FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1995
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 No. 0-14447
INVG MORTGAGE SECURITIES CORP.
(Exact name of Registrant as specified in its Charter)
Maryland 13-3397560
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Meadow Wood Crown Plaza
1575 Delucchi Lane, Suite 115-20 89502
Reno, Nevada (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (702) 828-5405
________________________________________________________________________
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 and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock as of the latest practicable date
Class of Common Stock Outstanding at August 11, 1995
--------------------- ---------------------------
$.01 Par Value 596,475 Shares
(Exclusive of Treasury Stock)
<PAGE>
INVG MORTGAGE SECURITIES CORP.
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited) Page Number
Condensed Consolidated Statements of Income (Loss)
Three months and six months ended
June 30, 1995 and 1994 3
Condensed Consolidated Balance Sheets
June 30, 1995 and December 31, 1994 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II. Other Information
Item 4. Results of Votes of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
INVG MORTGAGE SECURITIES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1995 1994 1995 1994
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Mortgage Certificates, net $ 6,784,040 $12,345,965 $13,759,080 $21,228,494
Mortgage Derivative Investments 1,414,704 471,230 2,736,763 1,170,178
------------- ------------- ------------- -------------
Total Interest Income 8,198,744 12,817,195 16,495,843 22,398,672
Interest Expense 7,027,448 12,202,358 14,235,765 21,597,316
------------- ------------- ------------- -------------
Net Interest Income 1,171,296 614,837 2,260,078 801,356
Gain (Loss) on Sales of Investments (104,295) (25,228) (104,295) 30,546
Gain on Sale of GNMA Certificates 0 0 0 4,500,169
Impairment of Mortgage Derivative Investments (362,202) 0 (362,202) 0
Valuation Reserve Provision 175,307 (985,402) 308,383 (985,402)
Other Income (Expense) 0 (8,782) 103 5,949
------------- ------------- ------------- -------------
Total Income (Loss) 880,106 (404,575) 2,102,067 4,352,618
------------- ------------- ------------- -------------
Expenses
Incentive Management Fee 194,523 175,364 194,523 389,002
Professional Fees 98,300 143,879 123,765 154,393
Trustee Fee 11,788 29,099 18,848 31,496
Management Fee and Officers' Compensation 78,000 78,000 156,000 156,000
Directors' Fees 7,500 3,000 19,500 10,000
General and Administrative 114,324 42,673 161,293 79,958
------------- ------------- ------------- -------------
Total Expenses 504,435 472,015 673,929 820,849
------------- ------------- ------------- -------------
Income (Loss) before Extraordinary Item 375,671 (876,590) 1,428,138 3,531,769
Extraordinary Item - Loss from Redemption of Bonds 0 0 0 (2,250,778)
------------- ------------- ------------- -------------
Net Income (Loss) $375,671 ($876,590) $1,428,138 $1,280,991
============= ============= ============= =============
-----------------------------------------------------------------------------------------------------------------
Per Common Share
Income (Loss) before Extraordinary Item $0.63 ($1.38) $2.38 $5.42
Net Income (Loss) $0.63 ($1.38) $2.38 $1.97
Dividends Declared $0.20 $0.20 $0.40 $0.40
Weighted Average Shares Outstanding 598,681 636,449 600,696 651,072
-----------------------------------------------------------------------------------------------------------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>>
<PAGE>
<TABLE>
INVG MORTGAGE SECURITIES CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
1995 1994
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $3,716,783 $1,425,534
Government National Mortgage
Association Certificates, at amortized cost 166,730,702 177,990,217
Other Mortgage Certificates 100,240 100,730
Mortgage Derivative Investments 27,653,790 21,322,104
Accrued Interest and Accounts Receivable 2,176,370 3,973,306
Deferred Issuance Costs 1,202,159 1,321,892
Organization Costs 65,799 74,145
Other Investments 972,902 837,149
------------- -------------
Total Assets $202,618,745 $207,045,077
============= =============
-----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
GNMA-Backed Sequential Pay Bonds $167,398,820 $178,933,727
Accrued Interest Payable 1,612,400 1,723,202
Short-term Debt 18,290,324 14,694,000
Incentive Management Fee Payable 881,945 687,421
Accrued Expenses and Other Liabilities 631,807 173,874
Dividends Payable 136,455 136,455
------------- -------------
Total Liabilities 188,951,751 196,348,679
------------- -------------
Stockholders' Equity
Common Stock, $.01 Par Value;
25,000,000 Shares Authorized;
682,275 Shares Issued and Outstanding 6,823 6,823
Additional Paid-in Capital 15,103,692 15,103,692
Treasury Shares (1995 - 85,800 shares;
1994 - 61,800) (769,939) (682,050)
