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 June 30, 1995
[ ] 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.)
4880 Cox Road, Glen Allen, Virginia 23060
(Address of principal executive offices) (Zip Code)
(804) 967-5800
(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 July 31, 1995, the registrant had 20,134,370 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, 1995 and
December 31, 1994.........................................3
Consolidated Statements of Operations for the three months
and the six months ended June 30, 1995 and 1994...........4
Consolidated Statement of Shareholders' Equity for
the six months ended June 30, 1995........................5
Consolidated Statements of Cash Flows for
the six months ended June 30, 1995 and 1994...............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..........................................................14
Item 2. Changes in Securities.......................................14
Item 3. Defaults Upon Senior Securities.............................14
Item 4. Submission of Matters to a Vote of Security Holders.........14
Item 5. Other Information............................................14
Item 6. Exhibits and Reports on Form 8-K.............................14
SIGNATURES............................................................15
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,
1995 1994
ASSETS
Mortgage investments:
Collateral for CMOs $ 882,825 $ 441,222
Adjustable-rate mortgage securities, net 2,058,661 2,321,388
Fixed-rate mortgage securities, net 69,007 194,078
Other mortgage securities 66,814 64,293
Mortgage warehouse lines of credit 4,233 7,938
3,081,540 3,028,919
Mortgage loans in warehouse 199,418 518,131
Cash 3,213 6,340
Accrued interest receivable 15,986 19,019
Other assets 35,826 28,187
$ 3,335,983 $ 3,600,596
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Collateralized mortgage obligations $ 821,978 $ 424,800
Repurchase agreements 2,039,383 2,804,946
Notes payable 151,488 135,110
Accrued interest payable 7,780 11,450
Deferred income - 12,117
Other liabilities 27,471 14,702
3,048,100 3,403,125
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share,
50,000,000 shares authorized:
9.75% Cumulative Convertible Series A
1,350,000 and none issued
and outstanding, respectively 14 -
Common stock, par value $.01 per share,
50,000,000 shares authorized, 20,117,936
and 20,078,013 issued and outstanding, respectively 201 201
Additional paid-in capital 310,951 279,296
Net unrealized loss on available-for-sale
mortgage securities (13,296) (72,678)
Retained deficit (9,987) (9,348)
287,883 197,471
$ 3,335,983 $ 3,600,596
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,
1995 1994 1995 1994
Interest Income:
Collateral for CMOs $ 13,347 $ 8,270 $ 23,020 $ 16,809
Adjustable-rate mortgage securities 35,767 26,355 70,317 51,651
Fixed-rate mortgage securities 2,112 3,589 4,848 7,707
Other mortgage securities 2,296 3,502 5,419 5,930
Mortgage warehouse lines of credit 82 1,343 275 2,772
Mortgage loans in warehouse 7,719 8,673 18,261 18,158
61,323 51,732 122,140 103,027
Interest and CMO-related expense:
Collateralized mortgage obligations:
Interest 11,030 7,743 19,289 15,783
Other 781 352 1,216 760
Repurchase agreements 35,712 28,759 76,311 55,642
Notes payable 3,131 1,411 5,852 2,181
Commercial paper - 779 - 1,582
Other 1,201 1,127 2,391 2,256
51,855 40,171 105,059 78,204
Net margin on mortgage assets 9,468 11,561 17,081 24,823
Gain on sale of mortgage assets,
net of associated costs 1,934 9,718 4,388 16,559
Other income, net 972 391 1,919 620
General and administrative expenses (4,333) (6,301) (8,751) (11,133)
Net income 8,041 15,369 14,637 30,869
Dividends paid on preferred stock - - - -
Net income available to
common stockholders $ 8,041 $ 15,369 $ 14,637 $ 30,869
Net income per common share $ 0.40 $ 0.78 $ 0.73 $ 1.58
Weighted average number of common
shares outstanding 20,105,209 19,750,225 20,091,686 19,599,758
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
Preferred Common paid-in mortgage Retained
stock stock capital securities deficit Total
Balance at
December 31, 1994 $ - $ 201 $ 279,296 $ (72,678) $ (9,348) $ 197,471
