UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996
Commission File Number 0-21912
First Chesapeake Financial Corporation
(Exact name of registrant as specified in its charter)
Virginia 54-1624428
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9100 Arboretum Parkway, Suite 160
Richmond, Virginia 23236
(Address of principal executive offices)
(Zip code)
(804)320-0160
(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 number of shares of common stock of registrant outstanding as of May 10,
1996 was 4,621,550 shares.
<PAGE>
First Chesapeake Financial Corporation
and Subsidiaries
Form 10-QSB
Index
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets 3
at March 31, 1996 (Unaudited)
and December 31, 1995
Consolidated Statements of Operations 4
Three Months Ended March 31, 1996
and 1995 (Unaudited)
Consolidated Statements of Cash Flows 5
Three Months Ended March 31, 1996
and 1995 (Unaudited)
Notes to Consolidated Financial Statements 6
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31,
1996 1995
___________ ____________
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,867,660 $ 1,833,216
Receivable from sale of servicing rights 17,132 196,934
Mortgage loans held for sale 1,658,414 590,529
Receivable from sale of loans - 798,285
Note receivable 74,000 109,000
Real estate owned - 298,000
Furniture and equipment 477,377 512,572
Organization costs 25,848 31,018
Loans to related parties 100,000 -
Other assets 188,700 184,917
___________ ___________
TOTAL ASSETS $ 4,409,131 $ 4,554,471
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes payable $ 1,403,218 $ 1,157,348
Accounts payable
Trade 52,584 61,145
Purchased mortgage servicing rights 2,500 2,500
Accrued restructuring charges 113,460 165,149
___________ ___________
Total liabilities 1,571,762 1,386,142
Stockholders' equity
Convertible preferred stock; no par value;
$1 stated value per share; 5,000,000 shares
authorized; no shares issued - -
Common stock; no par value; 10,000,000 shares
authorized; 4,621,550 shares issued and
outstanding 10,542,458 10,542,458
Common stock warrant 50,000 50,000
Deficit ( 7,755,089) ( 7,424,129)
___________ ___________
Total stockholders' equity 2,837,369 3,168,329
___________ ___________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,409,131 $ 4,554,471
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
____________ ____________
<S> <C> <C>
REVENUES
Mortgage origination $ 7,539 $ 129,331
Servicing fees 2,104 105,036
Gain on sales of loans 53,798 223,507
Loan administration - 15,612
Interest income 44,916 215,352
Interest expense ( 24,450) ( 210,147)
Other 11,776 53,984
____________ ____________
Total revenues 95,683 532,675
OPERATING EXPENSES
Compensation and employee benefits 198,278 783,932
Professional fees 54,302 37,429
Commitment fees 17,558 -
Occupancy 38,642 79,216
Depreciation and other amortization 38,083 42,673
Other operating expenses 79,780 289,961
____________ ____________
Total operating expenses 426,643 1,233,211
____________ ____________
NET LOSS $ 330,960 $ 700,536
============ ============
LOSS PER SHARE $ 0.07 $ 0.15
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
____________ ____________
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $( 330,960) $( 700,536)
Adjustments
Depreciation and other amortization 38,083 42,673
Net decrease (increase) in loans held
for sale ( 1,067,885) 11,734,256
Decrease in receivable from loan sales 798,285 -
Loss on sale of fixed assets 409 -
Loss on sale of real estate owned 4,625 -
Decrease (increase) in other assets ( 3,783) 117,295
Increase (decrease) in trade accounts
payable and other liabilities ( 8,561) 9,480
Accrued restructuring charges, net ( 51,689) -
____________ ____________
Net cash provided (absorbed) by operating
activities ( 621,476) 11,203,168
____________ ____________
INVESTING ACTIVITIES
Purchase of furniture and equipment 1,597 ( 117,922)
Proceeds from sale of fixed assets 276 -
Extensions of credit to related parties ( 100,000) -
Repayments of notes receivable 35,000 -
Proceeds from sale of real estate 293,375 -
Proceeds from sale of servicing, net of
selling expenses 179,802 3,081,220
Other - ( 6,331)
____________ ____________
Net cash provided by investing activities 410,050 2,956,967
____________ ____________
FINANCING ACTIVITIES
Repayment of bank loans ( 1,742) ( 3,150,000)
Net (decrease) increase in warehouse line
of credit 247,612 (12,252,171)
____________ ____________
Net cash provided (absorbed) by financing
activities 245,870 (15,402,171)
____________ ____________
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 34,444 ( 1,242,036)
Cash and cash equivalents at beginning
of period 1,833,216 2,472,907
____________ ____________
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,867,660 $ 1,230,871
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash payments of interest expense $ 24,450 $ 186,996
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of
Regulation S-B. 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
only of normal recurring adjustments, considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1995.
