UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended March 31, 1997
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-9819
DYNEX CAPITAL, INC.
(formerly Resource Mortgage Capital, Inc.)
(Exact name of registrant as specified in its charter)
Virginia 52-1549373
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10900 Nuckols Road, 3rd Floor, Glen Allen, Virginia 23060
(Address of principal executive offices) (Zip Code)
(804) 217-5800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.
|X| Yes |_| No
On April 30, 1997, the registrant had 42,422,208 shares of common stock of $.01
value outstanding, which is the registrant's only class of common stock.
<PAGE>
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<CAPTION>
DYNEX CAPITAL, INC.
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1997 and
December 31, 1996...................................................................3
Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996.......................................................4
Consolidated Statement of Shareholders' Equity for
the three months ended March 31, 1997...............................................5
Consolidated Statements of Cash Flows for
the three months ended March 31, 1997 and 1996......................................6
Notes to Unaudited Consolidated Financial
Statements................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................30
Item 2. Changes in Securities........................................................................30
Item 3. Defaults Upon Senior Securities..............................................................30
Item 4. Submission of Matters to a Vote of Security Holders..........................................30
Item 5. Other Information............................................................................30
Item 6. Exhibits and Reports on Form 8-K.............................................................30
SIGNATURES............................................................................................31
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
DYNEX CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
March 31, December 31,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Investments:
Portfolio assets:
Collateral for collateralized bonds $ 2,498,964 $ 2,702,294
Mortgage securities 911,973 892,037
Other 118,628 96,236
Loans held for securitization 388,077 265,537
------------ ------------
3,917,642 3,956,104
Cash 8,415 11,396
Accrued interest receivable 8,643 8,078
Other assets 15,166 11,879
------------ ------------
$ 3,949,866 $ 3,987,457
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Collateralized bonds $ 2,325,372 $ 2,519,708
Repurchase agreements 842,167 756,448
Notes payable 243,153 177,124
Accrued interest payable 3,029 2,717
Other liabilities 31,196 27,843
------------ ------------
3,444,917 3,483,840
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, 50,000,000 shares authorized:
9.75% Cumulative Convertible Series A,
1,499,300 and 1,552,500 issued and 34,245 35,460
outstanding, respectively
9.55% Cumulative Convertible Series B,
2,106,743 and 2,196,824 issued and 49,316 51,425
outstanding, respectively
9.73% Cumulative Convertible Series C,
1,840,000 issued and outstanding, respectively 52,740 52,740
Common stock, par value $.01 per share, 100,000,000
shares authorized,
42,053,042 (1) and 20,653,593 issued and 421 207
outstanding, respectively
Additional paid-in capital 301,045 291,637
Net unrealized gain on investments available-for-sale 58,480 64,402
Retained earnings 8,702 7,746
------------ ------------
504,949 503,617
------------ ------------
$ 3,949,866 $ 3,987,457
============ ============
<FN>
(1)Reflects the two-for-one common stock split which will be distributed on May 23, 1997.
See notes to unaudited consolidated financial statements.
</FN>
</TABLE>
<PAGE>
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<CAPTION>
DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except share data)
Three Months Ended
March 31,
1997 1996
----------- ----------
<S> <C> <C>
Interest income:
Collateral for collateralized $ 48,462 $ 23,509
bonds
Mortgage securities 19,681 36,537
Other portfolio assets 2,362 668
Loans held for securitization 6,556 11,451
----------- ----------
77,061 72,165
----------- ----------
Interest and related expense:
Collateralized bonds 39,352 17,773
Repurchase agreements 12,328 33,104
Notes payable 3,200 2,508
Other 556 561
Provision for losses 995 400
----------- ----------
56,431 54,346
----------- ----------
Net interest margin 20,630 17,819
Gain on sale of assets, net of 2,487 201
associated costs
Other income 412 616
General and administrative expenses (5,219) (5,951)
=========== ==========
Net income $ 18,310 $ 12,685
=========== ==========
Net income 18,310 12,685
Dividends on preferred stock (3,687 ) (2,193)
=========== ==========
Net income available to common $ 14,623 $ 10,492
shareholders
=========== ==========
Net income per common share $ 0.35 $ 0.26
=========== ==========
Weighted average number of common 41,666,720 40,530,398
shares outstanding
=========== ==========
<FN>
See notes to unaudited consolidated financial statements.
</FN>
</TABLE>
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<TABLE>
<CAPTION>
DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(amounts in thousands except share data)
Net
Additional Unrealized Gain
Preferred Common Paid-in on Investments Retained
Stock Stock Capital Available-for Earnings Total
-------- ------- -------- -------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $139,625 $ 207 $291,637 $ 64,402 $ 7,746 $503,617
Net income - three months ended
March 31, 1997 - - - - 18,310 18,310
Issuance of common stock - 2 6,296 - - 6,298
Conversion of (3,324) 1 3,323 - - -
preferred stock
Two-for-one stock split 211 (211)
Change in net
unrealized gain on - - - (5,922) - (5,922)
investments available-for-sale
Dividends on common stock - - - - (13,667) (13,66)
at $0.325 per share
Dividends on preferred stock - - - - (3,687) (6,687)
-------- --------- ---------- ----------- ---------- ---------
Balance at March 31, 1997 $136,301 $ 421 $301,045 $ 58,480 $ 8,702 $504,949
========= ======== ========= ============ ========== =========
<FN>
See notes to unaudited consolidated financial statements.
</FN>
</TABLE>
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<CAPTION>
DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended
(amounts in thousands) March 31,
1997 1996
--------------- ---------------
<S> <C> <C>
Operating activities:
Net income $ 14,623 $ 10,492
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Provision for losses 995 400
Net gain from sale of portfolio assets (2,487) (201)
Amortization and depreciation 6,101 5,124
Net change in accrued interest, other 7,004 (27,275)
assets and other liabilities
------------- ------------
Net cash provided by (used for) 26,236 (11,460)
operating activities
------------- ------------
Investing activities:
Collateral for collateralized bonds:
Fundings of loans subsequently securitized - (608,084)
Principal payments on collateral 193,514 67,116
Net change in funds held by trustees 751 3,056
------------- ------------
194,265 (537,912)
Net increase in loans held for securitization (122,824) (141,024)
Purchase of other portfolio assets (34,754) -
Payments on other portfolio assets 12,236 2,658
Purchase of mortgage securities (47,407) (22,606)
Payments on mortgage securities 20,094 108,003
Proceeds from sales of mortgage securities 3,454 -
Capital expenditures (1,575) (1,122)
------------- ------------
Net cash provided by (used for) 23,489 (592,003)
investing activities
------------- ------------
Financing activities:
Collateralized bonds:
Proceeds from issuance of securities - 583,023
Principal payments on securities (194,518) (53,032)
------------- ------------
(194,518) 529,991
Proceeds from borrowings, net 151,748 69,323
Proceeds from stock offerings, net 6,298 1,998
Dividends paid (16,234) (11,533)
------------- ------------
Net cash (used for) provided by (52,706) 589,779
financing activities
------------- ------------
Net decrease in cash (2,981) (13,684)
Cash at beginning of period 11,396 22,229
============= ============
Cash at end of period $ 8,415 $ 8,545
============= ============
Cash paid for interest $ 53,329 $ 52,749
============= ============
<FN>
See notes to unaudited consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
DYNEX CAPITAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997 (amounts in
thousands except share data)
NOTE 1--BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. The consolidated financial statements include the
accounts of Dynex Capital, Inc. (formerly Resource Mortgage Capital, Inc.), its
wholly-owned subsidiaries, and certain other entities. As used herein, the
"Company" refers to Dynex Capital, Inc. (Dynex) and each of the entities that is
consolidated with Dynex for financial reporting purposes. A portion of the
Company's operations are operated by taxable corporations that are consolidated
with Dynex for financial reporting purposes, but are not consolidated for income
tax purposes. All significant intercompany balances and transactions have been
eliminated in consolidation.
In the opinion of management, all material adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation of the
consolidated financial statements have been included. The Consolidated Balance
Sheets at March 31, 1997 and December 31, 1996, the Consolidated Statements of
Operations for the three months ended March 31, 1997 and 1996, the Consolidated
Statement of Shareholders' Equity for the three months ended March 31, 1997, the
Consolidated Statements of Cash Flows for the three months ended March 31, 1997
and 1996 and related notes to consolidated financial statements are unaudited.
Operating results for the three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. For further information, refer to the audited consolidated financial
statements and footnotes included in the Company's Form 10-K for the year ended
December 31, 1996.
Certain amounts for 1996 have been reclassified to conform with the presentation
for 1997.
NOTE 2--NET INCOME PER COMMON SHARE
Net income per common share as shown on the consolidated statements of
operations for the three months ended March 31, 1997 and 1996 is primary net
income per common share. Fully diluted net income per common share basis is not
presented as the dilutive effect of the Preferred Stock and Stock Appreciation
Rights was less than 3%. As a result of the two-for-one split of the Company's
common stock discussed in Note 8, the Company's Preferred Stock is convertible
into two shares of common stock for one share of Preferred Stock.
<PAGE>
NOTE 3--PORTFOLIO ASSETS
The Company has classified collateral for collateralized bonds and all mortgage
securities as available-for-sale. The following table summarizes the Company's
amortized cost basis and fair value of collateral for collateralized bonds and
mortgage securities held at March 31, 1997 and December 31, 1996, and the
related average effective interest rates (calculated excluding unrealized gains
and losses) for the month ended March 31, 1997 and December 31, 1996:
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<CAPTION>
- ----------------------------------------------------------------------------------
March 31, 1997 December 31, 1996
- ---------------------------------------------------------------------------------
Effective Effective
Fair Value Interest Rate Fair Value Interest Rate
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateral for
collateralized bonds:
Amortized cost $ 2,470,073 7.8% $ 2,668,633 7.9%
Allowance for losses (30,707 ) (31,732)
- -----------------------------------------------------------------------------------
Amortized cost, net 2,439,366 2,636,901
Gross unrealized gains 70,739 73,696
Gross unrealized losses (11,141 ) (8,303)
- -----------------------------------------------------------------------------------
$ 2,498,964 $ 2,702,294
- -----------------------------------------------------------------------------------
Mortgage securities:
Adjustable-rate $ 777,173 7.4% $ 780,259 6.9%
mortgage securities
Fixed-rate mortgage 21,609 9.2% 29,505 10.9%
securities
Other mortgage 119,183 17.5% 88,198 16.4%
securities
- -----------------------------------------------------------------------------------
917,965 897,962
Allowance for losses (4,874) (4,934)
- -----------------------------------------------------------------------------------
Amortized cost, net 913,091 893,028
Gross unrealized gains 24,002 23,591
Gross unrealized losses (25,120) (24,582)
- -----------------------------------------------------------------------------------
$ 911,973 $ 892,037
- -----------------------------------------------------------------------------------
</TABLE>
NOTE 4--GAIN ON SALE OF ASSETS
Mortgage securities with an aggregate principal balance of $3,284 were sold
during the three months ended March 31, 1997 for an aggregate net gain of $170.
The specific identification method is used to calculate the basis of mortgage
investments sold. Gain on sale of assets also includes premiums received of
$2,438 on $400,000 notional balance of call options written which expired
unexercised during the first quarter.
<PAGE>
NOTE 5--ADOPTION OF FINANCIAL ACCOUNTING STANDARDS
In January 1997, the Company adopted the Financial Accounting Standards Board
Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (FAS No. 125). FAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial components approach that focuses on control of the respective assets
and liabilities. It distinguishes transfers of financial assets that are sales
from transfers that are secured borrowings. FAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. The impact of adopting FAS No 125 did not
result in a material change to the Company's financial position and results of
operations.
NOTE 6 -- OTHER MATTERS
During the period from March 12, 1997 through March 31,1997, the Company issued
84,000 shares of its common stock, adjusted for the two-for-one stock split,
pursuant to a registration statement filed with the Securities and Exchange
Commission. The net proceeds from the issuance were approximately $1,256. The
Company also issued 376,314 shares of its common stock, adjusted for the
two-for-one stock split, pursuant to its dividend reinvestment program for net
proceeds of $5,057.
NOTE 7- CHANGE OF COMPANY NAME
Effective April 25, 1997, the Company changed its name from Resource
Mortgage Capital, Inc. to Dynex Capital, Inc.
NOTE 8 -- SUBSEQUENT EVENTS
At the annual meeting of shareholders, held on April 24, 1997, the shareholders
approved an amendment to the Articles of Incorporation to effect a two-for-one
split of the issued and outstanding shares of the Company's $0.01 par value
common stock to holders of record on May 5, 1997 and also to increase the number
of authorized shares of common stock to 100,000,000. As a result of the split,
approximately 21.2 million additional shares were issued. All references in
the accompanying financial statements to the number of shares for 1997 have
been restated to reflect the stock split. All references in the accompanying
financial statements to the per share amounts for 1996 and 1997 have also been
restated to reflect the stock split.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Summary
Dynex Capital, Inc. (the "Company") is a mortgage and consumer finance
company which uses its loan production operations to create investments for its
portfolio. Currently, the Company's primary loan production operations include
the origination of mortgage loans secured by multi-family properties and the
origination of loans secured by manufactured homes. During the first quarter,
the Company expanded its production sources by including other financial
products, such as commercial real estate loans. The Company will generally
securitize the loans funded as collateral for collateralized bonds, limiting its
credit risk and providing long-term financing for its portfolio. The Company has
elected to be treated as a real estate investment trust (REIT) for federal
income tax purposes and, as such, must distribute substantially all of its
taxable income to shareholders and will generally not be subject to federal
income tax.
