UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
____X___ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1996
OR
________ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 001-11914
THORNBURG MORTGAGE ASSET CORPORATION
(Exact name of Registrant as specified in its Charter)
MARYLAND 85-0404134
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
119 E. MARCY STREET, SUITE 201
SANTA FE, NEW MEXICO 87501
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (505) 989-1900
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes _____X_____ No __________
(2) Yes _____X_____ No __________
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Common Stock ($.01 par value) 15,474,063 as of May 1, 1996
THORNBURG MORTGAGE ASSET CORPORATION
FORM 10-Q
INDEX
Page
PART I.FINANCIAL INFORMATION ------
Item 1.Financial Statements
Balance Sheets at March 31, 1996 and December 31, 1995........... 3
Statements of Operations for the three months ended March 31,
1996 and March 31, 1995.......................................... 4
Statement of Stockholders' Equity for the three months ended
March 31, 1996................................................... 5
Statements of Cash Flows for the three months ended March 31,
1996 and March 31, 1995.......................................... 6
Notes to Financial Statements.................................... 7
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 13
PART II.OTHER INFORMATION
Item 1. Legal Proceedings................................................ 18
Item 2. Changes in Securities ........................................... 18
Item 3. Defaults Upon Senior Securities ................................. 18
Item 4. Submission of Matters to a Vote of Security Holders.............. 18
Item 5. Other Information................................................ 18
Item 6. Exhibits and Reports on Form 8-K................................. 18
SIGNATURES .............................................................. 19
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THORNBURG MORTGAGE ASSET CORPORATION
BALANCE SHEETS
(In thousands, except share data)
March 31, 1996 December 31, 1995
------------------ ---------------------
ASSETS
Adjustable-rate mortgage securities
(Notes 2, 3 and 4) $ 2,012,151 $ 1,995,287
Cash and cash equivalents 4,012 3,660
Accrued interest receivable 17,172 18,778
Prepaid expenses and other 377 260
------------------ --------------------
$ 2,033,712 $ 2,017,985
================== ====================
LIABILITIES
Reverse repurchase agreements
(Note 3 and 4) $ 1,827,284 $ 1,780,854
Other borrowings (Note 3 and 4) 26,250 18,446
Payable for securities purchased - 42,990
Accrued interest payable 8,823 9,907
Dividends payable (Note 7) 4,972 4,632
Accrued expenses and other 970 679
------------------ --------------------
1,868,299 1,857,508
------------------ --------------------
STOCKHOLDERS' EQUITY
Common stock: par value $.01 per share;
50,000,000 shares authorized, 12,430,066
and 12,190,712 shares issued and
outstanding (Note 6) 124 122
Additional paid-in-capital 179,303 175,708
Available-for-sale securities:
Unrealized gain (loss) (Note 2) (19,825) (21,835)
Realized deferred hedging gain 6,179 7,009
Retained earnings (deficit) (368) (527)
------------------ --------------------
165,413 160,477
------------------ --------------------
$ 2,033,712 $ 2,017,985
================== ====================
See Notes to Financial Statements.
THORNBURG MORTGAGE ASSET CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except share data)
Three Months Ended March 31,
1996 1995
------------ ------------
Interest income $ 32,702 $ 25,880
Interest expense 26,512 24,722
---------- ----------
Net interest income 6,190 1,158
---------- ----------
Gain(loss) on sale of adjustable-rate
mortgage securities 13 (659)
General and administrative expenses:
Management fee (Note 5) 947 344
Other 125 113
---------- ----------
1,072 457
---------- ----------
Net income $ 5,131 $ 42
========== ==========
Net income per share $ 0.42 $ 0.00
========== ==========
Average number of shares outstanding 12,334,847 11,780,726
========== ==========
See Notes to Financial Statements.
THORNBURG MORTGAGE ASSET CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 1996
(In thousands, except share data)
Available-for-Sale Securities
Realized
Additional Deferred Retained
Common Paid-in Unrealized Gain From Earnings
Stock Capital Gain(Loss) Hedging (Deficit) Total
------ --------- ---------- --------- --------- --------
Balance,
December 31, 1995 $ 122 $175,708 $ (21,835) 7,009 $ (527) $160,477
Issuance of common
stock (Note 5) 2 3,595 - - - 3,597
Available-for-Sale
Securities:
Fair value adj.,
net of amortization - - 2,010 - - 2,010
Deferred gain on
sale of hedges, net
of amortization - - - (830) - (830)
Net income - - - - 5,131 5,131
Dividends declared -
$0.40 per share - - - - (4,972) (4,972)
Balance, ------ --------- ---------- --------- --------- --------
March 31, 1996 $ 124 $ 179,303 $ (19,825) $ 6,179 $ (368 $165,413
====== ========= ========== ========= ========= ========
See Notes to Financial Statements.
