<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
//x// Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended March 31, 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. //x// Yes / / No
On April 30, 1994, the registrant had 19,734,872 shares of common stock
of $.01 value outstanding, which is the registrant's only class of
common stock.
<PAGE>
RESOURCE MORTGAGE CAPITAL, INC.
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
March 31, 1994
and December 31, 1993 3
Consolidated Statements of Operations
for the three months
ended March 31, 1994 4
Consolidated Statement of Shareholders'
Equity for
the three months ended March 31, 1994 5
Consolidated Statements of Cash Flows
for the three months ended
March 31, 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
<PAGE>PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
March 31, December 31,
1994 1993
--------- ------------
ASSETS
Mortgage investments:
Collateral for CMOs $ 390,093 $ 434,698
Adjustable-rate mortgage
securities, net 2,150,553 2,021,196
Fixed-rate mortgage securities,
net 203,421 214,128
Other mortgage securities 81,539 65,625
Mortgage warehouse participations 94,591 156,688
----------- -------------
2,920,197 2,892,335
Mortgage loans in warehouse 573,724 777,769
Cash 7,401 1,549
Accrued interest receivable 13,468 13,466
Other assets 19,111 41,643
----------- -------------
$ 3,533,901 $ 3,726,762
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Collateralized mortgage
obligations $ 382,148 $ 432,677
Repurchase agreements 2,679,821 2,754,166
Notes payable 57,271 87,451
Commercial paper 86,615 148,672
Accrued interest payable 11,375 14,695
Deferred income 13,891 13,214
Other liabilities 14,562 22,855
------------ ------------
3,245,683 3,473,730
------------ ----------
SHAREHOLDERS' EQUITY
Common stock: par value $.01 per share,
50,000,000 shares authorized,
19,619,145 and 19,331,932 issued
and outstanding, respectively 196 193
Additional paid-in capital 267,517 259,622
Net unrealized gain on available-
for-sale mortgage investments 21,930 -
Retained earnings (deficit) (1,425 ) (6,783 )
------------ -----------
288,218 253,032
------------ -----------
$ 3,533,901 $ 3,726,762
============ ============
See notes to consolidated financial statements.
<PAGE>
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except share data) Three Months Ended
March 31,
1994 1993
Interest Income:
Collateral for CMOs $ 8,539 $ 11,704
Adjustable-rate mortgage securities 25,296 17,071
Fixed-rate mortgage securities 4,118 3,267
Other mortgage investments 2,428 1,740
Mortgage warehouse participations 1,429 1,472
Mortgage loans in warehouse 9,485 4,549
-------- -------
51,295 39,803
-------- -------
Interest and CMO-related expense:
Collateralized mortgage obligations:
Interest 8,040 10,999
Other 408 552
Repurchase agreements 26,883 14,431
Notes payable 770 1,166
Commercial paper 803 927
Other 1,129 1,218
------- ------
38,033 29,293
------- ------
Net margin on mortgage assets 13,262 10,510
Gain on sale of mortgage assets, net of
associated costs 6,841 5,059
Other income 229 189
General & administrative expenses (4,832 ) (3,259)
--------- -------
Net income $ 15,500 $ 12,499
======== ==========
Net income per share $ 0.80 $ 0.76
======== ==========
Weighted average number of common shares
outstanding 19,447,618 16,517,599
========== ===========
See notes to consolidated financial statements.
<PAGE>
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENT OF Net
SHAREHOLDERS' EQUITY unrealized
(amounts in thousands except share data) gain 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 287,213 3 7,895 - - 7,898
Net income -
three months ended
March 31, 1994
- - - - 15,500 15,500
Net change in
unrealized gain on
available-for-sale
mortgage
investments - - - 21,930 - 21,930
Dividends declared
- $0.52 per share - - - - (10,142) (10,142)
-------- ------- -------- ------- -------- --------
Balance at
March 31, 1994
19,619,145 $ 196 $ 267,517 $ 21,930 $ (1,425) $ 288,218
========== ===== ========= ======== ========= =========
See notes to consolidated financial statements.
<PAGE>
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended
(amounts in thousands) March 31,
1994 1993
----- ------
Operating activities:
Net income $ 15,500 $ 12,499
Adjustments to reconcile net income to net
cash used for operating activities:
Amortization and depreciation 1,343 1,391
Net decrease (increase) in mortgage loans
held for sale 200,554 (94,379)
Net decrease (increase) in accrued interest,
other payables and other assets 20,251 (546)
Net gain from sales of mortgage investments (1,514) (803)
Other 85 -
---------- ----------
Net cash provided by (used for)
operating activities 236,219 (81,838)
---------- ----------
Investing activities:
Collateral for CMOs:
Principal payments on collateral 48,501 49,505
Net decrease in funds held by trustees 2,337 12,746
--------- --------
50,838 62,251
Purchase of other mortgage investments (260,152) (387,104)
Payments on other mortgage investments 136,071 19,419
Proceeds from sales of other mortgage investments 67,844 151,344
Capital expenditures (883) (161)
---------- ---------
Net cash used for investing activities (6,282) (154,251)
---------- ---------
Financing activities:
Principal payments on CMOs (50,232) (61,465)
(Repayments of) proceeds from short-term
borrowings, net (166,583) 314,556
Proceeds from stock offerings, net 7,897 577
Dividends paid (15,167) (18,165)
--------- ---------
Net cash provided by financing activities (224,085) 235,503
--------- ---------
Net increase (decrease) in cash 5,852 (586)
Cash at beginning of period 1,549 1,135
Cash at end of period $ 7,401 $ 549
=========== ===========
Cash paid for interest $ 40,376 $ 30,587
========== ===========
See notes to consolidated financial statements.
<PAGE>
RESOURCE MORTGAGE CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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. The Company's mortgage loan purchase
program is 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
March 31 1994, the Consolidated Statements of Operations for the three
months ended March 31, 1994 and 1993, the Consolidated Statement of
Stockholders' Equity for the three months ended March 31, 1994, the
Consolidated Statements of Cash Flows for the three months ended March
31, 1994 and 1993 and related notes are unaudited. Operating results
for the three months ended March 31, 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 $952,894 during the three months ended
March 31, 1994. During this period, the Company sold mortgage loans
with an aggregate principal balance of $1,155,432, primarily as
collateral for mortgage securities.
In the three months ended March 31, 1994, the Company recognized net
gains of $5,327 on securitizations and sales of mortgage loans.
Additionally, during the three months ended March 31, 1994, the Company
deferred gains of $1,530 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 related taxes totaling $459 for the three months ended March 31,
1994.
<PAGE>
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.
<PAGE>
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 results have improved primarily from
an increase in the net margin on its mortgage assets. This increase in
net margin resulted primarily from the addition to the Company's
portfolio of investments created by the Company's mortgage conduit
operations. Lower overall mortgage loan originations in the market are
anticipated for 1994 as compared to 1993 as a result of the recent
increase in mortgage loan interest rates and the resulting decrease in
mortgage loan refinancings. The Company expects that new loan products
and other lines of business will reduce the impact on the Company of the
overall lower level of mortgage loan originations in the market.
