U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
Commission File Number 0-17832
Harbourton Financial Corporation
--------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 54-1208450
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8180 Greensboro Drive, McLean, VA 22102
- --------------------------------- -----
(Address of principal executive offices) (Zip Code)
(703) 883-9757
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
---- ----
The number of shares outstanding of the issuer's common stock, $.01 par value,
as of May 7, 2002, was 15,184,164.
Transitional Small Business Disclosure Format
(check
one): Yes No X
---- ----
Harbourton Financial Corporation
Form 10-QSB
Index
Part I Page Number
- -------------------------------------------------------------------------------------------------------------------
Item 1. Financial Statements
Consolidated Balance Sheets.......................................................................1
Consolidated Statements of Operations (unaudited).................................................2
Consolidated Statements of Comprehensive Income (unaudited).......................................3
Consolidated Statements of Shareholders' Equity (unaudited).......................................4
Consolidated Statements of Cash Flows (unaudited).................................................5
Notes to Consolidated Financial Statements........................................................6
Item 2. Management's Discussion and Analysis or Plan of Operation.................................9
Part II.............................................................................................15
Item 1. Legal Proceedings........................................................................15
Item 2. Changes in Securities and Use of Proceeds................................................15
Item 3. Defaults Upon Senior Securities..........................................................15
Item 4. Submission of Matters to a Vote of Security Holders......................................15
Item 5. Other Information........................................................................15
Item 6. Exhibits and Reports on Form 8-K.........................................................15
Signatures..........................................................................................16
Harbourton Financial Corporation and Subsidiaries
Consolidated Balance Sheets
March 31, 2002 December 31, 2001
--------------- -----------------
Unaudited
Assets
Cash and cash equivalents $ 833,973 $ 1,199,925
Loans receivable, net 14,459,959 13,426,318
Loans held for sale, net 2,248,323 -
Purchased receivables, net 1,518,454 1,518,454
Securities available for sale - 16
Deferred income taxes, net 3,220,760 3,151,157
Furniture, fixtures and equipment, net 177,077 191,276
Other assets 259,569 167,724
----------- -----------
Total assets $22,718,115 $19,654,870
============ ===========
Liabilities and shareholders' equity
Liabilities
Notes payable $ 4,912,987 $1,725,000
Convertible subordinated notes 266,000 266,000
Accounts payable and accrued expenses 177,420 448,236
Income taxes payable (28,692) 5,622
============ ==========
Total liabilities 5,327,715 2,444,858
Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares; 15,184,164 issued and outstanding 151,841 151,841
Additional paid-in-capital 24,612,674 24,612,674
Accumulated deficit (7,374,115) (7,550,519)
Accumulated other comprehensive income: unrealized
(loss) gain on investment securities - (3,984)
----------- -----------
Total shareholders' equity 17,390,400 17,210,012
----------- -----------
Total liabilities and shareholders' equity $22,718,115 $19,654,870
=========== ===========
See Notes to Consolidated Financial Statements
1
Harbourton Financial Corporation and Subsidiaries
Consolidated Statements of Operations (unaudited)
Three Months Ended, March 31,
2002 2001
---------------- --------------------
Revenue
Interest, discounts and loan fees $568,565 $ 516,401
Interest expense (52,986) (37,283)
-------- --------
Net interest income before provision 515,579 479,118
Provision for loss (11,700) -
-------- --------
Net interest income 503,879 479,118
Fees and other income 283,905 377,696
Profit participations 35,131 28,422
Gain on sale of loans 106,631 -
Other income 1,023 6,565
------- -------
Total net revenues 930,569 891,801
------- -------
Expenses
Compensation 609,625 292,580
General and administrative 168,034 87,605
Professional fees 58,601 (159)
Depreciation 21,822 10,098
------ ------
Total expenses 858,082 390,124
Income before income tax 72,487 501,677
