SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PUSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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: 0-25744
HOMEOWNERS FINANCIAL CORP.
--------------------------
(Exact name of the small business issuer as specified in its charter)
DELAWARE 13-2747380
-------- ----------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
2075 West Big Beaver Road, Suite 550, Troy, Michigan 48084
----------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (800) 723-6001
--------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 ______
Indicate the number of shares outstanding of each of issuer's classes of Common
Stock, as of the latest practicable date.
Class Outstanding at June 30, 1996
----- ----------------------------
Common Stock, par value 4,131,213 Shares
$.01 per share
Transitional Small Business Format
(check one); YES ______ NO ___X___
<PAGE>
HOMEOWNERS FINANCIAL CORP.
INDEX
Part I. Financial Information
Item 1. Financial Statements: P. 3
Condensed Consolidated Statements of Financial Condition P. 4
as of June 30, 1996 and September 30, 1995.
Condensed Consolidated Statements of Operations for the nine
P. 5 months and three months ended June 30, 1996 and June 30,
1995.
Condensed Consolidated Statement of Stockholders' Equity P. 6
for the nine months ended June 30, 1996.
Condensed Consolidated Statements of Cash Flows for the P. 7-8
nine months ended June 30, 1996 and June 30, 1995.
Notes to Consolidated Financial Statements. P. 9-11
Item 2. Management's Discussion and Analysis of Financial P. 12-20
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings P. 21
Item 2. Change in Securities P. 21
Item 3. Defaults Upon Senior Securities P. 21
Item 4. Submission of Matters to a Vote of Security Holders P. 21
Item 5. Other Information p. 21
Item 6. Exhibits and Reports on Form 8-K P. 21
Signatures P. 22
Financial Data Schedule P. 23
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying financial statements are unaudited for the interim
periods, but include all adjustments (consisting only of normal recurring
accruals) which management considers necessary for the fair presentation of
results for the three and nine months ended June 30, 1996 and the three and nine
months ended June 30, 1995.
Moreover, these financial statements do not purport to contain complete
disclosure in conformity with generally accepted accounting principals and
should be read in conjuction with the Company's audited financial statements at,
and for the fiscal year ended September 30, 1995.
The results reflected for the three and the nine months ended June 30,
1996 and June 30, 1995, respectively, are not necessarily indicative of the
results for the entire fiscal year.
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<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
June September
30, 30,
1996 1995
------- -------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents ............................................... $ 31 $ 44
Cash - restricted ....................................................... 255 255
Mortgage loans held for sale ............................................ 2,657 478
Purchased mortgage servicing rights-net ................................. 5,032 5,825
Accrued income and servicing receivables ................................ 417 295
Property, premises equipment-net ........................................ 153 181
Other assets ............................................................ 1,436 957
------- -------
$ 9,981 $ 8,035
======= =======
LIABILITIES AND STOCK HOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities .................................. $ 3,642 $ 986
Notes payable ........................................................... 4,139 5,089
------- -------
7,781 6,075
------- -------
Stockholders' equity
Preferred stock, $.10 par value 1,000,000 shares authorized,
1,750 shares issued and outstanding, designated as Series A, ............ * *
503 shares issued and outstanding, designated as Series B, .............. ** --
58,608 shares issued and outstanding designated as Series C;............. 6 --
Common stock, $.10 par value, 10,000,000 shares
authorized, 4,131,213 and 4,122,125 shares
issued and outstanding, respectively .................................... 41 41
Additional paid-in capital .............................................. 3,166 2,470
Retained accumulated deficit ............................................ (1,013) (551)
------- -------
2,200 1,960
------- -------
$ 9,981 $ 8,035
======= =======
<FN>
* Preferred stock amount prior to rounding to thousands was $175.
** Preferred stock amount prior to rounding to thousands was $50.
</FN>
See accompanying notes to financial statements.
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<PAGE>
<CAPTION>
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Share and Per Share Amounts)
Nine Months Ended Three Months Ended
June 30, June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
INCOME
Mortgage servicing and subservicing income ............................ $ 1,891 $ 1,311 658 626
Origination income .................................................... 234 33 80 33
Interest .............................................................. 136 29 76 1
Gain on sale of mortgage loans held for sale .......................... 17 52 --
1
Gain on sale of mortgage servicing rights ............................. 38 -- -- --
Other income .......................................................... 88 -- 28 --
----------- ----------- ----------- -----------
2,404 1,425 842 661
----------- ----------- ----------- -----------
EXPENSES
Compensation and benefits ............................................. 1,029 912 322 421
Office occupancy ...................................................... 147 111 51 52
Office supplies and expenses .......................................... 269 405
145 173
Professional services ................................................. 98 271 37 89
Interest .............................................................. 155 65 55 34
Provision for estimated losses on loans serviced ...................... -- -- -- --
Amortization of mortgage loan servicing rights ........................ 810 317 270 152
Other ................................................................. 262 163 26
----------- ----------- -----------
53
2,770 2,244 906 974
----------- ----------- ----------- -----------
NET LOSS BEFORE PROVISION FOR
INCOME TAXES .......................................................... (366) (819) (64) (313)
INCOME TAX (PROVISION) BENEFIT ........................................ -- 72 -- (6)
----------- ----------- ----------- -----------
NET LOSS .............................................................. (366) (747) (64) (319)
Less cumulative preferred stock dividends ............................. (96) (144) -- (48)
----------- ----------- ----------- -----------
Loss attributable to common stock ..................................... $ (462) $ (891) $ (64) $ (367)
=========== =========== =========== ===========
Loss per share ........................................................ $ (.11) $ (.22) $ (.02) $ (.09)
=========== =========== =========== ===========
Weighted average shares ............................................... 4,126,669 4,080,158 4,128,756 4,076,408
=========== =========== =========== ===========
See accompanying notes to financial statements.
