UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1996
|_| 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, 1996, the registrant had 20,553,943 shares of common stock of
$.01 value outstanding, which is the registrant's only class of common
stock.
=============================================================================
<PAGE>
3
RESOURCE MORTGAGE CAPITAL, INC.
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1996 and
December 31, 1995 3
Consolidated Statements of Operations for the
three and six months
ended June 30, 1996 and 1995 4
Consolidated Statement of Shareholders' Equity for
the six months ended June 30, 1996 5
Consolidated Statements of Cash Flows for
the six months ended June 30, 1996 and 1995 6
Notes to Unaudited Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
PART II. OTHER INFORMATION
Item 1.Legal
Proceedings 28
Item 2.Changes in
Securities 28
Item 3. Defaults Upon Senior
Securities 28
Item 4. Submission
of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
<PAGE>
===================================================================
PART I. FINANCIAL INFORMATION
===================================================================
Item 1. Financial Statements
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
<TABLE>
<CAPTION>
December
June 30, 31,
1996 1995
----------- ------------
<S> <C> <C>
ASSETS
Investments:
Mortgage investments:
Collateral for CMOs $ 2,005,679 $ 1,028,935
Mortgage securities 1,965,785 2,149,416
Loans in warehouse 132,421 247,633
Note receivable 47,696 -
----------- ------------
4,151,581 3,425,984
Cash 20,901 22,229
Accrued interest receivable 12,999 14,851
Other assets 35,058 26,974
----------- ------------
$ 4,220,539 $ 3,490,038
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Collateralized mortgage $ 1,858,985 $ 949,139
obligations
Repurchase agreements 1,824,733 1,983,358
Notes payable 77,312 154,041
Accrued interest payable 4,797 5,278
Other liabilities 36,715 43,399
----------- ------------
3,802,542 3,135,215
----------- ------------
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01 per
share,
50,000,000 shares
authorized:
9.75% Cumulative Convertible
Series A 1,552,500 issued and
outstanding
($37,260 aggregate liquidation 35,460 35,460
preference)
9.55% Cumulative Convertible
Series B 2,196,824 issued and
outstanding
($53,822 aggregate liquidation 51,425 51,425
preference)
Common stock, par value $.01 per
share, 50,000,000 shares authorized,
20,421,567 and 20,198,654
issued and outstanding, 204 202
respectively
Additional paid-in capital 286,005 281,508
Net unrealized gain (loss) on 41,173 (4,759)
mortgage investments
Retained earnings (deficit) 3,730 (9,013)
----------- ------------
417,997 354,823
----------- ------------
$ 4,220,539 $ 3,490,038
=========== ============
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1995 1996 1995
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Interest income:
Collateral for CMOs $ 32,133 $ 13,347 $ 55,643 $ 23,020
Mortgage securities 35,419 40,175 71,956 80,584
Loans in warehouse 10,362 7,801 22,480 18,536
Note receivable 412 - 412 -
---------- --------- ----------- ----------
78,326 61,323 150,491 122,140
---------- --------- ----------- ----------
Interest and related
expense:
Collateralized mortgage 26,306 11,811 44,079 20,505
obligations
Repurchase 29,856 35,712 62,960 76,311
agreements
Notes payable 2,338 3,131 4,845 5,852
Other 1,134 1,201 1,696 2,391
Provision for losses 400 253 800 462
---------- --------- ----------- ----------
60,034 52,108 114,380 105,521
---------- --------- ----------- ----------
Net interest margin 18,292 9,215 36,111 16,619
Gain on sale of 18,899 - 18,899 -
single-family operations
Gain (loss) on sale of
mortgage (6,396) 2,187 (6,196) 4,850
investments, net of
associated costs
Other income 407 972 1,023 1,919
General and (5,305) (4,333) (11,255) (8,751)
administrative expenses
========== ========= =========== ==========
Net income $ 25,897 $ 8,041 $ 38,582 $ 14,637
========== ========= =========== ==========
Net income 25,897 8,041 38,582 14,637
Dividends on
preferred stock (2,193) - (4,386) -
========== ========= =========== ==========
Net income available to
common shareholders $ 23,704 $ 8,041 $ 34,196 $ 14,637
========== ========= =========== ==========
Per common share:
Primary $ 1.16 $ 0.40 $ 1.68 $ 0.73
========== ========= =========== ==========
Fully diluted $ 1.07 $ 0.40 $ 1.60 $ 0.73
========== ========= =========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(amounts in thousands except share data)
<TABLE>
<CAPTION>
Net
Preferred unrealized
stock Additional gain(loss) Retained
Series Series Common paid-in on mortgage earnings
A B stock capital investments (deficit) Total
------ ------ ----- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1995 $35,460 $51,425 $202 $281,508 $(4,759) $(9,013) $354,823
Net income - six
months ended
June 30, 1996 - - - - - 38,582 38,582
Issuance of common
stock - - 2 4,497 - - 4,499
Net change in
unrealized gain
(loss) on
mortgage investments - - - - 45,932 - 45,932
Common dividends
declared - $1.06
per share - - - - - (21,453) (21,453)
Preferred Series A
dividends declared
- $1.17 per share - - - - - (1,816) (1,816)
Preferred Series B
dividends declared
- $1.17 per share - - - - - (2,570) (2,570)
------ -------- ------ ------- ----- ------ ------
Balance at June 30,
1996 $35,460 $51,425 $204 $286,005 $41,173 $3,730 $417,997
======== ======= ===== ======= ====== ====== ======
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
--------- --------
<S> <C> <C>
Operating activities:
Net income available to common shareholders $ 34,196 $14,637
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses 800 462
Net (gain) loss from sales of mortgage 6,196 (739)
assets
Gain on sale of single-family operations (18,899) -
Amortization and depreciation 11,694 5,091
Net decrease in loans held in warehouse 93,943 322,174
Net decrease in accrued interest, other
assets and other liabilities 36,113 63,389
Other 244 (3,101)
--------- --------
Net cash provided by operating activities 164,287 401,913
--------- --------
Investing activities:
Collateral for CMOs:
Fundings of loans subsequently securitized (1,176,393) (540,156)
Principal payments on collateral 204,773 97,280
Net change in funds held by trustees 3,056 1,488
--------- --------
(968,564) (441,388)
Purchase of mortgage securities (44,670) (165,874)
Principal payments on mortgage securities 211,666 96,324
Proceeds from sales of mortgage securities 22,522 507,302
Proceeds from sale of single-family 20,413 -
operations
Capital expenditures (1,536) (147)
--------- --------
Net cash used for investing activities (760,169) (3,783)
--------- --------
Financing activities:
Collateralized mortgage obligations:
Proceeds from issuance of securities 1,035,832 419,993
Principal payments on securities (186,345) (96,507)
--------- --------
849,487 323,486
Repayments of borrowings, net (235,354) (749,185)
Proceeds from issuance of common stock, net 4,499 31,669
Dividends paid (24,078) (7,227)
--------- --------
Net cash provided by (used for)
financing activities 594,554 (401,257)
--------- --------
Net decrease in cash (1,328) (3,127)
Cash at beginning of period 22,229 6,340
========= ========
Cash at end of period $ 20,901 $ 3,213
========= ========
Cash paid for interest $ 110,156 $106,920
========= ========
</TABLE>
See notes to unaudited consolidated financial
statements.