Income tax benefit (103,918) (30,741)
--------- - --------
Net income $176,405 $532,418
========= ========
Income per common share $.01 $.04
==== ====
Weighted average shares outstanding 15,184,164 15,184,164
=========== ==========
See Notes to Consolidated Financial Statements
2
Harbourton Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
Three Months Ended March 31,
2002 2001
- --------------------------------------------------------------------------------
Net income $176,405 $532,418
Other comprehensive income:
Unrealized loss on securities
available for sale (3,984) (36,000)
-------- --------
Comprehensive income $172,421 $ 496,418
======== =========
See Notes to Consolidated Financial Statements
3
Harbourton Financial Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
Retained Accumulated
Additional Earnings Other
Common Paid-in- Treasury (Accumulated Comprehensive
Stock Capital Stock Deficit) Income Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 2000 $151,841 $24,612,674 $ - ($9,704,847) $ 56,000 $15,115,668
Unrealized loss on investment
securities (59,984) (59,984)
- - - -
Net income 2,154,328 - 2,154,328
----------- ----------- ------- ------------ --------- -----------
- - -
Balance- December 31, 2001 151,841 24,612,674 (7,550,519) (3,984) 17,210,012
-
Unrealized loss on investment
securities (unaudited) 3,984 3,984
- - - -
Net Income
(unaudited) - - - 176,404 - 176,404
----------- ----------- ------- ------------ --------- -----------
Balance - March 31, 2002
(unaudited) $151,841 $24,612,674 $ - $(7,374,115) $ - $17,390,400
========= ============ ======== ============ ====== ===========
See Notes to Consolidated Financial Statements
4
Harbourton Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
Three months ended
March 31, 2002 March 31, 2001
Cash flows from operating activities:
Net earnings $176,405 $ 532,418
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Depreciation 21,822 10,098
Amortization of valuation allowance (7,549) (22,647)
Loans originated for sale (2,248,323) -
Increase in warehouse line of credit 2,212,987 -
Changes in operating assets and liabilities:
Deferred income taxes (69,603) (30,741)
Net change in other assets and Liabilities (392,976) (470,419)
--------- ---------
Net cash provided by (used in) operating activities (307,237) 18,710
--------- ---------
Cash flows from investing activities:
(Increase, decrease in) collection of receivables, net (1,027,892) 793,926
Recoveries of charged off assets, net 1,800 -
Purchase of furniture, fixtures and equipment (7,622) (4,928)
--------- ---------
Net cash (used in) provided by investing activities (1,033,714) 789,034
--------- ---------
Cash flows from financing activities:
Principal borrowings (payments) on notes payable, net 975,000 (630,000)
Net cash provided by (used in) financing activities 975,000 (630,000)
--------- ---------
Net increase (decrease) in cash (365,951) 177,743
Cash, beginning of period 1,199,924 447,184
--------- ---------
Cash, end of period $ 833,973 $624,927
========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest $33,457 $51,046
========= =======
Unrealized (loss) gain on securities available for sale
$ (4,000) ($36,000)
========= =========
See Notes to Consolidated Financial Statements
5
Harbourton Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. General. The consolidated financial statements of Harbourton Financial
Corporation (f/k/a Allstate Financial Corporation, prior to its name change
on May 1, 2001) and subsidiaries (the "Company") included herein are
unaudited for the periods ended March 31, 2002 and 2001; however, they
reflect all adjustments (consisting only of normal recurring accruals)
which, in the opinion of management, are necessary to present fairly the
results for the periods presented. The December 31, 2001 balance sheet has
been extracted from audited financial information. Harbourton Mortgage
Investment Corporation ("HMIC") began mortgage operations on January 2,
2002. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. The Company
believes that the disclosures are adequate to make the information
presented not misleading. The results of operations for the three months
ended March 31, 2002 are not necessarily indicative of the results of
operations to be expected for the remainder of the year. It is suggested
that these consolidated financial statements be read in conjunction with
the consolidated financial statements and notes thereto included in
Harbourton Financial Corporation's Annual Report on Form 10-KSB for the
year ended December 31, 2001.
Receivables.
