UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
//xx// Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended June 30, 1994
// // Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-9819
RESOURCE MORTGAGE CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Virginia 52-1549373
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10500 Little Patuxent Parkway, Columbia, Maryland 21044
(Address of principal executive offices) (Zip Code)
(410) 715-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past ninety days. //xx//
Yes // //No
On July 31, 1994, the registrant had 20,055,888 shares of common stock
of $.01 value outstanding, which is the registrant's only class of
common stock.
RESOURCE MORTGAGE CAPITAL, INC.
FORM 10-Q
INDEX
PAGE
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1994
and December 31, 1993 3
Consolidated Statements of Operations for the three
months ended and the six months ended
June 30, 1994 and 1993 4
Consolidated Statement of Shareholders'
Equity for the six months ended June 30, 1994 5
Consolidated Statements of Cash Flows for
the six months ended June 30, 1994 and
1993 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 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
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
June 30, December 31,
1994 1993
------- -----------
ASSETS
Mortgage investments:
Collateral for CMOs $ 388,610 $ 434,698
Adjustable-rate mortgage securities, net 2,381,504 2,021,196
Fixed-rate mortgage securities, net 203,925 214,128
Other mortgage securities 63,507 65,625
Mortgage warehouse participations 61,677 156,688
--------- ---------
3,099,223 2,892,335
Mortgage loans in warehouse 286,342 777,769
Cash 8,855 1,549
Accrued interest receivable 15,058 13,466
Other assets 17,817 41,643
-------- --------
$ 3,427,295 $ 3,726,762
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Collateralized mortgage obligations $ 377,699 $ 432,677
Repurchase agreements 2,622,359 2,754,166
Notes payable 61,909 87,451
Commercial paper 58,376 148,672
Accrued interest payable 11,340 14,695
Deferred income 13,829 13,214
Other liabilities 14,500 22,855
------- -------
3,160,012 3,473,730
--------- ---------
SHAREHOLDERS' EQUITY
Common stock: par value $.01 per share,
50,000,000 shares authorized, 20,040,552
and 19,331,932 issued and outstanding,
respectively 200 193
Additional paid-in capital 278,598 259,622
Net unrealized loss on available-for-sale
mortgage investments (10,060) -
Retained earnings (deficit) (1,455) (6,783)
-------- -------
267,283 253,032
-------- --------
$ 3,427,295 $ 3,726,762
=========== ===========
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except share data)
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
---- ---- ---- ----
Interest Income:
Collateral for CMOs $ 8,270 $ 10,436 $ 16,809 $ 22,139
Adjustable-rate mortgage
securities 26,355 18,637 51,651 35,709
Fixed-rate mortgage securities 3,589 3,400 7,707 6,667
Other mortgage investments 3,502 1,831 5,930 3,571
Mortgage warehouse
participations 1,343 946 2,772 2,418
Mortgage loans in warehouse 8,673 5,279 18,158 9,828
------ ------ ------ -------
51,732 40,529 103,027 80,332
------ -------- -------- ------
Interest and CMO-related expense:
Collateralized mortgage obligations:
Interest 7,743 9,835 15,783 20,834
Other 352 543 760 1,095
Repurchase agreements 28,759 16,518 55,642 30,949
Notes payable 1,411 1,341 2,181 2,506
Commercial paper 779 580 1,582 1,507
Other 1,127 1,118 2,256 2,337
40,171 29,935 78,204 59,228
Net margin on mortgage assets 11,561 10,594 24,823 21,104
Valuation adjustments on
mortgage assets - (1,000) - (1,000)
Gain on sale of mortgage assets,
net of associated costs 9,718 5,820 16,559 10,880
Other income 391 102 620 292
General & administrative
expenses (6,301) (2,958) (11,133) (6,218)
------- ------- --------- -------
Net income $ 15,369 $ 12,558 $ 30,869 $ 25,058
======== ======== ======== ========
Net income per share $ 0.78 $ 0.76 $ 1.58 $ 1.52
========= ======= ======= ========
Weighted average number of
common shares outstanding 19,750,225 16,536,103 19,599,758 16,526,882
========== ========== ========== ==========
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENT OF Net
SHAREHOLDERS' EQUITY unrealized
(amounts in thousands except share data) loss on
available-
Additional for-sale Retained
Number of Common paid-in mortgage earnings
shares stock capital investments (deficit) Total
-------- ------ --------- ----------- -------- -----
Balance at
