UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
|_| 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 I.D. No.)
incorporation or organization)
4880 COX ROAD, GLEN ALLEN, VIRGINIA 23060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (804) 967-5800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Series A 9.75% Cumulative National Association of Securities Dealers
Convertible Preferred Stock, Automated
$.01 par value Quotation National Market System
Series B 9.55% Cumulative
Convertible Preferred National Association of Securities Dealers
Stock, Automated
$.01 par value Quotation National Market System
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 90 days.
Yes XX No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of January 31, 1996, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $419,910,695 (19,530,730
shares at a closing price on The New York Stock Exchange of $21 1/2 ). Common
stock outstanding as of January 31, 1996 was 20,297,926 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be filed pursuant to Regulation
14A within 120 days from December 31, 1995, are incorporated by reference into
Part III.
<PAGE>
RESOURCE MORTGAGE CAPITAL, INC.
1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I
Item 1. BUSINESS............................................. 3
Item 2. PROPERTIES.......................................... 13
Item 3. LEGAL PROCEEDINGS................................... 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 13
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS..................... 13
Item 6. SELECTED FINANCIAL DATA............................. 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....... 15
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......... 22
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. 22
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.. 23
Item 11. EXECUTIVE COMPENSATION.............................. 23
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................... 23
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...... 23
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.............................. 23
<PAGE>
ITEM 1. BUSINESS
GENERAL
Resource Mortgage Capital, Inc. (the Company), incorporated in Virginia in 1987,
is a self-managed real estate investment trust (REIT) that originates, services
and securitizes residential mortgage loans (collectively, the mortgage
operations) and invests in a portfolio of residential mortgage loans and
securities. The Company's primary business activities include investing in a
portfolio of residential mortgage investments and operating its mortgage
operations. The Company's strategy is to use its mortgage operations to create
investments for its investment portfolio. Principal sources of earnings for the
Company are net interest income on its investment portfolio, and the interest
spread realized while the mortgage loans are being accumulated for sale or
securitization. The Company's earnings also include gain from the securitization
or sale of mortgage loans and investments.
The Company has structured its operations such that in many respects it is
similar to a finance company, but with several important differences. The
Company generally does not pay taxes on its earnings and has generally retained
substantially less credit risk than most finance companies as a result of its
securitization structures. Due to its REIT election, the Company has focused its
business activities almost exclusively on mortgage assets that qualify as
eligible REIT investments. The Company does not have direct investments in real
estate which is characteristic of traditional REITs. The Company (i) has focused
its origination activities on the "non-conforming" segment of the mortgage
market, (ii) retains the servicing on a loan when the Company has retained all
or a portion of the credit risk on the loan, and (iii) generally invests in all
or a portion of the loans that the Company originates or purchases.
On March 21, 1996, the Company's Board of Directors approved an agreement in
principle with Dominion Capital, Inc., (Dominion) to sell the Company's
single-family correspondent, wholesale, and servicing operations. Such sale is
anticipated to be consummated in the second quarter of 1996. See SIGNIFICANT
DEVELOPMENTS FOR FURTHER DISCUSSION.
MORTGAGE OPERATIONS
The Company's mortgage operations have principally consisted of (i) the purchase
or wholesale origination of single-family mortgage loans, (ii) the purchase or
origination of multi-family mortgage loans, (iii) the securitization of such
mortgage loans, and (iv) the servicing of mortgage loans where the Company has
retained all or a portion of the credit risk. In an effort to broaden the
sources of production and income, as well as to enhance shareholder value
through risk diversification, the Company expanded its product line to include
manufactured housing loans during the fourth quarter of 1995.
SINGLE-FAMILY MORTGAGE ACTIVITIES
The Company has concentrated its single-family mortgage activities in the
"non-conforming" segment of the residential loan market, in contrast to
"conforming" segment. Non-conforming mortgage loans do not qualify for purchase
by Federal Home Loan Mortgage Association (FHLMC) or Federal National Mortgage
Association (FNMA) or for inclusion in a loan guarantee program sponsored by
Government National Mortgage Association (GNMA). Non-conforming mortgage loans
may have (i) principal balances in excess of the program limits of these
agencies, (ii) underwriting variances from agency conforming standards due to
credit history or income ratios, or (iii) documentation that does not meet
agency guidelines. Such non-conforming loans may have higher risks than
conforming mortgage loans due to their lower liquidity, different underwriting
or qualification criteria, and higher loan balances.
Single-family mortgage loans funded by the Company are secured by single
(one-to-four) family residential properties and have either fixed or adjustable
interest rates. Fixed-rate mortgage loans generally have a constant interest
rate over the life of the loan, primarily 15, 20 or 30 years. In addition,
fixed-rate mortgage loans funded by the Company may also have a fixed interest
rate for the first 3, 5, or 7 years and an interest rate which adjusts at six or
twelve month intervals thereafter, subject to periodic and lifetime interest
rate caps. Adjustable-rate mortgage (ARM) loans provide for the periodic
adjustment to the rate of interest equal to the sum of a fixed margin and an
index, generally subject to certain periodic and lifetime interest rate caps.
The Company has specifically focused on loan products with adjustable rates of
interest due to its preference for ARM securities in its investment portfolio.
In 1995, approximately 64% of the Company's purchases and originations were ARM
loans.
In 1995, the Company used two primary methods for sourcing single-family
mortgage loans including (i) a network of approved correspondents, and (ii)
approved mortgage brokers (wholesale). The loans originated or purchased by the
Company are secured by properties throughout the United States.
The correspondent network consists of purchasing closed loans from a customer
base of financial institutions such as mortgage banks, savings and loan
associations, and commercial banks. The correspondents are responsible for
closing and funding the mortgage loan in their name prior to selling the loan to
the Company. In 1995, the volume from the correspondent network was $532
million.
In 1994, the Company established its mortgage loan wholesale origination
capability in order to diversify its sources of mortgage loan production and to
compete more on service than price. By adding the wholesale origination process,
the Company became vertically integrated from origination and underwriting to
servicing and ultimate securitization. In the wholesale process, the broker
performs the marketing and sourcing functions, and the Company performs the
underwriting and closing functions. This method allows the Company to be
directly involved in the origination process of the loan, but without the direct
cost and overhead of a retail branch operation. The Company originated $338
million of loans through its wholesale network in 1995.
The Company has established its own underwriting department and underwrites 100%
of the loans it originates through the broker network and purchases from
correspondents. This allows the Company to be more responsive to its customers
and create new loan products more quickly to meet the changing needs of the
market. It also provides the Company with the ability to better manage the
credit risk of the loans as the Company's underwriting standards are followed.
The Company also has a risk management/quality control department. The functions
of this department include: (i) providing quality control on the Company's
underwriting department; (ii) reviewing and approving new correspondent sellers
and wholesale brokers; (iii) monitoring the performance of the correspondent
sellers and wholesale brokers; and (iv) focusing on resolving loan default
issues with the correspondents and pool insurers.
Through an acquisition in 1994, the Company established the capability to
service mortgage loans funded through its single-family mortgage operations.
This acquisition was part of the overall strategy of managing the Company's
exposure when all or a portion of the credit risk on a mortgage loan has been
retained subsequent to securitization. As of December 31, 1995, the Company
serviced approximately $1 billion in single-family mortgage loans, $765 million
of which the Company had retained either all or a portion of the credit risk.
MULTI-FAMILY HOUSING LENDING
In an effort to diversify its product lines outside of single-family lending,
during the third quarter of 1995 the Company re-entered the multi-family housing
lending market. Multi-family loans originated by the Company are secured by
first liens on apartment properties that have qualified for low income housing
tax credits. During 1995, the Company issued commitments aggregating $450
million to fund such loans through 1997. As with single-family mortgage lending,
the Company underwrites 100% of the multi-family loans originated. The
underwriting criteria are designed to assess the particular property's current
and future capacity to make all debt service payments on a current basis. Key
aspects of the Company's underwriting methodology include verifying and
analyzing the project's operating results; requiring minimum debt service
coverage ratios equal to or greater than 1.15 times net operating income;
structuring loan payments to focus on the build-up of equity in the project over
the 15-year tax credit compliance period; limiting the loan to value ratio to
80%; requiring a minimum of three months physical occupancy at 90% or more for
newly-constructed properties and four months for rehabilitated locations; and
requiring a $200 per annum per unit replacement reserve escrowed monthly. The
Company plans to service all its multi-family loans originated since October
1995.
The multi-family loans typically have fixed-rates of interest and generally
provide for a 15-year prepayment lockout. Since 1993, the Company has
securitized $140 million of multi-family mortgage loans through CMO or pass-
through securities.
<PAGE>
MANUFACTURED HOUSING LENDING
As another means of diversification, the Company established a manufactured
housing lending business during the fourth quarter of 1995. Funding is expected
to commence in the second quarter of 1996. This is a large and growing market,
representing over 30% of all new single-family housing production in the United
States. These loans will be underwritten internally, primarily from credit
scoring. Most products will be fixed-rate with some adjustable-rate and
step-rate loans being introduced. Securitization of these loans will principally
occur through the issuance of collateralized mortgage obligations (CMOs) with
the Company holding a limited amount of credit risk.
The following schedule summarizes the principal balances for mortgage loans
funded through the Company's mortgage operations during the year ended December
31, 1995.
(amounts in thousands)
Single-family :
Fixed-rate:
3-year $ 36,547
10-year 219
15-year 40,401
20-year 1,153
30-year 270,746
----------
Total fixed-rate 349,066
----------
Adjustable-rate:
1-month LIBOR 23,915
3-month LIBOR 6,011
6-month LIBOR 384,723
1-year CMT 111,806
----------
Total adjustable-rate 526,455
----------
Total single-family 875,521
Multi-family:
18 to 25-year fixed-rate 18,432
----------
Total mortgage loans funded $ 893,953
==========
<PAGE>
SALES AND SECURITIZATIONS
When a sufficient volume of mortgage loans is accumulated, the Company may elect
to sell such loans as whole loans directly to an investment banking firm or to
securitize a pool of loans through the issuance of mortgage securities in the
form of CMOs or pass-through securities. During 1995, the Company sold $114.5
million directly to investment banking firms as whole loans and securitized $1.1
billion through the issuance of securities. The Company recognizes a gain or
loss on the issuance and sale of a pass-through security, while no gain or loss
is recognized on the issuance of CMOs, as CMOs represent the issuance of a debt
security.
The securities are structured so that substantially all of the securities are
rated in one of the two highest rating categories (i.e. AA or AAA) by at least
one of the nationally recognized rating agencies. Credit enhancement for these
securities may take the form of overcollateralization, subordination, reserve
funds, mortgage pool insurance, bond insurance, or any combination of the
foregoing. The Company strives to use the most cost effective security structure
and form of credit enhancement available at the time of securitization. The
securities issued by the Company are not generally guaranteed by the federal
agencies. Each series of securities is expected to be fully payable from the
collateral pledged to secure the series. It is expected that the recourse of
investors in the series generally will be limited to the collateral underlying
the securities. Except in the case of a breach of the standard representations
and warranties made by the Company when loans are sold or securitized, the
securities are non-recourse to the Company.
Credit Enhancement
As mentioned above, credit enhancement for these securities may take the form of
overcollateralization, subordination, reserve funds, pool insurance, bond
insurance, or any combination of the foregoing. Regardless of the form of credit
enhancement, the Company may retain a limited portion of the direct credit risk
after securitization, including the risk of loss related to hazards not covered
under standard hazard insurance policies. 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. Additionally, the Company
may be contingently exposed to losses due to fraud during the origination of a
mortgage loan if the originator of such mortgage loan, if other than the
Company, defaults on its repurchase obligation.
Overcollateralization is generally used in conjunction with bond insurance in
the issuance of CMOs. Losses are first applied to the overcollateralization
amount, and any losses in addition to that amount would be borne by the bond
insurer or holders of the CMOs. The Company generally receives an excess yield
on the mortgage loans relative to the yield on the CMOs to compensate the
Company for retaining such loss exposure. At December 31, 1995, the Company
retained $42.0 million in principal amount of overcollateralization for $734
million of Collateral for CMOs issued during 1995. The reserves established as
of December 31, 1995 for such exposure total $1.8 million.
Pass-through securities generally use subordination structures as its form of
credit enhancement. Pass-through securities may also utilize a combination of
subordination, reserve funds, pool insurance or bond insurance. The credit risk
of subordinated pass-through securities is concentrated in the subordinated
classes (which may 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 ratings. 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.
As mentioned above, the Company may use mortgage pool insurance and reserve
funds for credit enhancement. Mortgage pool insurance is currently less
available as a form of credit enhancement than it had been in the past. Credit
losses covered by the pool insurance policies are borne by the pool insurers to
the limits of their policies and by the security holders if losses exceed those
limits. To the extent a loan is to be covered by mortgage pool insurance, the
Company may rely upon the credit review and analysis of each loan, which is
performed by the mortgage insurer, in deciding to fund the mortgage loan. After
these loans are securitized, the Company has only limited exposure to losses not
covered by pool insurance, resulting primarily from special hazard risks and
fraud during the origination of a mortgage loan. The Company has established
discounts and reserve funds to cover risks not covered by the pool insurance
policies, or to cover credit risks on loans not covered by pool insurance. These
discounts and reserves totaled $3.6 million and $6.2 million, respectively at
December 31, 1995.
The following table summarizes the mortgage loan delinquency information as a
percentage of the total portfolio balance at December 31, 1995 for those CMOs
issued where the Company has retained a portion of the credit risk.
