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FINANCIAL STATEMENTS AS OF DECEMBER 31 1977 TOGETHER WITH AUDITORS REPORT ARTHUR ANDERSEN & CO. CERTIFIED PUBLIC ACCOUNTANTS TAMPA, FLORIDA To the Stockholder and 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 December 31, 1977 and February 28, 1977, and the related consolidated statements of income, stockholder's equity and changes in financial position for the ten months ended December 31, 1977 and year ended February 28, 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 procedures as we considered necessary in the circumstances. The examination referred to above included tests of the records and documents relating to mortgage loans serviced for others in accordance with requirements of the Uniform Single Audit Program for Mortgage Bankers, except that for the ten months ended December 31, 1977, certain procedures in that program were modified based on our evaluation of internal control. The more significant modifications were: (1) We reduced the number of confirmation requests mailed to mort- gagors so that negative and positive requests were mailed to aproximately 3.6 percent and 0.4 percent, respectively, of the mortgagors. (2) Approximately 11 percent of the investors representing 3S percent of the principal balance of loans serviced were circularized to confirm the total of the investors' trial balance, the number of loans, the balances per the statements of arrears and prepay- ments, and documents held pending satisfaction on loans under foreclosure. Our examination disclosed no exceptions relating to mortgage loans serviced for others that, in our opinion, paragraph four of that program requires us to report. In our opinion, the accompanying consolidated financial statements present fairly the financial position of u.s. Home Mortgage Corporation and subsidiaries as of December 31, 1977 and February 28, 1977, and the results of their operations and the changes in their financial position for the periods then ended in conformity with generally accepted accounting princi- ples consistently applied during the periods. ~~,,.f c:;, Tampa, Florida, March 10, 1978. - U. S. HOME MORTGAGE CORl (A Wholly Owned Subsidial CONSOLIDATED DECEMBER 31, 1977 j ASSETS December 31, February 28, 1977 1977 CASH (Note 2) $ 696,687 $ 625,108 LIAI Sl INVENTORY OF MORTGAGE LOANS (Notes 1 and 2): First mortgage loans held for sale 22,154,877 13,496,816 GNMA mortgage-backed securities held An for sale 1,021,713 6,929,792 Construction loans 206,200 926,607 Ac FE DEFERRED COMMITMENT FEES (Note 1) 206,446 206,630 MORTGAGES RECEIVABLE, held for investment ($648,963 and $17,265 due in one year) - Notes 2 and 5 803,033 169,875 COM!' FEDERAL NATIONAL MORTGAGE ASSOCIATION STOCK, at cost (market value of $59,300 and $54,500, respectively) - Note 3 68,028 58,933 STO< C( fROPERTY AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $70,997 and $55,065 (Note 1) 89,437 82,155 C, RE OTHER ASSETS 310,043 300,499 $25,556,464 $22,796,415 The accompanying notes are an in1 1E MORTGAGE CORPORATION AND SUBSIDIARIES Owned Subsidiary of U.S. Home Corporation) CONSOLIDATED BALANCE SHEETS ~MBER 31, 1977 AND FEBRUARY 28, 1977 :uary 28, 1977 625,108 496,816 .929,792 926,607 206,630 169,875 58,933 82,155 300,499 .796,415 LIABILITIES AND STOCKaOLDER'S EQUITY LIABILITIES: Short-term debt (Notes 1 and 2) - Secured bank financing Securities sold under repurchase agreements Amounts payable to bank subsequently converted to secured bank financing Accounts payable and accrued expenses Federal and state income taxes (Notes 1 and 4) - Current Deferred Total liabilities CO~lITMENTS AND CONTINGENCIES (Notes 5 and 6) STOCKHOLDER'S EQUITY: Common stock, $100 par value, 100 shares authorized and outstanding Capital in excess of par value (Note 5) Retained earnings lotes are an integral part of these balance sheets. December 31, 1977 $19,514,384 9~0 ,000 1,966,780 441,443 237,017 12,127 23,151,751 10,000 2,105,098 289,615 2,404,713 $25,556,464 February 28, 1977 $12,112,907 '5,877 ,500 2,326,563 442,967 