December 31,
1993 19,331,932 $ 193 $ 259,622 $ - $ (6,783)$ 253,032
Issuance of
common stock,
net 708,620 7 18,976 - - 18,983
Net income -
six months
ended
June 30,
1994
- - - - 30,869 30,869
Net change
in unrealized
loss on
available-
for-sale
mortgage
investments
- - - (10,060) - (10,060)
Dividends
declared -
$1.56 per
share - - - - (25,541) (25,541)
------- ------ ------- --------- ------- --------
Balance at
June 30,
1994 20,040,552 $ 200 $ 278,598 $ (10,060) $ (1,455)$ 267,283
========== ===== ========= ========== ======== ========
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Six months Ended
(amounts in thousands) June 30,
1994 1993
----- -----
Operating activities:
Net income $ 30,869 $ 25,058
Adjustments to reconcile net income to
net cash used for operating activities:
Amortization and depreciation 3,241 3,675
Net decrease (increase) in mortgage loans
held for sale 487,936 (197,734)
Net decrease in accrued interest, other
payables and other assets 18,831 91
Net gain from sales of mortgage investments (4,474) (1,211)
Other (149) 2,601
------- --------
Net cash provided by
(used for) operating activities 536,214 (167,520)
-------- ---------
Investing activities:
Collateral for CMOs:
Principal payments on collateral 81,657 106,413
Net decrease in funds held by trustees 9,466 9,416
------ ---------
91,123 115,829
Purchase of CMOs, net (1,651) -
Purchase of other mortgage investments (613,170) (578,315)
Payments on other mortgage investments 261,231 52,834
Proceeds from sales of other mortgage
investments 83,664 188,600
Capital expenditures (1,134) (227)
--------- ----------
Net cash used for investing activities (179,937) (221,279)
-------- ----------
Financing activities:
Principal payments on CMOs (89,741) (114,400)
(Repayments of) proceeds from short-term
borrowings, net (247,645) 533,767
Proceeds from stock offerings, net 18,983 1,057
Dividends paid (30,568) (30,566)
-------- ---------
Net cash (used for) provided by
financing activities (348,971) 389,858
--------- ---------
Net increase in cash 7,306 1,059
Cash at beginning of period 1,549 1,135
--------- ---------
Cash at end of period $ 8,855 $ 2,194
========== ==========
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1994
(amounts in thousands except share data)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of
the information and notes required by generally accepted accounting
principles for complete financial statements. The consolidated
financial statements include the accounts of Resource Mortgage Capital,
Inc., its wholly owned subsidiaries, and certain other entities. As
used herein, the "Company" refers to Resource Mortgage Capital, Inc.
("RMC") and each of the entities that is consolidated with RMC for
financial reporting purposes. A portion of the Company's mortgage
operations are
operated by a taxable corporation that is consolidated with RMC for
financial reporting purposes, but is not consolidated for income tax
purposes. All significant intercompany balances and transactions have
been eliminated in consolidation.
In the opinion of management, all material adjustments, consisting of
normal recurring adjustments, considered necessary for a fair
presentation have been included. The Consolidated Balance Sheet at June
30, 1994, the Consolidated Statements of Operations for the three months
and the six months ended June 30, 1994 and 1993, the Consolidated
Statement of Stockholders' Equity for the six months ended June 30,
1994, the Consolidated Statements of Cash Flows for the six months ended
June 30, 1994 and 1993 and related notes are unaudited. Operating
results for the six months ended June 30, 1994 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1994. For further information, refer to the audited
consolidated financial statements and footnotes included in the
Company's Form 10-K for the year ended December 31, 1993.
NOTE 2--MORTGAGE LOANS IN WAREHOUSE AND SECURITIZATION ACTIVITY
The Company purchases and originates fixed-rate and adjustable-rate
loans secured by first mortgages or first deeds of trust on single-
family attached or detached residential properties and originates fixed-
rate loans secured by first mortgages or deeds of trust on multi-family
residential properties. The Company funded mortgage loans with an
aggregate principal balance of $1,839,864 during the six months ended
June 30, 1994. During this period, the Company sold or securitized
mortgage loans with an aggregate principal balance of $2,351,345.