(dollar amounts in thousands)
December 31, 1995
-----------------------------------
Number Dollar
of loans amount Percent
----------- ---------- ---------
Collateral principal balance 4,673 $ 700,125 100%
----------- ---------- ---------
Delinquent Loans
60 to 89 days delinquent 87 14,846 2.12
90 days and over delinquent (includes
REO and foreclosures) 152 28,649 4.09
=========== ========== ========
Total 239 $ 43,495 6.21%
=========== ========== ========
Master Servicing
The Company performs the function of master servicer for certain of the
securities it has issued. The master servicer's function typically includes
collecting loan payments from servicers of loans and remitting loan payments,
less master servicing fees receivable and other fees, to a trustee or other
purchaser for each series of securities. Master servicing responsibilities also
include monitoring the servicers' compliance with its servicing guidelines and
performing, or contracting with a third party to perform, all obligations not
adequately performed by any servicer. A master servicer typically employs
servicers to carry out servicing functions. Servicers typically perform
servicing functions for the master servicer as independent contractors. As
master servicer, the Company is paid a monthly fee based on the outstanding
principal balance of each such loan master serviced or serviced by the Company
as of the last day of each month. The Company has been master servicing mortgage
loans since November 1993.
MORTGAGE INVESTMENT PORTFOLIO
Strategy
The Company's investment strategy is to create a diversified portfolio of
securities that in the aggregate generates stable income for the Company in a
variety of interest rate environments and preserves the capital base of the
Company. The Company has created the majority of the investments for its
portfolio by retaining a portion of the securities that are generated from its
mortgage operations. The Company expects to continue to create investments from
its mortgage operations. To the extent the Company retains a portion of the
credit risk on securities in the portfolio, the Company generally will retain
the servicing of the underlying mortgage loans to better manage this risk.
Composition
Included in the Company's portfolio of mortgage investments are ARM securities,
collateral for CMOs, fixed-rate securities, and other mortgage securities. The
majority of the Company's portfolio is comprised of investments in ARM
securities. The Company increases the return on these investments by pledging
the ARM securities as collateral for repurchase agreements. The interest rates
on the majority of the Company's ARM securities reset every six months, and the
rates are subject to both periodic and lifetime limitations ("caps"). Generally,
the repurchase agreements have terms that range from 30 to 90 days, and the
interest rates are not subject to the periodic and lifetime limitations. Thus,
the yield on the ARM investments could decline if the spread between the yield
on the ARM security versus the interest rate on the repurchase agreement was to
be reduced. To partially mitigate this risk, the Company has (i) entered into a
series of interest rate swap agreements which effectively caps the increase in
repurchase agreement costs in any six-month period to 1%, and (ii) purchased
interest rate cap agreements to reduce the risk of the lifetime interest rate
limitation on the ARM securities. For these interest rate swap and cap
agreements, the Company receives additional cash flow should the related index
increase above the contracted rates on the agreements. At December 31, 1995, the
Company had interest rate swap agreements with a notional amount of $1.02
billion and interest rate cap agreements with a notional amount of $1.6 billion.
A growing segment of the Company's portfolio consists of collateral for CMOs.
The net margin on CMOs is derived primarily from the difference between the cash
flow generated from the CMO collateral, and the amounts required for interest
payments on the CMOs and administrative expenses. The CMOs are substantially
non-recourse to the Company. The Company's yield on its investment in CMOs is
affected primarily by changes in prepayment rates; such yield will decline with
an increase in prepayment rates, and the yield will increase with a decrease in
prepayment rates. During 1995, the Company issued three CMOs where
overcollateralization was used in conjunction with bond insurance as the form of
credit enhancement. Such overcollateralization, which ranges from 4%-7% of the
initial CMO balance, is retained by the Company upon securitization. Credit
losses are first applied to the overcollateralization, with any losses in excess
of that amount borne by the insurers or holders of the CMOs. The Company expects
that credit losses over the life of the CMOs will not exceed 2%-3.5% of the
initial CMO balance. To the extent that credit losses actually exceed the
expected amounts, the Company's return on its CMO investments may be diminished.
The Company's portfolio also contains fixed-rate mortgage securities which
consist of securities that have a fixed-rate of interest for specified periods
of time. Certain fixed-rate mortgage securities have a fixed interest rate for
the first 3, 5, or 7 years and an interest rate that adjusts at six or twelve
month intervals thereafter, subject to periodic and lifetime interest rate caps.
The Company's yields on these securities are primarily affected by changes in
prepayment rates; such yield will decline with an increase in prepayment rates,
and the yield will increase with a decrease in prepayment rates. The Company
generally borrows against its fixed-rate mortgage securities, through the use of
repurchase agreements. The spread between the interest rate on a repurchase
agreement and the interest rate on any fixed-rate security that the Company
plans to hold is generally fixed by using an interest rate swap. A portion of
fixed-rate mortgage securities in the Company's portfolio may be financed by
short-term repurchase agreements on a temporary basis as the Company obtains
long-term financing or elects to sell the securities. As a result, the yield on
these investments could decline if the spread between the yield on the
fixed-rate mortgage securities and the interest rate on the repurchase
agreements were to be reduced during this time period.
Other securities in the Company's portfolio consist of interest-only securities
(I/Os), principal-only securities (P/Os) and residual interests which were
either purchased or created through the Company's mortgage operations. An I/O is
a class of a CMO or a mortgage pass-through security that pays to the holder
substantially all interest. A P/O is a class of a CMO or a mortgage pass-through
security that pays to the holder substantially all principal. Residual interests
represent the excess cash flows on a pool of collateral after payment of
principal, interest, and expenses of the related mortgage-backed security or
repurchase arrangement. Residual interests may have little or no principal
amount and may not receive scheduled interest payments. The Company may borrow
against its other mortgage securities for working capital purposes. The yields
on these securities are affected primarily by changes in prepayment rates, and
to a lesser extent, by changes in short-term interest rates.
The Company continuously monitors the aggregate projected yield of its
investment portfolio under various interest rate environments. While certain
investments may perform poorly in an increasing interest rate environment,
certain investments may perform well, and others may not be impacted at all.
Generally, the Company adds investments to its portfolio which are designed to
increase the diversification and reduce the variability of the yield produced by
the portfolio in different interest rate environments. The Company may add new
types of mortgage investments to its portfolio in the future.
Risks
The Company is exposed to three types of risks inherent in investing in a
portfolio of mortgage securities. These risks include credit risk (inherent in
the mortgage security structure), prepayment/interest rate risk (inherent in the
underlying mortgage loan), and margin call risk (inherent in the mortgage
security if it is used as collateral for borrowings). Credit risk and methods
used by the Company to manage it were previously addressed in the Sales and
Securitizations section above. For prepayment/interest rate risk and margin call
risk, the Company has developed several analytical tools and risk management
strategies to monitor and address these risks, including (i) weekly
mark-to-market of a representative basket of securities within the portfolio,
(ii) monthly analysis using advanced option-adjusted spread (OAS) methodology to
calculate the expected change in the market value of various representative
securities within the portfolio under various extreme scenarios, and (iii)
monthly static cash flow and yield projections under 49 different scenarios.
Such tools allow the Company to continually monitor and evaluate its exposure to
these risks and to restructure or otherwise change the risk profile of the
investment portfolio in response to changes in the risk profile.
The Company also views its hedging activities as a tool to manage these
identified risks. For the risks associated with the periodic and lifetime
interest rate caps on the ARM securities, the Company uses interest rate cap and
interest rate swap agreements. The purpose of these transactions is to protect
the Company in the event that interest rates increase to levels higher than the
periodic and/or lifetime caps on the index on the underlying ARM loans. The caps
effectively lift the lifetime cap on a portion of the ARM securities in the
Company's portfolio while the various interest rate swap agreements limit the
Company's exposure to changes in the financing rates on a portion of these
securities.
Eurodollar financial futures and options contracts are utilized to hedge the
risks associated with financing the securities portfolio with variable rate
repurchase agreements. These instruments lengthen the duration of the repurchase
agreement financing, typically from one month to three and six months. The
Company will receive additional cash flow if the related Eurodollar index
increases above the contracted rates. If, however, the Eurodollar index
decreases below contracted rates, the Company will pay additional cash flow. As
of December 31, 1995, the Company had lengthened the duration of $2.3 billion of
its repurchase agreements to three months and $0.9 billion to six months by
entering into such futures and option contracts.
As the Company uses reverse repurchase agreements to finance a portion of its
ARM investment portfolio, the Company is exposed to margin calls if the market
value of the securities pledged as collateral for the repurchase agreements
decline. The Company has established equity requirements for each type of
investment to take into account the price volatility and liquidity of each such
investment. The Company models and plans for the margin call risk related to its
repurchase borrowings through the use of its OAS model to calculate the
projected change in market value of its investments that are pledged as
collateral for repurchase borrowings under various adverse scenarios.
As of December 31, 1995, the Company had the following repurchase agreements
outstanding:
(dollars in Millions)
Repurchase agreements secured by:
ARM Securities $1,951.5
Fixed-rate Mortgage Securities 24.2
Other Mortgage Securities 7.7
=============
Total $1,983.4
=============
During 1995, the Company structured the majority of its ARM loan securitizations
as CMOs, with the financing in effect incorporated into the bond structure. This
structure eliminates the need for repurchase agreements, consequently
eliminating the margin call risk and to a lesser degree the interest rate risk.
During 1995, the Company issued approximately $700 million in CMOs primarily
collateralized by ARM loans. The Company plans to continue to use CMOs as its
primary securitization vehicle.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The Company and its qualified REIT subsidiaries (collectively "Resource REIT")
believes it has complied, and intends to comply in the future, with the
requirements for qualification as a REIT under the Internal Revenue Code (the
"Code"). To the extent that Resource REIT qualifies as a REIT for federal income
tax purposes, it generally will not be subject to federal income tax on the
amount of its income or gain that is distributed to shareholders. However,
various subsidiaries of the Company, which conduct the mortgage operations and
are included in the Company's consolidated financial statements prepared in
accordance with generally accepted accounting principles ("GAAP"), are not
qualified REIT subsidiaries. Consequently, all of the nonqualified REIT
subsidiaries' taxable income is subject to federal and state income taxes.
The REIT rules generally require that a REIT invest primarily in real
estate-related assets, its activities be passive rather than active, and it
distribute annually to its shareholders a high percentage of its taxable income.
The Company could be subject to a number of taxes if it failed to satisfy those
rules or if it acquired certain types of income-producing real property through
foreclosure. Although no complete assurances can be given, Resource REIT does
not expect that it will be subject to material amounts of such taxes.
Resource REIT's failure to satisfy certain Code requirements could cause the
Company to lose its status as a REIT. If Resource REIT failed to qualify as a
REIT for any taxable year, it would be subject to federal income tax (including
any applicable minimum tax) at regular corporate rates and would not receive
deductions for dividends paid to shareholders. As a result, the amount of
after-tax earnings available for distribution to shareholders would decrease
substantially. While the Board of Directors intends to cause Resource REIT to
operate in a manner that will enable it to qualify as a REIT in all future
taxable years, there can be no certainty that such intention will be realized.
QUALIFICATION OF THE COMPANY AS A REIT
Qualification as a REIT requires that Resource REIT satisfy a variety of tests
relating to its income, assets, distributions and ownership. The significant
tests are summarized below.
Sources of Income
To qualify as a REIT in any taxable year, Resource REIT must satisfy three
distinct tests with respect to the sources of its income: the "75% income test,"
the "95% income test," and the "30% income test." The 75% income test requires
that Resource REIT derive at least 75% of its gross income (excluding gross
income from prohibited transactions) from certain real estate related sources.
In order to satisfy the 95% income test, at least an additional 20% of Resource
REIT's gross income for the taxable year must consist either of income that
qualifies under the 75% income test or certain other types of passive income.
The 30% income test, unlike the other income tests, prescribes a ceiling for
certain types of income. A REIT may not derive more than 30% of its gross income
from the sale or other disposition of (i) stock or securities held for less than
one year, (ii) dealer property that is not foreclosure property, or (iii)
certain real estate property held for less than four years.
If Resource REIT fails to meet either the 75% income test or the 95% income
test, or both, in a taxable year, it might nonetheless continue to qualify as a
REIT, if its failure was due to reasonable cause and not willful neglect, and
the nature and amounts of its items of gross income were properly disclosed to
the Internal Revenue Service. However, in such a case Resource REIT would be
required to pay a tax equal to 100% of any excess non-qualifying income. No
analogous relief is available to REITs that fail to satisfy the 30% income test.
Nature and Diversification of Assets
At the end of each calendar quarter, three asset tests must be met by Resource
REIT. Under the "75% asset test," at least 75% of the value of Resource REIT's
total assets must represent cash or cash items (including receivables),
government securities or real estate assets. Under the "10% asset test",
Resource REIT may not own more than 10% of the outstanding voting securities of
any single non-governmental issuer, if such securities do not qualify under the
75% asset test. Under the "5% asset test," ownership of any stocks or securities
that do not qualify under the 75% asset test must be limited, in respect of any
single non-governmental issuer, to an amount not greater than 5% of the value of
the total assets of Resource REIT.
If Resource REIT inadvertently fails to satisfy one or more of the asset tests
at the end of a calendar quarter, such failure would not cause it to lose its
REIT status, provided that (i) it satisfied all of the asset tests at the close
of a preceding calendar quarter, and (ii) the discrepancy between the values of
Resource REIT's assets and the standards imposed by the asset tests either did
not exist immediately after the acquisition of any particular asset or was not
wholly or partially caused by such an acquisition. If the condition described in
clause (ii) of the preceding sentence was not satisfied, Resource REIT still
could avoid disqualification by eliminating any discrepancy within 30 days after
the close of the calendar quarter in which it arose.
Distributions
With respect to each taxable year, in order to maintain its REIT status,
Resource REIT generally must distribute to its shareholders an amount at least
equal to 95% of the sum of its "REIT taxable income" (determined without regard
to the deduction for dividends paid and by excluding any net capital gain) and
any after-tax net income from certain types of foreclosure property minus any
"excess noncash income." The Internal Revenue Code provides that distributions
relating to a particular year may be made early in the following year, in
certain circumstances. The Company will balance the benefit to the shareholders
of making these distributions and maintaining REIT status against their impact
on the liquidity of the Company. In an unlikely situation, it may benefit the
shareholders if the Company retained cash to preserve liquidity and thereby lose
REIT status.
