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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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-23725
BNC MORTGAGE, INC.
------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0661303
------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1063 McGaw Avenue Irvine, California 92614-5532
-----------------------------------------------
(Address of principal executive offices including ZIP Code)
(949) 260-6000
--------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
As of May 15, 1998, registrant had outstanding 5,875,979 shares of Common Stock.
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BNC MORTGAGE, INC.
TABLE OF CONTENTS
TO FORM 10-Q
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1998
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
Consolidated Balance Sheet as of March 31, 1998 and June 30, 1997...........................3
Consolidated Statement of Income for the Three Months and Nine Months Ended
March 31, 1998 and 1997....................................................................4
Consolidated Statement of Cash flows for the Nine Months Ended March 31, 1997
and 1998....................................................................................5
Notes to the Consolidated Financial Statements..............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................14
Item 2. Changes in Securities......................................................................14
Item 3. Defaults Upon Senior Securities............................................................14
Item 4. Submission of Matters to a Vote of Securities Holders......................................14
Item 5. Other Information..........................................................................14
Item 6. Exhibits and Reports on Form 8-K...........................................................14
(a) Exhibits............................................................................14
(b) Reports on Form 8-K.................................................................14
Signatures.........................................................................................16
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ITEM 1. FINANCIAL STATEMENTS
BNC MORTGAGE, INC.
CONSOLIDATED BALANCE SHEET
March 31, 1998 June 30, 1997
-------------- -------------
ASSETS
Cash and cash equivalents....................... $ 19,991,000 $ 8,268,000
Restricted cash................................. 623,000 ------
Mortgage loans held for sale.................... 78,829,000 55,145,000
Property and equipment, net..................... 1,066,000 609,000
Deferred income taxes........................... 1,319,000 1,154,000
Notes receivable from officers.................. 250,000 ------
Other assets.................................... 1,141,000 537,000
------------ -----------
Total assets.................................... $103,219,000 $65,713,000
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse line-of-credit........................ $ 71,584,000 $54,625,000
Accounts payable and accrued liabilities........ 2,559,000 1,358,000
Income taxes payable............................ 409,000 526,000
------------ -----------
Total liabilities............................... 74,552,000 56,509,000
Stockholders' equity:
Series A preferred stock, $0.001 par value...... ------ 1,575,000
Series A common stock, voting, no par value..... ------ ------
Series B common stock, nonvoting, no par value.. ------ 7,000
Common Stock, voting $0.001 par value:
Authorized Shares 50,000,000
Issued and outstanding shares - 0 at June 30, 1997
and 5,875,979 at March 31, 1998................. 7,000 ------
Additional paid in capital...................... 16,188,000 ------
Retained earnings............................... 12,472,000 7,622,000
------------ -----------
Total stockholders' equity...................... 28,667,000 9,204,000
------------ -----------
Total liabilities and stockholders' equity...... $103,219,000 $65,713,000
============ ===========
See accompanying notes.
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BNC MORTGAGE, INC.
CONSOLIDATED STATEMENT OF INCOME
For the Three For the Nine
Months Ended Months Ended
March 31, March 31,
------------- ------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Gain on sale of mortgage loans $ 7,598,000 $6,017,000 $21,141,000 $14,543,000
Loan origination income 887,000 1,453,000 3,654,000 3,835,000
Interest income 2,145,000 1,403,000 5,592,000 3,618,000
Other income 129,000 67,000 349,000 158,000
----------- ---------- ----------- -----------
Total revenues 10,759,000 8,940,000 30,736,000 22,154,000
----------- ---------- ----------- -----------
Expenses:
Employees' salaries and commissions 4,825,000 3,131,000 13,151,000 7,526,000
General and administrative expenses 1,968,000 1,461,000 5,225,000 3,740,000
Interest expense 1,443,000 980,000 3,914,000 2,576,000
----------- ---------- ----------- -----------
Total expenses 8,236,000 5,572,000 22,290,000 13,842,000
----------- ---------- ----------- -----------
Income before income taxes 2,523,000 3,368,000 8,446,000 8,312,000
Income tax expense 997,000 1,332,000 3,389,000 3,285,000
----------- ---------- ----------- -----------
Net income $ 1,526,000 $2,036,000 $ 5,057,000 $ 5,027,000
=========== ========== =========== ===========
Net income per share basic $0.34 $0.49 $1.20 $1.60
Net income per share diluted $0.33 $0.49 $1.16 $1.60
=========== ========== =========== ===========
Weighted average shares used in
computing
Net income per share:
Basic Shares 4,486,000 4,192,000 4,229,000 3,144,000
=========== ========== =========== ===========
Diluted Shares 4,635,000 4,192,000 4,378,000 3,144,000
=========== ========== =========== ===========
See accompanying notes.
