1
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, 1999
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
- -------------------------------------------------------------------------------
(Registrants' 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 periods 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
--- ---
As of May 17, 1999, the registrant had 5,092,350 outstanding 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, 1999
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1999 and June 30, 1998........................ 3
Consolidated Statement of Income for the Three Months and Nine Months Ended
March 31, 1999 and 1998................................................................ 4
Consolidated Statement of Cash flows for the Nine Months Ended
March 31, 1999 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
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 17
Item 2. Changes in Securities.................................................................... 17
Item 3. Defaults Upon Senior Securities.......................................................... 17
Item 4. Submission of Matters to a Vote of Securities Holders.................................... 17
Item 5. Other Information........................................................................ 17
Item 6. Exhibits and Reports on Form 8-K......................................................... 17
(a) Exhibits.......................................................................... 17
(b) Reports on Form 8-K............................................................... 18
Signatures........................................................................................... 19
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ITEM 1. FINANCIAL STATEMENTS
BNC MORTGAGE, INC.
CONSOLIDATED BALANCE SHEET
March 31, 1999 June 30, 1998
-------------- -------------
ASSETS
Cash and cash equivalents ............................ $ 28,162,000 $ 25,890,000
Restricted cash ...................................... 1,100,000 638,000
Mortgage loans held for sale ......................... 129,390,000 98,717,000
Property and equipment, net .......................... 2,069,000 1,533,000
Intangible assets, net ............................... 1,492,000 --
Deferred income taxes ................................ 2,132,000 2,131,000
Notes receivable from officers ....................... 100,000 100,000
Other assets ......................................... 1,706,000 1,546,000
------------ ------------
Total assets ............................. $166,151,000 $130,555,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse lines-of-credit ............................ $125,356,000 $ 96,022,000
Accounts payable and accrued liabilities ............. 5,857,000 2,880,000
Income taxes payable ................................. 1,739,000 802,000
------------ ------------
Total liabilities ........................ 132,952,000 99,704,000
------------ ------------
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares -- 5,000,000
Issued and outstanding shares -- none at
March 31, 1999 and June 30, 1998 ..................... -- --
Series A Junior Participating Preferred Stock,
$0.001 par value:
Authorized Shares -- 570,000
Issued and outstanding shares -- none at
March 31, 1999 and June 30, 1998 ..................... -- --
Common stock, voting $0.001 par value:
Authorized Shares -- 50,000,000
Issued and outstanding shares 5,359,250 at
March 31, 1999 and 5,875,979 at June 30, 1998 ........ 6,000 6,000
Additional paid in capital ........................... 13,234,000 16,193,000
Retained earnings .................................... 19,959,000 14,652,000
------------ ------------
Total stockholders' equity ............... 33,199,000 30,851,000
------------ ------------
Total liabilities and stockholders' equity $166,151,000 $130,555,000
============ ============
See accompanying notes.
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BNC MORTGAGE, INC.
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenues:
Gain on sale of mortgage loans .................... $ 5,498,000 $ 7,598,000 $27,738,000 $21,141,000
Loan origination income ........................... 1,927,000 887,000 5,615,000 3,654,000
Interest income ................................... 2,494,000 2,145,000 5,893,000 5,592,000
Other income ...................................... 353,000 129,000 1,122,000 349,000
----------- ----------- ----------- -----------
Total revenues ........................ 10,272,000 10,759,000 40,368,000 30,736,000
----------- ----------- ----------- -----------
Expenses:
Employees' salaries and commissions ............... 5,221,000 4,825,000 18,363,000 13,151,000
General and administrative expenses ............... 2,452,000 1,968,000 9,430,000 5,225,000
Interest expense .................................. 1,547,000 1,443,000 3,755,000 3,914,000
----------- ----------- ----------- -----------
Total expenses ........................ 9,220,000 8,236,000 31,548,000 22,290,000
----------- ----------- ----------- -----------
Income before income taxes ........................ 1,052,000 2,523,000 8,820,000 8,446,000
Income tax expense ................................ 410,000 997,000 3,513,000 3,389,000
----------- ----------- ----------- -----------
Net income ............................ $ 642,000 $ 1,526,000 $ 5,307,000 $ 5,057,000
=========== ----------- =========== ===========
Net income per share basic ........................ $ 0.12 $ 0.34 $ 0.94 $ 1.20
=========== =========== =========== ===========
Net income per share diluted ...................... $ 0.12 $ 0.33 $ 0.94 $ 1.16
=========== =========== =========== ===========
Weighted average number of shares used in computing
Net income per share:
Basic Shares .......................... 5,418,000 4,486,000 5,613,000 4,229,000
=========== ----------- =========== ===========
Diluted Shares ........................ 5,418,000 4,635,000 5,613,000 4,378,000
=========== =========== =========== ===========
See accompanying notes.