Net income - six months ended
June 30, 1995 - - - - 14,637 14,637
Issuance of
preferred stock 14 - 30,989 - - 31,003
Issuance of
common stock - - 666 - - 666
Net change in unrealized loss on
available-for-sale
mortgage securities - - - 59,382 - 59,382
Dividends declared -
$0.76 per share - - - - (15,276) (15,276)
Balance at
June 30, 1995 $ 14 $ 201 $ 310,951 $ (13,296) $ (9,987) $ 287,883
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended
(amounts in thousands) June 30,
1995 1994
Operating activities:
Net income $ 14,637 $ 30,869
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization and depreciation 5,091 3,241
Net decrease in mortgage loans held for sale 322,174 487,936
Net decrease in accrued interest,
other assets and other liabilities 63,389 18,831
Net gain from sales of mortgage investments (739) (4,474)
Other (2,639) (189)
Net cash provided by operating activities 401,913 536,214
Investing activities:
Collateral for CMOs:
Purchases of mortgage
loans subsequently securitized (540,156) -
Principal payments on collateral 97,280 81,657
Net decrease in funds held by trustees 1,488 9,466
(441,388) 91,123
Purchase of CMOs, net - (1,651)
Purchase of other mortgage investments (165,874) (613,170)
Payments on other mortgage investments 96,324 261,231
Proceeds from sales of other
mortgage investments 507,302 83,664
Capital expenditures (147) (1,134)
Net cash used for investing activities (3,783) (179,937)
Financing activities:
Proceeds from issuance of CMOs 419,993 -
Principal payments on CMOs (96,507) (89,741)
Repayments of borrowings, net (749,185) (247,645)
Proceeds from stock issuance, net 31,669 18,983
Dividends paid (7,227) (30,568)
Net cash used for financing activities (401,257) (348,971)
Net (decrease) increase in cash (3,127) 7,306
Cash at beginning of period 6,340 1,549
Cash at end of period $ 3,213 $ 8,855
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1995
(amounts in thousands except share data)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 taxable corporations that
are consolidated with RMC for financial reporting purposes, but are 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, 1995, the Consolidated
Statements of Operations for the three and six months ended June 30, 1995 and
1994, the Consolidated Statement of Stockholders' Equity for the six months
ended June 30, 1995, the Consolidated Statements of Cash Flows for the six
months ended June 30, 1995 and 1994 and related notes to consolidated
financial statements are unaudited. Operating results for the six months
ended June 30, 1995 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1995. 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, 1994.
Certain amounts for 1994 have been reclassified to conform with the
presentation for 1995.
NOTE 2--AVAILABLE-FOR-SALE MORTGAGE INVESTMENTS
The Company has classified all of its mortgage investments as available-
for-sale. The following tables summarize the Company's mortgage securities
held at June 30, 1995 and mortgage securities sold during the six months
ended June 30, 1995. The basis of securities sold is computed using the
specific identification method.
Securities held at June 30, 1995
Amortized Gross Gross
cost basis Fair value unrealized gain unrealized loss
Collateral for CMOs $ 874,864 $ 882,825 $ 8,998 $ 1,037
Adjustable-rate
mortgage securities 2,089,374 2,058,661 10,218 40,931
Fixed-rate
mortgage securities 69,228 69,007 898 1,119
Other mortgage securities 57,137 66,814 13,653 3,976
Mortgage warehouse lines
of credit 4,233 4,233 - -
$ 3,094,836 $ 3,081,540 $ 33,767 $ 47,063
Securities sold during the six months ended June 30, 1995
Amortized Proceeds Gross realized Gross
cost basis rom sale gain realized loss
Collateral for CMOs $ - $ - $ - $ -
Adjustable-rate
mortgage securities 497,736 500,686 12,117 9,167
Fixed-rate
mortgage securities - - - -
Other mortgage
securities 8,827 6,616 1,859 4,070
Mortgage warehouse lines
of credit - - - -
$ 506,563 $ 507,302 $ 13,976 $ 13,237
The gros realized gain on sale of adjustable-rate mortgage securities sold
during 1995 includes the basis in the repurchase obligation related to
convertible adjustable-rate mortgage loans previously securitized or sold.