Loan Receivables
At March 31, 2002 and December 31, 2001, loans receivable, net, comprises
the following:
-------------------------------------------------- ---------------------------- ---------------------------
March 31, 2002 December 31, 2001
-------------------------------------------------- ---------------------------- ---------------------------
Loans receivable - gross $46,160,655 $51,824,734
Portion sold to participants (29,724,715) (36,577,307)
Deferred interest and fees (1,358,597) (1,192,984)
Amount allocated from purchase of minority
interest - (7,549)
Allowance for credit losses (617,384) (620,576)
--------- ---------
Loans receivable, net $ 14,459,959 $13,426,318
============ ===========
At March 31, 2002 and December 31, 2001, loans held for sale, net, is as
follows:
-------------------------------------------------- ---------------------------- ---------------------------
March 31, 2002 December 31, 2001
-------------------------------------------------- ---------------------------- ---------------------------
Loans held for sale- gross $2,260,023 $
-
Allowance for credit losses (11,700) -
---------- -------
Loans held for sale - net $ 2,248,323 $ -
=========== =======
Loans held for sale, carried at the lower of cost or market, represent
loans originated by HMIC that are in the process of being sold to investors
in the secondary mortgage market.
6
Purchased Receivables:
At March 31, 2002 and December 31, 2001, purchased receivables, net, is
as follows:
--------------------------------------------------- --------------------------- ---------------------------
March 31, 2002 December 31, 2001
--------------------------------------------------- --------------------------- ---------------------------
Life insurance policies $2,814,868 $2,814,868
Valuation allowance (1,336,560) (1,336,560)
----------- -----------
Life insurance policies, net 1,478,308 1,478,308
---------- ---------
Litigation claims, net of unearned discount 40,146 40,146
Allowance for credit losses - -
--------- ---------
Litigation claims, net 40,146 40,146
--------- ---------
Total purchased receivables, net $1,518,454 $1,518,454
=========== ===========
Loan Loss Provision:
Activity in the allowance for losses for the three months ended March 31,
2002 was as follows:
---------------------------------------------------------------------------------
Three Months Ended
March 31, 2002
---------------------------------------------------------------------------------
Beginning Balance $620,576
Provision for losses 11,700
Charge-offs (4,991)
Recoveries of amounts previously charged-off 1,800
--------
Ending Balance $629,083
========
Impaired Loans:
When any receivable becomes doubtful as to collection of interest or
discount income, the account is placed on non-performing status and is
considered by management to be impaired. Impaired loans are measured based
on the present value of expected future cash flows discounted at a rate
determined by management, or, as a practical expedient, the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent.
Information regarding impaired loans at March 31, 2002 and December 31, 2001 is
as follows:
March 31, 2002 December 31, 2001
Number of impaired loans 1 1
Total recorded investment in impaired loans, net of
deferred income $2,080,019 $2,194,723
Recorded investment in impaired loans
For which there is a related allowance $2,080,019 $2,194,723
Related allowance for impaired loans $617,383 $620,576
7
Credit Concentrations.
For the three months ended March 31, 2002, the total revenue from the largest
borrower, which accounted for 10% or more of the Company's total revenues was
27.8% of the Company's total revenues, compared to revenues from two clients,
each accounting for over 10% of the Company's total revenue, representing 40.6%
of the total in the same period in 2001. At March 31, 2002, three borrowers
whose balances were more than 10% of the Company's outstanding loan balances,
net of deferred income and participations sold, accounted for 36.8% of the
Company's total receivables, while at December 31, 2001 four such borrowers
accounted for 47.7%.
Stock Options.
The Company maintains one stock option plan, the 2000 Stock Option Plan
("2000 Plan"), under which either qualified or non-qualified options may be
issued. The Company continues to account for stock options under APB 25 and
provides the additional disclosures as required by SFAS No. 123.
As of March 31, 2002, the Company reserved 450,000 shares of the then
issued and outstanding shares of common stock for issuance under its 2000
Plan. At the Company's annual stockholders' meeting held on May 7, 2002,
the stockholders approved an increase in the number of stock options
available under the 2000 Pan to 1,200,000 shares.
During the three months ended March 31, 2002, a total of 45,000
non-qualified stock options were issued to three non-employee directors
under the 2000 Stock Option Plan. The options were granted with a strike
price equal to $1.13, which equated to the book value of the Company on
December 31, 2001, this amount exceeded the market value of the common
shares through out the three month period ending March 31, 2002. The strike
price for these options increases by 5% per annum, beginning March 31,
2002, with a seven-year term (expiring March 31, 2009), and all options
vest immediately. On May 2, 2001, senior executives of the Company were
granted 400,000 stock options. The exercise price of these options was
$1.00 per share through December 31, 2001 and thereafter increasing by 5%
per annum. The options vest by December 31, 2003 and expire on December 31,
2008. Because the exercise price of all options outstanding during the
period exceeded the market value of the underlying stock on every day
during the period, no compensation cost has been recognized under the
provisions of APB 25 for the 2000 Plan for the three months ended March 31,
2002.