Unrealized Gain on Investments 2,170,993 298,459
Retained Deficit (2,844,575) (4,030,526)
------------- -------------
Total Stockholders' Equity 13,666,994 10,696,398
------------- -------------
Total Liabilities and Stockholders' Equity $202,618,745 $207,045,077
============= =============
-----------------------------------------------------------------------------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>>
<PAGE>
<TABLE>>
INVG MORTGAGE SECURITIES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Six Months Ended
June 30,
----------------------------
1995 1994
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $1,428,138 $1,280,991
------------ ------------
Adjustments to reconcile Net Income to Net Cash
Provided by Operating Activities:
Amortization of Deferred Bond Issuance Costs 119,733 730,296
Amortization of Bond Discount 3,964,987 10,533,149
Amortization of Discount on Government
National Mortgage Association Certificates, Net (3,432,545) (6,986,939)
Amortization of Organization Costs 8,346 0
Impairment of Mortgage Derivative Investments 362,202 0
Loss (Gain) on Sales of Investments 104,295 (30,546)
Decrease in Reserve for Loss on Investments (807,834) (77,062)
Decrease in Accrued Interest and Accounts Receivable 1,796,936 848,539
Increase (Decrease) in Incentive Management Fee Payable 194,524 (384,998)
Increase (Decrease) in Accrued Expenses 457,933 (37,883)
Decrease in Accrued Interest Payable (110,802) (301,629)
------------ ------------
Total Adjustments 2,657,775 4,292,927
------------ ------------
Net Cash Provided by Operating Activities 4,085,913 5,573,918
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in Principal Amount of
Government National Mortgage Association Certificates 15,499,893 100,517,276
Investment in Other Mortgage Certificates and Investments 0 (12,527,555)
Investment in Mortgage Derivative Investments (6,728,771) (6,755,432)
Principal Collections and Proceeds from Sales of
Mortgage Derivative Investments 1,667,370 2,603,629
Cash Receipts from Other Mortgage Certificates
and Investments 490 706,036
------------ ------------
Net Cash From Investing Activities 10,438,982 84,543,954
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Principal Amount of
GNMA-Backed Sequential Pay Bonds (15,499,893) (100,600,248)
Increase in Short-term Debt 3,596,324 10,962,250
Decrease in Due to Broker 0 (2,704,621)
Repurchase of Common Stock (87,889) (473,676)
Dividends Paid (242,188) (253,836)
------------ ------------
Net Cash Used in Financing Activities (12,233,646) (93,070,131)
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 2,291,249 (2,952,259)
Cash and Cash Equivalents at Beginning of Period 1,425,534 4,464,990
------------ ------------
Cash and Cash Equivalents at End of Period $3,716,783 $1,512,731
============ ============
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
INVG MORTGAGE SECURITIES CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. - Basis of Presentation
In the opinion of the Company, the accompanying condensed consolidated
financial statements contain all adjustments necessary to present fairly
the financial position as of June 30, 1995 and the results of operations
and the cash flows for the six months ended June 30, 1995 and 1994.
Operating results for the quarter and six months ended June 30, 1995 are
not necessarily indicative of the results that may be expected for the
entire year. These financial statements should be read in conjunction with
the December 31, 1994 financial statements and notes thereto.
Note 2. - Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
Investors GNMA Mortgage-Backed Securities Trust, Inc. and INVG Government
Securities Corp. All significant intercompany balances and transactions
have been eliminated.
Accounting Change - On December 31, 1993 the Company adopted Statement
of Financial Accounting Standards No. 115 ("SFAS 115") - Accounting for
Certain Investments in Debt and Equity Securities. In accordance with this
new Standard, the Company classified its investments as either available-
for-sale or held-to-maturity. The Company has elected to classify its
investments in CMO Residuals and REMIC Residuals as available-for-sale
while it has elected to classify its investments in GNMA Certificates as
held-to-maturity investments. SFAS 115 requires that held-to-maturity
investments be accounted for at amortized cost. However, if the fair
value, as defined, of the investment declines below the amortized cost
basis and the decline is considered to be "other than temporary", the cost
basis of the individual asset must be written down to its fair value as the
new cost basis. The amount of the write down is included in the Company's
current earnings (i.e. accounted for as a realized loss). The decline in
fair value is considered to be other than temporary if the cost basis
exceeds the related projected cash flow from the investment discounted at a
risk-free rate of return.