For federal income tax purposes, Resource REIT is required to recognize income
on an accrual basis and to make distributions to its shareholders when income is
recognized. Accordingly, it is possible that income could be recognized and
distributions required to be made in advance of the actual receipt of such funds
by Resource REIT. The nature of Resource REIT's investments is such that it
expects to have sufficient cash to meet any federal income tax distribution
requirements.
TAXATION OF DISTRIBUTIONS BY THE COMPANY
Assuming that Resource REIT maintains its status as a REIT, any distributions
that are properly designated as "capital gain dividends" generally will be taxed
to shareholders as long-term capital gains, regardless of how long a shareholder
has owned his shares. Any other distributions out of Resource REIT's current or
accumulated earnings and profits will be dividends taxable as ordinary income.
Shareholders will not be entitled to dividends-received deductions with respect
to any dividends paid by Resource REIT. Distributions in excess of Resource
REIT's current or accumulated earnings and profits will be treated as tax-free
returns of capital, to the extent of the shareholder's basis in his shares, and
as gain from the disposition of shares, to the extent they exceed such basis.
Shareholders may not include on their own tax returns any of Resource REIT
ordinary or capital losses. Distributions to shareholders attributable to
"excess inclusion income" of Resource REIT will be characterized as excess
inclusion income in the hands of the shareholders. Excess inclusion income can
arise from Resource REIT's holdings of residual interests in real estate
mortgage investment conduits and in certain other types of mortgage-backed
security structures created after 1991. Excess inclusion income constitutes
unrelated business taxable income ("UBTI") for tax-exempt entities (including
employee benefit plans and individual retirement accounts), and it may not be
offset by current deductions or net operating loss carryovers. In the unlikely
event that the Company's excess inclusion income is greater than its taxable
income, the Company's distribution would be based on the Company's excess
inclusion income. In 1995 the Company's excess inclusion income was
approximately 31.46% of its taxable income. Although Resource REIT itself would
be subject to a tax on any excess inclusion income that would be allocable to a
"disqualified organization" holding its shares, Resource REIT's by-laws provide
that disqualified organizations are ineligible to hold Resource REIT's shares.
Dividends paid by Resource REIT to organizations that generally are exempt from
federal income tax under Section 501(a) of the Code should not be taxable to
them as UBTI except to the extent that (i) purchase of shares of Resource REIT
was financed by "acquisition indebtedness" or (ii) such dividends constitute
excess inclusion income.
TAXABLE INCOME
Resource REIT uses the calendar year for both tax and financial reporting
purposes. However, there may be differences between taxable income and income
computed in accordance with GAAP. These differences primarily arise from timing
differences in the recognition of revenue and expense for tax and GAAP purposes.
Additionally, Resource REIT's taxable income does not include the taxable income
of its taxable affiliate, although the affiliate is included in the Company's
GAAP consolidated financial statements. For the year ended December 31, 1995,
Resource REIT's estimated taxable income was approximately $37.8 million.
<PAGE>
A portion of the dividends paid during 1995 was allocated to satisfy 1994
distribution requirements and a portion of the dividends paid in 1996 will be
allocated to satisfy 1995 distribution requirements. All dividends paid during
1995 represented ordinary income for federal tax purposes.
REGULATION
As an approved mortgage loan originator, the Company is subject to various
federal and state regulations. A violation of such regulations may result in the
Company losing its ability to originate mortgage loans in the respective
jurisdiction.
The rules and regulations applicable to the mortgage operations, among other
things, prohibit discrimination and establish underwriting guidelines that
include provisions for inspections and appraisals, require credit reports on
prospective borrowers and fix maximum loan amounts. Mortgage loan acquisition
activities are subject to, among other laws, the Equal Credit Opportunity Act,
Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act and
the regulations promulgated thereunder that prohibit discrimination and require
the disclosure of certain basic information to mortgagors concerning credit
terms and settlement costs.
The Company is also an approved FNMA and FHLMC seller/servicer subject to the
rules and regulations of FNMA and FHLMC with respect to acquiring, processing,
selling and servicing conforming mortgage loans. The Company is required to
submit annually to FNMA and FHLMC audited financial statements.
Additionally, there are various state and local laws and regulations affecting
the mortgage operations. The mortgage operations will be licensed in those
states requiring such a license. Mortgage operations may also be subject to
applicable state usury statutes. The Company believes that it is in present
material compliance with all material rules and regulations to which it is
subject.
COMPETITION
The Company competes with a number of institutions with greater financial
resources in originating and purchasing mortgage loans through its mortgage
operations. In addition, in purchasing mortgage assets and in issuing mortgage
securities, the Company competes with investment banking firms, savings and loan
associations, banks, mortgage bankers, insurance companies and other lenders,
GNMA, FHLMC and FNMA and other entities purchasing mortgage assets, many of
which have greater financial resources than the Company. Additionally, mortgage
securities issued relative to its mortgage operations will face competition from
other investment opportunities available to prospective purchasers.
EMPLOYEES
As of December 31, 1995, the Company had 199 employees.
SIGNIFICANT DEVELOPMENTS
On March 21, 1996, the Company's Board of Directors approved an agreement in
principle with Dominion Capital, Inc. (Dominion) to sell the Company's
single-family correspondent, wholesale, and servicing operations (the
Operations). The agreement provides Dominion an exclusive right to purchase the
Operations through April 22, 1996, which may be extended under certain
circumstances. The sales price is expected to be $67 million in consideration
for the stock and assets of the Operations with a net book value of
approximately $7 million. The proposed terms of the transaction include an
initial cash payment of approximately $17 million, with the remainder of the
purchase price paid evenly over the next five years pursuant to a note
agreement.
The terms of the agreement generally prohibit the Company from originating
single-family mortgages through either correspondents or a wholesale network for
a period of five years.
The transaction is expected to close during the second quarter of 1996. The
closing of the transaction is contingent on Dominion's completion of its due
diligence, regulatory approvals, 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.
ITEM 2. PROPERTIES
The Company's executive and administrative offices and operations offices are
both located in Glen Allen, Virginia, on properties leased by the Company. The
address is 4880 Cox Road, Glen Allen, Virginia 23060.
ITEM 3. LEGAL PROCEEDINGS
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 at December 31, 1995.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange under the
trading symbol RMR. The Company's common stock was held by approximately 4,428
holders of record as of January 31, 1996. In addition, depository companies held
stock for approximately 8 beneficial owners. During the last two years, the high
and low closing stock prices and cash dividends declared on common stock were as
follows:
Cash Dividends
High Low Declared
1995
First quarter $ 17 3/4 $ 10 3/8 $ 0.36
Second quarter 20 3/4 15 0.40
Third quarter 21 1/2 16 5/8 0.44
Fourth quarter 21 5/8 18 5/8 0.48
1994
First quarter $ 30 $ 25 1/8 $ 0.52
Second quarter 27 1/2 22 1/8 0.78
Third quarter 25 3/4 20 3/8 0.78
Fourth quarter 22 3/4 9 1/2 0.68
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(amounts in thousands except share data)
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net margin on mortgage assets $ 42,419 $ 44,364 $ 40,627 $ 23,357 $ 19,902
==============================================================================
Gain on sale of mortgage assets, net of
associated costs $ 9,651 $ 27,723 $ 27,977 $ 28,941 $ 10,218
==============================================================================
Total revenue $ 266,496 $ 256,483 $ 200,967 $ 179,455 $ 161,229
Total expenses 229,586 204,226 146,840 141,286 139,593
Net income $ 36,910 $ 52,257 $ 54,127 $ 38,169 $ 21,636
==============================================================================
Net income per common share (1) $ 1.70 $ 2.64 $ 3.12 $ 2.73 $ 1.60
Average number of common shares outstanding 20,122,772 19,829,609 17,364,309 13,999,047 13,531,290
Dividends declared per share:
Common $ 1.68 $ 2.76 $ 3.06 $ 2.60 $ 1.53
Series A Preferred $ 1.17 $ - $ - $ - $ -
Series B Preferred $ 0.42 $ - $ - $ - $ -
Return on average common shareholders'
equity (2) 12.5% 19.2% 25.8% 27.7% 17.9%
Principal balance of mortgage
loans funded $ 893,953 $ 2,861,443 $ 4,093,714 $ 5,334,174 $ 2,491,434
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mortgage Investments: (3)
Collateral for CMOs $ 1,028,935 $ 443,392 $ 434,698 $ 571,567 $ 820,517
Mortgage securities $ 2,149,416 $ 2,579,759 $ 2,300,949 $ 1,401,578 $ 733,549
Total assets $ 3,490,038 $ 3,600,596 $ 3,726,762 $ 2,239,656 $ 1,829,632
CMO bonds payable (4) $ 949,139 $ 424,800 $ 432,677 $ 561,441 $ 805,493
Repurchase agreements $ 1,983,358 $ 2,804,946 $ 2,754,166 $ 1,315,334 $ 637,599
Total liabilities $ 3,135,215 $ 3,403,125 $ 3,473,730 $ 2,062,219 $ 1,708,197
Shareholders' equity (2) $ 359,582 $ 270,149 $ 253,032 $ 177,437 $ 121,435
Number of common shares outstanding 20,198,654 20,078,013 19,331,932 16,507,100 13,542,137
Book value per common share (2) $ 13.50 $ 13.45 $ 13.09 $ 10.75 $ 8.97
- ---------------------------
</TABLE>
(1) Fully diluted net income per common share is not presented as the
Company's convertible preferred stock is anti-dilutive.
(2) Excludes unrealized gain/loss on mortgage investments. If unrealized
gain/loss were included in the calculation, return on average common
shareholders' equity would be 14.7% and 23.2% for 1995 and 1994,
respectively.
(3) Mortgage investments are shown at fair value as of December 31, 1995 and
1994 and at amortized cost as of December 31, 1993 and prior.
(4) This debt is non-recourse to the Company.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Resource Mortgage Capital, Inc. (the Company) originates, services, and
securitizes residential mortgage loans (collectively, the mortgage operations)
and invests in a portfolio of residential mortgage loans and securities. The
Company's strategy is to use its mortgage operations to create investments for
its portfolio. Principal sources of earnings for the Company are net interest
income on its mortgage investment portfolio, and the interest spread realized
while mortgage loans are being accumulated for securitization or sale. The
Company's earnings also include gains from the securitization or sale of
mortgage loans and investments.
The Company's earnings per common share for 1995 were $1.70 compared with $2.64
per common share for 1994. This decline was primarily the result of the
continued adverse effect of the rapid increase in short-term interest rates
during 1994 and the first quarter of 1995, which significantly decreased the net
interest spread earned on adjustable-rate mortgage (ARM) securities, which
constitute a substantial portion of the Company's portfolio of mortgage
investments. This increase in short-term interest rates, reflected by the
increase in the Federal Funds rate from 3.0% in February 1994 to 6.0% in
February 1995, caused the net interest spread on ARM securities for 1995 to
decrease to 0.61% versus a net interest spread of 0.72% in 1994. As the ARM
securities reset upward and short-term interest rates stabilized and then
declined in the second half of 1995, the net interest spread improved,
increasing to 1.10% for the fourth quarter of 1995, versus 0.30% for the fourth
quarter of 1994. Earnings were also negatively impacted during 1995 by the
Company's lower overall production volume, and the Company's greater use of
collateralized mortgage obligations (CMOs) for securitizing its production. The
Company funded $894 million of residential mortgage loans in 1995, compared to
$2.9 billion in 1994. This decline was due in part to a reduction in the overall
mortgage production volume in the market, as well as a flat yield curve, which
was adverse to the Company's production of ARM loans.
The CMO securitizations are recorded as financing transactions, and, as such, no
gain is recognized at the time of issuance. Instead, income related to CMOs is
recognized over time as part of net interest margin. The Company may also
securitize its loan production as pass-through securities pursuant to a
senior/subordinated structure, in which case a gain or loss is recognized at the
time of issuance. In either securitization structure, the Company has limited
exposure to credit losses. Additionally, the Company may have exposure to credit
losses related to delinquent mortgage loans in warehouse. The Company has
established an allowance for such potential losses as a result of such exposure.
A provision for losses for credit risk retained by the Company has been recorded
in the financial statements as a reduction of the net margin on mortgage assets.
In 1994 and prior, this provision had been recorded as a reduction in the gain
on sale of mortgage assets. Such prior year amounts have been reclassified for
presentation purposes in 1995.
During the third quarter of 1995, the Company re-entered the multi-family
housing lending market in an effort to expand its product lines outside of
single-family lending. During 1995, the Company issued various commitments
aggregating $450 million through 1997 to fund multi-family mortgage loans
secured by first liens on apartment properties that have qualified for low
income housing tax credits. As of December 31, 1995, the Company had funded $7.7
million of such loans.
As a further means of expanding its product line, the Company plans to enter the
manufactured housing lending business. In addition to favorable market
characteristics, these loans will conform to the Company's current CMO
securitization strategy. Products will either be fixed or adjustable-rate and
the loans are expected to be underwritten and serviced internally. The Company
expects to commence funding manufactured housing loans in the second quarter of
1996.
The following discussion and analysis provides information that management
believes to be relevant to an understanding of the Company's consolidated
results of operations and financial condition. This discussion should be read in
conjunction with the consolidated financial statements and the notes thereto.
<PAGE>
RESULTS OF OPERATIONS
This section discusses the Company's results of operations for the years ended
1995, 1994 and 1993. An overview of these results is initially presented, and is
followed by more specific discussions related to mortgage investments and
mortgage operations activities.
1995 1994 1993
---- ---- ----
(amounts in thousands except per share information)
Net margin on mortgage assets $42,419 $44,364 $40,627
Net gain on sale of mortgage assets 9,651 27,723 27,977
General and administrative expenses 18,123 21,284 15,211
Net income 36,910 52,257 54,127
Net income per common share 1.70 2.64 3.12
Dividends declared per share:
Common $ 1.68 $ 2.76 $ 3.06
Series A Preferred 1.17 - -
Series B Preferred 0.42 - -
1995 compared to 1994. The decrease in the Company's earnings during 1995 as
compared to 1994 is primarily the result of the decrease in net gain on sale of
mortgage assets and net margin on mortgage assets. This decrease was partially
offset by a decrease in general and administrative expenses.