THORNBURG MORTGAGE ASSET CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
1996 1995
----------- ----------
Operating Activities:
Net Income $ 5,131 $ 42
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization 3,293 254
Net (gain) loss from investing activities (13) 659
Change in assets and liabilities:
Accrued interest receivable 1,606 179
Prepaid expenses and other (117) (94)
Accrued interest payable (1,084) 1,050
Accrued expenses and other 291 (32)
---------- ----------
Net cash provided by operating activities 9,107 2,058
---------- ----------
Investing Activities:
Available-for-sale securities:
Purchase of adj.-rate mortgage securities (205,970) (37,352)
Proceeds on sales of adj.-rate mortgage sec. 6,574 44,071
Principal payments on adj.-rate mortgage sec. 106,813 27,546
Held-to-maturity securities:
Principal payments on adj.-rate mortgage sec. 30,842 15,838
Purchase of interest rate cap agreements (234) -
---------- ---------
Net cash provided by(used in) invest. activities (61,975) 50,103
---------- ---------
Financing Activities:
Net borr. from(repayments of) reverse
repurchase agreements 46,430 (47,682)
Net borr. from(repayments of) other borrowings 7,804 (628)
Proceeds from common stock issued 3,618 68
Dividends paid (4,632) (1,766)
---------- ---------
Net cash provided by (used in) financing activities 53,220 (50,008)
---------- ---------
Net increase (decrease) in cash and cash equivalents 352 2,153
Cash and cash equivalents at beginning of period 3,660 10,848
--------- ---------
Cash and cash equivalents at end of period $ 4,012 $ 13,001
========= =========
Supplemental disclosure of cash flow information and non-cash activities are
included in Note 3.
See Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Cash and cash equivalents
Cash and cash equivalents includes cash on hand and highly
liquid investments with original maturities of three months or
less. The carrying amount of cash equivalents approximates
their value.
Adjustable-rate mortgage securities
The Company's policy is to classify each of its assets as
available-for-sale as they are purchased and then monitor each
asset for a period of time, generally six to twelve months,
prior to making a determination whether the asset will be
classified as held-to-maturity. Management has made the
determination that certain securities are available-for-sale
in order to be prepared to respond to potential future
opportunities in the market, to sell securities in order to
optimize the portfolio's total return and to retain its
ability to respond to economic conditions that require the
Company to sell assets in order to maintain an appropriate
level of liquidity. Management re-evaluates the classification
of the securities on a quarterly basis. All securities
classified as held-to-maturity are carried at the fair value
of the security at the time the designation is made and any
fair value adjustment to the cost basis as of the date of the
classification is amortized into interest income as a yield
adjustment. All securities designated available-for-sale are
reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of
shareholders' equity.
Premiums and discounts associated with the purchase of the
securities are amortized into interest income over the lives
of the securities using the effective yield method adjusted
for the effects of estimated prepayments.
Securities transactions are recorded on the date the
securities are purchased or sold. Purchases of new issue
securities are recorded when all significant uncertainties
regarding the characteristics of the securities are removed,
generally shortly before settlement date. Realized gains and
losses on securities transactions are determined on the
specific identification basis.
Credit Risk
The Company has limited its exposure to credit losses on its
portfolio of adjustable-rate mortgage ("ARM") securities by
only purchasing securities that are either guaranteed by an
agency of the federal government or have an investment grade
rating by at least one of two nationally recognized rating
agencies, Moody's or S&P. The Company monitors the
delinquencies and losses on the underlying mortgages and makes
a provision for possible credit losses at a level deemed
appropriate by management to provide for known losses as well
as unidentified potential losses in its ARM securities
portfolio if the impairment is deemed to be other than
temporary. The provision is based on management's assessment
of numerous factors affecting its portfolio of ARM securities
including, but not limited to, current and projected economic
conditions, delinquency status, credit losses to date on
underlying mortgages and remaining credit protection. The
provision is made by reducing the cost basis of the individual
security and the amount of such write down reduces earnings.
Interest rate cap agreements
The Company purchases interest rate cap agreements (the "Cap
Agreements") to limit the Company's risks associated with the
lifetime or maximum interest rate caps of its ARM securities
should interest rates rise above specified levels. The Cap
Agreements, in effect, reduce the effect of the lifetime cap
feature so that the yield on the ARM securities will continue
to rise in high interest rate environments as the Company's
cost of borrowings also continue to rise. The Company's
borrowings do not have a similar interest rate cap limitation.
