FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
[]Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
For the transition period from ________ to ___________ Act of 1934
Commission file number 0-17771
FRANKLIN CREDIT MANAGEMENT CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
75-2243266
(I.R.S. Employer identification No.)
Six Harrison Street
New York, New York 10013
(212) 925-8745
(Address of principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes_____ No_X___.
As of November 15, 2004 the issuer had 5,916,527 of shares of Common Stock, par
value $0.01 per share, outstanding.
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FRANKLIN CREDIT MANAGEMENT CORPORATION
FORM 10-Q
INDEX
C O N T E N T S
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 2004
and December 31, 2003 3
Consolidated Statements of Income for the three and
nine months ended September 30, 2004 and September
30, 2003 4
Consolidated Statement of changes in Stockholders' Equity
for the nine months ended September 30, 2004 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2004 and September 30, 2003 6
Notes to Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-23
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 24-25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
CERTIFICATIONS
CONSOLIDATED BALANCE SHEETS (Unaudited)
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ASSETS September 30, 2004 December 31, 2003
CASH AND CASH EQUIVALENTS $ 22,533,835 $ 14,418,876 35
RESTRICTED CASH 113,457 413,443
NOTES RECEIVABLE:
Principal 796,079,203 465,553,870
Purchase discount (38,809,394) (25,678,165)
Allowance for loan losses (84,031,931) (46,247,230)
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Net notes receivable 673,237,878 393,628,475
ORIGINATED LOANS HELD FOR SALE 34,861,339 27,372,779
ORIGINATED LOANS HELD FOR INVESTMENT 43,212,524 9,536,669
ACCRUED INTEREST RECEIVABLE 7,764,609 4,332,419
OTHER REAL ESTATE OWNED 16,684,155 13,981,665
OTHER RECEIVABLES 4,664,500 2,893,735
MARKETABLE SECURITIES 256,697 202,071
DEFERRED TAX ASSET 614,166 681,398
OTHER ASSETS 4,440,257 3,720,163
BUILDING, FURNITURE AND EQUIPMENT - Net 1,341,133 1,252,711
DEFERRED FINANCING COSTS- Net 7,033,597 4,298,942
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TOTAL ASSETS $ 816,758,147 $ 476,733,346
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 7,088,629 $ 4,979,806
Financing agreements 35,180,332 23,315,301
Notes payable 747,154,565 427,447,844
Income tax liability:
Current 61,011
Deferred 1,402,204 1,311,089
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TOTAL LIABILITIES 790,886,741 457,054,040
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value,
10,000,000 authorized shares; issued
and outstanding: 5,916,527 59,167 59,167
Additional paid-in capital 6,985,968 6,985,968
Retained earnings 18,826,271 12,634,171
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TOTAL STOCKHOLDERS' EQUITY 25,871,406 19,679,306
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $816,758,147 $476,733,346
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See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
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Three Months Nine Months
Ended Sept 30, Ended Sept 30,
2004 2003 2004 2003
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REVENUES:
Interest income $16,628,125 $10,438,099 $38,618,733 $31,721,768
Purchase discount earned 2,969,825 1,385,753 6,039,002 3,366,675
Gain on sale of notes
receivable 229,840 36,991 1,074,742 633,105
Gain on sale of originated
loans held for sale 1,026,372 895,774 3,171,801 2,302,819
Loss/gain on sale of other
real estate owned (145,846) 174,651 227,551 927,845
Rental income 9,725 29,874 33,675 103,674
Prepayments and other income 1,247,416 1,096,582 3,646,884 2,899,019
---------- ---------- ---------- -----------
21,965,457 14,057,724 52,812,388 41,954,905
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Interest expense 9,939,303 5,489,147 20,733,508 16,102,017
Collection, general and
administrative 5,974,354 4,476,633 16,167,756 12,995,727
Provision for loan losses 728,504 783,854 2,436,763 2,368,299
Amortization of deferred
financing costs 584,916 516,483 1,738,043 1,356,875
Depreciation 118,590 120,283 368,214 327,742
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17,345,667 11,386,400 41,444,284 33,150,660
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INCOME BEFORE PROVISION
FOR INCOME TAXES 4,619,790 2,671,324 11,368,104 8,804,245
---------- ---------- ---------- ----------
PROVISION FOR INCOME TAXES 2,102,004 1,215,900 5,176,004 4,072,200
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NET INCOME $2,517,786 $1,455,424 $6,192,100 $4,732,045
========== ========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic $ 0.43 $ 0.25 $ 1.05 $ 0.80
Diluted $ 0.37 $ 0.22 $ 0.92 $ 0.73
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING BASIC 5,916,527 5,916,527 5,916,527 5,916,527
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING DILUTED 6,815,141 6,573,879 6,749,544 6,506,560
========== ========== ========== ==========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2004 (Unaudited)
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Additional
Common Stock Paid-In Retained
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Shares Amount Capital Earnings Total
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January 1, 2004 5,916,527 $59,167 $6,985,968 $12,634,171 $19,679,306
Net income 6,192,100 6,192,100
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September 30, 2004 5,916,527 $59,167 $6,985,968 $18,826,271 $25,871,406
========================================================
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See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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Nine Months Ended Sept 30,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,192,100 $ 4,732,045
Adjustments to reconcile net income to
net cash used in operating activities:
Gain on sale of notes receivable (1,074,742) (633,105)
Gain on sale of other real estate owned (227,551) (927,845)
Gain on sale of originated loans held for sale (3,171,801) (2,302,819)
Depreciation 368,214 327,742
Amortization of deferred financing costs 1,738,043 1,356,875
Origination of loans held for sale (130,834,004) (67,934,759)
Proceeds from the sale of and principal
collections on loans held for sale 86,497,788 62,244,362
Purchase discount earned (6,039,002) (3,366,675)
Provision for loan losses 2,436,763 2,368,299
Changes in operating assets and liabilities:
Accrued interest receivable (3,432,190) 191,868
Other receivables (1,770,765) (1,526,879)
Deferred income tax asset 67,232 (91,390)
Other assets (774,720) (876,162)
Current income tax liability 61,011
Deferred income tax liability 91,115 (349,497)
Accounts payable and accrued expenses 2,108,823 478,702
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Net cash used in operating activities (47,763,686) (6,309,238)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash 299,986 170,937
Purchase of notes receivable (438,971,026) (163,332,881)
Principal collections on notes receivable
and loans held for investment 143,954,741 109,716,685
Acquisition and loan fees (4,223,652) (1,887,363)
Proceeds from sale of other real estate owned 15,077,792 11,345,657
Proceeds from sale of notes receivable 8,625,688 4,280,676
Purchase of building, furniture and equipment (456,636) (592,062)
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Net cash used in investing activities (275,693,107) (40,298,351)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 494,919,071 173,789,284
Principal payments of notes payable (175,212,350) (133,573,437)
Proceeds from financing agreements 134,886,080 72,218,917
Principal payments of financing agreements (123,021,049) (67,722,555)
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Net cash provided by financing activities 331,571,752 44,712,209
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NET CHANGE IN CASH AND CASH EQUIVALENTS. 8,114,959 (1,895,380)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,418,876 10,576,610
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,533,835 $ 8,681,230
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest $ 19,210,233 $ 14,902,010
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Cash payments for taxes $ 4,739,000 $ 4,742,329
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See notes to consolidated financial statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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1. ORGANIZATION AND BUSINESS
Nature of Business - Franklin Credit Management Corporation ("FCMC", and
together with its wholly-owned subsidiaries, the "Company") is a specialty
consumer finance and asset management company primarily engaged in the
acquisition, origination, servicing and resolution of performing, sub-performing
and non-performing residential mortgage loans and residential real estate. The
Company acquires these mortgages from a variety of mortgage bankers, banks, and
other specialty finance companies. These loans are generally purchased in pools
at discounts from their aggregate contractual balances, from sellers in the
financial services industry. Real estate is acquired in foreclosure or otherwise
and is usually acquired at a discount relative to the appraised value of the
asset. The Company conducts its business from its executive and main office in
New York City and through its website www.franklincredit.com.
