SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q-SB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
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 December 31, 1996
Common Stock, par value 4,133,313 Shares
$.01 per share
Transitional Small Business Format
(check one); YES ______ NO __X__
<PAGE>
HOMEOWNERS FINANCIAL CORP.and SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements: P. 3
Condensed Consolidated Statements of Financial Condition P. 4
as of December 31, 1996 and September 30, 1996.
Condensed Consolidated Statements of Operations for the P. 5
three months ended December 31, 1996 and December 31, 1995.
Condensed Consolidated Statement of Stockholders' Equity P. 6
for the three months ended December 31, 1996.
Condensed Consolidated Statements of Cash Flows for the P. 7-8
three months ended December 31, 1996 and December 31, 1995.
Notes to Condensed Consolidated Financial Statements. P. 9-10
Item 2. Management's Discussion and Analysis of Financial P.11-18
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings P. 19
Item 2. Change in Securities P. 19
Item 3. Defaults Upon Senior Securities P. 19
Item 4. Submission of Matters to a Vote of Security Holders P. 19
Item 5. Other Information P. 19
Item 6. Exhibits and Reports on Form 8-K P. 19
Signatures P. 20
Financial Data Schedule P. 21
2
<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 months ended December 31, 1996 .
Moreover, these financial statements do not purport to contain complete
disclosure in conformity with generally accepted accounting principles and
should be read in conjuction with the Company's audited financial statements at,
and for the fiscal year ended September 30, 1996.
The results reflected for the three months ended December 31, 1996 are not
necessarily indicative of the results for the entire fiscal year.
3
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December September
31, 30,
1996 1996
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents .................................. $ 145 $ 203
Cash - restricted .......................................... 259 259
Mortgage loans held for sale ............................... 3,296 2,986
Mortgage loans held for sale-related party ................. 157 157
Purchased mortgage servicing rights-net .................... 4,771 5,173
Accrued income and servicing receivables ................... 887 557
Property, premises and equipment-net ....................... 116 94
Deferred stock issuance costs .............................. 1,103 926
Other assets ............................................... 590 609
-------- --------
$ 11,324 $ 10,964
======== ========
LIABILITIES AND STOCK HOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities ..................... $ 2,163 $ 1,089
Repurchase agreements ...................................... 1,504 1,513
Notes payable .............................................. 5,942 6,384
Notes payable to related parties ........................... 18 18
-------- --------
9,627 9,004
-------- --------
Stockholders' equity
Preferred stock, $.10 par value 1,000,000 shares authorized,
Series A, 1,750 shares issued and outstanding, ............. * *
Series B, 503 shares issued and outstanding, ............... ** **
Series C, 58,608 shares issued and outstanding, ............ 6 6
Common stock, $.01 par value, 10,000,000 shares authorized,
4,133,313 shares issued and outstanding, ................... 41 41
Additional paid-in capital ................................. 3,210 3,210
Accumulated deficit ........................................ (1,560) (1,297)
-------- --------
1,697 1,960
-------- --------
$ 11,324 $ 10,964
======== ========
</TABLE>
* Preferred stock amount prior to rounding to thousands was $175.
** Preferred stock amount prior to rounding to thousands was $50.
See accompanying notes to financial statements.