The Cap Agreements classified as a hedge against
held-to-maturity securities are initially carried at their
fair value as of the time the Cap Agreements and the related
securities are designated as held-to-maturity with an
adjustment to equity for any unrealized gains or losses at the
time of the designation. Any adjustment to equity is
thereafter amortized into interest income as a yield
adjustment in a manner consistent with the amortization of any
premium or discount. The Cap Agreements that are classified as
a hedge against available-for-sale securities are carried at
fair value with unrealized gains and losses reported as a
separate component of equity, consistent with the reporting of
such securities. The carrying value of the Cap Agreements are
included in ARM securities on the balance sheet. The
amortization of the carrying value of the Cap Agreements is
included in interest income as a contra item (i.e. expense)
and, as such, reduces interest income over the lives of the
Cap Agreements.
Realized gains and losses resulting from the termination of
the Cap Agreements that are hedging assets classified as
held-to-maturity are deferred as an adjustment to the carrying
value of the related assets and are amortized into interest
income over the terms of the related assets. Realized gains
and losses resulting from the termination of such agreements
that are hedging assets classified as available-for-sale are
initially reported in a separate component of equity,
consistent with the reporting of those assets, and are
thereafter amortized as a yield adjustment.
Interest rate swap agreements
The Company enters into interest rate swap agreements in order
to manage its interest rate exposure when financing its ARM
assets. Revenues and expenses from the interest rate swap
agreements are accounted for on an accrual basis and
recognized as a net adjustment to interest expense.
Income taxes
The Company has elected to be taxed as a Real Estate
Investment Trust ("REIT") and intends to comply with the
provisions of the Internal Revenue Code of 1986, as amended
(the "Code") with respect thereto. Accordingly, the Company
will not be subject to Federal income tax to the extent of its
distributions to shareholders and as long as certain asset,
income and stock ownership tests are met.
Net income per share
Net income per share is computed by dividing net income by the
weighted average number of common shares and common share
equivalents (e.g., stock options), if dilutive, outstanding
during the period.
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that effect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Note 2. Adjustable-Rate Mortgage Securities and Interest Rate Cap Agreements
Investments in ARM securities consist of mortgage certificates
secured by ARMs primarily on single-family residential housing.
The following table pertains to the Company's ARM securities
classified as available-for-sale as of March 31, 1996 and December
31, 1995, which are carried at their fair value:
Available-for-Sale
---------------------------------------
(In thousands) March 31, 1996 December 31, 1995
------------------ -------------------
Amortized cost basis $ 1,487,094 $ 1,440,345
Gross unrealized gains 5,036 4,468
Gross unrealized losses (23,486) (24,800)
----------------- ------------------
Fair Value $ 1,468,644 $ 1,420,013
================= ==================
During the quarter ended March 31, 1996, the Company realized
$61,000 in gains and $48,000 in losses on the sale of $6.5 million
of ARM securities, which were classified as available-for-sale.
The following table pertains to the Company's ARM securities
classified as held-to-maturity as of March 31, 1996 and December
31, 1995, which are carried at their amortized cost basis:
Held-To-Maturity
--------------------------------------
(In thousands) March 31, 1996 December 31, 1995
----------------- -------------------
Amortized cost basis $ 543,507 $ 575,274
Gross unrealized gains 4,020 3,746
Gross unrealized losses (4,623) (5,437)
---------------- --------------------
Fair Value $ 542,904 $ 573,583
================ ====================
As of March 31, 1996, the Company had commitments to purchase
$94.0 million of ARM securities.
The average effective yield on the securities owned, including the
amortization of the Cap Agreements, was 6.49% as of March 31, 1996
and 6.73% as of December 31, 1995.
As of March 31, 1996 and December 31, 1995, the Company had
purchased Cap Agreements with a remaining notional amount of
$1,773,691,000 and $1,461,814,000, respectively. The notional
amount of the Cap Agreements purchased decline at a rate that is
expected to approximate the amortization of the ARM securities.
Under these Cap Agreements, the Company will receive cash payments
should either the three-month or six-month London InterBank Offer
Rate ("LIBOR") increase above the contract rates of the Cap
Agreements which range from 7.50% to 12.50%. The initial aggregate
notional amount of the Cap Agreements declines to approximately
$1,050,277,000 over the period of the agreements, which expire
between 1999 and 2001. The Company purchased these Cap Agreements
by incurring a one-time fee, or premium. The premium is amortized,
or expensed, over the lives of the Cap Agreements and decreases
interest income on the Company's ARM securities during the period
of amortization. The Company has credit risk to the extent that
the counterparties to the Cap Agreements do not perform their
obligations under the Cap Agreements. If one of the counterparties
does not perform, the Company would not receive the cash to which
it would otherwise be entitled under the conditions of the Cap
Agreement. In order to mitigate this risk and achieve competitive
pricing, the Company has entered into Cap Agreements with four
different counterparties, two of which are rated AAA and two of
which are rated AA.