Results of Operations
Three Months Ended
(amounts in thousands except per share March 31,
------------------------------
information) 1994 1993
---- ----
Net margin on mortgage assets $ 13,262 $ 10,510
Net gain on sale of mortgage assets 6,841 5,059
Net income 15,500 12,499
Net income per share 0.80 0.76
Principal balance of
mortgage loans funded 952,894 863,585
Three Months Ended March 31, 1994 Compared to Three Months Ended March
31, 1993
- ------------------------------------------------------------------------
The increase in the Company's earnings during the first three 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 earnings was
partially offset by an increase in general and administrative expenses.
The net margin on mortgage assets increased to $13.3 million for the
three months ended March 31, 1994 from $10.5 million for the three
months ended March 31, 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.
The gain on sale of mortgage assets increased to $6.8 million for the
three months ended March 31, 1994 from $5.1 million for the three months
ended March 31, 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 Company incurred $4.8 million of general and administrative
expenses for the three months ended March 31, 1994 as compared with $3.3
million during the three months ended March 31, 1993. The increase in
general and administrative expenses is due primarily to the growth of
the underwriting and risk management departments in late 1993.
<PAGE>
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 March 31,
----------------------------
(amounts in thousands) 1994 1993
Average Effective Average Effective
Balance Rate Balance Rate
-------- --------- -------- ----------
Interest-earning
assets : (1)
Collateral for CMOs (2) $ 384,179 8.89 % $ 505,092 9.27 %
Adjustable-rate mortgage
securities 2,126,564 4.76 1,314,080 5.20
Fixed-rate mortgage
securities 209,951 7.85 167,423 7.81
Other mortgage
securities 74,841 12.97 36,097 19.28
Mortgage warehouse
participations 103,456 5.53 118,405 4.97
---------- ----- --------- -----
Total portfolio
-related assets 2,898,991 5.77 2,141,097 6.59
Mortgage loans in
warehouse 650,776 5.83 263,620 6.90
---------- ----- --------- -----
Total interest
-earning assets $ 3,549,767 5.78 % $ 2,404,717 6.62 %
========== ===== ========= =====
Interest-bearing liabilities:
Portfolio-related
liabilities:
CMOs $ 394,540 8.15 % $ 514,282 8.55 %
Repurchase agreements:
Adjustable-rate
mortgage securities 2,055,643 3.62 1,215,304 3.68
Fixed-rate mortgage
securities 197,114 5.19 151,475 4.29
Other mortgage securities 11,214 3.71 6,652 3.85
Commercial paper 96,732 3.32 112,972 3.28
--------- ----- --------- -----
Total portfolio
-related liabilities 2,755,243 4.37 2,000,685 4.96
Warehouse-related
liabilities:
Repurchase agreements 508,760 4.41 136,356 4.60
Notes payable 51,098 6.03 79,948 5.83
--------- ----- --------- -----
Total warehouse
-related liabilities 559,858 4.56 216,304 5.06
--------- ----- --------- -----
Total interest-bearing
liabilities $ 3,315,101 4.40 % $ 2,216,989 4.97 %
========= ===== ========= ====
Net interest spread 1.38 % 1.65 %
===== ====
Net yield on average
interest earning assets 1.67 % 2.04 %
===== =====
<PAGE>
- ------------------
(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 $12,632 and
$20,841 for the three months ended March 31, 1994 and March 31, 1993,
respectively.
The decrease in net interest spread is primarily the result of the
decrease in the spread on adjustable-rate mortgage securities. The
decrease in the spread on adjustable-rate mortgage securities resulted
from 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 these securities may increase as the mortgage loans underlying
these securities reset to a level where the interest rate is not teased.
Conversely, the spread on these securities could decrease further should
the rates on the related repurchase borrowings increase faster than the
interest rates reset on these securities.
<PAGE>
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 Ended March 31, 1994 Compared to Three Months Ended March
31, 1993
- ------------------------------------------------------------------------
The size of the Company's portfolio of mortgage investments at March
31, 1994 has increased as compared to March 31, 1993, through the
addition of investments created through the Company's conduit operations
and the purchase of mortgage investments. During the three months ended
March 31, 1994, the Company added approximately $204.6 million principal
amount of adjustable-rate mortgage securities, $8.8 million principal
amount of fixed-rate mortgage securities and $0.5 million of other
mortgage securities to its portfolio through its conduit operations.
Also during the three months ended March 31, 1994, the Company purchased
approximately $17.5 million principal amount of adjustable-rate mortgage
securities, $10.7 million principal amount of fixed-rate mortgage
securities and $16.0 million of other mortgage securities for its
portfolio. A portion of these securities were financed through
repurchase agreements with investment banking firms. Additionally,
during the three months ended March 31, 1994, the Company sold $55.5
million principal amount of adjustable-rate securities and $5.7 million
of other mortgage securities from its portfolio. During the three
months ended March 31, 1993, the Company sold $150.4 million principal
amount of fixed-rate mortgage securities from its portfolio. The
Company realized net gains of $1.5 million and $0.8 million on the sale
of mortgage securities for the three months ended March 31, 1994 and
1993.
The net margin on the Company's portfolio of mortgage investments
increased to $10.1 million for the three months ended March 31, 1994
from $8.7 million for the three months ended March 31, 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 are
funded primarily by sales of commercial paper. An agreement with a bond
guarantor and a syndicate of commercial banks provides 100% credit and
liquidity support for the commercial paper and for the Company's
obligations under such lines of credit. As of March 31, 1994, the
Company had $185.0 million of such lines of credit and had advanced
$94.6 million pursuant to such lines of credit. Under the Company's
liquidity agreement, which terminates on May 9, 1995, such lines of
credit are limited to $250 million.
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 multi-family mortgage loans and recently began
to originate single family mortgage loans.
<PAGE>Single-family Mortgage Operations
Through its single-family mortgage operations, the Company purchases
mortgage loans from approved sellers, primarily mortgage companies,
savings and loan associations and commercial banks and, beginning in
1994, 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 single-family activity for the three
months ended March 31, 1994 and 1993.
Three Months Ended
March 31,
(amounts in thousands) 1994 1993
----- -----
Principal amount of loans funded $ 952,894 $ 832,933
Principal amount securitized or sold 1,155,432 768,105
Investments added to portfolio from the
single-family conduit, net of
associated borrowings 19,837 16,028
Three Months Ended March 31, 1994 Compared to Three Months Ended March
31, 1993
- ------------------------------------------------------------------------
The increase in the funding volume of single-family loans for the three
months ended March 31, 1994 as compared to the three months ended March
31, 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 $5.3 million for the three months ended March 31,
1994 from $4.3 million for the three months ended March 31, 1993. This
increase was primarily the result of the increased volume of mortgage
loans securitized or sold during the period.