In the six months ended June 30, 1994, the Company recognized net gains
of $12,085 on securitizations and sales of mortgage loans.
Additionally, during the six months ended June 30, 1994, the Company
deferred gains of $2,491 related to securitization and sales of
adjustable-rate mortgage loans that are convertible to a fixed rate.
The deferred gain will be recognized as income over the five year
optional conversion period. The recognized gain and deferred gain are
net of taxes totaling $1,408 for the six months ended June 30, 1994.
NOTE 3--AVAILABLE-FOR-SALE MORTGAGE INVESTMENTS
On January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities. This statement requires that investments in debt
and equity securities be classified as either held-to-maturity
securities, trading securities, or available-for-sale securities. Held-
to-maturity securities are defined as securities that the Company has
the positive intent and ability to hold to maturity and are measured at
amortized cost. Trading securities are defined as securities that are
bought and held principally for the purpose of selling in the near term
and are measured at fair value, with unrealized gains and losses
included in earnings. Securities not classified as either held-to-
maturity securities or trading securities are deemed to be available-for
sale securities and are measured at fair value, with unrealized gains
and losses reported as a separate component of stockholders' equity.
The Company has classified all of its mortgage investments as available-
for-sale securities.
NOTE 4--SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION
Six months ended June 30,
1994 1993
----- -----
Cash paid for interest $ 40,376 $ 56,587
======== ========
Supplemental disclosure of non-cash
activities:
Purchase of collateral for CMOs $ (37,253) $ -
Assumption of CMOs 35,602 -
--------- ---------
Purchase of CMOs, net $ (1,651) $ -
=========== ===========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Resource Mortgage Capital, Inc. (the "Company") operates mortgage
conduits and invests in a portfolio of residential mortgage securities.
The Company's primary strategy is to use its mortgage conduit
operations, which involve the purchase and securitization of residential
mortgage loans, to create investments for its portfolio. The Company's
principal sources of income are net interest income on its investment
portfolio, gains on the securitization and sale of mortgage loans and
the interest spread realized while the mortgage loans are being
accumulated for securitization.
In recent periods, the Company's net income improved primarily from an
increase in the net margin on its mortgage assets and an increase in the
gain on sale of mortgage assets. The increase in net margin resulted
primarily from the addition to the Company's portfolio of investments
created by the Company's mortgage conduit operations. However, during
the first six months of 1994, this increase was partially offset by a
decrease in the net interest spread earned on the adjustable-rate
mortgage securities in the rising interest rate environment. Lower
overall mortgage loan originations in the market are anticipated for
1994 as compared to 1993 as a result of this recent increase in mortgage
loan interest rates and the resulting decrease in mortgage loan
refinancings. This lower anticipated volume is expected to reduce the
gain on sale of mortgage assets during the second six months of 1994
relative to the first six months of 1994.
Results of Operations
Three Months Ended Six Months Ended
(amounts in thousands
except per share June 30, June 30,
----------------- -----------------
information) 1994 1993 1994 1993
----- ----- ----- ------
Net margin on mortgage
assets $ 11,561 $ 10,594 $ 24,823 $ 21,104
Net gain on sale of
mortgage assets 9,718 5,820 16,559 10,880
General and administrative
expenses 6,301 2,958 11,133 6,218
Net income 15,369 12,558 30,869 25,058
Net income per share 0.78 0.76 1.58 1.52
Principal balance of
mortgage loans funded 886,970 847,958 1,839,864 1,711,544
Three Months and Six Months Ended June 30, 1994 Compared to Three Months
and Six Months Ended June 30, 1993
- ------------------------------------------------------------------------
The increase in the Company's earnings during the first six months of
1994 as compared to the same period in 1993 is primarily the result of
the increase in net margin on mortgage assets and the increase in the
net gain on sale of mortgage assets. The increase in the Company's
earnings for the three months ended June 30, 1994 as compared to the
same period in 1993 can be attributed primarily to the same factors
discussed in the comparison of the six months ended June 30, 1994 to the
same period in 1993.