4
<PAGE>
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
(unaudited)
1996 1995
---- ----
<S> <C> <C>
INCOME
Mortgage servicing and subservicing income ........ $ 521 $ 602
Origination income ................................ 70 71
Interest .......................................... 62 4
Gain on sale of mortgage loans held for sale ...... 31 --
Gain on sale of purchased mortgage servicing rights -- --
Other income ...................................... 2 29
----------- -----------
686 706
----------- -----------
EXPENSES
Compensation and benefits ......................... 339 358
Office occupancy .................................. 56 47
Office supplies and expenses ...................... 102 58
Professional services ............................. 9 27
Interest .......................................... 97 41
Provision for estimated losses on loans serviced .. -- --
Amortization of mortgage loan servicing rights .... 225 270
Other ............................................. 122 122
----------- -----------
950 923
----------- -----------
NET LOSS BEFORE PROVISION FOR
INCOME TAXES ...................................... (264) (217)
INCOME TAX (PROVISION) BENEFIT .................... -- --
----------- -----------
NET LOSS .......................................... (264) (217)
Less cumulative preferred stock dividends ......... (69) (48)
----------- -----------
Loss attributable to common stock ................. $ (333) $ (265)
=========== ===========
Loss per share .................................... $ (.08) $ (.06)
----------- -----------
Weighted average shares ........................... 4,132,263 4,124,212
----------- -----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except shares outstanding)
(unaudited)
<TABLE>
<CAPTION>
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, 1996 1,750 503 58,608 4,131,213 $ * $ ** $ 6 $ 41
Issued for services -- -- -- 2,100 -- -- -- --
Net loss ........... -- -- -- -- -- -- -- --
Rounding ........... -- -- -- -- -- -- -- --
----- --- ------ --------- ----- ------ ----- ------
Balance at December 31, 1996 1,750 503 58,608 4,133,313 $ * $ ** $ 6 $ 41
----- --- ------ --------- ----- ------ ----- ------
</TABLE>
Additional
Paid-in Accumulated
Capital Deficit Total
------- ------- ---------
Balance at September 30, 1996 $ 3,210 $(1,297) $ 1,960
Issued for services -- -- --
Net loss ........... -- (264) (264)
Rounding ........... -- 1 1
------- ------- ---------
Balance at December 31, 1996 $ 3,210 $(1,560) $ 1,697
------- ------- ---------
*Preferred "A" stock amount prior to rounding to thousands was $175.
**Preferred "B" stock amount prior to rounding to thousands was $50.
See accompanying notes to financial statements.
6
<PAGE>
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months
Ended
December 31,
1996 1995
-------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................... $ (264) $ (217)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization .............. 262 282
Common stock issued for services ........... 10 --
Gain on sale of mortgage loans held for sale
(31) --
Purchases of mortgage loans held for sale .. (8,761) (1,308)
Proceeds from sale of mortgage loans held
for sale ................................... 8,641 427
Recoveries (losses) on mortgage loans
serviced and held for sale ................. 2 --
Change in assets- (increase) decrease
Accrued income and servicing receivable . (330) (350)
Other assets ............................ (20) 343
Deferred stock issuance costs .............. (177) (55)
Change in liabilities-increase (decrease)
Accounts payable and other liabilities .. 1,074 (96)
------- -------
Net cash provided by (used in)
operating activities ....................... 406 (974)
------- -------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months
Ended
December 31,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Receipts from other loans ...................... -- 137
Purchases of mortgage servicing
rights ......................................... (48) --
Purchases of property, premises and equipment .. (22) --
-------- --------
Net cash (used in ) provided by
investing activities .............. (70) 137
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of repurchase agreements ............ (467) --
Proceeds from borrowings ....................... 14,696 1,053
Repayments of borrowings ....................... (14,623) (200)
Payment of dividends ........................... -- (48)
-------- --------
Net cash (used in) provided by
financing ...................................... (394) 805
--------
activities
--------
Net (decrease) in cash and cash
equivalents .................................... (58) (32)
Cash and cash equivalents at beginning of period
203 44
-------- --------
Cash and cash equivalents at end of period ..... $ 145 $ 12
======== ========
</TABLE>
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 PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with the instructions for Form 10Q-SB and Regulation
SB 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, stockholders' equity 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 December 31, 1996 and September 30, 1996, Condensed
Consolidated Statements of Operations for the three months ended December 31,
1996 and December 31, 1995, Condensed Consolidated Statement of Stockholders'
Equity for three months ended December 31, 1996 and Condensed Consolidated
Statements of Cash Flows for the three months ended December 31, 1996 and
December 31, 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.