The table below summarizes the option activity for the 2000 Plan for the
three months ended March 31, 2002:
----------------------------------------------------------------------------
Weighted Option Price
Number of Options Per Share
----------------------------------------------------------------------------
Outstanding at January 1, 2002 400,000 $1.00
Granted 45,000 $1.13
----------------------------------
Outstanding at March 31, 2002 445,000 $1.01
-------
Exercisable at March 31, 2002 245,000 $1.02
======= =====
==================================
8
Income taxes.
The Company determined that a portion of the valuation allowance for the
deferred tax asset was not required because of projected future profitability
and recorded appropriate reductions to the allowance in the three-month period
ended March 31, 2002.
Activity in the net deferred income taxes account for the three months ended
March 31, 2002 was as follows:
--------------------------------------------------------------------
Three months ended
March 31, 2002
--------------------------------------------------------------------
Beginning balance $3,151,157
Reduction in valuation allowance (69,603)
----------
Ending Balance $3,220,760
==========
Item 2. Management's Discussion and Analysis or Plan of Operation
This Form 10-QSB may contain certain "forward-looking statements" relating to
the Company (defined in the notes to the financial statements above, and also
referred to herein as "we," "our," or "us") that represent our current
expectations or beliefs, including, but not limited to, statements concerning
our operations, performance, financial condition and growth. For this purpose,
any statements contained in this Form 10-QSB that are not statements of
historical fact may be deemed forward-looking statements. Without limiting the
generality of the foregoing, words such as "may", "will", "expect", "believe",
"anticipate", "intend", "could", "estimate", or "continue", or the negatives or
other variations thereof, or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, such as credit losses, dependence on management and key
personnel, seasonality and variability of quarterly results, our ability to
continue our growth strategy, competition, and regulatory restrictions relating
to potential new activities, certain of which are beyond our control. Should one
or more of these risks or uncertainties materialize or should the underlying
assumptions prove incorrect, actual outcomes and results could differ materially
from those indicated in the forward-looking statements.
General Description. Harbourton Financial Corporation, f/k/a Allstate Financial
Corporation, was formed in 1982 as a Virginia corporation. On August 28, 2000,
we changed our state of incorporation to Delaware and, on November 30, 2000,
acquired Harbourton Financial Corp. ("Old Harbourton") by merger. On May 1,
2001, the name of the company was changed to Harbourton Financial Corporation to
better reflect our business plan, which is to provide financing to the
residential building and development community, through products that were
previously offered by Old Harbourton. On October 5, 2001, Harbourton Mortgage
Investment Corporation ("HMIC") was incorporated as a wholly owned subsidiary to
purchase and originate both conforming and non-conforming mortgage loans and to
subsequently sell these loans to investors in the secondary mortgage market.
HMIC began mortgage operations on January 2, 2002 and is expected to operate
nationwide.
HMIC acts as a loan broker and sells all of its production in the secondary
market. All loans are sold on a servicing released basis and thus, all gains on
sale of loans are represented by cash proceeds from the sales. Gains on sales of
mortgage loans are recognized on the date of sale based on the difference
between the selling price of the loans and the carrying value of the loans sold.
Related loan fees and direct costs associated with the origination of loans are
deferred and income is recognized at the time the loans are sold.
9
Liquidity and Capital Resources. Our requirement for capital is a function of
the level of our generation of and investment in receivables. We fund our
investment in receivables through loan participations, shareholders' equity,
bank lines of credit, convertible subordinated notes, and internally generated
funds. HMIC funds its mortgage banking operations through a line of credit and
from additional equity contributed by Harbouton. Harbourton will provide
additional equity until HMIC has established stabilized profitable operations.
The Company sells participation interests in its loans in a structure designed
to provide credit enhancement to participants as well as incentives for the
Company to efficiently service and administer loans. The Company retains an
interest in each loan, with repayment on a pro rata basis with the participant.