The net margin on mortgage assets increased to $24.8 million for the
six months ended June 30, 1994 from $21.1 million for the six months
ended June 30, 1993. This increase resulted primarily from the overall
growth of the portfolio partially offset by a decrease in the net
interest spread on the portfolio from 1.61% for the six months ended
June 30, 1993 to 1.27% for the six months ended June 30, 1994.
The gain on sale of mortgage assets increased to $16.6 million for the
six months ended June 30, 1994 from $10.9 million for the six months
ended June 30, 1993. This increase resulted from (i) an increase in the
gain on securitizations and sales of mortgage loans and the (ii) an
increase in the gain on sale of mortgage assets from the Company's
portfolio. As part of its ongoing portfolio management strategy, from
time to time the Company may sell mortgage assets from its portfolio.
The increase in earnings was partially offset by an increase in
general and administrative expenses. The Company incurred $11.1 million
of general and administrative expenses for the six months ended June 30,
1994 as compared with $6.2 million during the six months ended June 30,
1993. The increase in general and administrative expenses is due
primarily to the development of the Company's mortgage loan origination
capabilities and the growth of the underwriting and risk management
departments in late 1993 and early 1994. The underwriting and risk management
departments were expanded when the Company began purchasing mortgage loans
without a commitment for mortgage pool insurance in 1993. The Company has
taken steps to reduce general and administrative expenses during the second
six months of 1994 relative to the first six months of 1994.
The following tables summarize the average balances of the Company's
interest-earning assets and their average effective yields, along with
the Company's average interest-bearing liabilities and the related
average effective interest rates, for each of the periods presented.
Average Balances and Effective Interest Rates
- ---------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(amounts in
thousands)
1994 1993 1994 1993
----- ----- ----- -----
Average Effective Average Effective Average Effective Average Effective
Balance Rate Balance Rate Balance Rate Balance Rate
- ------- --------- ------- -------- ------- --------- ------- ---------
Interest-
earning
assets : (1)
Collateral
for CMOs (2)
$ 368,409 8.98% $ 454,968 9.18% 376,294 8.93% $ 480,030 9.22%
Adjustable-
rate mortgage
securities
2,127,153 4.96 1,488,930 5.012,126,858 4.86 1,401,552 5.10
Fixed-
rate
mortgage
securities
204,580 7.02 181,091 7.51 208,008 7.41 174,257 7.65
Other
mortgage
securities
77,647 18.04 36,561 20.03 76,244 15.55 36,329 19.66
Mortgage
warehouse
participations
84,678 6.35 76,543 4.94 94,067 5.90 97,474 4.96
------ ---- ------- ----- ------- ---- ------- -----
Total
portfolio-
related
assets
2,862,467 6.02 2,238,093 6.302,881,471 5.89 2,189,642 6.44
Mortgage
loans
in
warehouse
552,140 6.28 325,202 6.49 601,458 6.04 294,411 6.68
------- ---- --------- ---- ------- ---- --------- -----
Total
interest-
earning
assets
$3,414,607 6.06%$ 2,563,295 6.32%3,482,929 5.92% $2,484,053 6.47%
========== ==== ========== ==== ========= ===== ========= =====
Interest-bearing liabilities:
Portfolio-related liabilities:
CMOs
$ 374,967 8.26% $ 460,996 8.53% 384,754 8.20% $ 487,639 8.54%
Repurchase agreements:
Adjustable-
rate
mortgage
securities
2,022,473 4.20 1,394,562 3.53 2,039,058 3.91 1,604,978 3.60
Fixed-
rate
mortgage
securities
194,127 5.20 170,645 4.87 198,471 5.12 161,060 4.59
Other
mortgage
securities
2,990 4.28 5,497 3.71 7,102 3.83 6,074 3.75
Commercial
paper
77,307 4.04 72,057 3.23 87,020 3.64 92,515 3.26
----- ----- -------- ----- ------- ---- ------ ------
Total
portfolio-
related
liabilities
2,671,864 4.84 2,103,847 4.72 2,716,405 4.60 2,052,266 4.84
Warehouse-
related
liabilities:
Repurchase
agreements
395,432 5.03 178,197 4.70 452,096 4.68 157,277 4.66
Notes
payable
84,605 6.64 95,722 5.60 67,852 6.41 87,835 5.71
----- ----- --------- ----- --------- ----- ------- ------
Total
warehouse-
related
liabilities
480,037 5.32 273,919 5.01 519,948 4.91 245,111 5.03
------- ---- ------- ----- ------- --- ------ -----
Total
interest-
bearing
liabilities
$3,151,901 4.91% $2,377,766 4.76% $3,236,353 4.65% $ 2,297,377 4.86%
========= ===== =========== ==== ========== ==== =========== =====
Net
interest
spread
1.15% 1.56% 1.27% 1.61%
===== ===== ===== ======
Net
yield
on
average
interest
earning
assets
1.53% 1.91% 1.60% 1.98%
===== ===== ===== ======
- -----------------
(1) Average balances exclude adjustments made in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities to record available-
for-sale securities at fair value.