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BNC MORTGAGE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended
March 31,
----------------------------------
1999 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ......................................................... $ 5,307,000 $ 5,057,000
Adjustment to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation ............................................. 662,000 309,000
Amortization ............................................. 8,000 --
Origination of mortgage loans held for sale .............. (877,100,000) (536,216,000)
Sales and principal repayments of mortgage loans
held for sale ........................................... 846,032,000 512,531,000
Deferred loan origination fees ........................... 395,000 --
Change in accounts payable and accrued liability ......... 2,977,000 1,201,000
Change in income taxes payable ........................... 937,000 (117,000)
Change in deferred income taxes .......................... (1,000) (165,000)
Change in notes receivable from officers ................. -- (250,000)
Change in other assets ................................... (160,000) (604,000)
------------- -------------
Total adjustments .................................................... (26,250,000) (23,311,000)
------------- -------------
Net cash used in operating activities ................................ (20,943,000) (18,254,000)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ................................................. (654,000) (766,000)
Purchase of America's Lender, Inc. ................................... (2,044,000) --
------------- -------------
Net cash used in investing activities ................................ (2,698,000) (766,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in warehouse lines of credit .............................. 29,334,000 16,959,000
Payment of dividends on preferred stock .............................. -- (74,000)
Repurchase of common stock ........................................... (2,959,000) (132,000)
Repurchase of preferred stock ........................................ -- (1,575,000)
Net proceeds from initial public offering ............................ -- 16,188,000
Increase in restricted cash .......................................... (462,000) (623,000)
------------- -------------
Net cash provided by financing activities ............................ 25,913,000 30,743,000
------------- -------------
Net increase in cash and cash equivalents ............................ 2,272,000 11,723,000
Cash and cash equivalents, beginning of the period ................... 25,890,000 8,268,000
------------- -------------
Cash and cash equivalents, end of the period ......................... $ 28,162,000 $ 19,991,000
============= =============
See accompanying notes.
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BNC MORTGAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
* * * * *
DESCRIPTION OF THE BUSINESS
BNC Mortgage, Inc. ("BNC" or the "Company"), is a specialty finance company
engaged in the business of originating, purchasing and selling, on a whole loan
basis for cash, non-conforming and, to a lessor extent, conforming, residential
mortgage loans secured by one-to-four family residences. The term
"non-conforming loans" as used herein means (i) subprime loans, which are loans
made to borrowers who are unable or unwilling to obtain mortgage financing from
conventional mortgage sources, whether for reasons of credit impairment, income
qualification, credit history or a desire to receive funding on an expedited
basis and (ii) non-conforming loan products for primarily high credit borrowers
whose credit scores equal or exceed levels required for the sale or exchange of
their mortgage loans through the Federal National Mortgage Association ("FNMA")
and Federal Home Loan Mortgage Corporation ("FHLMC"), but where the loan itself
fails to meet conventional mortgage guidelines, such as the principal balance
exceeds the maximum loan limit of $240,000 or the loan structure documentation
does not conform to agency requirements. The Company's loans are made primarily
to refinance existing mortgages, consolidate other debt, finance home
improvements, education and other similar needs, and, to a lesser extent, to
purchase single family residences. The Company has two divisions: (i) a
wholesale subprime division which has relationships with approximately 4,593
approved independent loan brokers and which to date has accounted for the
substantial portion of the Company's total loan originations, (ii) a wholesale
prime division which originates non-conforming loan products and which are not
subprime loans.
Mortgage Logic.com, Inc. ("ML.COM"), a wholly owned subsidiary of BNC, is
engaged in the business of originating, purchasing and selling, on a whole loan
basis for cash, primarily conforming loans that meet FNMA, FHLMC and other
conventional mortgage guidelines and non-conforming loan products which are not
subprime loans.
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.
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 10-K for the fiscal year
ended June 30, 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.
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BNC MORTGAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 49.8% of these properties are located in California
as of March 31, 1999. Mortgage loans held for sale include net deferred fees of
$373,000 and $769,000 at March 31, 1999 and June 30, 1998, respectively.
3. WAREHOUSE LINES OF CREDIT
The Company has entered into a Warehouse Line of Credit Agreement with DLJ
Mortgage Capital, Inc. ("DLJ"), which provides for borrowings up to $150.0
million and terminates on March 16, 2000. Borrowings under this line of credit
are collateralized by mortgage loans held for sale. Up until March 16, 1999,
interest was payable monthly at the Federal Funds rate plus 50 basis points and
thereafter at the Federal Funds rate plus 100 basis points. As of March 31,
1999, the outstanding borrowings were $93.0 million and the interest rate was
6.125%.