Since the interest retained by the Company may become subordinate to that of the
participant under certain circumstances of default, the Company assumes the risk
of potential credit losses up to a maximum amount of the Company's retained
interest in the loan. Each transaction is treated as an individual loan with no
cross collateralization and no blanket subordination. Loan to value to the
participant will range from 50% to 70% after giving consideration to the
Company's subordinated interest. This structure provides the participant with an
investment with reduced risk, and without the cost of origination and servicing.
All loans and subsequent participations are structured to meet the requirements
of applicable law and regulatory guidelines. The Company currently has
participations with four sources including banks and a major non-bank financial
services company. The Company may seek to establish relationships with new
participants or increase the level of existing agreements.
On March 21, 2002, our bank approved an increase in Harbourton's secured line of
credit from $3.0 million to $4.5 million, and an extension of the maturity to
December 31, 2002. On March 31, 2002, there was $1.8 million available to the
Company under the line.
HMIC has a $12.0 million line of credit available to originate mortgage loans,
which is secured by the loans closed under the line, by the assets of HMIC and a
loan guaranty by Harbourton. When HMIC purchases or originates a new loan,
approximately 94% to 97% of the loan amount is funded through the line of credit
and the remainder from internal funds. When the loan is sold, the lender for the
line of credit is repaid and HMIC receives the residual cash flow. On March 31,
2002, there was $2.2 million outstanding under the line.
Financial condition at March 31, 2002 and December 31, 2001.
The financial results for HMIC, which started mortgage operations on January 2,
2002, are included in the consolidated results for the quarter ended March 31,
2002. Total consolidated assets were $22.7 million at March 31, 2002 compared to
$19.7 million at December 31, 2001. Our total loans receivable, before the sale
of participations ("Managed Loan Portfolio"), was $44.8 million at March 31,
2002 and $50.6 million at December 31, 2001. Participations sold as of those
same dates were $29.7 million and $36.6 million. The decline in the Managed Loan
Portfolio resulted from the significant reduction in the loans outstanding for
one of Harbourton's loan accounts. Purchased receivables remained unchanged at
$1.5 million. Loans held for sale, representing loans originated and purchased
by HMIC during the period and not yet sold, were $2.25 million at March 31,
2002. The net balance of our deferred tax asset increased by $70 thousand as a
result of the change in the valuation allowance applied to the asset. Securities
held for resale (consisting of stock accepted in partial settlement of a loan)
were written off during the first quarter of 2002. Other assets increased to
$260 thousand from $168 thousand.
The cash flows from our operations during the three months ended March 31, 2002,
along with an increase in notes payable of $3.2 million, were used to fund the
increase in our net receivables of $3.3 million, principally represented by the
increase in loans held for sale by HMIC. Harbourton also reduced accounts
payable and accrued expenses, primarily through the payment of bonus
compensation for the year ended December 31, 2001.
10
The following table indicates the composition of our portfolio, net of deferred
income and participations sold (gross of the allowance for losses), by loans
receivable and purchased receivables, as of March 31, 2002 and December 31, 2001
(dollars in thousands and as a percentage of the total loan and receivables
portfolio).
Composition of Loan and Receivables Portfolio
- ----------------------------------------------------------------------------------------------------------------
March 31, 2002 December 31, 2001
Amount Per cent of Amount Per cent of
total total
portfolio portfolio
- ----------------------------------------------------------------------------------------------------------------
Loans $15,077 80.0% $14,054 90.3%
Loans held for sale 2,260 12.0 - -
Purchased receivables 1,518 8.0 1,518 9.7
------- ------ ------- ------
Total loan and receivables portfolio $18,855 100.0% $15,572 100.0%
======= ====== ======= ======
The following table indicates the composition of our retained loan
portfolio, net of deferred income and participations sold (gross of the
allowance for loan losses), by loan product, as of March 31, 2002 and December
31, 2001 (dollars in thousands and as a percentage of the loans receivable).