(2) Average balances exclude funds held by trustees of $10,645 and
$16,710 for the three months ended June 30, 1994 and June 30, 1993,
respectively and $11,639 and $18,776 for the six months ended June 30,
1994 and June 30, 1993, respectively.
The decrease in net interest spread is primarily the result of the
decrease in the spread on adjustable-rate mortgage securities. As a
result of the rapidly increasing interest rate environment during the
first six months of 1994, the interest rate on certain repurchase
borrowings increased at a faster rate than the interest rate earned on
the adjustable-rate mortgage securities which collateralize these
borrowings. Additionally, the decrease in the spread on adjustable-rate
mortgage securities resulted from the increase in securities retained in
the portfolio during late 1993 and early 1994 with low initial pass-
through rates (i.e., a "teaser rate"). The spread on adjustable-rate
mortgage securities may increase as the mortgage loans underlying these
securities reset to a higher level. These resets occur generally every
six months. Conversely, the spread on these securities could decrease
further should the rates on the related repurchase borrowings continue
to increase faster than the interest rates reset on these securities.
Portfolio Activity
The Company's investment strategy is to create a diversified portfolio
of mortgage securities that in the aggregate generate stable income in a
variety of interest rate and prepayment rate environments and preserve
the capital base of the Company. The Company has pursued its strategy
of concentrating on its mortgage conduit activities in order to create
investments with attractive yields and to benefit from potential gains
on securitization. In many instances the Company's investment strategy
involves not only the creation or acquisition of the asset, but also the
related borrowing to pay for a portion of that asset.
Three Months and Six Months Ended June 30, 1994 Compared to Three Months
and Six Months Ended June 30, 1993
- ------------------------------------------------------------------------
The size of the Company's portfolio of mortgage investments at June 30,
1994 has increased as compared to June 30, 1993, through the addition of
investments created through the Company's conduit operations and the
purchase of mortgage investments. During the six months ended June 30,
1994, the Company added approximately $525.1 million principal amount of
adjustable-rate mortgage securities, $0.9 million principal amount of
fixed-rate mortgage securities and $11.7 million of other mortgage
securities to its portfolio through its conduit operations. Also during
the six months ended June 30, 1994, the Company purchased approximately
$34.8 million principal amount of adjustable-rate mortgage securities,
$20.2 million principal amount of fixed-rate mortgage securities, $23.1
million of other mortgage securities and $37.3 million of collateral for
CMOs, net of $35.6 million of associated borrowings, for its portfolio.
A portion of these securities were financed through repurchase
agreements with investment banking firms. Additionally, during the six
months ended June 30, 1994, the Company sold $55.5 million principal
amount of adjustable-rate securities and $18.1 million of other mortgage
securities from its portfolio. During the six months ended June 30,
1993, the Company sold $184.3 million principal amount of fixed-rate
mortgage securities from its portfolio. The Company realized net gains
of $4.5 million and $1.2 million on the sale of mortgage securities for
the six months ended June 30, 1994 and 1993, respectively.
The net margin on the Company's portfolio of mortgage investments
increased to $19.4 million for the six months ended June 30, 1994 from
$17.4 million for the six months ended June 30, 1993. This increase
resulted from the overall growth of mortgage assets partially offset by
a decrease in the net interest spread on the portfolio.
The Company funds mortgage warehouse lines of credit to various
mortgage companies, either through the purchase of a participation in
such lines of credit, or a direct loan (collectively "lines of credit").