The Company's wholly-owned subsidiary, Tribeca Lending Corp. ("Tribeca"),
originates primarily residential mortgage loans made to individuals whose credit
histories, income and other factors cause them to be classified as sub-prime
non-conforming borrowers. Management believes that lower credit quality
borrowers present an opportunity for the Company to earn superior returns for
the risks assumed. The majority of first and second mortgages are originated on
a retail and wholesale basis through marketing efforts, utilization of the FCMC
database and the Internet. Tribeca anticipates holding certain of its mortgages
in its portfolio when it believes that the return from holding the mortgage, on
a risk-adjusted basis, outweighs the return from selling the mortgage in the
secondary market.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying consolidated financial statements are
unaudited. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows have been made. Certain
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 2003. The results of
operations for the interim periods are not necessarily indicative of the
operating results for the full year.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates of the Company are allowances for loan losses.
The Company's estimates and assumptions primarily arise from risks and
uncertainties associated with interest rate volatility and credit exposure.
Although management is not currently aware of any factors that would
significantly change its estimates and assumptions in the near term, future
changes in market trends and conditions may occur which could cause actual
results to differ materially.
Reclassification- Certain 2003 amounts have been reclassified to conform with
the 2004 presentation.
Operating Segments- Statement of Financial Accounting Standards ("SFAS") No. 131
Disclosures about Segments of an Enterprise and Related Information requires
companies to report financial and descriptive information about their reportable
operating segments, including segment profit or loss, certain specific revenue
and expense items, and segment assets. The Company is currently operating in two
business segments: (i) portfolio asset acquisition; and (ii) mortgage banking.
Earnings per share- Basic earnings per share is calculated by dividing net
income by the weighted average number of shares outstanding during the year.
Diluted earnings per share is calculated by dividing net income by the weighted
average number of shares outstanding, including the dilutive effect, if any, of
stock options outstanding, calculated under the treasury stock method.
Cash and Cash Equivalents - Cash and cash equivalents includes cash and
short-term investments with original maturities of three months or less, with
the exception of restricted cash. The Company maintains accounts at banks, which
at times may exceed federally insured limits. The Company has not experienced
any losses from such concentrations.
Notes Receivable and Income Recognition - The notes receivable portfolio
consists primarily of secured residential real estate mortgage loans purchased
from financial institutions, and mortgage and finance companies. Such notes
receivable are performing, nonperforming or underperforming at the time of
purchase and are usually purchased at a discount from the principal balance
remaining. Notes receivable are stated at the amount of unpaid principal,
reduced by purchase discount and allowance for loan losses. The Company
periodically evaluates the collectability of both interest and principal of its
notes receivable to determine whether they are impaired. A note receivable is
considered impaired when it is probable the Company will be unable to collect
all contractual principal and interest payments due in accordance with the terms
of the note agreement. The Company has the ability and intent to hold these
notes until maturity, payoff or liquidation of collateral or may sell certain
notes, if it is economically advantageous to do so. An allowance for loan losses
on impaired notes receivable is recorded based on the present value of expected
future cash flows discounted at the note's effective interest rate or, as a
practical expedient, at the observable market price of the note receivable or
the fair value of the collateral if the note is collateral dependent.
In general, interest on the notes receivable is calculated based on contractual
interest rates applied to daily balances of the collectible principal amount
outstanding using the accrual method. Accrual of interest on notes receivable,
including impaired notes receivable, is discontinued when management believes,
after considering economic and business conditions and collection efforts, that
the borrowers' financial condition is such that collection of interest is
doubtful. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Subsequent recognition of income occurs only to the extent payment is
received subject to management's assessment of the collectability of the
remaining interest and principal. A non-accrual note is restored to an accrual
status when it is no longer delinquent and collectability of interest and
principal is no longer in doubt. Accordingly any allowance for loan losses
is reversed and past due interest is recognized at that time.
Loan purchase discounts are amortized into income using the interest method over
the period to maturity. The interest method recognizes income by applying the
effective yield on the net investment in the loans to the projected cash flows
of the loans. Discounts are amortized if the projected payments are probable of
collection and the timing of such collections are reasonably predictable. The
projection of cash flows for purposes of amortizing purchase loan discount is a
material estimate, which could change significantly, in the near term. Changes
in the projected payments are accounted for as a change in estimate and the
periodic amortization is prospectively adjusted over the remaining life of the
loans.
In the event projected payments do not exceed the carrying value of the loan,
the periodic amortization is suspended and either the loan is written down or an
allowance for uncollectibility is recognized.
Allowance for Loan Losses - The allowance for loan losses, a material estimate
which could change significantly in the near term, is initially established by
an allocation of the purchase loan discount based on management's assessment of
the portion of purchase discount that represents uncollectable principal.
Subsequently, increases to the allowance are made through additional allocation
from purchase discount if available. If there is not discount available, the
provision for loan loss is charged to expense.
The allowance is maintained at a level that management considers adequate to
absorb probable losses in the loan portfolio. Management's judgment in
determining the adequacy of the allowance is based on the evaluation of
individual loans within the portfolios, the known and inherent risk
characteristics and size of the note receivable portfolio, the assessment of
current economic and real estate market conditions, estimates of the current
value of underlying collateral, past loan loss experience and other relevant
factors. Impaired notes receivable are charged against the allowance for loan
losses when management believes that the collectability of principal and
interest is not probable, based on a note-by-note review. In connection with the
determination of the allowance for loan losses, management obtains independent
appraisals for the underlying collateral when considered necessary.
The Company's notes receivable are collateralized by residential real estate
located throughout the United States with concentrations in California, New
York, Georgia, and Florida. Accordingly, the collateral value of a substantial
portion of the Company's real estate notes receivable and real estate acquired
through foreclosure is susceptible to changes in market conditions in certain
specific markets. Management believes that the allowance for loan losses is
adequate. While management uses available information to recognize losses on
notes receivable, future additions to the allowance or write-downs may be
necessary based on changes in economic conditions. An allowance of $84,031,931
and $46,247,230 is included in notes receivable at September 30, 2004 unaudited
and December 31, 2003, respectively.