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BNC MORTGAGE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine
Months Ended
March 31,
---------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................... $ 5,057,000 $ 5,027,000
Adjustment to reconcile net income to net cash
used in operating activities:
Depreciation............................... 309,000 176,000
Origination of mortgage loans held for sale (536,216,000) (375,999,000)
Sales and principal repayments of mortgage
loans held for sale........................ 512,531,000 360,551,000
Change in accounts payable and accrued
liability.................................. 1,201,000 415,000
Change in income taxes payable............. (117,000) (805,000)
Change in deferred income taxes............ (165,000) (528,000)
Change in notes receivable from officers... (250,000) 0
Change in other assets..................... (604,000) (128,000)
------------ ------------
Total adjustments.................................. (23,311,000) (16,318,000)
------------ ------------
Net cash used in operating activities............. (18,254,000) (11,291,000)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................... (766,000) (371,000)
------------ ------------
Net cash used in investing activities.............. (766,000) (371,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in warehouse line of credit............. 16,959,000 13,015,000
Payment of dividends on preferred stock............ (74,000) (142,000)
Repurchase of preferred stock...................... (1,575,000) 0
Repurchase of common stock......................... (132,000) 0
Net proceeds from initial public offering.......... 16,188,000 (2,000)
Increase in restricted cash........................ (623,000) ----
------------ ------------
Net cash provided by financing activities.......... 30,743,000 12,871,000
------------ ------------
Net increase in cash and cash equivalents.......... 11,723,000 1,209,000
Cash and cash equivalents, beginning of the period. 8,268,000 2,452,000
------------ ------------
Cash and cash equivalents, end of the period....... $ 19,991,000 $ 3,661,000
============ ============
See accompanying notes.
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BNC MORTGAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS, INITIAL PUBLIC OFFERING AND BASIS OF
PRESENTATION
DESCRIPTION OF THE BUSINESS
The Company is a specialty finance company engaged in the business of
originating, purchasing and selling non-conforming residential mortgage loans
secured by one-to-four family residences. The Company's loans are made to owners
of single family residences who typically use the loan proceeds for purposes
such as refinancing existing mortgages, debt consolidation, financing of home
improvements, education and other similar needs, and, to a lesser extent, to
purchase residences. The Company originates loans through its wholesale
division, which originates mortgage loans through approved independent mortgage
loan brokers, and through its retail division, which markets loans directly to
homeowners. The Company currently sells all of its mortgage loans to
institutional purchasers such as investment banks, real estate investment trusts
and other large mortgage bankers for cash through whole loan sales.
The Company was formed on May 2, 1995 and began originating mortgage loans in
October 1995.
INITIAL PUBLIC OFFERING
On March 10, 1998, The Company's Registration Statement (No. 333-38651) on Form
S-1 under the Securities Act of 1933, as amended (the "Registration Statement"),
relating to the initial public offering of its common stock, was declared
effective. The initial public offering of 3,173,196 shares of common stock
closed at a price of $9.50 per share on March 10, 1998. On March 11, 1998, the
underwriters purchased an additional 475,979 shares of common stock at a price
of $9.50 per share following their exercise of the overallotment option,
resulting in a total of 3,649,175 shares sold in the initial public offering
(the "Offering"). The Company received proceeds net of costs of $16,188,000 from
the offering. All of these proceeds were placed in short term investments.