<PAGE>
RESOURCE MORTGAGE CAPITAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(amounts in thousands except share data)
NOTE 1--BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. The consolidated financial statements include the
accounts of Resource Mortgage Capital, Inc., its wholly owned subsidiaries, and
certain other entities. As used herein, the "Company" refers to Resource
Mortgage Capital, Inc. (RMC) and each of the entities that is consolidated with
RMC for financial reporting purposes. A portion of the Company's 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 of the
consolidated financial statements have been included. The Consolidated Balance
Sheet at June 30, 1996, the Consolidated Statements of Operations for the three
and six months ended June 30, 1996 and 1995, the Consolidated Statement of
Stockholders' Equity for the six months ended June 30, 1996, the Consolidated
Statements of Cash Flows for the six months ended June 30, 1996 and 1995 and
related notes to consolidated financial statements are unaudited. Operating
results for the six months ended June 30, 1996 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1996. 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,
1995.
Certain amounts for 1995 have been reclassified to conform with the presentation
for 1996.
<PAGE>
NOTE 2--NET INCOME PER COMMON SHARE
Net income per common share as shown on the consolidated statements of
operations for the three and six months ended June 30, 1996 is presented on both
a primary net income per common share and fully diluted net income per common
share basis. Fully diluted net income per common share is computed by dividing
net income applicable to common stock by the average number of shares of common
stock and common stock equivalents outstanding for items that are dilutive. The
average number of shares is increased by the assumed conversion of convertible
items, but only if dilutive. For the three and six months ended June 30, 1996
the Company's Series A and B Cumulative Convertible Preferred Stocks were
dilutive. Series A and Series B Preferred Stock are convertible to shares of
common stock on a one-for-one basis. The following table summarizes the average
number of shares of common stock and equivalents used to compute primary and
fully diluted net income per common share for the three and six months ended
June 30, 1996 and 1995:
<TABLE>
- --------------------------------------------------------------------
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
------------ --------------------- ----------
<S> <C> <C> <C> <C>
Primary 20,379,424 20,105,209 20,322,312 20,091,686
Fully diluted 24,128,748 20,105,209 24,071,636 20,091,686
- --------------------------------------------------------------------
</TABLE>
NOTE 3--AVAILABLE FOR SALE MORTGAGE INVESTMENTS
The following table summarizes the Company's amortized cost basis of collateral
for CMOs and mortgage securities held at June 30, 1996 and December 31, 1995,
and the related average effective interest rates (calculated excluding
unrealized gains and losses) for the month ended June 30, 1996 and December 31,
1995:
<TABLE>
- -----------------------------------------------------------------------
<CAPTION>
June 30, 1996 December 31, 1995
- -----------------------------------------------------------------------
Amortized Effective Amortized Effective
Cost Interest Cost Interest
Rate Rate
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateral for CMOs $ 1,982,699 8.1% $ 1,012,399 8.4%
Allowance for losses $ (30,152) (1,800)
- ------------------------------------------------------------------------
Amortized cost, net $ 1,952,547 $ 1,010,599
- ------------------------------------------------------------------------
Mortgage securities:
Adjustable-rate $ 1,894,242 6.7% $ 2,087,435 7.0%
mortgage securities
Fixed-rate mortgage 39,396 10.9% 35,074 10.6%
securities
Other mortgage 51,451 8.8% 56,190 8.8%
securities
- ------------------------------------------------------------------------
1,985,089 2,178,699
Allowance for losses (7,345) (6,188)
- ------------------------------------------------------------------------
Amortized cost, net $ 1,977,744 $ 2,172,511
- ------------------------------------------------------------------------
</TABLE>
<PAGE>
The Company has classified collateral for CMOs and all mortgage securities as
available-for-sale. Other mortgage securities with an aggregate principal
balance of $26,715 were sold during the three and six months ended June 30, 1996
for an aggregate net loss of $4,747. The specific identification method is used
to calculate the basis of mortgage investments sold. In addition, the Company
reduced the basis in certain other mortgage securities as expectations of future
prepayment rates would result in the Company receiving less cash than its
current basis in those investments. The adjustment recorded was $1,043 and is
included in loss on sale of mortgage investments in the accompanying financial
statements.
The following table presents the fair value of the Company's collateral for CMOs
and mortgage securities held at June 30, 1996 and December 31, 1995:
<TABLE>
- ---------------------------------------------------------------
<CAPTION>
June 30, 1996 December 31, 1995
- ---------------------------------------------------------------
Collateral Mortgage Collateral Mortgage
for CMOs securities for CMOs securities
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Amortized cost, $1,952,547 $1,977,744 $1,010,599 $2,172,511
net
Gross unrealized 55,454 22,985 20,208 22,488
gains
Gross unrealized (2,322) (34,944) (1,872) (45,583)
losses
- ---------------------------------------------------------------
Fair value $ 2,005,679 $1,965,785 $ 1,028,935 $ 2,149,416
- ---------------------------------------------------------------
</TABLE>
NOTE 4--SALE OF SINGLE-FAMILY OPERATIONS
On May 13, 1996, the Company sold its single-family correspondent, wholesale,
and servicing operations (collectively, the single-family mortgage operations)
to Dominion Mortgage Services, Inc. (Dominion), a wholly-owned subsidiary of
Dominion Resources, Inc. (NYSE: D) The purchase price was $68 million for stock
and assets of the single-family mortgage operations. The terms of the purchase
included an initial cash payment of $20.4 million, with the remainder of the
purchase price paid in five annual installments of $9.5 million beginning
January 2, 1997, pursuant to a note agreement. The note bears interest at a rate
of 6.50%. The terms of the sale generally prohibit the Company from acquiring
single-family, residential mortgages through either correspondents or a
wholesale network for a period of five years. As a result of the sale, the
Company recorded a net gain of $18.9 million. Such amount is net of various
reserves for contingent liabilities related to the sale of the operations and
includes a provision of $29.7 million for possible losses on single-family loans
where the Company, which performed the servicing of such loans prior to the
sale, has retained a portion of the credit risk on these loans.
<PAGE>
NOTE 5--ADOPTION OF FINANCIAL ACCOUNTING STANDARDS
In January 1996, the Company adopted Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS No. 123). FAS
No. 123 establishes a fair value based method of accounting for stock-based
compensation plans. FAS No. 123 permits entities to expense an estimated fair
value of employee stock options or to continue to measure compensation cost for
these plans using the intrinsic value accounting method contained in APB Opinion
No. 25. As the Company issues only stock appreciation rights pursuant to various
stock incentive plans which are currently paid in cash, the impact of adopting
FAS No. 123 did not result in a material change to the Company's financial
position or results of operations.
In June 1996, the Financial Accounting Standards Board (FASB) issued FAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". FAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial components approach
that focuses on control of the respective assets and liabilities. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. FAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996. The impact of this statement on the Company's financial position and
results of operations has not been determined, but is not expected to be
material.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Summary
Resource Mortgage Capital, Inc. (the Company) is a mortgage and consumer finance
company which uses its production operations to create investments for its
portfolio. Currently, the Company's primary production operations include the
origination of loans secured by manufactured housing and the origination of
mortgage loans secured by multi-family properties. The Company will generally
securitize loans funded as collateral for collateralized mortgage obligations
(CMOs) or mortgage-backed securities to limit its credit risk and provide
long-term financing for its portfolio. The majority of the Company's current
investment portfolio is comprised of loans or securities that have coupon rates
which adjust over time (subject to certain limitations) in conjunction with
changes in short-term interest rates. The Company intends to expand its
production sources in the future to include other financial products, such as
commercial mortgage loans.
