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CONSOLIDATED FINANCIAL STATEMENTS AS OF 02/28/77 TOGETHER WITH AUDITORS REPORT ARTHUR ANDERSEN & CO. CERTIFIED PUBLIC ACCOUNTANTS TAMPA, FLORIDA To the Board of Directors of u.s. Home Mortgage Corporation: We have examined the consolidated financial statements of U.S. HOME MORTGAGE CORPORATION for the year ended February 28, 1977, and have issued our report thereon dated May 6, 1977. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing pro- cedures as we considered necessary in the circumstances. The examination referred to above included tests relating to mort- gage loans serviced for others in accordance with the requirements of the Uniform Single Audit Program for Mortgage Bankers. Our examination dis- closed no exceptions or errors in records relating to mortgage loans serviced for others that, in our opinion, paragraph 4 of that Program re- qu i res us to repo rt. We are Independent Certified Public Accountants with respect to U.S. Home Mortgage Corporation within the meaning of the Code of Profes- sional Ethics of the American Institute of Certified Public Accountants. a77 .~ o ~r - _- ( ~. Tampa, Florida, May 6, I 977 . ARTHUR ANDERSEN & CO. CERTIFIED PUBLIC ACCOUNTANTS TAMPA, FLORIDA To the Board of Directors of U.S. Home Mortgage Corporation: We have examined the consolidated balance sheets of U.S. HOME MORTGAGE CORPORATION (a Florida corporation and a wholly owned subsidiary of U.S. Home Corporation) and subsidiaries as of February 28, 1977 and February 29, 1976, and the related consolidated statements of income (loss), stockholder's equity and changes in financial position for the years then ended. Our examination was made in accordance with generally accepted audit- ing standards, and accordingly included such tests of the accounting records and such other auditing procedures, including tests of escrow funds relating to owned and serviced loans, as we considered necessary in the circumstances. The procedures followed with respect to such escrow funds are set forth in the following paragraph. Escrow fund cash in banks as shown by the mortgage service led- gers was reconciled with amounts confirmed directly to us by the depositor- ies. By reference, on a test basis, to data supporting collections and 'disbursements of such funds we satisfied ourselves that such deposits are adequate but not excessive in relation to the disbursements made from the funds and that satisfactory procedures are followed to account for such funds. In our opinion, the accompanying consol idated financial statements present fairly the financial position of U.S. Home Mortgage Corporation and subsidiaries as of February 28, 1977 and February 29, 1976, and the results of their operations and the changes in their financial position for the years then ended in conformity with generally accepted accounting principles appl ied on a consistent basis after giving retroactive effect to the change (with which we concur) to presenting consolidated financial statements as explained in Note 1 of Notes to Consol idated Financial Statements. ~ a /l~~~~ ( Lo'. Tampa, F lor i da , May 6, 1977. u.s. HOME MORTGAGE CORPC (A Wholly Owned Subsidiary CONSOL I DATED BJl FEBRUARY 28, 1977 AND ASSETS INVENTORY OF MORTGAGE LOANS (Notes 1 and 2). First mortgage loans held for sale GNMA mortgage-backed securities held for sale Construction loans 1977 1976 (Note 1) $ 625, 108 $ 223,849 13,496,816 4,204,342 6,929,792 926,607 353,130 206,630 169,875 1,590,848 CASH (Note 2) DEFERRED COMMITMENT FEES (Note 1) FIRST MORTGAGES RECEIVABLE, held for investment ($17,265 and $513,485 due in one year) -Note FEDERAL NATIONAL MORTGAGE ASSOCIATION STOCK, at cost (market of $54,500 and $49.300, respectively) - Note 4 58,933 52,851 PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $55,065 and $38,021 (Note 1) 82, 155 300,499 62,309 105,552 OTHER ASSETS $22,796,415 $6,592,881 The accompanying notes are an integ JRATION AND SUBSIDIARIES I of U.S. Home Corporation) ~LANCE SHEETS ) FEBRUARY 29, 1976 LIABILITIES AND STOCKHOLDER'S EQUITY 1977 1976 (Note 1) LIABILITIES: Short-term debt (Note 2) - Secured bank financing Securities sold under agreements to repurchase Cash overdraft (subsequently converted to secured bank financing) - Note 2 Accounts payable Accrued expenses Federal and state income tax liability (Notes 1 and 5)- Current Deferred Total 1 iabi 1 ities $12, 112,907 $3,289,682 5,877,500 2,326,563 1,100,386 48,787 98,874 394, 180 139,944 82,519 55,179 (81,073) (60,973) 20,761,383 4,623,092 COMMITMENTS AND CONTINGENCIES (Notes 6 and 7) STOCKHOLDER'S EQUITY: Common stock, $100 par value, 100 shares authorized and outstanding Capital in excess of par value Retained earnings (deficit) 10,000 2,005,098 19,934 10,000 2,005,098 (45,309) 1,969,789 $6,592,881 2,035,032 $22,796,415 iral part of these balance sheets. ~ U.S, HOME MORTGAGE CORPORATION AND SUBSIDIARIES (A Wholly Owned Subsidiary of U.S. Home Corporation) CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THE YEARS ENDED FEBRUARY 28, 1977 AND FEBRUARY 29, 1976 REVENUES (Note 1) Interest on mortgages receivable Loan origination fees Servicing fees Other EXPENSES: Interest General and administrative (including depre- ciation and amortization of $16,731 and $14,509) Loss on sale of mortgages (Note 9) Unreal ized 105$ on inventory of mortgage loans and future del iverycontracts (Notes 1 and 7) Income (loss) before income taxes PROVISION (CREDIT) FOR INCOME TAXES (Notes 1 and 5): Cu rrent Deferred NET INCOME (LOSS) 1977 $1 , 161 ,056 688,787 376,684 98,958 2,325,485 756,002 1,177,440 262,500 2,195,942 129,543 84,400 (20,100) 64,300 $ 65,243 The accompanying notes are an integral part of these statements. 