Loans Receivable, Net of Deferred Income, by Loan Product
- --------------------------------------------------------------------------------------------------------------------
March 31, 2002 December 31, 2001
Percent of Percent of
Amount total Amount total
- --------------------------------------------------------------------------------------------------------------------
Mezzanine $7,962 45.9% $6,778 48.2%
Acquisition, development and construction 6,468 37.3 6,583 46.9
Loans held for sale 2,260 13.1 - 0.0
Asset-based 539 3.1 583 4.1
Other 108 0.6 110 0.8
-------- ---- ------- ------
Total loans receivable (1) $17,337 100.0% $14,054 100.0%
======== ====== ======== ======
At March 31, 2002, our allowance for losses on loans receivable was $629
thousand, compared to $621 thousand at December 31, 2001 and $553 thousand at
March 31, 2001. At March 31, 2002, one mezzanine loan with a balance (net of
deferred income) of $2.1 million was non-performing.
(1) Excludes purchased receivables of $1.5 million.
11
During the quarter ended March 31, 2002, HMIC purchased $4,664,362 of mortgage
loans and sold $2,402,000 in the secondary market as follows:
Originations and purchases of mortgage loans
-----------------------------------------------------------------------
Three Months ended
March 31, 2002
State Amount Per Cent
--------------------------------------------------------------------------
California $ 3,642,600 78.1%
Florida 926,562 19.9
Arizona 95,200 2.0
----------- -------
$ 4,664,362 100.0%
Loan type
--------------------------------------------------------------------------
First trust $ 4,465,262 95.7%
Second trust 199,100 4.3
----------- -------
$ 4,664,362 100.0%
Three months ended March 31, 2002 vs. three months ended March 31, 2001.
The following table indicates the components of revenue for the three-month
periods ended March 31, 2002 and 2001, (dollars in thousands and as a percentage
of total revenues).
- ----------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
Dollars in thousands 2002 2001 Change
- ----------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------
Interest, discounts, and loan $569 61.1% $ 516 57.9% $ 52 10.1%
fees
Interest expense (53) (5.7) (37) (4.2) (16) 42.1
------ ------ ------ ------ ----- ------
Net interest income before 516 55.4 479 53.7 36 7.6
provision
Provision for loss (recovery) (12) (1.3) - - (12) 100
------ ------ ------ ------ ----- ------
Net interest income 504 54.1% 479 53.7% 25 5.7%
Fees and other income 284 30.5 378 42.4 (94) (24.8)
Profit participations 35 3.8 28 3.2 7 24
Gain on sale of loans 107 11.5 - - 107 100
Other income 1 .1 7 .7 (6) (84.4)
------ ------ ------ ------ ----- ------
Total net revenues $ 931 100.0% $ 892 100.0% $ 39 100.0%
====== ====== ====== ====== ===== ======
12
During the quarter ended March 31, 2002, the consolidated results were
significantly impacted by inclusion of HMIC's revenues and expenses for the
first time. HMIC began operations on January 2, 2002 as a start-up mortgage
banking operation, and incurred operating expenses necessary to establish the
personnel and operations to support future growth in the volume of originations
and purchases of mortgage loans.
For the three months ended March 31, 2002, net income declined to $176 thousand
from $532 thousand, a drop of $356 thousand or 66.7%, for the comparable quarter
for 2001. The majority of the decline is attributable to the start up operation
of HMIC, which incurred a consolidated loss after tax of approximately $287
thousand. The remainder of the decline was associated with reduced loan fees for
the Company. Net interest income increased by $36,000 or 7.6% during the quarter
ended March 31, 2002, representing a higher volume of loans outstanding during
the period; however, the Company was significantly impacted by the lower levels
of interest rates in the market. Since the majority of the Company's loan
receivables is adjustable and floats at a premium to the prime rate, the overall
yields to the Company declined in the period ended March 31, 2002. The majority
of the Company's funds for investment are provided in the form of equity, which
results in the Company being negatively impacted when the market levels of
interest rates decline. During the period, HMIC recognized $107 thousand of gain
on sale of loans related to the sale of $2.4 million in loans to three secondary
market investors. Gain on sales of mortgage loans are recognized at the date of
settlement and are based on the difference between the selling price of the loan
and the carrying value of the loan. Nonrefundable fees and other direct costs
are deferred at the time of loan origination or purchase and recognized at
settlement of the loan sale. HMIC sells all loans servicing released and does
not service any loans once the loan has been sold.
Total revenues increased to $931 thousand during the three months ended March
31, 2002, compared to $892 thousand during the comparable period, an increase of
$39 thousand or 4.3%. Included in this amount was revenues from HMIC of $150
thousand during the period.