During the first quarter 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.
Multi-family Mortgage Operations
The Company originates multi-family mortgage loans secured by
properties that have qualified for low income housing tax credits
pursuant to Section 42 of the Internal Revenue Code. These tax credits,
which are available generally for ten years beginning when the property
was placed in service, provide a substantial incentive for the borrower
not to default on the mortgage loan, as the borrower would lose upon
foreclosure any future tax credits relating to the property and could
face recapture of a portion of the tax credits already taken.
At March 31, 1994, mortgage loans in warehouse included multi-family
mortgage loans with an aggregate principal balance of $11.2 million and
the Company had commitments outstanding to fund an additional $26.1
million in such mortgage loans.
<PAGE>
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 March 31, 1994 the allowance
totaled $5.5 million and was included in other liabilities.
The Company is exposed to losses to the extent that mortgage loans
which were in warehouse at the time of the January 1994 earthquake in
the Los Angeles area are secured by properties that were damaged as a
result of the earthquake. The Company does not expect that any losses
due to this earthquake will have a material effect on its financial
position or results of operations.
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 three months ended March
31, 1994 was approximately $16.3 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 presently has revolving committed repurchase
agreements of $300 million and $100 million maturing on June 25, 1994
and September 12, 1994, respectively. 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 March 31, 1994 the
Company had borrowed $481.2 million under these credit facilities. The
lines of credit contain certain financial covenants which the Company
met as of March 31, 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 March 31, 1994, the Company
had outstanding obligations of $2.3 billion under such repurchase
agreements, of which $2.1 billion, $196.1 million and $8.4 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 rated classes that are subordinate to related
AAA rated classes from the same series of securities. Such AA rated
<PAGE>
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 mortgage pool insurer or the credit
performance of the underlying mortgage loans. As a result of either
changes in interest rates, a downgrade of a mortgage pool 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. An agreement with a
consortium of commercial banks provides 100% liquidity support for the
commercial paper and for the Company's obligation to fund on such lines
of credit. Based on such liquidity support, the Company's commercial
paper has been rated in the highest category by two nationally
recognized rating agencies.
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 quarter ended March 31, 1994 the Company issued 287,213
additional shares of common stock through its Dividend Reinvestment
Plan. Total net proceeds of $7.9 million were used for general
corporate purposes.
Subsequent Events
The rapid increase in market interest rates since May 5, 1994, may
adversely impact both the Company's net margin income during the
remainder of 1994 and the Company's volume of mortgage loans funded. In
particular, the interest rates that the Company pays under its various
borrowing arrangements may increase faster than the interest
rates the Company earns on its adjustable-rate mortgage securities or
mortgage loans in warehouse. Additionally, the increase in mortgage
interest rates will reduce overall mortgage origination activity in the
market, which may reduce the Company's ability to purchase or
originate mortgage loans at a volume level consistent with the $4.0
billion funded during 1993. To the extent that the Company experiences
a lower net margin and a lower volume of mortgage loans funded, the
Company would likely have lower income on a quarterly basis during the
remainder of 1994 than during the first quarter of 1994. Because the
Company's dividend is based on taxable income and the Company had a taxable
income carryover of $0.45 per share from 1993, the Company believes that a
temporary reduction in earnings would not necessitate a reduction in the
current dividend level.
<PAGE>
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
99.1 Analysis of Projected Yield.
(b) Reports on Form 8-K
None
<PAGE>
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, President
(authorized officer of registrant)
-------------------------------
Lynn K. Geurin, Executive Vice
President and Chief Financial Officer
(principal accounting officer)
Dated: May 16, 1994
<PAGE>
Exhibit 99.1
ANALYSIS OF PROJECTED YIELD
This presentation contains an analysis of the projected yield on the
Company's mortgage investments as of March 31, 1994, under the specific
assumptions set forth herein. This presentation does not seek to predict, nor
should it be interpreted as a prediction of, the actual present or future
yield on such investments since the actual interest rates and prepayment rates
in the future will be different than those assumed in any of the projected
scenarios. Capitalized terms used herein and not defined herein shall have
the respective meanings assigned to them in the Glossary.
Resource Mortgage invests a portion of its equity in a portfolio of mortgage
investments. These investments include mortgage loans and mortgage securities
subject to collateralized mortgage obligations (CMOs), adjustable-rate
mortgage securities, fixed-rate mortgage securities, other mortgage securities
and participations in mortgage warehouse lines of credit.
The Company has pursued its investment strategy of concentrating on its
mortgage conduit activities in order to create investments for its portfolio
with attractive yields and also to benefit from potential securitization
income. Through its single-family mortgage conduit activities the Company
purchases mortgage loans from approved mortgage companies, savings and loan
associations and commercial banks; in its multi-family conduit activities, the
Company originates the loans directly. When a sufficient volume of loans is
accumulated, the Company securitizes these mortgage loans through the issuance
of mortgage-backed securities. The mortgage-backed securities are structured
so that substantially all of the securities are rated in one of the two
highest categories (i.e. AA or AAA) by at least one of the nationally
recognized rating agencies.
The yield on the Company's investment portfolio is influenced primarily by
(i) prepayment rates on the underlying mortgage loans, (ii) the level of
short-term interest rates and (iii) the relationship between short-term
financing rates and adjustable-rate mortgage yields. The following analysis
provides a projection of the yield of the Company's investment portfolio in
variety of interest rate and prepayment rate environments. 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. For purposes of this analysis
only, certain of the Company's assets and liabilities have been excluded, and
certain liability balances have been reduced to better reflect the Company's
net investment in its investment portfolio.
<PAGE>
Summary of Mortgage Investments
For purposes of calculating the projected yield, the Company calculates its
net investment in its mortgage investments as of March 31, 1994 and December
31, 1993 and can be summarized as follows (amounts in thousands):
March 31, December 31,
1994 (2) 1993
--------- ------------
Collateral for CMOs, net of CMO
liabilities $ 3,346 $ 8,403
--------- -----------
Adjustable-rate mortgage securities,
net (1) 140,479 132,401
--------- -----------
Fixed-rate mortgage securities, net (1) 14,216 14,520
--------- -----------
Other mortgage securities:
Mortgage residual interests 41,501 22,900
----------- -----------
Mortgage derivative securities 38,023 37,494
----------- -----------
Other mortgage securities subtotal 79,524 60,394
----------- -----------
Mortgage warehouse participations,
net of related liabilities 9,081 9,393
----------- ------------
Net investment $ 246,646 $ 225,111
========== ==========
(1) Net of repurchase borrowings and discounts recorded by the Company to
compensate for certain risks on mortgage securities collateralized by mortgage
loans purchased by the Company for which mortgage pool insurance is used as
the primary source of credit enhancement. At March 31, 1994 the discount
totaled $16.4 million on adjustable-rate mortgage securities and $2.0 million
on fixed-rate mortgage securities. Amounts exclude certain first-loss class
securities retained by the Company from mortgage securties for which a senior/
subordinated security structure is used as a primary source of credit
enhancement.