On May 13, 1996, the Company completed the sale of its single-family mortgage
operations to Dominion Mortgage Services, Inc. (Dominion), a wholly-owned
subsidiary of Dominion Resources, Inc., for approximately $68 million. Included
in the single-family mortgage operations were the Company's single-family
correspondent, wholesale, and servicing operations. The sale resulted in a gain
of $18.9 million for the quarter, which was net of various reserves for
contingent liabilities related to the single-family mortgage operations
including a provision of $29.7 million for possible losses on single-family
loans where the Company has retained a portion of the credit risk and where
prior to the sale the Company had serviced such single-family loans.
The Company's principle sources of earnings are net interest income on its
investment portfolio and loans in warehouse. The Company's investment portfolio
consists principally of adjustable-rate mortgage (ARM) securities and collateral
for CMOs. The Company funds its production and its portfolio investments with
both borrowings and cash raised from the issuance of equity capital. For the
portion of loans in warehouse and portfolio investments funded with borrowings,
the Company generates net interest income to the extent that there is a positive
spread between the yield on the earning assets and the cost of borrowed funds.
For that portion of the balance sheet that is funded with equity capital, net
interest income is primarily a function of the yield generated from the interest
earning asset. The cost of the Company's borrowings may be increased or
decreased by interest rate swap, cap, or floor agreements.
Generally, during a period of rising interest rates, the Company's net interest
spread earned on its investment portfolio will decrease. The decrease of the net
interest spread results from (i) the lag in resets of the ARM loans underlying
the ARM securities and collateral for CMOs and (ii) the fact that the resets on
the ARM loans are limited to generally 1% every six months, while the associated
borrowings have no such limitation. As interest rates stabilize and the ARM
loans reset, the net interest margin may be restored to its former level as the
yields on the ARM loans adjust to market conditions. Conversely, net interest
margin may increase following a fall in short-term interest rates; this increase
may be temporary as the yields on the ARM loans adjust to the new market
conditions after a lag period. In each case, however, the Company expects that
the increase or decrease in the net interest spread due to changes in the
short-term interest rates is temporary. The net interest spread may also be
increased or decreased by the cost or proceeds of the interest rate swap, cap or
floor agreements.
The Company seeks to generate growth in earnings and dividends per share in a
variety of ways, including (i) adding investments to its portfolio when
opportunities in the market are favorable, (ii) developing production
capabilities to originate and acquire financial assets in order to create
investments for the portfolio at a lower effective cost then if such assets were
purchased and (iii) increasing the efficiency with which the Company utilizes
its equity capital over time.
The Company elects to be taxed as a real estate investment trust (a REIT) and,
as a result, is required to distribute substantially all of its earnings
annually to its shareholders. In order to grow its equity base, the Company may
issue additional preferred or common stock. Management strives to issue such
additional shares when it believes existing shareholders are likely to benefit
from such offerings through higher earnings and dividends per share than as
compared to the level of earnings and dividends the Company would likely
generate without such offerings.
On July 30, 1996, the Company's Board of Directors approved the acquisition of
Multi-Family Capital Markets, Inc., which specializes in the sourcing,
underwriting and closing of multi-family loans secured by first liens on
apartment properties that have qualified for low income housing tax credits. The
Company believes that this acquisition will complement its current strategy of
expanding its multi-family lending business and improving its competitive
position in the marketplace for such loans. The transaction is expected to close
during the third quarter of 1996 and is contingent on the Company's due
diligence, the negotiation and execution of a definitive purchase and sale
agreement and other matters. There can be no assurance that the transaction will
be consummated.
<TABLE>
RESULTS OF OPERATIONS
- ---------------------------------------------------------------------
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
(amounts in thousands except 1996 1995 1996 1995
per share information)
--------- --------- -------- ----------
<S> <C> <C> <C> <C>
Net interest margin $ 18,292 $ 9,215 $36,111 $ 16,619
Gain on sale of
single-family operations 18,899 - 18,899 -
Gain (loss) on sale of
mortgage investments, net (6,396) 2,187 (6,196) 4,850
General and administrative
expenses 5,305 4,333 11,255 8,751
Net income 25,897 8,041 38,582 14,637
Primary net income per
common share 1.16 0.40 1.68 0.73
Fully diluted net income per
common share 1.07 0.40 1.60 0.73
Principal balance of
mortgage loans funded
through mortgage operations 233,618 197,516 592,531 434,636
Dividends declared per share:
Common $ 0.550 $ 0.40 $ 1.06 $ 0.76
Series A Preferred 0.585 - 1.17 -
Series B Preferred 0.585 - 1.17 -
- ---------------------------------------------------------------------
</TABLE>
Three Months and Six Months Ended June 30, 1996 Compared to Three Months and Six
Months Ended June 30, 1995. The increase in the Company's earnings during the
three and six months ended June 30, 1996 as compared to the same period in 1995
is primarily the result of the increase in net interest margin and the gain on
the sale of the single-family operations, offset by the loss of the sale of
certain mortgage investments and an increase in general and administrative
expenses.
Net interest margin for the six months ended June 30, 1996 increased to $36.1
million, or 117%, over the $16.6 million for the same period for 1995. This
increase was a result of an overall increase in the net interest spread on all
interest-earning assets, as well as the increased contribution from CMOs issued.
The net interest spread increased to 160 basis points for the six months ended
June 30, 1996 versus 78 basis points for the six months ended June 30, 1995. The
net interest spread on portfolio-related assets increased to 151 basis points
from 77 basis points. The increase in the net interest spreads is generally
attributable to the ARM securities upward rate resets, such that these
securities were generally fully-indexed for the first six months of 1996, and
the more favorable interest rate environment on borrowings related to the ARM
securities and CMOs.
The gain on the sale of single-family operations is a one-time gain related to
the sale of the Company's single-family correspondent, wholesale and servicing
business. The net loss on sale of mortgage investments for the six months ended
June 30, 1996 consists primarily of the loss from the sale of certain
underperforming securities in the Company's investment portfolio. The net loss
on sale of mortgage investments also includes a reduction in the carrying value
of certain other mortgage securities as expectations of future prepayment rates
would result in the Company receiving less cash than its current basis in those
investments. For the six months ended June 30, 1995, the gain on sale of
mortgage investments includes gains of $2.9 million related to securitizations
and whole loan sales of single-family loans, $1.2 million from the sale of
servicing and $0.7 million related to the sale of investments.
General and administrative expenses increased $2.5 million or 28.6%, to $11.3
million for the six months ended June 30, 1996, as the Company continues to
build its infrastructure for its manufactured housing operations. General and
administrative expenses also increased as the Company continued expansion of its
wholesale origination capabilities for its single-family operations prior to the
sale. General and administrative expenses are expected to decline for the
balance of the year due to the sale of the Company's single-family production
operations.
The following table 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.