Note 3. NOTES PAYABLE
The Company was not in compliance with certain provisions of the term note
and the amended credit facility as of September 30, 1996 through December 31,
1996. On January 23, 1997 the Company, as result of closing on the sale of its
public offering of common stock and warrants, was in compliance with all
provisions of the term note and amended credit facility except for one provision
for which compliance has been waived until June 30, 1997. (See Note 5)
Note 4. COMMITMENTS AND CONTINGENCIES
GNMA Claims
In March 1995, the Company was informed by 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. The claim
alleges an approximate $3,100,000 projected liability based upon a review of
only about one percent of the transactions performed by the Company under its
agreements with GNMA. 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. GNMA has made no formal claim or demand for payment or reimbursement
under these terminated sub-servicing agreements. Management believes that there
will be no material impact from the uncertainty pursuant to SFAS No. 5.
9
<PAGE>
Legal Proceedings
In June 1996, Crescent Real Estate Fund, the Company's former landlord in
Dallas, Texas, commenced 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.
General Corporate
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. SUBSEQUENT EVENTS
Notes Payable
On December 27, 1996, the $695,000 note payable matured and was not paid.
No extension of the due date was requested. The note payable and accrued
interest was paid in full on January 24, 1997 with proceeds from the sale of the
Company's common stock and warrants offering and operating capital.
Repurchase Agreement
In January 1997, the Company repurchased and sold approximately $742,000 of
the repurchase agreement mortgage loans and remitted the repurchase price plus
accrued interest to the lender.
In January 1997, the lender extended the maturity date of the repurchase
agreement until April 30, 1997. All other terms and conditions remained the
same.
Initial Public Offering
On January 23, 1997, the Company closed its initial public offering,
selling an aggregate of 558,276 shares of Common Stock and 1,263,601 Class A
Common Stock purchase warrants. The Company received approximately $2,981,000 in
proceeds from the offering before offering costs of $1,344,000. Shortly after
the closing of the offering, Toluca Pacific Corporation, the underwriter of the
offering, ceased operations. This resulted in a delay in the delivery of
security certificates to purchasers. It also means that Toluca Pacific
Securities Corporation will not be a market maker in the Company's Securities.
On February 19, 1997, due to the fact that the inside bid price of the Company's
Common Stock dropped below $3.00 per share, NASDAQ informed the Company that the
Company's common stock and Class A Warrants would not be listed on the NASDAQ
SmallCaps market.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Effect of Interest Rate Fluctuations. Low interest rates generally favor 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, fee
income and the net interest margin earned for each loan originated usually
decreases in such an environment. While current interest rates are not high by
historical standards, any sustained increase in interest rates will likely have
a materially negative effect on loan origination volume throughout the industry.
The Company's loan origination volume historically has declined as a result of
increases in interest rates. If interest rates 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.
Low interest rates generally have the effect of increasing prepayments in
the Company's servicing portfolio because they tend to stimulate both a higher
level of home purchases and the 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 a
portion of prepayments, transfers and sales of loan servicing. If origination
and acquisition activity cannot replace prepayments, transfers and sales, 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 7.86%
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 reduce the volume of home purchases and
the refinancing of existing mortgage debt. While interest rates are not high by
historical standards, management believes that the current level of interest
rates, approximately 8.0%, relative to the recent historically low interest
rates of approximately 7.0% during early 1995, are at a level where prepayment
levels will not be affected.
Variations in interest rates may also impact revenue from the sale of
servicing rights. To the extent that it's 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 December 31, 1996, the principal balances of mortgage loans in the
Company's servicing portfolio were primarily located in the states of California
(33.8%, Maryland (13.9%), New York (9.5%), Washington (8.0%) and Virginia
(6.1%). 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") was 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.
11
<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. 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. Currently, because of the small volume of mortgage loan
originations, approximately 50% of the Company's originations are sold with
mortgage loan servicing released to the purchasers. The Company has not
experienced any material effect resulting from the adoption of SFAS No. 122 on
the Company's financial condition or statement of operations for the three month
period ended December 31, 1996. However, as the Company increases its
origination volume in the future, management anticipates that a proportionately
larger volume 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.
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.
Three Months Ended December 31, 1996 Compared with Three
Months Ended December 31, 1995
Overview. The Company's net loss for the three months ended December 31, 1996
was $264,000 before cumulative but unpaid preferred dividends of $69,000 as
compared to a net loss of $217,000 before preferred dividend payments of $48,000
for the three months ended December 31, 1995, an increase in loss of $47,000,
approximately 21.7%. The increase in loss was primarily attributable to a
reduction in net servicing income of $81,000, partially offset by a reduction of
$45,000 in amortization of mortgage loan servicing rights.