Net gain on sale of mortgage assets decreased $18.0 million, or 65%, to $9.7
million in 1995 from $27.7 million in 1994. This decrease resulted from the
combined effect of (i) the Company's current securitization strategy in 1995
involving the issuance of CMOs which are accounted for as financing
transactions, versus the use of pass-through mortgage security structures in
1994, which are accounted for as sales, and (ii) the lower mortgage loan funding
levels by the Company as a result of a decrease in overall industry-wide
mortgage loan originations, the resulting higher level of price competition for
mortgage loans, and (iii) the flatter yield curve which had an adverse impact on
the Company's production of ARM loans.
Net margin on mortgage assets decreased $2.0 million, or 5%, to $42.4 million in
1995 from $44.4 million for 1994. This decrease resulted primarily from the
change in the net interest spread on the portfolio-related assets, which
declined from 1.15% in 1994 to 0.90% in 1995. The decline in net interest spread
is attributable to a temporary reduction in the net interest spread in ARM
securities. This temporary reduction resulted from the interest rate on
borrowings increasing at a faster rate than the ARM securities which
collateralize these borrowings. In December 1995, the net interest spread had
increased to 1.18% as a result of the upward resets on the ARM securities and
the more favorable short-term interest rate environment. Net margin on mortgage
assets also declined as a result of the increase in the provision for credit
losses, which was $2.9 million and $2.1 million in 1995 and 1994, respectively.
General and administrative expenses decreased 15%, to $18.1 million for 1995
from $21.3 million for 1994. This decline resulted primarily from the Company's
effort to reduce costs in line with the reduced level of mortgage loan
originations.
1994 compared to 1993. The decrease in the Company's net income during 1994 as
compared to 1993 is primarily the result of the increase in general and
administrative expenses which offsets the increase in net margin.
Net margin on mortgage assets increased to $44.4 million for 1994 from $40.6
million for 1993. This increase resulted primarily from the overall growth of
the portfolio partially offset by a decrease in its net interest spread, from
1.55% for 1993 to 1.12% for 1994.
The net gain on sale of mortgage assets was $27.7 million for 1994 compared to
$28.0 million for 1993. As a result of the lower mortgage funding levels by the
Company, lower gains on sales of loans securitized and sold were recognized.
This decrease was substantially offset by an increase in gains from sales of
portfolio investments.
The Company incurred $21.3 million of general and administrative expenses during
1994 as compared with $15.2 million during 1993. The increase in general and
administrative expenses was due primarily to the development of the Company's
mortgage loan origination capabilities, the growth of the underwriting and risk
management departments and the acquisition of a mortgage servicing company. The
underwriting and risk management departments were expanded when the Company
began funding mortgage loans without a commitment for mortgage pool insurance in
1993.
Net income on a per share basis also declined as the result of the issuance of
common stock by the Company during 1994.
The following table summarizes 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.
<TABLE>
<CAPTION>
Average Balances and Effective Interest Rates
Year Ended December 31,
-----------------------------------------------------------------------------
(amounts in thousands) 1995 1994 1993
------------------------- ------------------------- ------------------------
Average Effective Average Effective Average Effective
Balance Rate Balance Rate Balance Rate
-------------- --------- -------------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Collateral for CMOs (1) $ 711,316 8.39% $ 375,147 8.99% $ 432,715 9.14%
Adjustable-rate mortgage securities 2,137,170 6.81 2,310,047 5.39 1,534,073 4.96
Fixed-rate mortgage securities 94,102 7.87 205,305 7.31 184,087 7.62
Other mortgage securities 56,644 15.61 72,934 19.76 43,045 19.22
---------- ----- --------- ----- --------- -----
Total mortgage investments 2,999,232 7.33 2,963,433 6.33 2,193,920 6.23
portfolio
Mortgage loans in warehouse 357,398 8.58 610,610 6.52 573,016 6.22
---------- ----- --------- ----- --------- -----
Total interest-earning mortgage $3,356,630 7.51% $3,574,043 6.36% $2,766,936 6.23%
assets ========== ===== ========= ===== ===========
Interest-bearing liabilities:
Portfolio-related liabilities:
CMOs $ 679,551 7.21% $ 380,099 8.28% $ 439,488 8.46%
Repurchase agreements:
Adjustable-rate mortgage 1,986,872 6.20 2,179,775 4.67 1,443,092 3.62
securities
Fixed-rate mortgage securities 78,486 5.54 192,738 5.23 173,126 4.90
Other mortgage securities 6,392 6.32 6,722 4.86 6,668 3.72
Commercial paper - - 55,353 3.92 106,464 3.25
---------- ----- --------- ----- --------- -----
Total portfolio-related 2,751,301 6.43 2,814,687 5.18 2,168,838 4.68
liabilities
Warehouse-related liabilities:
Repurchase agreements 204,296 7.12 422,979 5.38 308,148 4.50
Notes payable 81,719 7.13 68,883 7.02 80,220 5.36
---------- ----- --------- ----- --------- -----
Total warehouse-related 286,015 7.40 491,862 5.61 388,368 4.68
liabilities ---------- ----- --------- ----- --------- -----
Total interest-bearing $3,037,316 6.52% $3,306,549 5.24% $2,557,206 4.68%
liabilities ========== ===== ========= ===== ===========
Net interest spread (2) 0.99% 1.12% 1.55%
===== ===== =====
Net yield on average interest
earning assets 1.63% 1.51% 1.90%
===== ===== =====
</TABLE>
- ---------------------------
(1) Average balances exclude funds held by trustees of $3,815, $8,855 and
$16,325 for the years ended December 31, 1995, 1994 and 1993, respectively.
(2) Effective rates are calculated excluding "Provision for losses".
<PAGE>
The decrease in net interest spread for 1995 relative to 1994 and for 1994
relative to 1993 is primarily the result of the decreasing spread on ARM
securities. The interest rates on ARM securities reset throughout the year,
generally on a semi-annual basis. The interest rates on these securities are
subject to certain periodic and lifetime interest rate caps. Due to the nature
of the periodic caps, semi-annual 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 repurchase borrowings, which are not subject
to caps, increased at a faster rate than the interest rate on the ARM securities
which collateralize these borrowings, decreasing the net interest spread on
these securities. The decrease in the spread on ARM securities was also impacted
by 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
December 31, 1994, ARM securities in the Company's portfolio were "teased"
approximately 1.45% on a weighted average basis. During 1995, as short-term
interest rates stabilized and then declined, the Company's ARM securities reset
upward and consequently were substantially fully indexed by December 31, 1995.
The following tables summarize the amount of change in interest income and
interest expense due to changes in interest rates versus changes in volume:
<TABLE>
<CAPTION>
1995 to 1994 1994 to 1993
--------------------------------------------------------------------------
(amounts in thousands) Rate Volume Total Rate Volume Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Collateral for CMOs $ (2,093) $ 29,381 $ 27,288 $ (635) $ (5,184) $ (5,819)
Adjustable-rate mortgage securities 29,423 (8,349) 21,074 7,166 41,347 48,513
Fixed-rate mortgage securities 1,254 (8,852) (7,598) (547) 1,512 965
Other mortgage securities (2,702) (2,871) (5,573) 239 5,901 6,140
Mortgage loans in warehouse 31,683 (40,298) (8,615) 3,194 2,057 5,251
---------------------------------------------------------------------------
Total interest income 57,565 (30,989) 26,576 9,417 45,633 55,050
Collateralized mortgage obligations (3,432) 21,576 18,144 (810) (4,931) (5,741)
Repurchase agreements:
Adjustable-rate mortgage 29,303 (7,813) 21,490 17,958 31,586 49,544
securities
Fixed-rate mortgage securities 643 (6,353) (5,710) 596 1,002 1,598
Other mortgage securities 92 (15) 77 77 2 79
Mortgage loans in warehouse 16,899 (25,073) (8,174) 3,973 5,943 9,916
Notes payable 617 4,380 4,997 989 (450) 539
Commercial paper - (1,986) (1,986) 958 (2,253) (1,295)
---------------------------------------------------------------------------
Total interest expense 44,122 (15,284) 28,838 23,741 30,899 54,640
---------------------------------------------------------------------------
Net interest on mortgage assets $ 13,443 $ (15,705) $ (2,262) $ (14,324) $ 14,734 $ 410
============================================================================
</TABLE>
Note: The change in interest income and interest expense due to changes in
both volume and rate, which cannot be segregated, has been allocated
proportionately to the change due to volume and the change due to rate. This
table excludes other interest expense and provision for credit losses.
Mortgage Investments
The Company's investment strategy is to create a diversified portfolio of
mortgage investments that in the aggregate generates stable income in a variety
of interest rate and prepayment rate environments and preserves the capital base
of the Company. However, the rapid increase in short-term interest rates which
began during the first quarter of 1994, reduced the net interest spread on the
portfolio through the first quarter of 1995 and also negatively impacted the
portfolio's value. As interest rates have stabilized and then declined during
1995, the net interest spread on portfolio-related assets has increased as the
ARM securities have reset upward, and the fair value of the Company's
available-for-sale mortgage investments has improved. The net unrealized loss on
available-for-sale mortgage investments improved by $67.9 million in 1995, from
$72.7 million at December 31, 1994 to $4.8 million at December 31, 1995. This
decrease in the net unrealized loss is attributable principally to the increase
in value of the Company's ARM securities, and secondarily to the value of the
collateral for CMOs.
The Company has pursued its strategy of concentrating on its mortgage operations
to create investments with attractive yields. 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, such as CMOs.
1995 compared to 1994. The net margin on the Company's portfolio of mortgage
investments decreased slightly to $39.1 million for 1995 from $39.2 million for
1994. The decrease in net margin on the Company's portfolio of mortgage
investments is generally attributable to a decrease in the spread on such
investments during 1995, which was partially offset by a net increase in capital
invested by the Company in the portfolio. The spread on the Company's portfolio
of mortgage investments decreased from 1.15% for 1994 to 0.90% for 1995.
Specifically, the spread on the Company's ARM securities decreased from 0.72%
for 1994 to 0.61% for 1995, principally as a result of increased repurchase
agreement borrowing costs. This decline was offset by the increase in the spread
on CMOs, which increased to 1.18% in 1995 from 0.71% in 1994, respectively. The
increase in the net interest spread for CMOs resulted principally from lower
financing costs in 1995. The average balance of collateral for CMOs increased to
$711.3 million for 1995 from $375.1 million for 1994, consistent with the
Company's current securitization strategy, while the average balance for ARM
securities declined from $2.3 billion to $2.1 billion. Average capital invested
increased from $267.5 million in 1994 to $338.7 million in 1995.
During 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
$632.1 million, consisting of $623.3 million principal amount of ARM securities
and $8.8 million of other mortgage securities from its portfolio. Additionally,
during the first quarter of 1995, the Company sold its repurchase obligation on
all convertible ARM loans previously securitized or sold. During 1994, the
Company sold $208.6 million principal amount of ARM securities and $28.2 million
of other mortgage securities from its portfolio. The Company realized a net gain
of $3.8 million on these sales of mortgage securities and its repurchase
obligation for 1995 compared to a net gain of $7.7 million for 1994. During
1995, the Company added approximately $851.7 million of collateral for CMOs,
with $803.8 million of associated borrowings, $1.7 million of fixed-rate
mortgage securities and $5.7 million of other mortgage securities to its
portfolio through its mortgage operations. Additionally, the Company purchased
approximately $409.5 million of ARM securities and $6.0 million of fixed-rate
mortgage securities for its mortgage investment portfolio. During 1994, the
Company retained in its portfolio approximately $537.0 million principal amount
of ARM securities, $0.9 million principal amount of fixed-rate mortgage
securities, $15.3 million of other mortgage securities and $78.2 million of
collateral for CMOs, with $70.9 million of associated borrowings, from its
mortgage operations. Also in 1994, the Company made purchases of approximately
$274.0 million principal amount of ARM securities, $34.3 million of fixed-rate
mortgage securities, $24.8 million of other mortgage securities and $34.3
million of collateral for CMOs, with $31.4 million of associated borrowings, for
its portfolio.
The Company owns interest rate cap agreements which limit its exposure to the
lifetime interest rate caps on its ARM securities. At December 31, 1995 and
1994, the Company had purchased cap agreements with aggregate notional amounts
of $1.6 billion and $1.5 billion, respectively. Pursuant to these agreements,
the Company will receive additional cash flow should the related index increase
above the specified contract rates. The amortization of the cost of the cap
agreements will reduce interest income on ARM securities over the lives of the
agreements. Additionally, the Company may also enter into various interest rate
swap agreements to limit its exposure to changes in financing rates of certain
mortgage securities. During 1995, the Company entered into a series of interest
rate swap agreements which effectively caps the increase in borrowing costs in
any six-month period to 1% for $1.0 billion notional amount of short-term
borrowings. These agreements expire in 2001.
1994 Compared to 1993. The net margin on the Company's portfolio of mortgage
investments increased to $39.2 million for 1994 from $34.6 million for 1993.
This increase resulted from the overall growth of mortgage assets partially
offset by a decrease in the net interest spread on the portfolio.
Compared to 1993, the size of the Company's portfolio of mortgage investments at
December 31, 1994 increased from the addition of investments created through the
Company's mortgage operations and the purchase of mortgage investments. As
discussed previously, the Company added $998.8 million principal amount of
mortgage securities to its portfolio in 1994, from purchases and through its
mortgage operations. During 1994, the Company sold $208.6 million principal
amount of ARM securities and $28.2 million of other mortgage securities from its
portfolio, compared to $72.5 million principal amount of ARM securities and
$184.3 million principal amount of fixed-rate mortgage securities in 1993. The
Company realized net gains of $7.7 million and $1.4 million on these sales of
mortgage securities for 1994 and 1993, respectively.
