,772 22,735
EXPENSES
Servicing costs 2,516 1,621 4,771 3,265
Prepayment costs and interest
curtailments 604 422 1,173 863
Provision for foreclosure
losses 1,500 755 3,593 1,439
Amortization of mortgage servicing
rights less net of impairment
recovery 3,158 1,832 5,501 3,129
Total servicing expenses 7,778 4,630 15,038 8,696
Loan production and secondary
marketing costs 9,931 6,119 18,228 8,941
General and administrative costs,
including management fees 1,694 1,673 3,212 3,104
Interest expense - term loans 752 467 1,528 954
Other interest expense 323 87 797 195
Other interest expense-affiliates,
net of interest income
-affiliates 738 189 1,084 233
Other amortization and
depreciation 423 404 901 702
Total Expenses 21,639 13,569 40,788 22,825
Net Income Before Equity in Earnings
of Affiliates and Gain on Bulk Sale
of Originated Servicing 2,656 (214) 3,984 (90)
Equity in earnings of affiliates 5 - 5 (254)
Gain on bulk sale of originated
servicing - - - 9,148
Net Income $ 2,661 $ (214) $3,989 $8,804
Net Income per Preferred Unit,
based on 41,414,002, 36,985,082
41,658,447 and 33,536,454 weighted
average number of Preferred Units
outstanding, respectively $ 0.06 $ (0.01) $0.09 $ 0.26
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
</TABLE>
<TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in thousands)
<S> <C> <C>
Six Months Ended
June 30, June 30,
1996 1995
Cash Flows From Operating Activities:
Net Income $ 4,463 $ 8,804
Adjustments to reconcile net income to net cash from
operating activities:
(Gain) loss on sale of CMO bonds, residual
interests, and SMATs (2,486) 245
Gain on bulk sale of originated servicing - (9,148)
Gain on sale of defaulted loans (511) (316)
Mortgage servicing rights valuation recovery (1,043) -
Amortization and depreciation 7,444 4,445
Equity in earnings of affiliates (5) 254
Provision for foreclosure losses 3,593 1,439
Changes in operating assets and liabilities:
Mortgage loans held for sale and
investment, net (36,477) (54,055)
Advances receivable (11,609) 6,067
Other assets (9,534) 3,576
Due to/from affiliates 4,665 684
Accounts payable and other liabilities (3,875) (673)
Net Cash Flows From Operating Activities (45,375) (38,678)
Net Cash Flows From Investing Activities:
Gain on sale associated with retained
servicing (14,644) (879)
Proceeds from bulk sale of originated
servicing - 9,148
Settlement of installment purchase obligation (4,975) 371
Purchase of short-term investments - (9,948)
Increase in restricted cash - (226)
Increase in notes receivable - affiliates - 33
Funding of deferred acquisition and
transaction costs (226) (1,108)
Amortization of CMO bonds, residual interests, and
investment securities (70) -
Proceeds from sale of CMO bonds, residual interests
and SMATs 5,550 -
Investment in subsidiary (100) -
Purchases of property and equipment (2,183) (472)
Cash acquired in purchase transaction - 2,715
Net Cash Flows From Investing Activities (16,648) (591)
Cash Flows From Financing Activities:
Principal payments on term loans (4,135) (10,015)
Funding of deferred loan costs (72) -
Term debt advances 8,248 -
Redemption of Preferred Units (1,100) -
Payment on partners' note receivable - 300
Net borrowings on lines of credit and short
term borrowings 26,711 45,863
Net borrowings from notes payable-affiliates 33,734 6,587
Net Cash Flows From Financing Activities 63,386 42,735
Increase in cash and cash equivalents 1,363 3,466
Cash and cash equivalents at beginning of period 2,273 1,670
Cash and cash equivalents at end of period $ 3,636 $ 5,136
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
<TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(unaudited) (in thousands)
<S> <C> <C>
Six Months Ended
June 30, June 30,
1996 1995
Non-cash Investing and Financing Activities:
Acquisition and consolidation of HBT, TMC, HFC, and TMC Mortgage
Corp., net of cash acquired
Mortgage loans held for sale, net $ - $ 12,922
Mortgage loans held for investment - 222
CMO bonds and residual interests - 3,864
Notes receivable - affiliates - 314
Advances receivable - 5,875
Mortgage servicing rights, net - 18,631
Deferred acquisition and loan costs, net - 86
Property and equipment, net - 468
Investment in affiliates - (1,652)
Excess cost over identifiable tangible
and intangible assets acquired - 2,236
Other assets - 7,212
Total Assets - 50,178