Note 3. Reverse Repurchase Agreements and Other Borrowings
The Company has entered into reverse repurchase agreements to
finance most of its mortgage securities. The reverse repurchase
agreements are secured by the market value of the Company's
mortgage securities and bear interest rates that have historically
moved in close relationship to LIBOR.
As of March 31, 1996, the Company had outstanding $1,827,284,000
of reverse repurchase agreements with a weighted average borrowing
cost of 5.57%, which includes the cost of interest rate swaps, and
a weighted average remaining maturity of 3.0 months. As of March
31, 1996, $845,221,000 of the Company's borrowings were
variable-rate term reverse repurchase agreements with original
maturities that range from six months to two years. The interest
rates of these term reverse repurchase agreements are indexed to
either the one, three or six month LIBOR rate and reprice
accordingly. The reverse repurchase agreements at March 31, 1996
were collateralized by mortgage securities with a carrying value
of $1,925,593,000, including accrued interest.
The Company has a line of credit agreement which provides for
short-term borrowings of up to $25,000,000 collateralized by the
Company's principal and interest receivables. At March 31, 1996,
the Company had an outstanding balance under this agreement of
$8.9 million at a stated interest rate of 5.925%.
As of March 31, 1996, the Company had financed most of its
portfolio of Cap Agreements with $17,308,000 of other borrowings
which require quarterly or semi-annual payments until the year
2000. These borrowings have a weighted average fixed rate of
interest of 7.91% and have a weighted average remaining maturity
of 3.8 years. The Cap Agreements at March 31, 1996 were
collateralized by mortgage securities with a carrying value of
$18,706,000, including accrued interest.
During the quarter ended March 31, 1996, the total cash paid for
interest was $27,535,000.
Note 4. Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated
fair values of the Company's financial instruments at March 31,
1996 and December 31, 1995. FASB Statement No. 107, Disclosures
About Fair Value of Financial Instruments, defines the fair value
of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale.
March 31, 1996 December 31, 1995
-------------------- ----------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
---------- ---------- ---------- -----------
Assets:
Adj.-rate mortgage
securities $2,003,806 $2,006,446 $1,988,127 $1,990,217
Cap agreements 8,395 5,151 7,160 3,379
Liabilities:
Other borrowings 26,250 26,838 18,446 19,131
Swap agreements 32 293 (33) 580
The above carrying amounts for assets are combined in the balance
sheet under the caption "adjustable-rate mortgage securities". The
carrying amount for assets categorized as available-for-sale is
their fair value whereas the carrying amount for assets
held-to-maturity is their unamortized cost.
The fair values of the Company's ARM securities and Cap Agreements
are based on market prices provided by certain dealers who make
markets in these financial instruments. The fair value of the
Company's long-term debt and interest rate swap agreements, which
are off-balance sheet financial instruments, are based on market
values provided by dealers who are familiar with the terms of the
long-term debt and swap agreements. The fair values reported
reflect estimates and may not necessarily be indicative of the
amounts the Company could realize in a current market exchange.
Cash and cash equivalents, interest receivable, reverse repurchase
agreements and other liabilities are reflected in the financial
statements at their amortized cost, which approximates their fair
value because of the short-term nature of these instruments.
Note 5. Common Stock and Stock Option Plan
On October 9, 1995, the Company entered into a one-year Sales
Agency Agreement with PaineWebber Incorporated. In accordance with
the Sales Agency Agreement, PaineWebber agreed to sell up to
1,174,969 additional shares of the Company's common stock,
representing 10% of aggregate market value of the Company's common
stock held by non-affiliates. During the quarter ended March 31,
1996, the Company sold 207,500 shares under this Sales Agency
Agreement and received net proceeds of $3,118,000.
During the quarter ended March 31, 1996, the Company issued 31,854
shares of common stock under its dividend reinvestment and stock
purchase plan and received net proceeds of $479,000.
On April 23, 1996, the Company completed a public offering of
3,000,000 shares of its common stock pursuant to its Registration
Statement on Form S-3 that was declared effective on September 12,
1995. The Company received net proceeds of $42,358,000. The
offering was managed by PaineWebber Incorporated, EVEREN
Securities, Inc., Principal Financial Securities, Inc., Stifel
Nicolaus & Company, Incorporated and Thornburg Securities
Corporation (the "Underwriters"). On April 29, 1996, the
Underwriters notified the Company of their intent to exercise
their option to purchase an additional 450,000 shares to cover
over-allotments which will provide the Company with additional net
proceeds of $6,369,000.