1976 (Note 1) $ 566,619 151,236 233,502 1 06, 1 77 1 ,057 , 534 378,558 656,348 70, 134 1,105,040 (47,506) 53,800 (77,500) (23,700) $ (23,806) ':~t~'i4":~cF~~'lfi''',\~-~, .' U.S. HOME MORTGAGE CORPORATION AND SUBSIDIARIES (A Wholly Owned Subsidiary of U.S. Home Corporation) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED FEBRUARY 28, 1977 AND FEBRUARY 29, 1976 The accompanying notes are an integral part of these statements. u.s. HOME MORTGAGE CORPORATION AND SUBSIDIARIES (A Wholly Owned Subsidiary of U.S. Home Corporation) CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION FOR THE YEARS ENDED FEBRUARY 28, 1977 AND FEBRUARY 29, 1976 FUNDS PROVIDED: Net income (loss) Charges to income not requirIng (providing) funds: Unrealized loss on inventory of mortgage loans and future delivery contracts Provision for future interest Amortization of commitment fees Deferred credit for income taxes Depreciation and amortization Funds provided from operations Mortgage loans and GNMA mortgage-backed securities sold, net of discount Increase in- Short-term debt and cash overdraft Accounts payable and accrued expenses Decrease in first mortgages receivable and construction loans Contribution of common stock of U.SoH. Mortgage Services, Inc. by U.S. Home Corporation Total funds provided FUNDS APPLIED: Mortgage loans originated, net of discount Increase in- Cash Deferred commitment fees Property and equipment Other Total funds applied 1977 1976 (Note 1) $ 65,243 $ ( 23,806) 262,500 ( 15,600) 79,900 197,645 33,068 ( 20,100) ( 77,500) 16,73 1 14,509 506,419 26, 1 71 50,104,397 24,916,472 15,926,902 958,096 97,249 105,460 847,496 166,119 ---- 5,000 $67 ,48~~~1 ~26., 177,31]. $66,500,733 401,259 404,275 36,577 139,619 $67,482,463 $26,035,382 215,622 ( 73 ,686) $26,177,318 The accompanying notes are an integral part of these statements. ~' u.s. HOME MORTGAGE CORPORATION AND SUBSIDIARIES (A Wholly Owned Subsidiary of U.S. Home Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1977 AND FEBRUARY 29, 1976 (I) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Consol idation - On March I, 1976, the Company retroactively changed its method of accounting for its investment in its wholly owned subsidiaries from the equity method of accounting to consolidating the accounts of the subsidi- aries with those of the Company. The financial statements for 1976 have been restated for comparative purposes to consolidate the accounts of the subsidiaries. Since the equity method was previously used, the change to presenting consolidated financial statements did not affect previously re- ported net income. All significant intercompany balances and transactions between the Company and its wholly owned subsidiaries, Real Estate Appraisals, Inc. and U.S.H. Mortgage Services, Inc., have been el iminated in consolidation. Revenues - The Company originates mortgage loans with individual homeowners and commercial entities and sells the mortgages to investors. The Company con- tinues to service on a fee basis substantially all mortgages sold. The re- lated service fees, which are generally based on a percerttage of the out- standing principal balances of the mortgages, are recorded as income when the installment collections on the mortgages are made. Loan origination fees result from services performed by the Company in arranging and originating mortgage loans and are recorded as income when the related mortgage loan is funded and closed. Loan commitment fees result from the issuance or purchase of mortgage commitments, the terms of which have been accepted by the borrower and the lender. Fees paid or received by the Company for issuing commitments are recorded as deferred commitment fees and are amortized to income on a straight-l ine basis over the related commitment period. If a commitment is exercised or is determined to be unusable prior to the expiration date, the balance of the fee deferred at that date is charged or credited to income. Inventory of Mortgage Loans _ The Company has issued mortgage-backed securities guaranteed by the Government National Mortgage Association under provisions bf the N~tional Housing Act. Mortgage-backed securities sold to permanent investors, and the simultaneous placement of the related mortgages in trust, have been accounted for as a sale of mortgages; accordingly, neither the mortgages re- ceivable nor the securities payable appear on the balance sheet. ~ - 2 - Mortgage~backed securities issued