In February 1999, the Company entered into a warehouse line of credit agreement
with Bank United, which provides for borrowings up to $50.0 million and expires
on February 1, 2000. The facility bears interest at a floating rate based on the
London Interbank Offered Rate ("LIBOR") and has a commitment fee of $125,000.
The facility contains a number of financial covenants including: (i) the Company
maintain tangible net worth equal to at least $25.0 million, (ii) the ratio of
total liabilities to adjusted tangible net worth may not exceed 15:1, and (iii)
other affirmative, negative and financial covenants typical of similar credit
facilities. As of March 31, 1999, the outstanding borrowings were $7.5 million,
and the interest rate was 6.440%.
In March 1999, the Company entered into a warehouse line of credit agreement
with Residential Funding Corporation ("RFC"), which provides for borrowings up
to $50.0 million and expires on March 1, 2000. The facility bears interest at a
floating rate based on LIBOR and has a commitment fee of $67,500. The facility
contains a number of financial covenants including: (i) the Company maintain a
tangible net worth equal to at least $25.0 million, (ii) the ratio of total
liabilities to adjusted tangible net worth may not exceed 15:1, (iii) net income
per quarter must exceed $1.00, and (iv) other affirmative, negative and
financial covenants typical of similar credit facilities. As of March 31, 1999,
outstanding borrowings were $23.1 million and the interest rate was 6.439%.
In March 1999, the Company entered into a $50.0 million uncommitted master
repurchase credit facility agreement with Paine Webber Real Estate Securities,
Inc. ("PWRS"). The facility bears interest at a floating rate based on LIBOR. As
of March 31, 1999, the outstanding borrowings were $1.8 million, and the
interest rate was 6.086%.
4. COMMITMENTS AND CONTINGENCIES
FORWARD LOAN SALES COMMITMENTS
The Company has entered into a forward loan sale contract with an investment
bank under which it can deliver up to $361.8 million in subprime loans. As of
March 31, 1999, the Company had sold $115.6 million in loans under this
commitment which expires in July 1999.
In June 1998, the Company entered into a $50.0 million optional delivery master
commitment to sell certain nonconforming mortgage loans at current market rates
to Impac Funding Corporation. The forward sales commitment is for a 12 month
period and provides an option to increase the commitment to $100.0 million. The
Company paid a commitment fee of $63,000 which was recorded as an asset and will
be amortized as the loans are sold into the commitment. At March 31, 1999, $14.6
million in loans had been sold under this commitment. Joseph R. Tomkinson, a
Director of BNC Mortgage, Inc., is also the Chairman and Chief Executive Officer
of Impac Funding Corporation.
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 $1.5 million and $500,000 at March 31, 1999 and
June 30, 1998, respectively, is included in accounts payable and accrued
liabilities.
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BNC MORTGAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACQUISITION
The Company acquired the origination platform and certain assets and liabilities
of America's Lender, Inc. on February 26, 1999. The Company paid $2.0 million in
cash and has agreed to pay up to an additional $1.0 million based upon net loan
originations achieved during the 12 month period after the closing. The Company
deposited $500,000 into an interest bearing escrow account to collateralize the
future obligation. The acquisition was accounted for using purchase accounting.
Accordingly, the purchase price was allocated to the assets acquired by the
Company based on the fair market value. The excess of the purchase price over
the fair value of the assets acquired of $1.5 million is recorded as goodwill
and is being amortized over 15 years on a straight line basis.
5. SUBSEQUENT EVENTS
COMMON STOCK REPURCHASE PLAN
The Company's Board of Directors has authorized the Company to repurchase up to
$5.0 million of the Company's common stock in open market purchases from time to
time at the discretion of the Company's management. As of March 31, 1999, the
Company had repurchased 516,729 shares of Common Stock at a cost of $3.0
million. Subsequent to March 31, 1999, the Company repurchased 266,900 shares of
common stock at a cost of $1.2 million.
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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.
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.
Forward-looking statements used in this report can be identified by the use of
words such as: "could," "may," "will," "expects," "believes," and the negatives
or derivatives thereof, and similar expressions. Investors are encouraged to
fully examine such risks prior to making an investment decision in the Company's
securities.