The Company's principal source of earnings is net interest income on its
investment portfolio. The Company's investment portfolio consists principally of
collateral for collateralized bonds, adjustable-rate mortgage securities (ARM)
and loans held for securitization. The Company funds its portfolio investments
with both borrowings and cash raised from the issuance of equity. For the
portion of the portfolio investments funded with borrowings, the Company
generates net interest income to the extent that there is a positive spread
between the yield on the interest-earning assets and the cost of borrowed funds.
The cost of the Company's borrowings may be increased or decreased by interest
rate swap, cap or floor agreements. For the portion of the balance sheet that is
funded with equity, net interest income is primarily a function of the yield
generated from the interest-earning asset.
Business Focus and Strategy
The Company's overall level of earnings is dependent upon (i) the spread
between interest earned on its investment portfolio, and the cost of borrowed
funds to finance those assets; and (ii) the aggregate amount of interest-earning
assets that the Company has on its balance sheet. The Company strives to create
a diversified portfolio of 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. In many instances, the Company's
investment strategy has involved not only the creation or acquisition of the
asset, but also structuring the related borrowings through the securitization
process to create a stable yield profile.
Investment Portfolio Strategies
The Company adheres to the following business strategies in managing its
investment portfolio:
use of its loan origination capabilities to provide assets for its
investment portfolio, generally at a lower effective cost than if
investments of comparable risk profiles where purchased in the secondary
market;
securitization of its loan production to provide long-term financing and
to reduce the Company's liquidity, interest rate and credit risk for these
long-term assets;
utilization of leverage to finance purchases of loans and investments in
line with prudent capital allocation guidelines which are designed to
balance the risk in certain assets, thereby increasing potential returns
to shareholders while seeking to protect the Company's equity base;
structuring borrowings to have interest rate adjustment indices and
interest rate adjustment periods that, on an aggregate basis, generally
correspond (within a range of one to six months) to the interest rate
adjustment indices and interest rate adjustment periods of the related
asset; and
utilization of interest rate caps, swaps and similar instruments and
securitization vehicles with such instruments embodied in the structure to
mitigate the risk of the cost of its variable rate liabilities increasing
at a faster rate than the earnings on its assets during a period of rising
interest rates.
Lending Strategies
The Company generally adheres to the following business strategies in its
lending operations:
developing loan production capabilities to originate and acquire
financial assets in order to create attractively priced investments for its
portfolio, generally at a lower cost than if investments with comparable
risk profiles were purchased in the secondary market;
focusing on loan products that maximize the advantages of the REIT tax
election;
emphasizing direct relationships with the borrower and minimize, to
the extent practical, the use of origination intermediaries; using
internally generated guidelines to underwrite loans for all product types
and maintain centralized loan pricing;
performing the servicing function for loans on which the Company has
credit exposure; emphasize the use of early intervention, aggressive
collection and loss mitigation techniques in the servicing process to
manage and seek to reduce delinquencies and to minimize losses in its
securitized loan pools; and
vertical integration of the loan origination process by performing the
sourcing, underwriting, funding and servicing of loans to maximize
efficiency and provide superior customer service.
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RESULTS OF OPERATIONS
- -------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------
(amounts in thousands except per share 1997 1996
information)
-----------------------
<S> <C> <C>
Net interest margin $ 20,630 $ 17,819
Gain on sale of assets, net of associated costs 2,487 201
General and administrative expenses 5,219 5,951
Net income 18,310 12,685
Primary net income per common share (1) 0.35 0.26
Principal balance of fundings through the 175,146 767,630
production operations
Dividends declared per share:
Common (1) $ 0.325 $ 0.255
Series A Preferred 0.650 0.585
Series B Preferred 0.650 0.585
Series C Preferred 0.730 -
- ---------------------------------------------------------------------------
<FN>
(1) Adjusted for two-for-one common stock split.
</FN>
</TABLE>
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996.
The increase in the Company's earnings during the three months ended March 31,
1997 as compared to the same period in 1996 is primarily the result of the
increase in net interest margin. In addition, the increase can also be partially
attributed to the increased gain on sale of assets and reduction in general and
administrative expenses.
Net interest margin for the three months ended March 31, 1997 increased to
$20.6 million, or 16%, over the $17.8 million for the same period for 1996. This
increase was the result of the increased contribution from the net investment in
collateralized bonds issued during 1996 and the increase in other mortgage
securities during the past several quarters. These increases were partially
offset by a decrease in the contribution from ARM securities as a result
of securitizing several of the ARM securities in a collateralized bond issued
in September 1996.
The gain on sale of assets increased to a net $2.5 million for the three
months ended March 31, 1997, from $0.2 million for the three months ended March
31, 1996. The increase in the net gain is primarily the result of premiums
received of $2.4 million on $400 million notional call options which expired
unexercised during the first quarter. In addition, the Company sold certain
investments during the three months ended March 31, 1997, which generated a gain
of $0.2 million. During the three months ended March 31, 1996, the Company did
not sell any of its investments.
General and administrative expenses decreased $0.7 million, or 12%, to $5.2
million for the three months ended March 31, 1997 as compared to the same period
for 1996. The decrease is a result of the sale of single-family operations on
May 13, 1996 offset partially by the growth in the current production
operations. General and administrative expenses should increase on a quarter by
quarter basis during 1997 as the Company continues to build its production
infrastructure.
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.
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<TABLE>
<CAPTION>
Average Balances and Effective Interest Rates
- ---------------------------------------------------------------------------------------
Three Months Ended March 31,
--------------------------------------------------
(amounts in thousands) 1997 1996
------------------------- ------------------------
Average Effective Average Effective
Balance Rate Balance Rate
------------------------- ------------------------
<S> <C> <C> <C> <C>
Interest-earning assets : (1)
Collateral for collateralized 2,500,179 7.75 % $ 1,079,600 8.71 %
bonds (2) (3)
Adjustable-rate mortgage 774,059 7.36 1,987,569 6.83
securities
Fixed-rate mortgage securities 27,231 9.22 39,855 9.68
Other mortgage securities 111,575 17.22 62,418 10.63
Other portfolio assets 99,010 9.54 25,680 10.43
Loans held for securitization 310,424 8.45 551,227 8.30
------------ ------- ----------- -------
Total interest-earning 3,822,478 8.06 % $ 3,746,349 7.70 %
============= ======= ============= =======
Interest-bearing liabilities:
Collateralized bonds (3) 2,382,985 6.43 % $ 1,028,572 6.57 %
Repurchase agreements:
Adjustable-rate mortgage 718,665 6.15 1,917,513 5.65
securities
Fixed-rate mortgage 26,471 5.72 25,528 5.77
securities
Other mortgage securities 10,428 5.83 7,382 5.74
Loans held for 31,561 5.95 362,231 6.10
securitization
Notes payable:
Other portfolio assets 13,776 7.93 547 5.85
Loans held for 156,740 5.11 84,027 6.03
securitization
============= ====== ============= =======
Total interest-bearing 3,340,626 6.30 % $ 3,425,800 5.99 %
liabilities
============= ======= ============= =======
Net interest spread on all investments 1.76 % 1.71 %
======= =======
Net yield on average 2.56 % 2.23 %
interest-earning assets
======= =======
--------------------------------------------------------------------------------------
<FN>
(1) Average balances exclude adjustments made in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" to record available-for-sale securities at
fair value.
(2) Average balances exclude funds held by trustees of $2,285 and
$3,168 for the three months ended March 31, 1997 and March 31, 1996,
respectively.
(3) Effective rates are calculated excluding non-interest related
collateralized bond expenses and provision for credit losses.
</FN>
</TABLE>
The slight increase in net interest spread for the three months ended March
31, 1997 relative to the same period in 1996 is primarily the result of the
increased spread on the other mortgage securities and to a lesser extent ARM
securities, offset by a decrease in the net spread on both net investment in
collateralized bonds (defined as collateral for collateralized bonds less
collateralized bonds) and other portfolio assets. The Company's overall yield on
interest-earning assets increased to 8.06% for the three months ended March 31,
1997 from 7.70% for the same period in 1996. The weighted average borrowing
costs also increased to 6.30% for the three months ended March 31, 1997 from
5.99% for the three months ended March 31, 1996. During the first part of 1996,
the net interest spread temporarily benefited by the declining short-term
interest rate environment, which had the impact of reducing the Company's
borrowing costs faster than it reduced the yields on the Company's
interest-earning assets. After remaining fairly stable during most of the first
quarter 1997, short-term interest rates rose by approximately 25 basis points at
the end of the quarter.
Individually, the net interest spread on collateralized bonds decreased 82
basis points, from 214 basis points for the three months ended March 31, 1996,
to 132 basis points for the three months ended March 31, 1997. This decline was
primarily due to the securitization of lower coupon collateral, principally A+
quality single-family mortgage loans. In addition, the spread on the net
investment in collateralized bonds decreased due to higher premium amortization
during the first quarter 1997 due to higher prepayments. The net interest spread
on ARM securities increased 3 basis points, from 118 basis points for the three
months ended March 31, 1996, to 121 basis points during the same period in 1997.
The net interest spread on other mortgage securities increased to 1,139 basis
points for the three months ended March 31, 1997 from 489 basis points for the
three months ended March 31, 1996. This increase is due to the purchase of $38
million of residual trusts during the three months ended March 31, 1997. The net
interest spread on other portfolio assets decreased 297 basis points, from 458
basis points from the three months ended March 31, 1996, to 161 basis points for
the three months ended March 31, 1997. This decrease in net interest spread is
due to the inclusion in 1997 of the $38 million note receivable from the 1996
sale of the Company's single-family operations which has a 6.5% fixed interest
rate, plus higher borrowing costs associated with the Company's model home
purchase and lending business.
PORTFOLIO RESULTS
The core of the earnings is derived from its investment portfolio. The
Company's investment strategy is to create a diversified portfolio of securities
that in the aggregate generate stable income in a variety of interest rate and
prepayment rate environments and preserves the capital base of the Company. The
Company has pursued its strategy of concentrating on its production activities
to create investments with attractive yields. In many instances, the Company's
investment strategy has involved not only the creation or acquisition of the
asset, but also structuring the related borrowings through the securitization
process to create a stable yield profile.
Approximately $3.2 billion of the Company's investment portfolio as of March
31, 1997 are comprised of loans or securities that have coupon rates which
adjust over time (subject to certain periodic and lifetime limitations) in
conjunction with changes in short-term interest rates. Generally, during a
period of rising interest rates, the Company's net interest spread earned on its
investment portfolio will decrease. The decrease of the net interest spread
results from (i) the lag in resets of the ARM loans underlying the ARM
securities and collateral for collateralized bonds relative to the rate resets
on the associated borrowings and (ii) rate resets on the ARM loans which are
generally limited to 1% every six months, while the associated borrowings have
no such limitation. As interest rates stabilize and the ARM loans reset, the net
interest margin may be restored to its former level as the yields on the ARM
loans adjust to market conditions. Conversely, net interest margin may increase
following a fall in short-term interest rates. This increase may be temporary as
the yields on the ARM loans adjust to the new market conditions after a lag
period. In each case, however, the Company expects that the increase or decrease
in the net interest spread due to changes in the short-term interest rates to be
temporary. The net interest spread may also be increased or decreased by the
cost or proceeds of interest rate swap, cap or floor agreements.
Interest Income and Interest-Earning Assets
The Company's average interest-earning assets were $3.8 billion during the
three months ended March 31, 1997, an increase of 2% from $3.7 billion of
average interest-earning assets during the same period of 1996. Total interest
income rose 7%, from $72.2 million for the three months ended March 31, 1996 to
$77.1 million for the same period of 1997. Overall, the yield on
interest-earning assets rose to 8.06% for the three months ended March 31, 1997
from 7.70% for the three months ended March 31, 1996, as the investment in
higher yielding assets grew. On a quarter to quarter basis, average
interest-earning assets for the quarter ended December, 1996 were $4.3 billion
versus $3.8 billion for the quarter ended March 31, 1997. This decrease in
average interest-earnings assets was the result of higher prepayments speeds
during the first quarter of 1997 in the investment portfolio and the sale of
approximately $400 million of ARM securities in December 1996. Total interest
income for the quarter ended December 31, 1996 was $83.2 million versus $77.1
million for the quarter ended March 31, 1997. The decrease was due to the lower
average interest-earning assets. As indicated in the table below, average yields
for these periods were 7.72% and 8.06%, respectively, which were 2.12% and 2.37%
higher than the average daily London InterBank Offered Rate (LIBOR) for
six-month deposits (six-month LIBOR) during those periods. The majority of the
ARM loans underlying the Company's ARM securities and collateral for
collateralized bonds are indexed to and reset based upon the level of six-month
LIBOR. As a result of the six-month LIBOR daily average increasing during the
first quarter of 1997, the Company expects that the yield on the ARM loans
underlying the ARM securities and certain collateral for collateralized bonds
will trend upward during the second and third quarter since the majority of the
ARM loans underlying the Company's ARM securities and collateral for
collateralized bonds reset generally every six months and on a one-to-two month
lag.