82,519 (81,073) 20,761,383 10,000 2,005,098 19,934 2,035,032 $22,796,415 1,115,611 756,002 1,474,865 1,177 ,440 90,000 262,500 2,680,476 2,195,942 545,681 129,543 276,000 64,300 $ 269,681 $ 65,243 ""'f':"!""'" i,'-""" u.s. HONE MORTGAGE CORPORATION AND SUBSIDIARIES (A WhOlly ~~ned Sunsidiary of u.S. Home Corporation) CONSOLIDATED STATEMENTS OF INCOME FOR THE TEN MONTHS ENDED DECEMaER 31, 1977 AND FOR THE YEAR ENDED FEBRUARY 28, 1977 Ten Months Ended December 31, 1977 ~VENUES (Note 1); Interest on mortgages receivable Loan origination fees Servicing fees Other $1,543,448 1,103,959 495,144 83,606 3,226,157 EXPENSES: Interest General and ad~inistrative (including depreciation and amortization of $17,139 and $16,731) Unrealized loss on inventory of mortgage loans (Note 1) INCOME BEFORE INCOME TAXES PROVISION FOR INCOME TAXES (Notes 1 and 4) NET INCOME Year Ended February 28, 1977 $ 1,161,056 688,787 376,684 98,958 2,325,485 The accompanying notes are an integral part of these statements. --"~i,t!1l~f!"i'." .' ;'(:j.~'~}~('; .' ........ ..... , .. :'~ "\",, :;; U.S. HOME MORTGAGE CORPORA.'rION AND SUBSIDIARJES ;~~ +\~ ~:~ ~t$ jt;ili! jlj '~l~l ~-r ,':"/ (AWho11r Owned Subsidiary of U.S. Home Corporation) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE TEN MONTHS ENDED DECEMBER 31, 1977 AND FOR THE YEAR ENDED FEBRUARY 28, 1977 >" t' :<. 'J':' Common Capital in Retained Stock Excess of Earnings $100 Par Par Value (Deficit) BALANC:~, Fe1;lruary 29, 1976 $ 10,000 $2,005,098 $( 45,309 ) Net income for the year 65,243 BALANCE , february 28, 1977 10,000 2,005,098 19,934 Net income for the period 269,681 Contr:i.bution of capital by U. S. Home Corporation (Note 5) 100,000 BALANCE, De~ember 31, 1977 $ 10,000 $2,105,098 $ 289,615 The accompanying notes are an integral part of these statements. .ir,,,,.,, ,: ," u.s. HOME MORTGAGE CORPORATION AND SUBSIDIARIES (A Wholly Owned Subsidiary of u.s. Home Corporation) CONSOLJDATED STATEMENTS OF CHANGES IN FINANCJAL POSITION FOR THE TEN MONTHS ENDED DECEMBER 31, 1977 AND FOR THE YEAR ENDED FEBRUARY 28, 1977 FUNDS PROVIDED: Net income Charges to income not requiring (providing) funds: Increase (decrease) in allowance for unrealized loss on inventory of mortgage loans Amortization of commitment fees Provision (credit) for deferred income taxes Other Funds provided from operations Mortgage loans and GNMA mortgage-backed securities sold, net of discount IncJ;ease in- Short-term debt and amounts payable to bank subsequently converted to secured financing Accounts payable and accrued expenses Current income taxes Decrease in mortgages receivable and construction loans Contribution of capital by U. S. Home Corporation Total funds provided FUNDS APPL lED: Mortgage loans originated, net of discount Increase (decrease) in- Cash Deferred commitment fees Property and equipment Other Total funds applied Ten Months Ended December 31, 1977 Year Ended February 28, 1977 $ 269,681 $ 65,243 (172,500) 262,500 178,835 197,645 93,200 ( 20,100) 3 ,813 1,131 373,029 506,419 91,622,416 2,144,194 133,976 154,498 87,249 100,000 $ 94,615,362 $ 94,396,618 71,579 178,651 24,095 ( 55,581) $ 94,615,362 50,104,397 15,926,902 97,249 27,340 847,496 $ 67,509,803 $ 66,500,733 401,259 404,275 36,577 166,959 $ 67,509,803 The accompanying notes are an integral part of these statements. Ill""',' ',"~',"," >,,,"; u.s. HOME MORTGAGE CORPORATION AND SUBSIDIARIES (A Wholly Owned Subsidiary of U.S. Home Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1977 AND FEBRUARY 28, 1977 (1) SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Basis of Presentation - The accompanying consolidated financial statements include the ac- counts of the Company and its wholly owned subsidiaries, Real Estate Appraisals, Inc. and U. S. H. Mortgage Services, Inc. after elimination of significant intercompany balances and transactions. In 1977, the Company changed its fiscal year end from February 28/29 to December 31. Accordingly, the consolidated financial statements are presented as of December 31, 1977 and for the ten months