In connection with the Offering, warrants were issued to the representatives of
the underwriters to purchase up to 317,319 additional shares of common stock at
an exercise price of $10.45 per share, exercisable over a period of four years,
commencing one year from March 10, 1998. As of March 31, 1998, the Company had
5,875,979 shares of common stock outstanding.
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and in accordance with the instructions to Form 10-Q and Regulation S-X. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the results for the interim
periods have been included. The results of operations for the interim periods
are not necessarily indicative of the results to be expected for the full year.
In addition, this document should be read in conjunction with the financial
statements and footnotes included in the Company's Form S-1 dated March 10,
1998.
The preparation of the financial statements of the Company requires management
to make estimates and assumptions that affect reported amounts. These estimates
are based on information available as of the date of the financial statements.
Therefore, actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of the
Company and all of its wholly owned subsidiaries. All significant intercompany
transactions and balances are eliminated.
INCOME TAXES
The Company accounts for income taxes using Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes This Statement requires the use
of the asset and liability method of accounting for taxes. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. 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. Under Statement 109, the effect on deferred tax assets and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share. This Statement replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share.
Net income per share is computed using the weighted average number of shares of
common stock outstanding. In accordance with Securities and Exchange Commission
Staff Accounting Bulletins, common equivalents shares issued by the Company at
prices substantially below the anticipated initial public offering price during
the period beginning one year prior to the proposed public offering have been
included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method and the estimated initial public
offering price).
2. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are collateralized by first and second trust deeds
on underlying real properties and are used as collateral for the Company's
borrowings. Approximately 31% of these properties are located in California, as
of March 31, 1998. Mortgage loans held for sale include net deferred costs of
$502,000 and $401,000 at March 31, 1998 and June 30, 1997, respectively.
3. WAREHOUSE LINE OF CREDIT
The Company has a warehouse line-of-credit with DLJ Mortgage Capital, Inc.
("DLJ"). The maximum borrowing is $150.0 million with interest payable monthly
at the Federal Funds rate plus 50 basis points during the first 12 months and
100 basis points during the second 12 months. The warehouse line-of-credit
matures in March 2000. It is expected that the DLJ Facility will not be extended
beyond the term. The Company is currently negotiating with other lenders to
obtain additional warehouse lines of credit with interest rates and terms that
are consistent with management's objectives. Additionally, DLJ has agreed to
provide the Company with up to $5.0 million of financing for a term of one year
for subordinated "interest-only" securities to the extent they are retained by
the Company in connection with any future securitizations of loans originated by
the Company.
4. COMMITMENTS AND CONTINGENCIES
REPURCHASE OBLIGATION
The Company engages in bulk loan sales pursuant to agreements that generally
require the Company to repurchase or substitute loans in the event of a breach
of a representation or warranty made by the Company to the loan purchaser, any
misrepresentation during the mortgage loan origination process or, in some
cases, upon any fraud or first payment default on such mortgage loans. A reserve
for potential repurchases of $447,000 and $503,000 at March 31, 1998 and June
30, 1997, respectively, is included in accounts payable and accrued liabilities.
5. STOCKHOLDERS' EQUITY
THE RECAPITALIZATION
The Company completed a series of corporate transactions to properly position
the Company prior to the Offering. The transactions were as follows:
REPURCHASE OF SERIES A PREFERRED STOCK.
In November 1997, the Company redeemed all outstanding shares of its Series A
Preferred Stock for $1.575 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REINCORPORATION IN DELAWARE.
Prior to the consummation of the Offering, the Company reincorporated in
Delaware to take advantage of certain favorable provisions of Delaware law.