<PAGE>
<TABLE>
<CAPTION>
Earning Asset Yield
($ in millions)
- --------------------- --------------- - ------------ -- -------------- --- ---------------- -----------------
Average Daily Asset
Interest- Average Average Yield versus
Earning Interest Asset Month Six Month
Assets Income Yield LIBOR LIBOR
- --------------------- --------------- - ------------ -- -------------- --- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
1995, Quarter 1 $ 3,406.9 $ 60.8 7.14% 6.60% 0.54%
1995, Quarter 2 3,181.4 61.3 7.71% 6.14% 1.57%
1995, Quarter 3 3,450.4 66.8 7.74% 5.89% 1.85%
1995, Quarter 4 3,360.8 64.5 7.67% 5.75% 1.92%
1996, Quarter 1 3,746.3 72.1 7.70% 5.34% 2.36%
1996, Quarter 2 4,164.8 78.3 7.52% 5.64% 1.88%
1996, Quarter 3 4,106.5 78.4 7.64% 5.80% 1.84%
1996, Quarter 4 4,308.6 83.2 7.72% 5.60% 2.12%
1997, Quarter 1 3,822.5 77.1 8.06% 5.69% 2.37%
- --------------------- --- ----------- -- ----------- -- -------------- --- ---------------- -----------------
</TABLE>
The net yield on average interest-earning assets increased to 2.56% for the
three months ended March 31, 1997, compared to 2.25% for the three months ended
December 31, 1996 and 2.23% for the three months ended March 31, 1996. The
increase from the three months ended December 31, 1996 is principally due to the
increase in the spread earned on the interest-earning assets. The increase from
the three months ended March 31, 1996 is due to the increased investment in
higher yielding assets. The net yield percentages presented below exclude
non-interest collateralized bonds expenses such as provision for credit losses,
and interest on senior notes payable. For the three months ended March 31, 1997,
if these expenses were included, the net yield on average interest-earning
assets would be 2.16%.
<TABLE>
<CAPTION>
Net Yield on Average Interest-Earning Assets
($ in millions)
- -------------------------- ---------------------- -- -------------------- -- -----------------
Net Yield
Average Interest- Average Interest- Net Average
Earning Assets Earning Assets Assets (1)
- -------------------------- ---------------------- -- -------------------- -- -----------------
<S> <C> <C> <C>
1995, Quarter 1 $ 3,406.9 1.23% $ 3,259.8
1995, Quarter 2 3,181.4 1.60% 3,036.6
1995, Quarter 3 3,450.4 1.74% 3,031.5
1995, Quarter 4 3,360.8 2.00% 2,800.4
1996, Quarter 1 3,746.3 2.23% 2,757.5
1996, Quarter 2 4,164.8 2.11% 2,937.9
1996, Quarter 3 4,106.5 2.21% 2,734.3
1996, Quarter 4 4,308.6 2.25% 2,333.5
1997, Quarter 1 3,822.5 2.56% 2,033.9
- -------------------------- -- ------------------- -- -------------------- -- -----------------
<FN>
(1) Average interest-earning assets less non-recourse collateralized bonds.
</FN>
</TABLE>
<PAGE>
The average asset yield is reduced for the amortization of premium on the
Company's investment portfolio. By creating its investments through its
production operations, the Company believes that premium amounts are less than
if the investments were acquired in the market. As indicated in the table below,
premiums on the Company's ARM securities, fixed-rate securities and collateral
for collateralized bonds at March 31, 1997 were $50.2 million, or approximately
1.58% of the aggregate investment portfolio balance. The mortgage principal
repayment rate for the Company (indicated in the table below as "CPR Annualized
Rate") was 29% for the three months ended March 31, 1997. The Company expects
that the long-term prepayment speeds will range between 24% and 28%. The CPR for
the first quarter of 1997 is currently within this range and the Company expects
it will remain within this range for the second quarter of 1997. CPR stands for
"constant prepayment rate" and is a measure of the annual prepayment rate on a
pool of loans.
<TABLE>
<CAPTION>
Premium Basis and Amortization
($ in millions)
- ---------------------------------------------------------------------------------------------------------------------
Ending Amortization
CPR Investment Expense as a %
Net Premium Amortization Annualized Principal of Average
(Discount) Expense Rate Balance (2) Assets
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995, Quarter 1 $ 26.6 $ 1.0 (1) $ 2,454.2 0.12%
1995, Quarter 2 23.7 1.6 (1) 2,432.5 0.21%
1995, Quarter 3 35.3 2.5 (1) 2,705.0 0.30%
1995, Quarter 4 39.3 2.8 (1) 2,772.9 0.33%
1996, Quarter 1 49.3 3.2 30% 3,214.4 0.34%
1996, Quarter 2 56.0 4.0 28% 3,557.7 0.38%
1996, Quarter 3 60.8 2.8 19% 3,808.3 0.28%
1996, Quarter 4 54.1 3.7 24% 3,379.0 0.34%
1997, Quarter 1 50.2 3.8 29% 3,176.9 0.40%
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) CPR rates were not available for those periods.
(2) Includes only collateral for collateralized bonds, ARM securities and fixed-rate securities.
</FN>
</TABLE>
<PAGE>
Interest Expense and Cost of Funds
The Company's largest expense is the interest cost on borrowed funds. Funds
to finance the investment portfolio are generally borrowed in the form of
collateralized bonds or repurchase agreements, both of which are primarily
indexed to one-month LIBOR. For the three-month period ended March 31, 1997 as
compared to the same period in 1996, interest expense increased to $52.6 million
from $51.3 million while the average cost of funds increased to 6.30% compared
to 5.99%. The increased cost of funds for the first quarter of 1997 compared to
the first quarter of 1996 was due primarily to increased cost of funds for both
other portfolio assets and ARM securities. On a quarter to quarter basis, the
cost of funds rose from 6.16% for the three months ended December 31, 1996, to
6.30% for the three months ended March 31, 1997, which was due primarily to the
increased cost of funds on collateralized bonds. The Company may use interest
rate swaps, caps and financial futures to manage its interest rate risk. The net
cost of these instruments is included in the cost of funds table below as a
component of interest expense for the period to which it relates.
<TABLE>
<CAPTION>
Cost of Funds
($ in millions)
- ----------------------------------------------------------------------------------------
Average Cost Average
Borrowed Interest of One-month
Funds Expense (1) Funds LIBOR
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995, Quarter 1 $ 3,058.1 $ 50.3 6.58% 6.06%
1995, Quarter 2 2,906.1 48.5 6.68% 6.08%
1995, Quarter 3 3,159.7 51.0 6.46% 5.88%
1995, Quarter 4 3,025.3 47.6 6.30% 5.86%
1996, Quarter 1 3,425.8 51.3 5.99% 5.43%
1996, Quarter 2 3,735.8 56.4 6.04% 5.45%
1996, Quarter 3 3,667.9 55.7 6.07% 5.46%
1996, Quarter 4 3,825.1 59.0 6.16% 5.46%
1997, Quarter 1 3,340.6 52.6 6.30% 5.46%
- ----------------------------------------------------------------------------------------
<FN>
(1) Excludes non-interest collateralized bond-related expenses and interest on
non-portfolio related notes payable
</FN>
</TABLE>
Interest Rate Agreements
As part of its asset/liability management process, the Company enters into
interest rate agreements such as interest rate caps and swaps and financial
futures contracts. These agreements are used to reduce interest rate risk which
arises from the lifetime yield caps on the ARM securities, the mismatched
repricing of portfolio investments versus borrowed funds, and finally, assets
repricing on indices such as the prime rate which differ from the related
borrowing indices. The agreements are designed to protect the portfolio's cash
flow, and to provide income and capital appreciation to the Company in the event
that short-term interest rates rise quickly.
<PAGE>
The following table includes all interest rate agreements in effect as of the
various quarter ends for asset/liability management of the investment portfolio.
This table excludes all interest rate agreements in effect for the Company's
production operations. Generally, interest rate swaps and caps are used to
manage the interest rate risk associated with assets that have periodic and
annual interest rate reset limitations financed with borrowings that have no
such limitations. Financial futures contracts and options on futures are used to
lengthen the terms of repurchase agreement financing, generally from one month
to three and six months. Amounts presented are aggregate notional amounts. To
the extent any of these agreements are terminated, gains and losses are
generally amortized over the remaining period of the original agreement.
<TABLE>
<CAPTION>
Instruments Used for Interest Rate Risk Management Purposes (1)
($ in millions)
- ---------------------------------------------------------------------------------------------------
Interest Interest Financial Options
Notional Amounts Rate Caps Rate Swaps Futures on Futures
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995, Quarter 1 $ 1,475 $ 200 $ - $ -
1995, Quarter 2 1,475 200 1,000 500
1995, Quarter 3 1,475 220 1,000 500
1995, Quarter 4 1,575 1,227 1,000 2,130
1996, Quarter 1 1,575 1,631 1,000 1,250
1996, Quarter 2 1,575 1,559 400 880
1996, Quarter 3 1,499 1,480 1,550 -
1996, Quarter 4 1,499 1,453 - -
1997, Quarter 1 1,499 1,427 - -
- ---------------------------------------------------------------------------------------------------
<FN>
(1) Excludes all interest rate agreements in effect for the Company's production operations.
</FN>
</TABLE>
<PAGE>
Net Interest Rate Agreement Expense
The net interest rate agreement expense, or hedging expense, equals the cost
of the agreements, net of any benefits received from these agreements. For the
quarter ended March 31, 1997, net hedging expense amounted to $2.65 million
versus $2.67 million and $1.63 million for the quarters ended December 31, 1996
and March 31, 1996, respectively. The increase in hedging expense for the
quarter ended March 31, 1997 compared to March 31, 1996, relates to costs on
financial futures used to lengthen repurchase agreement maturities during the
quarter. Such amounts exclude the hedging costs and benefits associated with the
Company's production activities as these amounts are deferred as additional
premium or discount on the loans funded and amortized over the life of the loans
as an adjustment to their yield.
<TABLE>
<CAPTION>
Net Interest Rate Agreement Expense
($ in millions)
- ---------------------------------------------------------------------------------------------------
Net Expense as
Net Expense Percentage of
Net Interest as Percentage Average
Rate Agreement of Average Borrowings
Expense Assets (annualized) (annualized)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995, Quarter 1 $ 1.38 0.160% 0.180%
1995, Quarter 2 1.30 0.163% 0.179%
1995, Quarter 3 0.86 0.100% 0.109%
1995, Quarter 4 0.16 0.018% 0.020%
1996, Quarter 1 1.63 0.174% 0.191%
1996, Quarter 2 1.02 0.100% 0.110%
1996, Quarter 3 1.29 0.126% 0.141%
1996, Quarter 4 2.67 0.248% 0.280%
1997, Quarter 1 2.65 0.277% 0.317%
- ---------------------------------------------------------------------------------------------------
</TABLE>
Fair Value
The fair value of the available-for-sale portion of the Company's investment
portfolio as of March 31, 1997, as measured by the net unrealized gain on
investments available-for-sale, was $58.5 million above its cost basis, which
represents a $44.9 million improvement from March 31, 1996. At March 31, 1996,
the fair value of the available-for-sale portion of the Company's investment
portfolio was above its amortized cost by $13.6 million. This increase in the
portfolio's value is primarily attributable to the increase in the value of the
collateral for collateralized bonds relative to the collateralized bonds issued
during the last twelve months, as well as an increase in value of the Company's
ARM securities due principally to the ARM securities becoming fully indexed
during 1996. The portfolio also benefited from the reduction in amortized cost
basis of its investments through additional provision for losses. The fair value
of the available-for-sale portion of the Company's investment portfolio at March
31, 1997, decreased $5.9 million from the fair value at December 31, 1996, which
was $64.4 million above the amortized cost of its investment portfolio. This
decrease was primarily the result of the increase in interest rates during the
quarter and the increase in prepayment speeds for the Company's collateral for
collateralized bonds.
<PAGE>
Credit Exposures
The Company has historically securitized its loan production in
collateralized bonds or pass-through securitization structures. With either
structure, the Company may use overcollateralization, subordination, reserve
funds, bond insurance, mortgage pool insurance or any combination of the
foregoing for credit enhancement. Regardless of the form of credit enhancement,
the Company may retain a limited portion of the direct credit risk after
securitization. This risk can include risk of loss related to hazards not
covered under standard hazard insurance policies and credit risks on loans not
covered by standard borrower mortgage insurance, or pool insurance.
Beginning in 1994, the Company issued pass-through securities which used
subordination structures as their form of credit enhancement. The credit risk of
subordinated pass-through securities is concentrated in the subordinated classes
(which may themselves partially be credit enhanced with reserve funds or pool
insurance) of the securities, thus allowing the senior classes of the securities
to receive the higher credit rating. To the extent credit losses are greater
than expected (or exceed the protection provided by any reserve funds or pool
insurance), the holders of the subordinated securities will experience a lower
yield (which may be negative) than expected on their investments. At March 31,
1997, the Company retained $18.4 million in aggregate principal amount of
subordinated securities, which are carried at a book value of $1.7 million,
reflecting such potential credit loss exposure.
With collateralized bond structures, the Company also retains credit risk
relative to the amount of overcollateralization required in conjunction with the
bond insurance. Losses are generally first applied to the overcollateralization
amount, with any losses in excess of that amount borne by the bond insurer or
the holders of the collateralized bonds. The Company only incurs credit losses
to the extent that losses are incurred in the repossession, foreclosure and sale
of the underlying collateral. Such losses generally equal the excess of the
principal amount outstanding, less any proceeds from mortgage or hazard
insurance, over the liquidation value of the collateral. To compensate the
Company for retaining this loss exposure, the Company generally receives an
excess yield on the collateralized loans relative to the yield on the
collateralized bonds. At March 31, 1997, the Company retained $87.2 million in
aggregate principal amount of overcollateralization, and had reserves, or
otherwise had provided coverage on $61.0 million of the potential credit loss
exposure. This reserve includes a provision recorded as a result of the sale of
the single-family operations of approximately $31.0 million for possible losses
on securitized single-family loans where the Company, which performed the
servicing of such loans prior to the sale, has retained a portion of the credit
risk on these loans. Also, as a result from the sale of the single-family
operations, a $30.3 million loss reimbursement guarantee from Dominion Mortgage
Services, Inc. has been included in the reserves at March 31, 1997.