2. Loan Servicing
The Company services both conforming and nonconforming single family
first mortgage loans. Conforming conventional loans serviced by the Company are
securitized through Federal National Mortgage Association ("FNMA") or Federal
Home Loan Mortgage Association ("FHLMC") programs on a nonrecourse basis whereby
foreclosure losses are generally the responsibility of FNMA or FHLMC and not the
Company. Nonconforming loans serviced by the Company are loans originated by a
subsidiary of the Company and are being temporarily serviced pending sale of the
loans and related servicing to other investors. Loans being serviced are
summarized as follows:
March 31, 1996 December 31, 1995
----------------- -----------------
No. Amount No. Amount
--- ---------- --- ----------
Conforming 56 $7,202,391 58 $7,458,380
Nonconforming 17 1,658,572 13 1,235,065
--- ---------- --- ----------
73 $8,860,963 71 $8,693,445
=== ========== === ==========
Of the loans being serviced at March 31, 1996 and 1995, the
nonconforming loans for sale servicing released and the servicing will transfer
to the investor within 60 days. Additionally, the conforming loans are being
subserviced for the Company by another servicer. Loans serviced for others are
not included in the accompanying consolidated balance sheets.
In connection with its loan servicing activities, the Company makes
certain payments of property taxes and insurance premiums and advances certain
principal and interest payments to investors prior to collecting them from
specific mortgagors. These amounts represent receivables to the Company and are
included in other assets in the accompanying consolidated balance sheets.
At March 31, 1996, the Company carried Fidelity coverage of $1,000,000
and errors and omissions coverage of $1,000,000 related to its mortgage banking
activities.
<PAGE>
3. Notes Payable
Notes payable consists of the following:
March 31, December 31,
1996 1995
---------- -----------
Warehouse line of credit $1,370,209 $1,122,597
Vehicle loan 33,009 34,751
---------- -----------
$1,403,218 $1,157,348
========== ==========
The Company's subsidiary, American Mortgage Express, Inc., has a
warehouse line of credit ("Warehouse Facility") for $10,000,000 with First Union
National Bank of North Carolina. This Warehouse Facility provides a credit line
to fund the origination of nonconforming 1 to 4 family residential first-lien
mortgage loans. It bears interest at the prime rate and expires on August 29,
1996. The Warehouse Facility is collateralized by the loans held for sale and
provides for certain covenants, including required financial ratios and minimum
net worth requirements.
The following information relates to the Warehouse Facility:
March 31, December 31,
1996 1995
---------- -----------
Outstanding at end of period $1,370,209 $ 1,122,597
Weighted average interest rate
at end of period 8.25% 7.00%
Maximum amount outstanding
during the period $1,958,045 $16,102,475
Average amount outstanding
during the period $1,236,836 $ 3,230,360
Weighted average interest rate
during the period 7.74% 7.52%
4. Loss Per Share
Loss per share for the three months ended March 31, 1996 and 1995 was
computed by dividing the net loss by 4,621,550 common shares representing the
aggregate of the weighted average number of common shares outstanding during the
periods. Outstanding stock options and warrants have been excluded from loss
per share calculations as their exercise prices exceed the average market price
for the three months ended March 31, 1996 and 1995 or their inclusion would be
anti-dilutive.
5. Commitments
The Company regularly enters into short term commitments with applicants
to fund mortgage loans subject to approval. Certain of these commitments
require the Company to offer mortgage loans at pre-established interest rates
and fees. As of March 31, 1996, commitments to fund mortgage loan applications
in process with pre-established interest rates and fees aggregated approximately
$11,556,000.
<PAGE>
6. Proposed Acquisition
On December 11, 1995, the Company executed a Letter of Intent to acquire
all of the outstanding stock of a federal savings bank (the "Bank") located in
Florida for a purchase price of approximately $5,000,000. The purchase price is
payable $4,000,000 in cash at closing and a $1,000,000 note payable in five
equal annual installments of $200,000 each and bearing interest at a rate of 6%
on the unpaid balance. On March 25, 1996 a Definitive Acquisition Agreement was
executed between the parties. Consummation of this transaction is subject to
regulatory approval. The Company proposes to raise between $3,000,000 and
$5,000,000 in a private placement of its convertible preferred stock to acquire
the Bank or another financial institution.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations Financial Condition
Assets. Assets of the Company decreased from $4,554,471 at December 31,
1995 to $4,409,131 at March 31, 1996, a decrease of $145,340 or 3%. The major
contributors to this decrease were a $269,600 increase in mortgage loans held
for sale (after netting the $798,285 decline in receivable from sale of loans),
offset by decreases of $179,802 in the receivable from sale of servicing and
$298,000 in real estate owned.