<PAGE>
<TABLE>
Average Balances and Effective Interest Rates
- -------------------------------------------------------------------------
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------
(amounts in thousands) 1996 1995 1996 1995
------------ ------------ --------------- ---------
Average Effective Average Effective Average Effective Average Effective
Balance Rate Balance Rate Balance Rate Balance Rate
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets : (1)
Collateral for
CMOs (2) $1,594,875 8.06% $611,474 8.73% $1,337,237 8.32% $536,305 8.58%
Adjustable-rate 1,921,917 6.72 2,075,575 6.89 1,954,743 6.77 2,122,755 6.63
mortgage securities
Fixed-rate
mortgage securities 41,986 12.37 101,887 8.29 40,921 11.06 123,711 7.84
Other mortgage
securities 74,161 9.84 58,148 15.80 69,899 9.96 58,050 18.67
Note receivable 25,333 6.50 - - 12,667 6.50 - -
------- ----- ------ ---- ----- ------ ------ ---
Total 3,658,272 7.43 2,847,084 7.52 3,415,467 7.50 2,840,821 7.29
portfolio-related
assets
Loans in 506,576 8.18 334,279 9.34 540,121 8.32 434,529 8.07
warehouse
Total
interest-earning
assets $ 4,164,848 7.52% 3,181,363 7.71% 3,955,588 7.61% 3,275,350 7.40%
Interest-bearing
liabilities:
Portfolio-related
liabilities:
CMOs $1,513,078 6.71% $596,447 7.40% $1,270,825 6.65% $528,290 7.30%
Repurchase
agreements:
Adjustable-rate 1,821,868 5.43 1,920,323 6.41 1,869,691 5.54 1,935,088 6.38
mortgage securities
Fixed-rate 36,306 5.69 92,623 5.51 30,917 5.72 113,406 5.44
mortgage securities
Other 8,970 5.71 5,161 6.43 8,176 5.72 5,699 6.39
mortgage securities
------------ ----------- ----------- ------ ---
Total 3,380,222 6.01 2,614,554 6.59 3,179,609 5.99 2,582,483 6.52
portfolio-related
liabilities
Warehouse-related
liabilities:
Repurchase 303,657 6.49 200,882 7.26 333,173 6.31 312,828 7.11
agreements
Notes payable 51,897 5.44 90,619 8.02 68,030 5.78 72,602 8.11
Total 355,554 6.33 291,501 7.49 401,203 6.22 385,430 7.30
warehouse-related
liabilities
Total
interest-bearing
liabilities $ 3,735,776 6.04% $2,906,055 6.68% $3,580,812 6.01% 2,967,913 6.62%
Net interest spread
on portfolio-related
assets 1.42% 0.93% 1.51% 0.77%
Total net interest 1.48% 1.03% 1.60% 0.78%
spread
Net yield on average 2.11% 1.61% 2.16% 1.39%
interest earning
assets
------------------------------------------------------------------------
<FN>
(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 $ 3,262 and $2,906
for the three months ended June 30, 1996 and June 30, 1995, respectively, and
$3,215 and $4,522 for the six months ended June 30, 1996 and June 30, 1995,
respectively. Effective rates are calculated excluding non-interest related CMO
expenses.
</FN>
</TABLE>
<PAGE>
The increase in net interest spread for both the three and six months ended June
30, 1996 relative to the same periods in 1995 is primarily the result of the
increase in the spread on the ARM securities. The net interest spread on ARM
securities increased 98 basis points, from 25 basis points at June 30, 1995 to
123 basis points at June 30, 1996. ARM securities during the first six months of
1996 were generally fully-indexed relative to their respective indices. At June
30, 1995, the ARM securities were "teased" approximately 115 basis points on a
weighted average basis. The ARM securities have become fully-indexed as
short-term interest rates stabilized and then declined during the latter half of
1995 and through the first quarter of 1996. The net interest spread also
temporarily benefited as a result of the declining short-term interest rate
environment during the first six months of 1996, which had the impact of
reducing the Company's borrowing costs faster than it reduced the yields on the
Company's interest earning assets. The Company's overall weighted average
borrowing costs decreased to 6.01% for the six months ended June 30, 1996 from
6.62% for the six months ended June 30, 1995, while the overall yield on
interest-earning assets increased to 7.61% from 7.40%.
PORTFOLIO RESULTS
The Company's investment strategy is to create a diversified portfolio of
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 production
activities to create investments with attractive yields. In many instances, the
Company's investment strategy has involved not only the creation or acquisition
of the asset, but also the related long-term, non-recourse borrowings such as
through the issuance of CMOs.
Interest Income and Interest Earning Assets
The Company's average interest earning assets were $3.96 billion during the six
months ended June 30, 1996, an increase of 21% from $3.28 billion of average
interest earning assets during the same period of 1995. This growth was due to
the investment of proceeds from the preferred stock issuance in the second half
of 1995. Total interest income rose 23%, from $122.1 million during the six
months ended June 30, 1995 to $150.5 million during the same period of 1996.
Overall, the yield on interest earning assets rose to 7.61% for the six months
ended June 30, 1996 from 7.40% for the six months ended June 30, 1995 as the
yields on the Company's ARM securities increased and its investment in higher
yielding collateral for CMOs continued to grow. On a quarter to quarter basis,
average interest earning assets for the quarter ended March 31, 1996 were $3.75
billion versus $4.16 billion for the quarter ended June 30, 1996. As indicated
in the table below, average yields for these periods were 7.70% and 7.52%,
respectively, which were 2.36 % and 1.88% higher than the average daily six
month LIBOR interest rate during those periods. The majority of the ARM loans
underlying the Company's ARM securities and collateral for CMOs are indexed to
and reset based upon the level of the London InterBank Offered Rate (LIBOR) for
six month deposits (six-month LIBOR). The average asset yield declined in the
second quarter 1996 despite the increase in the daily average six-month LIBOR
rate, as the majority of the ARM loans underlying the Company's ARM securities
and CMO securities reset generally every six months and on a one-to-two month
lag. As the six-month LIBOR daily average declined in the first quarter of 1996
to 5.34% versus 5.75% for the fourth quarter of 1995, the majority of the
Company's ARM securities and collateral for CMOs was resetting down in the
second quarter of 1996, even though six-month LIBOR was trending up. The Company
expects the yield on the ARM loans underlying it ARM securities and collateral
for CMOs to trend upward by the end of the third quarter.
<PAGE>
<TABLE>
Earning Asset Yield
($ in millions)
- ---------------------------------------------------------------
<CAPTION>
Average Daily Asset
Interest Average Average Yield
Earning Interest Asset Six versus
Assets Income Yield Month Six
LIBOR Month
LIBOR
- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995
Quarter 1 $ 3,406.9 $ 60.8 7.14% 6.60% 0.54%
1995,
Quarter 2 3,181.4 61.3 7.71% 6.14% 1.57%
1995,
Quarter 3 3,450.4 66.1 7.66% 5.89% 1.77%
1995,
Quarter 4 3,360.8 64.5 7.67% 5.75% 1.92%
1996,
Quarter 1 3,746.3 72.1 7.70% 5.34% 2.36%
1996,
Quarter 2 4,164.8 78.3 7.52% 5.64% 1.88%
- ---------------------------------------------------------------
</TABLE>
The average asset yield is reduced for the amortization of premium on the
Company's investment portfolio. By creating its investments through its
production operations, the Company believes that premium amounts are less than
if the investments were acquired in the market. As indicated in the table below,
premiums on the Company's ARM securities, fixed-rate securities and collateral
for CMOs at June 30, 1996 approximate 1.57% of the aggregate investment
portfolio balance. The mortgage principal repayment rate for the Company
(indicated in the table below as "CPR Annualized Rate") was 28% for the three
months ended June 30, 1996. The Company expects that the CPR rate will decline
for the balance of the year given the current interest rate environment. CPR
stands for "constant prepayment rate" and is a measure of the annual prepayment
rate on a pool of loans.
<TABLE>
Premium Basis and Amortization
($ in millions)
- ---------------------------------------------------------------
<CAPTION>
Ending
CPR Investment
Net Amortization Annualized Principal
Premium Expense Rate Balance
(Discount)
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
1995,
Quarter 1 26.6 1.0 (1) $ $ 2,454.2
1995,
Quarter 2 23.7 1.6 (1) 2,432.5
1995,
Quarter 3 35.3 2.5 (1) 2,705.0
1995,
Quarter 4 39.3 2.8 (1) 2,772.9
1996,
Quarter 1 49.3 3.2 30% 3,214.4
1996,
Quarter 2 56.0 4.0 28% 3,557.7
- ---------------------------------------------------------------
(1) CPR rates were not available for those periods.