GENERAL
BNC Mortgage, Inc. ("BNC" or the "Company"), is a specialty finance company
engaged in the business of originating, purchasing and selling, on a whole loan
basis for cash, non-conforming and, to a lessor extent, conforming, residential
mortgage loans secured by one-to-four family residences. The term
"non-conforming loans" as used herein means (i) subprime loans, which are loans
made to borrowers who are unable or unwilling to obtain mortgage financing from
conventional mortgage sources, whether for reasons of credit impairment, income
qualification, credit history or a desire to receive funding on an expedited
basis and (ii) non-conforming loan products for primarily high credit borrowers
whose credit scores equal or exceed levels required for the sale or exchange of
their mortgage loans through the Federal National Mortgage Association ("FNMA")
and Federal Home Loan Mortgage Corporation ("FHLMC"), but where the loan itself
fails to meet conventional mortgage guidelines, such as the principal balance
exceeds the maximum loan limit of $240,000 or the loan structure documentation
does not conform to agency requirements. The Company's loans are made primarily
to refinance existing mortgages, consolidate other debt, finance home
improvements, education and other similar needs, and, to a lesser extent, to
purchase single family residences. The Company has two divisions: (i) a
wholesale subprime division which has relationships with approximately 4,593
approved independent loan brokers and which to date has accounted for the
substantial portion of the Company's total loan originations, (ii) a wholesale
prime division which originates non-conforming loan products which are not
subprime loans.
On February 26, 1999, the Company acquired the origination platform and certain
assets and liabilities of America's Lender, Inc. The America's Lender
origination platform is operated as a wholly owned subsidiary named Mortgage
Logic.com, Inc. ("ML.COM"), and is engaged in the business of originating,
purchasing and selling, on a whole loan basis for cash, primarily conforming
loans that meet FNMA, FHLMC and other conventional mortgage guidelines and
non-conforming loan products which are not subprime loans ("prime mortgage
loans"). ML.COM currently originates loans in California and has one origination
location.
During the quarter ended March 31, 1999, the Company's wholesale prime division
reduced staffing by 50% and discontinued marketing conforming loans in order to
refocus its efforts towards originating non-conforming loan products which are
not subprime loans. The Company also discontinued its retail division marketing
efforts.
Approximately 28.9% of total loan production for the three months ended March
31, 1999 consisted of conforming loans. 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table shows the Company's mortgage loan originations including
brokered loans, mortgage loan sales, cash gain on sale of mortgage loans and
origination locations with account executives for the periods indicated:
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in Thousands) (Dollars in Thousands)
Mortgage loan originations:
Subprime .............................. $243,835 $176,873 $717,533 $531,446
Prime ................................. 99,352 4,770 163,542 4,770
-------- -------- -------- --------
$343,187 $181,643 $881,075 $536,216
======== ======== ======== ========
Mortgage loan sales:
Subprime .............................. $212,999 $178,607 $705,026 $511,653
Prime ................................. 75,021 -- 141,006 --
-------- -------- -------- --------
$288,020 $178,607 $846,032 $511,653
======== ======== ======== ========
Gain on sale of mortgage loans:
Subprime .............................. $ 5,339 $ 7,596 $ 26,997 $ 21,139
Prime ................................. 159 2 741 2
-------- -------- -------- --------
$ 5,498 $ 7,598 $ 27,738 $ 21,141
======== ======== ======== ========
Origination locations at end of period .. 52 46 52 46
======== ======== ======== ========
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.
Total revenues decreased 4.5% to $10.3 million for the three months ended March
31, 1999 as compared to $10.8 million for the three months ended March 31, 1999.
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, 1999 and 1998 accounted for 56.6% and 58.6%
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 $9.2 million for the three months ended March 31, 1999,
compared to $8.2 million for the three months ended March 31, 1999.
The Company's net income decreased to 57.9% to $642,000 for the three months
ended March 31, 1999, compared to $1.5 million for the three months ended March
31, 1998. The decrease in net income resulted primarily from a reduction in the
cash gain on sale of mortgage loans during the period due to secondary marketing
conditions.
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.
The mortgage loan industry experienced significant turmoil during the nine
months ended March 31, 1999 due to a lack of liquidity in the mortgage and
asset-backed securitization market. These developments in the mortgage and
asset-backed securitization markets have caused a tightening in the pricing of
whole loan sales as many mortgage securitizers have been forced to sell their
loans on a whole loan basis for cash. Average prices offered by third parties
for mortgage loans in the first quarter of 1999 have been less than that which
the Company received in the prior quarter.
In the event that declines in whole loan pricing continue, the Company expects
to see a decrease in its cash gain on sale of mortgage loans in future quarters.