Held-to-Maturity. The investment in GNMA Certificates is classified
as a held-to-maturity investment. In connection with the fourth quarter
1993 adoption of SFAS 115 and consistent with the consensus reached by the
Emerging Issues Task Force on Issue No. 93-18, the Company measures other
than temporary impairment by comparing the net cash flows from the GNMA
Certificates (net of GNMA Bonds principal and interest payments and related
trustee expenses) discounted at a risk-free rate to the net carrying value
of the GNMA Certificates (i.e. net of GNMA Bond liabilities). If such
discounted cash flows are less than the net carrying value, the Company
records a reserve to reduce the net carrying value to fair value. For
purposes of determining fair value, the Company discounts the net cash
flows as discussed above using an estimated risk-adjusted rate of return.
Available-for-Sale. The Company is not in the business of trading its
mortgage-related assets, however, from time to time the Company may sell an
asset as part of the Company's efforts to adjust its portfolio composition
to reflect changes in economic conditions. Therefore the Company has
classified its investments in CMO Residual Interests and REMIC Residual
interests as available-for-sale. They are carried at fair value in the
financial statements. Unrealized holding gains and losses for available-
for-sale investments are excluded from earnings and reported as a net
amount in shareholders' equity until realized. Available-for-sale
investments are also subject to write down whenever the carrying value
(excluding unrealized losses) is less than the future projected cash flows
discounted at a risk-free rate. At June 30, 1995, the Company recognized
an impairment to its CMO residual interests and REMIC residual interests of
$362,202.
Cash Equivalents - Cash equivalents are short-term investments which
are readily converted to cash and have original maturities of less than
three months.
Mortgage Certificates and Collateralized Mortgage Obligation Bonds
("CMOs") - Mortgage certificates and CMO bonds are carried at their
outstanding principal balance plus or minus any premium or discount,
respectively.
Amortization of Deferred Issuance Costs, Premiums and Discounts -
Deferred issuance costs, premiums and discounts relating to mortgage
certificates and GNMA Bonds are amortized to income using the interest
method over the stated maturity of the mortgage certificates or bonds.
Prepayments are not anticipated. When prepayments occur, a proportionate
amount of the related costs, premiums and discounts are recognized in
income so that the effective interest rate on the remaining balance
continues unchanged.
Mortgage Derivative Investments - With respect to income recognition,
Mortgage Derivative Investments are accounted for under the Prospective
method. Under this method, assets are carried at cost and income is
amortized over their estimated lives based on a method which provides a
constant yield. At the end of each quarter, the yield over the remaining
life of the asset is recalculated based on expected future cash flows using
current interest rates and mortgage prepayment speeds. This new yield is
then used to calculate the subsequent quarter's income.
Under certain extended high interest rate periods, or in the event of
extremely high prepayment rates on the collateral, the return on the
Company's investment in a Mortgage Derivative Investment could be zero or
negative. In the event that the projected return on an investment in a
mortgage derivative investment falls below a risk-free rate, the Company
would be required to write down the investment to its fair value.
Income Taxes - The Company has elected to be taxed as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended. As a REIT, the Company must distribute annually at least 95% of
its taxable income to its shareholders. No provision has been made for
income taxes in the accompanying financial statements as the Company will
not be subject to income taxes. Over the life of a Mortgage Derivative
Investment, total taxable income will equal total financial statement
income; however, the timing of income recognition may differ significantly
between the two from year to year.
Reclassifications - Certain reclassifications have been made to the
Statement of Cash Flows for the six months ended June 30, 1994 to conform
such financial statement to the June 30, 1995 statement. Such
reclassifications do not affect net income as reported.
Net Income (Loss) Per Share - Net income (loss) per share is based
upon the weighted average number of shares of common stock outstanding.