then ended and as of February 28, 1977 and for the year then ended. Income Recognition - The Company originates residential mortgage loans and sells the mort- gages to investors. In some cases, the Company originates the loans for other lenders. Approximately 90% of the loans originated during the year ended February 28, 1977 and the ten months ended December 31, 1977 were to purchasers of homes fr9m divisions of U. S. Home Corporation. Loan origination fees result from services performed by the Company in origin- ating mortgage loans and are recorded as income when the related mortgage loan is closed. The Company services on a fee basis a majority of mortgages sold. The related service fees, which are generally based on a percentage of the outstanding principal balances of the mortgages, are recorded as income when the installment collections on the mortgages are received. 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 on a straight-line basis over the related commitment period. If a commitment is exercised or is determined to be unusable prior to its expiration date, the balance of the fee deferred at that date is charged or credited to income. Discounts received in connection with loans originated are deferred and recognized as income when the related loans are sold. Inventory of Mortgage Loans - The Company issues mortgage-backed securities guaranteed by the Government National Mortgage Association (GNMA) under provisions of the National Housing Act. GNMA 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 receivable nor the securities payable appear on the balance sheet. GNMA mortgage-backed securities issued and outstanding in the name of the Company and those held under short-term guaranteed repur- chase agreements have not been accounted for as sales and are included in the balance sheet. r - 2 - First mortgages receivable and GNMA mortgage-backed securities are held for sale in the normal course of business and are recorded at the lower of cost or market on an aggregate basis. The computation of market value considers any gains or losses on mandatory and standby loan purchase and delivery contracts. At December 31, 1977 and February 28, 1977 the cost net of discount exceeded market value by approximately $90,000 and $262,000, respectively. Accordingly, a valuation allowance was estaQ1ished with a corresponding charge to net income. Construction loans are recorded at the unpaid principal balances of the loans, which approximated their market value. Mort~age Servicin~ Activities - At December 31, 1977, the Company was servicing approximately 2,200 loans totaling $56,579,000 for permanent investors and approximately 460 loans totaling $18,096,000 for the Company's own acCount. In addition, the Company was servicing mortgage-backed securities guaranteed by the Govern- ment National Mortgage Association under the provisions of the National Housing Act. The principal amounts of these securities outstanding at December 31, 1977, were approximately $119,229,000. Such amounts also rep- resent the approximate principal amount of the related mortgages that serve as collateral for the securi ties. Not included in the Company's balance sheet are related trust funds for the foregoing of approximately $2,583,000 (of which $783,000 was attri- butable to FHA insured loans) on deposit in special bank accounts. The Company carries fidelity bond coverage of $5,000,000 and mortgage impair- ment insurance of $100,000 for anyone mortgage. Income Taxes - The Company J01ns with its parent company in filing consolidated in- come tax returns. Deferred income taxes result from different methods being utilized in the recognition of certain income and expense items for financial and income tax reporting purposes as set forth in Note 4. Depreciation and Amortization - Property and equipment are depreciated using the straight-line method at rates calculated to amortize the cost of the assets over their estimated useful Ii ves. The ranges of lives used in computing depreciation are as follows: Furniture and fixtures Equipment Leasehold improvements Years 5 - 8 5 - 8 1 - 8 mr-''''''!