Loan Servicing. Mortgage loan servicing revenue decreased from $602,000 for the
three months ended December 31, 1995 to $521,000 for the three months ended
December 31, 1996. This decrease in mortgage loan servicing revenue of $81,000,
approximately 13.5%, was primarily the result of a reduction in the volume of
loans serviced to $548.2 million as of December 31, 1996 from $652.8 million as
of December 31, 1995, a reduction of $104.6 million, approximately 16.0%.
12
<PAGE>
During the three months ended December 31, 1996 loans paid in full were
$9.1 million, representing an annualized prepayment rate of approximately 6.2%,
compared to loans paid in full of $12.2 million during the three months ended
December 31, 1995, representing an annualized prepayment rate of approximately
7.1%. The reduction in loans paid in full of approximately $3.1 million during
the three months ended December 31, 1996 as compared to the three months ended
December 31, 1995, a reduction of approximately 25.4%, resulted primarily from
an increase in mortgage interest rates from approximately 7.25% at December 31,
1995 to approximately 8.0% at December 31, 1996.
Regular principal reductions, transfers, bulk sales, and foreclosures were
approximately $37.6 million during the three months ended December 31, 1996
compared to $27.2 million during the three months ended December 31, 1995. This
represents an increase of $10.4 million, approximately 38.2%, and resulted
primarily from the sale of $31.1 million of housing authority servicing rights
back to the owner during December, 1996. The Company is to receive a fee equal
to approximately $233,000 for the sale of the housing authority servicing
rights, the fee being essentially equal to the net book value of the servicing
rights sold
Loan Origination. Loan origination revenue, which includes the fees associated
with the origination process and the net gains on the sale of loans, was
$101,000 for the three months ended December 31, 1996 compared with $71,000 for
the three months ended December 31, 1995. The increase of $30,000 approximately
42.3%, resulted primarily from gains on the sale of loans held for sale of
$31,000 during the three months ended December 31, 1996. During the three months
ended December 31, 1996 the Company began selling loan originations while
retaining the servicing rights. During the three months ended December 31, 1995
all mortgage loan originations were sold on a servicing released basis and there
was no separate gain on the sale of mortgage loans held for sale as all net
proceeds on such sales were classified as loan origination fees.
Analysis of Loan Origination Revenues
Three Months Ended
December 31
1996 1995
($000)
Loan origination fees $70 $71
Net marketing gains 31 -
---- ----
Loan origination revenues 101 71
==== ====
Net Interest. The Company's net interest cost for the three months ended
December 31, 1996 was $35,000 compared with a net interest cost of $37,000 for
the three months ended December 31, 1995. The decrease of $2,000 represented
approximately 5.4%. Interest income increased to $62,000 during the three months
ended December 31, 1996 from $4,000 during the three months ended December 31,
1995. The increase of $58,000 resulted primarily from additional interest income
on mortgage loans held for sale. Mortgage loans held for sale were approximately
$3.3 million at December 31, 1996 compared to approximately $1.6 million at
December 31, 1995, $1.1 million of December 31, 1995 balance being funded during
the month of December, 1995. The increase in mortgage loans held for sale
resulted from increasing use of the Company's warehouse line of credit and
deemphasis of table funding originations during the 1996 period. Interest
expense increased to $97,000 during the three months ended December 31, 1996
compared to $41,000 during the three months ended December 31, 1995. The $56,000
increase, approximately 136.6%, resulted from increased use of the Company's
warehouse line of credit and interest expense on the Company's repurchase
agreement.
13
<PAGE>
Net Interest Cost
Three Months Ended
December 31,
1996 1995
----- ----
($000)
Net interest cost:
Interest income............................. $ 62 $ 4
Interest expense on warehouse and other
operating debt............................. $ (97) $ (41)
------- -------
Net interest cost........................... $ (35) $ (37)
======== ========
Other Income. Other income decreased to $2,000 for the three months ended
December 31, 1996 compared to $29,000 for the three months ended December 31,
1995. The reduction of $27,000 resulted from significantly lower miscellaneous
income.