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<PAGE>
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands, except shares outstanding)
(unaudited)
Shares Outstanding Par Value
----------------------------------------------- -----------------------------------------------
Preferred A Preferred B Preferred C Common Preferred A Preferred B Preferred C Common
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 .... 1,750 -- -- 4,122,125 $ * $ -- $ -- $ 41
Stocks issued for services ..... -- -- -- 9,088 -- -- -- ***
Stockholders debt converted
to preferred stock ............. -- 503 -- -- -- ** --
Stock issued for cash .......... -- -- 58,608 -- -- -- 6 --
Dividends ...................... -- -- -- -- -- -- -- --
Net loss ....................... -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Balance at June 30, 1996 ......... 1,750 503 58,608 4,131,213 $ * $ ** $ 6 $ 41
------ ------ ------ ------ ------ ------ ------ ------
Additional
Paid-in Retained
Capital (Deficit) Total
------- ---------- -------
$ 2,470 $ (551) $ 1,960
-- -- --
502 -- 502
194 -- 200
-- (96) (96)
-- (366) (366)
------ ------ ------
$3,166 $(1,013) $2,200
------ ------ ------
<FN>
*Preferred "A" stock amount prior to rounding to thousands was $175.
**Preffered "B" stock amount prior to rounding to thousands was $50.
***Common stock amount prior to rounding to thousands was $91.
</FN>
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
Nine Months
Ended
June 30,
1996 1995
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................................ $ (366) $ (747)
Adjustments to reconcile net loss to net
cash (used in) provided by:
Depreciation and amortization ........................... 846 377
Provision for losses .................................... -- --
Common stock issued for services ........................ -- --
Gain on disposal of property, premises
and equipment ........................................ -- --
Gain on sale of mortgage loans held for sale
------- -------
Gain on sale of purchased mortgage
servicing rights ........................................ -- --
Reduction of deferred tax allowance ..................... -- --
Purchases of mortgage loans held for sale ............... (4,549) (2,437)
Proceeds from sale of mortgage loans
held for sale ........................................... 1,711 3,514
Recoveries (losses) on mortgage loans
serviced and held for sale .............................. -- 72
Change in assets- (increase) decrease
Accrued income and servicing receivable .............. (122) (412)
Other assets ......................................... (479) (103)
Change in liabilities-increase (decrease)
Accounts payable and other liabilities ............... 2,656 (33)
Income taxes payable ................................. -- (58)
------- -------
Net cash (used in) provided by
operating activities .................................... (303) 173
------- -------
See accompaying notes to financial statements.
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<PAGE>
HOMEWONERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in Thousands)
(unaudited)
Nine Months
Ended
June 30,
1996 1995
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash - restricted ........................................ -- 703
Origination of other loans ............................... -- --
Receipts from other loans ................................ 137 50
Proceeds from sale of purchased
mortgage servicing rights .............................. -- --
Purchases of purchased mortgage servicing rights ......... -- (5,244)
Proceeds from sale of property, premises and
equipment .............................................. -- --
Purchases of property, premises equipment ................ -- (521)
Acquisition of businesses ................................ -- --
------- -------
Net cash provided by (used in )
investing activities ........................ 137 (5,012)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of repurchase agreements ...................... -- (1,488)
Proceeds from borrowings ................................. 3,872 4,921
Repayments of borrowings ................................. (4,407) (157)
Proceeds from affiliate borrowings ....................... 584 --
Repayments from affiliate borrowings ..................... (503) --
Distributions to stockholders ............................ -- --
Payment of dividends ..................................... (96) (144)
Net proceeds from issuance of stock ...................... 703 --
------- -------
Net cash provided by financing activities ..... 153 3,132
------- -------
Net decrease in cash and cash equivalents ................ (13) (1,707)
Cash and cash equivalents at beginning of period ......... 44 1,707
------- -------
Cash and cash equivalents at end of period ............... $ 31 $ --
======= =======
See accompanying notes to financial statements.
-8-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. ORIGINATION AND NATURE OF BUSINESS
Homeowners Financial Corp. (the "Company"), through its wholly-owned
subsidiaries, FIS, Inc. ("FIS") and FIS' wholly -owned subsidiary, Home Owners
Funding Corp. of America ("HOFCA") and Developers Mortgage Corporation ("DMC"),
is full service mortgage banking company that services, originates acquires and
markets mortgage loans secured primarily by residential properties located in 48
states and the District of Columbia. All of the Company's substantive operations
are conducted by HOFCA and DMC.
Note 2. BASIS OF OPERATION
The accompanying unaudited Condensed Consolidated Financial Statements
have been prepared in accordance with the instructions for Form 10-QSB and
Regulation S-B and in the opinion of management of the Company include all
information and footnotes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The information furnished, in the opinion of
management, reflects all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the Condensed Consolidated Statements of
Financial Condition at June 30, 1996 and September 30, 1995, Condensed
Consolidated Statements of Operations for the nine months and the three months
ended June 30, 1996 and the nine months and three months ended June 30, 1995,
Condensed Consolidated Statement of Stockholders' Equity for nine months ended
June 30, 1996 and Condensed Consolidated Statements of Cash Flows for the nine
months ended June 30, 1996 and the nine months ended June 30, 1995. The results
of operations of interim periods are not necessarily indicative of results which
may be expected for any other interim period or for the year as whole.
Results for the nine months and three months ended June 30, 1996 as
reflected in the accompanying unaudited Condensed Consolidated Financial
Statements include activity of the Company as it is currently organized. The
results for the nine months and the three months ended June 30, 1995 include the
operations of the Company prior to the acquisition of DMC and the ASR-PMSR. The
results for the Company for the nine months and the three months ended June 30,
1996 and for the nine months and the three months ended June 30, 1995 are not
necessarily comparable nor are they necessarily indicative of results which may
be expected for any other interim period or for the year as a whole.