~", V\ ,,' ", ,I - 3 - I I i (2) CREDIT AGREEMENT AND SHORT-TERM DEBT: The Company is a party to a Warehousing Credit Agreement (the "Agreement") with a bank which has committed to loan the COmpany up to $22,000,000. As of December 31, 1977, borrowings under the Agreement totaled $18,969,384. Borrowings under the Agreement are payable on July 31, 1978. Borrowings pursuant to the Agreement bear interes t at 1/4% above the prime rate, which was 7-3/4% at December 31, 1977. In addition, tht;!. Com- pany pays a fee to the bank for services rendered under this Agreement at the rate of 1/4 of 1% of the average daily borrowing~ under the Agreement. Under the terms of the Agreement, unrestricted compensating balances are to be maintained at the bank equal to 15% of the commitment. A balance defi- ciency fee is payable at an amount equal to the interes t at the average daily rate of 1/21. 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 Decembe r 31, ],977, and ac- cordingly no deficiency fees were paid or accrued. The Company has pledged all first mortgages held for sale, GNMA mortgage-backed securities held for sale excluding those sold under repurchase agreements and construction loans as collateral under the Agreement. The terms of the Agreement cqn- tain indebtedness, net worth and various other restrictions. At Decem- ber 31, 1977, the Company was in compliance with the provisions of the Agreement. Also included in the balance sheet as of December 31, 1977 as secured bank financing is $545,000 due the same bank under a note which is due April 30, 1978. This note is secured by two mortgage notes receivable ag- gregating $645,000 and bears interest at 1/2 of 1% above the prime rate. Securities sold under the repurchase agreements consisted of GN~~ mortgage-backed securities. Under the terms of the repurchase agreements the COmpany sells the securities and simultaneously agrees to repurchase the same securities at the same price at a specified date in the future. At December 31, 1977 the Company has an agreement with a third party to purchase from the Company the securities at the repurchal,;e date. The re- purchase agreement bears interest at 6.65% at December 31, 1977. The maximum amounts of short-term borrowings outstanding at any time during the ten months ended December 31, 1977 and the year ended Febru- ary 28, 1977 were $21,231,000 and $18,166,000, respectively. The average short-term borrowings outstanding during the periods were $18,138,000 and $11,465,00U, respectively, and the applicable weighted average interest rates, without giving effect to compensating balance requirements were 7.34% and 6.82%, respectively. Computations of the weighted average rates were made based upon the average monthly outstanding loan ba1ancel,;o ~c"- ';~' .... ,,'"~.". ."'i1.'" :;:::} 'J ,,:~ ~~;:: 1; <~: '~),: }::,:~:~ :', ,', - 4 - (3) FEDERAL NATIO~AL MORTGAGE ASSOCIATION (FNMA) STOCK; At December 31, 1977, the Company was required to be the Qwner of record of approximately 3,500 shar~s of FNMA common stock in order to cow"" ply with the FNMA Servicing Agreement. As of that date, the Company was in compliance with the stock ownership requirements. (4) INCOME TAXES: The pr~vision for income taxes for the ten months ended December 31, 1977 and for the year ended February 28, 1977, consisted of the following: Provision (Credit ) Ten Months Year Ended Ended December 31, Febr~ary 28, 1977 1977 Current - Federal $ 165,000 $ 76,000 State 17,800 8 ~ 400 182,~00 84,400 Deferred - Federal 84,000 (18,100) State 9,200 ( 2,000) 93,200 (20,100) Total provision $ 276,000 9 64~300 Deferred income tax provisions (credits) res~lt from timing differ- ences in the recognition of revenue and expense for financial statement and income tax purposes. The source and tax effect of significant timing dif,... ferences for the ten months ended December 31, 1977 and for the year enqed February 28, 1977 are as follows: Provision Ten Months Ended December 31, 1977 (Credit) Year