and outstanding in the name of the Company and those sold under short-term guaranteed repurchase agreements have not been accounted for as sales and are included in the balance sheet. First mortgages and GNMA mortgage-backed securities are carried at the lower of cost or market on an aggregate basis. These loans and sec- urities are held for sale in the normal course of business. The discounts on these mortgages and securities are recorded as income at the time the related mortgage is sold to a permanent investor. At February 28, 1977, the book value of first mortgages and GNMA mortgage-backed securities ex- ceeded their market value by $34,000 and $106,000, respectively. Accordingly, a valuation allowance of $140,000 has been established with a corresponding charge to net income as of February 28, 1977. At February 29, 1976, the market value of first mortgages approximated their book value. Construction loans are carried at the unpaid principal balances of loans disbursed. At February 28, 1977 and February 29, 1976, the market value of these loans approximated their book value. Mortga~e Servicing Activities _ At February 28, 1977, the Company was servicing approximately 2,200 loans for permanent investors totaling $56,728,000 and approximately 380 loans totaling $13,868,000 for the Company's Own account. In addition, the Company was servicing mortgage-backed securities guaranteed by the Government National Mortgage Association under the provisions of the National Housing Act. The principal amounts of these securities outstanding at February 28, 1977, were approximately $70,190,000. Such amounts also represent the approx- imate principal amount of the related mortgages that serve as collateral for th~ securities. Related trust funds for the foregoing of approximately $1,578.000 (of which $532,000 was attributable to FHA insured loans) on deposit in special bank ac- counts are not included in the Company's balance sheet. The Company carries fidel ity bond coverage of $5,000,000 and mortgage impairment insurance of $100,000 for anyone mortgage. Income Taxes - The Company JOins with its parent company in fil ing consolidated income tax returns and therefore, any losses for tax purposes are appl ied against the taxable income of the consol idated group. Deferred income taxes result from different methods being utilized in the recognition of certain income and ex- pense items for financial reporting and income tax purposes as set forth in Note 5. Depreciation and Amortization _ Property and equipment are depreciated by the straight-line method at rates calculated to amortize the cost of the assets over their estimated useful 1 ives. The ranges of lives used in computing Furniture and fixtures leasehold improvements depreciation are as follows: Years ~ 2 - 8 but not exceeding terms of lease - 3 - (2) CREDIT AGREEMENT AND SHORT-TERM DEBT: The Company is a party to a Warehousing Credit Agreement (the "Agreement") with a Minneapolis bank which has committed to loan the Company up to $12,000,000. As of February 28, 1977, borrowings under the Agreement total- ed $12,112,907. Borrowings under the Agreement are payable on July 31, 1977 . Borrowings pursuant to the Agreement bear interest at 1/2% above the prime rate (6 3/~% .a~' February 28, 1977). . Linder the terms of th~Agreement, unrestricted compensating balances are to be maintained at the bank equal to 15% of the commitment. A balance deficiency fee is payable at an amount equal to the interest at the average daily rate of 1/2% per annum above prime on the average amount by which the daily demand deposit balances maintained by the Company are less than 15% of the commitment. The Company has maintained average daily balances in excess of the minimum during the period ended February 28, 1977, and accordingly no deficiency fees were paid or accrued. The Company has pledged first mortgages held for sale, GNMA mortgage-backed securities held for sale and construction loans in the amount of $15,018,000, including loans in process which are represented by the cash overdraft, as collateral under the Agreement. The terms of the Agreement contain indebted- ness, net worth and various other restrictions. At February 28, 1977, the Compa- ny was in compliance with those provisions which had not been waived by the bank. The securities sold under agreements to repurchase bear interest at 4.9% to 5.1% and are secured by GNMA mortgage-backed securities in the amount of $5,956,000. Under the terms of the agreements, t~e Company is required to repurchase the securities in March, 1977. The maximum amount of short-term borrowings outstanding at any time during the years ended February 28, 1977 and February 29, 1976 were $23,530,000 and $6,899,000, respectively. The average short-term borrowings outstanding during the years were $11,465,000 and $4,546,000, respectively, and the ap- plicable weighted average interest rates, without giving effect to compensat- ing balance requirements were 6.82% an'd 8.56%. respectively. Computations of the weighted average rates were made based upon the average monthly