The Company principally used pool insurance as its means of credit
enhancement for years prior to 1994. Pool insurance has generally been
unavailable as a means of credit enhancement since the beginning of 1994. Pool
insurance covered substantially all credit risk for the security with the
exception of fraud in the origination or certain special hazard risks. Loss
exposure due to special hazards is generally limited to an amount equal to a
fixed percentage of the principal balance of the pool of mortgage loans at the
time of securitization. Fraud in the origination exposure is generally limited
to those loans which default within one year of origination. The reserve for
potential losses on these risks was $6.5 million at March 31, 1997, which the
Company believes represents its maximum exposure from these risks.
The following table summarizes the aggregate principal amount of collateral
for collateralized bonds and pass-through securities outstanding which are
subject to credit exposure; the maximum credit exposure held by the Company
represented by the amount of overcollateralization and first loss securities
owned by the Company; the credit reserves available to the Company for such
exposure through provision for losses; indemnifications or insurance and the
actual credit losses incurred. The table excludes reserves and losses due to
fraud and special hazard exposure. Additionally, for purposes of this table, the
aggregate principal amount of subordinated securities held by the Company are
included in the Maximum Credit Exposure column, with the difference between this
amount and the carrying amount of these securities as reported in the Company's
consolidated financial statements included in Credit Reserves.
<PAGE>
<TABLE>
<CAPTION>
Credit Reserves and Actual Credit Losses
($ in millions)
- -----------------------------------------------------------------------------------------------------------------
Credit Credit Reserves
Outstanding Maximum Credit Actual Credit Reserves to to Maximum
Loan Balance Exposure Credit Losses Average Assets Credit Exposure
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995, Quarter 2 $ 2,435 $ 49.6 $ 14.6 $ - 0.46% 29.44%
1995, Quarter 3 2,462 51.3 16.4 - 0.48% 31.97%
1995, Quarter 4 2,504 65.9 18.5 - 0.55% 28.07%
1996, Quarter 1 2,888 79.2 19.3 - 0.52% 24.37%
1996, Quarter 2 3,131 106.7 79.0 1.1 1.90% 74.04%
1996, Quarter 3 3,919 109.5 80.0 2.0 1.95% 73.06%
1996, Quarter 4 3,848 116.0 86.0 2.1 2.00% 74.14%
1997, Quarter 1 3,583 114.0 84.4 2.6 2.21% 74.01%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes the single-family mortgage loan delinquencies
as a percentage of the outstanding loan balance for the total collateral for
collateralized bonds and pass-through securities outstanding where the Company
has retained a portion of the credit risk either through holding a subordinated
security or through overcollateralization. There were no delinquencies on any
multi-family loans where the Company has retained a portion of the credit risk
either through holding a subordinated security or through overcollateralization.
As of March 31, 1997, the Company believes that its credit reserves are
sufficient to cover any losses which may occur as a result of current
delinquencies presented in the table below.
<TABLE>
<CAPTION>
Delinquency Statistics
- -----------------------------------------------------------------------------------------------------
60 to 90 days 90 days and over delinquent
days delinquent (includes REO and foreclosures) Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995, Quarter 2 0.54% 1.24% 1.78%
1995, Quarter 3 0.78% 1.77% 2.55%
1995, Quarter 4 2.50% 3.23% 5.73%
1996, Quarter 1 0.90% 2.95% 3.85%
1996, Quarter 2 1.91% 3.47% 5.38%
1996, Quarter 3 0.73% 3.01% 3.74%
1996, Quarter 4 0.88% 3.40% 4.28%
1997, Quarter 1 0.95% 4.16% 5.11%
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The following table summarizes the credit rating for investments held in the
Company's portfolio assets. This table excludes the Company's other mortgage
securities (as the risk on such securities is prepayment-related, not
credit-related) and other portfolio assets. In preparing the table, the carrying
balances of the investments rated below A are net of credit reserves and
discounts. The average credit rating of the Company's mortgage investments at
the end of the first quarter of 1997 was AAA. At March 31, 1997, securities with
a credit rating of AA or better were $3.2 billion, or 99.1% of the Company's
total mortgage investments compared to 99.1% and 96.5% at December 31, 1996 and
March 31, 1996, respectively. At the end of the first quarter 1997, $469.7
million of all mortgage investments were split rated between rating agencies.
Where investments were split-rated, for purposes of this table, the Company
classified such investments based on the higher credit rating.
<TABLE>
<CAPTION>
Portfolio Assets by Credit Rating (1)
($ in millions)
- -------------------- -- ---------- --- ---------- -- ---------- --- ---------- ----------- ----------- --------- -----------
AAA AA A Carrying Below A AAA Percent AA Percent A Percent Below A
Carrying Carrying Value Carrying of Total of Total of Total Percent
Value Value Value of Total
- -------------------- -- ---------- --- ---------- -- ---------- --- ---------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996, Quarter 1 $ 2,487.3 $ 943.1 $ 64.2 $ 60.6 70.0% 26.5% 1.8% 1.7%
1996, Quarter 2 2,935.2 914.0 63.6 28.7 74.5% 23.2% 1.6% 0.7%
1996, Quarter 3 3,333.3 766.4 17.1 31.1 80.3% 18.5% 0.4% 0.8%
1996, Quarter 4 2,708.4 752.8 - 29.9 77.5% 21.6% - 0.9%
1997, Quarter 1 2,504.1 739.4 - 29.4 76.5% 22.6% - 0.9%
- -------------------- -- ---------- --- ---------- -- ---------- --- ---------- ----------- ----------- --------- -----------
<FN>
(1) Excludes other mortgage securities and other portfolio assets.
</FN>
</TABLE>
Purchase, Securitization and Sale of Portfolio Assets
During the three months ended March 31, 1997, the Company sold various
portfolio investments due to favorable market conditions. The aggregate
principal amount of investments sold during the three months ended March 31,
1997 was $3.3 million, consisting primarily of other mortgage securities, which
resulted in gains of $0.2 million. Also during the three months ended March 31,
1997, the Company exercised its call right or otherwise purchased $7.8 million
of ARM securities, $1.4 million of fixed-rate mortgage securities and $38.1
million of other mortgage securities.
PRODUCTION ACTIVITIES
Since the sale of its single-family mortgage operations to Dominion in 1996,
the Company's primary production operations have been focused on multi-family
and manufactured housing lending. During the first quarter of 1997, the Company
broadened its multi-family lending capabilities to include other types of
commercial real estate loans including commercial industrial warehouse
properties. Future commercial lending efforts may include apartment properties
which have not received low-income housing tax credits, assisted living and
retirement housing, limited and full service hotels, urban and suburban office
buildings, retail shopping strips and centers, other light industrial buildings
and manufactured housing parks. The Company has also expanded its manufactured
housing lending during the first quarter of 1997 to include inventory financing
to manufactured housing dealers. In addition to these production sources, the
Company may also purchase single-family loans on a "bulk" basis from time to
time and may originate such loans on a retail basis.
The purpose of the Company's production operations is to enhance the return
on shareholders' equity (ROE) by earning a favorable net interest spread while
loans are being accumulated for securitization or sale and creating investments
for its portfolio through the securitization process at a lower cost than if
such investments were purchased from third parties. The creation of such
investments generally involves the issuance of collateralized bonds or
pass-through securities collateralized by the loans generated from the Company's
production activities, and the retention of one or more classes of the
securities or collateralized bonds relating to such issuance. The issuance of
collateralized bonds and pass-through securities generally limits the Company's
credit and interest rate risk in contrast to retaining loans in its portfolio in
whole-loan form.
When a sufficient volume of loans is accumulated, the Company generally
securitizes the loans through the issuance of collateralized bonds or
pass-through securities. The Company believes that securitization is an
efficient and cost effective way for the Company to (i) reduce capital otherwise
required to own the loans in whole loan form; (ii) limit the Company's exposure
to credit risk on the loans; (iii) lower the overall cost of financing the
loans; and (iv) depending on the securitization structure, limit the Company's
exposure to interest rate and/or valuation risk. As a result of the reduction in
the availability of mortgage pool insurance, and the Company's desire to both
reduce its recourse borrowings as a percentage of its overall borrowings, as
well as the variability of its earnings, the Company has utilized the
collateralized bond structure for securitizing substantially all of its loan
production since the beginning of 1995.
The following table summarizes the production activity for the three month
periods ended March 31, 1997 and 1996.
<TABLE>
<CAPTION>
Production Activity
($ in thousands)
- -------------------------------------------------------------
Three Months Ended
March 31,
---------------------------
1997 1996
---------- ---------------
<S> <C> <C>
Multi-family $ 8,063 $ 11,121
Commercial 4,613 -
Manufactured housing 29,240 -
Single-family 98,144 756,431
Specialty finance 35,086 78
======== ============
Total principal amount of
fundings through the $ 175,146 $ 767,630
production operations
======== ============
Principal amount securitized $ - $ 595,387
or sold
======== ============
- -------------------------------------------------------------
</TABLE>
Manufactured housing lending commenced during the second quarter of 1996.
Since commencement, the Company has opened five regional offices in North
Carolina, Georgia, Texas, Michigan and Washington. As of March 31, 1997, the
Company had $67.1 million in principal balance of manufactured housing loans in
inventory, and had commitments outstanding of approximately $71.6 million.
Principally all funding volume to date has been obtained through relationships
with manufactured housing dealers and, to a lesser extent, through direct
marketing to consumers. In the future, the Company plans to expand its sources
of origination to nearly all sources for manufactured housing loans by
establishing relationships with park owners, developers of manufactured housing
communities, manufacturers of manufactured homes, brokers and correspondents.
Once certain volume levels are achieved at a particular region, district offices
may be opened in an effort to further market penetration. The first district
office is expected to be opened in the third quarter of 1997.
As of March 31, 1997, the Company had $220.5 million in principal balance
of multi-family loans held for securitization. The Company funded $8.1 million
in multi-family loans during the three months ended March 31, 1997 compared to
$60.4 million for the three months ended December 31, 1996 and $11.1 million for
the three months ended March 31, 1996. The lower funding volume for the first
quarter of 1997 compared to the fourth quarter of 1996 is due to longer than
expected lease-up periods and construction delays. Principally all fundings are
under the Company's lending programs for properties that have been allocated low
income housing tax credits. As of March 31, 1997 commitments to fund
multi-family loans over the next 20 months were approximately $516.6 million.
The Company expects that it will have funded volume sufficient enough to
securitize a portion of its multi-family loans in the second half of 1997
through the issuance of collateralized bonds. The Company will retain a portion
of the credit risk after securitization and intends to continue servicing the
loans.
As previously mentioned, during the first quarter of 1997 the Company
expanded its production operations to include commercial loans. The Company
funded $4.6 million of commercial loans during the first quarter. These
commercial loans will be securitized with the Company's multi-family production.
Included in the first quarter specialty finance fundings are $33.1 million
of model homes purchased from home builders which were simultaneously leased
back to the builders. The terms of these leases are generally twelve to eighteen
months at lease rates of typically one-month LIBOR plus a spread. At the end of
each lease, the Company will sell the home. As of March 31, 1997, the Company
had leases on $66.3 million of model homes, and had otherwise provided financing
to home builders for model homes for an additional $13.0 million.
Additionally, during the first quarter of 1997, the Company purchased $98
million of single-family loans through two bulk purchases. This is compared to
$409 million purchased during the first quarter of 1996. The Company will
continue to purchase single-family loans on a bulk basis to the extent, upon
securitization, such purchases would generate a favorable return on a proforma
basis.
OTHER ITEMS
General and Administrative Expenses
General and administrative expenses (G&A expense) consist of expenses
incurred in conducting the Company's production activities and managing the
investment portfolio, as well as various other corporate expenses. G&A expense
decreased for the three-month period ended March 31, 1997 as compared to the
same period in 1996 primarily as a result of the sale of the Company's
single-family mortgage operations during the second quarter of 1996. Offsetting
a portion of this decrease is the addition of G&A expenses resulting from the
current production operations. G&A related to the production operations will
continue to increase over time as the Company expands its production activities
with current and new product types.
The following table summarizes the Company's efficiency, the ratio of G&A
expense to average interest- earning assets, and the ratio of G&A expense to
average total equity.
<TABLE>
<CAPTION>
Operating Expense Ratios
- ---------------------------------------------------------------------
G&A G&A
G&A Expense/Average Expense/Average
Efficiency Interest-Earning Total Equity
Ratio (1) Assets (2)
(Annualized) (Annualized)
- ---------------------------------------------------------------------
<S> <C> <C> <C>
1995, Quarter 1 7.26% 0.52% 6.48%
1995, Quarter 2 7.07% 0.54% 6.13%
1995, Quarter 3 6.68% 0.51% 5.71%
1995, Quarter 4 7.51% 0.59% 5.50%
1996, Quarter 1 8.25% 0.64% 6.53%
1996, Quarter 2 6.77% 0.51% 5.60%
1996, Quarter 3 5.67% 0.43% 4.60%
1996, Quarter 4 6.09% 0.47% 4.57%
1997, Quarter 1 6.77% 0.55% 4.65%
- ---------------------------------------------------------------------
<FN>
(1) G&A expense as a percentage of interest income.
(2) Average total equity excludes net unrealized gain (loss) on investments
available-for-sale.
</FN>
</TABLE>
Net Income and Return on Equity
Net income increased from $12.7 million for the three months ended March 31,
1996 to $18.3 million for the three months ended March 31, 1997. Return on
common equity (excluding the impact of the net unrealized gain on investments
available-for-sale) also increased from 15.12% for the three months ended March
31, 1996 to 18.82% for the three months ended March 31, 1997. The majority of
the increase in both the net income and the return on common equity is due
mostly to the increased net interest margin related to an increased level of
interest-earning assets and, to a lesser extent, the increase in the net
interest spread on interest-earning assets.