Originated Loans Held for Sale - The loans held for sale consist primarily of
residential loans originated by the Company collateralized by first and second
mortgages where the Company intends to sell the loan within six months. Such
loans held for sale are performing and are carried at lower of cost or market.
The gain or loss on sale is recorded as the difference between the carrying
amount of the loan and the proceeds from sale on a loan-by-loan basis. The
Company records a sale when the title transfers to the seller.
Originated Loans Held for Investment - Such loans consist primarily of
residential loans originated by the Company collateralized by first and second
mortgages originated by the Company where the Company has the intent and
financial ability to hold the loans to maturity. Such loans held for investment
are performing and are carried at amortized cost.
Other Real Estate Owned - Other real estate owned ("OREO") consists of
properties acquired through, or in lieu of, foreclosure or other proceedings and
are held for sale and carried at the lower of cost or fair value less estimated
costs to sell. Any write-down to fair value, less estimated cost to sell, at the
time of acquisition is charged to purchase discount. Subsequent write-downs are
charged to operations based upon management's continuing assessment of the fair
value of the underlying collateral. Property is evaluated periodically to ensure
that the recorded amount is supported by current fair values and valuation
allowances are recorded as necessary to reduce the carrying amount to fair value
less estimated cost to sell. Revenue and expenses from the operation of OREO and
changes in the valuation allowance are included in operations. Direct costs
relating to the development and improvement of the property are capitalized,
subject to the limit of fair value of the collateral, while costs related to
holding the property are expensed. OREO is not depreciated. Gains or losses are
included in operations upon disposal.
Building, Furniture and Equipment - Building, furniture and equipment is
recorded at cost net of accumulated depreciation. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from 3 to 40 years. Maintenance and repairs are expensed as incurred.
Deferred Financing Costs - Costs incurred in connection with obtaining financing
are deferred and are amortized over the term of the related loan.
Retirement Plan - The Company has a defined contribution retirement plan
covering all full-time employees who have completed one month of service.
Contributions to the plan are made in the form of payroll deductions based on
employees' pretax wages. Currently, the Company offers a matching contribution
of 50% of the first 3% of the employees' contribution.
Income Taxes - Income taxes are accounted for under SFAS No. 109, Accounting for
Income Taxes which requires an asset and liability approach in accounting for
income taxes. This method provides for deferred income tax assets or liabilities
based on the temporary difference between the income tax basis of assets and
liabilities and their carrying amount in the consolidated financial statements.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
reduced by a valuation allowance when management determines that it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of the enactment.
Fair Value of Financial Instruments - SFAS No. 107, Disclosures About Fair Value
of Financial Instruments, requires disclosure of fair value information of
financial instruments, whether or not recognized in the balance sheets, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. Statement No. 107 excludes certain
financial instruments and all non-financial assets and liabilities from its
disclosure requirements. Accordingly, the aggregate fair value amounts do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
a. Cash, Restricted Cash, Accrued Interest Receivables, Other Receivable and
Accrued Interest Payable - The carrying values reported in the consolidated
balance sheets are a reasonable estimate of fair value.
b. Notes Receivable - Fair value of the net note receivable portfolio is
estimated by discounting the future cash flows using the interest method. The
estimated fair value of notes receivable at September 30, 2004 unaudited and
December 31, 2003 was $673,237,878 and $393,628,475, respectively.
c. Short-Term Borrowings - The interest rates on financing agreements and other
short-term borrowings are reset on a monthly basis and therefore, the
carrying amounts of these liabilities approximate their fair value.
d. Long-Term Debt - The interest is at a variable rate that resets monthly,
therefore the amount reported in the balance sheet approximates fair value.
Comprehensive Income - SFAS No. 130, Reporting Comprehensive Income defines
comprehensive income as the change in equity of a business enterprise during a
period from transactions and other events and circumstances, excluding those
resulting from investments by and distributions to stockholders. The Company had
no items of other comprehensive income during the nine months ended September
30, 2004 and September 30, 2003; therefore, net income was equivalent to
comprehensive income.
Accounting for Stock options- The incentive stock option plan is accounted for
under the recognition and measurement principles of Accounting Principles Board
Opinion 25, Accounting for Stock Issued to Employees and related
interpretations. No stock-based employee compensation cost is reflected in net
income for stock options, because all options granted under these plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
Had compensation cost been determined upon the fair value of the stock options
at the grant date consistent with the method of SFAS No.123, the Company's
unaudited September 30, 2004 and September 30, 2003 net income and earnings per
share would have been reduced to the pro forma amounts indicated in the table
that follows.
2004 2003
Net income - as reported $ 2,517,786 $ 1,455,424
Net income - pro forma $ 2,510,661 $ 1,438,758
Net income per common share
- basic - as reported $ 0.43 $ 0.25
Net income per common share
- basic - pro forma $ 0.42 $ 0.24
Net income per common share
- diluted - as reported $ 0.37 $ 0.22
Net income per common share
- diluted - pro forma $ 0.37 $ 0.22
2004 2003
Net income - as reported $ 6,192,100 $ 4,732,045
Net income - pro forma $ 6,170,725 $ 4,682,046
Net income per common share
- basic - as reported $ 1.05 $ 0.80
Net income per common share
- basic - pro forma $ 1.04 $ 0.79
Net income per common share
- diluted - as reported $ 0.91 $ 0.73
Net income per common share
- diluted - pro forma $ 0.91 $ 0.72
There were no options granted during the three or nine months ended September
30, 2004.
Recent Accounting Pronouncements
In January of 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, Consolidation of Variable Interest Entities, which was
revised in December of 2003 by FIN 46(R).~ This Interpretation clarifies the
application of existing accounting pronouncements to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties.~The adoption of Interpretation No. 46(R) had no impact on the
Company's consolidated financial statements.
3. BUSINESS SEGMENTS
The Company has two reportable operating segments: (i) portfolio asset
acquisition and resolution; and (ii) mortgage banking. The portfolio asset
acquisition and resolution segment acquires performing, nonperforming,
nonconforming and subperforming notes receivable and promissory notes from
financial institutions, mortgage and finance companies, and services and
collects such notes receivable through enforcement of terms of the original
note, modification of original note terms and, if necessary, liquidation of the
underlying collateral. The mortgage-banking segment originates residential
mortgage loans from individuals whose credit histories, income and other factors
cause them to be classified as sub-prime nonconforming borrowers.
The Company's management evaluates the performance of each segment based on
profit or loss from operations before unusual and extraordinary items and income
taxes. The accounting policies of the segments are the same as those described
in the summary of significant accounting policies.