Note 3. NOTES PAYABLE
The Company was not in compliance with one provision of the First Term
Loan agreement. At December 31, 1995, March 31, 1996 and June 30, 1996 the
Company was not in compliance with the provisions of the Debt Service Coverage
Ratio of the First Term Loan Agreement. The minimum Debt Service Coverage Ratio
as defined in the First Term Loan Agreement is 1.20 to 1.00. The Company's Debt
Service Coverage Ratio at December 31, 1995 was .44 to 1.00, at March 31, 1996
was .072 to 1.00 and at June 30, 1996 the Debt Service Coverage Ratio was 1.07
to 1.00. The Company requested a waiver of the compliance condition and had
discussed with First Bank alternative actions to bring the Company into
compliance with all provisions of the First Term Loan Agreement. The Company and
First Bank have agreed to suspend payments of all preferred stock dividends,
approximately $69,000 on a quarterly basis, until the Company is in full
complaince with all terms and provisions of the First Term Loan Agreement. On
May 31, 1996 the Company entered into the First Amendment to the Credit
Agreement whereby the Company received a waiver of the noncompliance condition
relating the Debt Service Coverage Ratio. In addition, First Bank adjusted
certain provisions of the term note and warehouse credit facility and extended
the Warehouse Termination Date, as defined, to May 29, 1997. The outstanding
balance of the First Term Loan and the outstanding balance of the First
Warehouse Facility were $3.4 million and $44,000, respectively, at June 30, 1996
and $3.4 million and $1.2 million, respectively, as of the date hereof.
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<PAGE>
Note 4. CONTINGENCIES
In June 1996, Cresent Real Estate Fund, The Company's former landlord
in Dallas, Texas, commmenced an action in Texas District Court, Dallas County,
for past due rent from August 1995 forward. The amount sought is not
determinable from the compliant, but may be in excess of $200,000. The Company
disputes the amount owed, has responded to the complaint and has had the action
removed to the U.S. Federal District Court for the Northern District of Texas,
Dallas Division. The Company intends to vigorously contest the action. The
Company's management does not expect this action to have a material adverse
impact on the financial position or operations of the Company. The Company has
accrued $30,000 to settle this action, which amount represents its estimate of
the balance due to the former landlord at the time that the lease was
terminated.
The Company is involved in various lawsuits and claims stemming from
foreclosure proceedings, bankruptcy and reorganization proceedings, mechanics'
liens and other matters which are incidental to its business. Such claims are
generally on behalf of investors for whom the Company acts as servicing agent
and, in the opinion of the Company's management, the resolution of these matters
will not have a material adverse effect on the financial position or operations
of the Company.
Note 5. RELATED PARTY TRANSACTIONS
Subsequent to September 30, 1995 the Company borrowed $200,000 from
certain directors and a shareholder. Such borrowings were at a rate of 11%. In
consideration for a portion of these advances, a director received stock options
expiring on October 10, 1997 for 30,000 shares of common exercisable at $2.00
per share. In March 1996, the directors and shareholders converted their
principal and accrued interest on their loans into Series B Preferred Stock,
$.10 par value, at a rate of $1,000 per share.
On December 29, 1995, the Company executed a multiple advance
promissory note for $250,000 with a corporation controlled by the President of
the Company. The Company borrowed $208,000 at a rate of 8% per annum maturing on
demand but no later than December 31, 1996. In March 1996, $200,000 of this loan
was converted into Series B Preferred Stock, $.10 par value, at a rate of $1,000
per share.
In March 1996, a Company shareholder converted a $100,000 loan to the
Company into Series B Preferred Stock, $.10 par value, at a rate of $1,000 per
share.
Note 6. STOCK TRANSACTIONS
In March 1996, the Board of Directors approved the issuance of 4,174 shares
of common stock to an attorney in exchange for a legal services provided. The
amount of common stock issued approximated a
fair market value of $16,000.
Note 7. SUBSEQUENT EVENTS
Modification of Note Payable
On April 11, 1996, the note payable to a bank in the amount of
$695,489, was modified in order to extend the maturity date, of April 27, 1996,
to July 26, 1996. The Company paid an extension fee of .25% of the loan amount
($1,739), to the bank in order to extend the maturity date of the note payable.
In August 1996, in consideration of the payment of an extension fee by the
Company equal to .25% of the Barnett loan amount ($1,739), Barnett extended the
due date of the loan to September 27, 1996. All other terms of the note payable
remain in effect as if the note was not modified. It is the Company's intention
to pay off this note including all accrued interest with a portion of the
proceeds of the Company's public offering (anticipated in September 1996).
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Effect of Interest Rate Fluctuations. Long-term interest rates declined
throughout the period from 1991 into 1993 and reached historically low levels in
1993. That interest rate environment generally favored loan origination
activities. Such low interest rates normally expand the market demand for new
loan financing, and increase mortgage loan activity and revenue associated with
such operations. However, partly because of competition, the net interest margin
earned on a given loan held for sale usually decreases in such an environment.
Commencing in late 1993 long-term interest rates increased until approximately
mid-1995 and then declined until late February, 1996. Since February, 1996,
long-term interest rates have increased by approximately 100 basis points. While
current interest rates are not high by historical standards, the increase in
interest rates had a materially negative effect on loan origination volume
throughout the industry during 1994 and early 1995. If interest rates continue
to increase, it is uncertain whether the Company will be able to maintain it's
origination volume. If interest rates decrease, the Company's origination volume
should increase.
Lower interest rates generally have the effect of increasing
prepayments in the Company's servicing portfolio because they tend to stimulate
a higher level of home purchases and refinancing of existing mortgage debt.
However, with the expansion of it's mortgage loan servicing rights acquisition
activities, the Company has been able to add a significant volume of servicing
rights to it's servicing portfolio. These acquisitions have served to offset the
sale of manufactured housing loan servicing. If origination and acquisition
activity cannot continue to replace prepayments, future loan servicing revenues
will decline. Higher levels of loan prepayments also increase the Company's
amortization of purchased mortgage servicing rights to reflect a shorter
expected life of loans serviced. The Company's servicing portfolio carries a
weighted average interest rate of approximately 7.81% resulting in stable and
expected prepayment levels for the Company.
Higher interest rates historically slow prepayments in the Company's
servicing portfolio because they tend to decrease the level of home purchases
and refinancing of existing mortgage debt. While interest rates had recently
dropped, management believes that the decline was not sufficient in light of the
recent historically low interest rates to effect levels of loan payments.