<TABLE>
<CAPTION>
Components of Return on Equity
- --------------------------------------------------------------------------------------------------------------------------
Gains and G&A Preferred
Net Interest Provision Other Expense/ Dividend/ Return on
Margin/ for Losses Income Average Average Average Net Income
Average /Average Common /Average Common Common Common Available to
Common Equity Equity Common Equity Equity Equity Equity Common
(annualized) (annualized) (annualized) (annualized) (annualized) (annualized) Shareholders
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995, Quarter 1 11.17% 0.31% 5.30% 6.48% N/A 9.68% $ 6,596
1995, Quarter 2 13.91% 0.37% 4.64% 6.36% N/A 11.81% 8,041
1995, Quarter 3 19.19% 1.72% 3.85% 6.45% 1.33% 13.53% 10,128
1995, Quarter 4 21.99% 1.82% 4.68% 7.22% 2.67% 14.96% 12,145
1996, Quarter 1 26.26% 0.58% 1.18% 8.58% 3.16% 15.12% 10,492
1996, Quarter 2 25.59% 0.55% 17.67% 7.26% 3.00% 32.45% 23,704
1996, Quarter 3 26.56% 1.20% 2.67% 5.93% 2.93% 19.17% 14,363
1996, Quarter 4 28.26% 1.87% 4.24% 6.75% 4.57% 19.31% 14,480
1997, Quarter 1 27.85% 1.28% 3.73% 6.72% 4.76% 18.82% 14,623
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Dividends and Taxable Income
The Company and its qualified REIT subsidiaries (collectively "Dynex 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 Dynex
REIT to distribute to shareholders substantially all of its taxable income,
thereby restricting its ability to retain earnings. The Company may issue
additional common stock, preferred stock or other securities in the future in
order to fund growth in its operations, growth in its portfolio of mortgage
investments, or for other purposes.
The Company intends to declare and pay out as dividends 100% of its taxable
income over time. The Company's current practice is to declare quarterly
dividends per share. Generally, the Company strives to declare a quarterly
dividend per share which, in conjunction with the other quarterly dividends,
will result in the distribution of most or all of the taxable income earned
during the calendar year. At the time of the dividend announcement, however, the
total level of taxable income for the quarter is unknown. Additionally, the
Company has considerations other than the desire to pay out most of its taxable
earnings, which may take precedence when determining the level of dividends.
<PAGE>
<TABLE>
<CAPTION>
Dividend Summary
($ in thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------
Taxable Net
Income Income Dividend
Available to
Common
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995, Quarter 1 $ 5,070 $ 0.126 $ 0.180 144% $ 1,507
1995, Quarter 2 5,577 0.139 0.200 143% (956)
1995, Quarter 3 11,223 0.279 0.220 79% 1,410
1995, Quarter 4 13,176 0.325 0.240 74% 4,882
1996, Quarter 1 12,719 0.314 0.255 81% 7,249
1996, Quarter 2 13,359 0.328 0.275 84% 9,376
1996, Quarter 3 13,973 0.341 0.293 86% 11,194
1996, Quarter 4 8,831 0.214 0.310 145% 5,672
1997, Quarter 1 23,849 0.572 0.325 57% 15,854
- ---------------------------------------------------------------------------------------------
<FN>
(1) Adjusted for two-for-one common stock split.
</FN>
</TABLE>
Taxable income differs from the financial statement net income which is
determined in accordance with generally accepted accounting principles (GAAP).
For the three months ended March 31, 1997, the Company's taxable earnings per
share of $0.572 were higher than the Company's declared dividend per share of
$0.325. The majority of the difference was caused by GAAP and tax differences
related to the sale of the single-family operations. For tax purposes, the sale
is accounted for on an installment sale basis with annual taxable income of
approximately $10 million from 1996 through 2001. Cumulative undistributed
taxable income represents timing differences in the amounts earned for tax
purposes versus the amounts distributed. Such amounts can be distributed for tax
purposes in the subsequent year as a portion of the normal quarterly dividend.
Such amounts also include certain estimates of taxable income until such time
the company files its federal income tax returns for each year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has various sources of cash flow upon which it relies for its
working capital needs. Sources of cash flow from operations include primarily
the return of principal on its portfolio of investments and the issuance of
collateralized bonds. Other borrowings provide the Company with additional cash
flow in the event that it is necessary. Historically, these sources have
provided sufficient liquidity for the conduct of the Company's operations.
However, if a significant decline in the market value of the Company's
investment portfolio should occur, the Company's available liquidity from these
other borrowings may be reduced. As a result of such a reduction in liquidity,
the Company may be forced to sell certain investments 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.
In order to grow its equity base, the Company may issue additional capital
stock. Management strives to issue such additional shares when it
believes existing shareholders are likely to benefit from such offerings through
higher earnings and dividends per share than as compared to the level of
earnings and dividends the Company would likely generate without such offerings.
The Company borrows funds on a short-term basis to support the accumulation
of loans prior to the sale of such loans or the issuance of collateralized bonds
and mortgage- or asset-backed securities. These borrowings may bear fixed or
variable interest rates, may require additional collateral in the event that the
value of the existing collateral declines, and may be due on demand or upon the
occurrence of certain events. If borrowing costs are higher than the yields on
the assets financed with such funds, the Company's ability to acquire or fund
additional assets may be substantially reduced and it may experience losses.
These short-term borrowings consist of the Company's lines of credit and
repurchase agreements. These borrowings are paid down as the Company securitizes
or sells loans.
A substantial portion of the assets of the Company are pledged to secure
indebtedness incurred by the Company. Accordingly, those assets would not be
available for distribution to any general creditors or the stockholders of the
Company in the event of the Company's liquidation, except to the extent that the
value of such assets exceeds the amount of the indebtedness they secure.
Lines of Credit
At March 31, 1997, the Company has three credit facilities aggregating $500
million to finance loan fundings and for working capital purposes of which $300
million expires in 1997 and $200 million expires in 1998. One of these
facilities includes several sublines aggregating $300 million to serve various
purposes, such as multi-family loan fundings, working capital, and manufactured
housing loan fundings, which may not, in the aggregate, exceed the overall
facility commitment of $150 million at any time. Working capital borrowings
under this facility are limited to $30 million. The Company expects that these
credit facilities will be renewed, if necessary, at their respective expiration
dates, although there can be no assurance of such renewal. The lines of credit
contain certain financial covenants which the Company met as of March 31, 1997.
However, changes in asset levels or results of operations could result in the
violation of one or more covenants in the future.
Repurchase Agreements
The Company finances the majority of its portfolio assets through
collateralized bonds and repurchase agreements. Collateralized bonds are
non-recourse to the Company. Repurchase agreements allow the Company to sell
portfolio assets for cash together with a simultaneous agreement to repurchase
the same portfolio assets on a specified date for a price which is equal to the
original sales price plus an interest component. At March 31, 1997, the Company
had outstanding obligations of $1.1 billion under such repurchase agreements. As
of March 31, 1997, $350 million of various classes of collateralized bonds
issued by the Company have been retained by the Company and have been pledged as
security for $365 million of repurchase agreements. For financial statement
presentation purposes, the Company classified the $365 million of repurchase
agreements, secured by collateralized bonds, as collateralized bonds
outstanding. The remainder of the repurchase agreements were secured by ARM
securities -- $716.3 million, fixed-rate securities -- $20.5 million and other
mortgage securities -- $9.7 million.
Increases in either short-term interest rates or long-term interest rates
could negatively impact the valuation of these mortgage securities and may limit
the Company's borrowing ability or cause various lenders to initiate margin
calls. Additionally, certain of the Company's ARM securities are AAA or AA rated
classes that are subordinate to related AAA rated classes from the same series
of securities. Such AAA or AA rated classes have less liquidity than securities
that are not subordinated and the value of such classes is more dependent on the
credit rating of the related insurer or the credit performance of the underlying
mortgage loans. In instances of a downgrade of an insurer or the deterioration
of the credit quality of the underlying mortgage collateral, the Company may be
required to sell certain portfolio 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.
In addition to the lines of credit, the Company also may finance a portion of
its loans held for securitization with repurchase agreements on an uncommitted
basis. At March 31, 1997, the Company had $95.7 million outstanding obligations
under such repurchase agreements.
To reduce the Company's exposure to changes in short-term interest rates on
its repurchase agreements, the Company may lengthen the duration of its
repurchase agreements secured by mortgage securities by entering into certain
futures and/or option contracts. As of March 31, 1997, the Company had no such
financial futures or option contracts outstanding. During the quarter, however,
the Company settled several such positions, which have effectively extended the
duration of approximately $500 million notional amount of repurchases agreements
through the first half of 1998.
Potential immediate sources of liquidity for the Company include cash
balances and unused availability on the credit facilities described above.
<TABLE>
<CAPTION>
Potential Immediate Sources of Liquidity
($ in millions)
- --------------------------------------------------------------------------------------------------------------------
Potential Immediate Sources
Estimated Unused Potential of Liquidity as a % of
Borrowing Capacity Immediate Sources of Recourse Borrowings (1)
Cash Balance Liquidity
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996, Quarter 1 $ 8.5 $ 32.6 $ 41.1 1.79%
1996, Quarter 2 20.9 102.8 123.7 6.56%
1996, Quarter 3 13.8 118.7 132.5 10.13%
1996, Quarter 4 11.4 131.8 143.2 10.16%
1997, Quarter 1 8.4 139.9 148.3 10.26%
- --------------------------------------------------------------------------------------------------------------------
<FN>
(1) Excludes borrowings, such as collateralized bonds, that are non-recourse to the Company.
</FN>
</TABLE>
Unsecured Borrowings
The Company issued two series of unsecured notes payable totaling $50 million
in 1994. The proceeds from this issuance were used for general corporate
purposes. These notes payable have an outstanding balance at March 31, 1997 of
$44 million. The first principal repayment on one of the series of notes payable
was due October 1995 and annually thereafter, with quarterly interest payments
due. Principal repayment on the second note payable is contracted to begin in
October 1998. The notes mature between 1999 and 2001 and bear fixed interest
rates of 9.56% and 10.03%, respectively. The note agreements contain certain
financial covenants which the Company met as of March 31, 1997. However, changes
in asset levels or results of operations could result in the violation of one or
more covenants in the future. The Company also has various acquisition notes
payable totaling $2.0 million at March 31, 1997.
FORWARD-LOOKING STATEMENTS
Certain written statements in this Form 10-Q made by the Company, that are
not historical fact constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements may
involve factors that could cause the actual results of the Company to differ
materially from historical results or from any results expressed or implied by
such forward-looking statements. The Company cautions the public not to place
undue reliance on forward-looking statements, which may be based on assumptions
and anticipated events that do not materialize. The Company does not undertake,
and the Securities Litigation Reform Act specifically relieves the Company from,
any obligation to update any forward-looking statements.
Factors that may causes actual results to differ from historical results or
from any results expressed or implied by forward-looking statements include the
following:
Economic Conditions. The Company is affected by consumer demand for
manufactured housing, multi-family housing and other products which it finances.
A material decline in demand for these goods and services would result in a
reduction in the volume of loans originated by the Company. The risk of defaults
and credit losses could increase during an economic slowdown or recession. This
could have an adverse effect on the Company's financial performance and the
performance on the Company's securitized loan pools.
Capital Resources. The Company relies on various credit facilities and
repurchase agreements with certain investment banking firms to help meet the
Company's short-term funding needs. The Company believes that as these
agreements expire, they will continue to be available or will be able to be
replaced; however no assurance can be given as to such availability or the
prospective terms and conditions of such agreements or replacements.
Interest Rate Fluctuations. The Company's income depends on its ability to
earn greater interest on its investments than the interest cost to finance these
investments. Interest rates in the markets served by the Company generally rise
or fall with interest rates as a whole. A majority of the loans currently
originated by the Company are fixed-rate. The profitability of a particular
securitization may be reduced if interest rates increase substantially before
these loans are securitized. In addition, the majority of the investments held
by the Company are variable rate collateral for collateralized bonds and
adjustable-rate investments. These investments are financed through non-recourse
long-term collateralized bonds and recourse short-term repurchase agreements.
The net interest spread for these investments could decrease during a period of
rapidly rising interest rates, since the investments generally have periodic
interest rate caps and the related borrowing have no such interest rate caps.
Defaults. Defaults may have an adverse impact on the Company's financial
performance, if actual credit losses differ materially from estimates made by
the Company at the time of securitization. The allowance for losses is
calculated on the basis of historical experience and management's best
estimates. Actual defaults may differ from the Company's estimate as a result of
economic conditions. Actual defaults on ARM loans may increase during a rising
interest rate environment. The Company believes that its reserves are adequate
for such risks.
Prepayments. Prepayments may have an adverse impact on the Company's
financial performance, if prepayments differ materially from estimates made by
the Company. The prepayment rate is calculated on the basis of historical
experience and management's best estimates. Actual rates of prepayment may vary
as a result of the prevailing interest rate. Prepayments are expected to
increase during a declining interest rate environment. The Company's exposure to
more rapid prepayments is (i) the faster amortization of premium on the
investments and (ii) the replacement of investments in its portfolio with lower
yield securities.
Competition. The financial services industry is a highly competitive market.
Increased competition in the market could adversely affect the Company's market
share within the industry and hamper the Company's efforts to expand its
production sources.
Regulatory Changes. The Company's business is subject to federal and state
regulation which, among other things require the Company to maintain various
licenses and qualifications and require specific disclosures to borrowers.
Changes in existing laws and regulations or in the interpretation thereof, or
the introduction of new laws and regulations, could adversely affect the
Company's operation and the performance of the Company's securitized loan pools.