outstanding loan balances. (3) WHOLLY OWNED SUBSIDIARIES: Real Estate Appraisals, Inc. and U.S.H. Mortgage Services, Inc. are wholly owned subsidiaries of the Company and have been inactive since in- ception. Condensed balance sheets of the subsidiaries as of February 28, 1977 and February 29, 1976, which are included in the accompanying consol- idated balance sheets, are as follows: REAL ESTATE APPRAISALS, INC. CONDENSED BALANCE SHEET ASSETS 1977 1976 Cash $105,898 $105,012 Other 162 245 S106.060 S105.257 STOCKHOLDERIS EQUITY $106,060 $105,257 ~""> - 4 - U.S.H, MORTGAGE SERVICES, INC. CONDENSED BALANCE SHEET ASSETS 1977 $109,308 339 $109,647 $109,647 Cash Other STOCKHOLDER'S EQUITY (4) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) STOCK: 1976 $109,645 170 $109,815 $109,815 At February 28, 1977, the Company was required to be the owner of record of approximately 3,200 shares of FNMA common stock in order to comply with the FNMA Servicing Agreement. As of that date, the Company was in com- pliance with the stock ownership requirements. (5) INCOME TAXES: For the years ending February 28, 1977 and February 29, 1976, the pro- vision (credit) for income taxes consisted of the following: 1977 1976 Currently payable - Fede ra 1 State $ 76,000 8,400 84,400 Deferred - Federal State ( 1 8, 1 00) ( 2,000) (20,100) $ 64,300 Total provision (credit) $ 47,700 6,100 53,800 (71 ,400) ( 6,100) (77,500) $(23,700) Deferred income tax provisions (credits) result from timing differences in the recognition of revenue and expense for financial statement and income tax purposes. The source and tax effect of significant timing differences for fiscal years 1977 and 1976 are as follows: Nonrefundable commitment fees, deducted currently for tax purposes Recognized currently for financial reporting purposes - Estimated decl ine in market value of mortgage inventory Provision for estimated loss on future del ivery contracts Provision for future interest and losses on sales of mortgages Other Provision (Credit) 1977 . 1976 $104,400 $ ( 1 6, 700) (]0,700) (62,000) 7,900 (60,800) 300 $(20,100) $(77,500) - 5 - (6) TRANSACTIONS WitH AFFILIATED COMPANIES: In September, 1972 the Company originated a $3,300,000 first mortgage loan for a limited partnership in which an affiliate is the general partner, and subsequently sold the mortgage with recourse to a financial institu- tion. The current balance of this loan is approximately $3,180,000. In May, 1976, the Company entered into an agreement with its parent company, whereby the parent will acquire the related property, if it should become necessary for the Company to reacquire the mortgage and institute foreclo- sure proceedings by virtue of its previous sale of the mortgage with recourse. In fiscal year 1977, in connection with providing commitments for mortgage financing to affiliated companies, the Company agreed to adjust the cost of the financing for certain marketing profits which resulted from the sale of the mortgage loans to permanent investors. The adjustment for marketing profits was 1 imited to discount points paid to the Company by the affil iated companies. Such adjustments during fiscal year 1977 totaled $148,000. The Company leases office space and receives data processing services from its parent. Rentals paid to the parent were $36,100 in 1977 and $45,800 in 1976. Data processing fees were $21,000 in 1977 and $15,000 in 1976. (7) COMMITMENTS AND CONTINGENCIES: As of February 28, 1977, the Company had issued or was in the process of issuing mortgage purchase commitments aggregating approximately $44,900,000 ($42,900,000 is applicable to affiliated companies). The Company had arrange- ments for approximately $10,800,000 of standby mortgage delivery commitments and $41,000,000 of standby mortgage-backed security delivery commitments from institutional investors. As of February 28, 1977, the Company had entered into contracts for the future purchase and sale of GNMA mortgage-backed securities in the principal amount ot $27,000,000. At this date, the contract purchase prices exceeded the contract selling prices, in the aggregate, by approximately $122,500. Ac- cordingly a provision for this estimated loss has been charged to net income. The Company occupies office space under noncancelable leases wi th re- maining annual rentals of approximately $20,700 in 1978 and $600 in 1979. The Company incurred lease rental expenses in 1977 and 1976 of approximately $93,000 and $86,000, respectively. (8) PROFIT SHARING PLAN: The Company participates in the profit sharing plan (which may be ter- minated at any time) of its parent for the benefit of its employees. The annual contributions may be made in such amounts as the Board of Directors of the Company shall determine, not to exceed 15% of the total compensation (as defined) of all participating employees. Generally, employees are eli- gible to participate in the plan after one year of continuous employment and become fully vested after 10 years of eligibility. The aggregate con- tributions made during 1977 and 1976 were $27,600 and $18,500, respectively.