The Company had in place interest rate cap agreements of $1.5 billion and
$1.3 billion aggregate notional amounts at December 31, 1994 and 1993,
respectively.
<PAGE>
Mortgage Operations
The Company's mortgage operations consist of originating, servicing and
securitizing residential 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 1995, 1994 and
1993.
<TABLE>
<CAPTION>
(amounts in thousands) 1995 1994 1993
------------- ------------- --------------
<S> <C> <C> <C>
Principal amount of loans funded $ 893,953 $ 2,861,443 $ 4,093,714
Principal amount of loans securitized or sold 1,172,101 3,100,595 3,332,200
Investments added to portfolio from mortgage
operations, net of associated borrowings 55,258 57,268 54,528
Principal amount of loans serviced at year-end 1,027,429 773,901 -
</TABLE>
1995 compared to 1994. The decrease in the funding volume of mortgage loans for
1995 as compared to 1994 is the result of the lower overall mortgage loan
originations in the market and an increased level of price competition for
mortgage loans. Additionally, approximately 64% of the mortgage loans funded by
the Company are ARM loans, which declined as a percentage of the overall loan
origination market as a result of the flat yield curve environment during much
of 1995.
The Company's principal securitization strategy for 1995 included 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 recorded at the time of the securitization. Instead, income related to
CMOs is recognized over time as part of net margin income. With respect to the
remaining portion of the Company's loan production, the Company sold whole loan
pools during 1995 aggregating $124 million, and securitized $278 million of
mortgage loans using a senior/subordinated structure. The net gain on
securitizations and sales of these mortgage loans, excluding recognition of
deferred gains, amounted to $4.7 million for 1995. This represented a decline of
$15.3 million, or 77%, from net gains on sale of mortgage loans of $20.0 million
for 1994.
During 1994, the Company acquired a mortgage servicing company with a servicing
portfolio of approximately $600 million. Through this acquisition, the Company
plans to service those mortgage loans where it has retained all or a portion of
the credit risk. During 1995, the Company sold a portion of its purchased
mortgage servicing rights which were acquired in the acquisition. The gain
resulting from this sale totaled $1.2 million, and is included in net gain on
sale of mortgage assets. Pursuant to the original acquisition strategy, the
Company may continue to sell purchased mortgage servicing rights as it adds its
own mortgage loan products to the servicing portfolio. The Company has generally
serviced mortgage loans which it has originated or purchased and where it has
retained all or a portion of the credit risk. As of December 31, 1995, the
Company serviced $1.0 billion in mortgage loans. Approximately $765 million
relates to mortgage loans where the Company has retained all or a portion of the
credit risk.
In 1995 the Company funded multi-family mortgage loans with an aggregate
principal balance of $18.4 million, compared to $20.6 million in 1994.
Multi-family loans in warehouse totaled $7.7 million and $30.9 million at
December 31, 1995 and 1994, respectively.
1994 Compared to 1993 The decrease in the funding volume of mortgage loans for
1994 as compared to 1993 was a result of the lower overall mortgage loan
originations in the market. The gain on securitizations and sales of mortgage
loans decreased to $20.0 million for 1994 from $26.5 million for 1993, resulting
primarily from increased competition in the market and the lower funding volume.
During 1994, the Company began originating certain single-family mortgage loans
through a network of mortgage brokers. As the Company developed these mortgage
loan origination capabilities, general and administrative expenses have
correspondingly increased. General and administrative costs also increased as a
result of the acquisition of the servicing operation in the third quarter of
1994.
During 1994 and 1993, the Company funded multi-family mortgage loans with an
aggregate principal balance of $20.6 million and $91.3 million, respectively. At
December 31, 1994, mortgage loans in warehouse included multi-family mortgage
loans with an aggregate principal balance of $30.9 million and the Company had
commitments outstanding to fund an additional $51.4 million in such mortgage
loans.
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 investments 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.
During 1995, the Company increased its equity base by approximately $86.9
million through the issuance of 1,552,500 shares of Series A and 2,196,824
shares of Series B preferred stock. Additionally, the Company replaced $700
million of its short-term floating rate borrowings with long-term floating rate
borrowings through the issuance of CMOs.
In an effort to diversify the Company's product lines outside of single-family
lending, the Company recently re-entered the multi-family housing market by
issuing commitments in the amount of $450 million to fund mortgage loans through
1997. In addition, the Company plans to enter the manufactured housing lending
business in early 1996. The Company anticipates that loan production will
commence in the second quarter of 1996, and that it will have regional offices
and loans funded in more than ten states by the end of the year.
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 $260 million to finance mortgage loan fundings that expire in May
and November 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 $200 million 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 December 31, 1995, the Company had no such outstanding
agreements. The lines of credit contain certain financial covenants which the
Company met as of December 31, 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 ARM 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 a price which is equal to the original
sales price plus an interest component. At December 31, 1995, the Company had
outstanding obligations of $2.03 billion under such repurchase agreements, of
which $2.0 billion, $24.2 million and $7.7 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 assets
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 by entering into certain
futures and/or option contracts. As of December 31, 1995, the Company had
lengthened the duration of $2.2 billion of its repurchase agreements to three
months and $880 million to six months by entering into certain futures and
option contracts. Additionally, the Company owns approximately $103.6 million of
its CMOs and has financed such CMOs with $102.0 million of short-term debt. For
financial statement presentation purposes, the Company has classified the $102.0
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 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 December 31, 1995 of $47 million. The notes
mature between 1999 and 2001. The note agreements contain certain financial
covenants which the Company met as of December 31, 1995. However, changes in
asset levels or results of operations could result in the violation of one or
more covenants in the future.
Impact of Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Standards No. 121 (SFAS 121), Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by a company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company expects that adoption of SFAS 121 will have no impact
on the Company's consolidated financial position or results of operations.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation. This Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans, including stock option
and stock appreciation rights (SAR) plans. As the Company's current practice is
to issue compensation awards as SARs and to settle such SARs granted in cash at
the settlement date, the Company expects that SFAS 123 will have no impact on
its consolidated financial position or results of operations.
REIT Status
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. Resource REIT estimates that its taxable
income for 1995 was approximately $37.8 million. Of that amount, approximately
31.5% represents excess inclusion income. Furthermore, all dividends paid in
1995 represented ordinary income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and the related notes,
together with the Independent Auditors' Report thereon are set forth on pages
F-3 through F-18 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 as to directors and executive officers of
the Company is included in the Company's proxy statement for its 1996 Annual
Meeting of Stockholders (the 1996 Proxy Statement) in the Election of Directors
section on pages 2 through 4 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is included in the 1996 Proxy Statement in
the Executive Compensation section on pages 4 through 6 and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is included in the 1996 Proxy Statement in
the Ownership of Common Stock section on page 3 and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is included in the 1996 Proxy Statement in
the Compensation Committee Interlocks and Insider Participation section on pages
7 through 8 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. and 2. Financial Statements and Financial Statement Schedule
The information required by this section of Item 14 is set forth in the
Consolidated Financial Statements and Independent Auditors' Report beginning at
page F-1 of this Form 10-K. The index to the Financial Statements and Schedule
is set forth at page F-2 of this Form 10-K.
<PAGE>
3. Exhibits
Exhibit
Number Exhibit
3.1 Articles of Incorporation of the Registrant, as amended.
(Incorporated herein by reference to the Company's Registration
Statement on Form S-3 (No. 33-53494) filed October 20, 1992.)
3.2 Amended Bylaws of the Registrant (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
1992, as amended.)
10.1 Selected Portions of the Registrant's Seller/Servicer Guide
(Incorporated herein by reference to Saxon Mortgage Securities
Corporation's Registration Statement on Form S-11 (No. 33-57204)
filed January 21, 1993.
10.2 Program Servicing Agreement between the Registrant and Ryland Mortgage
Company, as amended (Incorporated by reference to Exhibits the
Company's Annual Report on Form 10-K for the year ended December 31,
1991 (File No. 1-9819) dated February 18, 1992.
10.3 Dividend Reinvestment and Stock Purchase Plan (Incorporated herein
by reference to Exhibits to the Company's Registration Statement on
Form S-3 (No. 33-52071).)
10.4 1992 Stock Incentive Plan (Incorporated herein by reference to the
Proxy Statement dated July 13, 1992 for the Special Meeting of
Stockholders held August 17, 1992.)
10.5 Executive Deferred Compensation Plan (Incorporated by reference to
Exhibits the Company's Annual Report on Form 10-K for the year ended
December 31, 1993 (File No. 1-9819) dated March 21, 1994.)
10.6 Employment Agreement: Thomas H. Potts (Incorporated by reference
to Exhibits the Company's Annual Report filed on Form 10-K for the
year ended December 31, 1994 (File No. 1-9819) dated March 31, 1996.)
21.1 List of subsidiaries and consolidated entities of the Company (filed
herewith)
23.1 Consent of KPMG Peat Marwick LLP (filed herewith)
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
March 29, 1996 /s/THOMAS H. POTTS
Thomas H. Potts
President
(Principal Executive Officer)
March 29, 1996 /s/LYNN K. GEURIN
Lynn K. Geurin
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
/s/THOMAS H. POTTS Director March 29, 1996
Thomas H. Potts
/s/J. SIDNEY DAVENPORT, IV Director March 29, 1996
J. Sidney Davenport, IV
/s/RICHARD C. LEONE Director March 29, 1996
Richard C. Leone
/s/PAUL S. REID Director March 29, 1996
Paul S. Reid
/s/DONALD B. VADEN Director March 29, 1996
Donald B. Vaden
<PAGE>
EXHIBIT INDEX
Exhibit
Numbered Exhibit
21.1 List of subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP.
<PAGE>
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
For Inclusion in Form 10-K
Annual Report Filed with
Securities and Exchange Commission
December 31, 1995
<PAGE>
RESOURCE MORTGAGE CAPITAL, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Financial Statements: Page
Independent Auditors' Report F- 3
Consolidated Balance Sheets -- December 31, 1995 and 1994 F- 4
Consolidated Statements of Operations -- For the years ended
December 31, 1995, 1994 and 1993 F- 5
Consolidated Statements of Shareholders' Equity -- For the
years ended December 31, 1995, 1994 and 1993 F- 6
Consolidated Statements of Cash Flows -- For the years ended
December 31, 1995, 1994 and 1993 F- 7
Notes to Consolidated Financial Statements --
December 31, 1995, 1994 and 1993 F- 8
Summary of Quarterly Results F-18
Schedule IV - Mortgage Loans on Real Estate F-19
All other schedules are omitted because they are not applicable or not required.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Resource Mortgage Capital, Inc.:
We have audited the consolidated financial statements of Resource Mortgage
Capital, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Resource Mortgage
Capital, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole presents fairly, in all material respects, the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 122, Accounting for
Mortgage Servicing Rights, during 1995.
KPMG PEAT MARWICK LLP
Richmond, Virginia
February 6, 1996
<PAGE>
CONSOLIDATED BALANCE SHEETS
RESOURCE MORTGAGE CAPITAL, INC.
December 31, 1995 and 1994
(amounts in thousands except share data)
<TABLE>
<CAPTION>
ASSETS 1995 1994
------------- -------------
<S> <C> <C>
Mortgage assets:
Mortgage investments:
Collateral for CMOs $ 1,028,935 $ 443,392
Mortgage securities 2,149,416 2,579,759
Mortgage loans in warehouse 247,633 518,131
------------- -------------
3,425,984 3,541,282
Cash 22,229 7,914
Accrued interest receivable 14,851 19,019
Other assets 26,974 32,381
============= =============
$ 3,490,038 $ 3,600,596
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Collateralized mortgage obligations $ 949,139 $ 424,800
Repurchase agreements 1,983,358 2,804,946
Notes payable 154,041 135,110
Accrued interest payable 5,278 11,450
Other liabilities 43,399 26,819
------------- -------------
3,135,215 3,403,125
------------- -------------
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share,
50,000,000 shares authorized:
9.75% Cumulative Convertible Series A,
1,552,500 and none issued and outstanding, respectively 35,460 -
($37,260 aggregate liquidation preference)
9.55% Cumulative Convertible Series B,
2,196,824 and none issued and outstanding, respectively 51,425 -
($53,822 aggregate liquidation preference)
Common stock, par value $.01 per share, 50,000,000 shares authorized,
20,198,654 and 20,078,013 issued and outstanding, respectively 202 201
Additional paid-in capital 281,508 279,296
Net unrealized loss on mortgage investments (4,759) (72,678)
Retained deficit (9,013) (9,348)
------------- -------------
354,823 197,471
------------- -------------
$ 3,490,038 $ 3,600,596
============= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
RESOURCE MORTGAGE CAPITAL, INC.
Years ended December 31, 1995, 1994 and 1993
(amounts in thousands except share data)
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Collateral for CMOs $ 61,007 $ 33,719 $ 39,538
Mortgage securities 161,889 157,701 104,086
Mortgage loans in warehouse 30,986 35,886 28,632
------------ ------------ ------------
253,882 227,306 172,256
------------ ------------ ------------
Interest and related expense:
Collateralized mortgage obligations 50,984 32,840 39,265
Repurchase agreements 142,474 134,791 74,822
Notes payable 11,186 6,189 4,299
Other 3,931 6,998 8,851
Provision for losses 2,888 2,124 4,392
------------ ------------ ------------
211,463 182,942 131,629
------------ ------------ ------------
Net margin on mortgage assets 42,419 44,364 40,627
Gain on sale of mortgage assets, net of associated costs 9,651 27,723 27,977
Other income 2,963 1,454 734
General and administrative expenses (18,123) (21,284) (15,211)
------------ ------------ ------------
Net income $ 36,910 $ 52,257 $ 54,127
============ ============ ============
Net income $ 36,910 $ 52,257 $ 54,127
Dividends on preferred stock (2,746) - -
============ ============ ============
Net income available to common shareholders $ 34,164 $ 52,257 $ 54,127
============ ============ ============
Net income per common share $ 1.70 $ 2.64 $ 3.12
============ ============ ============
Weighted average number of
common shares outstanding 20,122,772 19,829,609 17,364,309
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
RESOURCE MORTGAGE CAPITAL, INC.