The Company has adopted a Stock Option Plan which authorizes the
granting of options to purchase an aggregate of up to 1,000,000
shares, but not more than 5% of the outstanding shares of the
Company's common stock. The exercise price for any options granted
under the Stock Option Plan may not be less than 100% of the fair
market value of the shares of the common stock at the time the
option is granted. As of March 31, 1996, the Company had granted
491,544 options at exercise prices of $9.375 to $16.125 per share,
substantially all of which were exercisable. The weighted average
exercise price of the options granted is $15.506 per share. These
options become exercisable six months after the date granted and
will expire ten years after the date granted.
In the quarter ended March 31, 1996, the Company was required to
adopt Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation". This statement applies
to transactions in which an entity grants shares of its common
stock, stock options or other equity instruments to its employees
and requires the entity to compute a compensation cost based on
the fair value of the award on the date of the grant. The entity
can either recognize this compensation expense or continue to
account for such awards using the intrinsic value method of
accounting while providing a pro forma disclosure of net income
and earnings per share based on the fair value method. The Company
has elected to continue to account for its stock option plan using
the intrinsic value method and in the current quarter the
compensation expense that would have been recognized under the
fair value method was immaterial.
Note 6. Transactions with Affiliates
The Company has a Management Agreement (the "Agreement") with
Thornburg Mortgage Advisory Corporation ("the Manager"). Under the
terms of this Agreement, the Manager, subject to the supervision
of the Company's Board of Directors, is responsible for the
day-to-day operations of the Company and provides personnel and
office space. The Agreement provides for an annual review by the
unaffiliated directors of the Board of Directors of the Manager's
performance under the Agreement.
The Company pays the Manager an annual base management fee based
on Average Net Invested Assets (generally defined as total assets
less total debts incurred to finance assets) payable monthly in
arrears as follows:
1% of the first $50 million of Average Net Invested assets, plus
3/4 of 1% of the portion between $50 million and $100 million, plus
5/8 of 1% of the portion between $100 million and $200 million, plus
1/2 of 1% of the portion between $200 million and $300 million, plus
3/8 of 1% of the portion above $300 million.
For the quarter ended March 31, 1996, the Company paid the Manager
$359,000 in base management fees in accordance with the terms of
the Agreement and $344,000 for the quarter ended March 31, 1995.
The Manager is also entitled to earn incentive compensation in an
amount equal to 25% of the Company's annualized net income, before
incentive compensation, above an annualized Return on Equity
(generally defined as proceeds from issuance of common stock
before underwriter's discount and other costs of issuance plus
retained earnings), equal to the ten year U.S. Treasury Rate plus
1%. For the quarter ended March 31, 1996, the Manager earned
incentive compensation in the amount of $588,000. The Manager did
not earn any incentive compensation in the quarter ended March 31,
1995.
Note 7. Dividends
On March 15, 1996, the Company declared a first quarter dividend
of $4,972,026 or $0.40 per share to be paid on April 10, 1996 to
shareholders of record as of March 29, 1996. For federal income
tax purposes such dividends are ordinary income to the Company's
shareholders.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Thornburg Mortgage Asset Corporation (the "Company") is a special purpose
financial institution that primarily invests in ARM securities, thereby
indirectly providing capital to the singe-family residential housing market. ARM
securities represent interests in pools of adjustable-rate mortgage loans, which
often include guarantees or other credit enhancements against losses from loan
defaults. While the Company is not a bank or savings and loan, its business
purpose, strategy, method of operation and risk profile are best understood in
comparison to such institutions. The Company leverages its equity capital using
borrowed funds, invest in ARM securities and seeks to generate income based on
the difference between the yield on its ARM securities portfolio and cost of its
borrowings. The corporate structure of the Company differs from most lending
institutions in that the Company is organized for tax purposes as a real estate
investment trust ("REIT") and, therefore, generally passes through substantially
all of its earnings to shareholders without paying federal income tax at the
corporate level.
The Company's mortgage securities portfolio may consist of either agency or
privately issued (generally publicly registered) mortgage pass-through
securities, multiclass pass-through securities, Collateralized Mortgage
Obligations ("CMOs") or short-term investments that either mature within one
year or have an interest rate that reprices within one year.
The Company's investment policy is to invest at least 70% of total assets in
High Quality ARM securities and short-term investments. High Quality means:
(1) securities which are rated within one of the two highest rating categories
by at least one of either Standard & Poor's Corporation or Moody's Investors
Service, Inc. (the "Rating Agencies");
(2) securities that are unrated but are guaranteed by the U.S. Government or
issued or guaranteed by an agency of the U.S. Government; or
(3) securities that are unrated or whose ratings have not been updated but are
determined to be of comparable quality (by the rating standards of at least
one of the Rating Agencies) to a High Quality rated mortgage security.