New Production Sources. The Company has expanded both its manufactured
housing and commercial lending businesses. The Company is incurring or will
incur expenditures related to the start-up of these businesses, with no
guarantee that production targets set by the Company will be met or that these
businesses will be profitable. Various factors such as economic conditions,
interest rates, competition and the lack of the Company's prior experience in
these businesses could all impact these new production sources.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On March 20, 1997, American Model Homes ("Plaintiff") filed a
complaint against the Company in Federal District Court in the
Central District of California alleging that the Company, among
other things, misappropriated Plaintiff's trade secrets and
confidential information in connection with the Company's
establishment of its model home lending business. The Plaintiff
seeks injunctive relief and money damages. The Company believes the
claims are without merit and will vigorously defend against such
claims.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
3.10 Amendment to Articles of Incorporation, effective April 25, 1997 (filed herewith.)
3.11 Amendment to Articles of Incorporation, effective May 5, 1997 (filed herewith.)
10.10 Directors Stock Appreciation Rights Plan (filed herewith.)
10.11 1992 Stock Incentive Plan as amended (filed herewith.)
</TABLE>
(b)Reports on Form 8-K
Current Report on Form 8-K filed with the Commission on February 27,
1997, regarding the consolidated financial statements of Resource
Mortgage Capital, Inc. and the independent auditor's report thereon,
for the year ended December 31, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNEX CAPITAL, INC.
By:/s/ Thomas H. Potts
Thomas H. Potts, President
authorized officer of registrant)
/s/ Lynn K. Geurin
Lynn K. Geurin, Executive Vice
President and Chief Financial Officer
(principal accounting officer)
Dated: May 15, 1997
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Page
<S> <C> <C>
3.10 Amendment to Articles of Incorporation, effective I
April 25, 1997
3.11 Amendment to Articles of Incorporation, effective May II
5, 1997
10.10 Directors Stock Appreciation Rights Plan III
10.11 1992 Stock Incentive Plan as amended IV
</TABLE>
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
RESOURCE MORTGAGE CAPITAL, INC.
1. The name of the corporation is Resource Mortgage Capital, Inc.
2. The first sentence of Article I shall be deleted and in place
thereof shall be the following sentence:
The name of the corporation is Dynex Capital, Inc. (the
"Corporation").
3. This amendment to the Articles of Incorporation was proposed by the
Board of Directors and submitted to the shareholders for approval in accordance
with Section 13.1-707 of the Virginia Stock Corporation Act at the annual
meeting on April 24, 1997.
4. The designation, number of outstanding shares and number of votes
entitled to be cast by each voting group entitled to vote separately on the
amendment are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
<S> <C> <C>
Designation of
Voting Group
Entitled Number of Shares Number of Votes
to Vote Separately Outstanding Entitled to be Cast
- ----------------------------------------------------------------------
Holders of Common Stock - Common Stock -
Common Stock 20,822,465 20,822,465
- ----------------------------------------------------------------------
</TABLE>
5. There were 18,759,383 undisputed votes cast by the holders of the
Company's common stock in favor of the amendment and these votes were sufficient
for approval of the amendment.
6. The effective date of this amendment is April 25, 1997 at 5:00 p.m.
IN WITNESS WHEREOF, the undersigned President of the Corporation has
executed these Articles of Amendment on behalf of the Corporation.
Dated: April 24, 1997 RESOURCE MORTGAGE CAPITAL, INC.
By: /S/ Thomas H. Potts
Thomas H. Potts
President
Exhibit 3.11
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
DYNEX CAPITAL, INC.
1. The name of the corporation is Dynex Capital, Inc.
2. The first sentence of Article III shall be deleted and in place
thereof shall be the following sentences:
The number of shares of Common Stock that the Corporation shall have
the authority to issue shall be 100,000,000 shares of Common Stock
with the par value of $.01 each. Each issued and outstanding share
of Common Stock, par value $.01 per share, as of the date this
amendment to the Articles of Incorporation shall have become
effective, shall be changed into two shares of Common Stock, par
value $.01 per share and at the close of business on such date, each
holder of record of Common Stock, without further action, shall be
and become the holder of one additional share for each share of
Common Stock held of record immediately prior thereto.
3. This amendment to the Articles of Incorporation was proposed by the
Board of Directors and submitted to the shareholders for approval in accordance
with Section 13.1-707 of the Virginia Stock Corporation Act at the annual
meeting on April 24, 1997.
4. The designation, number of outstanding shares and number of votes
entitled to be cast by each voting group entitled to vote separately on the
amendment are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
<S> <C> <C>
Designation of
Voting Group
Entitled Number of Shares Number of Votes
to Vote Separately Outstanding Entitled to be Cast
- ----------------------------------------------------------------------
Holders of Common Stock - Common Stock -
Common Stock 20,822,465 20,822,465
- ----------------------------------------------------------------------
</TABLE>
5. There were 18,911,262 undisputed votes cast by the holders of the
Company's common stock in favor of the amendment and these votes were sufficient
for approval of the amendment.
6. The effective date of this amendment shall be May 5, 1997.
IN WITNESS WHEREOF, the undersigned President of the Corporation has
executed these Articles of Amendment on behalf of the Corporation.
Dated: April 24, 1997 RESOURCE MORTGAGE CAPITAL, INC.
By: /S/ Thomas H. Potts
Thomas H. Potts
President
RESOURCE MORTGAGE CAPITAL, INC.
1995 DIRECTORS STOCK INCENTIVE PLAN
SECTION 1. Purpose. The purpose of this Resource Mortgage Capital, Inc.,
1995 Directors' Stock Incentive Plan (the "Plan") are to promote the interest of
Resource Mortgage Capital, Inc. (together with any successor thereto, the
"Company") and its stockholders by (i) attracting and retaining the services of
experienced and knowledgeable directors, (ii) encouraging such directors to
acquire a proprietary and vested interest in the growth and performance of the
Company and (iii) generating an increased incentive for such directors to
contribute to the Company's future success and prosperity, thus enhancing the
value of the Company for the benefit of its stockholders. The Plan is intended
to permit the grant of SARs and the award of DERs.
SECTION 2. Definitions. As used in the Plan, the following terms shall
have the meanings set forth below:
"Affiliate" shall mean (i) any entity that, directly or indirectly,
controls or is controlled by the Company, and (ii) any entity in which the
Company has a significant equity interest.
"Average Net Worth" shall for any period mean the arithmetic average of
the Net Worth of the Company at the beginning of such period and at the end of
such period.
"Average Ten Year Treasury Rate" shall be an the arithmetic average of the
weekly per annum average yield to maturity for actively traded marketable U.S.
Treasury fixed rate securities (adjusted to constant maturities of ten years)
published by the Federal Reserve Board.
"Board" shall mean the Board of Directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
"Common Equivalent Share" shall mean any Share that would be outstanding
if all contingent issuances of Shares and all other shares convertible into
Shares were exercised.
"Dividend Equivalent Right" shall mean any right granted under Section
6(c) of the Plan.
"Eligible Director" shall mean each director of the Company, who is not an
employee of the Company or any of the Company's Affiliates.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall bean the Securities Exchange Act of 1934, as amended.
"Fair Market Value" shall mean, on any given date, the closing price of a
share of Common Stock as reported on the New York Stock Exchange composite tape
on such date, or if the Common Stock was not traded on the New York Stock
Exchange on such day, then on the next preceding day that the Common Stock was
traded on such exchange, all as reported by such source as the Administrator may
select.
"Net Worth" shall mean the excess of the Company's assets over
liabilities, as determined in accordance with generally accepted accounting
principles.
"Participant" shall mean any Eligible Director granted an award under the
Plan.
"Person" shall mean any individual, corporation, partnership, association,
joint-stock company, trust, unincorporated organization, government or political
sub-division thereof or other entity.
"Rule 16b-3" shall mean Rule 16b-3 promulgated by the SEC under the
Exchange Act, or any successor rule or regulation thereto as in effect from time
to time.
"SAR Agreement" shall mean any written agreement, contract, or other
instrument or document evidencing any SAR, which may, but need not, be executed
or acknowledged by a Participant.
"SAR" means a stock appreciation right that entitles the holder to
receive, with respect to each share of Common Stock encompassed by the exercise
of such SAR, the amount determined by the Administrator and specified in an
Agreement. In the absence of such a determination, the holder shall be entitled
to receive, with respect to each share of Common Stock encompassed by the
exercise of such SAR, the excess of the Fair Market Value on the date of
exercise over the Initial Value. References to "SARs" include both Corresponding
SARs and SARs granted independently of SARs, unless the context requires
otherwise.
"SEC" shall mean the Securities and Exchange Commission, or any successor
thereto.
"Shares" shall mean the common shares of the Company.
SECTION 3. Administration. The Plan shall be administered by the Board.
Subject to the terms of the Plan, the Board shall have the power to interpret
the provisions and supervise the administration of the Plan.
SECTION 4. SARs. On May 1, 1995, each Eligible Director, as of such date,
shall be granted an SAR Award of ten thousand (10,000) Shares. Any individual
who becomes an Eligible Director after May 1, 1995 shall be granted an SAR Award
of ten thousand (10,000) Shares as of the date such individual becomes an
Eligible Director. On May 1, 1996 and on May 1 of each subsequent year through
and including the year 2005, each Eligible Director, as of the relevant May 1,
shall be granted an SAR Award to acquire one thousand (1,000) Shares.
(a) Exercise Price. The exercise price per Share under an SAR Award
shall be the per Share Fair Market Value on the date of the grant of such SAR.
(b) Dividend Equivalent Rights. Each SAR will accrue, at no cost to the
Participant, Dividend Equivalent Rights. Dividend Equivalent Rights will accrue
on May 2, 1995 and on each May 1, excluding the May 1 on which the particular
SAR was granted, (a"DER Award Date") in an amount determined by the following
formula: the number of Shares subject to the SAR, including for this purpose
only the number of Shares subject to Dividend Equivalent Rights accrued on such
SAR, will be multiplied by the Dividend Excess (as hereinafter defined) per
Common Equivalent Share and the resulting product will be divided by the Fair
Market Value per Share on the DER award Date. The "Divided Excess", if any,
shall equal the excess of dividends actually paid by the Company on Shares and
preferred shares during the calendar year preceding the DER Award Date, which
excess shall not exceed the Company's net income for such calendar year, over
the Benchmark Earnings (as hereinafter defined) for such calendar year. The
Benchmark Earnings shall equal the product of the Average Ten Year Treasury Rate
for the relevant calendar year plus one percentage point and the Company's
Average Net Worth during such calendar year.
(c) Time and Method of Exercise. Except as otherwise provided in this
Plan, each SAR shall be immediately exercisable upon grant and shall remain
exercisable until the expiration date of such SAR. Upon exercise of the SAR, a
number of accrued Dividend Equivalent Rights shall be deemed to have been
exercised equal to the total number of such accrued Dividend Equivalent Rights
on such exercise date multiplied by a fraction, the numerator of which is the
number of Shares for which the SAR is being exercised on such date, and the
denominator of which is the maximum number of Shares for which the SAR could
have been exercised immediately prior to such exercise; provided, however, that
any fractional Dividend Equivalent Rights resulting from this calculation shall
not be deemed to have been exercised. Each Dividend Equivalent Right shall
entitle the SAR holder to receive one Share upon the deemed exercise of such
Right. Fractional Dividend Equivalent Rights shall continue to accrue with
respect to any SAR that has not been totally exercised. Upon the total exercise
of any SAR, any fractional Dividend Equivalent Rights accrued with respect
thereto shall be canceled.
(d) Limits on Transfer of SARs. Each SAR and each DER under any SAR shall
be exercisable only by the Participant, any individual who received the SAR
pursuant to a qualified domestic relations order as defined in the Code or Title
I of ERISA (or the rules thereunder), or any guardian or legal representative of
the Participant or any such individual if permissible under applicable law.
No SAR and no DER under any such SAR may be assigned, alienated, pledged,
attached, sold or otherwise transferred or encumbered by a Participant otherwise
than by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined in the Code or Title I of ERISA,
or the rules thereunder, and any such purported assignment, alienation, pledge,
attachment, sale, transfer or encumbrance shall be void and unenforceable
against the Company or any Affiliate; provided, that the designation of a
beneficiary shall not constitute an assignment, alienation, pledge, attachment,
sale, transfer or encumbrance.
(e) Term of SARs. The maximum period in which an SAR may be exercised
shall not exceed 10 years from the date of grant; provided, that under the
applicable SAR Agreement the SAR may expire within a shorter period.
(f) Payment Terms for Exercise of SARs. The payment of the SAR price and
corresponding DER shall be made in cash.
(g) Termination of Service. If a Participant's service as an Eligible
director is terminated for any reason, any SAR held by such Participant shall
remain exercisable for 90 days after such termination, but in no event beyond
the expiration date of such SAR. Upon the expiration of such 90 day period, any
unexercised SARs held by such Participant shall be canceled.
(h) Shareholder Rights. No Participant shall have any rights as a
stockholder with respect to shares subject to his SAR.
SECTION 5. Amendment and Termination Except to the extent prohibited by
applicable law and unless otherwise expressly provided in an SAR Agreement or in
the Plan:
(a) Amendments to the Plan. The Board may amend, alter, suspend,
discontinue, or terminate the Plan; provided, that any such amendment,
alteration, suspension, discontinuation, or termination that would materially
impair the rights of any Participant or a beneficiary thereof as to any
outstanding SAR shall not to that extent be effective without the approval of
the affected Participant or beneficiary; and provided further, that
notwithstanding any other provision of the Plan or any SAR Agreement, no such
amendment, alteration, suspension, discontinuation, or termination shall be made
that would:
(i) permit SARs encompassing rights to purchase Shares to be
granted with per Share exercise or purchase prices of less than the Fair
Market Value of Share on the date of grant thereof; or
(iii) otherwise cause the Plan to cease to comply with any tax
or regulatory requirement, including for these purposes any approval or
other requirement which is a prerequisite for exemptive relief from
Section 16(b) of the Exchange Act.