</TABLE>
<PAGE>
Interest Expense and Cost of Funds
The Company's largest expense is the interest cost on borrowed funds. Funds to
finance the investment portfolio are borrowed in the form of repurchase
agreements or CMOs, both of which are primarily indexed to LIBOR, principally
one-month LIBOR. For the six month period ended June 30, 1996 as compared to the
same period in 1995, interest expense increased to $107.7 million from $98.8
million while the average cost of funds decreased to 6.01% for the six month
period ended June 30, 1996 compared to 6.62% for the six month period ended June
30, 1995. The Company's cost of funds rose in conjunction with the increase in
the one-month LIBOR rate through the second quarter of 1995, and then began to
decline correspondingly with the decline in interest rates. The Company may use
interest rate swaps, caps and financial futures to manage its interest rate
risk. The net costs during the related period of these instruments are included
in the cost of funds table below.
<TABLE>
Cost of Funds
($ in millions)
- ----------------------------------------------------
<CAPTION>
Average GAAP Cost Average
Borrowed Interest of One-month
Funds Expense Funds LIBOR
(a)
<S> <C> <C> <C> <C>
- ----------------------------------------------------
1995,
Quarter 1 $ 3,058.1 $ 50.3 6.58% 6.06%
1995,
Quarter 2 2,906.1 48.5 6.68% 6.08%
1995,
Quarter 3 3,159.7 51.0 6.46% 5.88%
1995,
Quarter 4 3,025.3 47.6 6.30% 5.86%
1996,
Quarter 1 3,425.8 51.3 5.99% 5.43%
1996,
Quarter 2 3,735.8 56.4 6.04% 5.45%
- ----------------------------------------------------
<FN>
(a) Excludes non-interest CMO-related expenses and interest on
non-portfolio related notes payable
</FN>
</TABLE>
Interest Rate Agreements
As part of its asset/liability management process, the Company enters into
interest rate agreements such as interest rate caps and swaps and financial
futures contracts ("hedges"). These agreements are used to reduce interest rate
risk which arise from the lifetime yield caps on the ARM securities, the
mismatched repricing of portfolio investments versus borrowed funds, and
finally, assets repricing on indices such as the prime rate which are different
than the related borrowing indices. The agreements are designed to protect the
portfolio's cash flow, and to provide income and capital appreciation to the
Company in the event that short-term interest rates rise quickly.
The following table includes all interest rate agreements in effect as of the
various quarter ends. Generally, interest rate swaps and caps are used to manage
the interest rate risk associated with assets that have periodic and annual
reset limitations financed with borrowings that have no such limitations.
Financial futures contracts and options on futures are used to lengthen the
terms of repurchase agreement financing, generally from one month to three and
six months. Amounts presented are aggregate notional amounts. To the extent any
of these agreements are terminated, gains and losses are amortized over the
remaining period of the original hedge.
<PAGE>
<TABLE>
Instruments Used for Interest Rate Risk Management Purposes
($ in millions)
- -----------------------------------------------------------
<CAPTION>
Interest Interest Financial Options
Notional Rate Rate on
Amounts Caps Swaps Futures Futures
<S> <C> <C> <C> <C>
- -----------------------------------------------------------
1995, $ 1,475 $ 200 $ - $ -
Quarter 1
1995, 1,475 200 1,000 500
Quarter 2
1995, 1,475 220 1,000 500
Quarter 3
1995, 1,575 1,227 1,000 2,130
Quarter 4
1996, 1,575 1,631 1,000 1,250
Quarter 1
1996, 1,575 1,559 400 880
Quarter 2
- -----------------------------------------------------------
</TABLE>
Net Interest Rate Agreement Expense
The net interest rate agreement expense, or hedging expense, equals the
expenses, net of any benefits received, from these agreements. For the quarter
ended June 30, 1996, net hedging expense amounted to $1.02 million versus $1.63
million and $1.30 million for the quarters ended March 31, 1996 and June 30,
1995, respectively. For the six months ended June 30, 1996, net hedging expense
was $2.65 million versus $2.68 million for the six months ended June 30, 1995.
Such amounts exclude the hedging costs and benefits associated with the
Company's production activities as these amounts are deferred as additional
premium or discount on the loan funded and amortized over the life of the loan
as an adjustment to its yield.
<TABLE>
Net Interest Rate Agreement Expense
($ in millions)
- -----------------------------------------------------------
<CAPTION>
Net Expense Net Expense
as as
Net Interest Percentage Percentage
Rate of Average of Average
Agreement Assets Borrowings
Expense (annualized) (annualized)
<S> <C> <C> <C>
- -----------------------------------------------------------
1995, $ 1.38 0.160% 0.180%
Quarter 1
1995, 1.30 0.163% 0.165%
Quarter 2
1995, 0.86 0.108% 0.119%
Quarter 3
1995, 0.16 0.018% 0.020%
Quarter 4
1996, 1.63 0.174% 0.191%
Quarter 1
1996, 1.02 0.100% 0.110%
Quarter 2
- -----------------------------------------------------------
</TABLE>
<PAGE>
Fair value
The fair value of the Company's investment portfolio as of June 30, 1996
relative to June 30, 1995 has improved over last year as short-term interest
rates have stabilized and declined. The net unrealized gain on mortgage
investments improved by $54.5 million from June 30, 1995 to June 30, 1996. This
increase in the portfolio's value is primarily attributable to the increase in
value of the Company's ARM securities, as well as an increase in the value of
the collateral for CMOs relative to the CMOs issued during the last twelve
months.
Credit Exposures
The Company has historically securitized its loan production in pass-through or
CMO securitization structures. With either structure, the Company may use
overcollateralization, subordination, reserve funds, bond insurance, mortgage
pool insurance or any combination of the foregoing for credit enhancement.
Regardless of the form of credit enhancement, the Company may retain a limited
portion of the direct credit risk after securitization. This risk can include
risk of loss related to hazards not covered under standard hazard insurance
policies and credit risks on loans not covered by standard borrower mortgage
insurance, or pool insurance.
Beginning in 1994, the Company issued pass-through securities which used
subordination structures as their form of credit enhancement. The credit risk of
subordinated pass-through securities is concentrated in the subordinated classes
(which may themselves partially be credit enhanced with reserve funds or pool
insurance) of the securities, thus allowing the senior classes of the securities
to receive the higher credit rating. To the extent credit losses are greater
than expected (or exceed the protection provided by any reserve funds or pool
insurance), the holders of the subordinated securities will experience a lower
yield (which may be negative) than expected on their investments. At June 30,
1996, the Company retained $22.8 million in aggregate principal amount of
subordinated securities, which are carried at a book value of $4.4 million,
reflecting such potential credit loss exposure.
With CMO structures, the Company also retains credit risk relative to the amount
of overcollateralization required in conjunction with the bond insurance. Losses
are generally first applied to the overcollateralization amount, and any losses
in excess of that amount would be borne by the bond insurer or the holders of
the CMOs. The Company only incurs credit losses to the extent that losses are
incurred in the repossession, foreclosure and sale of the underlying collateral.
Such losses generally equal the excess of the principal amount outstanding, less
any proceeds from mortgage or hazard insurance, over the liquidation value of
the collateral. To compensate the Company for retaining this loss exposure, the
Company generally receives an excess yield on the mortgage loans relative to the
yield on the CMOs. At June 30, 1996 the Company retained $83.9 million in
aggregate principal amount of overcollateralization, and had reserves or
otherwise had provided coverage on $60.5 million of the potential credit loss
exposure.