Years ended December 31, 1995, 1994 and 1993
(amounts in thousands except share data)
<TABLE>
<CAPTION> Net
Preferred Unrealized
Stock Additional Loss on
---------------------- Common Paid-in Mortgage Retained
Series A Series B Stock Capital Investments Deficit Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ $ - $ 165 $ 184,347 $ - $ (7,075) $ 177,437
Issuance of common stock - - 28 75,275 - - 75,303
Net income - 1993 54,127 54,127
Dividends declared - $3.06 per share - - - - - (53,835) (53,835)
-------------------------------------------------------------------------------
Balance at December 31, 1993 - - 193 259,622 - (6,783) 253,032
Issuance of common stock 8 19,674 - - 19,682
Net income - 1994 - - - - - 52,257 52,257
Change in net unrealized loss on
mortgage investments - - - - (72,678) - (72,678)
Dividends declared - $2.76 per share - - - - - (54,822) (54,822)
-------------------------------------------------------------------------------
Balance at December 31, 1994 - - 201 279,296 (72,678) (9,348) 197,471
Issuance of common stock - - 1 2,212 - - 2,213
Issuance of preferred stock 35,460 51,425 - - - - 86,885
Net income - 1995 - - - - - 36,910 36,910
Change in net unrealized loss on
mortgage investments - - - - 67,919 - 67,919
Dividends declared:
Common - $1.68 per share - - - - - (33,829) (33,829)
Preferred:
Series A - $1.17 per share - - - - - (1,817) (1,817)
Series B - $0.42 per share - - - - - (929) (929)
================================================================================
Balance at December 31, 1995 $ 35,460 $ 51,425 $ 202 $ 281,508 $ (4,759) $ (9,013) $ 354,823
================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
RESOURCE MORTGAGE CAPITAL, INC.
<TABLE>
<CAPTION>
Years ended December 31, 1995, 1994 and 1993
(amounts in thousands)
1995 1994 1993
--------------- --------------- --------------
<S> <C> <C> <C>
Operating activities
Net income available to common shareholders $ 34,164 $ 52,257 $ 54,127
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Amortization and depreciation 14,091 8,006 6,763
Net decrease (increase) in mortgage loans in warehouse 296,293 258,841 (654,437)
Net increase in accrued interest, other
assets and other liabilities (4,286) (882) (18,514)
Net gain from sale of mortgage assets (2,276) (7,685) (1,420)
Other (2,639) (2,092) 5,927
-------------- --------------- -------------
Net cash provided by (used for) operating activities 335,347 308,445 (607,554)
-------------- --------------- --------------
Investing activities:
Collateral for CMOs:
Purchases of mortgage loans subsequently securitized (708,954) (77,917) (104,650)
Principal payments on collateral 205,150 120,088 226,198
Net change in funds held by trustees 952 12,917 12,909
-------------- -------------- -------------
(502,852) 55,088 134,457
Purchase of CMOs, net - (1,890) -
Purchase of mortgage securities (432,885) (890,170) (1,346,580)
Principal payments on mortgage securities 260,850 436,351 141,926
Proceeds from sales of mortgage securities 634,364 251,454 263,931
Capital expenditures (911) (1,990) (675)
-------------- -------------- -------------
Net cash used for investing activities (41,434) (151,157) (806,941)
-------------- -------------- -------------
Financing activities:
Collateralized mortgage obligations:
Proceeds from issuance of securities 678,121 68,972 107,670
Principal payments on securities (174,150) (131,452) (235,807)
-------------- -------------- -------------
503,971 (62,480) (128,137)
(Repayments of) proceeds from borrowings, net (847,624) (48,283) 1,526,456
Proceeds from stock offerings, net 89,097 19,682 75,303
Dividends paid (25,042) (59,842) (58,713)
-------------- -------------- -------------
Net cash (used for) provided by financing activities (279,598) (150,923) 1,414,909
-------------- -------------- -------------
Net increase in cash 14,315 6,365 414
Cash at beginning of year 7,914 1,549 1,135
============== ============== =============
Cash at end of year $ 22,229 $ 7,914 $ 1,549
============== ============== =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESOURCE MORTGAGE CAPITAL, INC.
December 31, 1995, 1994 and 1993
(amounts in thousands except share data)
NOTE 1 - THE COMPANY
The Company originates, purchases, services and securitizes single-family
residential and multi-family mortgage loans (collectively, mortgage operations)
and invests in a portfolio of residential mortgage assets. The Company
originates or purchases mortgage loans throughout the United States. In its
single-family residential mortgage operations, the Company targets
"non-conforming" loans, where borrowers cannot easily qualify for a loan from
the federal mortgage agencies due to credit or documentation issues. The
Company's primary strategy is to use its mortgage operations to create
investments for its portfolio of mortgage investments.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Resource Mortgage
Capital, Inc., its wholly owned subsidiaries (together, Resource Mortgage), and
certain other entities (collectively, the Company). All significant intercompany
balances and transactions have been eliminated in consolidation.
Certain amounts for 1994 and 1993 have been reclassified to conform to the
presentation for 1995.
FEDERAL INCOME TAXES
Resource Mortgage has elected to be taxed as a real estate investment trust
(REIT) under the Internal Revenue Code. As a result, Resource Mortgage generally
will not be subject to federal income taxation at the corporate level to the
extent that it distributes at least 95 percent of its taxable income to its
shareholders and complies with certain other requirements. No provision has been
made for income taxes for Resource Mortgage and its qualified REIT subsidiaries
in the accompanying consolidated financial statements, as Resource Mortgage has
met the prescribed distribution requirements.
MORTGAGE ASSETS
Mortgage Investments. Pursuant to the requirements of Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities, the Company has classified collateral for CMOs and mortgage
securities as available-for-sale. These mortgage assets at December 31, 1995 and
1994 are therefore reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of shareholders'
equity. The basis of any securities sold is computed using the specific
identification method. Any of these investments may be sold prior to maturity to
support the Company's investment strategy.
Mortgage Loans in Warehouse. Mortgage loans in warehouse held for investment are
carried at their unpaid principal balance, net of unamortized discount or
premium and adjusted for deferred hedging gains or losses, if any. Mortgage
loans in warehouse held for sale are carried at the lower of aggregate cost or
market value.
PRICE PREMIUMS AND DISCOUNTS
Price premiums and discounts on mortgage securities and collateralized mortgage
obligations (CMOs) are deferred as an adjustment to the basis of the related
investment or obligation and are amortized into interest income or expense,
respectively, over the life of the related investment or obligation using the
effective yield method adjusted for the effects of prepayments.
DEFERRED ISSUANCE COSTS
Costs incurred in connection with the issuance of CMOs are deferred and
amortized over the estimated lives of the CMOs using the interest method
adjusted for the effects of prepayments. These costs are included in the
carrying value of the CMOs.
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HEDGING INSTRUMENTS
The nature of the Company's portfolio and financing strategies expose the
Company to interest rate risk. Interest rate cap agreements may be utilized to
limit the Company's risks related to the financing of certain mortgage
investments should short-term interest rates rise above specified levels. The
amortization of the cost of such interest rate cap agreements will reduce
interest income on the related investment over the lives of the interest rate
cap agreements. The remaining unamortized cost is included with the related
investment in the consolidated balance sheets. The Company may also enter into
financial futures and options contracts and interest rate swaps. Revenues or
costs associated with financial futures and options contracts are recognized in
income or expense in a manner consistent with the accounting for the asset or
liability being hedged. Revenues and costs associated with interest rate swaps
are recorded as adjustments to interest expense on the financing obligation
being hedged.
The Company may also enter into forward delivery contracts and into financial
futures and options contracts for the purpose of reducing exposure to the effect
of changes in interest rates on mortgage loans which the Company has funded or
committed to fund. Gains and losses on such contracts are either (i) deferred
until such time the related mortgage loans are sold, or (ii) deferred as an
adjustment to the carrying value of the related mortgage loan and amortized into
income over the life of the loan using the effective yield method adjusted for
the effects of prepayments.
CASH
Approximately $5,400 and $1,600 of cash at December 31, 1995 and 1994,
respectively, is restricted for the payment of premiums on various insurance
policies related to certain mortgage securities, or is held in trust to cover
losses not otherwise covered by insurance. Cash at December 31, 1995 also
includes approximately $15,300 of deposits in-transit from repo counterparties
or the trustee for certain mortgage securities pledged as collateral for
repurchase agreements.
NET INCOME PER COMMON SHARE
Net income per common share as presented is primary net income per common share.
Net income per common share is computed by deducting dividend requirements on
preferred stock from net income and dividing the remainder by the weighted
average number of common shares outstanding during the year. Fully diluted net
income per common share is not presented as both the Series A and Series B
Cumulative Convertible preferred stock are anti-dilutive.
MORTGAGE SERVICING RIGHTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 122, Accounting for Mortgage Servicing Rights in May
1995. This statement requires that the cost of mortgage loans originated or
purchased with the intent to sell the loans and retain the servicing rights be
allocated between the loans and servicing rights based on their estimated fair
values at the date of purchase or origination or sale. The estimated fair value
of the rights is determined at the date of sale by using an appropriate market
price. The Company adopted this new accounting standard effective as of the
third quarter resulting in capitalized servicing rights of $1,020, related to
mortgage loans with a principal balance of $98,804.
USE OF ESTIMATES
Fair Value. The Company uses estimates in establishing fair value for its
mortgage investments. Estimates of fair value for most investments are based on
market prices provided by certain dealers. Estimates of fair value for certain
other mortgage investments are determined by calculating the present value of
the projected net cash flows of the instruments using appropriate discount
rates. The discount rates used are based on management's estimates of market
rates, and the net cash flows are projected utilizing the current interest rate
environment and forecasted prepayment rates. Estimates of fair value for all
remaining mortgage investments are based primarily on management's judgment.
Since the fair value of the Company's mortgage investments are based on
estimates, actual gains and losses recognized may differ from those estimates
recorded in the consolidated financial statements. The fair value of all on- and
off-balance sheet financial instruments is presented in Notes 3 and 8.
Allowance for Losses. As discussed in Note 7, the Company has credit risk on
certain securitized mortgage loans. An allowance for losses has been estimated
and established for the credit risk retained based on management's judgment. The
allowance for losses is evaluated and adjusted periodically by management based
on the actual and reprojected timing and amount of potential credit losses, as
well as industry loss experience. The Company's actual credit losses may differ
from those estimates used to establish the allowance.
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other Mortgage Securities. Income on certain other mortgage securities is
accrued using the effective yield method based upon estimates of future net cash
flows to be received over the estimated remaining lives of the mortgage
securities. Estimated effective yields are changed prospectively consistent with
changes in current interest rates and current prepayment assumptions on the
underlying mortgage collateral used by various dealers in mortgage-backed
securities. Reductions in carrying value are made when the total projected cash
flow is less than the Company's basis, based on either the dealers' prepayment
assumptions or, if it would accelerate such adjustments, management's
expectations of interest rates and future prepayment rates.
NOTE 3 - MORTGAGE ASSETS
MORTGAGE INVESTMENTS
The following table summarizes the Company's amortized cost basis of collateral
for CMOs and mortgage securities held at December 31, 1995 and 1994, and the
related average effective interest rates (calculated excluding unrealized gains
and losses):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------------------
Amortized Effective Amortized Effective
Cost Interest Rate Cost Interest Rate
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateral for CMOs $1,012,399 8.4% $ 435,306 9.0%
Allowance for losses (1,800) --
Amortized cost, net $1,010,599 $ 435,306
- ------------------------------------------------------------------------------------------------------------------
Mortgage Securities:
Adjustable-rate mortgage securities $2,087,435 6.8% $2,407,512 5.4%
Fixed-rate mortgage securities 35,074 7.9% 198,517 7.3%
Other mortgage securities 56,190 15.6% 63,197 19.8%
- ------------------------------------------------------------------------------------------------------------------
2,178,699 2,669,226
Allowance for losses (6,188) (8,703)
Amortized cost, net $2,172,511 $2,660,523
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Collateral for CMOs. Collateral for CMOs consists of adjustable-rate and
fixed-rate mortgage loans secured by first liens on single-family and
multi-family residential housing and fixed-rate mortgage securities guaranteed
by U.S. government agencies. All collateral for CMOs is pledged to secure
repayment of the related debt obligation. All principal and interest (less
servicing related fees) on the collateral is remitted to a trustee and is
available for payment on the bond obligation. The Company's exposure to loss on
collateral for CMOs is limited to its net investment, as CMOs are nonrecourse to
the Company.
The components of collateral for CMOs at December 31, 1995 and 1994 is
summarized as follows:
<TABLE>
<CAPTION>
-------------------------------------------- --------------- -- -------------
1995 1994
-------------------------------------------- --------------- -- -------------
<S> <C> <C>
Mortgage collateral $ 992,716 $ 430,054
Funds held by trustees 3,056 4,008
Accrued interest receivable 7,801 3,239
Unamortized premiums and discounts, net 22,107 3,921
Deferred issuance costs 3,255 2,170
=============== =============
$ 1,028,935 $ 443,392
=============== =============
</TABLE>
Adjustable-Rate Mortgage Securities. Adjustable-rate mortgage securities
(ARMs) consist of mortgage certificates secured by adjustable-rate mortgage
loans.
<PAGE>
NOTE 3 - MORTGAGE ASSETS (CONTINUED)
Fixed-Rate Mortgage Securities. Fixed-rate mortgage securities consist of
securities collateralized by mortgage loans that have a fixed rate of interest
for at least one year from the balance sheet date.