Three Months Ended September 30,
2004 2003
Unaudited
CONSOLIDATED REVENUE
Portfolio asset acquisition
and resolution $ 18,607,190 $ 12,067,078
Mortgage banking 3,358,267 1,990,646
Consolidated Revenue $ 21,965,457 $ 14,057,724
CONSOLIDATED INCOME BEFORE INCOME TAXES
Portfolio asset acquisition
and resolution $ 3,517,400 $ 2,236,779
Mortgage banking 1,102,390 434,545
Consolidated Income before income taxes $ 4,619,790 $ 2,671,324
Nine Months Ended Sept 30,
2004 2003
Unaudited
CONSOLIDATED REVENUE
Portfolio asset acquisition
and resolution $ 44,361,474 $ 36,621,059
Mortgage banking 8,450,914 5,333,846
Consolidated Revenue $ 52,812,388 $ 41,954,905
CONSOLIDATED INCOME BEFORE INCOME TAXES
Portfolio asset acquisition
and resolution $ 9,239,730 $ 7,768,991
Mortgage banking 2,128,374 1,035,254
Consolidated Income before income taxes $ 11,368,104 $ 8,804,245
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
Forward-Looking Statements. Statements contained herein that are not historical
fact may be forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, that are subject to a variety of risks and
uncertainties. There are a number of important factors that could cause actual
results to differ materially from those projected or suggested in
forward-looking statements made by the Company. These factors include, but are
not limited to: (i) unanticipated changes in the U.S economy, including changes
in business conditions such as interest rates, and changes in the level of
growth in the finance and housing markets; (ii) the status of relations between
the Company and a bank as its "Senior Debt Lender" and the Senior Debt Lender's
willingness to extend additional credit to the Company; (iii) the availability
for purchase of additional loans; (iv) the status of relations between the
Company and its sources for loan purchases; (v) unanticipated difficulties in
collections under loans in the Company's portfolio; and (vi) other risks
detailed from time to time in the Company's SEC reports. Additional factors that
would cause actual results to differ materially from those projected or
suggested in any forward-looking statements are contained in the Company's
filings with the Securities and Exchange Commission, including, but not limited
to, those factors discussed under the caption "Real Estate Risk" in the
Company's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, which
the Company urges investors to consider. The Company undertakes no obligation to
publicly release the revisions to such forward-looking statements that may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrences of unanticipated events, except as other wise required by
securities, and other applicable laws. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
thereof. The Company undertakes no obligation to release publicly the results on
any events or circumstances after the date hereof or to reflect the occurrence
of unanticipated events.
Overview
The Company's net income for the nine months ending September 30, 2004 was
$6,192,100 compared to $4,732,045 for the same period last year. This increased
income was facilitated by increased interest, purchase discount and prepayment
penalty income due to the growth in size of the portfolio. The nine months was
further bolstered by gains on the sale of originated loans due to a new
marketing campaign. This increase in income was partially offset by increases in
the costs of funds during the third quarter due to increases in federal interest
rates. The Company's cost of funds was 5.33% at September 30, 2004 as compared
to 4.77% at September 30, 2003.
Critical Accounting Policies. The following management's discussion and analysis
of financial condition and results of operations is based on the amounts
reported in the Company's consolidated financial statements. In preparing the
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP"), management is
required to make estimates and assumptions that affect the financial statements
and disclosures. These estimates require management's most difficult, complex or
subjective judgments. The Company's critical accounting policies are described
in its Form 10-K for the year ended December 31, 2003. There have been no
significant changes in the Company's critical accounting policies since December
31, 2003.
Acquisition Activity. Acquisitions were funded through incurrence of senior debt
in the amount equal to the purchase price plus a loan origination fee
generally equal to 1%. Included in the purchases during the quarter, was a
single purchase of a mixed pool of $32 million in face amount of performing,
sub-performing and nonperforming mortgage loans secured by single-family
residences, from Master Financial. The following table sets forth the number of
loans, unpaid principal balance at acquisition, purchase price and purchase
price percentage of the Company's loan acquisitions during the three and
nine-month periods ended September 30, 2004 and 2003:
Three Months ended September 30,
2004 2003
Number of Loans 4,239 756
Unpaid Principal Balance at Acquisition $ 120,605,382 $ 58,054,127
Purchase Price $ 87,266,354 $ 50,641,202
Purchase Price Percentage 72% 87%
Nine months ended September 30,
2004 2003
Number of Loans 13,786 2,608
Unpaid Principal Balance at Acquisition $ 536,662,897 $ 173,426,098
Purchase Price $ 438,971,026 $ 150,086,133
Purchase Price Percentage 82% 87%
Residential Lending. Since commencing operations in 1997, Tribeca has originated
approximately $378 million in loans. The following table sets forth the number
of loans and original aggregate principal balance of loans originated during the
three and nine-month periods ended September 30, 2004 and September 30, 2003:
Three months ended September 30,
2004 2003
Number of Loans 288 153
Original Principal Balance $ 50,655,663 $ 25,727,618
Nine months ended September 30,
2004 2003
Number of Loans 804 405
Original Principal Balance $ 130,834,004 $ 67,934,759
During the nine months ended September 30, 2004, Tribeca had income before taxes
of $2,128,374 as compared to $1,035,254 during the nine months ended September
30, 2003. This increase in income reflected the increased volume of loans
originated and sold during the nine months ending September 30, 2004 due to the
expansion of offices in New York and New Jersey and a new marketing campaign.
As of September 30, 2004, Tribeca had approximately $35 million face value of
loans held for sale and $43 million held for investment.
Cost of Funds. As of September 30, 2004, the Company owed an aggregate of $747
million ("Senior Debt") to a bank (the "Senior Debt Lender"), which was incurred
in connection with the purchase of, and is secured by, the Company's loan
portfolios and Other Real Estate Owned ("OREO") portfolios. The Company's Senior
Debt incurred after March 1, 2001, accrues interest at the Federal Home Loan
Bank of Cincinnati ("FHLB") thirty-day advance rate (the "Index") plus a spread
of 3.50% (the "Spread"). Senior Debt incurred before March 1, 2001 accrues
interest at prime rate plus a margin of between 0% and 1.75%. At September 30,
2004, approximately $24 million of the Senior Debt incurred before March 1, 2001
remained outstanding and will continue to accrue interest at the prime rate plus
a margin of between 0% and 1.75%. At September 30, 2004, the weighted average
interest rate on Senior Debt was 5.33%.
Inflation. The impact of inflation on the Company's operations during the
periods presented was immaterial.
Results of Operations
Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003.
Total revenue, which is comprised of interest income, purchase discount
earned, gains on bulk sale of notes receivable, gain on sale of loans receivable
originated, gain on sale of OREO, rental income and other income, increased by
$7,907,733 or 56%, to $21,965,457 during the three months ended September 30,
2004, from $14,057,724 during the three months ended September 30, 2003.
Interest income increased by $6,190,026 or 59% to $16,628,125 during the
three months ended September 30, 2004 from $10,438,099 during the three months
ended September 30, 2003. The Company recognizes interest income on notes
included in its portfolio based upon three factors: (i) interest on performing
notes, (ii) interest received with settlement payments on non-performing notes
and (iii) the balance of settlements in excess of the carried face value. This
increase resulted primarily from notes acquired by the Company between October
31, 2003 and September 30, 2004 and included a single purchase of $310 million
in notes from Bank One on June 30, 2004, these acquisitions have been only
partially offset by prepayments, collections and loan sales.
Purchase discount earned increased by $1,584,072 or 114%, to $2,969,825
during the three months ended September 30, 2004, from $1,385,753 during the
three months ended September 30, 2003. This increase reflected the growth in
size of the portfolio and an increase in prepayments during the three months
ended September 30, 2004 as compared to the three months ended September 30,
2003.