Foreclosure reserves - 3,334
Lines of credit - 11,890
Term loans - 7,202
Short-term borrowings - 9,582
Notes payable - affiliates - 5,588
Due to affiliates - (44)
Accounts payable and other liabilities - 1,724
Total Liabilities - 39,276
Distribution to affiliates prior to the
purchase transaction - (6,284)
Unrealized gain (loss) on available for
sale securities - (67)
Push down of purchase price in connection
with Harbourton's acquisition of management
interest in Western:
Purchased servicing rights - 389
Excess cost over identifiable tangible and
intangible assets acquired - 238
- 627
Cash paid for interest 7,415 2,886
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
</TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996 (Unaudited) and December 31, 1995
Note 1. Basis of Presentation
The consolidated financial statements primarily include the
accounts of Harbourton Financial Services L.P. ("HBT") and its
wholly owned subsidiaries Harbourton Mortgage Co., L.P. ("HMCLP")
and Harbourton Funding Corporation ("HFC") (collectively, the
"Partnership"). All intercompany accounts and transactions have
been eliminated in consolidation. HBT, through its subsidiary
HMCLP, is a full-service mortgage banking operation that
originates and services mortgage loans.
On March 14, 1995, the existing Unitholders of HBT approved the
issuance of approximately 21.5 million Preferred Units of HBT in
exchange for 100% ownership interest in HMCLP and HFC. Because
of the change in control of HBT, this transaction was accounted
for as a reverse acquisition of HBT by HMCLP ("the Purchase
Transaction"). Accounting for a reverse acquisition requires that
the historical results of operations reflect the operations of
HMCLP as the continuing accounting entity, thus, HBT is reported
as if it were purchased as of the date of the transaction.
Concurrent with the transaction, HBT acquired a 50% interest in
TMC Mortgage Co., L.P. ("TMC") in exchange for approximately
0.8 million Preferred Units of HBT. This interest, combined with
the 50% interest previously owned by HMCLP resulted in HBT's
direct and indirect 100% ownership of TMC. Thereafter, the
results of operations of TMC are reflected as a 100% owned
subsidiary of the Partnership and reported in the consolidated
statements of operations.
On July 31, 1995, HBT acquired Western Sunrise Holdings, L.P. and
subsidiaries ("Western") in exchange for approximately 8.6
million Preferred Units. This was a transaction between entities
under common control, therefore, the transaction was accounted
for similar to a pooling-of-interests. Under reorganization
accounting, the results of operations of Western are presented as
if the transaction occurred at the inception date of HMCLP and
Western.
In summary, the historical consolidated results of operations
presented herein primarily represent the following: a) HMCLP and
Western consolidated plus a 50% equity interest in TMC for the
three months ended March 31, 1995, and b) HMCLP, Western, HBT and
TMC consolidated for the periods commencing subsequent to April
1, 1995.
The accompanying unaudited consolidated financial statements of
the Partnership have been prepared in accordance with generally
accepted accounting principles for interim financial information
and in accordance with the instructions to Form 10-Q and Article
10 of Regulation S-X. 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 of the Partnership, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results
for the three and six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for
the year ended December 31, 1996. For further information, refer
to the consolidated financial statements and footnotes thereto
included in the Partnership's Form 10-K for the year ended
December 31, 1995.
Note 2. Mortgage Servicing Rights
The Partnership adopted SFAS No. 122 in the quarter ended
September 30, 1995 retroactive to January 1, 1995 and its
consolidated financial statements for the three and six months
ended June 30, 1995 were restated to reflect the impact of
adopting SFAS No. 122. The overall impact on the Partnership's
consolidated financial statements of adopting SFAS No. 122 was an
increase in net earnings for the three and six months ended June
30, 1995 of approximately $545 thousand and $879 thousand,
respectively.