<PAGE>
Note 3. - GNMA Certificates
The GNMA Certificates are being used as collateral for the GNMA-Backed
Sequential Pay Bonds (the "Bonds"). Information with respect to such GNMA
Certificates is as follows:
<TABLE>
<CAPTION>
COST LESS ESTIMATED
BOND INTEREST DUE PRINCIPAL UNAMORTIZED FAIR
CERTIFICATES SERIES RATE DATE AMOUNT DISCOUNT VALUE
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1995
1984-2 8.0% 2008 $ 93,021,844 $76,133,979 $ 95,260,182
1984-3 9.0% 2009 62,867,085 50,034,676 66,030,085
1984-4 11.0% 2013 52,687,127 47,358,869 58,614,429
Reserve (6,796,822)
------------------------------------------
Total $208,576,056 $166,730,702 $219,904,696
==========================================
December 31, 1994
1984-2 8.0% 2008 $ 99,473,878 $80,900,971 $95,090,811
1984-3 9.0% 2009 66,767,191 52,813,548 67,351,404
1984-4 11.0% 2013 57,834,880 51,880,352 62,823,138
Reserve (7,604,654)
------------------------------------------
Total $224,075,949 $177,990,217 $225,265,353
==========================================
Note 4. - GNMA-Backed Sequential Pay Bonds
The Bonds are collateralized by the GNMA Certificates. Information
with respect to such Bonds is as follows:
</TABLE>
<TABLE>
<CAPTION>
BOND STATED DUE PRINCIPAL UNAMORTIZED
BONDS SERIES MATURITY DATE AMOUNT DISCOUNT NET
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1995
1984-2 7.875% 2008 $ 93,021,231 $20,648,932 $72,372,299
1984-3 8.875-9.0% 2009 62,866,616 14,439,286 48,427,330
1984-4 10.875% 2013 52,686,419 6,087,228 46,599,191
-------------------------------------------
Total $208,574,266 $41,175,446 $167,398,820
===========================================
December 31, 1993
1984-2 7.875% 2008 $ 99,473,266 $22,681,427 $76,791,839
1984-3 8.875-9.0% 2009 66,766,722 15,658,178 51,108,544
1984-4 10.875% 2013 57,834,171 6,800,827 51,033,344
-------------------------------------------
Total $224,074,159 $45,140,432 $178,933,727
===========================================
</TABLE>
The sequence of each series of Bonds with the latest stated maturity
is redeemable at the option of the Company in whole, but not in part, when
the outstanding principal amount of that sequence declines to 10% or less
of its original outstanding principal amount at a redemption price equal to
the outstanding principal amount thereof, plus accrued interest.
The Company's Net Interest Margin continues to decline through the
process of repayments and prepayments on the mortgages underlying the
Company's assets as well as from the redemptions of Bond Series.
Additionally, the Company's asset pool is depleted by normal business
expenses and the payment of dividends. The indentures under which the
Bonds were issued do not permit the issuer to effect a redemption at the
point where Net Interest Margin is less than expenses. As a result, the
Company is exploring possible ways of refinancing the Bonds before net
interest margin becomes insufficient to meet expenses, including seeking
changes in the Indenture to allow a call redemption when market conditions
allow.
Note 5. - Redemption of Series A Bonds
On January 5, 1994 the Board of Directors of the Company authorized an
optional redemption of the Series A Bonds on February 1, 1994 pursuant to
the call provisions of the Series A Bonds. On January 24, 1994, the GNMA
Certificates securing the Series A Bonds were sold. The Company realized a
gain of $4,500,000 from the sale of the GNMA Certificates. On February 1,
1994, the Series A Bonds were redeemed at par. After accounting for
expenses, including amortization of discounts and premiums, the Company
incurred an extraordinary loss of $2,250,000 from the redemption of the
Series A Bonds. The net cash the Company received from this series of
transactions was $5,000,000.
Note 6. - Other Mortgage Certificates
At June 30, 1995, Other Mortgage Certificates consisted of 7.0% and
8.5% GNMA certificates.
On May 17, 1994, the Board of Directors of INVG Government Securities
Corp. authorized an optional redemption of Thomson McKinnon Mortgage Assets
Trust 2, which was previously classified as a Mortgage Derivative
Investment, and the Company received $11,527,555 Federal National Mortgage
Association bonds. Simultaneously the Company increased its short-term
borrowings by $11,698,000. On July 25, 1994 the bonds were sold and the
debt was retired resulting in a loss of $162,000.