The increase in loans held for sale resulted because loan originations
during quarter increased somewhat. However, the mortgage market is still
somewhat depressed, and the Company has struggled to increase its loan
originations.
The Company held one property as real estate owned at December 31, 1995
that it acquired through foreclosure. This property was sold during the first
quarter of 1996 resulting in a loss of $4,625. The Company doesn't hold any
real estate acquired through foreclosure at March 31, 1996.
As of November 30, 1994, the Company sold its purchased mortgage
servicing rights. The $179,000 decrease in the receivable from the sale of the
servicing rights was attributable to a scheduled payment by the buyer of the
rights.
Liabilities. Liabilities increased from $1,386,142 at December 31, 1995
to $1,571,762 at March 31, 1996, an increase of $185,620 or 13%. This increase
is primarily a result of an increase in notes payable. The warehouse line of
credit used to finance loan originations increased by approximately $245,000
(see Note 4 to "Notes to Consolidated Financial Statements"). This increase is
attributable to the increase in loan originations discussed previously.
Stockholders' Equity. Stockholders' equity decreased by $330,960 during
the first three months of 1996 resulting from the Company's net loss for the
period.
<PAGE>
Results of Operations
Current Year Performance and Earnings Outlook
The Company incurred a loss of $330,960 for the three months ended March
31, 1996. This loss is a result of the Company's continued inability to
generate sufficient loan originations to be profitable. The mortgage loan
environment has continued to be highly competitive and has put tremendous
pressure on the operating margins of the Company. To the extent that general
demand for mortgage loans remains at or below its current level and price
competition within the industry continues, the Company's future operating
margins for its origination business will remain under pressure. Further, the
timing of any recovery in the mortgage market cannot be predicted.
On March 25, 1996, the Company executed a definitive agreement to
acquire all of the outstanding stock of a federal savings bank located in
Florida for a purchase price of approximately $5,000,000 (see Note 7 to "Notes
to Consolidated Financial Statements"). Management has extensive experience in
operating financial institutions and believes the acquisition of a savings bank
will provide the operations necessary to obtain profitability. Consummation of
this transaction is subject to regulatory approval. The Company proposes to
raise between $3,000,000 and $5,000,000 in a private placement of its
convertible preferred stock to acquire the savings bank or another financial
institution.
Comparison of Three Months Ended March 31, 1996 to Three Months Ended March 31,
1995
Revenues. Total revenues for the three months ended March 31, 1996
amounted to $95,683 representing a decrease of $436,992, or 82%, when compared
to the same period in 1995. The Company's principal sources of revenue are fees
from mortgage origination and servicing activities. The Company experienced the
decrease in revenues as a result of the sale of its servicing portfolio on
November 30, 1994 and the closure of origination operations in northern Virginia
during the second and third quarters of 1995. As a result of the servicing
sale, servicing fees declined by approximately $103,000, from $105,000 in 1995
to $2,000 in 1996. As a result of the closure of its conforming loan
origination operations in northern Virginia, mortgage origination fees declined
by $121,000, from $129,000 in 1995 to $8,000 in 1996, and gain on sale of loans
declined by $170,000, from $224,000 in 1995 to $54,000 in 1996.
Expenses. Total expenses for the three months ended March 31, 1996
amounted to $426,643 as compared to $1,233,211 for the same period in 1995.
This decrease is attributable to the reduction in overhead associated with the
sale of servicing and the closure of the origination operations in northern
Virginia.
<PAGE>
Liquidity and Capital Resources
The Company's primary liquidity requirements have been the funding of
its mortgage banking operations, the net cost of mortgage loan originations and
the purchase of mortgage loan servicing rights. The Company currently does not
have any plans to purchase mortgage loan servicing rights, and, accordingly,
future funding requirements will relate to the cost of mortgage loan
originations and any additional business activities as may be approved by the
Board of Directors.
Cash and cash equivalents at March 31, 1996 amounted to $1,867,660 as
compared to $1,833,216 at December 31, 1995.
During the three months ended March 31, 1996, the Company's operating
activities utilized $621,476 as compared to providing $11,203,168 in the first
three months of 1995. These amounts reflect the decrease in loans held for sale
without regard to the associated decrease in the warehouse line of credit
reflected in financing activities. Netting the change in the warehouse line of
credit against loans held for sale provides a better picture of utilization of
funds from operating activities. If the change in the warehouse line of credit
is netted against the change in loans held for sale, the Company's operating
activities utilized $373,864 in 1996 as compared to the utilization of
$1,049,003 in 1995. The utilization of cash resources in 1996 and 1995
resulted primarily from the Company's losses in those periods.