Other Mortgage Securities. Other mortgage securities include primarily mortgage
derivative securities and mortgage residual interests. Mortgage derivative
securities are classes of CMOs, mortgage pass-through certificates, or mortgage
certificates that pay to the holder substantially all interest (i.e., an
interest-only security), or substantially all principal (i.e., a principal-only
security). Mortgage residual interests represent the right to receive the excess
of (i) the cash flow from the collateral pledged to secure related
mortgage-backed securities, together with any reinvestment income thereon, over
(ii) the amount required for principal and interest payments on the
mortgage-backed securities or repurchase arrangements, together with any related
administrative expenses.
The Company has classified collateral for CMOs and all mortgage securities as
available-for-sale. The following table presents the fair value of the Company's
collateral for CMOs and mortgage securities held at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------------------
Collateral Mortgage Collateral Mortgage
for CMOs securities for CMOs securities
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Amortized cost, net $ 1,010,599 $2,172,511 $435,306 $2,660,523
Gross unrealized gains 20,208 22,488 8,491 23,382
Gross unrealized losses (1,872) (45,583) (405) (104,146)
- ------------------------------------------------------------------------------------------------------------------
Fair value $1,028,935 $2,149,416 $443,392 $2,579,759
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of mortgage securities totaled $634,364 in 1995, compared to
$246,934 in 1994. Gross gains of $15,513 in 1995 and $11,435 in 1994, and gross
losses of $13,237 in 1995 and $3,750 in 1994, were realized on those sales.
Gross realized gains for 1995 includes the recognition of the Company's basis in
the repurchase obligation related to convertible adjustable-rate mortgage loans
previously securitized or sold as a result of the transfer of this obligation to
a third party.
Discounts on Mortgage Securities. Certain securities or classes of securities
include recorded discounts to compensate the Company for risk of loss not
covered by insurance. At December 31, 1995 and 1994, such discounts amounted to
$3,566 and $16,706, respectively and are included in mortgage securities in the
accompanying consolidated financial statements.
MORTGAGE LOANS IN WAREHOUSE
The Company purchases and originates fixed-rate and adjustable-rate loans
secured by first mortgages or first deeds of trust on single-family attached or
detached residential properties and originates fixed-rate loans secured by first
mortgages or deeds of trust on multi-family residential properties.
Substantially all mortgage loans in warehouse at December 31, 1995 are held to
be pledged as collateral for future CMO securitizations. Approximately 34% of
the properties collateralizing mortgage loans in warehouse at December 31, 1995
were located in California. The Company funded mortgage loans with an aggregate
principal balance of $893,953, $2,861,443, and $4,093,714 during 1995, 1994 and
1993, respectively.
NOTE 4 - COLLATERALIZED MORTGAGE OBLIGATIONS
Each series of a CMO may consist of various classes of bonds, either at fixed or
variable rates of interest. Payments received on the mortgage collateral and any
reinvestment income thereon are used to make payments on the CMOs. (See Note 3).
The obligations under the CMOs are payable solely from the collateral for CMOs
and are otherwise non-recourse to the Company. The maturity of each class is
directly affected by the rate of principal prepayments on the related mortgage
collateral. Each series is also subject to redemption according to specific
terms of the respective indentures. As a result, the actual maturity of any
class of a CMO series is likely to occur earlier than its stated maturity.
<PAGE>
NOTE 4 - COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
The components of CMOs along with certain other information at December 31, 1995
and 1994 are summarized below:
<TABLE>
<CAPTION>
------------------------------------ ------------------ --- ------------------
1995 1994
------------------------------------ ------------------ --- ------------------
<S> <C> <C>
Fixed-rate classes $ 253,183 $ 341,231
Variable-rate classes 680,993 67,623
Accrued interest payable 3,021 3,642
Unamortized premium 11,942 12,304
================== ==================
$ 949,139 $ 424,800
================== ==================
Range of average interest rates 6.1% - 15.0% 6.4% - 11.4%
Range of stated maturities 1998 - 2027 1998 - 2027
Number of series 37 35
</TABLE>
The variable rates are based on one- or six-month LIBOR. The average effective
rate of interest expense for CMOs was 7.2%, 8.3% and 8.5% for the years ended
December 31, 1995, 1994 and 1993, respectively.
NOTE 5 - REPURCHASE AGREEMENTS
The Company utilizes repurchase agreements to finance certain of its mortgage
assets. These repurchase agreements may be secured by adjustable-rate mortgage
securities, fixed-rate mortgage securities, mortgage loans in warehouse, and by
certain other mortgage securities. These agreements bear interest at rates
indexed to LIBOR. At December 31, 1995, substantially all repurchase agreements
had maturities within thirty days. If the counterparty to the repurchase
agreement fails to return the collateral, the ultimate realization of the
security by the Company may be delayed or limited.
The excess market value of the mortgage assets securing the Company's repurchase
obligations at December 31, 1995 did not exceed 10% of shareholders' equity for
any of the individual counterparties with whom the Company had contracted these
agreements.
At December 31, 1995, the Company had a committed repurchase agreement in the
amount of $200,000 relating to mortgage loans in warehouse.
The following table summarizes the Company's repurchase agreements outstanding
at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Amount Weighted Average Carrying Value
Outstanding Annual Rate of Collateral
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1995:
Repurchase agreements secured by:
Adjustable-rate mortgage securities $1,951,492 5.80% $2,040,425
Fixed-rate mortgage securities 24,165 6.03% 34,582
Other mortgage securities 7,701 6.12% 32,202
- ------------------------------------------------------------------------------------------------------------------
$1,983,358 $2,107,209
- ------------------------------------------------------------------------------------------------------------------
December 31, 1994:
Repurchase agreements secured by:
Mortgage loans in warehouse $ 420,455 7.15% $ 443,801
Adjustable-rate mortgage securities 2,196,008 6.20% 2,266,365
Fixed-rate mortgage securities 181,880 5.53% 192,284
Other mortgage securities 6,603 5.36% 14,466
- ------------------------------------------------------------------------------------------------------------------
$2,804,946 $2,916,916
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTE 6 - NOTES PAYABLE
Secured. At December 31, 1995, the Company had three credit facilities
aggregating $260,000 to finance the purchase of mortgage loans. These facilities
expire in May and November 1996. One of these facilities includes a
sub-agreement which allows the Company to borrow up to $30,000 for working
capital purposes. 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 following table summarizes amounts outstanding under the above referenced
notes payable facilities at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Amount Weighted Average Carrying Value
Outstanding Annual Rate of Collateral
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1995:
Secured by:
Mortgage loans $105,681 5.68% $ 153,298
December 31, 1994:
Secured by:
Mortgage loans $ 61,226 6.00% $ 71,192
Loan servicing rights 7,300 2.00% 8,046
Warehouse lines of credit 7,867 1.50% 8,100
Interest rate cap agreements 7,255 9.78% 23,697
- ------------------------------------------------------------------------------------------------------------------
$ 83,648 $ 111,035
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Unsecured. The Company issued two series of unsecured notes totaling $50,000 in
1994. The Series A 9.56% notes totaling $15,000 are payable in five annual
installments commencing October 15, 1995. The Series B 10.03% notes totaling
$35,000 are payable in four annual installments commencing October 15, 1998. The
remaining aggregate balance of these notes was $47,000 and $50,000 at December
31, 1995 and 1994, respectively. The principal payments due pursuant to these
notes for the five years after December 31, 1995 are $3,000, $3,000, $11,750,
$11,750 and $8,750. The Company also issued four unsecured notes payable in
conjunction with the acquisition of Cram Mortgage Service, Inc. (See Note 9).
These notes had an aggregate outstanding principal balance of $1,360 and $1,462
at December 31, 1995 and 1994, respectively. These notes accrue interest at 8.0%
and are payable in quarterly installments until October 1, 1999. The principal
payments due pursuant to these notes for the remaining four years after December
31, 1995 are $100, $100, $100 and $1,060, respectively.
NOTE 7 - ALLOWANCE FOR LOSSES
The Company has limited exposure to credit risk retained on mortgage loans which
it has securitized through the issuance of CMOs. The aggregate loss exposure is
generally limited to the Company's net investment in these CMOs. An allowance
for losses, which is based on industry and Company experience, has been
established for estimated potential losses over the expected life of these
securities.
On certain mortgage securities collateralized by mortgage loans purchased by the
Company for which mortgage pool insurance is used as the primary source of
credit enhancement, the Company has limited exposure to certain credit risks not
covered by such insurance. An allowance was established based on the estimate of
losses at the time of securitization. The Company has not significantly utilized
pool insurance as a form of credit enhancement since 1993. Accordingly, the
Company's exposure to such potential losses is declining as the remaining
outstanding securities pay-down.
The allowance for losses is evaluated and adjusted periodically by management
based on the actual and reprojected timing and amount of potential credit
losses, as well as industry and Company loss experience.
<PAGE>
NOTE 7 - ALLOWANCE FOR LOSSES (CONTINUED)
The following table summarizes the activity for the above allowance for losses
for the years ended December 31, 1995 and 1994:
------------------------------ ------------ --- --------------
1995 1994
------------------------------ ------------ --- --------------
Beginning balance $ 8,703 $ 7,915
Provision for losses 2,888 2,124
Losses charged-off, net (3,603) (1,336)
============ ==============
$ 7,988 $ 8,703
============ ==============
NOTE 8 - ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS
The following table presents the carrying values and estimated fair values of
the Company's recorded financial instruments, as well as information about
certain specific off-balance sheet financial instruments as of December 31, 1995
and 1994:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------------------
Notional Cost Fair Notional Cost Fair
Amount Basis Value Amount Basis Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Recorded financial instruments:
Assets:
Collateral for CMOs $ -- $1,010,599 $1,028,935 $ -- $ 435,306 $ 443,392
Mortgage securities -- 2,148,759 2,145,670 -- 2,632,288 2,556,062
Interest rate cap agreements 1,575,000 23,752 3,746 1,475,000 28,235 23,697
Mortgage loans in warehouse -- 247,633 251,036 -- 518,131 518,806
Cash -- 22,229 22,229 -- 7,914 7,914
Liabilities:
CMOs -- 949,139 949,139 -- 424,800 424,800
Repurchase agreements -- 1,983,358 1,983,358 -- 2,804,946 2,804,946
Notes payable -- 154,041 154,041 -- 135,110 135,110
Off-balance sheet financial
instruments:
Financial futures contracts:
Repurchase agreements 1,000,000 -- (107) -- -- --
Mortgage loans in warehouse -- -- -- 727,800 -- 502
Options on futures contracts:
Repurchase agreements 2,130,000 -- 46 -- -- --
Mortgage loans in warehouse 30,000 -- (2) 3,582,000 -- 312
Interest rate swap agreements:
Mortgage securities 1,020,000 -- 4,882 -- -- --
CMOs 207,094 -- (3,898) -- -- --
Forward delivery contracts:
Mortgage loans in warehouse 274,700 -- (628) 106,700 -- (192)
Commitments to fund
mortgage loans 954,900 -- 985,200 179,332 -- 179,332
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The estimated fair values of financial instruments have been determined using
available market information and appropriate valuation methodologies. However, a
degree of judgment is necessary in evaluating market data and forming these
estimates.
Recorded Financial Instruments. The carrying amount of cash and liabilities
considered to be financial instruments approximates fair value at December 31,
1995 and 1994. As discussed in Note 2, the fair value of mortgage securities is
based on actual dealer price quotes, or by determining the present value of the
projected net cash flows using appropriate discount rates.
<PAGE>
NOTE 8 - ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS (CONTINUED)
The Company purchased London InterBank Offered Rate (LIBOR) and One-year
Constant Maturity Treasury Index (CMT) based interest rate cap agreements to
limit its exposure to the lifetime interest rate caps on certain of its
adjustable-rate mortgage securities. Under these agreements, the Company will
receive additional cash flow should the related index increase above the
contracted rates. Contract rates on these cap agreements range from 6.58% to
11.5%, with expiration dates ranging from 1996 to 2004.
Off-Balance Sheet Financial Instruments. The Company may engage in derivative
financial instrument activities for the purpose of interest rate risk
management. All of the Company's derivative financial instruments are for
purposes other than trading. The Company has credit risk to the extent that the
counterparties to the derivative financial instruments do not perform their
obligation under the agreements. If one of the counterparties does not perform,
the Company would not receive the cash to which it would otherwise be entitled
under the conditions of the agreement.
The Company utilizes Eurodollar financial futures and options contracts to
moderate the risks inherent in the financing of its mortgage securities with
variable-rate repurchase agreements. The Company utilizes these instruments to
lengthen the terms of the repurchase agreement financing, generally from one
month to three and six months. Under these contracts, the Company will receive
additional cash flow if the related Eurodollar index increases above the
contracted rates. The Company will pay additional cash flow if the related
Eurodollar index decreases below the contracted rates. Contract rates range from
5.0% to 5.4%, with expiration dates in March 1996 ($2,250,000 notional) and June
1996 ($880,000 notional).
The Company may enter into various interest rate swap agreements to limit its
exposure to changes in financing rates of certain mortgage securities. The
Company has entered into a series of interest rate swap agreements which
effectively caps the increase in borrowing costs in any six-month period to 1%
for $1,020,000 notional amount of short-term borrowings. Pursuant to the terms
of this agreement, the Company pays the lesser of current 6-month LIBOR, or
6-month LIBOR with a 180-day lookback plus 1%, and receives current 6-month
LIBOR. These agreements expire in 2001. The Company has also entered into a
5-year amortizing $220,000 notional interest rate swap agreement related to
variable-rate CMO classes. Under the terms of this agreement, the Company
receives 1-month LIBOR and pays 6.15%. This agreement expires in 2000.
Forward delivery contracts and financial futures and options contracts are used
to reduce exposure to the effect of changes in interest rates on funded mortgage
loans, as well as those mortgage loans which the Company has committed to fund.