(b) Limitation on Amendments. This Plan shall not be amended more than
once every six months, other than to comport with changed in the Code.
(c) Correction of Defects, Omissions and Inconsistencies. The Board may
correct any defect, supply any omission, or reconcile any inconsistency in the
Plan or any SAR or SAR Agreement in the manner and to the extent it shall deem
desirable to carry the Plan into effect. In the event of a conflict between any
term or provision contained in SAR or an SAR Agreement and a term or provision
contained in the Plan, the applicable terms and conditions of the Plan shall
govern and prevail.
SECTION 6. General Provisions.
(a) No Rights to SAR Awards. No Person shall have any claim to be granted
any SAR, and there is no obligation for uniformity of treatment of Participants
or holders or beneficiaries of SARs. The terms and conditions of SARs need not
be the same with respect to each recipient.
(b) Withholding. The Company or any Affiliate is hereby authorized to
withhold from any payment pursuant to the exercise of an SAR or from any
compensation or other amount owing to a Participant the amount of any applicable
withholding taxes in respect of the exercise of an SAR and to take such other
action as may be necessary in the opinion of the Company to satisfy all
obligations for the payment of such taxes.
(c) No Limit on Other Compensation Arrangements. Nothing contained in the
Plan shall prevent the Company or any Affiliate from adopting or continuing in
effect other compensation arrangements, and such arrangements may be either
generally applicable or applicable only in specific cases.
(d) Governing Law. The validity, construction, and effect of the Plan
and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the Commonwealth of Virginia.
(e) Severability. If any provision of the Plan or any Award is or becomes
or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as
to any Person or SAR, or would disqualify the Plan or any SAR under any law
deemed applicable by the Board, such provision shall be construed or deemed
amended to conform applicable laws, or if it cannot be construed or deemed
amended without, in the determination of the Board, materially altering the
intent of the Plan or the Award, such provision shall be stricken as to such
jurisdiction, Person or SAR and the remainder of the Plan and any such SAR shall
remain in full force and effect.
(f) No Trust or Fund Created. Neither the Plan nor any SAR shall create or
be construed to create a trust or separate fund of any kind or a fiduciary
relationship between the Company or any Affiliate and a Participant or any other
Person. To the extent that any Person acquires a right to receive payments from
the Company or any Affiliate pursuant to an SAR, such right shall be no greater
than the right of any unsecured general creditor of the Company or any
Affiliate.
(g) Headings. Headings are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Plan or any provision thereof.
SECTION 7. Effective Date of the Plan. The Plan shall be effective as of
May 1, 1995.
Exhibit 10.11
RESOURCE MORTGAGE CAPITAL, INC.
1992 STOCK INCENTIVE PLAN
(As Amended)
<PAGE>
TABLE OF CONTENTS
Page
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE I DEFINITIONS..................................... A-4
ARTICLE II PURPOSES........................................ A-5
ARTICLE III ADMINISTRATION.................................. A-5
ARTICLE IV ELIGIBILITY..................................... A-6
4.01 General......................................... A-6
4.02 Grants.......................................... A-6
ARTICLE V STOCK SUBJECT TO GRANTS......................... A-6
ARTICLE VI OPTION PRICE.................................... A-7
ARTICLE VII EXERCISE OF OPTIONS............................. A-7
7.01 Maximum Option or SAR Period.................... A-7
7.02 Nontransferability.............................. A-7
7.03 Employee Status................................. A-7
ARTICLE VIII METHOD OF EXERCISE.............................. A-7
8.01 Exercise........................................ A-7
8.02 Payment Terms for Exercise of Options........... A-8
8.03 Determination of Payment of Cash and/or
Common Stock Upon Exercise of SAR............... A-8
8.04 Shareholder Rights.............................. A-8
ARTICLE IX DIVIDEND EQUIVALENT RIGHTS...................... A-8
9.01 Dividend Equivalent Rights...................... A-8
9.02 Time and Method of Exercise..................... A-8
ARTICLE X RESTRICTED STOCK................................ A-9
10.01 Award........................................... A-9
10.02 Vesting......................................... A-9
10.03 Shareholder Rights.............................. A-9
ARTICLE XI ADJUSTMENT UPON CHANGE IN
COMMON STOCK.................................... A-9
ARTICLE XII COMPLIANCE WITH LAW AND APPROVAL
OF REGULATORY BODIES............................ A-10
ARTICLE XIII GENERAL PROVISIONS.............................. A-10
13.01 Effect on Employment............................ A-10
13.02 Unfunded Plan................................... A-10
13.03 Rules of Construction........................... A-10
ARTICLE XIV AMENDMENT....................................... A-10
ARTICLE XV DURATION OF PLAN................................ A-11
ARTICLE XVI EFFECTIVE DATE OF PLAN.......................... A-11
</TABLE>
<PAGE>
RESOURCE MORTGAGE CAPITAL, INC.
1992 STOCK INCENTIVE PLAN
(As Amended)
ARTICLE I
DEFINITIONS
1.01 Administrator means the Committee.
1.02 Affiliate means any entity in which the Company has a significant equity
interest, as determined by the Company.
1.03 Agreement means a written agreement (including any amendment or supplement
thereto) between the Company and a Participant specifying the terms and
conditions of an award of Restricted Stock or an Option or SAR granted to such
Participant.
1.04 Average Net Worth means for any period the arithmetic average of the Net
Worth of the Company at the beginning of such period and at the end of such
period.
1.05 Board means the Board of Directors of the Company.
1.06 Code means the Internal Revenue Code of 1986, and any amendments thereto.
1.07 Committee means a committee of the Board; such Committee may be the
Compensation Committee of the Board, a subcommittee thereof, or any other
committee the Board may appoint, and in all events shall consist of at least two
members.
1.08 Common Stock means the Common Stock of the Company.
1.09 Company means Resource Mortgage Capital, Inc., or any successor thereto.
1.10 Corresponding SAR means an SAR that is granted in relation to a particular
Option and that can be exercised only upon the surrender to the Company,
unexercised, of that portion of the Option to which the SAR relates.
1.11 DER Accrual Period means any period that begins with the previous DER Award
Date, or any date determined by the Committee after the grant date of the
related Option or SAR if there is no previous DER Award Date, and ends on the
next DER Award Date.
1.12 DER Award Date means any date determined by the Committee on which Dividend
Equivalent Rights are awarded.
1.13 Dividend Equivalent Right means any right granted under Section 9.01 of the
Plan.
1.14 Fair Market Value means, on any given date, the closing price of a share of
Common Stock as reported on the New York Stock Exchange composite tape on such
date, or if the Common Stock was not traded on the New York Stock Exchange on
such day, then on the next preceding day that the Common Stock was traded on
such exchange, all as reported by such source as the Administrator may select.
1.15 Initial Value means, with respect to an SAR, the Fair Market Value of one
share of Common Stock on the date of grant.
1.16 Net Worth means the excess of the Company's assets over liabilities, as
determined in accordance with generally accepted accounting principles.
1.17 Option means a stock option that entitles the holder to purchase from the
Company a stated number of shares of Common Stock at the price set forth in an
Agreement.
1.18 Participant means a key employee of the Company or an Affiliate, including
an employee who is a member of the Board and is selected by the Administrator to
receive a Restricted Stock award, an Option, an SAR, or a combination thereof.
1.19 Plan means the Resource Mortgage Capital, Inc. 1992 Stock Incentive Plan.
1.20 Restricted Stock means Common Stock awarded to a Participant under Article
X. Shares of Common Stock shall cease to be Restricted Stock when, in accordance
with the terms of the applicable Agreement, they become transferable and free of
substantial risks of forfeiture.
1.21 SAR means a stock appreciation right that entitles the holder to receive,
with respect to each share of Common Stock encompassed by the exercise of such
SAR, the amount determined by the Administrator and specified in an Agreement.
In the absence of such a determination, the holder shall be entitled to receive,
with respect to each share of Common Stock encompassed by the exercise of such
SAR, the excess of the Fair Market Value on the date of exercise over the
Initial Value. References to "SARs" include both Corresponding SARs and SARs
granted independently of Options, unless the context requires otherwise.
ARTICLE II
PURPOSES
2.01 The Plan is intended to assist the Company in recruiting and retaining
individuals with ability and initiative who provide services to the Company or
an Affiliate by enabling such persons to participate in its future success and
to associate their interests with those of the Company and its shareholders. The
Plan is intended to permit the award of shares of Restricted Stock, the grant of
SARs, the grant of Options not qualifying for special tax treatment under
Section 422 of the Code and the award of Dividend Equivalent Rights. The
proceeds received by the Company from the sale of any Common Stock pursuant to
this Plan shall be used for general corporate purposes.
ARTICLE III
ADMINISTRATION
3.01 The Plan shall be administered by the Administrator. The Administrator
shall have authority to award Restricted Stock and to grant Options (with or
without Dividend Equivalent Rights) and SARs (with or without Dividend
Equivalent Rights) upon such terms (not inconsistent with the provisions of this
Plan) as the Administrator may consider appropriate. Such terms may include
conditions (in addition to those contained in this Plan) on the exercisability
of all or any part of an Option, an SAR or Dividend Equivalent Rights or on the
transferability or forfeitability of Restricted Stock. Such conditions may be
based on business criteria contemplated by Section 162(m) of the Code and may
include earnings per share, share price, revenue growth, return on equity,
return on assets or net assets, timely completion of specific projects,
retention or hiring of key employees, net interest margin, income or net income
(before or after taxes), sales, operating income or net operating income,
operating margin, return on operating revenue, delinquency ratios, credit loss
levels, market share, cash flow, expenses, total shareholders' equity, return on
capital, return on portfolio assets, portfolio growth, servicing volume,
production volume, total return and dividends. Notwithstanding any such
conditions, the Administrator may, in its discretion, accelerate the time at
which any Option, SAR or Dividend Equivalent Rights may be exercised or the time
at which Restricted Stock may become transferable or nonforfeitable. In
addition, the Administrator shall have complete authority to interpret all
provisions of this Plan; to prescribe the form of Agreements; to adopt, amend,
and rescind rules and regulations pertaining to the administration of the Plan;
and to make all other determinations necessary or advisable for the
administration of this Plan. The express grant in the Plan of any specific power
to the Administrator shall not be construed as limiting any power or authority
of the Administrator. Any decision made, or action taken, by the Administrator
or in connection with the administration of this Plan shall be final and
conclusive. Neither the Administrator nor any member of the Committee shall be
liable for any act done in good faith with respect to this Plan or any
Agreement, Option, SAR, Dividend Equivalent Right or Restricted Stock award. All
expenses of administering this Plan shall be borne by the Company.
3.02 Anything in the Plan to the contrary notwithstanding, all members of the
Committee shall be persons who qualify as "outside directors" as defined in
Section 162 of the Code. The Board may require that all members of the Committee
also be "non-employee directors" as defined in Rule 16b-3 of the Securities and
Exchange Commission. Unless otherwise provided by the Board, the Compensation
Committee of the Board (or such members of the Compensation Committee as shall
constitute "outside directors" if all such members do not constitute "outside
directors") shall constitute the Committee hereunder.
ARTICLE IV
ELIGIBILITY
4.01 General. Any employee of the Company or an Affiliate (including a
corporation that becomes an Affiliate after the adoption of this Plan) is
eligible to participate in this Plan if the Administrator, in its sole
discretion, determines that such person has contributed significantly or can be
expected to contribute significantly to the profits or growth of the Company or
an Affiliate. Directors of the Company (whether or not employees of the Company
or an Affiliate) may also be selected to participate in this Plan.
4.02 Grants. The Administrator will designate individuals to whom shares of
Restricted Stock are to be awarded and to whom Options (with or without Dividend
Equivalent Rights) and SARs (with or without Dividend Equivalent Rights) are to
be granted and will specify the number of shares of Common Stock subject to each
award or grant. An Option may be granted with or without a related SAR. An SAR
may be granted with or without a related Option. All shares of Restricted Stock
awarded, and all Options, SARs and Dividend Equivalent Rights granted, under
this Plan shall be evidenced by Agreements which shall be subject to applicable
provisions of this Plan and to such other provisions as the Administrator may
adopt.
ARTICLE V
STOCK SUBJECT TO GRANTS
5.01 Upon the award of shares of Restricted Stock the Company may issue
authorized but unissued Common Stock. Upon the exercise of any Option, SAR or
Dividend Equivalent Right, the Company may deliver to the Participant (or the
Participant's broker if the Participant so directs), authorized but unissued
Common Stock. The maximum aggregate number of shares of Common Stock that may be
issued pursuant to the exercise of Options, SARs and Dividend Equivalent Rights
and the award of Restricted Stock under this Plan is 1,200,000. Anything in the
Plan to the contrary notwithstanding, no Participant, in any fiscal year, may be
awarded grants hereunder covering in the aggregate more than 100,000 shares of
Common Stock; provided, however, that shares of Common Stock underlying a tandem
grant of Options and Corresponding SARs shall be counted only once in
calculating this limit. The maximum aggregate number of shares of Common Stock
that may be issued under this Plan as a whole, as well as the per Participant
limit described in the immediately preceding sentence hereof, shall be subject
to adjustment as provided in Article XI. If an Option is terminated, in whole or
in part, for any reason other than its exercise or the exercise of a
Corresponding SAR, the number of shares of Common Stock allocated to the Option
and any related Dividend Equivalent Rights or portion thereof may be reallocated
to other Options, SARs, Dividend Equivalent Rights and Restricted Stock awards
to be granted under this Plan. Upon the termination of an SAR, in whole or in
part, other than in connection with its exercise (or the exercise of a related
Option) for shares of Common Stock, the number of shares of Common Stock
allocated to the SAR and any related Dividend Equivalent Rights or portion
thereof may be reallocated to other Options, SARs, Dividend Equivalent Rights
and Restricted Stock awards to be granted under this Plan.