Note 3. Lines of Credit
At June 30, 1996, the Partnership's lines of credit consisted of
the following:
Warehouse lines of credit $ 216,167
Short-term funding obligations 35,819
T&I revolving lines of credit 5,000
Repurchase agreements (CMO bonds and residual
interests) 1,869
Total $ 258,855
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following is management's discussion and analysis of the
financial condition and results of operations of the Partnership.
The discussion and analysis should be read in conjunction with
the financial statements included herein.
Business
The Partnership's primary business currently is focused on
mortgage banking which consists of (i) mortgage loan servicing
activities, including the acquisition and sale of mortgage
servicing rights, (ii) the origination and purchase of mortgage
loans, including the securitization and sale of the mortgage
loans with the related servicing rights retained or released, and
(iii) investments in other mortgage-related securities.
Mortgage Servicing Portfolio
The Partnership's servicing and subservicing portfolio was
comprised of the following (in thousands except number of loans):
<TABLE>
<S> <C> <C> <C> <C>
June 30, 1996 December 31, 1995
Principal Number of Principal Number of
Balance Loans Balance Loans
GNMA Loans 4,040,730 73,464 4,262,160 79,994
Other(primarily 2,180,723 24,558 1,768,924 20,218
Agency loans)
Subserviced for 170,353 2,823 161,395 2,663
affiliates
Subservicing 181,777 1,812 148,923 1,542
Total Portfolio 6,573,583 102,657 6,341,402 104,417
</TABLE>
The Partnership's mortgage servicing and subservicing portfolio
included loans in all 50 states and the District of Columbia.
The following table shows the geographic concentration of the
mortgage servicing portfolio:
<TABLE>
<S> <C> <C>
June 30, December 31,
1996 1995
California 29.6% 26.6%
Florida 8.1 8.0
Texas 7.1 7.8
Arizona 4.7 4.4
Colorado 4.8 4.7
Virginia 4.6 4.4
Other* 41.3 44.1
100.0% 100.0%
</TABLE>
* Loans from no other state exceeded 4% of the principal balance
of loans in the portfolio at either date.
Mortgage Loan Production
The Partnership originates and purchases mortgage loans insured
by the Federal Housing Administration ("FHA"), mortgage loans
partially guaranteed by the Veterans Administration ("VA"),
conventional mortgage loans, nonconforming jumbo loans, and home
equity loans. The Partnership originates loans through three
principal geographic regions (Eastern United States, Western
United States and Central United States), which consist of
approximately 30 branch offices, on both a wholesale and retail
basis. Mortgage loan production for the three and six months
ended June 30, 1996 and 1995 was as follows (principal balance in
thousands):
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended
June 30, 1996 June 30, 1995
Principal Number of Principal Number of
Balance Loans Balance Loans
Conventional - fixed 310,972 3,188 62,123 645
Conventional - ARM 12,978 181 31,729 240
Conventional - other 68,655 526 3,841 27
Total Conventional 392,605 3,895 97,693 912
Government - fixed 236,378 2,334 45,738 361
Government - ARM 132,632 1,228 84,527 724
Total Government 369,010 3,562 130,265 1,085
Nonconforming - 60,276 382 30,600 202
fixed
Nonconforming - ARM 23,705 132 40,407 402
Nonconforming - 2,144 9 1,250 9
other
Total Nonconforming 86,125 523 72,257 613
Total Production 847,740 7,980 300,215 2,610
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Six Months Ended
June 30, 1996 June 30, 1995*
Principal Number of Principal Number of
Balance Loans Balance Loans
Conventional - fixed 686,586 6,735 90,535 940
Conventional - ARM 20,586 340 53,447 404
Conventional - other 109,926 849 5,409 38
Total Conventional 817,098 7,924 149,391 1,382
Government - fixed 483,558 4,680 73,766 582
Government - ARM 197,429 1,818 113,475 972
Total Government 680,987 6,498 187,241 1,554
Nonconforming - 128,747 769 43,507 287
fixed
Nonconforming - ARM 43,450 213 47,436 472
Nonconforming - 2,452 10 5,378 40
other
Total 174,649 992 96,321 799
Nonconforming
Total Production 1,672,734 15,414 432,953 3,735
</TABLE>
* Excludes originations for TMC from January 1, 1995 to March
31, 1995 since TMC was accounted for using the equity method
during that period.