Personnel Costs. Personnel costs for the three months ended December 31, 1996
were $339,000 compared to $358,000 for the three months ended December 31, 1995,
a decrease of $19,000 or approximately 5.3%. This decrease resulted from a
reduction in servicing personnel costs due to operating efficiencies.
Approximately $29,000 in commissions were paid during the three months ended
December 31, 1996. Approximately $20,000 in commissions were paid during the
three months ended Dcember 31, 1995. Commissions are generally calculated as a
percentage of the loan origination fee, and, the percentage is based upon the
volume of business produced monthly by the loan officer. This allows the Company
to match more closely the origination fee income with the related commission
expense.
Occupancy, Office and Professional Expenses. Occupancy, office and professional
expenses increased to $167,000 for the three months ended December 31, 1996 from
$132,000 for the three months ended December 31, 1995. The increase of $35,000,
approximately 26.5%, was primarily due to additional office and occupancy
expenses, partially offset by a reduction in professional services expense.
Provisions for Loan Losses. There was no additional provision for loan losses
for either the three month period ended December 31, 1996 or the three month
period ended December 31, 1995. The 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 $237,000 remaining on the Company's books is sufficient
to cover the limited amount of recourse exposure in the loan servicing
portfolio. Approximately 50% 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 , it retains neither the loans nor
the servicing rights of the loans sold with servicing rights released, and, all
loans sold with serviced rights retained were sold with no loss recourse back to
the Company. The Company's portfolio is essentially without recourse to the
Company. The investors for whom the portfolio 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.
Amortization of Mortgage Loan Servicing Rights. Amortization of mortgage loan
servicing rights was $225,000 for the three months ended December 31, 1996
compared to $270,000 for the three months ended December 31, 1995. The decrease
of $45,000, approximately 16.7%, resulted from decreased prepayments because of
an increase in mortgage loan interest rates from approximately 7.25% at December
31, 1995 to approximately 8.0% at December 31, 1996. See - "Loan Servicing."
14
<PAGE>
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 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 7.86%, 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
generally increased, prepayment speeds on interest rates of 8.00% or less have
remained constant or declined. 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
that, if interest rates were to fall to a level where prepayment speeds increase
such that results of operations and liquidity are affected, increased fee income
from loan origination volume could partially offset the impact on results of
operations and liquidity. The Company would seek to refinance that portion of
its servicing portfolio that was most susceptible to prepayment, retaining the
loan servicing rights on the refinanced loans.
Other Expenses. Other expenses for the three months ended December 31, 1996 and
for the three months ended December 31, 1995 were $122,000.
Income Taxes. There was no income tax expense or benefit for the three months
ended December 31, 1996 or the three months ended December 31, 1995 because of
the Company's net operating losses of $264,000 and $217,000, respectively,
during these periods.
Liquidity and Capital Resources
The Company's primary short-term liquidity requirements are for mortgage
loan fundings and for 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, other short-term 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 three months ended December 31,1996 and three months ended
December 31, 1995, the Company had a net decrease in cash and cash equivalents
of $58,000 and $32,000, respectively. Net cash provided by operating activities
of $406,000 for the three months ended Dcember 31, 1996 and net cash used in
operating activities of $974,000 for the three months ended December 31, 1995,
reflect net losses of $264,000 and $217,000, respectively, plus adjustments to
the net losses of $670,000 and $757,000, 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 used in investing
activities was $70,000 for the three months ended December 31, 1996 and net cash
provided by investing activities was $137,000 for the three months ended
December 31, 1995. Net cash used in financing activities was $394,000 for the
three months ended December 31, 1996 and net cash provided by financing
activities was $805,000 for the three months ended December 31, 1995.
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").
15
<PAGE>
As of December 31, 1996, the Company's outstanding principal balance under
the First Term Loan is $3.0 million. The Company used the proceeds from this
loan to pay the balance of the purchase price for DMC, including mortgage
servicing rights and related assets, and, to repay debt. 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 as amended): "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
of the independent auditor in the Company's audited consolidated financial
statements cannot contain a "going concern" explanatory paragraph.