(2) Amounts exclude adjustments related to unrealized gains and losses on
available-for-sale mortgage investments in accordance with the Statement of
Financial Accounting Standards No.115.
The following tables list the Company's various investments (and related
information) as of March 31, 1994 that were used in the calculation of the
projected yield.
<PAGE>
Collateral Pledged to Secure CMOs
(Dollars in thousands)
Type of Weighted
Mortgage Average Net
Series Collateral Coupon Rate (1) Investment (2)
MCA1, Series 1 Loans (3) 8.97 (3,043)
RAC Four, Series 77 Loans 9.55 1,690
RMSC Series 89-4A Loans 10.60 257 (89-4A&B)
RMSC Series 89-4B Loans 10.59
RMSC Series 91-2 Loans 9.81 909
RMSC Series 92-12 Loans 8.10 1,333
RMSC, 4 Misc. Series Loans 11.18 46
RAC Four, 26 Misc. Series Various 9.90 2,154
------
Total $ 3,346
=========
- ---------------------
(1) Based on the weighted average coupons of the underlying mortgage loans or
mortgage certificates when the CMOs were issued and the current principal
balances of such mortgage collateral. This information is presented as of
December 31, 1993.
(2) Equal to the outstanding principal balance of the mortgage collateral
plus unamortized discounts, premiums, accrued interest receivable and deferred
issuance costs, and net of bond principal, discounts, premiums and accrued
interest payable as of March 31, 1994.
(3) Multi-family loans.
<PAGE>
Adjustable-Rate Mortgage Securities
(Dollars in thousands)
Remaining
Principal Interest Net
Description (1) Balance (2) Rate (3) Investment (4)
- -------------- ------------ --------- --------------
FNMA Pools, various $ 376,290 3.78-5.23%(A) $ 21,594
FNMA and FHLMC Pools, various 136,372 3.85-5.61 (B) 7,920
FNMA and FHLMC Pools, various 6,136 3.85-5.61 (C) 347
LIBOR ARM Trust 1991-19, Class B 40,01 5.60 (A) 2,298
LIBOR ARM Trust 1992-1, Class B 40,350 5.55 (A) 2,223
LIBOR ARM Trust 1992-4, Class B 59,940 5.57 (A) 3,314
LIBOR ARM Trust 1992-6, Class B 70,109 5.61 (A) 3,994
LIBOR ARM Trust 1992-8, Class B 105,208 5.54 (A) 6,018
LIBOR ARM Trust 1992-10, Class B 32,945 5.50 (A) 1,884
RMSC, AHF 1989-1 Trust, Class A-2 7,051 5.61 (B) 399
RMSC, Series 1991-5 55,445 6.26 (A) 3,058
RMSC, Series 1991-7, Class B 48,003 5.85 (A) 2,767
RMSC, Series 1991-11 69,160 5.70 (A) 3,961
RMSC, Series 1991-12, Class B 45,983 5.65 (A) 2,639
RMSC, Series 1991-15, Class B 39,972 5.73 (A) 2,293
RMSC, Series 1991-16, Class B 57,109 5.82 (A) 3,275
RMSC, Series 1991-17, Class B 39,523 5.63 (A) 2,269
RMSC, Series 1992-5 81,407 5.74 (A) 4,665
RTC M-1, A-4 410 7.01 (C) 23
RTC M-6, A-1, A-2 40,238 5.59, 5.68 (C) 2,326
SMSC, Series 1992-1, Class B 5,000 5.55 (A) 285
SMSC, Series 1992-4, Class B 55,900 5.47 (A) 3,157
SMSC, Series 1992-6, Class B 60,193 5.41 (A) 3,415
SMSC, Series 1993-1, Class B-1, B-2 9,963 5.59, 5.53 (A) 570
SMSC, Series 1993-3, Class A-2, B-2 112,103 5.55 (A) 6,410
SMSC, Series 1993-5, Class A-2, B-2 67,169 5.29 (A) 3,866
SMSC, Series 1993-6, Class B 16,951 5.11 (A) 971
SMSC, Series 1993-7, Class B 30,147 4.99 (A) 1,725
SMSC, Series 1993-9, Class A-2, B-2 96,560 4.74 (A) 5,563
SMSC, Series 1993-11 147,681 3.66 (A) 8,530
SMSC, Series 1994-1, Class A, B 98,082 3.89 (A) 5,652
SMSC, Series 1994-3, Class M 44,121 4.00 (A) 2,380
LIBOR Cap Agreements (5) 20,688
-------
Total $ 140,479
========
(A) Index - Six-month LIBOR
(B) Index - 1-yr CMT
(C) Index - COFI
(1) All the "Class B" adjustable-rate mortgage securities were created from
the Company's mortgage conduit operations, and represent a AA rated class that
is subordinated to AAA rated class(es) within the security offering.
(2) As of March 31, 1994.
(3) Pass-through rate as of March 31, 1994.
(4) Equal to the outstanding principal balance of the adjustable-rate
mortgage securities, plus any unamortized premiums and net of any unamortized
discounts, less repurchase borrowings, if any, calculated at 94% of such
amount.
<PAGE>
(5) The Company has purchased various LIBOR cap agreements in regard to
the adjustable-rate mortgage securities. Pursuant to the cap agreements, the
Company will receive additional cash flows should six-month LIBOR increase
above certain levels as specified below.
Notional Amount Cap Rate
--------------- --------
Cap agreements expiring between 2001 and 2002 230,500 11.50%
Cap agreements expiring between 2001 and 2002 108,000 10.50%
Cap agreements expiring in 1999 235,000 10.00%
Cap agreements expiring between 2000 and 2003 490,000 9.50%
Cap agreements expiring between 2002 and 2004 525,000 9.00%
-----------
$ 1,588,500
===========
Fixed-rate Mortgage Securities
(Dollars in thousands)
Remaining
Principal Interest Net
Description Balance (1) Rate Investment (2)
- ----------- ----------- --------- --------------
Citibank, Series 1990-B,
Class B-5 $ 1,172 9.60 % $ 720
RMSC, various series 21,004 8.19 1,285 (3)
RMSC, various series 3,517 10.02 227 (3)
RMSC, Series 91-2,Class 2-B (4) 11,672 10.00 1,513 (3)
SMSC, Series 1993-3,
Class A-1, B-1 (4) 82,364 6.75 5,103 (3)
SMSC, Series 1993-5,
Class A-1, B-1 (4) 53,262 6.51 3,293 (3)
SMSC, Series 1993-9,
Class A-1, B-1 (4) 32,240 6.09 1,993 (3)
LIBOR Cap Agreements(5) 82
--------
Total $ 14,216
==========
(1) As of March 31, 1994.
(2) Equal to the outstanding principal balance of the securities, plus any
unamortized premiums and net of any unamortized discounts at March 31, 1994.