The following table shows our expenses for the three month periods ended March
31, 2002 and March 31, 2001.
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
Dollars in thousands 2002 2001 Change
- -----------------------------------------------------------------------------------------------------------------------
Amount Percent of Amount Percent of Amount Percent of
total total revenue total
revenue revenue
- -----------------------------------------------------------------------------------------------------------------------
Compensation and benefits $610 65.5% $292 32.8% $317 108.4%
General and administrative 168 18.1 88 9.8 80 91.8
Professional fees 59 6.3 - - 59 100.0
Depreciation 22 2.3 10 1.1 12 116.1
Total expenses 858 92.2 390 43.7 468 120.0
Income before income
tax (benefit) 72 7.8 502 56.3 (430) (85.7)
Income tax ( benefit) (104) 11.2 (31) 3.4 74 238.8
----- ----- ----- ----- ------ -------
Net income $ 176 19.0% $ 532 59.7% $(356) 66.7%
===== ===== ===== ===== ====== =======
Total expenses increased by $468 thousand or 120.0% for the three months ended
March 31, 2002 as compared to the like period in 2001. This increase was
directly attributable to the $471 thousand of additional start up operating
expenses incurred by HMIC during the reporting period. HMIC was projected to
report operating losses in the early phase of its start-up because of the
necessity to retain the essential personnel and system support to provide the
platform to successfully originate and purchase an increasing volume of mortgage
loans. HMIC continues to apply for and obtain licenses to operate in a number of
states. At March 31, 2002, HMIC was authorized to do business in 9 states.
13
Compensation and fringe benefits increased to $610 thousand from $292 thousand,
representing an increase of $317 thousand or 108.4% during the period ended
March 31, 2002 as compared to the like period in 2001, accounting for the
largest component of the operating expense increase. HMIC compensation expense
for the period was approximately $341 thousand. Compensation expense without the
inclusion of HMIC, declined by $24 thousand, resulting from a decrease in the
number of employees for Harbourton. At March 31, 2002, the Company had
approximately 31 full time equivalent employees, with 7 at the Company level and
24 at HMIC. Management anticipates additional account executives will be added
in future periods to HMIC to solicit new mortgage loan production.
General and administrative fees increased to $168 thousand from $88 thousand,
representing an increase of $80 thousand or 91.8% for the three months ended
March 31, 2002 as compared to the like period in 2001. The amount attributable
to HMIC for the 2002 period was $116 thousand, principally related to occupancy
expense, and operating expenses for telephone, stationery, licensing and
equipment. HMIC has two offices, including a main executive office and a support
and origination branch location in California.
Professional fees increased by $59 thousand, principally as a result of HMIC
professional fee expense of $41 thousand during the quarter ended March 31,
2002.
The income tax benefit increased to $104 thousand for the three months ended
March 31, 2002 as compared to $31 thousand in the like period of 2001. Based on
the Company's projected profitability, we determined that a portion of the
valuation allowance for the deferred tax asset was not required and recorded a
$70 thousand reduction to the allowance at March 31, 2002. HMIC is subject to
California state income taxes, for which the Company does not have a loss
carryforward. For the three months ended March 31, 2002, HMIC recorded a state
income tax benefit of $35 thousand predicated on management's expectations that
HMIC will achieve profitability prior to the end of the year.
During the period ending March 31, 2002, a nominal provision of $11.7 thousand
for potential losses associated with the credit risk of loans purchased and
originated by HMIC was recorded. The Company excluding HMIC, did not record a
provision in the periods ended March 31, 2002 and 2001. During the three months
ended March 31, 2002, miscellaneous other receivables of $5.0 thousand were
charged off and $1.8 thousand of prior period losses were recovered.
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Part II
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
No Reports were filed on Form 8-K during the period.
15
Signatures
In accordance with the requirements of the Securities and Exchange Act of 1934,
Harbourton Financial Corporation caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Harbourton Financial Corporation
Date: May 15, 2002
/s/ J. Kenneth McLendon
J. Kenneth McLendon
President and Chief Executive Officer
Date: May 15, 2002
/s/ Paula M. Morgan
Paula M. Morgan
Senior Vice President and Chief Financial Officer
16