<PAGE>
Note 7. - Mortgage Derivative Investments
At June 30, 1995, the Company owned Mortgage Derivative Investments as
shown in the schedule below:
<TABLE>
<CAPTION>
CARRYING
VALUE
PURCHASE % PURCHASE JUNE 30,
RESIDUAL SERIES DATE OWNERSHIP COLLATERAL PRICE 1995
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Merrill Lynch Trust 8-R Aug. 10, 1993 68.850% FHLMC 9.50% $ 3,600,000 $ 1,490,227
FNMA REMIC 92-G64 R Aug. 26, 1993 100.00% GNMA 8.00% 3,668,000 153,606
FNMA REMIC 92-G65 R Sept. 21, 1993 100.00% GNMA 8.00% 2,200,000 0
FHLMC REMIC 1424-R Sept. 27, 1993 100.00% FHLMC 8.00% 377,108 15,466
Paine Webber G-3 Oct. 14, 1993 25.00% FNMA 12.00% 318,719 222,343
FHLMC REMIC 9-R Various 87.50% FHLMC 10.01% 2,114,992 1,196,561
Drexel Burnham Q-7 Various 74.4369% FNMA 10.00% 1,279,136 1,052,635
Santa Barbara 1-A Various 9.74406% FHLMC 9.50% 799,751 496,784
CMOT Series 5-R Dec. 10, 1993 49.00% FNMA 9.50% 560,682 647,044
CMOT Series 6-R Various 64.00% FHLMC 9.50% 189,713 800,144
Morgan Stanley Trust E Feb. 14, 1994 42.00% FHLMC 9.308% 315,000 229,468
Ryan Mortgage IV - 3 Mar. 28, 1994 100.00% GNMA 12.00% 800,000 745,690
Ryan Mortgage IV - 4 Mar. 28, 1994 100.00% FNMA 10.00% 400,000 395,479
CMIT Series 7 Mar. 30, 1994 100.00% GNMA 9.50% 800,000 784,106
FHLMC REMIC 4-R Apr. 21, 1994 52.593% FHLMC 10.5% 2,550,000 1,747,623
Oxford Acceptance 3D July 29, 1994 100.00% FHLMC 10.63% 1,999,316 1,937,885
CMSC Series 1988-14 July 5, 1994 100.00% FHLMC 10.60% 2,100,000 1,441,800
Mortgage Capital 6C July 22, 1994 100.00% GNMA 11.00% 1,350,000 1,400,670
Drexel Burnham Series N Sept. 3, 1994 50.00% FNMA 10.50% 611,326 450,484
FHLMC Series 150 Sept. 16, 1994 100.00% FHLMC 9.50% 1,350,000 945,653
FHLMC Series 118 Sept. 27, 1994 100.00% FHLMC 9.50% 725,000 535,825
FNMA Trust 88-19 Oct. 17, 1994 74.40% FNMA 9.50% 1,227,600 1,051,035
Drexel Burnham Trust D Nov. 10, 1994 12.6305% FHLMC 9.50% 235,000 200,453
E.F. Hutton III 87-1 Nov. 10, 1994 37.6143% GNMA 12.13% 1,222,225 1,194,212
E.F. Hutton Trust 1 Nov. 15, 1994 20.00% GNMA 10.00% 30,000 30,500
Merrill Lynch Trust 7 Nov. 17, 1994 8.96% FHLMC 11.00% 208,000 186,362
FHLMC REMIC 7 Nov. 23, 1994 10.00% FHLMC 9.50% 165,000 141,172
FBMS II 1987-4 Class 2 Nov. 30, 1994 100.00% Whl.Loan 9.5% 275,000 287,981
L.F. Rothschild Series 3 Nov. 30, 1994 20.90% GNMA 10.00% 5,539 12
Pacific Coll. Mtg. Trust 2 Nov. 30, 1994 7.50% FHLMC 10.00% 25,000 29,628
Kidder Peabody Trust 1 Various 100.00% FHLMC 9.00% 145,000 869,106
Leader Funding 1 Various 79.50% FHLMC 10.00% 628,308 984,088
Ryland Acceptance 38 Nov. 30, 1994 66.99% FHLMC 10.10% 301,950 491,743
FHLMC REMIC 105-R Jan. 17, 1995 69.6706% FHLMC 9.50% 1,672,093 1,025,886
Ryland Acceptance 62 Feb. 8, 1995 27.995% GNMA 10.00% 350,116 258,789
Ryland Acceptance 74 Feb. 8, 1995 23.664% GNMA 10.50% 466,104 740,787
Ryland Acceptance 75 Feb. 8, 1995 35.997% GNMA 9.50% 472,337 627,473
FHLMC REMIC 111-R Mar. 27, 1995 100.00% FHTPM 9.50% 860,000 661,105
FHLMC REMIC 5-R April 26, 1995 50.00% FHLMC 9.50% 1,450,000 1,197,582
FNMA REMIC 90-13 April 26, 1995 100.00% FNMA 9.00% 95,000 80,810
Merrill Lynch Trust 37 May 2, 1995 34.6666% GNMA 10.00% 988,000 905,573
----------------------------
Total $38,931,015 $27,653,790
============================
</TABLE>
In the quarter ended June 30, 1995 the Company sold its 11.27%
interest in Kidder Peabody Trust 3 at a gain of $263,000. Additionally,
FHLMC REMIC 1332-R was disposed of at a cost of $375,000. No additional
cash receipts are anticipated from FNMA REMIC 92-G65-R. Therefore this
investment is carried at zero. However, this investment is still expected
to have taxable income or loss in the future which would be recognized in
taxable income or loss of the Company in amounts that are not presently
determinable.