(3) Equal to the outstanding principal balance of the securities, plus any
unamortized premiums and net of any unamortized discounts, less the associated
repurchase agreement borrowings at March 31, 1994.
(4) These series become adjustable-rate in 1995-1998.
(5) The Company has purchased various LIBOR cap agreements in regard to the
repurchase borrowings on SMSC Series 1993-3, Series 1993-5 and Series 1993-9.
Pursuant to the cap agreements, the Company will receive additional cash flows
should six-month LIBOR increase above certain levels ranging from 6.58%-6.75%.
The aggregate notional amount of these cap agreements was $16 million at March
31, 1994.
<PAGE>
Other Mortgage Securities
(Dollars in thousands)
Other Mortgage Securities are comprised of mortgage residual interests and
mortgage derivative securities as set forth below.
Mortgage residual interests:
Type of Weighted
Mortgage Percent Average Net Net
Series Collateral Owned Coupon Rate (1) Investment (2)
- ------ ---------- ------- --------------- --------------
FNMA REMIC Trust
1988-22 FNMA 40.00 % 9.50 % $ 1,585
GMS, Series 1994-1 FNMA 100.00 3.76 2,032
GMS, Series 1994-2 FHLMC 100.00 4.11 3,280
GMS, Series 1994-3 FHLMC 100.00 3.93 2,739
LIBOR ARM Trust
1991-19 Loans 100.00 5.60 298
LIBOR ARM Trust
1992-1 Loans 100.00 5.46 329
LIBOR ARM Trust
1992-4 Loans 100.00 5.51 374
ML Trust XI FHLMC 49.00 8.50 739
NMF, Series 1994-1 FNMA 100.00 3.83 6,281
NMF, Series 1994-2 FHLMC 100.00 3.80 1,654
NMF, Series 1994-3 FHLMC 100.00 3.90 2,538
RAC Four, Series 39 FHLMC 49.90 10.20 487
RAC Four, Series 62 GNMA 30.00 10.00 451
RAC Four, Series 73 GNMA 55.00 11.50 4,637
RAC Four, Series 74 GNMA 23.60 10.50 1,759
RAC Four, Series 75 GNMA 36.00 9.50 1,336
RAC Four, 22
Misc. Series Various Various 11.54 400
RMSC, Series 1991-7 Loans 100.00 6.01 436
RMSC, Series 1991-12 Loans 100.00 6.59 21
RMSC, Series 1991-15 Loans 100.00 6.67 106
RMSC, Series 1991-16 Loans 100.00 6.79 5
RMSC, Series 1991-17 Loans 100.00 5.62 97
Shearson Lehman,
Series K FNMA 50.00 10.00 181
LCPI Various 100.00 9.00 9,647
LIBOR Cap Agreements (3) 89
------
Total $ 41,501
=========
- --------------------
(1) Based on the weighted average coupons of the underlying mortgage loans or
mortgage certificates when the mortgage securities were issued and the current
principal balances of such mortgage collateral. This information is presented
as of December 31, 1993.
(2) Equal to the amortized cost of the mortgage residual interests as of
March 31, 1994.
(3) The Company has purchased LIBOR cap agreements through June 1994 in
regard to portions of the exposure to higher short-term interest rates of
certain of the mortgage residual interests. These cap agreements reduce the
Company's risk should one-month LIBOR exceed 8.50%. The aggregate notional
amount of these cap agreements was $150 million at March 31, 1994.
<PAGE>Other Mortgage Securities (continued)
Mortgage derivative securities: Weighted
Type of Average
Type of Mortgage Net Coupon Net
Description Securities (1) Collateral Rate (2) Investment (3)
- ----------- -------------- ---------- ----------- --------------
Chemical, Series 1988-4 I/O Loans 9.82 % $ 92
FNMA Trust 29 I/O GNMA 9.50 8,580
FNMA Trust 151 I/O FNMA 10.00 1,677
Interest-only strips,
various I/O Loans Various 5,432
LIBOR ARM Trust 1992-8,
Class I I/O Loans 5.54 789
LIBOR ARM Trust 1992-9,
Class I I/O Loans 5.46 561
LIBOR ARM Trust 1992-10,
Class I I/O Loans 5.41 474
Principal-only strips,
various P/O Loans Various 4,281
RMSC, Series 89-6, 6F I/O Loans 10.62 281
RMSC, Series 1989-7A,
A-2 I/O Loans 10.33 70
RMSC, Series 1989-7B,
B-2 I/O Loans 10.39 154
RMSC, Series 1991-14,
Class 14-P P/O Loans 9.77 146
RMSC, Series 1991-16,
Class I I/O Loans 5.79 266
RMSC, Series 1991-20,
Class P P/O Loans 8.96 254
RMSC, Series 1992-2,
Class I I/O Loans 9.07 3,500
RMSC, Series 1992-2,
Class P P/O Loans 8.47 46
RMSC, Series 1992-18,
Class P P/O Loans 8.18 148
RMSC, Series 1992-18,
Class X I/O Loans 8.18 1,232
SMSC, Series 1992-1,
Class I I/O Loans 5.46 478
SMSC, Series 1992-2,
Class I I/O Loans 5.53 527
SMSC, Series 1992-3,
Class I I/O Loans 5.56 259
SMSC, Series 1992-4,
Class I I/O Loans 5.46 288
SMSC, Series 1993-8,
Class 1I, 2I I/O Loans 7.97 1,271
SMSC, Series 1993-10,
Class I I/O Loans 7.72 2,843
SMSC, Series 1994-4,
Class 1I, 2I I/O Loans 7.09 4,374
-------
Total $ 38,023
==========
- ---------------------
(1) I/O means an interest-only security; P/O means a principal-only security.
(2) Based on the weighted average coupons of the underlying mortgage loans or
mortgage certificates when the mortgage securities were issued and the current
principal balances of such mortgage collateral. This information is presented
as of December 31, 1993 or as of the date purchased if purchased in 1994.
(3) Equal to the amortized cost of the mortgage derivative securities as of
March 31, 1994. The Company owned 100% of each such security, except for the
FNMA Trusts.
Mortgage Warehouse Participations
(Dollars in thousands)
Description Weighted Average Coupon (1) Net Investment (2)
- ----------- -------------------------- ------------------
Various Participations 5.64% $ 9,081
- ----------------------
(1) Based upon the weighted average rate on each participation as of
March 31, 1994.
(2) Equal to equity invested in mortgage warehouse participations as of
March 31, 1994.
<PAGE>
YIELD ON MORTGAGE INVESTMENTS
This presentation contains an analysis of the yield sensitivity to different
short-term interest rates and prepayment rates of the Company's Mortgage
Investments (as described in the previous section) as of April 1, 1994. The
Company utilizes this analysis in making decisions as to the cash flow
characteristics of investments that the Company desires to create or acquire
for its investment portfolio. The Company's investment strategy is to create
a diversified portfolio of mortgage securities that in the aggregate generates
stable income in a variety of interest rate and prepayment rate environments
and preserves the capital base of the Company. Capitalized terms used herein
and not defined within this section are defined in the glossary on page 15 of
this Exhibit.