The Company's obligations under such lines of credit may be funded by
sales of commercial paper or repurchase agreements. As of June 30,
1994, the Company had $185.0 million of such lines of credit and had
advanced $61.7 million pursuant to such lines of credit.
Mortgage Operations
The Company acts primarily as an intermediary between the originators
of mortgage loans and the permanent investors in the mortgage loans or
the mortgage-related securities backed by such mortgage loans. The
Company also originates single-family and multi-family mortgage loans
Through its mortgage operations, the Company purchases mortgage loans
from approved sellers, primarily mortgage companies, savings and loan
associations and commercial banks and originates mortgage loans
directly. When a sufficient volume of mortgage loans is accumulated,
the Company sells or securitizes these mortgage loans through the
issuance of CMOs or pass-through securities. During the accumulation
period, the Company finances its purchases of mortgage loans through
warehouse lines of credit or through repurchase agreements.
The following table summarizes mortgage operations activity for the
three months and six months ended June 30, 1994 and 1993.
Three Months Ended Six Months Ended
June 30, June 30,
(amounts in thousands) 1994 1993 1994 1993
---- ---- ---- ----
Principal amount of
loans funded $ 886,970 $ 847,958 $ 1,839,865 $ 1,711,544
Principal amount
securitized or sold 1,195,913 743,787 2,351,345 1,511,892
Investments added to
portfolio from
mortgage operations
conduit, net of
associated
borrowings 23,965 12,451 43,443 28,268
Three Months and Six Months Ended June 30, 1994 Compared to Three Months
and Six Months Ended June 30, 1993
- ------------------------------------------------------------------------
The increase in the funding volume of mortgage loans for the three months
and the six months ended June 30, 1994 as compared to the three months and
the six months ended June 30, 1993 reflects the success of new loan programs
introduced by the Company
during 1993. The gain on securitizations and sales of mortgage loans
increased to $12.1 million for the six months ended June 30, 1994 from
$10.9 million for the six months ended June 30, 1993. This increase was
primarily the result of the increased volume of mortgage loans
securitized or sold during the period.
During the first six months of 1994, the Company began originating
certain single-family mortgage loans through a network of mortgage
brokers. The Company also plans to develop a mortgage servicing
capability during 1994 for these mortgage loans. The Company will have
complete control over the entire mortgage process on these loans, from
underwriting and origination to accumulation and securitization. As the
Company developed these mortgage loan origination capabilities in recent
periods, general and administrative expenses have increased. The
Company plans to securitize these new loan products through the issuance
of CMOs, and, therefore, no gain on sale will be recognized on these
securitization. Instead, profits from these securitizations will be
recognized over time as part of net margin income. This strategy, which
is consistent with the Company's goal of increasing its net margin
income, will likely have a negative impact on earnings during the
balance of the year.
Other Matters
The Company has limited exposure to losses due to fraud resulting from
the origination of a mortgage loan. The Company has established a loss
allowance for such losses. An estimate for such losses is made at the
time loans are sold or securitized, and the loss allowance is adjusted
accordingly. This estimate is based on management's judgement and the
allowance is evaluated periodically. At June 30, 1994 the allowance
totaled $4.7 million and was included in other liabilities.
During the third quarter of 1994 the Company will be moving its
corporate offices to central Virginia. The Company's operations are
currently located in this area and the move will consolidate the
corporate and operations departments.
The Company and its qualified REIT subsidiaries (collectively
"Resource REIT") have elected to be treated as a real estate investment
trust for federal income tax purposes, and therefore is required to
distribute annually substantially all of its taxable income. Resource
REIT estimates that its taxable income for the six months ended June 30,
1994 was approximately $31.0 million. Taxable income differs from the
financial statement net income which is determined in accordance with
generally accepted accounting principles.
Liquidity and Capital Resources
The Company uses its cash flow from operations, issuance of CMOs or
pass-through securities, other borrowings and capital resources to meet
its working capital needs. Based on prior experience, the Company
believes that the cash flow from its portfolio and borrowing
arrangements provide sufficient liquidity for the conduct of its
operations.
The Company's borrowings may bear fixed or variable interest rates,
may require additional collateral in the event that the value of the
existing collateral declines, and may be due on demand or upon the
occurrence of certain events. If borrowing costs are higher than the
yields on the mortgage assets purchased with such funds, the Company's
ability to acquire mortgage assets may be substantially reduced and it
may experience losses.