NOTE 3--OTHER MATTERS
The gain on sale of mortgage assets for the six months ended June 30, 1995 is
net of tax expense totaling $5,990.
NOTE 4--SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
Six months ended June 30,
1995 1994
Cash paid for interest $ 106,920 $ 40,376
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") originates, purchases,
services and securitizes residential mortgage loans (collectively, the
mortgage operations) and invests in a portfolio of residential mortgage
securities. The Company's primary strategy is to use its mortgage operations
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 sales of mortgage loans and the interest spread realized
while the mortgage loans are being accumulated for securitization or sale.
The Company's results were negatively impacted during the six months
ended June 30, 1995 by the rapid increase in interest rates during 1994,
primarily during the second half of the year, and the resulting lower level of
overall mortgage loan originations in the market. As a result of this rapid
increase in interest rates, the Company experienced a decrease in the net
interest spread earned on the adjustable-rate mortgage securities, which
constitute a significant portion of the portfolio of mortgage investments.
The Company expects that the net interest spread that it earns on adjustable-
rate mortgage securities will increase during the second half of 1995 assuming
a relatively stable interest rate environment during this time period.
Results of Operations
Three Months Ended Six Months Ended
(amounts in thousands except per share June 30, June 30,
information) 1995 1994 1995 1994
Net margin on mortgage assets $ 9,468 $ 11,561 $ 17,081 $ 24,823
Net gain on sale of mortgage assets 1,934 9,718 4,388 16,559
General and administrative expenses 4,333 6,301 8,751 11,133
Net income 8,041 15,369 14,637 30,869
Net income per share 0.40 0.78 0.73 1.58
Principal balance of mortgage
loans funded 197,516 886,970 434,636 1,839,864
Three Months and Six Months Ended June 30, 1995 Compared to Three Months and
Six Months Ended June 30, 1994 The decrease in the Company's earnings during
the six months ended June 30, 1995 as compared to the same period in 1994 is
primarily the result of the decrease in the net margin on mortgage assets and
the gain on sale of mortgage assets. The decrease in the Company's earnings
for the three months ended June 30, 1995 as compared with the same period in
1994 can be attributed primarily to the same factors indicated above in the
comparison of the six months ended June 30, 1995 to the same period in 1994.
Net margin on mortgage assets decreased to $17.1 million for the six
months ended June 30, 1995 from $24.8 million for six months ended June 30,
1994. This decrease resulted primarily from the change in the net interest
spread on the portfolio-related assets which declined from 1.29% for the six
months ended June 30, 1994 to 0.78% for the six months ended June 30, 1995.
The gain on sale of mortgage assets decreased to $4.4 million for the six
months ended June 30, 1995 from $16.6 million for the six months ended June
30, 1994. This decrease resulted primarily from lower mortgage loan funding
levels by the Company as a result of a decrease in overall mortgage loan
originations in the market and a higher level of price competition for
mortgage loans. Lower funding levels resulted in lower gain on sale relating
to loans securitized or sold. The gain on sale of mortgage assets also
decreased as a result of the Company's securitization strategy during this
time period which includes securitizing a significant portion of its mortgage
loan production through the issuance of CMOs.
General and administrative expenses decreased to $8.8 million for the six
months ended June 30, 1995 from $11.1 million for the six months ended June
30, 1994 as the result of the Company's effort to reduce costs in line with
the reduced level of mortgage loan originations.