If the Company is unable to increase its mortgage loan origination volume
commensurate with such pricing declines, the Company's net income would be
adversely affected. The Company made certain internal adjustments in response to
market conditions in the mortgage industry. The Company reduced yield spread
premiums paid to brokers and compensation paid to employees. The Company also
reduced its employees, raised interest rates and increased origination fees
charged to borrowers to boost profitability. While the Company would also expect
to receive some benefit from these and other adjustments with regard to
profitability of its mortgage loan originations, the effect of these adjustments
may have an adverse effect on future mortgage loan production.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
REVENUES. The following table sets forth the components of the Company's
revenues for the periods indicated:
Three Months Ended
March 31,
---------------------
1999 1998
------- -------
(In Thousands)
Gain on sale of mortgage loans... $ 5,498 $ 7,598
Loan origination income ......... 1,927 887
Interest income ................. 2,494 2,145
Other income .................... 353 129
------- -------
$10,272 $10,759
======= =======
The increase in revenues was due primarily to increased mortgage loan
originations, loan origination income and cash gain on sales of mortgage loans.
Mortgage loan originations increased $161.6 million to $343.2 million for the
three months ended March 31, 1999 from $181.6 million for the three months ended
March 31, 1998. There can be no assurance that the Company will recognize
comparable levels of revenues and mortgage loan originations in future periods.
Cash gain on sale of mortgage loans decreased $2.1 million to $5.5 million for
the three months ended March 31, 1999 from $7.6 million for the three months
ended March 31, 1998. The decrease was due primarily to a decline in the average
cash premium paid for non-conforming mortgage loans. The weighted average cash
premium paid for non-conforming mortgage loans sold was 3.43% for the three
months ended March 31, 1999 and 5.64% for the three months ended March 31, 1998.
The Company makes yield spread premium payments to its mortgage broker customers
in the ordinary course of business. These payments have decreased in recent
periods, which offset the decline in cash premiums paid for non-conforming
mortgage loans for the three months ended March 31, 1999. The weighted average
yield spread premiums paid as a percentage of non-conforming mortgage loans sold
for the three months ended March 31, 1999 was 0.92% and for the three months
ended March 31, 1998 was 1.39%. The Company received some benefit from recent
reduction in yield spread premiums payable to brokers in the quarter ended March
31, 1999. There can be no assurance that the Company will recognize comparable
levels of cash gain on sale of mortgage loans in future periods or that yield
spread premium payments will continue to decline. The weighted average cash
premiums paid for prime mortgage loans sold was 0.93% and the weighted average
yield spread premium as a percentage of prime mortgage loans sold was 0.71% for
the three months ended March 31, 1999.
Loan origination income increased to $1.9 million for the three months ended
March 31, 1999 from $887,000 for the three months ended March 31, 1998. As a
percentage of total revenues, loan origination income for the three months ended
March 31, 1999 increased to 18.8% as compared to 8.2% for the three months ended
March 31, 1998. This increase was primarily due to a decrease in cash gain on
sale of mortgage loans. Loan originations may be adversely affected in future
periods as a result of a decrease in yield spread premiums payable to brokers
and raised interest rates charged to borrowers.
Interest income increased $400,000 to $2.5 million for the three months ended
March 31, 1999 from $2.1 million for the three months ended March 31, 1998. This
decrease is due to the Company changing its policy of selling its loans on the
secondary market from a monthly basis to a bi-monthly basis.
Other income, which is comprised of investment income, prepayment penalties and
late charges, increased to $353,000 for the three months ended March 31, 1999 as
compared to $129,000 for the three months ended March 31, 1998 largely as a
result of interest earned on the net proceeds from the Offering completed on
March 10, 1998.
11
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
EXPENSES. The following table sets forth the components of the Company's
expenses for the periods indicated:
Three Months Ended
March 31,
-------------------
1999 1998
------ ------
(In Thousands)
Employees' salaries and commissions... $5,221 $4,825
General and administrative expenses... 2,452 1,968
Interest expense ..................... 1,547 1,443
------ ------
$9,220 $8,236
====== ======
Total expenses increased to $9.2 million for the three months ended March 31,
1999 from $8.2 million for the three months ended March 31, 1998. This increase
is primarily related to an increase in mortgage loan originations.
Employee salaries and commissions increased $400,000 to $5.2 million during the
three months ended March 31, 1999 from $4.8 million for the three months ended
March 31, 1998. The primary reason for the increase was due to an increase in
mortgage loan originations.
General and administrative expenses increased $500,000 to $2.5 million for the
three months ended March 31, 1999 from $2.0 million for the three months ended
March 31, 1998. The primary reason for the increase was due to an increase in
mortgage loan originating.
Interest expense increased $100,000 to $1.5 million for the three months ended
March 31, 1999 from $1.4 million for the three months ended March 31, 1998. This
decrease is due to the increase in mortgage loan originations.