Variations in interest rates may also impact revenue from the sale of
servicing rights. To the extent that origination volume varies, the Company may
have more or less servicing rights available for sale or retention. Market
expectations regarding future mortgage loan prepayments and other supply and
demand factors may influence the price the Company receives for servicing
rights. At June 30, 1996, the principal balances of mortgage loans in the
Company's servicing portfolio were primarily located in the states of
California, 31.5%, Maryland, 12.1%, Virginia, 11.1%, New York, 9.6%, and
Washington, 7.6%. Economic slow downs in the states in which the Company's
business is conducted may result in a decline in the Company's results of
operations in the future to the extent such decline affects loan origination
volumes or levels of loan delinquency and defaults.
Effect of Inflation. The Company's mortgage banking operations are affected by
inflation primarily through its impact on interest rates. See above.
Accounting for Mortgage Banking Activities. For the year ended September 30,
1995 and all prior years, the cost of purchased mortgage servicing rights
("PMSR") is capitalized and amortized over the estimated remaining life of the
related loans proportionate to the estimated discounted net servicing income on
a disaggregated basis. The Company monitors changes in interest rates,
prepayment and default experience on the mortgage loans underlying its PMSR's
and, to the extent unanticipated mortgage prepayments and/or defaults occur,
adjusts the anticipated amortization on a prospective basis. To the extent that
unanticipated mortgage prepayments result in the carrying value of purchased
servicing rights exceeding estimated discounted future net servicing income, a
write-down of the PMSRs would be made through a charge to current earnings. The
PMSR portfolio is disaggregated by (i) investor type (ii) remittance type; (iii)
term of loans; (iv) average loan balance; (v) weighted average interest rate;
(vi) weighted average servicing fee; (vii) average custodial account balances;
and (viii) credit worthiness, to include delinquencies, foreclosures and
bankruptcies. Since November 1994, when the Company made its first bulk purchase
of PSMRs, the Company's PMSR portfolio has not experienced any impairment from
higher than anticipated prepayments or defaults. See "Effect Of Interest Rate
Fluctuations" above.
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<PAGE>
In May 1995, FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65" issued for fiscal years
beginning after December 15, 1995. The Company has adopted SFAS No. 122 for the
year ending September 30, 1996. Under SFAS No. 122, when an enterprise purchases
or originates mortgage loans, and the enterprise sells or securitizes the loans
and retains the servicing rights ("MSR"), the enterprise should allocate the
cost of the mortgage loans to the MSRs and the loans based upon their relative
fair values. Currently, because of the small volume of mortgage loan
originations, the majority of the Company's originations are sold with mortgage
loan servicing released to the purchasers. As a result, management does not
anticipate any material affect resulting from the adoption of SFAS No. 122 on
the Company's financial condition or statement of operations for the fiscal year
ending September 30, 1996. However, as the Company increases its origination
activity in the future, management anticipates that a proportionately larger
share of the mortgage loan servicing rights will be retained and not sold. At
such time, the adoption of SFAS No. 122 may have an impact on the Company's
financial condition and statement of operations. As these effects are directly
related to future interest rates and future expenses, as well as management's
internal decisions regarding retention of such rights, it is currently
impossible to quantify the impact of such events.
SFAS No. 122 also requires establishment of a valuation allowance for
the excess of the carrying amount of capitalized MSRs over estimated fair value.
Since the beginning of the fiscal year ending September 30, 1996, on a periodic
basis for purposes of measuring impairment, MSRs are disaggregated and
stratified on predominant risk characteristics, primarily loan type, interest
rate and investor type. The Company has not experienced and management does not
anticipate any material effect resulting from the adoption of SFAS No. 122 on
the Company's financial condition or statement of operations for the fiscal year
ending September 30, 1996.
Results of Operations
The Company is a diversified residential mortgage banker which
services, originates and, in most cases, sells mortgage loans secured by
one-to-four family residences. The Company provides a range of mortgage loan
products including, but not limited to fixed rate and adjustable rate loans with
a variety of terms.
Nine and Three Months Ended June 30, 1996 Compared to Nine and Three
Months Ended June 30, 1995
The Company had a net loss, before preferred dividends, of $366,000 and
$64,000 for the nine and three month periods ended June 30, 1996 compared to a
net loss of $747,000 and $319,000, respectively, for the nine and three month
periods ended June 30, 1995. The Company paid preferred dividends of $96,000 for
the nine month period ended June 30, 1996. No dividends were paid during the
three month period ended June 30, 1996. See "Liquidity and Capital Resources."
The Company paid preferred dividends of $144,000 for the nine month period ended
June 30, 1995 and $48,000 for the three month period ended June 30, 1995. The
decrease in loss of $381,000, to $366,000 from $747,000, for the nine month
period ended June 30, 1996 compared to the nine month period ended June 30,
1995, a decrease of approximately 51.0%, resulted primarily from additional loan
origination income of $201,000 from the Company's Minnesota loan origination
office and additional mortgage servicing and subservicing income, net of
amortization of mortgage loan servicing rights, of $87,000. The decrease in net
loss of $255,000, to $64,000 from $319,000, for the three month period ended
June 30, 1996 compared to the three month period ended June 30, 1995, a decrease
of approximately 80.0 %, resulted primarily from expense reductions of $186,000
realized during the 1996 period due to the closing of the Company's Dallas
office, and, additional origination income of $47,000 from the Company's
Minnesota office.
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<PAGE>
Loan Servicing: Mortgage servicing and subservicing income increased to $1.9
million from $1.3 million for the nine month period ended June 30, 1996 compared
to the nine month period ended June 30, 1995, an increase of approximately
$580,000, or 44.2%. This increase primarily resulted from the acquisition of DMC
and the ASC-PMSR. Mortgage servicing and subservicing income increased to
$658,000 from $626,000 for the three month period ended June 30, 1996 compared
to the three months ended June 30, 1995, an increase of $32,000, approximately
5.1%. This increase resulted because the DMC and the ASC-PMSR are reflected for
the entire three month period ended June 30, 1996 whereas the acquisition of DMC
and ASC-PMSR portfolios were reflected for two months during the three month
period ended June 30, 1995.