Further to the reincorporation, the existing California corporation was merged
into a newly formed Delaware corporation pursuant to which each outstanding
share of Class A and Class B Common Stock of the existing California corporation
was exchanged for 4,123.71134 shares of $.001 par value Common Stock of the new
Delaware corporation and the certificate of incorporation of the new Delaware
corporation will authorize 50,000,000 shares of Common Stock and 5,000,000
shares of Preferred Stock. As a result of the reincorporation, there will be no
outstanding shares of Class A or Class B Common Stock at the consummation of the
Offering.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders of the Company, to issue up to 5,000,000 shares of Preferred Stock
in one or more series, and to fix the designations, rights, preferences,
privileges, qualifications and restrictions thereof including dividend rights,
conversion rights, voting rights, rights and terms of redemption, liquidation
preferences and sinking fund terms, any or all of which may be greater than the
rights of the Common Stock. The Board of Directors, without stockholder
approval, can issue Preferred Stock with voting, conversion and other rights
which could adversely affect the voting power and other rights of the holders of
Common Stock. Preferred Stock could thus be issued quickly with terms calculated
to delay or prevent a change in control of the Company or to make removal of
management more difficult. In certain circumstances, such issuance could have
the effect of decreasing the market price of the Common Stock. The issuance of
Preferred Stock may have the effect of delaying, deterring or preventing a
change in control of the Company without any further action by the stockholders
including, but not limited to, a tender offer to purchase Common Stock at a
premium over then current market prices. The Company has no present plan to
issue any shares of Preferred Stock.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
consolidated financial statements and notes included in Item 1 of this 10-Q.
GENERAL
The Company is a specialty finance company engaged in the business of
originating and selling non-conforming, and to a lesser extent conforming,
residential mortgage loans secured by one-to-four family residences. The
Company's principal borrower base consists of individuals who do not qualify
under traditional lending criteria established by agencies such as FNMA and
FHLMC, because of their credit history, income or other factors. The Company
originates loans through independent mortgage brokers and, to a lesser extent,
through its retail origination division. The Company's loans are made primarily
to refinance existing mortgages, consolidate other debt, finance home
improvements, education and other similar needs, and to purchase single family
residences. The Company has three divisions: (i) a wholesale division which has
relationships with approximately 2,700 approved loan brokers and which
historically accounted for substantially all of the Company's total loan
originations and (ii) a retail division which is being developed to market loans
directly to homeowners and (iii) a wholesale conforming division, which
originates residential mortgage loans conforming to the traditional criteria
established by agencies such as FNMA and FHLMC. The conforming division's loan
production accounted for approximately 2.6% of total loan production for the
three months ended March 31, 1998. Substantially all of the Company's mortgage
loan originations are sold in the secondary market through loan sales in which
the Company disposes of its entire economic interest in the loans including the
related servicing rights for cash. As a result of this strategy, the Company
receives cash revenue, rather than recognizing non-cash revenue attributable to
residual interests in future loan payments on the loan, as is the case with
securitizations.
The following table shows the Company's mortgage loan originations, mortgage
loan sales, cash gain on sale of mortgage loans and origination locations with
account executives for the periods indicated:
Three Months Nine Months
Ended March 31, Ended March 31,
--------------- ---------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in Thousands)
Mortgage loan originations.............. $181,644 $152,140 $536,216 $375,999
Mortgage loan sales..................... $178,607 $137,002 $511,653 $335,113
Gain on sale of mortgage loans.......... $7,598 $6,017 $21,141 $14,543
Origination locations at end of period.. 46 35 46 35
The major components of the Company's revenues are (i) the volume of loans
originated, (ii) the premium over principal amount received in loan sales, (iii)
origination points received or paid, (iv) origination fees received and (v) the
differential between the interest rate on borrowings under revolving warehouse
credit facilities and the interest rate of loans held for sale. Cash gain on
sale of mortgage loans is affected by, among other things, borrower credit risk
classification, loan- to-value ratio, interest rate and margin of the loans.
Revenues increased 20.3% to $10.8 million and 38.7% to $30.7 million for the
three months and the nine months ended March 31, 1998, respectively.
The major components of expenses are employees' salaries and commissions,
general and administrative, and interest. Employees' salaries and commissions,
for the three months ended March 31, 1998 and 1997 and the nine months ended
March 31, 1998 and 1997 accounted for 58.6%, 56.2%, 59.0% and 54.4% of total
expenses, respectively. Employees' salaries and commissions are primarily
related to the loan origination volume because the Company's sales force is
compensated on a commission basis in addition to salaries. Total expenses
increased to $8.2 million and $22.3 million for the three months ended March 31,
1998 and the nine months ended March 31, 1998, respectively, compared to $5.6
million and $13.8 million for the three months ended March 31, 1997 and the nine
months ended March 31, 1997, respectively.