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998
REVENUES. The following table sets forth the components of the Company's
revenues for the periods indicated:
Nine Months Ended
March 31,
---------------------
1999 1998
------- -------
(In Thousands)
Gain on sale of mortgage loans... $27,738 $21,141
Loan origination income ......... 5,615 3,654
Interest income ................. 5,893 5,592
Other income .................... 1,122 349
------- -------
$40,368 $30,736
======= =======
12
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The increase in revenues was due primarily to increased mortgage loan
originations and cash gain on sales of mortgage loans. Mortgage loan
originations increased $344.9 million to $881.1 million for the nine months
ended March 31, 1999 from $536.2 million for the nine months ended March 31,
1998. There can be no assurance that the Company will recognize comparable
levels of revenues and mortgage loan originations in future periods.
Cash gain on sale of mortgage loans increased $6.6 million to $27.7 million for
the nine months ended March 31, 1999 from $21.1 million for the nine months
ended March 31, 1998. The increase was due primarily to a $334.3 million
increase in mortgage loan sales to $846.0 from $511.7 million for the nine
months ended March 31, 1999 and 1998, respectively. The weighted average cash
premium paid for non-conforming mortgage loans sold was 4.86% for the nine
months ended March 31, 1999 and 5.58% for the nine months ended March 31, 1998.
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 decreased in
recent periods, which offset the decline in cash premiums paid for
non-conforming mortgage loans for the nine months ended March 31, 1999. The
weighted average yield spread premiums paid as a percentage of non-conforming
mortgage loans sold was 1.03% and 1.45% for the nine months ended March 31, 1999
and 1998, respectively. The Company expects to receive some benefit from recent
reduction in yield spread premiums payable to brokers. However, this may be
offset in part by decreases in prices paid for the Company's loans by third
parties. The weighted average cash premium paid for prime mortgage loans sold
was 1.02% and the weighted average yield spread premium paid as a percentage of
prime mortgage loans sold was 0.49% for the nine months ended March 31, 1999.
Loan origination income increased to $5.6 million for the nine months ended
March 31, 1999 from $3.7 million for the nine months ended March 31, 1998. As a
percentage of total revenues, loan origination income for the nine months ended
March 31, 1999 increased to 13.9% as compared to 11.9% for the nine months ended
March 31, 1998. This increase was primarily a result of an increase in loan
originations and 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. Loan originations may be
adversely affected in future periods as a result of a decrease in yield spread
premiums payable to brokers and raised interest rates charged to borrowers.
Interest income increased $300,000 to $5.9 million for the nine months ended
March 31, 1999.
Other income, which is comprised of investment income, prepayment penalties and
late charges, increased to $1.1 million for the nine months ended March 31, 1999
as compared to $349,000 for the nine months ended March 31, 1998 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:
Nine months ended
March 31,
---------------------
1999 1998
------- -------
(In Thousands)
Employees' salaries and commissions... $18,363 $13,151
General and administrative expenses... 9,430 5,225
Interest expense ..................... 3,755 3,914
------- -------
$31,548 $22,290
======= =======
Total expenses increased to $31.5 million for the nine months ended March 31,
1999 from $22.3 million for the nine months ended March 31, 1998. This increase
is related to geographical expansion to 52 origination locations at March 31,
1999 from 46 at March 31, 1998, and to an increase in mortgage loan
originations.
13
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Employee salaries and commissions increased $5.2 million to $18.4 million during
the nine months ended March 31, 1999 from $13.2 million for the nine months
ended March 31, 1998. The primary reason for the increase was due to an increase
in mortgage loan originations and a higher level of geographical expansion for
the nine months ended March 31, 1999.
General and administrative expenses increased $4.2 million to $9.4 million for
the nine months ended March 31, 1999 from $5.2 million for the nine months ended
March 31, 1998. This increase is due primarily to an increase in the number of
origination locations and the related increase in mortgage loan originations.
Interest expense decreased $100,000 to $3.8 million for the nine months ended
March 31, 1999 from $3.9 million for the nine months ended March 31, 1998. This
decrease is due to the Company changing its policy of selling its loans on the
secondary market from a monthly basis to a bi-monthly basis.