Gain on sale of notes receivable increased by $192,849 or 521% to $229,840
during the three months ended September 30, 2004 from $36,991 during the three
months ended September 30, 2003. The Company sold $2 million of performing loans
during the three months ended September 30, 2004 as compared to $2 million of
non-performing loans during the three months ended September 30, 2003.
Gain on sale of loans originated by Tribeca increased by $130,598 or 15% to
$1,026,372 during the three months ended September 30, 2004, from $895,774
during the three months ended September 30, 2003. This increase is based on an
increase in the volume of loans sold during the three months ended September 30,
2004, compared to the three months ended September 30, 2003. The Company sold
$26 million of loans originated during the three months ended September 30, 2004
as compared to $21 million during the three months ended September 30, 2003.
Gain on sale of OREO decreased by $320,497 or 184% to $(145,846) during the
three months ended September 30, 2004 from $174,651 during the three months
ended September 30, 2003. The Company sold 62 and 54 OREO properties during the
three months ended September 30, 2004 and September 30, 2003, respectively. This
decrease and the corresponding loss in the three months ended September 30th,
2004 reflects a small percentage of the overall sales of OREO during the
quarter.
Prepayment penalties and other income increased by $150,834 or 14%, to
$1,247,416 during the three months ended September 30, 2004 from $1,096,582
during the three months ended September 30, 2003. The increase was due primarily
to increases in prepayment penalties and late charges resulting primarily from
the growth in the size of the portfolio and increased loan fees due to an
increase in origination volume.
Total operating expenses increased by $5,959,267 or 52% to $17,345,667
during the three months ended September 30, 2004 from $11,386,400 during the
three months ended September 30, 2003. Total operating expenses includes
interest expense, collection, general and administrative expenses, provisions
for loan losses, amortization of deferred financing costs and depreciation
expense.
Interest expense increased by $4,450,156 or 81%, to $9,939,303 during the
three months ended September 30, 2004, from $5,489,147 during the three months
ended September 30, 2003. This increase resulted primarily from an increase in
debt measured on the last day of the two periods and was further increased by a
5.24% increase in costs of funds due to federal rate increases. The weighted
average cost of funds was 5.02% and 4.77% during the three months ended
September 30, 2004 and September 30, 2003, respectively. Total debt increased by
$331,571,752 or 74% to $782,334,897 as of September 30, 2004, from $450,763,145
as of September 30, 2003. Total debt consists principally of Senior Debt and
financing agreements.
Collection, general and administrative ("CG&A") expenses increased by
$1,497,721 or 33% to $5,974,354 during the three months ended September 30, 2004
from $4,476,633 during the three months ended September 30, 2003. Collection,
general and administrative expense consists primarily of personnel expense, and
all other collection expenses including OREO related expense, litigation
expense, and miscellaneous collection expense.
Within CG&A, personnel expenses increased by $643,645 or 28% to $2,910,369
during the three months ended September 30, 2004 from $2,266,724 during the
three months ended September 30, 2003. This increase resulted largely from
increases in staffing due to the growth in the portfolio, management salary
increases and increased commissions due to increased loan originations. All
other CG&A expenses increased by $854,076 or 39% to $3,063,985 during the three
months ended September 30, 2004 from $2,209,909 during the three months ended
September 30, 2003. This increase resulted primarily from increased professional
expense due to staff recruiting fees, legal expenses relating to foreclosures,
increased office expense due to the growth in size of the portfolio.
Provisions for loan losses decreased by $55,350 or 7% to $728,504 during
the three months ended September 30, 2004 from $783,854 during the three months
ended September 30, 2003. This decrease resulted primarily from a decrease in
write-offs during the three month ended September 30, 2004 as compared to the
three months ended September 30, 2003.
Amortization of deferred financing costs increased by $68,433 or 13% to
$584,916 during the three months ended September 30, 2004, from $516,483 during
the three months ended September 30, 2003. This increase resulted primarily from
a reduction in the weighted average life of the notes portfolio based on an
increase in collections primarily a result of prepayments and an increase in
deferred financing costs as a result of a commensurate increase in notes payable
due to the growth in size of the notes portfolio.
During the three months ended September 30, 2004 the Company made a
provision for income taxes of $2,102,004 as compared to $1,215,900 during the
three months ended September 30, 2003. The effective tax rate for the three
months ended September 30, 2004 and September 30, 2003 was 46%.
The Company's net income increased by $1,062,362 or 73% to $2,517,786 from
$1,455,424 primarily for the reasons set forth above.
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September
30, 2003.
Total revenue increased by $10,857,483 or 26%, to $52,812,388 during the
nine months ended September 30, 2004, from $41,954,905 during the nine months
ended September 30, 2003.
Interest income increased by $6,896,965 or 22%, to $38,618,733 during the
nine months ended September 30, 2004 from $31,721,768 during the nine months
ended September 30, 2003. The Company recognizes interest income on notes
included in its portfolio based upon three factors: (i) interest on performing
notes, (ii) interest received with settlement payments on non-performing notes
and (iii) the balance of settlements in excess of the carried face value. This
increase resulted primarily from notes acquired by the Company between July 1,
2003 and September 30, 2004, and included a single purchase of $310,000,000 in
notes from Bank One on June 30, 2004 which has been partially offset by
prepayments, collections and loan sales.
Purchase discount earned increased by $2,672,327 or 79%, to $6,039,002
during the nine months ended September 30, 2004 from $3,366,675 during the nine
months ended September 30, 2003. This increase reflected an increase in the
growth of the portfolio and prepayments during the nine months ended September
30, 2004 as compared to the nine months ended September 30, 2003.
Gain on sale of notes receivable increased by $441,637 or 70% to $1,074,742
during the nine months ended September 30, 2004 from $633,105 during the nine
months ended September 30, 2003. The Company sold $8,400,000 bulk sale of low
yielding performing loans during the nine months ended September 30, 2004
compared to a $6,000,000 bulk sale of performing and nonperforming loans during
the nine months ended September 30, 2003.
Gain on sale of loans originated by Tribeca increased by $868,982 or 38% to
$3,171,801 during the nine months ended September 30, 2004 from $2,302,819
during the nine months ended September 30, 2003. This increase reflected an
increase in both the volume and margin received at point of sale on Tribeca
loans sold during the nine months ended September 30, 2004, as compared to the
nine months ended September 30, 2003. The Company sold $77,000,000 in loans
during the nine months ended September 30, 2004 as compared to $59,000,000 in
loans during the nine months ended 2003.
Gain on sale of OREO decreased by $700,294 or 75% to $227,551 during the
nine months ended September 30, 2004 from $927,845 during the nine months ended
September 30, 2003. Gain on sale of OREO decreased due to the sale of lower
valued OREO properties during the nine months ended September 30, 2004 as
compared to the nine months ended September 30, 2003 during which time the
company sold several appreciated rental properties. The Company sold 219 and 164
OREO properties during the nine months ended September 30, 2004 and September
30, 2003, respectively.
Prepayment penalties and other income increased by $747,865 or 26%, to
$3,646,884 during the nine months ended September 30, 2004 from $2,899,019
during the nine months ended September 30, 2003. The increase was due primarily
to increases in prepayment penalties resulting from an increase in prepayments,
late charges resulting primarily from the growth in the size of the portfolio
and increased loan fees due to an increase in origination volume.