Loan Origination: Loan origination income includes loan origination fees and
other processing and closing fees. Loan origination income for the nine month
period ended June 30, 1996 was $234,000 compared to $33,000 for the nine month
period ended June 30, 1995. This increase of $201,000, approximately 609.1%,
reflected nine months of origination activity during the 1996 period compared to
two months origination activity during the 1995 period. Loan origination income
for the three month period ended June 30, 1996 increased $47,000 to $80,000 from
$33,000, an increase of approximately of 142.4%. This increase resulted because
the Minnesota origination income was included for three months during the 1996
period whereas the 1995 period included only two months of Minnesota origination
income.
Interest Income: Interest income for the nine month period ended June 30, 1996
was $136,000 compared to $29,000 for the nine month period ended June 30, 1995.
The increase of $107,000, approximately 369.0% resulted primarily from increased
interest income on the Company's portfolio of mortgage loans held for sale.
Interest income for the three month period ended June 30, 1996 was $76,000
compared to $1,000 for the three month period ended June 30, 1995. The increase
of $75,000 resulted from the Company increasing its portfolio of mortgage loans
held for sale.
Gain on Sale of Mortgage Loans Held for Sale: Gain on sale of mortgage loans
held for sale was $17,000 for the nine month period ended June 30, 1996. There
was no gain on loans held for sale for the three month period ended June 30,
1996. Gain on the sale of mortgage loans held for sale for the nine and three
month periods ended June 30, 1995 was $52,000 and $1,000, respectively. The
decrease in gain of $35,000, to $17,000 from $52,000, for the nine month period
ended June 30, 1996 compared to the nine months ended June 30, 1995 resulted
from a $5.0 million whole loan sale transaction during the 1995 period.
Gain on Sale of Mortgage Loan Servicing Rights: Gain on sale of mortgage loan
servicing rights was $38,000 for the nine month period ended June 30, 1996.
There was no gain on sale of mortgage loan servicing rights for the three month
period ended June 30, 1996. The gain resulted primarily from the sale of the
servicing rights on the Company's approximately $20.0 million land contract
portfolio. The Company did not sell any mortgage loan servicing rights during
the nine and three month periods ended June 30, 1995.
Other Income: Other income was $88,000 for the nine month period ended June 30,
1996. There was no other income for the nine month period ended June 30, 1995.
Other income for the three month period ended June 30, 1996 was $28,000.
Compensation and Benefits: Compensation and benefits were $1.0 million for the
nine month period ended June 30, 1996 compared to $912,000 for the nine month
period ended June 30, 1995. The increase of $117,000, approximately 12.8%,
resulted primarily from the acquisition of DMC, partially offset by staff
reductions resulting from the closing of the Company's servicing office in
Dallas, Texas. Compensation and benefits for the three month period ended June
30, 1996 were $322,000 compared to $421,000 for the three month period ended
June 30, 1995. The decrease of $99,000, approximately 23.5%, resulted primarily
from cost savings associated with the closing of the Dallas servicing office
during the 1995 period together with cost savings associated with the
consolidation of the Company's servicing operations in its Troy, Michigan
office.
-13-
<PAGE>
Office Occupancy: Office occupancy expense was $147,000 for the nine month
period ended June 30, 1996 compared to $111,000 for the nine month period ended
June 30, 1995. The increase of $36,000, approximately 32.4%, resulted primarily
from the acquisition of DMC, which maintains a loan origination office in
Minnesota and duplicate office occupancy expenses during the 1995 period when
the Company consolidated its servicing operations in its Troy, Michigan office.
Office occupancy expense for the three month period ended June 30, 1996 was
$51,000 compared to $52,000 for the three month period ended June 30, 1995.
Office Supplies and Expense: Office supplies and expenses decreased to $269,000
for the nine month period ended June 30, 1996 from $405,000 for the nine month
period ended June 30, 1995. The decrease of $136,000, approximately 33.6%,
resulted from the consolidation of the Company's servicing and administrative
offices in Troy, Michigan. During the 1995 period, the Company incurred supplies
and other office expenses for both the Dallas, Texas and Troy, Michigan offices
prior to the consolidation in Troy, Michigan. Office supplies and expenses for
the three month period ended June 30, 1996 were $145,000 compared to $173,000
for the three month period ended June 30, 1995. The decrease of $28,000,
approximately 16.2%, resulted primarily from duplicate expenses from operating
both the Dallas, Texas and Troy, Michigan offices.
Professional Services: Professional services expenses for the nine month period
ended June 30, 1996 were $98,000 compared to $271,000 for the nine month period
ended June 30, 1995. The decrease of $173,000, approximately 63.8%, resulted
primarily from additional expenses during the 1995 period resulting from the
Company's reorganization and recapitalization. Professional service expenses
were $37,000 for the three month period ended June 30, 1996 compared to $89,000
for the three month period ended June 30, 1995. The decrease of $52,000,
approximately 58.4%, resulted from additional reorganization and
recapitalization expenses during the 1995 period.
Provisions for Loan Losses: There were no provisions for loan losses for the
nine month periods ended June 30, 1996 and June 30, 1995, respectively. A
provision is determined by analysis of such factors as the prevailing level of
loan delinquencies, anticipated reinstatement rates from the various stages of
delinquency, and loss experience on similar loans serviced. The Company acts as
the agent for the Mortgage Investor in filing the foreclosure action, and is
indemnified for all costs, losses and claims resulting from the foreclosure
process. Management believes that the reserve of approximately $182,000
remaining on the Company's books is sufficient to cover the limited amount of
recourse exposure in the loan servicing portfolio. Essentially all of the
Company's loan originations were sold with servicing released to the purchaser.
The Company does not require a loan loss reserve for origination activities
because generally it retains neither the loans nor the servicing rights of the
loans originated. The Company's purchase during the three months ended December
31, 1994 of $355.0 million in principal amount of loan servicing rights resulted
in the Company acquiring from a private, non-RTC seller servicing rights to a
residential mortgage loan portfolio with no delinquency or foreclosure recourse
to the Company. The DMC and ASC-PMSR portfolios were essentially without
recourse to the Company. The investors for whom the portfolios are serviced by
the Company are responsible for all costs, losses and claims resulting from the
servicing of the loans, including loan delinquencies and foreclosure actions.