YEAR 2000
The Company has performed a review of its internal systems to identify and
resolve the effect of Year 2000 software issues on the integrity and reliability
of the Company's financial and operational systems. Based on this review,
management believes that its internal systems are substantially compliant with
the Year 2000 issues. In addition, the Company is also communicating with its
principal service providers to ensure Year 2000 issues will not have an adverse
impact on the Company. Service providers which the Company is reviewing for year
2000 compliance includes payroll, loan servicing and telecommunications. The
Company however, cannot be assured that these third party
14
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
providers won't have other problems internally, which could have an adverse
impact on the Company. Presently, the Company does not have a contingency plan
to handle the worst case scenarios, but it intends to create one by the end of
fiscal year 1999. Based upon its internal review and communications with
external service providers, the Company believes that the costs of achieving
Year 2000 compliance will not have a material adverse impact on the Company's
business, operations or financial condition.
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, 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 loan assets.
The Company acquired certain assets and liabilities of America's Lender, Inc. on
February 26, 1999. In connection with the acquisition, the Company paid $2.0
million and agreed to pay up to an additional $1.0 million due 12 months after
the date of closing. There can be no assurance that any future acquisitions will
be consummated.
Capital expenditures totaled $654,000 and $766,000 for the nine months ended
March 31, 1999 and 1998, respectively. Capital expenditures were primarily
comprising furniture, fixtures and equipment software and leasehold
improvements.
Cash and cash equivalents were $28.2 million at March 31, 1999. The Company
invests its cash in short-term investments maintaining flexibility for funding
of loan originations and strategic opportunities. In March 1998 the Company
concluded its initial public offering and received net proceeds of $16.2 million
from the Offering. As of March 31, 1999, of these proceeds, approximately $9.5
million was used to fund loan originations, acquire Americas Lender, Inc., and
the remaining balance has been invested in short-term investments.
The Company funds its operations through cash reserves, loan sales, net earnings
and a revolving warehouse credit facility with DLJ, under which it borrows money
to finance the origination of mortgage loans. As of March 31, 1999, the
Company's facility with DLJ ("the DLJ Facility") provide borrowings up to $150.0
million and terminates on March 16, 2000. The DLJ Facility bears interest at the
Federal Funds rate plus 50 basis points through March 16, 1999 and thereafter,
the Federal Funds rate plus 100 basis points. It is expected that the DLJ
Facility will not be extended beyond the term. The Company has entered into a
LIBOR-based warehouse credit agreement with Bank United, which provides for
borrowings up to $50.0 million and expires on February 1, 2000. The Company has
entered into a LIBOR-based warehouse credit agreement with Residential Funding
Corporation which provides for borrowings up to $50.0 million and expires on
March 1, 2000. The Company has entered into a $50.0 million uncommitted
repurchase credit facility agreement with Paine Webber Real Estate Securities,
Inc. 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
proceeds from its loan sales. As of March 31, 1999 the balanced owing under all
of the Company's warehouse lines of credits was $125.4 million.
During the nine months ended March 31, 1999 and 1998, the Company used cash of
$877.1 million and $536.2 million, respectively, for new loan originations.
During the same periods, the Company received cash proceeds from the sale of
loans of $846.0 million and $512.5 million, respectively, representing the
principal balance of loans sold. The Company received cash proceeds from the
premiums on such sale of loans of $27.7 million and $21.1 million, for the nine
months ended March 31, 1999 and 1998, respectively.
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.
The Company's forward loan sale contract with an investment bank under which it
can deliver up to $246.2 million in loans expires in July 1999.
15
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Turmoil in the mortgage and asset-backed securitization market has caused a
tightening in the pricing of whole loan sales as many mortgage securitizers have
been forced to sell their loans on a whole loan basis for cash. Prices paid for
the Company's loans in the first quarter of 1999 have been less than that which
the Company received under that forward sales commitment which expired on
December 31, 1999. In the event that declines in the whole loan pricing
continue, the Company would expect to see a decrease in cash gain on sale of
mortgage loans in future quarters. If the Company is unable to increase its
mortgage loan origination volume commensurate with such pricing guidelines, the
Company's net income would be adversely affected. The Company would also expect
to see some benefit from adjustments made to the yield spread premiums paid to
brokers, employee compensation, interest rates charged to borrowers and other
adjustments. However, the effect of these adjustments may have an adverse effect
on mortgage loan production in future periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURE ABOUT MARKET RISK
The Company's earnings can be affected significantly by the movement of interest
rates, which is the primary component of market risk to the Company. The
interest rate risk affects the value of the mortgage loans held for sale, net
interest income earned on its mortgage inventory, interest income earned on idle
cash, interest expense and cash gain on sale of mortgage loans, as well as
consumer demand for mortgage loan production.
As it relates to lending activities, the Company originates mortgage loans,
which are generally presold through forward loan sales commitments. However,
between the time that the loan is originated and sold to the ultimate investor,
the Company earns interest income. The loans are funded through the use of the
warehouse lines of credit, and the interest charged by the lenders is generally
based upon short-term interest rates. Therefore, the net interest income that is
earned by the Company is generally dependent upon the spread between long-term
mortgage rates and short-term mortgage rates.