There is no exchange or other active market from which to obtain a
quoted market price for CMO Residual Interests. Instead, the estimate of
fair value was determined by calculating the present value of the projected
Excess Cash Flow to the Company discounted at a weighted average interest
rate of 21.5%. The discount rates, prepayment rates and other assumptions
were based upon current market information.
Excess Cash Flow represents the Company's proportionate share of the
difference between (I) the cash flow from the collateral pledged to secure
the related CMO issuance together with reinvestment income thereon, if any;
and (ii) the amount required for debt service payments on such CMO issuance
together with administrative expenses.
Note 8. - Fair Value of Investments
In accordance with FASB-107, the Company shall disclose the fair value
of financial instruments for which it is practicable to estimate that
value. Due to the complex nature of CMO structures, every CMO investment
and, in particular, every CMO Residual has a unique risk/return profile.
Not only do CMO structures vary significantly from issuance to issuance,
but the individual mortgage loans underlying the mortgage certificate
collateral for one CMO issuance are separate and distinct from those
underlying the mortgage certificate collateral of another CMO issuance. As
a result, these investments are very illiquid and there is no exchange or
other active market from which to obtain a quoted market price for these
financial instruments. Accordingly, the estimates of fair value have been
determined by the Company using available market information and valuation
methodologies. Considerable judgment was required to interpret the market
information and develop the estimates of fair value. The estimates of fair
value presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different
market assumptions and/or valuation methodologies may have a material
effect on the estimates of fair value.
The Company has disclosed in Note 3 the fair value of the GNMA
Certificates based on market prices for comparable instruments as of March
31, 1995. However, the Company is unable to sell the GNMA Certificates and
therefore realize any gain until the Bonds which are collateralized by the
certificates either mature or are called in accordance with the underlying
bond indenture. For purposes of determining fair value of the GNMA
Certificates, the Company uses the cash flows from GNMA Certificates net of
bond interest expenses and related trustee expenses. The Company includes
in its net cash flows an assumption of redemption of the Series at the
earliest available stated redemption date with an assumed sale of the GNMA
Certificates at a current market price. The net cash flows also assume
annual expenses of $175,000 for the three Series for trustee, auditing,
administration and legal expenses. These cash flows are discounted at a
fair value rate of 20%. The following table gives the pertinent fair value
assumptions used in forecasting the cash flows as of June 30, 1995:
<TABLE>
<CAPTION>
BOND SERIES COLLATERAL PSA FAIR VALUE
-----------------------------------------------------------------
<S> <C> <C> <C>
Series 1984-2 GNMA 8.00% 183% $160,908
Series 1984-3 GNMA 9.00% 270% 52,562
Series 1984-4 GNMA 11.00% 377% 340,400
-------------
Total Fair Value $553,870
=============
</TABLE>
The Company's methodology and fair value estimates for its mortgage
derivative investments, including CMO Residuals and REMIC Residuals are
discussed in Note 6. The Company has used available market information as
of June 30, 1995 and has concluded that the fair value of the mortgage
derivative investments at that date was approximately $2,180,000 in excess
of amortized cost. The Company estimated the prospective yield on these
investments for 1995 to be approximately 21.5% per annum.
Note 10. - Other Investments
At June 30, 1995 Other Investments consists of an interest in
Bennett/Lawrence Partners, L.P., an investment fund. This interest was
purchased January 4, 1994 for $750,000 and has a fair value of $972,902 at
June 30, 1995.
Note 11. - Short-Term Debt
At June 30, 1995 the Company owed $18,290,324 under 25 repurchase
agreements. These borrowings had initial terms of one month and are
renewed on a month-to-month basis. The interest rate on these borrowings
at June 30, 1995 was 6.3625%. The debt is collateralized by some of the
Company's mortgage derivative investments.