The Company was in default under the ATNW, ALR and the DSCR financial
requirements of its credit agreement with First Bank ("First Credit Agreement")
concerning the First Term Loan and the First Warehousing Facility as of
September 30, 1996 through December 31, 1996. At September 30, 1996, October 31,
1996, November 30, 1996 and December 31, 1996 the financial requirements of the
Company were as follows:
September 30, October 31, November 30, December 31,
1996 1996 1996 1996
ATNW $1.5 million $1.5 million $1.5 million $1.1 million
ALR 5.81 to 1.0 5.84 to 1.0 5.04 to 1.0 8.64 to 1.0
DSCR .51 to 1.0 NA NA .32 to 1.0
As a result of the receipt of funds from the Company's IPO which closed on
January 23, 1997, the Company's ATNW was $3.5 million and the Company's ALR was
2.59 to 1.0. First Bank has waived compliance with the DSCR financial
requirement until March 31, 1997.
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 borrowings against the
Warehouse Loan and 2.75% for borrowings against the Term Loan. The Company also
pays a monthly facility fee equal to .25% of the First Warehousing Facility
commitment. The Company must also maintain the above discussed minimum criteria.
Payment under the First Warehousing Facility is secured by all assets of the
Company.
16
<PAGE>
Pursuant to an agreement between the Company and the Government National
Mortgage Association ("GNMA") the Company was required to establish two
restricted cash accounts. The Company continues to maintain restricted cash
accounts in the amount of $259,000 which were established as the result of a
loan sale and servicing related agreements 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.
The Company 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 registration statement was declared
effective as of November 12, 1996. The Company raised approximately $2.98
million in proceeds from the IPO, before related IPO costs of approximately
$1.34 million, which closed on January 23, 1997.
Potential Liability. The Company 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, 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.
17
<PAGE>
The Company has begun the process of expanding its origination activities
by purchasing and reselling whole loan portfolios while retainging the servicing
rights. Through the acquisition and expansion of DMC's originations to a level
where originations exceed the volume of prepayments, sales and transfers
experienced in its mortgage loan servicing portfolio. The Company intends to use
approximately $250,000 from the net proceeds of its initial public offereing to
purchase approximately $25 million of morgage loan servicing rights. The Company
has made offers to purchase mortgage loan servicing rights subsequent to the
closing of its initial public offering. Some offers were rejected and some
remain under consideration by the sellers. The Company will continue to attempt
to acquire additional mortgage loan servicing rights, however no assurance can
be given that the Company will be able to purchase or otherwise acquire
additional mortgage loan servicing rights. If the Company is unable to acquire
additioanl mortgage loan sevicing rights, its operations will be materially
adversely affected.
18
<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
On February 19, 1997, due to the fact that the inside bid price of the
Company's Common Stock dropped below $3.00 per share, NASDAQ informed the
Company that the Company's common stock and Class A Warrants would not be listed
on the NASDAQ SmallCaps market.
Item 6. Exhibits and Reports on Form 8-K
None.
19
<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: April 28, 1997 /s/ Kenneth Germain
-----------------------------
Kenneth Germain, President
Chief Executive Officer
/s/ Joseph W. Traxler
---------------------
Joseph W. Traxler, Treasurer,
Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 145,000
<SECURITIES> 0
<RECEIVABLES> 1,124,000
<ALLOWANCES> 237,000
<INVENTORY> 3,453,000
<CURRENT-ASSETS> 4,744,000
<PP&E> 116,000
<DEPRECIATION> 9,000
<TOTAL-ASSETS> 11,324,000
<CURRENT-LIABILITIES> 7,667,000
<BONDS> 0
0
6,000
<COMMON> 41,000
<OTHER-SE> 1,650,000
<TOTAL-LIABILITY-AND-EQUITY> 11,324,000
<SALES> 0
<TOTAL-REVENUES> 686,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 853,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97,000
<INCOME-PRETAX> (264,000)
<INCOME-TAX> (264,000)
<INCOME-CONTINUING> (264,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (.001)
<EPS-DILUTED> (.001)
</TABLE>