The Company currently does not maintain a trading portfolio. As a result, the
Company is not exposed to market risk as it relates to trading activities. The
majority of the Company's loan portfolio is held for sale which requires the
Company to perform quarterly market valuations of its portfolio in order to
properly record the portfolio at the lower of cost or market. Therefore, the
Company continually monitors the interest rates of its loan portfolio as
compared to prevalent interest rates in the market.
The Company currently does not enter into any hedging activities as it currently
sells its loan production on a monthly basis.
Based on the information available and the interest environment as of March 31,
1999, the Company believes that a 100 basis point increase in long-term interest
rates over a twelve month period, with all else being constant, would have an
adverse effect on the pricing for the Company's whole loan sales. Therefore, the
Company believes that its net income could be adversely affected in the range of
$1.3 to $2.5 million. However, the Company believes that a 100 basis point
decrease in long-term interest rates over a twelve-month period may not result
in a similar increase of its net income. These estimates are limited by the fact
that they are performed at a particular point in time and incorporate many other
factors and thus should not be used as a forecast. Therefore, there can be no
assurance that the amount of such decrease would not substantially vary from
these estimates.
16
17
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - The Company is a party to various routine legal
proceedings arising out of the ordinary course of its business.
Management believes that none of these actions, individually or in the
aggregate, will have a material adverse effect on the consolidated
financial condition or results of operations of the Company.
ITEM 2. Changes in Securities - See Management Discussion and Analysis of
Financial Condition and Results of Operation Liquidity and Capital
Resources for a discussion of the use of proceeds from the Company's
initial public offering.
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
10.1 Warehouse Credit and Security Agreement (Single Family
Mortgage Loans), dated March 1, 1999 between BNC
Mortgage, Inc., a Delaware corporation and Mortgage
Logic.com, Inc., a California corporation and
Residential Funding Corporation, a Delaware corporation.
10.2 Purchase Agreement dated as of December 21, 1998 by and
between the Registrant, Mortgage Logic.com, Inc. and the
America's Lender, Inc., Keith Guy and SHL Holdings, Inc.
10.3 Non-Competition Agreement dated as of February 26, 1999,
by and between the Registrant, Mortgage Logic.com, Inc.
and the America's Lender, Inc., Keith Guy and SHL
Holdings, Inc.
10.4 Licensing and Web Site Hosting Agreement dated as of
February 26, 1999, by and between the Mortgage
Logic.com, Inc. and TrueLink, Inc.
10.5 Credit Bureau Services Agreement dated as of February
26, 1999, by and between the Registrant, Mortgage
Logic.com, Inc. and TrueLink, Inc.
17
18
PART II - OTHER INFORMATION CONTINUED
11.1 Statement regarding computation of per share earnings
21.1 Subsidiaries of the Registrant
27.1 Financial Statement Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
Form 8-A/A filed on January 6, 1999 reporting items 5 and 7
18
19
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 17, 1999
--------------------------- ------------
Evan R. Buckley Date
Chief Executive Officer and
Secretary
By: /s/ KELLY W. MONAHAN May 17, 1999
--------------------------- ------------
Kelly W. Monahan Date
President
By: /s/ PETER R. EVANS May 17, 1999
------------------------------------- ------------
Peter R. Evans Date
Vice President and
Chief Financial Officer
19
20
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Warehouse Credit and Security Agreement (Single Family Mortgage Loans),
dated March 1, 1999 between BNC Mortgage, Inc., a Delaware corporation
and Mortgage Logic.com, Inc., a California corporation and Residential
Funding Corporation, a Delaware corporation.
10.2 Purchase Agreement dated as of December 21, 1998 by and between the
Registrant, Mortgage Logic.com, Inc. and the America's Lender, Inc.,
Keith Guy and SHL Holdings, Inc.
10.3 Non-Competition Agreement dated as of February 26, 1999, by and between
the Registrant, Mortgage Logic.com, Inc. and the America's Lender, Inc.,
Keith Guy and SHL Holdings, Inc.
10.4 Licensing and Web Site Hosting Agreement dated as of February 26, 1999,
by and between the Mortgage Logic.com, Inc. and TrueLink, Inc.
10.5 Credit Bureau Services Agreement dated as of February 26, 1999, by and
between the Registrant, Mortgage Logic.com, Inc. and TrueLink, Inc.
11.1 Statement regarding computation of per share earnings
21.1 Subsidiaries of the Registrant
27.1 Financial Statement Data Schedule (EDGAR filing only)