The remainder of the Company's investment portfolio, comprising not more than
30% of total assets, may consist of Other Investment assets (formerly referred
to as Limited Investment assets), which may include:
(1) loans secured by first liens on single-family residential properties
acquired for the purpose of securitization into investment grade
securities; or
(2) pass-through securities or CMOs backed by loans on single-family
residential properties or on multi-family, commercial or other real
estate-related properties if they are rated at least Investment Grade
at the time of purchase. "Investment Grade" generally means a security
rating of BBB or Baa or better by at least one of the Rating Agencies.
The Company does not invest in REMIC residuals or other CMO residuals and,
therefore does not create excess inclusion income or unrelated business taxable
income for tax exempt investors. Therefore, the Company is a mortgage REIT
eligible for purchase by tax exempt investors, such as pension plans, profit
sharing plans, 401(k) plans, Keogh plans and Individual Retirement Accounts
("IRAs").
Financial Condition
At March 31, 1996, the Company held total assets of $2.034 billion, $2.012
billion of which consisted of ARM securities, as compared to $2.018 billion and
$1.995 billion, respectively, at December 31, 1995. At March 31, 1996, 93.3% of
the assets held by the Company were High Quality assets as compared with the
Company's investment policy of investing at least 70% of its total assets in
High Quality mortgage securities and cash and cash equivalents. All of the
mortgage securities currently owned by the Company are either in the form of a
pass-through certificates or a class of a multi-class pass-through certificate
backed by adjustable-rate mortgages.
The following table presents a schedule of ARM securities owned at March 31,
1996 and December 31, 1995 classified by High Quality and Other Investment
assets and further classified by those issued by an agency of the U.S.
Government and those privately issued, generally publicly registered mortgage
securities, and, lastly, classified according to the rating categories as
determined by at least one of the Rating Agencies.
MORTGAGE SECURITIES BY ISSUER AND CREDIT RATING
(Amounts in thousands)
Assets Held as of Assets Held as of
March 31, 1996 December 31, 1995
------------------------- ------------------------
Carrying Portfolio Carrying Portfolio
Value Mix Value Mix
High Quality: ----------- ---------- ----------- ----------
FHLMC/FNMA $ 921,516 45.8% $ 894,433 44.8%
Privately Issued:
AAA/Aaa Rating 168,149 8.4 165,196 8.3
AA/Aa Rating 787,770 39.1 784,633 39.3
--------- ------- --------- -------
Total Privately Issued 955,919 47.5 949,829 47.6
--------- ------- --------- -------
Total High Quality 1,877,435 93.3 1,844,262 92.4
--------- ------- --------- -------
Other Investment:
Privately Issued:
A Rating 119,423 5.9 134,970 6.8
BBB/Baa Rating 15,292 0.8 16,055 0.8
--------- ------- ---------- ------
Total Other Investment 134,715 6.7 151,025 7.6
--------- ------- ---------- ------
Total Mortgage Sec. $2,012,151 100.0% $1,995,287 100.0%
========= ======= ========= ======
The following table classifies the Company's portfolio of ARM securities by type
of interest rate index.
MORTGAGE SECURITIES BY INDEX
(Amounts in thousands)
Assets Held as of Assets Held as of
March 31, 1996 December 31, 1995
------------------------- ------------------------
Carrying Portfolio Carrying Portfolio
Value Mix Value Mix
Index: ---------- --------- ----------- ---------
One-month LIBOR $ 10,557 0.5% $ 10,229 0.5%
Six-month LIBOR 1,387,376 69.0 1,494,102 74.9
Six-month Certificate
of Deposit 29,327 1.5 32,349 1.6
One-year Constant
Maturity Treasury 511,746 25.4 385,066 19.3
11th District Cost
of Funds 73,144 3.6 73,541 3.7
---------- ------- --------- -------
$ 2,012,151 100.0% $ 1,995,287 100.0%
========== ======= ========= =======
The portfolio had a current weighted average coupon of 7.48% at March 31, 1996.
If the portfolio were "fully indexed", the weighted average coupon would be
7.56%, based upon the current composition of the portfolio and the applicable
indices at March 31, 1996.
For the month of March 1996, the current yield of the ARM securities portfolio
was 6.49%. The current yield includes the impact of the amortization of
applicable premiums and discounts, the cost of hedging and the amortization of
the deferred gains from hedging activity.
During the quarter ended March 31, 1996, the Company purchased $206.0 million of
ARM securities, all of which were High Quality assets. The Company also sold
$6.5 million of High Quality ARM securities for a net gain of $13,000 during the
quarter ended March 31, 1996.