Mortgage loan production increased significantly for the three
months ended June 30, 1996 as compared to the three months ended
June 30, 1995 primarily due to the growth in the production
operations of the Partnership. Mortgage loan production
increased for the six months ended June 30, 1996 as compared to
the six months ended June 30, 1995 primarily due to a decline in
the long-term interest rates (e.g. the average 30-year mortgage
interest rates declined from 8.08% to 7.48%), the growth in the
production operations of the Partnership and the exclusion of
TMC's production volume in the quarter ended March 31, 1995.
The geographic concentration of mortgage loans originated for the
three and six months ended June 30, 1996 and 1995 was as follows:
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
California 36.5% 55.7% 42.3% 59.5%
Florida 10.1 8.0 8.5 8.0
Maryland 7.6 2.7 7.9 7.8
Virginia 4.7 4.1 6.2 4.4
Arizona 6.9 7.0 6.0 7.3
Nevada 3.9 5.0 3.8 6.5
Other* 30.3 17.5 25.4 6.5
100.0% 100.0% 100.0% 100.0%
</TABLE>
* Loans from no other state exceeded 4% of the principal balance
of loans originated in any period.
Possible Loss of Taxation as Partnership and Strategic Planning
The Partnership is taxed as a partnership, and not as a
corporation, for federal income tax purposes pursuant to a
"grandfather" provision in the Internal Revenue Code which is
scheduled to expire on December 31, 1997. There have been
proposals in recent Congressional sessions to extend or modify
this grandfather period, but to date no such extension has been
adopted. If the grandfathered tax status expires, based on the
Partnership's existing composition of gross revenue commencing on
January 1, 1998, the Partnership will begin to be taxed as a
corporation, which would result, among other consequences, in
taxable income of the Partnership being subject to two levels of
income taxation, first when recognized by the Partnership and a
second time to the extent distributed to the Preferred
Unitholders. This "double taxation" could materially reduce the
after-tax return to Preferred Unitholders.
The General Partner is looking into the strategic alternatives
facing the Partnership, taking into account, among other factors,
the best interests of all of the Preferred Unitholders, the
business opportunities available to the Partnership, conditions
in the mortgage banking industry and the likely loss of the
grandfathered tax status.
Results of Operations
As noted previously, the historical consolidated results of
operations presented herein primarily represent the following:
a) HMCLP and Western consolidated plus a 50% equity interest in
TMC for the three months ended March 31, 1995, and b) HMCLP,
Western, HBT and TMC consolidated for the periods commencing
subsequent to April 1, 1995.
Revenues and Expenses for the three months ended June 30, 1996
compared to the three months ended June 30, 1995
Net income for the three months ended June 30, 1996 totaled
approximately $2.7 million or $.06 per unit compared to a net
loss of approximately $0.2 million or $.01 per unit for the three
months ended June 30, 1995, an increase of approximately $2.9
million or $.07 per unit. The following table summarizes the
Partnership's operating results for the three months ended June
30 (in thousands):
<TABLE>
<S> <C> <C>
1996 1995
Net income from servicing 3,399 3,371
operations
Net income (loss) from production 94 (761)
operations
Other investment and interest 3,093 (4)
income
General and administrative (1,694) (1,673)
expenses
Other expense (2,231) (1,147)
Net income (loss) $2,661 $(214)
</TABLE>
The most significant change in the results operations for the
quarter ended June 30, 1996 compared to the quarter ended June
30, 1995 was related to other investment and interest income. In
conjunction with the Purchase Transaction the Partnership
acquired other mortgage related securities (CMO bonds and
residual interests). During the three months ended June 30,
1996, the Partnership realized gains in its CMO bonds and
residual interests portfolio of approximately $2.5 million and
other income of approximately $0.6 million compared to losses of
approximately $0.2 million for the three months ended June 30,
1995. Other changes are detailed below.
Servicing
The average principal balance of loans serviced for the three
months ended June 30, 1996 compared to the three months ended
June 30, 1995 (based on beginning of the month's totals)
increased to approximately $6.5 billion from approximately $5.5
billion, respectively. In addition, the composition of the
servicing portfolio is currently more weighted towards GNMA
servicing which results in proportionately higher gross revenues
and expenses as compared to other servicing. The growth and
change in the composition of the servicing portfolio is
principally due to the acquisition of a $1.5 billion GNMA
servicing portfolio with an effective acquisition date of August
31, 1995 and the retention of approximately $1.3 billion in
originated loans sold on a servicing retained basis for the
period July 1, 1995 to June 30, 1996.