The Company's net income decreased to $1.5 million for the three months ended
March 31, 1998 and increased to $5.1 million for the nine months ended March 31,
1998, respectively, compared to $2.0 million and $5.0 million for the three
months ended March 31, 1997, and
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the nine months ended March 31, 1997, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Increased competition in the non-conforming mortgage industry could have the
effect of (i) lowering gains that may be realized on loan sales through lower
cash premiums paid for loans or an increase in demand for yield spread premium
paid to the mortgage brokers, (ii) reducing an individual company's volume of
loan originations and sales, (iii) increasing demand for experienced personnel
increasing the likelihood such personnel will be recruited by competitors and
(iv) lowering the industry standard for non-conforming underwriting guidelines
as competitors attempt to increase or maintain market share in the face of
increased competition. In the past, certain of these factors have caused the
revenues and net income of many participants in the non-conforming mortgage
industry, including the Company, to fluctuate from quarter to quarter.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1997
REVENUES. The following table sets forth the components of the Company's
revenues for the periods indicated:
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
(Dollars in Thousands)
Gain on sale of mortgage loans......................... $ 7,598 $ 6,017
Loan origination income................................ 887 1,453
Interest income........................................ 2,145 1,403
Other income........................................... 129 67
------- -------
$10,759 $ 8,940
======= =======
The increase in revenues was due primarily to increased mortgage loan
originations and cash gain on sales of mortgage loans. Mortgage loan
originations increased $29.5 million to $181.6 million for the three months
ended March 31, 1998 from $152.1 million for the three months ended March 31,
1997.
Cash gain on sale of mortgage loans increased $1.6 million to $7.6 million for
the three months ended March 31, 1998 from $6.0 million for the three months
ended March 31, 1997. The increase was due primarily to a $41.6 million increase
in mortgage loan sales to $178.6 from $137.0 million for the three months ended
March 31, 1998 and 1997, respectively. The weighted average cash premium paid
for mortgage loans sold was 5.7% for the three months ended March 31, 1998 and
5.1% for the three months ended March 31, 1997. There can be no assurance that
the Company will recognize comparable levels of cash gain on sale of mortgage
loans in future periods. The Company makes yield spread premium payments to its
mortgage broker customers in the ordinary course of business. Due to competitive
conditions, these payments have increased in recent periods, which adversely
affected the Company's cash gain on sale of mortgage loans for the three months
ended March 31, 1998. Management expects this level of payments to continue for
the three months ending June 30, 1998 and possibly thereafter.
Loan origination income decreased to $887,000 for the three months ended March
31, 1998 from $1.5 million for the three months ended March 31, 1997. As a
percentage of total revenues, loan origination income for the three months ended
March 31, 1998 decreased to 8.2% as compared to 16.3% for the three months ended
March 31, 1997. This decrease was a result of competitive conditions as
management was required to lower the amount of origination points and fees
charged on its loan products to satisfy mortgage broker and consumer demands.
Interest income increased $742,000 to $2.1 million for the three months ended
March 31, 1998 from $1.4 million for the three months ended March 31, 1997. This
increase is due to an increase in loan originations during the period.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other income, which is composed of investment income, prepayment penalties and
late charges, increased to $129,000 for the three months ended March 31, 1998 as
compared to $67,000 for the three months ended March 31, 1997 largely as a
result of interest earned on the net proceeds from the Offering completed on
March 10, 1998.
EXPENSES. The following table sets forth the components of the Company's
expenses for the periods indicated:
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
(Dollars in Thousands)
Employees' salaries and commissions..................... $4,825 $3,131
General and administrative expenses..................... 1,968 1,461
Interest expense........................................ 1,443 980
------ ------
$8,236 $5,572
Total expenses increased to $8.2 million for the three months ended March 31,
1998 from $5.6 million for the three months ended March 31, 1997. This increase
is related to geographical expansion to 46 origination locations at March 31,
1998 from 35 at March 31, 1997, and to an increase in mortgage loan
originations.