For the quarter ended March 31, 1996, the Company's mortgage securities paid
down at an approximate average annualized constant prepayment rate of 32%. The
prepayment experience during the quarter was above long term expectations. The
Company believes that this was primarily due to the re-pricing of a large
portion of the Company's portfolio at a time when the difference between
long-term and short-term interest rates were at a historically low level. These
conditions generally create attractive opportunities for consumers to refinance
ARMs into fixed-rate mortgages. Toward the end of the first quarter, long-term
interest rates increased and short-term interest rates remained substantially
the same. The Company expects that one of the results of this recent change in
interest rates will be a slowing down of prepayments of ARMs, which will then
result in a slowing down of the prepayments on the Company's ARM securities. The
constant prepayment rate assumption is used to calculate the estimated yield to
maturity on the mortgage securities. In the event that actual prepayment
experience exceeds the assumption due to sustained increased prepayment
activity, the Company would have to amortize its premiums over a shorter time
period, resulting in a reduced yield to maturity on the Company's ARM
securities. Conversely, if actual prepayment experience is less than the assumed
constant prepayment rate, the premium would be amortized over a longer time
period, resulting in a higher yield to maturity. The Company monitors its
prepayment experience on a monthly basis in order to adjust the amortization of
the net premium as appropriate.
The fair value of the Company's portfolio of ARM securities rose during the
quarter ended March 31, 1995. As of March 31, 1995, the Company's portfolio of
ARM securities available-for-sale, including the applicable Cap Agreements, had
a net unrealized loss of $18,450,000 and shareholders' equity has been adjusted
to reflect this valuation amount. At December 31, 1995, the Company's portfolio
of ARM securities available-for-sale had an unrealized loss of $20,332,000.
The Company has purchased Cap Agreements in order to limit its exposure to risks
associated with the lifetime interest rate caps of its ARM securities should
interest rates rise above specified levels. The Cap Agreements act to reduce the
effect of the lifetime or maximum interest rate cap limitation. The Cap
Agreements purchased by the Company will allow the yield on the ARM securities
to continue to rise in a high interest rate environment just as the Company's
cost of borrowings would continue to rise, since the borrowings do not have any
interest rate cap limitation. At March 31, 1996, the Cap Agreements owned by the
Company had a remaining notional balance of $1.774 billion with an average final
maturity of 3.9 years, as compared to a remaining notional balance of $1.461
billion with an average final maturity of 4.3 years at December 31, 1994.
Pursuant to the terms of the Cap Agreements, the Company will receive cash
payments if the three month or six month LIBOR index increases above certain
specified levels which range from 7.50% to 12.50% and average approximately
9.44%. The fair market value of these Cap Agreements also tends to increase when
general market interest rates increase and decrease when market interest rates
decrease, helping to partially offset changes in the market value of the
Company's ARM securities. At March 31, 1996 the fair value of the Cap Agreements
was $5.2 million, $13.2 million less than the amortized cost of the agreements.
Results of Operations For the Three Months Ended March 31, 1996
For the quarter ended March 31, 1996, the Company's net income was $5,131,000 or
$0.42 per share based on a weighted average of 12,334,847 shares outstanding as
compared to $42,000 or $0.00 per share based on a weighted average of 11,780,726
shares outstanding for the quarter ended March 31, 1995. Net interest income is
comprised of the interest income earned on mortgage investments less interest
expense from borrowings. Net interest income for the quarter totaled $6,190,000
as compared to $1,158,000 for the same period in 1995. The Company incurred
operating expenses of $1,072,000 for the quarter, consisting principally of
management fees of $947,000, including $588,000 of incentive compensation and
other miscellaneous expenses of $125,000 as compared to operating expenses of
$457,000 for the same period in 1995, consisting principally of management fees
of $344,000 and other miscellaneous expenses of $113,000. The Company also
reported a $13,000 gain from the sale of assets during the quarter ended March
31, 1996 as compared to a loss from the sale of assets of $659,000 for the same
period in 1995.
The primary reason for the rise in the Company's net interest income in the
first quarter of 1996 as compared to the same quarter in 1995 was the combined
effect of an increase in the yield on the Company's portfolio of ARM securities
and a decrease in the Company's cost of funds. As presented in the table below,
the Company's ARM securities portfolio generated a yield of 6.46% during the
first quarter of 1996 as compared to 5.92% for the first quarter of 1995. This
increase of 0.54% is primarily attributable to the increase in the weighted
average coupon on the portfolio that rose to 7.48% as of March 31, 1996 from
6.33% as of March 31, 1995. The benefit to net interest income from this
increase in the weighted average coupon was partially offset by the acceleration
of the amortization of the net premium paid for the ARM securities as a result
of the increased prepayment of ARM securities experienced by the Company during
the first quarter of 1996 as compared to the same period in 1995.
The Company's cost of funds during the quarter ended March 31, 1996 decreased to
5.73% from 6.28% for the same quarter of 1995, primarily as a result of lower
short-term interest rates available to the Company for financing purposes. The
combined effect of the higher yield on the Company's ARM securities portfolio
and the lower cost of funds increased the Company's net spread to 0.73% for the
first quarter of 1996 from a negative 0.36% for the first quarter of 1995. The
Company's yield on net interest earning assets, which includes the impact of
shareholders' equity, rose to 1.22% for the first quarter of 1996 from 0.26% for
the first quarter of 1995.