Total operating expenses increased by $8,293,624 or 25%, to $41,444,284
during the nine months ended September 30, 2004, from $33,150,660, during the
nine months ended September 30, 2003.
Interest expense increased by $4,631,491 or 29%, to $20,733,508 during the
nine months ended September 30, 2004 from $16,102,017 during the nine months
ended September 30, 2003. This increase resulted primarily from an increase in
the average amount of debt outstanding and further increased by an increase in
costs of funds. The weighted average cost of funds was 5.02% and 4.77% during
the nine months ended September 30, 2004 and September 30, 2003.
"CG&A" expenses increased by $3,172,029 or 24%, to $16,167,756 during the
nine months ended September 30, 2004 from $ 12,995,727 during the nine months
ended September 30, 2003.
Within CG&A, personnel expenses increased by $1,503,774 or 23%, to
$8,120,992 during the nine months ended September 30, 2004 from $6,617,218
during the nine months ended September 30, 2003. This increase resulted largely
from the $481,250 settlement paid to the Company's former CEO, increased
commissions due to increased loan production, additions to legal and servicing
staff and management salary increases. All other CG&A expenses increased by
$1,668,255 or 26%, to $8,046,764 during the nine months ended September 30, 2004
from $6,378,509 during the nine months ended September 30, 2003. This increase
resulted primarily from increased advertising expense for Tribeca, increased
professional expenses due to recruiting and audit fees.
Provisions for loan losses increased by $68,464 or 3% to $2,436,763 during
the nine months ended September 30, 2004 from $2,368,299 during the nine months
ended September 30, 2003. This increase resulted primarily from slightly
increased write-offs during the nine months ended September 30, 2004 as compared
to the nine months ended September 30, 2003.
Amortization of deferred financing costs increased by $381,168 or 28%, to
$1,738,043 during the nine months ended September 30, 2004, from $1,356,875
during the nine months ended September 30, 2003. This increase resulted
primarily from a reduction in the weighted average life of the notes portfolio
based on an increase in collections primarily a result of prepayments and an
increase in deferred financing costs as a result of a commensurate increase in
notes payable due to the growth in size of the notes portfolio.
During the nine months ended September 30, 2004 the Company made a
provision for income taxes of $5,176,004 as compared to $4,072,200 during the
nine months ended September 30, 2003. The effective tax rate for the three
months ended September 30, 2004 and September 30, 2003 was 46%.
The Company's net income increased by $1,460,055 or 31% to $6,192,100 from
$4,732,045 primarily for the reasons set forth above.
Financial Condition
Notes Receivable Portfolio- As of September 30, 2004, the Company's notes
receivable portfolio included approximately 20,268 loans with an aggregate
principal of $796 million. An allowance for loan losses of approximately $84
million has been recorded against this principal amount. The following table
provides a breakdown of the portfolio as of September 30, 2004 and December 31,
2003 respectively:
September 30, 2004 December 31, 2003
Performing loans $ 443,061,189 $ 322,345,537
Allowance for loan losses 19,847,201 15,584,769
Total performing loans ------------- -------------
Net of allowance for loan losses $ 423,213,988 $ 306,760,768
------------- -------------
Impaired loans $ 291,203,063 $ 126,341,722
Allowance for loan losses 47,970,727 30,111,278
Total impaired loans, ------------- -------------
Net of allowance for loan losses $ 243,232,336 $ 96,230,444
------------- ------------
Not recorded onto servicing system $ 61,814,951 $ 16,866,611
Allowance for loan losses 16,214,002 551,183
Not recorded onto servicing system ------------- ------------
Net of allowance for loan losses $ 45,600,949 $ 16,315,428
------------- ------------
Notes receivable, net of allowance for
loan losses $ 712,047,272 $ 419,306,640
============= =============
The following table provides a breakdown of the balance of the Company's
portfolio of notes receivable by coupon type, net of allowance for loan losses
and excluding loans purchased but not recorded onto the Company's servicing
system as of September 30, 2004 and December 31, 2003 of $61,814,951 and
$16,866,611, respectively:
September 30, 2004 December 31, 2003
Performing Loans
Fixed Rate Performing Loans $ 293,314,699 $ 199,691,299
------------- -------------
Adjustable Rate Performing Loans $ 129,899,289 $ 107,069,469
------------- -------------
Total Performing Loans $ 423,213,988 $ 306,760,768
============= =============
Impaired Loans
Fixed Rate Impaired Loans $ 207,375,844 $ 58,752,534
------------- -------------
Adjustable Rate Impaired Loans $ 35,856,492 $ 37,477,910
------------- -------------
Total Impaired Loans $ 243,232,336 $ 96,230,444
============= =============
The increase in the amount of the impaired loans reflects the acquisition of
portfolios from Bank One and Master Financial at significant discounts realtive
to thier face value. These portfolios included loans in bankruptcy and
foreclosure that are classified as impaired. Some of these impaired loans are
making payments even though they are contractually delinquent. These loans were
primarily fixed rate loans.
Liquidity and Capital Resources
General- During the nine months ended September 30, 2004, the Company purchased
13,786 loans with an aggregate face amount of $537 million at an aggregate
purchase price of $439 million or 82% of the face amount. During the nine months
ended September 30, 2003, the Company purchased 2,622 loans with an aggregate
face amount of $188 million at an aggregate purchase price of $163 million or
87% of the face amount. This increase reflected primarily the acquisition on
June 30, 2004 of a single mixed pool of $310 million in face amount of
performing, sub-performing and non-performing mortgage loans, secured by single
family residences, from Bank One, N.A., a national banking association.
The Company's portfolio of notes receivable at September 30, 2004, had a face
amount of $796 million and included net notes receivable of approximately $673
million. Net notes receivable are stated at the amount of unpaid principal,
reduced by purchase discount and allowance for loan losses. The Company has the
ability and intent to hold its notes until maturity, payoff or liquidation of
collateral or may sell certain notes, if it is economically advantageous to do
so.
In the ordinary course of its business, the Company accelerates its foreclosures
of real estate securing non-performing notes receivable included in its
portfolio. As a result of such foreclosures and selective direct purchases of
OREO, at September 30, 2004 and December 31, 2003, the Company held OREO
recorded in the consolidated financial statements at $17 million and $14
million, respectively. OREO is recorded on the consolidated financial statements
of the Company at the lower of cost or fair market value less estimated costs of
disposal. The Company believes that the OREO inventory held at September 30,
2004 has a net realizable value (market value less estimated commissions and
legal expenses associated with the disposition of the asset) of approximately
$18 million based on market analyses of the individual properties less the
estimated closing costs.
Cash Flow From Operating and Investing Activities
During the nine months ended September 30, 2004, the Company used cash in
the amount of $48 million in its operating activities primarily for the
origination of mortgage loans, interest expense, overhead, litigation expense
incidental to its collections and for the foreclosure and improvement of OREO
which uses were partially offset by proceeds from the sale of originated loans.