Therefore no additional provision for loan losses is required for the $355
million acquisition of loan servicing rights and the DMC and ASC-PMSR
portfolios. In the future, as the Company increases originations with servicing
rights retained, the Company will review and adjust its provision for loan
losses.
-14-
<PAGE>
Amortization of Mortgage Loan Servicing Rights: Amortization of mortgage loan
servicing rights for the nine month period ended June 30, 1996 was $810,000
compared to $317,000 for the nine month period ended June 30, 1995. The increase
of $493,000, approximately 155.5%, resulted primarily from additional
amortization due to the November 1994 acquisition of $355.0 million of mortgage
loan servicing rights, the acquisition of the DMC mortgage loan servicing rights
and the related ASC-PMSR. Amortization of mortgage loan servicing rights for the
three month period ended June 30, 1996 was $270,000 compared to $152,000 for the
three month period ended June 30, 1995. The increase of $118,000, approximately
77.6%, resulted primarily from additional amortization due to the acquisition of
the DMC mortgage loan servicing rights and the related ASC-PMSR.
Management expects that prepayment rates for servicing rights will
remain constant or increase slightly. The effect of lower interest rates,
resulting in potentially greater prepayment risk, is counterbalanced by the
economic threat posed by inflation, which stabilizes or increases interest
rates, thereby reducing prepayment risk. The Company anticipates that the
long-term interest rates will range between 7.50% and 8.50%. The overall
weighted average interest rate for the Company's portfolio is approximately
7.81%. Therefore, management believes that any material increase in prepayments
would not take place until mortgage interest rates reach or drop below 7.00%.
Currently long-term mortgage interest rates are approximately 8.00%.
Nationwide, prepayment speeds for interest rates of 9.00% or more have
increased more than 40% during calendar year 1995, prepayment speeds on interest
rates of 8.00% or less have remained constant. Results of operations and
liquidity for the Company are not likely to be affected materially by changes in
prepayment speeds unless mortgage interest rates decline to the 7.00% level.
Management believes, but cannot assure that if interest rates were to fall to
the level where prepayment speeds increase to the level where results of
operations and liquidity are affected, increased fee income from loan
origination volume from the Company's Minnesota office would significantly
offset the impact on results of operations and liquidity. The Company could seek
to refinance that portion of its portfolio that was most susceptible to
prepayment, retaining the loan servicing rights on the refinanced loans.
Other Expenses: Other expenses were $262,000 for the nine month period ended
June 30, 1996 compared to $163,000 for the nine month period ended June 30,
1995. Other expenses for the three month period June 30, 1996 were $26,000
compared to $53,000 for the three month period ended June 30, 1995.
Income Taxes: There was no income tax provision or benefit for the nine month
and three month periods ended June 30, 1996. There was an income tax benefit of
$72,000 for the nine period ended June 30, 1995 and an income tax provision of
$6,000 for the three month period ended June 30, 1995. The tax benefit for the
1995 periods resulted from the Company's loss carry forward against intangible
assets.
Liquidity and Capital Resources
The Company's primary short-term liquidity requirements are for
mortgage loan funding and advances that it is required to make related to its
obligations as a servicer of loans. These requirements are generally met through
short-term warehouse borrowings and from cash flow from operations. The Company
also has longer term liquidity requirements, principally related to acquired
mortgage loan servicing rights, which are funded with longer term debt.
During the nine months ended June 30,1996 and the nine months ended
June 30, 1995, the Company had a net decrease in cash and cash equivalents of
$13,000 and $1.7 million, respectively. Net cash used in operating activities of
$303,000 for the nine months ended June 30, 1996 and net cash provided by
operating activities of $173,000 during the nine months ended June 30, 1995,
reflect a net loss of $366,000 and $747,000, respectively, plus adjustments to
net loss of $63,000 and $920,000, respectively, which consisted of non-cash
amortization of mortgage loan servicing rights, an increase in accrued income
and servicing receivables and the purchase and sale of mortgage loans held for
sale and the proceeds from such sales. Net cash provided by investing activities
was $137,000 for the nine months ended June 30, 1996 and net cash used in
investing activities was $5.0 million for the nine months ended June 30, 1995.
Net cash provided by financing activities was $153,000 million and $3.1 million,
respectively, for the nine month periods ended June 30, 1996 and June 30, 1995,
and was primarily due to an increase in warehouse borrowings and an increase in
term debt, respectively.
-15-
<PAGE>
Changes in the level of mortgage loans held for sale and related
warehouse debt reflect, among other factors, the general level of, and trends
in, mortgage interest rates, the seasonality of home purchase activity and the
discontinuance of manufactured home lending activities and the shift to
one-to-four family residential mortgage lending.
In order to finance a portion of the acquisition of the $355.0 million
in mortgage loan servicing rights, on November 18, 1994, the Company entered
into a nonrevolving 36-month loan agreement with Franklin Federal Bancorp
("Franklin") in the amount of $2.0 million which enabled the Company to finance
the purchase of mortgage loan servicing rights. The Franklin term loan was
refinanced with part of the proceeds from a term loan from First Bank (see
below). The remainder of the $3.3 million purchase price for the $355.0 million
in mortgage loan servicing rights was funded from proceeds from the sale of
manufactured housing servicing rights and funds on hand (primarily from the
proceeds of FIS Inc.s' private offering of preferred stock, common stock and
warrants).
On April 28, 1995, the Company acquired all of the issued and
outstanding stock of DMC, the ASC-PMSR and related assets for approximately
$2.89 million. The Company had the right, within one year, to require the
repurchase or correction of any loans acquired in the transaction that do not
meet certain Agency eligibility standards. The Company has filed a timely
repurchase notice with ASC. As of the date hereof, management believes that
approximately $500,000 of the loans acquired do not meet such standards.