<PAGE>
The Company principally used pool insurance as its means of credit enhancement
for years prior to 1994. Pool insurance has generally been unavailable as a
means of credit enhancement since the beginning of 1994. Pool insurance covered
substantially all credit risk for the security with the exception of fraud in
the origination or certain special hazard risks. Loss exposure due to special
hazards 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.
Fraud in the origination exposure is generally limited to those loans which
default within one year of origination. The reserve for potential losses on
these risks was $10.5 million at June 30, 1996.
The following table summarizes the aggregate principal amount of collateral for
CMOs and pass-through securities outstanding which are subject to credit
exposure, the maximum credit exposure held by the Company represented by the
amount of overcollateralization and first loss securities owned by the Company
and the reserves and discounts established by the Company for such exposure.
<TABLE>
Credit Exposure and Related Reserves and Discounts
($ in millions)
- ---------------------------------------------------------
<CAPTION>
Reserves and
Outstanding Maximum Discounts for
Loan Balance Credit Losses
Exposure
<S> <C> <C> <C>
- ---------------------------------------------------------
1995, $ 2,435 $ 49.6 $ 14.6
Quarter 2
1995, 2,462 51.3 16.4
Quarter 3
1995, 2,504 65.9 18.5
Quarter 4
1996, 2,888 79.2 19.3
Quarter 1
1996, 3,131 106.7 79.0
Quarter 2
- --------------------------------------------------------
</TABLE>
The following table summarizes the mortgage loan delinquencies as a percentage
of the outstanding loan balance for the total collateral for CMOs and
pass-through securities outstanding where the Company has retained a portion of
the credit risk either through holding a subordinated security or the
overcollateralization.
<TABLE>
Delinquency Statistics
- ------------------------------------------------------------
<CAPTION>
60 to 90 90 days and over
days delinquent (includes
delinquent REO and foreclosures) Total
<S> <C> <C> <C>
- ------------------------------------------------------------
1995, 0.54% 1.24% 1.78%
Quarter 2
1995, 0.78% 1.77% 2.55%
Quarter 3
1995, 2.50% 3.23% 5.73%
Quarter 4
1996, 0.90% 2.95% 3.85%
Quarter 1
1996, 1.91% 3.47% 5.38%
Quarter 2
- ------------------------------------------------------------
</TABLE>
<PAGE>
PRODUCTION ACTIVITIES
The Company's results of operations for all periods presented include activity
from the single-family operations which were sold on May 13, 1996, to Dominion
Mortgage Services, Inc., a subsidiary of Dominion Resources, Inc. The terms of
the sale generally prohibit the Company from acquiring single-family,
residential mortgages through either correspondents or a wholesale network for a
period of five years.
The Company currently has two primary sources of loan production, manufactured
housing lending operations and multi-family lending operations. The Company's
strategy is to use its production activities to create investments for its
portfolio. When a sufficient volume of loans is accumulated, the Company sells
or securitizes these loans primarily through the issuance of CMOs or
pass-through securities. During the accumulation period, the Company finances
its funding of loans through warehouse lines of credit or through repurchase
agreements.
The following table summarizes the production activity for the three and six
month periods ended June 30, 1996 and 1995.
<TABLE>
Production Activity
($ in thousands)
- ---------------------------------------------------------------------
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1996 1995 1996 1995
---------- -------- --------- ---------
<S> <C> <C> <C> <C>
Multi-family $ 79,358 $ - $ 90,479 $ 10,741
Manufactured Housing 2,764 - 2,764 -
Single-family 151,496 197,516 499,288 423,895
======== ====== ======= =======
Total principal amount
of loans funded
through mortgage
operations $ 233,618 $197,516 $592,531 $434,636
======== ====== ======= =======
Single-family loans bulk $ 108,628 $ - $517,267 -
purchased
======== ====== ======= =======
Principal amount
securitized or sold $ 557,253 $366,560 $1,152,640 $737,847
======== ====== ======= =======
- ---------------------------------------------------------------------
</TABLE>
Manufactured housing lending commenced during the second quarter of 1996.
Additionally, during the second quarter, three regional offices were opened with
a fourth expected to open during the second half of the year. Principally all
funding volume has been obtained through relationships with manufactured housing
dealers. The Company has recently undertaken direct marketing efforts, including
telemarketing and direct mail. In addition, the Company also expects to offer
dealer inventory financing beginning in the fourth quarter 1996. Once certain
volume levels are achieved at a particular region, district offices may be
opened in an effort to further market penetration. The first district office is
expected to be opened in the first quarter of 1997.
<PAGE>
The Company funded $79.4 million in multi-family loans during the three months
ended June 30, 1996 compared to $11.0 million for the three months ended March
31, 1996 and none for the three months ended June 30, 1995. Principally all
fundings are under the Company's lending programs for properties that have been
allocated low income housing tax credits. As of June 30, 1996 commitments to
fund multi-family loans over the next 20 months were approximately $530 million.
The Company expects that it will have funded volume sufficient enough to
securitize a portion of its multifamily mortgage loans held in warehouse in the
first quarter of 1997 through the issuance of CMOs. The Company will retain a
portion of the credit risk after securitization and intends to service the
loans.
In July 1996, the Company announced that it had reached an agreement in
principle to acquire Multi-Family Capital Markets, Inc. (MCM). MCM, located in
Richmond, Virginia, sources, underwrites and closes multi-family loans secured
by first liens on apartment properties that have qualified for low income
housing tax credits. MCM has supplied the Company with multi-family product
since 1992. The closing of the transaction is contingent on the Company's
completion of its due diligence, the negotiation and execution of the definitive
purchase and sale agreements, and other matters. There can be no assurance that
the transaction will be consummated.
The Company anticipates that it will continue to expand its production
operations into new product types, such as commercial mortgages, in the future.
Such commercial mortgages would be securitized with the Company's multi-family
productions.
OTHER ITEMS
General and Administrative Expenses
General and administrative expenses (G&A expense) consist of expense incurred in
conducting the Company's production activities, managing the investment
portfolio, and various corporate expenses. G&A expense increased for the three
and six month period ended June 30, 1996 as compared to the same periods in 1995
primarily due to the expansion of the single-family wholesale operations and the
start up costs related to the manufactured housing lending operations. G&A
expenses are expected to decrease initially as a result of the sale of the
single-family operations, but increase over time as the Company expands its
production activities with current and new product types.
The following table summarizes the Company's efficiency, the ratio of G&A
expense to average interest earning assets, and the ratio of G&A expense to
average total equity.
<PAGE>
<TABLE>
Operating Expense Ratios
- -----------------------------------------------------------
<CAPTION>
G&A G&A
G&A Expense/Average Expense/Average
Efficiency Interest-earning Total
Ratio (a) Assets Equity (b)
(Annualized) (Annualized)
<S> <C> <C> <C>
- -----------------------------------------------------------
1995, 7.26% 0.52% 6.48%
Quarter 1
1995, 7.07% 0.54% 6.13%
Quarter 2
1995, 6.68% 0.51% 5.71%
Quarter 3
1995, 7.51% 0.59% 5.50%
Quarter 4
1996, 8.25% 0.64% 6.53%
Quarter 1
1996, 6.77% 0.51% 5.60%
Quarter 2
- -----------------------------------------------------------
<FN>
(a) G&A expense as a percentage of interest income.