The Company's investing activities provided $410,050 in cash resources
during the three months ended March 31, 1996 as compared to providing $2,956,967
for the same period in 1995. In 1995, the sale of the Company's servicing
portfolio provided $3,081,000 in cash resources in 1995, partially offset by
additions to fixed assets of $118,000. In 1996, the major sources of cash from
investing activities came from proceeds from the sale of real estate owned of
$293,375 and sale of servicing of $179,802, partially offset by net purchases
of notes receivable of $65,000.
Without consideration to the change in the warehouse line of credit,
financing activities utilized $3,150,000 during 1995, and had very little impact
on cash in 1996. In 1995, the Company utilized a portion of the funds it
received from the sale of servicing to repay the associated debt.
In the past, the Company has relied on net proceeds from capital raising
activities, a servicing secured bank facility, and a warehouse credit facility
to meet its liquidity requirements. The servicing secured credit facility has
been terminated and will no longer be available to the Company.
The Company has a mortgage loan warehouse line of credit facility
("Warehouse Facility") of $10,000,000 with First Union National Bank of North
Carolina ("First Union") which expires on August 29, 1996 and provides a credit
line to fund the origination of nonconforming 1 to 4 family residential
first-lien mortgage loans. It is secured by the loans held for sale and
provides for certain covenants, including required financial ratios and minimum
net worth requirements (see Note 4 to "Notes to Consolidated Financial
Statements").
As of September 30, 1995, the Company had cash and cash equivalents of
$1,867,660 and available borrowings of approximately $8,630,000 pursuant to the
Warehouse Facility. Management believes that the Company's current liquidity
and capital resources are adequate to meet its near-term goals.
<PAGE>
Inflation
The Company is affected by inflation primarily through its impact on
interest rates. During periods of rising inflation, interest rates generally
increase, causing mortgage loan origination volumes, particularly refinancing
activity, to decline. However, during such periods, mortgage loan prepayments
slow, extending the average life of the servicing portfolio and enhancing its
market value. Conversely, during periods of declining inflation, interest rates
generally decline, resulting not only in increased mortgage loan origination
volume and mortgage loan refinancing activity, but also in accelerated loan
prepayment rates which decrease the average life of the Company's servicing
portfolio, adversely impacting its value.
Seasonality
The mortgage banking industry is generally subject to seasonal trends
which reflect the general pattern of sales and resales of homes. Such sales
typically peak during the spring and summer seasons and decline to lower levels
from November through February. The mortgage loan servicing business is
generally not subject to seasonal trends. Cyclical trends resulting from
increasing or decreasing interest rates and the general state of the economy
also affect the mortgage banking industry and may tend to accentuate or
counteract seasonal trends.
<PAGE>
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
a. Exhibits
11 Statement re Computation of Per Share Earnings
b. Reports on Form 8-K. No reports on Form 8-K have been filed during
this reporting period.
<PAGE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FIRST CHESAPEAKE FINANCIAL CORPORATION
Registrant
Date: May 13, 1996 By Max E. Gray
Max E. Gray
Chairman, President and
Chief Executive Officer
Date: May 13, 1996 By C. Harril Whitehurst, Jr.
C. Harril Whitehurst, Jr.
Executive Vice President and
Chief Financial Officer
<PAGE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
EXHIBIT INDEX
Sequential
Exhibit Page
Number Document Description Number
- ------- ------------------------------- ----------
11 Statement re Computation of Per 16
Share Earnings
<PAGE>
<TABLE>
FIRST CHESAPEAKE FINANCIAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11
(Unaudited)
<CAPTION>
Three Months Ended March 31,
----------------------------
Notes 1996 1995
----- ----------- -----------
<S> <C> <C> <C>
PRIMARY
Calculation of shares
Weighted average common shares
outstanding 4,621,550 4,621,550
Common stock equivalents
Shares issuable from assumed
exercise of outstanding warrants
and options (1) - -
----------- -----------
Weighted average common and common
equivalent shares outstanding as
adjusted 4,621,550 4,621,550
=========== ===========
Calculation of primary earnings per share
Net loss $ 330,960 $ 700,536
----------- -----------
Primary loss per common share $ 0.07 $ 0.15
=========== ===========
<FN>
(1) In accordance with APB Opinion No. 15, outstanding stock options and
warrants should not be assumed to be exercised until the market price of the
common stock obtainable has been in excess of the exercise price for
substantially all of three consecutive months ending with the last month of the
period to which earnings per share relate. Additionally, stock options and
warrants determined to be common stock equivalents should be excluded from the
calculation of earnings per share if their effect would be anti-dilutive. For
the quarters ended March 31, 1996 and 1995, the average market price of the
Company's stock for the quarter was less than any of the exercise prices related
to the options and warrants, or their inclusion in the calculation of earnings
per share would be anti-dilutive. Therefore no exercise is assumed for any of
the outstanding options and warrants for any of the periods presented.
</TABLE>