Note 12. - Consulting Agreement
Under the terms of a consulting agreement with Page Mill Asset
Management, the Company pays a monthly fee of $10,000 plus an incentive
management fee. The incentive management fee is equal to 25% of the
amount, if any, by which the annual consolidated taxable income of the
group, before payment of any incentive fee to Page Mill, net operating loss
deductions arising from prior periods' losses and special Internal Revenue
Code deductions pertaining to real estate investment trusts, plus certain
other adjustments in accordance with generally accepted accounting
principles, exceeds the amount necessary to provide an annualized return on
equity equal to 1% over the average ten-year U.S. Treasury rate for the
year. Under this agreement, the Company has recorded expense in the six
months ended June 30, 1995 of $60,000 for the monthly management fee. In
the six months ended June 30, 1995 incentive management fee of $194,523 was
accrued representing an adjustment of the 1994 fee based on finalization of
taxable income for 1994. The Company recorded expense in the six months
ended June 30, 1994 of $60,000 and $389,002 for the monthly and incentive
management fees, respectively. Taxable income cannot be precisely
determined until the tax return is filed for the year
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Six Months Ended June 30, 1995 Compared to 1994
-----------------------------------------------
Net income for the six months ended June 30, 1995 amounted to
$1,428,138. This compares to net income of $1,280,991 for the six months
ended June 30, 1994. Results for 1994 include gains from sales of GNMA
Certificates and other investments as well as an extraordinary loss from
the redemption of Bonds. Results for both 1994 and 1995 include a
valuation reserve provision which writes the carrying value of held-to-
maturity investments up or down to fair value and 1995 includes a provision
for impairment of Mortgage Derivative Investments. The table below
indicates that results of remaining investments:
<TABLE>
<CAPTION>
Six Months Ended June 30
----------------------------
1995 1994 Change
------------ ------------ ------------
<S> <C> <C> <C>
Net Income $1,428,138 $1,280,991 $147,147
Less Gain on Sale of GNMA Certificates 0 (4,500,169) 4,500,169
Plus Extraordinary Loss from Redemption of Bonds 0 2,250,778 (2,250,778)
Plus Impairment of Mortgage Derivative
Investments 362,202 0 362,202
Plus Loss (Gain) on Sales of Investments 104,295 (30,546) 134,841
Less Other Income (103) (5,949) 5,846
------------ ------------ -----------
Net Income (Loss) from Remaining Investments $1,894,532 ($1,004,895) $2,899,427
============= ============= ============
</TABLE>
The variance in net income (loss) from remaining investments from year to
year is attributable to the change in net interest income and operating
expenses as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30
---------------------------
1995 1994 Change
------------ ------------ ------------
<S> <C> <C> <C>
Interest from GNMA Certificates $9,785,985 $12,328,954 ($2,542,969)
Interest on Bonds 9,605,687 12,213,471 (2,607,784)
------------ ------------ ------------
Net Interest Margin 180,298 115,483 64,815
Amortization of Discount 3,432,545 7,763,184 (4,330,639)
Amortization of Bond Discount and
Bond Issuance Costs (4,084,719) (9,211,218) 5,126,499
Adjustment of Reserve for Loss 499,449 1,062,464 (563,015)
Income from Mortgage Derivative Investments 2,736,763 1,170,178 1,566,585
Interest on Short-term Debt (545,359) (172,627) (372,732)
Other Interest Income 41,101 73,892 (32,791)
------------ ------------ ------------
Net Interest Income 2,260,078 801,356 1,458,722
Valuation Reserve Provision 308,383 (985,402) 1,293,785
Operating Expenses (673,929) (820,849) 146,920
------------ ------------ ------------
Net Income (Loss) from Remaining Investments $1,894,532 ($1,004,895) $2,899,427
============ ============= ============
</TABLE>
Net interest margin (interest from GNMA Certificates less interest on
Bonds) declined somewhat in 1995 because of the declining amount of
Certificates and Bonds outstanding. Amortization of discount and bond
issuance costs also declined for this reason. A significant component of
the adjustment of reserve for loss is related to the decline in principal
amount of Certificates outstanding which was less in 1995 than in 1994.
Income from Mortgage Derivative Investments and related interest on short-
term debt increased significantly in 1995 because of the reinvestment of
cash provided by operating activities into these securities. The 1995 gain
on sales of investments represents gain from the sale of a Mortgage
Derivative Investment partially offset by the payment for the disposition
of a non-economic Mortgage Derivative Investment described in Note 7. As a
result of a declining interest rate environment in 1995, the net value of
the GNMA Certificates and Bonds increased whereas the opposite was true in
1994.