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
(amounts in thousands)
Three Months Ended June 30, Six Months Ended June 30,
1995 1994 1995 1994
Average Effective Average Effective Average Effective Average Effective
Balance Rate Balance Rate Balance Rate Balance Rate
Interest-earning assets : (1)
Collateral for CMOs (2)
$ 611,474 8.73% $ 368,409 8.98% $ 536,305 8.58% $ 376,294 8.93%
Adjustable-rate mortgage securities
2,075,575 6.89 2,127,153 4.96 2,122,755 6.63 2,126,858 4.86
Fixed-rate mortgage securities
101,887 8.29 204,580 7.02 123,711 7.84 208,008 7.41
Other mortgage securities
58,148 15.80 77,647 18.04 58,050 18.67 76,244 15.55
Mortgage warehouse lines of credit
3,561 9.10 84,678 6.35 6,044 9.07 94,067 5.90
Total portfolio-related assets
2,850,645 7.52 2,862,467 6.02 2,846,865 7.30 2,881,471 5.89
Mortgage loans in warehouse
330,718 9.34 552,140 6.28 428,485 8.06 601,458 6.04
Total interest-earning assets
$3,181,363 7.71% $ 3,414,607 6.06% $ 3,275,350 7.40% $ 3,482,929 5.92%
Interest-bearing liabilities:
Portfolio-related liabilities:
CMOs
$ 596,447 7.40% $ 374,967 8.26 % $ 528,290 7.30% $ 384,754 8.20%
Repurchase agreements:
Adjustable-rate mortgage securities
1,920,323 6.41 2,022,473 4.20 1,935,088 6.38 2,039,058 3.91
Fixed-rate mortgage securities
92,623 5.51 194,127 5.20 113,406 5.44 198,471 5.12
Other mortgage securities
5,161 6.43 2,990 4.28 5,699 6.39 7,102 3.83
Warehouse lines of credit
3,465 3.58 77,307 4.04 5,945 6.43 87,020 3.64
Total portfolio-related liabilities
2,618,019 6.60 2,671,864 4.84 2,588,428 6.53 2,716,405 4.60
Warehouse-related liabilities:
Repurchase agreements
197,417 7.32 395,432 5.03 306,883 7.12 452,096 4.68
Notes payable
90,619 8.02 84,605 6.64 72,602 8.11 67,852 6.41
Total warehouse-related liabilities
288,037 7.54 480,036 5.32 379,485 7.31 519,948 4.91
Total interest-bearing liabilities
$ 2,906,055 6.68% $ 3,151,901 4.91% $ 2,967,913 6.62% $ 3,236,353 4.65%
Net interest spread on portfolio-related assets
0.92% 1.18% 0.77% 1.29%
Total net interest spread
1.02% 1.15% 0.78% 1.27%
Net yield on average interest earning assets
1.61% 1.53% 1.39% 1.60%
(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 $2,906 and $10,645 for
the three months ended June 30, 1995 and June 30, 1994, respectively, and
$4,522 and $11,639 for the six months ended June 30, 1995 and June 30, 1994,
respectively.
The decrease in net interest spread for both the three months and the six
months ended June 30, 1995 relative to the same periods in 1994 is primarily
the result of the decrease in the spread on adjustable-rate mortgage
securities. Adjustable-rate mortgage securities reset throughout the year,
generally on a semiannual basis. These securities are subject to certain
periodic and lifetime interest rate caps. Due to the nature of the periodic
caps, semiannual rate increases are generally limited to 1%. As a result of
rapidly increasing short-term interest rates from February 1994 to February
1995, the interest rate on certain repurchase borrowings, which are not
subject to caps, increased at a faster rate than the interest rate earned on
the adjustable-rate mortgage securities which collateralize these borrowings,
decreasing the net interest spread on these securities. 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., teaser rates). As of
June 30, 1995, adjustable-rate mortgage securities in the Company's portfolio
were "teased" approximately 1.15% on a weighted average basis. Comparatively,
as of June 30, 1994, adjustable-rate mortgage securities in the Company's
portfolio were "teased" approximately 0.85% on a weighted average basis. In
future periods, the rate the Company earns on adjustable-rate securities will
increase approximately 0.50% during each three month period until these
securities become fully indexed or are limited by their lifetime interest rate
caps. The spread on adjustable-rate mortgage securities may increase to the
extent the rates on the related repurchase borrowings either i) decrease or
ii) increase more slowly than the resets on these securities. Conversely, the
spread on these securities could decrease if the rates on the related
repurchase borrowings 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. However, the rapid increase in short-term interest rates
has reduced the portfolio income since the first quarter of 1994 and had a
negative impact on the value of the Company's portfolio. As interest rates
have stabilized during 1995, the net interest spread on portfolio-related
assets has increased relative to early 1995 and the value of the Company's
available-for-sale mortgage investments increased by $59.4 million during the
first six months of 1995, decreasing the net unrealized loss on available-for-
sale mortgage investments from $72.7 million at December 31, 1994 to $13.3
million at June 30, 1995. This increase is attributable primarily to the
increase in value of adjustable-rate mortgage securities. The Company
anticipates that the net interest spread on portfolio-related assets and the
value of adjustable-rate mortgage securities will continue to increase during
the remainder of 1995 assuming a relatively stable interest rate environment.