Employee salaries and commissions increased $1.7 million to $4.8 million during
the three months ended March 31, 1998 from $3.1 million for the three months
ended March 31, 1997. The primary reason for the increase was due to an increase
in mortgage loan originations and continued geographical expansion.
General and administrative expenses increased $507,000 to $2.0 million for the
three months ended March 31, 1998 from $1.5 million for the three months ended
March 31, 1997. This increase is due primarily to an increase in the number of
origination locations and the related increase in mortgage loan originations.
Interest expense increased $463,000 to $1.4 million for the three months ended
March 31, 1998 from $1.0 million for the three months ended March 31, 1997 is
attributable to the higher levels of warehouse borrowing as a result of the
increase in mortgage loan originations.
It is expected that the Company's expansion plans including the retail and
conforming wholesale divisions will result in an increase in operating expenses
in the short-term. Furthermore, management expects that there will be a lag time
between the incurrence of such expense and the receipt of any revenues from such
expansion efforts, and the results of operations may be adversely affected in
the short-term.
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE NINE MONTHS ENDED MARCH 31,
1997
REVENUES. The following table sets forth the components of the Company's
revenues for the periods indicated:
Nine Months Ended March 31,
---------------------------
1998 1997
---- ----
(Dollars in Thousands)
Gain on sale of mortgage loans.......................... $21,141 $14,543
Loan origination income................................. 3,654 3,835
Interest income......................................... 5,592 3,618
Other income............................................ 349 158
------- -------
$30,736 $22,154
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Revenues increased to $30.7 million for the nine months ended March 31, 1998
from $22.1 million for the nine months ended March 31, 1997, largely due to
increased mortgage loan originations and cash gain on sale of mortgage loans.
The increase in mortgage loan originations was due to both increased production
from existing branches and expansion into new markets. Origination locations
increased to 46 at March 31, 1998 from 35 at March 31, 1997.
Cash gain on sale of mortgage loans increased $6.6 million to $21.1 million in
the nine months ended March 31, 1998 from $14.5 million for the nine months
ended March 31, 1997. The increase was due primarily to the $160.2 million
increase in mortgage loan originations for the nine months ended March 31, 1998
compared to the nine months ended March 31, 1997. Total loans of $511.7 million
and $335.1 million were sold during the nine months ended March 31, 1998 and
1997, with a weighted average cash premium paid of 5.6% and 4.7%, respectively.
Loan origination income decreased to $3.7 million for the nine months ended
March 31, 1998 from $3.8 million for the nine months ended March 31, 1997. This
decrease was a result of competitive conditions as management was required to
lower the amount of origination points and fees charged on its loan products to
satisfy mortgage broker and consumer demands.
Interest income increased $2.0 million to $5.6 million for the nine months ended
March 31, 1998 from $3.6 million in the nine months ended March 31, 1997 due to
a higher balance of loans held for sale as a result of the increase in mortgage
loan originations.
Other income increased to $349,000 for the nine months ended March 31, 1998 as
compared to $158,000 for the nine months ended March 31, 1997 largely as a
result of increased mortgage loan originations and an increase in cash and cash
equivalents.
EXPENSES. The following table sets forth the components of the Company's
expenses for the periods indicated:
Nine Months Ended March 31,
1998 1997
---- ----
(Dollars in Thousands)
Employees' salaries and commissions......................... $13,151 $7,526
General and administrative expenses......................... 5,225 3,740
Interest expense............................................ 3,914 2,576
------- -------
$22,290 $13,842
======= =======
Expenses increased to $22.3 million for the nine months ended March 31, 1998
from $13.8 million for the nine months ended March 31, 1997, due to the cost of
geographical expansion and in large part to increased compensation and other
personnel costs related to the 42.6% increase in mortgage loan originations.
Employee salaries and commissions increased $5.6 million to $13.2 million during
the nine months ended March 31, 1998 from $7.5 million for the nine months ended
March 31, 1997, primarily due to an increase in the number of employees to 396
at March 31, 1998 from 254 at March 31, 1997 and increases in commissions paid
to account executives.