As of December 31, 1995, the Company had entered into commitments to fund
single-family mortgage loans of approximately $500,100. These commitments
generally had original terms of not more than 60 days. Additionally, the Company
had entered into commitments to fund multi-family mortgage loans of
approximately $454,800. These commitments had original terms of not more than
two years. The Company has deferred net hedging losses of $16,647 at December
31, 1995 and deferred net hedging gains of $2,976 at December 31, 1994 related
to these positions.
NOTE 9 - ACQUISITION
On September 30, 1994, the Company acquired all of the outstanding common stock
of Cram Mortgage Service, Inc., subsequently renamed to Meritech Mortgage
Services, Inc. (Meritech), for a purchase price of $7,174. The Company uses such
mortgage loan servicing capabilities to service substantially all of the
mortgage loans funded by the Company.
Of the $7,174 purchase price, approximately $5,687 was paid in cash with the
remaining $1,487 paid through the issuance of notes to the sellers, due in
installments through October 1, 1999. The acquisition was accounted for as a
purchase, and accordingly, the purchase price was allocated to the assets and
liabilities acquired based on their estimated fair values as of the date of
acquisition. There was no goodwill as a result of the purchase. Meritech's
results of operations were not material to the Company's consolidated financial
statements and pro forma financial information has therefore not been presented.
NOTE 10 - SHAREHOLDERS' EQUITY
The Company is authorized to issue up to 50,000,000 shares of preferred stock.
In June 1995, the Company issued 1,552,000 shares of Series A 9.75% Cumulative
Convertible preferred stock at an issue price of $24 per share, for net proceeds
of $35,460. In October 1995, the Company issued 2,196,824 shares of Series B
9.55% Cumulative Convertible preferred stock at an issue price of $24.50 per
share, for net proceeds of $51,425.
<PAGE>
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
For both series, dividends are cumulative from the date of issue and are payable
quarterly in arrears. The dividends are equal, per share, to the greater of (i)
the base rate of $0.585 per quarter, or (ii) the quarterly dividend declared on
the Company's common stock. Each share of Series A and Series B is convertible
at any time at the option of the holder into one share of common stock. Each
series is redeemable by the Company, in whole or in part, (i) for one share of
common stock, plus accrued and unpaid dividends, provided that for 20 trading
days within any period of 30 consecutive trading days, the closing price of the
common stock equals or exceeds the issue price, or (ii) for cash at the issue
price, plus any accrued and unpaid dividends beginning after June 30 and October
31, 1998 for Series A and B, respectively.
In the event of liquidation, the holders of both series of preferred stock will
be entitled to receive out of the assets of the Company, prior to any such
distribution to the common shareholders, the issue price per share in cash, plus
any accrued and unpaid dividends.
NOTE 11 - STOCK INCENTIVE PLAN
Pursuant to the Company's 1993 Stock Incentive Plan (the Employee Incentive
Plan), the Compensation Committee of the Board of Directors may grant to
eligible employees of the Company, its subsidiaries and affiliates for a period
of ten years beginning June 17, 1993 stock options, stock appreciation rights
(SARs) and restricted stock awards. An aggregate of 675,000 shares of common
stock are available for distribution pursuant to stock options, SARs and
restricted stock. The shares of common stock subject to any option or SAR that
terminates without a payment being made in the form of common stock would become
available for distribution pursuant to the Employee Incentive Plan. The
Compensation Committee of the Board of Directors may also grant dividend
equivalent rights (DERs) in connection with the grant of options or SARs. These
SARs and related DERs generally become exercisable as to 20 percent of the
granted amounts each year after the date of the grant.
The following table presents a summary of the SARs outstanding at December 31,
1995 and 1994:
------------------------------ ------------- -- ------------------
SARs Exercise Price
------------------------------ ------------- -- ------------------
December 31, 1993 236,310 $ 8 3/4 - 29
Granted 48,460 23 5/8
Forfeiture (47,632) 8 3/4 - 29
SARs exercised (25,178) 8 3/4 - 29
-------------
December 31, 1994 211,960 8 3/4 - 29
Granted 122,585 16 1/8
Forfeiture (24,973) 17 7/8 - 29
SARs exercised (3,062) 17 7/8 - 29
-------------
December 31, 1995 306,510 $ 8 3/4 - 29
------------------------------ ------------- -- ------------------
The Company expensed $8 and $1,640 for SARs and DERs during 1994 and 1993,
respectively. There was no such expense recorded for 1995. There were no stock
options outstanding as of December 31, 1995 and 1994. The number of SARs vested
and exercisable at December 31, 1995 and 1994 was 94,000 and 83,300,
respectively.
In 1995, the Company adopted a Stock Incentive Plan for its Board of Directors
(the Board Incentive Plan) with terms similar to the Employee Incentive Plan. On
May 1, 1995, the date of the initial date of grant under the Board Incentive
Plan, each member of the Board of Directors was granted 7,000 SARs. Each Board
member will receive an additional 1,000 SARs on May 1, 1996, 1997 and 1998,
respectively. The SARs granted on May 1, 1995 will become exercisable as to 33
1/3% of the granted amount each of the next three years. Each successive award
will become exercisable as to 20% of the granted amounts each year after the
date of grant. The maximum period in which any SAR may be exercised is 73 months
from the date of grant. The maximum number of shares of common stock encompassed
by the SARs granted under the Plan is 100,000. There were no SARs vested and
exercisable at December 31, 1995.
<PAGE>
NOTE 12 - EMPLOYEE SAVINGS PLAN
The Company provides an employee savings plan under Section 401(k) of the
Internal Revenue Code. The employee savings plan allows eligible employees to
defer up to 12% of their income on a pretax basis. The Company matched the
employees' contribution, up to 6% of the employees' income. The Company may also
make discretionary contributions based on the profitability of the Company. The
total expense related to the Company's matching and discretionary contributions
in 1995, 1994 and 1993 was $136, $331 and $108, respectively. The Company does
not provide post employment or post retirement benefits to its employees.
NOTE 13 - CONTINGENCIES
The Company makes various representations and warranties relating to the sale or
securitization of mortgage loans. To the extent the Company were to breach any
of these representations or warranties, and such breach could not be cured
within the allowable time period, the Company would be required to repurchase
such mortgage loans, and could incur losses. In the opinion of management, no
material losses are expected to result from any such representations and
warranties.
NOTE 14 - SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $210,638 $177,943 $115,608
- ------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash activities:
Purchase of collateral for CMOs $ -- $ (54,204) $ --
Assumption of CMOs -- 52,314 --
- ------------------------------------------------------------------------------------------------------------------
Purchase of CMOs, net $ -- $ (1,890) $ --
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 15 - EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF THE
INDEPENDENT AUDITORS
On March 21, 1996, the Company's Board of Directors approved an agreement in
principle with Dominion Capital, Inc. to sell the Company's single-family
correspondent, wholesale, and servicing operations. Such sale is anticipated to
be consummated in the second quarter of 1996.
<PAGE>
<TABLE>
<CAPTION>
Summary of Quarterly Results (unaudited)
(amounts in thousands except share data)
Year ended December 31, 1995 First Quarter Second Quarter Third Quarter Fourth Quarter
- ---------------------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Operating results:
Total revenues $ 64,426 $ 64,482 $ 69,061 $ 68,527
Net margin on mortgage assets 7,404 9,215 11,906 13,894
Net income 6,596 8,041 10,128 12,145
Net income per common share 0.33 0.40 0.46 0.51
Cash dividends declared per common share 0.36 0.40 0.44 .0.48
Mortgage loans funded 237,119 197,516 242,213 217,105
<CAPTION>
Year ended December 31, 1994 First Quarter Second Quarter Third Quarter Fourth Quarter
- ---------------------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Operating results:
Total revenues $ 58,941 $ 62,530 $ 66,009 $ 69,003
Net margin on mortgage assets 12,686 10,872 12,257 8,549
Net income 15,500 15,369 12,952 8,436
Net income per share 0.80 0.78 0.64 0.42
Cash dividends declared per share 0.52 0.78 0.78 0.68
Mortgage loans funded 958,772 905,538 598,935 398,198
</TABLE>
<PAGE>
RESOURCE MORTGAGE CAPITAL, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
<TABLE>
<CAPTION>
December 31, 1995
(amounts in thousands except number of loans)
Carrying Principal Amount
Number Final Amount of of Loans Subject
of Maturity Mortgage to Delinquent
Description Loans Interest Rate Date Loans Principal or Interest
- ------------------------ --- ----------- -- --------------------- - --------------- -- --------------- - ----------------------
Outstanding principal
balance of
Mortgage Loans
<S> <C> <C> <C> <C> <C>
$ 0 - $ 50 305 7.25% - 16.13% Varies $10,014 $ 37
51 - 100 588 6.50% - 13.88% Varies 42,854 549
101 - 150 417 6.25% - 13.63% Varies 50,339 1,406
151 - 200 182 5.38% - 12.38% Varies 31,414 1,657
201 - 250 152 6.13% - 12.88% Varies 34,178 4,099
251 - 300 78 3.63% - 11.50% Varies 20,977 2,782
301 - 350 53 6.63% - 11.25% Varies 16,987 634
351 - 400 20 6.50% - 9.63% Varies 7,552 1,166
401 - 450 14 6.63% - 10.50% Varies 5,966 1,299
451 - 500 14 7.50% - 9.38% Varies 6,718 489
Over $ 500 30 6.25% - 9.25% Varies 20,634 2,661
========== ============= ==========
1,853 $ 247,633 $16,779
========== ============= ==========
</TABLE>
All mortgage loans in warehouse are conventional mortgage loans secured by
single-family or multi-family dwellings with initial maturities of 15 to 30
years. Of the carrying amount, $111,435 or 45% are fixed-rate and $136,198 or
55% are adjustable-rate mortgage loans in warehouse. The Company believes that
its mortgage pool insurance and allowance are adequate to cover any exposure on
delinquent mortgage loans in warehouse. A summary of activity of mortgage loans
for the years ended December 31, 1995, 1994 and 1993 is as follows:
Balance at December 31, 1992 $ 123,627
Mortgage loans funded 4,132,101
Collection of principal (5,516)
Mortgage loans sold (3,472,443)
------------
Balance at December 31, 1993 777,769
Mortgage loans funded 2,861,443
Collection of principal (20,486)
Mortgage loans sold (3,100,595)
------------
Balance at December 31, 1994 518,131
Mortgage loans funded 893,953
Collection of principal (771,743)
Mortgage loans sold (392,708)
------------
Balance at December 31, 1995 $ 247,633
============
<PAGE>
RESOURCE MORTGAGE CAPITAL, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
The geographic distribution of the Company's mortgage loans in warehouse at
December 31, 1995 is as follows:
State Number of Loans Principal Amount
Alabama 2 $ 301
Arizona 58 6,872
Arkansas 1 137
California 468 79,207
Colorado 63 9,317
Connecticut 16 1,988
Delaware 5 526
District of Columbia 20 2,733
Florida 134 13,335
Georgia 72 7,331
Hawaii 1 196
Idaho 4 415
Illinois 78 11,138
Indiana 12 750
Iowa 1 81
Kansas 4 267
Maryland 158 22,208
Massachusetts 2 380
Minnesota 7 591
Missouri 26 2,142
Nevada 39 5,475
New Jersey 31 3,645
New Mexico 5 1,063
New York 15 3,256
North Carolina 89 8,313
Ohio 15 10,296
Oklahoma 30 1,921
Oregon 55 5,564
Pennsylvania 46 4,717
South Carolina 10 1,174
Tennessee 56 4,573
Texas 53 6,724
Utah 96 6,488
Virginia 127 16,390
Washington 47 7,447
Wisconsin 2 198
West Virginia 1 147
Wyoming 4 327
-------- -------------
Total 1,853 $ 247,633
======== =============
Exhibit 21.1
RESOURCE MORTGAGE CAPITAL, INC.
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1995
TC Acquisition, Inc.
EO Associates, Inc.
Multi-Family Capital Access One, Inc.
Resource Finance Co. One
Resource Finance Co. Two
SHF Corp.
ND Holding Co.
Merit Securities Corp.
Resource Mortgage Finance Corp.
** Saxon Holding, Inc.
Saxon Financial, Inc.
Saxon Mortgage, Inc.
National Model Homes, Inc.
** SMFC Holding, Inc.
SMFC Funding Corp.
Meritech Mortgage Services, Inc.
MSC I L.P.
Housing Solutions Inc.
Saxon Mortgage Securities Corp.
NOTE: All companies were incorporated in Virginia except for SMFC Holding,
Inc. (Delaware) and Meritech Mortgage Services, Inc. (Texas).
** Resource Mortgage Capital, Inc. has a non-voting preferred stock
interest in these companies.
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Resource Mortgage Capital, Inc.
We consent to incorporation by reference in the registration statements (Nos.
33-50705 and 33-52071) on Form S-3 and registration statement (No.33-60282) on
Form S-8 of Resource Mortgage Capital, Inc. of our report dated February 6,
1996, relating to the consolidated balance sheets of Resource Mortgage Capital,
Inc. and subsidiaries as of December 31, 1995 and 1994 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1995 and the
related financial statement schedule dated December 31, 1995, which report
appears in the December 31, 1995 Form 10-K of Resource Mortgage Capital, Inc..
KPMG PEAT MARWICK LLP
Richmond, Virginia
March 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 22,229
<SECURITIES> 3,425,984
<RECEIVABLES> 14,851
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,490,038
<CURRENT-LIABILITIES> 2,186,076
<BONDS> 949,139
0
86,885
<COMMON> 202
<OTHER-SE> 267,736
<TOTAL-LIABILITY-AND-EQUITY> 3,490,038
<SALES> 0
<TOTAL-REVENUES> 266,496
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 20,869
<LOSS-PROVISION> 2,888
<INTEREST-EXPENSE> 208,575
<INCOME-PRETAX> 34,164
<INCOME-TAX> 0
<INCOME-CONTINUING> 34,164
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,164
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 0
</TABLE>