The Company borrows funds on a short-term basis to support the
accumulation of mortgage loans prior to the sale of such mortgage loans
or the issuance of mortgage securities. These short-term borrowings
consist of the Company's warehouse lines of credit and repurchase
agreements and are paid down as the Company securitizes or sells
mortgage loans. The Company had a $150 million credit facility, which
also allows the Company to borrow up to $30 million on an unsecured
basis for working capital purposes. This credit facility expires in
February 1995. The Company also has various committed repurchase
agreements of $425 million. These facilities mature in June and
September 1995. The Company has arranged separate financing for the
origination of multi-family mortgage loans for up to $75 million. The
Company expects that these credit facilities will be renewed if
necessary, at their respective expiration dates, although there can be
no assurance of such renewal. At June 30, 1994 the Company had borrowed
$226.6 million under these credit facilities. The lines of credit
contain certain financial covenants which the Company met as of June 30,
1994. However, changes in asset levels or results of operations could
result in the violation of one or more covenants in the future.
The Company finances adjustable-rate mortgage securities and certain
other mortgage assets through repurchase agreements. Repurchase
agreements allow the Company to sell mortgage assets for cash together
with a simultaneous agreement to repurchase the same mortgage assets on
a specified date for an increased price, which is equal to the original
sales price plus an interest component. At June 30, 1994, the Company
had outstanding obligations of $2.5 billion under such repurchase
agreements, of which $2.3 billion, $194.2 million and $1.6 million were
secured by adjustable-rate mortgage securities, fixed-rate mortgage
securities and other mortgage securities, respectively. Increases in
either short-term interest rates or long-term interest rates could
negatively impact the valuation of these mortgage assets and may limit
the Company's borrowing ability or cause various lenders to initiate
margin calls. Additionally, certain of the Company's adjustable-rate
mortgage securities are AA or AAA rated classes that are subordinate to
related AAA rated classes from the same series of securities. Such AA
or AAA rated classes have less liquidity than securities that are not
subordinated, and the value of such classes is more dependent on the
credit rating of the related insurer or the credit performance of the
underlying mortgage loans. As a result of either changes in interest
rates, a downgrade of a insurer, or the deterioration of the credit
quality of the underlying mortgage collateral, the Company may be
required to sell certain mortgage assets in order to maintain liquidity.
If required, these sales could be made at prices lower than the carrying
value of the assets, which could result in losses.
The Company issues asset-backed commercial paper to support its funding
of mortgage warehouse lines of credit.
A substantial portion of the assets of the Company are pledged to
secure indebtedness incurred by the Company. Accordingly, those assets
would not be available for distribution to any general creditors or the
stockholders of the Company in the event of the Company's liquidation,
except to the extent that the value of such assets exceeds the amount of
the indebtedness they secure.
The REIT provisions of the Internal Revenue Code require Resource REIT
to distribute to shareholders substantially all of its taxable income,
thereby restricting its ability to retain earnings. The Company may
issue additional common stock or other securities in the future in order
to fund growth in its operations, growth in its portfolio of mortgage
investments, or for other purposes.
During the six months ended June 30, 1994 the Company issued 708,620
additional shares of common stock through its Dividend Reinvestment
Plan. Total net proceeds of $19.0 million were used for general
corporate purposes.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In March 1993, the Company was notified by the Securities
and Exchange Commission (the "Commission") that a formal
order of investigation had been issued to review trading
activity in the Company's stock during April and May of
1992. In this regard, the Company and certain of its
officers and directors have produced documents and testified
before the staff of the Commission. The Company and the
subpoenaed officers and directors are complying with the
requests of the Commission. Based on information available
to the Company, and upon advice of counsel, management does
not believe that the investigation will result in any action
that will have a material adverse impact on the Company.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
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.
RESOURCE MORTGAGE CAPITAL, INC.
By:Thomas H. Potts
-----------------------------
Thomas H. Potts, President
(authorized officer of registrant)
Lynn K. Geurin
-------------------------------
Lynn K. Geurin, Executive Vice
President and Chief Financial
Officer
(principal accounting officer)
Dated: August 15, 1994