The Company obtained a portion of the funds used to purchase DMC and the
other assets discussed above from two loans- a $695,489 loan from Barnett Bank
("Barnett") and a $675,000 loan from Inter Savings Bank, fsb ("ISB"). The
Barnett loan accrues interest at .75% over Barnett's prime rate; interest only
payable monthly and the principal was due and payable on or before April 27,
1996. In April 1996, in consideration of the payment of an extension fee by the
Company equal to .25% of the Barnett loan amount ($1,739), Barnett extended the
due date of the loan to July 26, 1996. In August 1996, in consideration of the
payment of an extension fee by the Company equal to .25% of the Barnett loan
amount ($1,739), Barnett extended the due date of the loan to September 27,
1996. The Barnett loan is principally secured by specific assets (bonds,
certificates of deposit, treasury notes and shares of stock) of certain
stockholders of the Company. The Company has allocated some of the net proceeds
from its planned initial public offering ("IPO"), currently in registration (see
below), to pay off the Barnett loan. The ISB loan accrued interest at the rate
of 10% per annum. All the principal and accrued interest under the ISB loan were
repaid on August 30, 1995. Management paid the balance of the purchase price and
repaid the ISB loan from the proceeds of a $4.0 million term loan from First
Bank (see below).
On August 30, 1995, the Company entered into a credit agreement with
First Bank, pursuant to which First Bank committed to loan the Company up to
$4.0 million ("First Term Loan") and provide a warehousing facility to the
Company of up to $5.0 million ("First Warehousing Facility").
As of the date hereof, the Company's outstanding principal balance
under the First Term Loan is $3.4 million. The Company used the proceeds from
this loan to pay the balance of the purchase price for DMC, the ASC-PMSR and
related assets, to repay the ISB loan and repay the Franklin term loan.
Principal under the First Term Loan accrues interest at the fixed rate of 2.75%.
Interest is payable monthly and five percent of the principal balance is payable
quarterly. All remaining principal and accrued interest is payable on or before
August 30, 2000 or sooner in the event of a default. Events of default include
failure to make required payments, breaches of the terms, representations or
warranties under the First Credit Agreement and related documents, insolvency
and material judgments. The Company must also maintain the following minimum
financial criteria (as defined in the First Credit Agreement): "Adjusted
Tangible Net Worth" ("ATNW") must be at least $2.7 million; the "Adjusted
Leverage Ratio" ("ALR") must be no greater than 4.0-to-1.0; the "Debt Service
Coverage Ratio" ("DSCR") must be at least 1.2-to-1.0; the aggregate principal
balance of mortgage loans serviced must be at least $500 million; and the report
the of the independent auditor in the Company's audited consolidated financial
statements cannot contain a "going concern" explanatory paragraph.
-16-
<PAGE>
The Company is in default under the DSCR financial requirement of its
credit agreement with First Bank ("First Credit Agreement") concerning the First
Term Loan and its warehousing facility First Warehousing Facility with First
Bank. The Company's DSCR at June 30, 1996 was 1.07 to 1.00. The Company has
requested and received a waiver of this default until September 30, 1996 and has
discussed with First Bank alternative actions to bring the Company into
compliance with all provisions of the First Credit Agreement. In March, 1996 the
Company converted $503,000 of debt to equity in the form of Series B Preferred
Stock. As a result of this conversion as of March 31, 1996 the Company was in
compliance with the minimum ATNW and ALR requirements which, prior to the
conversion, had been in default. First Bank has required that the Company
suspend payments of all preferred stock dividends, approximately $69,000 on a
quarterly basis, until the Company is in full compliance with all terms and
provisions of the First Credit Agreement.
Payment under the First Term Loan is secured by all of the assets of
the Company, including all servicing rights owned by the Company and securities
owned by the Company and FIS, Inc. The Company is required to make additional
payments of principal when the outstanding principal balance on the First Term
Loan exceeds the "Qualified Servicing Portfolio Collateral Value" (the lesser of
65% of qualified servicing rights or one percent of the aggregate principal
amount of Mortgage Loans serviced.)
The First Warehousing Facility permits the Company to finance mortgage
loan acquisitions and originations up to an aggregate of $5.0 million. Advances
under the Facility may not exceed 100% of the "Warehouse Collateral Value" of
the eligible mortgage loans ("WCV"). The WCV is the lesser of: (a) 98% of the
lesser of the origination or acquisition price of the mortgage loan; the
weighted average purchase price under a Firm or Standby Take-Out Commitment (a
commitment from an investor to purchase a mortgage loan within a specific time
period, under which commitment, respectively, the Company is obligated or has
the right to sell the mortgage loan); or the fair market value of the mortgage
loan; and (b) 100% of the remaining unpaid principal balance of the pledged
mortgage loan. A mortgage loan will be deemed to have no WCV if : (i) more than
90 days elapse from the date the mortgage loan was pledged; (ii) more than 45
days elapse from the date the mortgage loan was delivered to an investor for
examination and purchase; (iii) more than 21 days elapse from the date certain
Collateral documents were delivered to an investor for correction or completion;
(iv) a delinquency of at least 60 days occurred on the mortgage loan; (v) the
mortgage loan ceases to be an eligible mortgage loan (i.e., it is not entirely
owned by the Company, it does not qualify as an Agency eligible mortgage loan or
it does not qualify for purchase under an existing Take-Out Commitment); or (vi)
First Bank notifies the Company that, in its reasonable opinion, the mortgage
loan is not marketable. Interest is charged based upon one of the following
three methods: "Fixed Rate," "Reference Rate" or Floating Eurodollar Rate." The
applicable method of interest calculation is at the option of the Company. The
Fixed Rate is a rate equal to 2.75% for the Term Loan and 1.875% for the
Warehouse Loan. The Company must maintain at First Bank unencumbered deposit
balances equal to one hundred percent (100%) of the loan balances outstanding,
plus, regulatory reserve requirements, in order to obtain the Fixed Rate. The
Company maintains sufficient balances as of the date hereof to obtain the Fixed
Rate. In the event that deposit balances drop below one hundred percent (100%)
of the loan balances outstanding, the Company will pay a fee on the deficiency
at a floating per annum rate which is tied to the "Libor Rate." The Reference
Rate is equal to the bank's published rate for its customers, more commonly
known as the "prime rate." The Floating Eurodollar Rate, more commonly known as
the "Libor Rate," is based on the daily London Interbank Offered Rates as
published in the Wall Street Journal, plus 1.875% for borrowing against the
Warehouse Loan and 2.75% for borrowings against the Term Loan. The Company also
pays a monthly facility fee of approximately $1,000. The Company must also
maintain the above discussed minimum criteria. Payment under the First
Warehousing Facility is secured by all assets of the Company.