General and administrative expense increased $1.5 million to $5.2 million for
the nine months ended March 31, 1998 from $3.7 million in the nine months ended
March 31, 1997. The increase was due to the expansion of the Company's loan
origination network and the related increase in mortgage loan originations.
Interest expense increased $1.3 million to $3.9 million for the nine months
ended March 31, 1998 from $2.6 million in the nine months ended March 31, 1997
due to greater borrowings to fund the increased mortgage loan originations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash flow include cash gain on sale of mortgage loans,
origination income, net interest income and borrowings. The Company sells its
mortgage loans generally on a monthly basis to generate cash for operations. The
Company's uses of cash in the short-term include the funding of mortgage loan
originations, payment of interest, repayment of amounts borrowed under warehouse
lines of credit, operating and administrative expenses, start-up costs for new
origination locations and divisions, income taxes and capital expenditures.
Long-term uses of cash may also include the funding of securitization activities
and selective acquisitions of other specialty finance companies or portfolios of
mortgage loan assets. Capital expenditures totaled $766,000 and $371,000 for the
nine months ended March 31, 1998 and 1997, respectively.
Cash and cash equivalents were $20.0 million at March 31, 1998. The Company
invests its cash in short term investments maintaining flexibility for the
funding of loan originations and strategic opportunities.
The Company funds its operations through cash reserves, loan sales, net earnings
and a revolving warehouse credit facility with DLJ Mortgage Capital, Inc. ("DLJ
Facility"), under which it borrows money to finance the origination of mortgage
loans. As of March 31, 1998, the DLJ Facility provides borrowings up to $150.0
million and matures in March, 2000. The DLJ Facility bears interest at a rate of
the federal funds rate plus 50 basis points for the first 12 months and the
federal funds rate plus 100 basis points for the remainder of the term. It is
expected that the DLJ Facility will not be extended beyond the term. The Company
is currently negotiating with other lenders to obtain additional warehouse lines
of credit with interest rates and terms that are consistent with management's
objectives. The Company repays borrowings with the proceeds from its loan sales.
The Company's ability to continue to originate loans is dependent in large part
upon its ability to sell the mortgage loans at par or for a premium in the
secondary market in order to generate cash proceeds to repay borrowings under
the warehouse facility, thereby creating borrowing capacity to fund new
originations. The value of and market for the Company's loans are dependent upon
a number of factors, including the borrower credit risk classification,
loan-to-value ratios and interest rates, general economic conditions, warehouse
facility interest rates and governmental regulations.
* * * * *
Except for the historical information contained herein, this Form 10-Q contains
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially. Such risks and uncertainties include, but
are not limited to, changes in the performance of the financial markets, changes
in the demand for and market acceptance of the Company's products, changes in
the mortgage lending industry or changes in general economic conditions,
including interest rates; the impact of competition; changes in the value of
real estate; the ability to maintain and increase sources of funding; and other
risks disclosed from time to time in the Company's SEC reports and filings.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - Not Applicable
ITEM 2. Changes in Securities - Not Applicable
ITEM 3. Defaults upon Senior Securities - Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders - Not
Applicable
ITEM 5. Other Information - Not Applicable
ITEM 6. Exhibits and Reports on form 8-K
(a) Exhibits
11.1 Statement regarding computation of per share
earnings
27.1 Financial Statement Data Schedule (EDGAR
filing only)
(b) Reports on form 8-K
There were no reports filed on form 8-K for the quarter
ended March 31, 1998
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15
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized, in the City of Irvine, State of California.
BNC MORTGAGE, INC.
(Registrant)
By: /s/ EVAN R. BUCKLEY May 13, 1998
------------
Evan R. Buckley Date
Chief Executive Officer and
Secretary
By: /s/ KELLY W. MONAHAN May 13, 1998
------------
Kelly W. Monahan Date
President and
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------------------------------------------------
11.1 Statement regarding computation of per share earnings
27.1 Financial Statement Data Schedule (EDGAR filing only)
16