Three Months Ended June 30, 1995 Compared to 1994
-------------------------------------------------
Net income for the three months ended June 30, 1995 amounted to
$375,671. This compares to a net loss of $876,590 for the three months
ended June 30, 1994. The variance from year to year in the net loss is
analyzed in the table below:
<TABLE>
<CAPTION>
Three Months Ended June 30
---------------------------
1995 1994 Change
------------ ------------ ------------
<S> <C> <C> <C>
Interest from GNMA Certificates $4,813,949 $5,755,521 ($941,572)
Interest on Bonds 4,716,590 5,649,450 (932,860)
------------ ------------ ------------
Net Interest Margin 97,359 106,071 (8,712)
Amortization of Discount 1,697,822 5,493,665 (3,795,843)
Amortization of Bond Discount and
Bond Issuance Costs (2,021,699) (6,428,738) 4,407,039
Adjustment of Reserve for Loss 246,034 1,062,464 (816,430)
Income from Mortgage Derivative Investments 1,414,704 471,230 943,474
Interest on Short-term Debt (289,158) (124,170) (164,988)
Other Interest Income 26,234 34,315 (8,081)
------------ ------------ ------------
Net Interest Income 1,171,296 614,837 556,459
Loss on Sale of Investment (104,295) (25,228) (79,067)
Impairment of Mortgage Derivative Investments (362,202) 0 (362,202)
Valuation Reserve Provision 175,307 (985,402) 1,160,709
Other Income (Expense) 0 (8,782) 8,782
Operating Expenses (504,435) (472,015) (32,420)
------------ ------------ ------------
Net Income (Loss) $ 375,671 ($ 876,590) $1,252,261
============ ============= ============
</TABLE>
Net interest margin (interest from GNMA Certificates less interest on
Bonds) remained constant in 1995 because the relationship of interest rates
on the Certificates and the Bonds remained essentially the same as in 1994.
However, the amount of interest income, interest expense and amortization
declined in 1995 becuase of the decreased principal amount of Certificates
and Bonds outstanding. The other information above regarding the six
months ended June 30, 1995 compared to 1994 is applicable to the three
months ended June 30, 1995 compared to 1994.
On June 1, 1995 the Company declared a distribution of $0.20 per share,
payable on July 17, 1995 to shareholders of record as of September 30,
1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations of the Company totaled $4,085,913 for the six
months ended June 30, 1995 and $5,573,918 for the six months ended June 30,
1994. Cash and cash equivalents of the Company increased during the first
six months of 1995 by $2,291,249 but decreased $2,952,259 in the first six
months of 1994.
The Company had total assets of $202.4 million at June 30, 1995. At that
date GNMA Certificates collateralizing the Bonds comprised $166.7 million
of the assets and deferred issuance costs accounted for $1.2 million of the
assets. Other mortgage certificates and mortgage derivative investments
accounted for $27.0 million of the assets.
The Company had no capital expenditures in the quarter ended June 30, 1995.
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 4. Results of Votes of Security Holders
------------------------------------
Not Applicable
Item 5. Other Information
-----------------
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1995.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INVG MORTGAGE SECURITIES CORP.
By: /s/ Robert E. Greeley
-------------------------------------
Robert E. Greeley
Chairman of the Board,
President and Treasurer.
(Principal Executive and Financial Officer)
Dated: August 11, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1995 AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 3,716,783
<SECURITIES> 195,457,634
<RECEIVABLES> 2,176,370
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 202,618,745
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 202,618,745
<CURRENT-LIABILITIES> 21,552,931
<BONDS> 167,398,820
<COMMON> 6,823
0
0
<OTHER-SE> 13,660,171
<TOTAL-LIABILITY-AND-EQUITY> 202,618,745
<SALES> 0
<TOTAL-REVENUES> 16,337,832
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 673,929
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,235,765
<INCOME-PRETAX> 1,428,138
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,428,138
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,428,138
<EPS-PRIMARY> 2.38
<EPS-DILUTED> 2.38
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1995 AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 3,411,717
<SECURITIES> 198,367,021
<RECEIVABLES> 2,097,996
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 205,207,195
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 205,207,195
<CURRENT-LIABILITIES> 20,008,146
<BONDS> 172,986,920
<COMMON> 6,823
0
0
<OTHER-SE> 12,205,306
<TOTAL-LIABILITY-AND-EQUITY> 205,207,195
<SALES> 0
<TOTAL-REVENUES> 8,430,278
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 169,494
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,208,317
<INCOME-PRETAX> 1,052,467
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,052,467
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,052,467
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 1.75
</TABLE>