(b) Average total equity excludes unrealized gain (loss) on
available for sale mortgage investments.
</FN>
</TABLE>
Net Income and Return on Equity
Net income increased from $14.6 million for the six months ended June 30, 1995
to $38.6 million for the six months ended June 30, 1996. Return on common equity
also increased from 10.74% for the six months ended June 30, 1995 to 24.01% for
the six months ended June 30, 1996. The majority of the increase in both the net
income and the return on common equity is due to (i) the gain recognized on the
sale of the single-family operations in the second quarter of 1996, (ii) the
increased net margin related to increased levels of interest-earning assets and
(iii) the increase in the net interest spread on interest-earning assets.
<TABLE>
Components of Return on Equity
- ------------------------------------------------------------------------
<CAPTION>
Gains
Net Provisio and G&A Preferred
Interest for Other Expense/ Dividend/ Return
Margin/ Losses Income Average Average on Net
Average /Average /Average Common Common Average Income
Common Common Common Equity Equity Common Available
Equity Equity Equity Equity to
Common
(annualized) Shareholders
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995, 11.17% 0.31% 5.30% 6.48% N/A 9.68% $6,596
Quarter 1
1995, 13.91% 0.37% 4.64% 6.36% N/A 11.81% $8,041
Quarter 2
1995, 19.19% 1.72% 3.85% 6.45% 1.33% 13.53% $10,128
Quarter 3
1995, 21.99% 1.82% 4.68% 7.22% 2.67% 14.96% $12,145
Quarter 4
1996, 26.26% 0.58% 1.18% 8.58% 3.16% 15.12% $ 10,492
Quarter 1
1996, 25.59% 0.55% 17.67% 7.26% 3.00% 32.45% $ 23,704
Quarter 2
- ------------------------------------------------------------------------
</TABLE>
<PAGE>
Dividends and Taxable Income
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. 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, preferred 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.
The Company intends to declare and pay out as dividends 100% of its taxable
income over time. The Company's current practice is to declare quarterly
dividends per share. Generally, the Company strives to declare a quarterly
dividend per share which will result in the distribution of most or all of the
taxable income earned during the quarter. At the time of the dividend
announcement, however, the total level of taxable income for the quarter is
unknown. Additionally, the Company has considerations other than the desire to
pay out most of the taxable earnings for the quarter, which may take precedence
when determining the level of dividends.
<TABLE>
Dividend Summary
($ in thousands, except per share amounts)
- ------------------------------------------------------
<CAPTION>
Taxable
Taxable Net Dividend
Net Income Declared Cumulative
Income Per Per Dividend Undistributed
Available Common Common Pay-out Taxable
to Share Share Ratio Income
Common
Shareholders
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------
1995, $ 5,070 0.25 $ 0.36 144% $ $1,507
Quarter 1
1995, 5,577 0.28 0.40 143% (956)
Quarter 2
1995, 11,223 0.56 0.44 79% 1,410
Quarter 3
1995, 13,176 0.65 0.48 74% 4,882
Quarter 4
1996, 12,719 0.63 0.51 81% 7,249
Quarter 1
1996, 13,359 0.65 0.54 84% 9,376
Quarter 2
- -------------------------------------------------------
</TABLE>
Taxable income differs from the financial statement net income which is
determined in accordance with generally accepted accounting principles (GAAP).
For the second quarter of 1996, the Company's earnings per share of $1.16 were
higher than the Company's declared dividend per share of $0.54. The majority of
the difference ($0.62) was caused by GAAP and tax differences related to the
sale of the single-family operations. For tax purposes, the sale will be
accounted for on an installment sale basis with annual taxable income of
approximately $10 million. Additionally, the Company has a capital loss
carryforward available from prior years of $9 million which will offset the
portion of the tax gain from the sale of the single-family operations that would
be recognized in 1996. Cumulative undistributed taxable income represents timing
differences in the amounts earned for tax purposes versus the amounts
distributed. Such amounts can be distributed for tax purposes in the subsequent
year as a portion of the normal quarterly dividend.
LIQUIDITY AND CAPITAL RESOURCES
The Company has various sources of cash flow upon which it relies for its
working capital needs. Sources of cash flow from operations include primarily
the return of principal on its portfolio of mortgage investments and the
issuance of CMOs. Other borrowings provide the Company with additional cash flow
in the event that it is necessary. Historically, these sources 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 investments
should occur, the Company's available liquidity from these other borrowings 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 borrows funds on a short-term basis to support the accumulation of
loans prior to the sale of such loans or the issuance of mortgage- or
asset-backed securities. These 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 assets
financed with such funds, the Company's ability to acquire or fund additional
assets may be substantially reduced and it may experience losses. 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
loans.
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.
Warehouse Lines of Credit
The Company has various credit facilities aggregating $350 million to finance
loan fundings and for working capital purposes which expire in November 1996,
December 1996 and April 1998. One of these facilities includes several sublines
aggregating $300 million to serve various purposes, such as multi-family loan
fundings, working capital, and manufactured housing loan fundings, which may
not, in the aggregate, exceed the overall facility commitment of $150 million at
any time. Working capital borrowings are limited to $30 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.
The lines of credit contain certain financial covenants which the Company met as
of June 30, 1996. However, changes in asset levels or results of operations
could result in the violation of one or more covenants in the future.
Repurchase Agreements
The Company also may finance a portion of its loans in warehouse with repurchase
agreements on an uncommitted basis. As of June 30, 1996, the Company had no
outstanding obligations under such repurchase agreements.
<PAGE>
The Company finances its mortgage securities through repurchase agreements.
Repurchase agreements allow the Company to sell the mortgage securities for cash
together with a simultaneous agreement to repurchase the same mortgage
securities on a specified date for a price which is equal to the original sales
price plus an interest component. At June 30, 1996, the Company had outstanding
obligations of $1.8 billion under such repurchase agreements, of which $1.78
billion, $37.5 million and $9 million were secured by ARM 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 securities and may limit the Company's
borrowing ability or cause various lenders to initiate margin calls.
Additionally, certain of the Company's ARM securities are AAA or AA rated
classes that are subordinate to related AAA rated classes from the same series
of securities. Such AAA or AA 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. In instances of 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.
The Company may lengthen the duration of its repurchase agreements secured by
mortgage securities by entering into certain futures and/or option contracts. As
of June 30, 1996, the Company had lengthened the duration of $1.1 billion of its
repurchase agreements to three months by entering into certain futures and
option contracts. Additionally, the Company owns approximately $276 million of
its CMOs and has financed such CMOs with $276 million of short-term debt. For
financial statement presentation purposes, the Company has classified the $276
million of short-term debt as CMOs outstanding.
Potential immediate sources of liquidity for the Company include cash balances
and unused availability on the credit facilities described above.
<TABLE>
Potential Immediate Sources of Liquidity
($ in millions)
- --------------------------------------------------------------------
<CAPTION>
Estimated Potential Potential
Unused Immediate Immediate
Cash Borrowing Sources of Sources of
Balance Capacity Liquidity Liquidity as a
% of Recourse
Borrowings (a)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------
1996, $ 8.5 $ 32.6 $ 41.1 1.79%
Quarter 1
1996, 20.9 102.8 123.7 6.56%
Quarter 2
- --------------------------------------------------------------------
<FN>
(a) Excludes borrowings, such as CMOs, that are nonrecourse to
the Company.