Gross servicing revenues and expenses increased proportionately,
taking into consideration the growth and change in composition as
discussed above, for the three months ended June 30, 1996
compared to the three months ended June 30, 1995, with the
exception of amortization of mortgage servicing rights.
Amortization of mortgage servicing rights increased approximately
$1.4 million for the three months ended June 30, 1996 compared to
the three months ended June 30, 1995. The increase is a result
of (i) the growth in the portfolio discussed above, and (ii)
capitalized mortgage servicing rights as a percent of the total
servicing portfolio has increased to 1.31% as of June 30, 1996
from 1.12% as of June 30, 1995. This increase resulted from (i)
the Partnership's policy of retaining higher value servicing, and
(ii) the decline of no basis servicing in the portfolio.
The following table presents a summary rollforward of the
Partnership's mortgage servicing rights, net of accumulated
amortization at June 30 (in thousands):
<TABLE>
<S> <C> <C> <C>
1996 1995
Balance at April 1 $80,340 $51,599
Capitalized OMSR's 8,670 580
Acquisitions -- 262
Scheduled Amortization* (3,254) (1,300
)
Amortization due to acquisitions -- (567)
Impairment Recovery
96 --
Balance at June 30, $85,852 $50,574
</TABLE>
* Scheduled amortization is based on estimates made at the
beginning of each period.
As noted previously, the Partnership adopted SFAS No. 122 during
1995. SFAS No. 122 prohibits retroactive application for
Originated Mortgage Servicing Rights ("OMSRs") created prior to
the fiscal year in which the Partnership adopted the new
accounting pronouncement. As a result the Partnership, at June
30, 1996, owns servicing rights related to approximately $500
million in mortgage loans that are not capitalized in its
consolidated financial statements. Further, SFAS No. 122
prohibits the recognition of fair value in excess of the book
basis of the MSRs. As a result, the Partnership has off-balance
sheet value associated with its noncapitalized MSRs, as well as
the excess in fair value of the MSRs capitalized in the
consolidated financial statements.
Production
Net income from production operations for the three months ended
June 30, 1996 was approximately $0.1 million compared to a net
loss of approximately $0.8 million for the three months ended
June 30, 1995. Net income from production operations increased
primarily as a result of increased production volume which was
sufficient to cover fixed operating costs.
The principal balance of loans produced for the three months
ended June 30, 1996 increased to approximately $848 million from
approximately $300 million for the same period of 1995, an
increase of approximately $548 million or 183%. As noted
previously, mortgage loan production increased significantly
during the three months ended June 30, 1996 compared to the three
months ended June 30, 1995 primarily due to the growth in the
production operations of the Partnership.
Other Expense Items
The increase in other expense items is attributed to an increase
in term interest and other interest expense associated with the
completion of the Partnership's term facility in August 1995 and
the acquisition of the $1.5 billion bulk servicing portfolio on
August 31, 1995. The remaining net increase in other expense
items is primarily attributable to other interest expense for
interest on borrowings during the year to affiliates.