ARTICLE VI
OPTION PRICE
6.01 The price per share for Common Stock purchased on the exercise of an Option
shall be determined by the Committee on the date of grant.
ARTICLE VII
EXERCISE OF OPTIONS
7.01 Maximum Option or SAR Period. The maximum period in which an Option or SAR
may be exercised shall be determined by the Administrator on the date of grant,
but will not exceed 10 years from the date of the grant.
7.02 Nontransferability. Any Option, SAR or Dividend Equivalent Right granted
under this Plan shall be nontransferable except by will or by the laws of
descent and distribution or as permitted by the Committee. In the event of any
such transfer, the Option and any Corresponding SAR or Dividend Equivalent Right
that relates to such Option must be transferred to the same person or person(s).
During the lifetime of the Participant to whom the Option, SAR or Dividend
Equivalent Right is granted, the Option, SAR or Dividend Equivalent Right may be
exercised only by the Participant. No right or interest of a Participant in any
Option, SAR or Dividend Equivalent Right shall be liable for, or subject to, any
lien, obligation, or liability of such Participant.
7.03 Employee Status. The terms of any Option or SAR may provide for exercise
within a period following termination of employment. In the event that the terms
of any Option or SAR provide that it may be exercised only during employment or
continued service or within a specified period of time after termination of
employment or service, the Administrator may decide to what extent leaves of
absence for governmental or military service, illness, temporary disability, or
other reasons shall not be deemed interruptions of continuous employment or
service.
ARTICLE VIII
METHOD OF EXERCISE
8.01 Exercise. Subject to the provisions of Articles VII and XII, an Option or
SAR may be exercised in whole at any time or in part from time to time at such
times and in compliance with such requirements as the Administrator shall
determine. An Option or SAR granted under this Plan may be exercised with
respect to any number of whole shares less than the full number for which the
Option or SAR could be exercised. A partial exercise of an Option or SAR shall
not affect the right to exercise the Option or SAR from time to time in
accordance with this Plan and the applicable Agreement with respect to the
remaining shares subject to the Option or related to the SAR. The exercise of
either an Option or Corresponding SAR shall result in the termination of the
other to the extent of the number of shares with respect to which the Option or
Corresponding SAR is exercised.
8.02 Payment Terms for Exercise of Options. Unless otherwise provided by the
Agreement, payment of the Option price shall be made in cash or a cash
equivalent acceptable to the Administrator. If the Agreement provides, payment
of all or part of the Option price may be made by surrendering shares of Common
Stock to the Company. If Common Stock is used to pay all or part of the Option
price, the shares surrendered must have a Fair Market Value (determined as of
the day preceding the date of exercise) that is not less than such Option price
or such portion of the Option price paid by surrender of shares.
8.03 Determination of Payment of Cash and/or Common Stock Upon Exercise of SAR.
At the Administrator's discretion, the amount payable as a result of the
exercise of an SAR (and any related DERs) may be settled in cash, Common Stock,
or a combination of cash and Common Stock. No fractional share shall be
deliverable upon the exercise of an SAR but a cash payment will be made in lieu
thereof.
8.04 Shareholder Rights. No Participant shall have any rights as a stockholder
with respect to shares subject to his Option or SAR until the date of exercise
of such Option or SAR and then only to the extent shares of Common Stock are
issued.
ARTICLE IX
DIVIDEND EQUIVALENT RIGHTS
9.01 Dividend Equivalent Rights. If provided in an Agreement, any Option or SAR
granted hereunder will accrue Dividend Equivalent Rights on each DER Award Date
following the grant of such Option or SAR in an amount determined by the
following formula: the number of shares of Common Stock subject to the Option or
SAR (including for this purpose the number of shares of Common Stock subject to
Dividend Equivalent Rights previously accrued on such Option or SAR) will be
multiplied by the Dividend Excess (as hereinafter defined) per outstanding share
of Common Stock, and the resulting product will be divided by the Fair Market
Value on the DER Award Date. The "Dividend Excess," if any, for any DER Award
Date shall equal the excess of dividends actually paid on shares of Common Stock
during the DER Accrual Period ending with the DER Award Date, which excess shall
not exceed the Company's net income for such period, over the Benchmark Earnings
(as hereinafter defined). The Benchmark Earnings for any DER Award Date shall
equal the product of (i) the Designated Yield (as hereinafter defined) for the
DER Accrual Period ending with the DER Award Date, (ii) the Company's Average
Net Worth during such DER Accrual Period and (iii) a fraction, the numerator of
which is the number of days in the DER Accrual Period ending with the DER Award
Date and the denominator of which is 365. The Designated Yield shall be set by
the Committee on each DER Award Date, but will not be less than 2%. The
Committee will determine if the DERs are to be paid in additional Options (if
Options were granted), in additional SARs (if SARs were granted), in Common
Stock or in cash.
9.02 Time and Method of Exercise. Upon exercise of the Option or the SAR, a
number of accrued Dividend Equivalent Rights shall be deemed to have been
exercised equal to the total number of such accrued Dividend Equivalent Rights
as of the end of the month preceding the month of exercise multiplied by a
fraction, the numerator of which is the number of shares of Common Stock for
which the Option or SAR is being exercised on such date, and the denominator of
which is the maximum number of shares of Common Stock for which the Option or
the SAR could have been exercised immediately prior to such exercise; provided,
however, that any fractional Dividend Equivalent Rights resulting from this
calculation shall not be deemed to have been exercised. As provided in an
Agreement, each Dividend Equivalent Right shall entitle the Option or the SAR
holder to receive either (i) additional Options or SARs, as the case may be;
(ii) Common Stock or (iii) cash upon the deemed exercise of such Right.
Fractional Dividend Equivalent Rights shall continue to accrue with respect to
any Option or SAR that has not been totally exercised. Upon the total exercise
of any Option or SAR, any remaining fractional Dividend Equivalent Rights
accrued with respect thereto shall be canceled if paid in stock. Upon the
exercise of the Dividend Equivalent Rights on an Option, the proportionate
number of Dividend Equivalent Rights on any Corresponding SAR will be canceled
and vice versa.
ARTICLE X
RESTRICTED STOCK
10.01 Award. In accordance with the provisions of Article IV, the Administrator
will designate each individual to whom an award of Restricted Stock is to be
made and will specify the number of shares of Common Stock covered by the award.
10.02 Vesting. The Administrator, on the date of the award, may prescribe that a
Participant's rights in the Restricted Stock shall be forfeitable or otherwise
restricted for a period of time set forth in the Agreement. By way of example
and not of limitation, the restrictions may postpone transferability of the
shares or may provide that the shares will be forfeited if the Participant
separates from the service of the Company and its Affiliates before the
expiration of a stated term or if the Company, the Company and its Affiliates or
the Participant fails to achieve stated objectives.
10.03 Shareholder Rights. If provided in the Agreement, prior to their
forfeiture (in accordance with the terms of the Agreement and while the shares
are Restricted Stock), a Participant will have all rights of a shareholder with
respect to Restricted Stock, including the right to receive dividends and vote
the shares; provided, however, that (i) a Participant may not sell, transfer,
pledge, exchange, hypothecate, or otherwise dispose of Restricted Stock, (ii)
the Company shall retain custody of the certificates evidencing shares of
Restricted Stock, and (iii) the Participant will deliver to the Company a stock
power, endorsed in blank, with respect to each award of Restricted Stock. The
limitations set forth in the preceding sentence shall not apply after the shares
cease to be Restricted Stock.
ARTICLE XI
ADJUSTMENT UPON CHANGE IN COMMON STOCK
11.01 The maximum number of shares as to which Restricted Stock may be awarded
and as to which Options, SARs and Dividend Equivalent Rights may be granted
under this Plan shall be proportionately adjusted, and the terms of outstanding
Restricted Stock awards, Options, SARs and Dividend Equivalent Rights shall be
adjusted, as the Administrator shall determine to be equitably required in the
event that (a) the Company (i) effects one or more stock dividends, stock
split-ups, subdivisions or consolidations of shares or (ii) engages in a
transaction described in Section 424 of the Code or (b) there occurs any other
extraordinary event which, according to generally accepted accounting
principles, necessitates such action. Any determination made under this Article
XI by the Administrator shall be final and conclusive.
11.02 The issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, for cash or property, or for
labor or services, either upon direct sale or upon the exercise of rights or
warrants to subscribe therefor, or upon conversion of shares or obligations of
the Company convertible into such shares or other securities, shall not affect,
and no adjustment by reason thereof shall be made with respect to, outstanding
awards of Restricted Stock, Options, SARs and Dividend Equivalent Rights.
11.03 The Administrator may award shares of Restricted Stock, may grant Options
(with or without Dividend Equivalent Rights), and may grant SARs (with or
without Dividend Equivalent Rights) in substitution for stock awards, stock
options, stock appreciation rights, or similar awards held by an individual who
becomes an employee of the Company or an Affiliate in connection with a
transaction described in the first paragraph of this Article XI. Notwithstanding
any provision of the Plan (other than the limitation of Article V), the terms of
such substituted Restricted Stock awards and Option, SAR or Dividend Equivalent
Rights grants shall be as the Administrator, in its discretion, determines is
appropriate.
ARTICLE XII
COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES
12.01 No Option or SAR shall be exercisable, no Common Stock shall be issued, no
certificates for shares of Common Stock shall be delivered, and no payment shall
be made under this Plan except in compliance with all applicable federal and
state laws and regulations (including, without limitation, withholding tax
requirements), any listing agreement to which the Company is a party, and the
rules of all domestic stock exchanges on which the Company's shares may be
listed. The Company shall have the right to rely on an opinion of its counsel as
to such compliance. Any share certificate issued to evidence Common Stock for
which shares of Restricted Stock are awarded or for which an Option or SAR is
exercised may bear such legends and statements as the Administrator may deem
advisable to assure compliance with federal and state laws and regulations. No
Option or SAR shall be exercisable, no Restricted Stock shall be awarded, no
Common Stock shall be issued, no certificate for shares shall be delivered, and
no payment shall be made under this Plan until the Company has obtained such
consent or approval as the Administrator may deem advisable from regulatory
bodies having jurisdiction over such matters.
ARTICLE XIII
GENERAL PROVISIONS
13.01 Effect on Employment. Neither the adoption of this Plan, its operation,
nor any documents describing or referring to this Plan (or any part thereof)
shall confer upon any individual any right to continue in the employ or service
of the Company or an Affiliate or in any way affect any right and power of the
Company or an Affiliate to terminate the employment or service of any individual
at any time with or without assigning a reason therefor.
13.02 Unfunded Plan. The Plan, insofar as it provides for grants, shall be
unfunded, and the Company shall not be required to segregate any assets that may
at any time be represented by grants under this Plan. Any liability of the
Company to any person with respect to any grant under this Plan shall be based
solely upon any contractual obligations that may be created pursuant to this
Plan. No such obligation of the Company shall be deemed to be secured by any
pledge of, or other encumbrance on, any property of the Company.
13.03 Rules of Construction. Headings are given to the articles and sections of
this Plan solely as a convenience to facilitate reference. The reference to any
statute, regulation, or other provision of law shall be construed to refer to
any amendment to or successor of such provision of law.
ARTICLE XIV
AMENDMENT
14.01 The Board may at any time amend or terminate this Plan. The Board, in its
discretion, may require any Plan amendments to be submitted for approval by the
shareholders of the Company, including, but not limited to, cases in which such
approval is deemed necessary for compliance with Section 162(m) or other
requirements of the Code or with the requirements of any listing exchange, or to
secure exemption from Section 16(b) of the Securities Exchange Act of 1934. No
amendment shall, without a Participant's consent, adversely affect any rights of
such Participant under any outstanding Restricted Stock award or under any
Option or SAR outstanding at the time such amendment is made.
ARTICLE XV
DURATION OF PLAN
15.01 No shares of Restricted Stock may be awarded and no Option, SAR or
Dividend Equivalent Right may be granted under this Plan more than ten years
after the earlier of the date that the Plan is adopted by the Board or the date
that the Plan is approved by shareholders as provided in Article XV. Restricted
Stock awards and Options, SARs and Dividend Equivalent Rights granted before
that date shall remain valid in accordance with their terms.
ARTICLE XVI
EFFECTIVE DATE OF PLAN
16.01 Shares of Restricted Stock may be awarded and Options, SARs and Dividend
Equivalent Rights may be granted under this Plan upon its adoption by the Board,
provided that no Restricted Stock award, Option, SAR or Dividend Equivalent
Right will be effective unless this Plan is approved by a majority of the votes
entitled to be cast by the Company's shareholders, voting either in person or by
proxy, at a duly held shareholders' meeting within twelve months of such
adoption.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Mar-31-1997
<CASH> 8,415
<SECURITIES> 3,917,642
<RECEIVABLES> 8,643
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,949,866
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 2,325,372
0
136,301
<COMMON> 421
<OTHER-SE> 368,227
<TOTAL-LIABILITY-AND-EQUITY> 3,949,866
<SALES> 0
<TOTAL-REVENUES> 79,960
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,462
<LOSS-PROVISION> 54,880
<INTEREST-EXPENSE> 14,623
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 14,623
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,623
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
<FN>
<F1> The Company's balance sheet is unclassified
</FN>
</TABLE>