This presentation does not reflect all of the Company's assets and
liabilities (or income and expenses of such excluded assets or liabilities)
nor any of the general and administrative expenses of the Company. This
presentation also does not purport to reflect the liquidation or ongoing value
of the Company's business or assets. The yield information presented herein
is provided solely for analytical purposes. This presentation does not seek
to predict, nor should it be interpreted as a prediction of, the actual
present or future yield on such investments.
The table below sets forth the estimated cash yields calculated on a semi-
annual equivalent basis as of March 31, 1994 of the projected net cash flows
on the Company's existing investment portfolio as set forth in "Mortgage
Investments" above, based upon the current balances of the assets as of April
1, 1994, and upon assumptions set forth below on pages 10 through 14 for each
of the respective cases. The most important of these assumptions are the
prepayment rates applicable to each mortgage investment and the level of
short-term interest rates.
MORTGAGE INVESTMENTS YIELD SENSITIVITY ANALYSIS
-----------------------------------------------
YIELD ON INVESTMENT (%)
Short-Term Interest Rate Assumption Case
----------------------------------------
Prepayment
Assumption
Case Case I Case II Case III Case IV Case V Case VI Case VII
---- ------ ------- -------- ------- ------- ------- --------
Case A 23.5% 22.6% 21.1% 18.7% 15.6% 11.9% 8.4%
Case B 25.4 24.5 23.1 20.7 17.8 14.3 10.9
Case C 27.0 26.2* 24.7 22.5 19.6 16.3 13.1
Case D 28.5 27.6 26.2 24.0 21.3 18.2 15.1
Case E 29.8 28.9 27.6 25.6 22.9 19.9 16.8
Case F 31.0 30.1 28.8 26.7 24.3 21.4 18.3
Case G 32.0 31.1 29.9 27.9 25.7 22.8 19.6
The case most representative of short-term interest rates and prepayment
rates as of April 1, 1994, is case C-II, represented by the "*." This "base
case" is not in the center of the table due to the relatively low levels of
short term interest rates and relatively high projected prepayment speeds as
of March 31, 1994.
The yields for each case expressed above are level yields relative to the
Company's aggregate net investment of $246.6 million in the various listed
mortgage investments as shown beginning on page 2. In addition to the
foregoing, the projected yields assume that the Company is able to reinvest
principal received on its investments at the same yield as the yield in each
case; consequently, these yields do not purport to reflect the return when
such reinvestment is not available.
<PAGE>
Such yields do not give effect to the operating expenses of the
Company. These yields are also exclusive of the yields on mortgage assets of
the Company not listed in "Mortgage Investments" above. In particular, the
listed mortgage investments do not include (i) mortgage loans in warehouse,
and (ii) certain first-loss class securities, and (iii) certain other
adjustable-rate and fixed-rate mortgage securities. These other
securities are excluded in an amount equal to the discount which compensates
the Company for certain risks on mortgage securities collateralized by
mortgage loans for which mortgage pool insurance is used as the primary source
of credit enhancement. There is no assurance that any particular yield
actually will be obtained. Prepayment speeds may exceed those shown in the
tables on pages 11 and 12 and/or short-term interest rates may exceed those
shown in the table on page 13. If this happens, the portfolio yields may
differ significantly from those shown below. Also, the table shows changes in
short-term interest rates and prepayment rates occurring on a gradual basis
over one year. If these factors change more rapidly, the portfolio yields may
be significantly affected.
The Company also calculates the MacCauley duration of the aggregate cash
flows on its mortgage investments. The duration is 2.5 years in Case C-II,
the base case, and ranges from a high of 5.2 years in Case G-VII to a low of
2.2 years in Case A-I.
The assumptions that are set forth below detail certain information with
respect to the mortgage investments as of March 31, 1994, or other dates as
specified.
Factors Affecting Return
The return on the Company's portfolio of investments will be affected by a
number of factors. These include the rate of prepayments of the mortgage loans
directly or indirectly securing the mortgage investments and the
characteristics of the net cash flows available. Prepayments on mortgage
loans commonly are measured by a prepayment standard or model. Two models are
used herein. One such model which is used primarily for fixed-rate mortgage
loans (the "PSA" prepayment assumption model) is based on an assumed rate of
prepayment each month of the unpaid principal amount of a pool of new mortgage
loans expressed on an annual basis. A prepayment assumption of 100 percent of
the PSA assumes that each mortgage loan (regardless of interest rate,
principal amount, original term to maturity or geographic location) prepays at
an annual compounded rate of 0.2% of its outstanding principal balance in the
first month after origination. The prepayment rate increases by an additional
0.2% per annum in each month thereafter until the thirtieth month after
origination. In the thirtieth month and each month thereafter each mortgage
loan prepays at a constant prepayment rate of 6% per annum.
The other model used herein is the Constant Prepayment Rate ("CPR"), which
is used primarily to model prepayments on adjustable-rate mortgage loans. CPR
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans. A prepayment
assumption of 18% CPR assumes a rate of prepayment of the then outstanding
principal balance of such mortgage loans in each month equal to 18% per annum.
The Prepayment Assumption Model and CPR do not purport to be either an
historical description of the prepayment experience of any pool of mortgage
loans or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including mortgage loans underlying the mortgage investments.
The actual prepayment rate of the mortgage loans will likely differ from the
assumed prepayment rates.
The rate of principal payments on a single-family pool of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. In
general, however, mortgage loans are likely to be subject to relatively higher
prepayment rates if prevailing long-term interest rates fall significantly
below the interest rates on the mortgage loans. Conversely, the rate of
prepayments would be expected to decrease if long-term interest rates rise
above the interest rate on the mortgage loans. Other factors affecting
<PAGE>
prepayment of mortgage loans include changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties, assumability of mortgage loans and servicing decisions.
The terms of the multi-family mortgage loans that collateralize the multi-
family investments prohibit the prepayment of principal during the lock-out
period, a period generally equal to fifteen years after origination of the
loan. Subsequent to the lock-out period, prepayments will be subject to a
prepayment premium based on 1% of the remaining principal balance of the
multi-family mortgage loan.
The net cash flows on the Company's CMOs will be derived principally from
the difference between (i) the cash flow from the collateral pledged to secure
the CMO together with reinvestment income, and (ii) the amount required for
payment on the CMOs together with related administrative expenses. Certain of
the Company's other mortgage securities have similar net cash flow
characteristics (collectively, net cash flow investments). Distributions of
net cash flows on such net cash flow investments represent both income
relative to the investment and a return of the principal invested.