Revenues and Expenses for the six months ended June 30, 1996
compared to the six months ended June 30, 1995
Net income (before equity in earnings of affiliates and gain on
bulk sale of originated servicing) for the six months ended June
30, 1996 totaled approximately $4.0 million or $.09 per unit
compared to a net loss of approximately $0.1 million or $.00 per
unit earned during the six months ended June 30, 1995, an
increase of approximately $4.1 million or $.09 per unit. The
following table summarizes the Partnership's operating results
for the six months ended June 30, 1996 and 1995 (in thousands):
<TABLE>
<S> <C> <C>
1996 1995
Net income from servicing 6,424 6,169
operations
Net income (loss) from production 1,429 (1,111)
operations
Other investment and interest 3,653 40
income
General and administrative (3,212) (3,104)
expenses
Other expense (4,310) (2,084)
Net income before equity in
earnings of affiliates and gain on
sale of bulk servicing 3,984 (90)
Gain on bulk sale of servicing - 9,148
Equity in earnings of affiliates 5 (254)
Net income 3,989 8,804
</TABLE>
The most significant change in the results operations for the six
months ended June 30, 1996 compared to the six months ended June
30, 1995 was related to other investment and interest income. In
conjunction with the Purchase Transaction the Partnership
acquired other mortgage related securities (CMO bonds and
residual interests). During the six months ended June 30, 1996,
the Partnership realized gains in its CMO bonds and residual
interests portfolio of approximately $2.5 million and other
income of approximately $1.1 million compared to losses of
approximately $0.2 million for the six months ended June 30,
1995. In addition, net income from production operations
increased approximately $2.5 million for the six months ended
June 30, 1996 compared to the same period in 1995 as a result of
higher production volumes. Offsetting the increases in net
income from other investment and interest income and production
operations was an increase of other expenses of approximately
$2.2 million. The increase in other expense items is principally
the result of increased term and other interest expense. Other
changes are detailed below.
Servicing
The average principal balance of loans serviced for the six
months ended June 30, 1996 compared to the six months ended June
30, 1995 (based on beginning of the months totals) increased to
approximately $6.8 billion from approximately $5.8 billion,
respectively. In addition, the composition of the servicing
portfolio is currently more weighted towards GNMA servicing which
results in proportionately higher gross revenues and expenses as
compared to other servicing. The growth and change in the
composition of the servicing portfolio is principally due to the
acquisition of a $1.5 billion GNMA servicing portfolio with an
effective acquisition date of August 31, 1995, the acquisition of
the HBT portfolio of approximately $1.1 billion effective April
1, 1995 resulting from the purchase transaction described
earlier, and the retention of approximately $1.3 billion in
originated loans sold on a servicing retained basis for the
period July 1, 1995 to June 30, 1996, net of the sale of an
approximate $493 million bulk servicing portfolio effective
January 31, 1995.
Gross servicing revenues and expenses increased proportionately,
taking into consideration the growth and change in composition as
discussed above, for the six months ended June 30, 1996 compared
to the six months ended June 30, 1995, with the exception of
amortization of mortgage servicing rights.
Amortization of mortgage servicing rights increased approximately
$3.4 million for the six months ended June 30, 1996 compared to
the six months ended June 30, 1995. The increase is a result of
(i) the growth in the portfolio discussed above, and (ii)
capitalized mortgage servicing rights as a percent of the total
servicing portfolio has increased to 1.31% as of June 30, 1996
from 1.12% as of June 30, 1995. This increase resulted from (i)
the Partnership's policy of retaining higher value servicing, and
(ii) the decline of no basis servicing in the portfolio.
The following table presents a summary rollforward of the
Partnership's mortgage servicing rights, net of accumulated
amortization at June 30 (in thousands):
<TABLE>
<S> <C> <C> <C>
1996 1995
Balance at January 1, $75,846 $33,899
Capitalized OMSR's 15,508 946
Acquisitions -- 18,893
Scheduled Amortization* (6,544) (2,597)
Amortization due to acquisitions -- (567)
Impairment Recovery
1,042 --
Balance at June 30, $85,852 $50,574
</TABLE>
* Scheduled amortization is based on estimates made at the
beginning of each fiscal year.
As noted previously, the Partnership adopted SFAS No. 122 during
1995. SFAS No. 122 prohibits retroactive application for
Originated Mortgage Servicing Rights ("OMSRs") created prior to
the fiscal year in which the Partnership adopted the new
accounting pronouncement. As a result the Partnership, at June
30, 1996, owns servicing rights related to approximately $500
million in mortgage loans that are not capitalized in its
consolidated financial statements. Further, SFAS No. 122
prohibits the recognition of fair value in excess of the book
basis of the MSRs. As a result, the Partnership has off-balance
sheet value associated with its noncapitalized MSRs, as well as
the excess in fair value of the MSRs capitalized in the
consolidated financial statements.