-17-
<PAGE>
Immediately upon acquisition of DMC and the assets and operations of
ASC, the Company effected significant cost reductions, including the following:
(I) reducing staff by approximately 80% in the Minnesota office of DMC, the
effect of such actions was to reduce monthly personnel expenses by approximately
$60,000 without effecting income; (ii) closing the Dallas, Texas servicing
center and consolidating servicing operations in Troy, Michigan, effective June
1, 1995, thereby saving the Company approximately $75,000 in monthly personnel
and other operating expenses; (iii) replacing the Company's mainframe servicing
software with a less expensive and more efficient computer network system, as a
result of which, the system support staff for the mainframe based system was no
longer needed and these positions were eliminated. The effect of these cost
savings has reduced expenses to a level at which the Company's management
believes that the Company can operate profitably.
In addition to the cost cutting activities mentioned above and in
"Results of Operations" above, the Company's refinancing of the Franklin debt
with First Bank resulted in additional savings. Interest on the First Bank debt
is calculated at 2.75% on a fixed rate basis, resulting in an annual savings of
approximately $35,000. The term of the loan has been extended to sixty (60)
months, resulting in annual cash savings of approximately $225,000. The First
Term Loan also provided funding for the balance of the purchase price due DMC
and refinanced the ISB loan. Annual cash savings resulting from refinancing the
Franklin debt is equal to approximately fifty (50) percent of the annual debt
service for the balance of the term loan, which was used to refinance the ISB
loan and to fund the balance due on the DMC acquisition. Management believes
that the Company is currently generating sufficient cash flow from operations to
meet debt service obligations on the term loan with First Bank.
Pursuant to an agreement between the Company and the Government
National Mortgage Association ("GNMA") that was in effect prior to February
1992, the Company was required to establish two restricted cash accounts
totaling $1.0 million. Prior to September 30, 1994 and in accordance with the
terms of this agreement, the Company had withdrawn approximately $300,000. In
February 1995, GNMA reduced the restrictions placed on these Company cash
accounts thus releasing approximately $700,000 in funds to the Company for the
use in its operations.
The Company continues to maintain a restricted cash account in the
amount of $255,000 which was established as the result of a loan sale and
servicing agreement entered into in July, 1992. The Company can only use these
funds to reimburse itself as servicer for expenses it advances in collection,
bankruptcy and collateral protection concerning these loans. Additionally, the
purchaser of these loans has a security interest in these accounts and may make
claim to them to reimburse purchaser for losses attributable to loan defaults.
The Company believes that this restricted cash amount is sufficient to cover any
future collection, bankruptcy and collateral protection losses and expenses
related to these loans.
During 1996, the Company raised $200,000 in a private offering by
selling to a foreign investor 58,608 shares of Series C Preferred Stock which
are convertible into approximately a like number of freely tradable shares of
Common Stock, and, 150,000 warrants that are exercisable into a like number of
shares that are freely tradable beginning 41 days after their issuance. The
Company used the proceeds therefrom to pay professional fees related to the IPO.
Planned Initial Public Offering
The Company has filed a registration statement with the Securities and
Exchange Commission to register shares of its common stock and common stock
purchase warrants for sale to the public. The Company hopes to raise
approximately $5.7 million in net proceeds from the IPO. Management hopes, but
cannot assure, that the IPO will be completed in August 1996. No assurance can
be given as to if or when the IPO will close.
-18-
<PAGE>
Potential Liability. HOFCA has received informal notice from GNMA of a potential
claim wherein the Company, under its former ownership and management, allegedly
overcharged GNMA under the terms of certain sub-servicing agreements. Management
believes that this claim is essentially without merit and special counsel to the
Company has reviewed the claim and the relevant transactions and has informed
the Company of its belief that there are reasonable defenses to GNMA's claim in
any amount which might be material to the Company. However, if this matter
results in substantial liability, the Company's business could be materially
adversely affected.
Expansion Plans
The Company's strategy in the mortgage banking area is to increase the
size, diversity and quality of its mortgage loan servicing portfolio and to
expand its origination operations. The Company's acquisition of DMC is
consistent with this strategy. The Company plans to increase the size of its
mortgage loan servicing portfolio by selectively acquiring mortgage loan
servicing rights and by retaining the servicing rights on a portion of the loans
that it originates. Management believes that the Company currently has the loan
servicing capacity to increase the size of its mortgage loan servicing portfolio
by an additional 40,000 loans without incurring significant additional capital
expenditures or fixed costs. By increasing the size of the mortgage loan
servicing portfolio and consolidating the mortgage loan servicing operations of
DMC and HOFCA into DMC's Troy, Michigan facility, management believes that the
Company can enhance its mortgage loan servicing efficiency and become
profitable. Moreover, the Company believes that increasing the size, diversity,
type and quality of its mortgage loan servicing portfolio will enable it to
reduce the effects of prepayments resulting from fluctuations in interest rates
and defaults resulting from regional economic downturns.
The Company has allocated approximately $4.0 million from the net
proceeds of the IPO to expand its mortgage loan servicing portfolio. Management
anticipates that such funds will enable the Company to purchase servicing rights
to mortgage loans with between $350 million and $450 million in principal
balances.
The Company has begun the process of expanding its origination
activities by acquiring DMC and by purchasing and reselling whole loan
portfolios while retaining the servicing rights. Through the acquisition and
expansion of DMC's origination operations and whole loan activity, the Company
hopes to increase the volume of new loan originations to a level where
originations exceed the volume of prepayments experienced in its mortgage loan
servicing portfolio.
-19-
<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
None.
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registration has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOMEOWNERS FINANCIAL CORP.
Dated: August 14, 1996 /s/ Christian W. Pfluger, III
-----------------------------
Chrisitan W. Pfluger, III, President
Chief Executive Officer
/s/ Joseph W. Traxler
-----------------------------
Joseph W. Traxler, Treasurer,
Chief Financial Officer
-20-
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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