Assumptions Employed in Projecting the Net Cash Flows
In calculating the "Mortgage Investments Yield Sensitivity Analysis" above,
the projected net cash flows on the Company's mortgage investments were
calculated on the basis of the following:
(1) Prepayments on the mortgage loans underlying the mortgage investments
(other than adjustable-rate mortgage securities) were projected to be received
in proportion to the PSA model described in this report. Prepayments on the
adjustable-rate mortgage securities were projected to be received in
proportion to the CPR model described in this report.
The tables below show the prepayment rate projections, expressed as a
percentage of the PSA or CPR, on the mortgage loans underlying the mortgage
investments in which the Company has an interest under the assumed Case A,
Case B, Case C, Case D, Case E, Case F and Case G scenarios. Neither the
prepayment projections used in this report nor any other prepayment model or
projection purports to be a historical description of prepayment experience or
a prediction of the anticipated rate of prepayment of any pool of mortgage
loans. It is unlikely that actual prepayments on the mortgage collateral will
conform to any of the projected prepayment rates shown in the table below.
Prepayment rate projections for certain of the Company's smaller investments
are not listed in the tables below.
The prepayment rate for each type of mortgage loan is projected to begin at
the prepayment rate used in Case C in the table below. For cases other than
Case C, the applicable rate increases or decreases ratably over a one-year
period to the prepayment rate set forth for the applicable case. The
prepayment rates set forth in Case C are the average of the published
estimates of projected prepayment rates of a number of major Wall Street
firms, excluding the highest and lowest estimates, as published on Bloomberg
on April 1, 1994. Cases A through B and Cases D through G represent the
average of the prepayment estimates from two investment banking firms
multiplied by the ratio of Case C and the average of the comparable prepayment
estimates of the two investment banking firms.
<PAGE>
PREPAYMENT ASSUMPTION TABLE
FIXED-RATE MORTGAGE LOANS OR CERTIFICATES
Pass
Through Percentage of PSA
-----------------
Mortgage
Certificates Rate (%) Case A Case B Case C* Case D Case E Case F Case G
------- ----- ------- ------ ------- ------ ------ ------
GNMA Certif. 9.50 590 380 330 230 200 175 160
10.00 525 400 330 230 200 175 160
10.50 490 335 330 265 210 185 165
11.50 395 325 305 270 235 200 190
FNMA Certif. 9.00 685 430 310 225 200 185 175
9.50 590 450 365 250 220 195 175
10.00 590 450 370 295 240 215 190
FHLMC Certif. 8.50 670 465 270 220 200 190 180
10.00 580 445 390 305 255 230 215
10.25 565 435 390 320 260 235 220
10.50 555 430 390 335 265 240 225
Fixed-rate Mortgage Loans:
MCA 1, Series 1 340 335 330 325 320 315 310
RAC Four, Series 77 565 435 390 320 260 235 220
RMSC, Series 1989-4A
and 1989-4B 565 430 390 330 255 230 210
RMSC, Series 91-2** 435 370 300 235 170 100 70
RMSC, Series 92-12 730 430 240 205 190 180 175
* Case C is the case most representative of projected prepayment speeds as
of April 1, 1994. This is representative of the yield on a FNMA 30-year
pass-through security of 7.95%. (Case A represents a FNMA pass-through yield
of 5.95%, Case B 6.95%, Case D 8.95%, Case E 9.95%, Case F 10.95% and Case G
11.95%).
** The mortgage loans underlying the security become adjustable-rate in
1996-1998.
<PAGE>
CONSTANT PREPAYMENT RATES (CPR) TABLE (%)
ADJUSTABLE-RATE MORTGAGE LOANS OR CERTIFICATES
Case A Case B Case C* Case D Case E Case F Case G
------ ------ ------- ------ ------ ------ -------
FNMA Pools, Various 36 32 28 26 22 18 14
FHLMC Pools, Various 26 22 18 14 10 6 2
LIBOR ARM Trust 1991-19 26 22 18 14 10 6 2
LIBOR ARM Trust 1992-1 26 22 18 14 10 6 2
LIBOR ARM Trust 1992-4 26 22 18 14 10 6 2
LIBOR ARM Trust 1992-6 26 22 18 14 10 6 2
LIBOR ARM Trust 1992-8 26 22 18 14 10 6 2
LIBOR ARM Trust 1992-10 26 22 18 14 10 6 2
RMSC, AHF 1989-1 40 36 32 28 26 22 18
RMSC, Series 1991-5 26 22 18 14 10 6 2
RMSC, Series 1991-7 28 24 20 16 12 8 4
RMSC, Series 1991-11 26 22 18 14 10 6 2
RMSC, Series 1991-12 28 24 20 16 12 8 4
RMSC, Series 1991-15 28 24 20 16 12 8 4
RMSC, Series 1991-16 26 22 18 14 10 6 2
RMSC, Series 1991-17 26 22 18 14 10 6 2
RMSC, Series 1992-5 26 22 18 14 10 6 2
RTC M-1 15 13 10 7 5 5 5
RTC M-6 17 15 10 7 5 5 5
SMSC, Series 1992-4 26 22 18 14 10 6 2
SMSC, Series 1992-6 26 22 18 14 10 6 2
SMSC, Series 1993-1 26 22 18 14 10 6 2
SMSC, Series 1993-3** 26 22 18 14 10 6 2
SMSC, Series 1993-5** 26 22 18 14 10 6 2
SMSC, Series 1993-6 26 22 18 14 10 6 2
SMSC, Series 1993-7 26 22 18 14 10 6 2
SMSC, Series 1993-9** 26 22 18 14 10 6 2
SMSC, Series 1993-11 26 22 18 14 10 6 2
SMSC, Series 1994-1 26 22 18 14 10 6 2
SMSC, Series 1994-3 28 24 20 16 12 8 4
- ----------------------
* Case C is the case most representative of projected prepayment speeds as of
April 1, 1994.
** The mortgage loans underlying these securities become adjustable-rate in
1995-1996.
(2) Principal and interest payments on the mortgage collateral was assumed to
be received monthly with interest payments received in arrears.
(3) The LIBOR, commercial paper, COFI, 1 Yr-CMT, and reinvestment income
rates are assumed to be as set forth in the table set forth below. The
applicable rate is assumed to begin at the rate set forth in Case II in the
table below. For cases other than Case II, the applicable rate increases or
decreases ratably over a one-year period to the rate set forth for the
applicable case. The rates set forth in Case II are representative of the
rates as of April 1, 1994. Case I and Cases III through VII indicate rates
decreasing or increasing, respectively, from the rates of Case II in equal
steps each month over one year, to the rate indicated and continuing
thereafter at that rate. According to the scheduled resets and subject to the
periodic and lifetime caps, if applicable, the interest rates on the Company's
adjustable-rate mortgage securities, in each case, reset at the defined margin
relative to their respective indices.