Production
Net income from production operations for the six months ended
June 30, 1996 was approximately $1.4 million compared to a net
loss of approximately $1.1 million for the six months ended June
30, 1995. Net income from production operations increased
primarily as a result of increased production volume which was
sufficient to cover fixed operating costs. Recently, the
Partnership has significantly expanded its retail and wholesale
branch production operations. Therefore, the associated fixed
costs of these additions will have a negative impact on operating
income until production revenues from the newly acquired branches
exceed the additional fixed costs.
The principal balance of loans produced for the six months ended
June 30, 1996 increased to approximately $1.7 billion from
approximately $433 million for the same period of 1995, an
increase of approximately $1.2 billion or 286%. Mortgage loan
production increased significantly during the six months ended
June 30, 1996 compared to the six months ended June 30, 1995
primarily due to a decline in long-term interest rates (e.g. the
average 30-year mortgage interest rates declined from 8.08% to
7.48%), the growth in the production operations of the
Partnership and the exclusion of TMC's production volume in the
quarter ended March 31, 1995.
Other Expense Items
The increase in other expense items is attributed to an increase
in term interest and other interest expense associated with the
completion of the Partnership's term facility in August 1995 and
the acquisition of the $1.5 billion bulk servicing portfolio. The
remaining net increase in other expense items is primarily
attributable to other interest expense for interest on borrowings
during the year to affiliates.
Equity in Earnings of Affiliates
Equity in earnings of affiliates for the period from January 1,
1995 to March 31, 1995, represents the Partnership's 50% interest
in TMC. Prior to March 31, 1995, the Partnership reported its
interest in TMC on the equity method of accounting. Subsequent
to March 31, 1995 TMC's operations are consolidated and included
in the consolidated operating results of the Partnership.
Gain on Bulk Sale of Servicing
During the three months ended March 31, 1995, the Partnership
entered into a Purchase and Sale Agreement with an unrelated
third-party to sell OMSRs related to Government National Mortgage
Association ("GNMA") loans with unpaid principal balances
totaling approximately $493 million. The Purchase and Sale
Agreement was dated January 31, 1995 with a May 2, 1995 servicing
transfer date. In conjunction with the Purchase and Sale
Agreement, the Partnership entered into an Interim Servicing
Agreement with the Purchaser to perform the servicing functions
until the May 2, 1995 servicing transfer date. The Partnership
realized a gain on sale of approximately $9.1 million, net of
related transaction fees.
Liquidity and Capital Resources
The Partnership's available liquidity and uses can generally be
categorized into Mortgage Servicing and Mortgage Loan Production.
Servicing
A source of liquidity and cash flow available to the Partnership
is its owned portfolio of servicing rights on mortgage loans, net
of its servicing term loan, with underlying principal balances
aggregating approximately $6.5 billion at June 30, 1996.
Currently, there is a liquid and active market for the sale and
acquisition of servicing rights. The Partnership has term loans
secured by its mortgage servicing portfolio. Principal and
interest on the term loans is paid quarterly. The Partnership's
liquidity is affected by the level of loan delinquencies and
prepayments due to the servicer's advance requirements on the
loans it services. The Partnership is also required as a servicer
to fund advances for mortgage and hazard insurance and tax
payments on the scheduled due date in the event that sufficient
escrow funds are not be available. The Partnership's sources of
liquidity to meet these advance requirements are internally
generated operating cash flow, its existing lines of credit, and
defaulted loan repurchase and sale transactions with affiliated
parties.
The Partnership has repurchased defaulted loans and resold them
to affiliated parties, under a repurchase/buyout and sale program
with such affiliates, and repurchased additional defaulted loans
prior to foreclosure sale and sold the loans on a servicing
retained basis to such affiliated parties. The servicing
contract does not require the Partnership to advance payments to
the investor (the security holder) if the payments are not
received from the mortgagor or from the guarantor or insurer,
therefore, significantly reducing remittance day advance
requirements.
In addition to the above transaction, at June 30, 1996 the
Partnership has outstanding approximately $20 million of
defaulted mortgage loans (with average interest rates in excess
of 9.5%) which it has financed through an affiliated party. This
transaction is reflected in advances receivable in the
accompanying consolidated financial statements.