Ended F~bruary 28, 1977 Nonrefundable commitment fees, capitalized for financial reporting and deducted currently for income tax reporting $ ( 100) $104,400 Recognized currently for financial reporting and deferred for income tax reporting - Unrealized loss on inventory of mortgage loans 87,300 ( 13 2 , 7 00 ) Provision for future interest and losses on sales of mortgages 6,600 7,900 Other ( 600) $ 93,200 300 $(20,100) - 5 - (5) TRANSACTIONS WITH U. S. HOME CORPORATION: During the ten months ended December 31, 1977 and the year ended February 28, 1977, in connection with providing commitments for mortgage financing to U. S. Home Corporation building divisions, the Company agreed ~o adjust the cost of the financing for certain marketing profits resulting from the sale of the mortgage loans to permanent investors. The adjustment for marketing profits wa~ l~mited to discount points paid to the Company by the divisions. Such adjustments during these periods were $230,000 and $148,000, respect~ve1y. The Company leases office space and receives data processing services from U. S. Home Corporation. Rentals paid were $39,200 for th~ ten months ended December 31, 1977 and $36,100 for the year ended February 28, 1977, Data processing fees were $32,400 for the ten months ended December 31, 1977 and $21,000 for the year ended February 28, 1977. In March, 1977 the Company purchased, without recourse, from affili- ates two mortgages aggregating $695,000. In connection with this transac- tion the parent made a contribution of capital to the Company of $100,000. These mortgages are due and payable in January, 1978 ($250,000) and April, 1978 ($395,000). Subsequent to December 31, 1977 the note due in JanuarY, 1978 was paid in full. In September~ 1972 the Company originated a $3,300,000 first mortgage loan for a limited partnership in which an affiliate is the general part- ner, and subsequently sold the mortgage with recourse to a financial insti- tution. Tne current balance of this loan is approximately $3,1;35,000. In May, 1976, the Company entered into an agreement with its parent company, whereby the parent will acquire tne 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 mortgi;lge with re..... course. (6) COfillITMENTS AND CONTINGENCIES: As of December 31, 1977, the Company had issued mortgage purchase ColIt"" mitments which have remaining balances of $17,964,000 ($17,075,000 is ap- plicable to affiliates). The Company had arrangements for approximately $13,000,000 of standby mortgage delivery commitments and $36,000,000 of GNMA mortgage-backed security delivery commitments from institutional in~ vestors, of which $10,000,000 were mandatory delivery commitments. The Company occupies office space under noncancelable operating leases witll remaining annual rentals of approximately $33,600 in 1978, $23,600 in 1979 and $17,300 in 1980. The Company incurred lease rental expenses for the ten months ended December 31, 1977 and the year ended February 28, 1977 of approximately $95,000 and $93,000, respectively. - 6 - (7) PROFIT SHARJNG PLAN: The Company participates in the profit sharing plan (which may be teJ;- 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 Director~ 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 5 years of eligibility. The aggregate con- tdbutions made for the ten months end~d December 31, 1977 and the yeqr ended February 28, 1977 were $34,800 and $27,600, respectively. (8) 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. U.S.H. Mortgage Services, Inc. was dissolved in Dec~mbe+, ~977~ Condensed balance sheets of the subsidiaries as of December 3,1, 1977 and February 28, 1977, which are included in the accompanying consolidated balance sheets, are as follows: REAL ESTATE APPRAISALS ~ INC. CONDENSED BALANCE SHEETS ASSETS DECEMBER 31, 1977 FEBRUARY 28, 1977 Cash Other 3,692 169 3,861 $105,898 162 $106,060 STOCKHO~DI::R 's EQUITY 3,861 $106,060 U.S.H. MORTGAGE SERVICES, INC. CONDENSED BALANCE SHEET ASSETS FE6RUARY 28, 1977 Cash Other ~109,308 339 $109,647 STOCKHOLDER'S EQUITY $109,647