The Company has pursued its strategy of concentrating on its mortgage
operations to create investments with attractive yields and to benefit from
potential gains on sale or 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 finance a portion of that asset.
Three and Six Months Ended June 30, 1995 Compared to Three and Six Months
Ended June 30, 1994 The net margin on the Company's portfolio of mortgage
investments decreased to $8.5 million for the three months ended June 30, 1995
from $9.3 million for the three months ended June 30, 1994. The net margin on
the Company's portfolio of mortgage investments decreased to $15.9 million for
the six months ended June 30, 1995 from $19.4 million for the six months ended
June 30, 1994. The decrease in net margin on the Company's portfolio of
mortgage investments is generally attributable to a decline in the spread on
portfolio assets. The spread on the Company's portfolio assets decreased from
1.18% and 1.29% for the three and six months ended June 30, 1994,
respectively, to 0.92% and 0.77% for the three and six months ended June 30,
1995, respectively.
During the six months ended June 30, 1995, the Company sold certain
investments to (i) reduce the Company's exposure to periodic cap risk as
discussed above, (ii) reduce the Company's exposure to further declines in the
market value of such securities and (iii) increase liquidity. The aggregate
principal amount of investments sold was $517.9 million, consisting of $509.1
million principal amount of adjustable-rate mortgage securities and $8.8
million of other mortgage securities from its portfolio. Additionally, during
the six months ended June 30, 1995, the Company sold its repurchase obligation
on all convertible adjustable-rate mortgage loans previously securitized or
sold. During the six months ended June 30, 1994, the Company sold $55.5
million principal amount of adjustable-rate mortgage securities and $18.1
million of other mortgage securities from its portfolio. The Company realized
a net gain of $0.7 million on the sale of mortgage securities and its
repurchase obligation for the six months ended June 30, 1995 compared to a net
gain of $4.5 for the six months ended June 30, 1994. During the six months
ended June 30, 1995, the Company added approximately $608.2 million of
collateral for CMOs, with $576.9 million of associated borrowings and $1.8
million of other mortgage securities to its portfolio through its mortgage
operations.
Mortgage Operations
The Company originates, purchases and services single-family mortgage
loans. When a sufficient volume of mortgage loans is accumulated, the Company
sells or securitizes these mortgage loans primarily through the issuance of
CMOs or pass-through securities. During the accumulation period, the Company
finances its funding of mortgage loans through warehouse lines of credit or
through repurchase agreements.
The following table summarizes mortgage operations activity for the six months
ended June 30, 1995 and 1994.
Three Months Ended Six Months Ended
June 30, June 30,
(amounts in thousands) 1995 1994 1995 1994
Principal amount of loans funded $ 197,516 $ 886,970 $ 434,636 $ 1,839,864
Principal amount securitized or sold
366,560 1,195,913 737,847 2,351,345
Investments added to portfolio from mortgage
operations, net of associated borrowings
30,005 23,965 34,845 43,443
Three Months and Six Months Ended June 30, 1995 Compared to Three Months Ended
Six Months Ended June 30, 1994 The decrease in the funding volume of
mortgage loans for the three months and the six months ended June 30, 1995 as
compared to the three months and the six months ended June 30, 1994 is a
result of the lower overall mortgage loan originations in the market and an
increased level of price competition for mortgage loans. The gain on
securitizations and sales of mortgage loans, excluding recognition of deferred
gains, decreased to $2.5 million for the six months ended June 30, 1995 from
$12.1 million for the six months ended June 30, 1994, resulting primarily from
this lower funding volume and the Company's current securitization strategy.