Production
One of the Partnership's other primary liquidity requirements is
the financing of its mortgage loan originations and purchases,
until funded by secondary market investors and the cost of its
loan originations. The Partnership finances its short-term loan
funding requirements principally through warehouse lines of
credit. At December 31, 1995, the maximum amount of borrowing
available under the existing warehouse facility was $200 million.
On July 30, 1996, the Partnership increased this facility to a
maximum availability of $300 million in a debt refinancing
transaction as discussed below.
In addition, the decision to sell mortgage loans servicing
retained versus servicing released influences the Partnership's
liquidity. When mortgage loans are sold on a servicing-released
basis, the investor pays the Partnership for the value of the
servicing related to the mortgage loan, thereby increasing the
Partnership's cash flow. Alternatively, when mortgage loans are
sold on a servicing-retained basis, the investor does not pay the
Partnership for the value of the servicing related to the
mortgage loan, thereby decreasing the Partnership's initial cash
flow. On servicing retained loan sales, the Partnership receives
cash flow as servicing fee income over the life of the loan. The
following table summarizes the amount of loans retained and
released during 1996 and 1995 (in thousands):
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
Released $380,539 $178,188 $973,925 $295,195
Retained 448,879 72,739 758,169 118,865
$829,418 250,927 $1,632,094 $414,060
</TABLE>
Partners' Capital
During the three months ended June 30, 1996, the Partnership
purchased from an unaffiliated party approximately 0.7 million
publicly traded Preferred Units for approximately $1.1 million.
These units were redeemed thus reducing the publicly traded units
and total outstanding units to approximately 5.3 million units
and 41.2 million units, respectively. Accordingly, partners'
capital decreased by approximately $1.1 million during the three
months ended June 30, 1996 due to the transaction.
Other
The Partnership has investments in SMATs which are investments
that indirectly entitle the Partnership to the residual cash
flows generated by mortgage-related assets underlying an issuance
of a mortgage-related security transaction. During the first
quarter of 1996, the Partnership realized a $2.4 million gain
(recognized in income in 1995) through the sale of a portion of
its SMATs portfolio. The unsold SMATs have a carrying value and
fair value of $0 at June 30, 1996.
On July 30, 1996, the Partnership refinanced its credit
facilities with a new $75 million revolving servicing facility
which converts to a five-year term facility after one year; a
$375 million revolving warehouse credit facility consisting of
two tranches: (i) a $300 million revolving committed warehouse
facility and (ii) a $75 million discretionary facility for early
funding programs; and a revolving working capital facility of
approximately $45 million to provide financing for servicing
advances and loans held for investment. This refinancing will
allow the Partnership to manage its liquidity for its servicing
and production operations and to repay its borrowings to
affiliates.
Further, the Partnership has a subordinated line of credit
available from Harbourton Holdings, L.P. ("Harbourton"), an
affiliated party, which usually bears interest at rates ranging
from prime to prime plus 2%. Borrowings at June 30, 1996 totaled
approximately $9.7 million.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
HARBOURTON MORTGAGE CO., L.P.
By: Harbourton Mortgage Corporation, its
General Partner
Date: August 14, 1996 By: s/Jack W. Schakett
Jack W. Schakett
Chief Executive Officer
Date: August 14, 1996 By: s/Paul Szymanski
Paul Szymanski
Chief Financial Officer
Date: August 14, 1996 By: s/Brent F. Dupes
Brent F. Dupes
Executive Vice President
Date: August 14, 1996 By: s/Bill Reid
Bill Reid
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 3636
<SECURITIES> 3312
<RECEIVABLES> 35249
<ALLOWANCES> 1969
<INVENTORY> 0
<CURRENT-ASSETS> 273693
<PP&E> 9446
<DEPRECIATION> 3777
<TOTAL-ASSETS> 417898
<CURRENT-LIABILITIES> 360502
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 57396
<TOTAL-LIABILITY-AND-EQUITY> 417898
<SALES> 0
<TOTAL-REVENUES> 44777
<CGS> 0
<TOTAL-COSTS> 33266
<OTHER-EXPENSES> 4113
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3409
<INCOME-PRETAX> 3989
<INCOME-TAX> 0
<INCOME-CONTINUING> 3989
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3989
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>