</FN>
</TABLE>
The increase in sources of liquidity as a percentage of borrowings from the
first quarter 1996 to the second quarter 1996 is due to various events that
occurred in the second quarter. Following the sale of its single-family
operations, the Company issued a CMO and thus paid down much of its warehouse
line of credit borrowings just prior to the end of the quarter. The Company also
renewed its main warehouse facility tailoring it to meet the needs of the
Company's various lines of business and added an additional facility during the
second quarter. As a result of this increase in the facilities, along with a
decrease in borrowings during the second quarter, the Company's unused borrowing
capacity increased.
<PAGE>
Unsecured Borrowings
The Company issued two series of unsecured notes totaling $50 million in 1994.
The proceeds from this issuance were used for general corporate purposes. The
notes have an outstanding balance at June 30, 1996 of $47 million. The first
principal repayment of one of the notes was due in October 1995 and annually
thereafter, with quarterly interest payments due. Principal repayment of the
second note is contracted to begin in October 1998. The notes mature between
1999 and 2001 and bear interest at 9.56% and 10.03%. The note agreements contain
certain financial covenants which the Company met as of June 30, 1996. However,
changes in asset levels or results of operations could result in the violation
of one or more covenants in the future.
Forward-Looking Statements
Management has made certain statements in this Form 10-Q about anticipated
future activities and events, or results based on such future activities and
events. These statements represents management's best estimates of such
activities and events based on facts and circumstances through the date of
filing this Form 10-Q. There is no guarantee that these activities and events
may occur. Further, other unanticipated activities and events may occur that
have a material impact on the Company's results of operations.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
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
At the Company's annual meeting of shareholders held on April 23, 1996,
for which proxies were solicited pursuant to Regulation 14 under the
Securities Exchange Act of 1934, the following matters were voted upon by
shareholders.
1. The election of six directors for a term expiring in
1997:
J. Sidney Davenport
Richard C. Leone
Thomas H. Potts
Paul S. Reid
Donald B. Vaden
2.Ratification of KPMG Peat Marwick LLP as independent public accountants
of the Corporation for the year 1996.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.7 Promissory Note, dated as of May 13, 1996,
between Resource Mortgage Capital, Inc.
(as Lender) and Dominion Mortgage
Services, Inc. (as Borrower).
(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: /s/ Thomas H. Potts
Thomas H. Potts, President
(authorized officer of
registrant)
/s/ Lynn K. Geurin
Lynn K. Geurin, Executive Vice
President and Chief Financial Officer
(principal accounting officer)
Dated: August 14, 1996
<PAGE>
Index to Exhibits
Exhibit
No. Description
10.7 Promissory Note, dated as of May 13, 1996,
between Resource Mortgage Capital, Inc.
(as Lender) and Dominion Mortgage
Services, Inc. (as Borrower).
27.1 Financial Data Schedule
<PAGE>
EX 10.7
PROMISSORY NOTE
$47,500,000 Richmond, Virginia
May 13, 1996
FOR VALUE RECEIVED, DOMINION MORTGAGE SERVICES, INC., a Virginia
corporation (the "Borrower"), promises to pay to RESOURCE MORTGAGE CAPITAL, INC.
(the "Lender") at 4880 Cox Road, Glen Allen, Virginia, the principal amount of
FORTY-SEVEN MILLION, FIVE HUNDRED THOUSAND DOLLARS ($47,500,000) payable in five
equal annual installments beginning on January 2, 1997 and on each yearly
anniversary of such date until January 2, 2001.
The Borrower promises to pay interest on the unpaid principal amount
hereof for each day from the date hereof until the loan evidenced hereby becomes
due at a rate per annum equal to 6.50%. Accrued interest shall be payable in
arrears on the first day of each calendar quarter, beginning July 1, 1996.
Interest shall be calculated on a basis of a year of twelve 30-day months and
paid for the actual numbers of days elapsed. If the Borrower shall fail to pay
on or before the fifth day (excluding Saturdays, Sundays and any other days on
which commercial banks in Richmond, Virginia are required or authorized by law
to close) following the date on which any principal or interest on this Note
becomes due and payable, such overdue principal of and, to the extent permitted
by law, interest on this Note shall bear interest, payable on demand, for each
day until paid at a rate per annum equal to 8.50%.
All payments under this Note shall be made in lawful money of the
United States of America and in immediately available funds at the Lender's
address specified above or at such other place in the United States as the
Lender may designate to the Borrower in writing. If any amount evidenced by this
Note becomes due and payable on a Saturday, Sunday or other day that is not a
banking day in Richmond, Virginia, the maturity of such amount shall be extended
to the next succeeding banking day, and interest shall be payable for such
extension at the rate of interest specified herein. This Note may not be prepaid
in whole or in part.
If one or more of the following events ("Events of Default") shall
have occurred and be continuing:
(i) the Borrower shall fail to pay when due
any of the principal or interest on this Note;
(ii) the Borrower or Dominion Resources, Inc., a Virginia
corporation ("Dominion Resources"), shall commence a voluntary case or
other proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it
or any substantial part of its property, or shall consent to any such
relief or to the appointment of or taking possession by any such official
in any involuntary case or other proceeding commenced against it, or shall
make a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due, or shall take any corporate
action to authorize any of the foregoing; or
(iii) an involuntary case or other proceeding shall be commenced
against either of the Borrower or Dominion Resources seeking liquidation,
reorganization or other relief with respect to it or its debt under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or
other similar official of it or any substantial part of its property and
such involuntary case or other proceeding shall remain undismissed and
unstayed for a period of 60 days, or an order for relief shall be entered
against the Borrower or Dominion Resources under the federal bankruptcy
laws as now or hereafter in effect;
THEN, in any such case, the Lender, at its option may, by notice to the
Borrower, declare the principal amount of this Note (together with accrued
interest thereon) to be, and this Note (together with accrued interest thereon)
shall, thereupon become, immediately due and payable without presentment,
demand, protest or other notice of any kind, all of which are hereby waived by
the Borrower; provided that in the case of any of the Events of Default
specified in clauses (ii) or (iii) above, without notice to the Borrower or any
other act by the Lender, this Note (together with accrued interest thereon)
shall become immediately due and payable without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by the Borrower. The
Borrower shall pay all out-of-pocket expenses incurred by the Lender, including
reasonable fees and disbursements of counsel, in connection with any Event of
Default and collection and other enforcement proceedings resulting therefrom.
The Borrower hereby waives, to the extent permitted by law, any rights it may
now have or hereafter acquire to offset against amounts owing by the Borrower to
the Lender hereunder amounts owing by the Lender to the Borrower arising under
that certain Asset Purchase Agreement dated as of April 17, 1996 (the "Asset
Purchase Agreement") between the Lender and the Borrower, either of the other
Acquisition Agreements (as defined in the Asset Purchase Agreement), any Related
Agreement (as defined in each Acquisition Agreement) or any transaction
contemplated thereby.
This Note shall be governed by, and construed in accordance with, the
laws of the Commonwealth of Virginia without regard to its conflict of laws
rules.
DOMINION MORTGAGE SERVICES, INC.
By:
Name:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000826675
<NAME> Resource Mortgage Capital, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 20901
<SECURITIES> 4151581
<RECEIVABLES> 12999
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4220539
<CURRENT-LIABILITIES> 1943557
<BONDS> 1858985
0
86885
<COMMON> 204
<OTHER-SE> 330908
<TOTAL-LIABILITY-AND-EQUITY> 4220539
<SALES> 0
<TOTAL-REVENUES> 91236
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7498
<LOSS-PROVISION> 400
<INTEREST-EXPENSE> 59634
<INCOME-PRETAX> 23704
<INCOME-TAX> 0
<INCOME-CONTINUING> 23704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23704
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.07
</TABLE>