The Company's current securitization strategy includes securitizing a
significant portion of its loan production through the issuance of CMOs.
These securitizations are recorded as financing transactions and as such, no
gain on sale is recognized. Instead, income related to these securitizations
will be recognized over time as part of net margin income. With respect to
the remaining portion of the Company's loan production, the Company will
generally continue its strategy of either selling these loans in whole loan
pools or securitizing them using a senior subordinated structure. The Company
will recognize a gain or loss on sale of mortgage assets as a result of such
sales or securitizations.
During the six months ended June 30, 1995, the Company sold a portion of
its purchased mortgage servicing rights which were acquired along with the
Company's servicing operation in 1994. The gain resulting from this sale
totaled $1.2 million. Pursuant to the original acquisition strategy, the
Company will continue to sell purchased mortgage servicing rights as it adds
its own mortgage loan products to the servicing portfolio. As of June 30,
1995, the Company's serviced $759.6 million in mortgage loans.
Other Matters
The Company has exposure to credit losses related to delinquent loans in
warehouse. Additionally, the Company may retain a portion of the credit risk
after securitization. Such credit loss exposure is generally limited to an
amount equal to a fixed percentage of the principal balance of the pool of
mortgage loans at the time of securitization. After securitization, the
Company may also be exposed to losses due to fraud during the origination of
a mortgage loan or special hazards. The Company establishes discounts and
reserves for these estimated potential losses. At June 30, 1995, these
discounts and reserves totaled $33.8 million.
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, 1995 was approximately $12.0
million.
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. Historically, these sources of cash flow have provided
sufficient liquidity for the conduct of the Company's operations. However, if
a significant decline in the market value of the Company's mortgage securities
should occur, the Company's available liquidity may be reduced. As a result
of such a reduction in liquidity, the Company may be forced 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 such assets, which
could result in losses.
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 has
credit facilities aggregating $185 million to finance mortgage loan fundings
that expire in November 1995 and May 1996. One facility includes a sub-
agreement which allows the Company to borrow up to $30 million for working
capital purposes. The Company also has various committed repurchase
agreements totaling $260 million maturing in August 1995 and May 1996 relating
to mortgage loans in warehouse. 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. The Company may
also finance a portion of its mortgage loans in warehouse with repurchase
agreements on an uncommitted basis. At June 30, 1995, the Company had
borrowed $126.6 million under these credit facilities. The lines of credit
contain certain financial covenants which the Company met as of June 30, 1995.
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, 1995, the Company had outstanding
obligations of $2.0 billion under such repurchase agreements, of which $1.9
billion, $61.8 million and $6.0 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 such a downgrade of an 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. Additionally, the
Company owns approximately $313.1 million of its CMOs and has financed such
CMOs with $302.1 million of short-term debt. The Company plans to sell the
majority of these CMOs during 1995. For financial statement presentation
purposes, the Company has classified the $302.1 million of short-term debt as
CMOs outstanding.
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 Company has outstanding $50 million in unsecured notes maturing
between 1999 and 2001. The proceeds from this issuance were used for general
corporate purposes. The note agreements contain certain financial covenants
which the Company met as of June 30, 1995. However, changes in asset levels
or results of operations could result in the violation of one or more
covenants in the future.
During the three months ended June 30, 1995 the Company issued 1,350,000
shares of preferred stock. Subsequent to June 30, 1995, the Company issued an
additional 202,500 shares of preferred stock through the over-allotment
option. Net proceeds from these issuances totaling $35.7 million were used
initially to pay down short-term borrowings.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
At July 31, 1995, there were no material pending legal
proceedings, outside the normal course of business, to which the
Company was a party or of which any of its property was subject.
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
Form 8-K filed June 6, 1995 (Item 5 - regarding a proposed
settlement of the Commission's investigation)
Form 8-K filed July 18, 1995 (Item 5 - regarding the exercise of
the underwriter's preferred stock over-allotment and the
Commission's approval of the previously reported proposed
settlement of its investigation)
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 14, 1995
3
08/11/95 03:29 PM
3
15
6
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