<PAGE>
SHORT TERM INTEREST RATE ASSUMPTIONS
Case I Case II* Case III Case IV Case V Case VI Case VII
------ -------- --------- ------- ------ ------- --------
LIBOR
One-month 2.750% 3.750% 4.750% 5.750% 6.750% 7.750% 8.750%
Three-month 3.000 4.000 5.000 6.000 7.000 8.000 9.000
Six-month 3.375 4.375 5.375 6.375 7.375 8.375 9.375
COFI 2.987 3.687 4.387 5.087 5.787 6.487 7.187
1 Yr-CMT 3.500 4.500 5.500 6.500 7.500 8.500 9.500
Reinvestment
Rates 2.375 3.375 4.375 5.375 6.375 7.375 8.375
- ---------------------
* Case II is the case most representative of short-term interest rates as of
April 1, 1994.
(4) Principal and interest payments on each mortgage investment were assumed
to be made in accordance with the terms for each such mortgage investment.
(5) It was assumed that no optional redemptions are exercised on any of the
mortgage investments.
(6) Administrative fees for each series of mortgage securities have been
calculated using the assumptions set forth in the prospectus relating to each
such series. The administrative fee generally is based upon a fixed
percentage of the principal amount of such mortgage securities outstanding.
(7) For the purposes of calculating the net cash flows on the adjustable-rate
mortgage securities that are subject to repurchase borrowings, it was assumed
that the repurchase borrowings were equal to 94% of the Company's cost basis
in such adjustable-rate mortgage securities, and that such ratio would remain
constant. Actual repurchase borrowings were greater on March 31, 1994 than
the amount used for modeling. If the ratio that the Company was able to
borrow were to decrease to a level below the 94% for adjustable-rate mortgage
securities used in modeling due to either increases in short-term interest
rates or other market conditions, the yield to the Company would be lower in
each case.
(8) For purposes of calculating the net cash flows on the fixed-rate mortgage
securities that are subject to repurchase borrowings, it was assumed that the
repurchase borrowings were equal to 93.5% of the Company's basis in such
fixed-rate mortgage securities, and that such ratio would remain constant.
Actual repurchase borrowings were greater on March 31, 1994 than the amount
used for modeling. If the ratio that the Company was able to borrow were to
decrease to a level below the 93.5% for fixed-rate mortgage securities used in
modeling due to either increases in short-term interest rates or other market
conditions, the yield to the Company would be lower in each case.
(9) In modeling the mortgage warehouse participations, it was assumed that
each participation had a remaining average life of one year and the spread
between the weighted average coupon, associated costs and the commercial paper
rate remained constant.
(10) No losses are projected on any mortgage loans owned by the Company or
underlying any adjustable-rate mortgage security or other mortgage security
that would not be covered by external sources of insurance or the Company's
allowance for losses. Any losses not covered by such insurance or allowance
would lower the yield in each case to the Company.
<PAGE>
(11) While the cost of the LIBOR cap agreements has been added to the
Company's investment in its portfolio, the projections do not include any
benefit from them, as such caps are generally above the range of the short-term
interest rate assumptions set forth on page 13.
(12) In modeling certain of the Company's smaller mortgage investments, the
cash flows of the investments were modeled by substituting for the actual
assets and liabilities a small number of representative assets or liabilities,
the characteristics of which summarize the actual mortgage loans or mortgage
securities and the related liabilities that comprise the investment.
<PAGE>
GLOSSARY
AHF - American Home Funding.
Adjustable-rate mortgage loan (ARM) - A mortgage loan that features
adjustments of the loan interest rate at predetermined times based on an
agreed margin to an established index. An ARM is usually subject to
periodic and lifetime interest-rate and/or payment-rate caps.
Adjustable-rate mortgage securities - Mortgage certificates that represent the
pass-through of principal and interest on adjustable-rate mortgage loans.
Bloomberg - Bloomberg Business Services, Inc. information systems.
Chemical - Chemical Acceptance Corporation.
Citibank - Citibank, N.A., REMIC mortgage pass-through certificates.
COFI - Eleventh District Cost of Funds Index.
Collateralized Mortgage Obligations (CMOs) - Debt obligations (bonds) that are
collateralized by mortgage loans or mortgage certificates. CMOs are
structured so that principal and interest payments received on the
collateral are sufficient to make principal and interest payments on the
bonds. The bonds may be issued in one or more classes with specified
interest rates and maturities which are designed for the investment
objectives of different bond purchasers.
Company - Resource Mortgage Capital, Inc.
FHLMC - Federal Home Loan Mortgage Corporation.
Fixed-rate mortgage loan - A mortgage loan which features a fixed interest
rate that does not change during the life of the loan, or does not change
for at least one year from the date of the analysis.
FNMA - Federal National Mortgage Association.
FNMA Yield - FNMA 30-year mortgage certificate yield.
GAAP - Generally accepted accounting principles.
GMS - General Mortgage Securities, Inc. Two
GNMA - Government National Mortgage Association.
LIBOR - The London Inter-Bank Offered Rate for overseas deposits of U.S.
dollars. The LIBOR index generally follows the patterns of the short-term
interest rate environment in the U.S. market.
Long-term interest rates - The interest rates applicable to debt securities
with an average life of 10 years or more.
MCA 1 - Multi-family Capital Access One, Inc., a subsidiary of the Company
ML - Merrill Lynch
Mortgage certificates - Certificates which represent participation in pools of
mortgage loans. The principal and interest payments on the mortgage loans
are passed through to the certificate holders. GNMA, FNMA, or FHLMC may
issue and guarantee the payment of principal and interest on mortgage
certificates issued by them. Mortgage certificates may also be privately
issued.
Mortgage derivative securities - Mortgage securities that generally have a
market price that is substantially below or in excess of the principal
balance of the underlying mortgage loans or mortgage certificates (e.g., a
principal-only or interest-only security).
Mortgage loans - Mortgage loans secured by first liens on single-family
residential properties.
Mortgage residual interests - An investment which entitles the Company to
receive any excess cash flow on a pool of mortgage loans or mortgage
certificates after payment of principal, interest and fees on the related
mortgage securities.
Mortgage warehouse participations - A participation in a line of credit to a
mortgage originator that is secured by recently originated mortgage loans
that are in the process of being sold to permanent investors.
N/A - Not available.
NMF - National Mortgage Funding, Inc.
1 Yr-CMT - One-year constant maturity treasury index.
Other mortgage securities - Mortgage derivative securities and mortgage
residual interests.
<PAGE>
Prepayment rates - Represent a measure as to how quickly the number of
mortgage loans in a pool are prepaid-in-full.
RAC Four - Ryland Acceptance Corporation Four.
REMIC - A real estate mortgage investment conduit pursuant to the Internal
Revenue Code of 1986, as amended.
RMSC - Ryland Mortgage Securities Corporation.
RTC - Resolution Trust Corporation
SMART - Structured Mortgage Asset Residential Trust.
SMSC - Saxon Mortgage Securities Corporation, an affiliate of the Company.
Short-term interest rates - Short-term interest rates are the interest rates
applicable to debt securities with an average life of six months or less.