The Company used $276 million of cash in its investing activities, which
reflected primarily the use of $439 million for the purchase of notes receivable
offset by principal collections of its notes receivable of $144 million and
proceeds from sales of notes receivable of $7 million and OREO of $15 million.
Net cash provided by financing activities was $332 million primarily from a net
increase in Senior Debt of $320 million and a net $12 million increase in
financing agreements. The above activities resulted in a net increase in cash at
September 30, 2004 over December 31, 2003 of $8 million.
Substantially all of the assets of the Company are invested in its
portfolios of notes receivable and OREO. Primary sources of the Company's cash
flow for operating and investing activities are borrowings under its Senior Debt
facilities, collections on notes receivable and gain on sale of notes and OREO
properties.
At September 30, 2004, the Company had unrestricted cash, cash equivalents
and marketable securities of $23 million.
Cash Flow From Financing Activities
Senior Debt. As of September 30, 2004, the Company owed an aggregate of $747
million to the Lender of Senior Debt, under several loans.
The Senior Debt is collateralized by first liens on the respective loan
portfolios for the purchase of which the debt was incurred and is guaranteed by
the Company. The monthly payments on the Senior Debt have been, and the Company
intends for such payments to continue to be, met by the collections from the
respective loan portfolios. The loan agreements for the Senior Debt call for
minimum interest and principal payments each month and accelerated payments
based upon the collection of the notes receivable securing the debt during the
preceding month.
On October 13, 2004, the Company entered into a Master Credit and Security
Agreement (the "Agreement") with Sky Bank, an Ohio banking corporation ("Bank")
and each subsidiary of the Company, which is or from time to time may become a
party thereto (each, a "Company Subsidiary" collectively with the Company, the
"Borrowers"). The Agreement amends and restates into a single agreement the
Borrowers' previous loan agreements with the Bank, under which an aggregate
principal balance of approximately $747,000,000 was outstanding immediately
prior to the execution of the Agreement.
The Bank has the right to participate out its loans (or portions thereof)
to the Borrowers without the consent of the Borrowers; and the Bank has
participated a portion of the Borrowers' outstanding indebtedness to other
financial institutions. The Agreement provides for additional loans to be made,
subject to the Bank's consent, until October 13, 2006. Additional loans made
pursuant to the Agreement have a three-year term.
The unpaid principal balance of each loan is amortized over twenty years,
but matures three years after it was incurred. A substantial majority of the
loans under the Agreement bear interest at a floating rate of interest, bears
interest at a floating per annum rate of interest, adjusted monthly, equal to
the Federal Home Loan Bank of Cincinnati 30 day advance rate (the "Index"), plus
the applicable margin in accordance with the following matrix:
Index Bank Margin
<201 350
201 - 475 325
Greater than 475 300
The Borrowers' obligations under the Agreement are secured by a first
priority lien on the mortgage loans ("Mortgage Loans") financed by proceeds from
the Agreement. The Mortgage Loans securing each Borrower's obligations under the
Agreement also secure each other Borrower's obligations under the Agreement. The
Agreement contains customary affirmative and negative covenants and conditions
regarding the Borrowers' finances and operations and customary events of
default.
Each loan is also subject to an origination fee of 1% or such other amount
as is agreed upon by the parties, and related fees as well as back-end
participation payments subject to and based upon the performance of the related
Mortgage Loans.
The Agreement also clarifies how payments are allocated among the Bank and
any other participants, and provides that payments made on the Mortgage Loans
will be applied first to pay servicing and other fees and expenses required to
be paid on the Mortgage Loans, then towards principal, interest and other
amounts fees due on the loans in the manner set forth in the Agreement. Any
remaining amounts will be applied in the manner the Bank may determine.
Management believes that sufficient cash flow from the collection of notes
receivable will be available to repay the Company's secured obligations and that
sufficient additional cash flows will exist, through collections of notes
receivable, the sale of loans, sales and rental of OREO, or additional
borrowing, to repay the current liabilities arising from operations and to repay
the long term indebtedness of the Company
The Company's Senior Debt Lender has provided Tribeca with a warehouse
financing agreement of $40 million. This Senior Debt accrues interest based on
prime. At September 30, 2004, Tribeca had drawn down $35 million on the line.
Financing Agreements. The Company has a financing agreement with the Senior
Debt Lender permitting it to borrow a maximum of approximately $2,500,000 at
a rate equal to such lender's prime rate plus two percent per annum. Principal
repayment of the lines is due nine months from the date of each cash advance and
interest is payable monthly. The total amounts outstanding under the financing
agreements as of September 30, 2004 and December 31, 2003, were $477,966 and
$569,451 respectively. Advances made under the financing agreement were used to
satisfy senior lien positions and fund capital improvements in connection with
foreclosures of certain real estate loans financed by the Company. Management
believes the ultimate sale of these properties will satisfy the related
outstanding financing agreements and accrued interest of the original secured
notes receivable. The Company uses, when available, OREO sales proceeds to pay
down financing agreements to help reduce interest expense.
Additionally, the Company has a financing agreement with Citibank. The
agreement provides the Company with the ability to borrow a maximum of $150,000
at a rate equal to the bank's prime rate plus one percent per annum. As of
September 30, 2004 and December 31, 2003 $89,736 and $99,736 respectively, were
outstanding on the financing agreement.
Financing Activities and Contractual Obligations
Below is a schedule of the Company's contractual obligations and commitments at
September 30, 2004.
Less than
(Amounts in thousands) Total 1 Year 1-3 Years 3-5 Years Thereafter
- -------------------------------------------------------------------------------
Contractual Cash
Obligations:
Notes Payable $747,154,565 $16,191,270 $126,075,888 $115,720,677 $489,166,730
Warehouse Line 35,180,332 35,180,332 - - -
Operating Leases
-Rent 2,134,913 552,227 1,001,353 581,333 -
Capital Lease
-Equipment 661,963 186,899 280,645 194,420 -
Employment
Agreements 2,010,000 710,000 650,000 650,000 -
----------- ----------- ------------ ------------ ------------
Total Contractual
Cash Obligations $787,141,774 $52,820,728 $128,007,886 $117,146,430 $489,166,730
============ =========== ============ ============ ============
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate fluctuations can adversely affect the Company's income and value
of its common shares in many ways and present a variety of risks, including
the risk of mismatch between asset yields and borrowing rates, variances in the
yield curve and changing prepayment rates.
The Company's operating results will depend in large part on differences between
the income from its assets (net of credit losses) and its borrowing costs. Most
of the Company's assets, consisting primarily of mortgage notes receivable,
generate fixed returns and have terms in excess of five years. The Company
funds the origination and acquisition of a significant portion of these assets
with borrowings, which have interest rates that are based on the monthly Federal
Home Loan Bank of Cincinnati 30-day advance rate ("FHLB"). In most cases, the
income from assets will respond more slowly to interest rate fluctuations than
the cost of borrowings, creating a mismatch between yields and borrowing rates.
Consequently changes in interest rates, particularly short-term rates may
influence the Company's net income. The Company's borrowing under agreements
with its Senior Debt Lender bear interest at rates that fluctuate with the FHLB
rate of Cincinnati and the prime rate. Based on approximately $723 million and
$24 million of borrowings outstanding under this facility at September 30, 2004,
a 1% increase in FHLB and prime rate, would decrease the Company's quarterly
and nine month net income and net cash flows by approximately $1.0 million and
$3.0 million respectively, absent any other changes. The Company also has a
warehouse line of credit with its Senior Debt lender that funds the origination
of loans held for sale. These borrowings have interest rates that are based on
the prime rate. Based on approximately $35 million of borrowings outstanding
under this facility at September 30, 2004, a 1% increase in prime rate, would
further decrease the Company's quarterly and nine month net income and net cash
flows by approximately $47,000 and $141,750, respectively. Increases in these
rates will decrease the net income and market value of the Company's net assets.
Interest rate fluctuations that result in interest expense exceeding interest
income would result in operating losses.
The value of the Company's assets may be affected by prepayment rates on
investments. Prepayments rates are influenced by changes in current interest
rates and a variety of economic, geographic and other factors beyond the
Company's control, and consequently, such prepayment rates cannot be predicted
with certainty. When the Company originates and purchases mortgage loans, it
expects that such mortgage loans will have a measure of protection from
prepayment in the form of prepayment lockout periods or prepayment penalties.
In periods of declining mortgage interest rates, prepayments on mortgages
generally increase. If general interest rates decline as well, the proceeds of
such prepayments received during such periods are likely to be reinvested by the
Company in assets yielding less than the yields on the investments that were
prepaid. In addition the market value of mortgage investments may, because the
risk of prepayment, benefit less from declining interest rates than do other
fixed-income securities. Conversely, in periods of rising interest rates,
prepayments on mortgage loans, generally decrease, in which case the Company
would not have the prepayment proceeds available to invest in assets with higher
yields. Under certain interest rate and prepayment scenarios the Company may
fail to recoup fully its cost of acquisition of certain investments.
Real Estate Risk
Multi-family and residential property values and net operating income derived
from such properties are subject to volatility and may be affected adversely by
number of factors, including, but not limited to, national, regional and local
economic conditions (which may be adversely affected by industry slowdowns and
other factors); local real estate conditions (such as the over supply of
housing). In the event net operating income decreases, a borrower may have
difficultly paying the Company's mortgage loan, which could result in losses to
the Company. In addition, decreases in property values reduce the value of the
collateral and the potential proceeds available to a borrower to repay the
Company's mortgage loans, which could also cause the Company to suffer losses.
Item 4. Controls and Procedures.
As of the end of the period~covered by this Quarterly Report on Form 10-Q, the
Company carried out an evaluation, under the supervision and with the
participation of senior management, including the Company's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of its disclosure controls and procedures. Based upon that evaluation,
the Company's, Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information that the Company is
required to disclose in reports filed under the Securities Exchange Act of 1934.
There have been no significant changes in the Company's internal controls over
financial reporting or in other factors during the fiscal quarter ended
September 30, 2004 that materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting
subsequent to the date the Company carried out its most recent evaluation.
Part II Other Information
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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
EXHIBIT TABLE
Exhibit No. Description
3(a) Restated Certificate of Incorporation. Previously filed with,
and incorporated herein by reference to, the Company's 10-KSB,
filed with the Commission on December 31, 1994.
3(b) Bylaws of the Company. Previously filed with, and incorporated
herein by reference to, the Company's Registration Statement
on Form S-4, No.33-81948, filed with the Commission on November
24, 1994.
10(i) Promissory Note between Thomas J. Axon and the Company, dated
December 31,1998. Previously filed with, and incorporated
herein by reference to, the Company's 10-KSB, filed with the
Commission on April 14, 1999.
10(j) Promissory Note between Steve Leftkowitz, board member, and the
Company dated March 31,1999. Previously filed with, and
incorporated herein by reference to, the Company's 10-KSB, filed
with the Commission on March 30, 2000.
10(m) Master Credit and Security Agreement between Sky Bank and
Franklin Credit Management Corporation and subsidiaries. Filed
here with.
31.1 Chief Executive Officer Certification required by Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934,as amended.
31.2 Chief Executive Officer Certification required by Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as amended
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
The Company filed an 8-K on May 20, 2004, Item 5."Other Events",
the resignation of the companies CEO, Seth Cohen.
The Company filed an 8-K on July 15, 2004, Item 2 "Acquisition
or Disposition of Assets, relating to the acquisition of $310
million in loans from Bank One and Item 7. Financial Statements,
Pro Forma Financial Information and Exhibits.
The Company filed an 8-K on July 16, 2004, an amendment to Item
2 "Acquisition or Disposition of Assets, relating to the
acquisition of $310 million in loans from Bank One.
The Company filed an 8-K on July 20, 2004 19, 2004, Item 5
"Other Events and Regulation FD Disclosure", issuance of a press
release announcing the purchase of $310 million in assets from
Bank One.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
November 15 2004
FRANKLIN CREDIT MANAGEMENT
CORPORATION
By/s/ THOMAS J AXON
Thomas J Axon
Chairman of the Board
Signature Title Date
/s/JEFFREY R. JOHNSON Chief Executive Officer November 15 2004
Jeffrey R. Johnson and Director
(Chief Executive Officer)
/s/ALAN JOSEPH Executive Vice President, November 15 2004
Alan Joseph Chief Financial Officer
(Principal Financial Officer) and Director
Exhibit 31.1
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Jeffrey R. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Franklin Credit
Management Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth quarter in case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial report which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 15, 2004
By: /s/ Jeffrey R. Johnson
Jeffrey R. Johnson
Chief Executive Officer
Franklin Credit Management Corporation
Exhibit 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Alan Joseph, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Franklin Credit
Management Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth quarter in case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial report which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 15, 2004
By: /s/ Alan Joseph
Alan Joseph
Chief Financial Officer
Franklin Credit Management Corporation
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTIONS 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey R. Johnson, Chief Executive Officer of Franklin Credit Management
(the "Company") certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of
the Company on Form 10-Q for the fiscal quarter ended September 30, 2004 fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, and that information contained in the
Quarterly Report on Form 10-Q fairly presents in all material respects the
financial condition and results of operations of the Company.
Date: November 15, 2004
BY:/s/ Jeffrey R. Johnson
Name: Jeffrey R. Johnson
Title: Chief Executive Officer
The foregoing certification is being furnished solely pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) and is not being filed as
part of the Form 10-Q or as a separate disclosure document.
A signed original of this written statement required by Section 906 has been
provided to Franklin Credit Management Corporation and will be retained by
Franklin Credit Management Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTIONS 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Alan Joseph, Chief Financial Officer of Franklin Credit Management (the
"Company") certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of
the Company on Form 10-Q for the fiscal quarter ended September 30, 2004 fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, and that information contained in the
Quarterly Report on Form 10-Q fairly presents in all material respects the
financial condition and results of operations of the Company.
Date: November 15, 2004
BY: /s/ Alan Joseph
Name: Alan Joseph
Title: Chief Financial Officer
The foregoing certification is being furnished solely pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) and is not being filed as
part of the Form 10-Q or as a separate disclosure document.
A signed original of this written statement required by Section 906 has been
provided to Franklin Credit Management Corporation and will be retained by
Franklin Credit Management Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.