The increase in the Company's operating expenses is primarily the result of
achieving sufficient earnings for the Company's shareholders such that an
incentive fee was earned by the Manager. During the first quarter of 1995, the
Manager did not earn an incentive fee as a result of the earnings level of the
Company. In order for the Manager to earn an incentive fee payment, the rate of
return to the shareholders, as defined in the Management Agreement, must exceed
the average ten-year US Treasury rate during the quarter plus 1%. During the
first quarter of 1996, the Manager did earn an incentive fee of $588,000.
The following table reflects the average balances for each category of the
Company's interest earning assets as well as the Company's interest bearing
liabilities, with the corresponding effective rate of interest annualized for
the quarter ended March 31, 1996 and March 31, 1995:
AVERAGE BALANCE AND RATE TABLE
(Amounts in thousands)
For the Quarter Ended For the Quarter Ended
March 31, 1996 March 31, 1995
------------------------ ---------------------
Average Effective Average Effective
Balance Rate Balance Rate
----------- -------- ----------- --------
Interest Earning Assets:
Adj.-rate mortgage sec. $ 2,012,676 6.46% $ 1,729,535 5.92%
Cash and cash equivalents 13,086 5.61 18,936 5.97
---------- ------ ---------- ------
2,025,762 6.46 1,748,471 5.92
---------- ------ ---------- ------
Interest Bearing Liabilities:
Borrowings 1,850,508 5.73 1,575,442 6.28
Net Interest Earning Assets ---------- ------ ---------- ------
and Spread $ 175,254 0.73% $ 172,527 (0.36)%
========== ====== ========== ======
Yield on Net Interest
Earning Assets (1) 1.22% 0.26%
====== ======
(1) Yield on Net Interest Earning Assets is computed by dividing annualized
net interest income by the average daily balance of interest earning
assets.
Liquidity and Capital Resources
The Company's primary source of funds for the quarters ended March 31, 1996 and
1995 consisted of reverse repurchase agreements, which totaled $1.827 billion
and $1.554 billion at the respective quarter ends. The Company's other
significant sources of funds for the quarters ended March 31, 1996 and 1995
consisted of payments of principal and interest from the ARM securities in the
amounts of $175.1 million and $69.4 million, respectively, and the proceeds from
the sale of ARM securities in the amounts of $6.5 million and $44.1 million,
respectively. In the future, the Company expects its primary sources of funds
will continue to consist of monthly payments of principal and interest on its
ARM securities portfolio and of borrowed funds under reverse repurchase
agreement transactions with one to twelve month maturities and possibly from
asset sales as needed. The Company's liquid assets generally consist of
unpledged ARM securities, cash and cash equivalents.
The borrowings incurred at March 31, 1996 had a weighted average interest cost
of 5.60%, which includes the cost of interest rate swaps, a weighted average
original term to maturity of 6.5 months and a weighted average remaining term to
maturity of 3.4 months. As of March 31, 1996, $845.2 million of the Company's
borrowings were variable-rate term reverse repurchase agreements with original
maturities that range from three months to two years. The interest rates of
these term reverse repurchase agreements are indexed to either the one, two or
six-month LIBOR rate and reprice accordingly.
The Company has borrowing arrangements with twenty-two different investment
banking firms and commercial banks and at March 31, 1996 had borrowed funds
under reverse repurchase agreements with fifteen of these firms. Because the
Company borrows funds based on the fair value of its ARM securities, the
Company's borrowing ability could be adversely affected as a result of either a
significant increase in short-term interest rates or a credit downgrade of a
mortgage pool or a mortgage pool insurer, either of which would reduce the fair
value of the Company's ARM securities. If such a decrease in fair value was
significant enough, it could require the Company to sell assets in order to
maintain liquidity. For the quarter ended March 31, 1996, the Company had
adequate cash flow, liquid assets and unpledged collateral with which to meet
its margin requirements. Further, the Company has always maintained sufficient
liquidity to meet its cash requirements from its primary sources of funds and
believes it will be able to do so in the future.
The Company has a Dividend Reinvestment and Stock Purchase Plan (the "Plan")
designed to provide a convenient and economical way for existing shareholders to
automatically reinvest their dividends in additional shares of common stock and
to purchase additional shares at a 3% discount to the current market price of
the common stock, as defined in the Plan. As a result of participation in the
Plan, the Company issued 31,854 new shares of common stock and received proceeds
of $479,000 of new equity capital during the first quarter of 1996.
On October 9, 1995, the Company entered into a one-year Sales Agency Agreement
with PaineWebber Incorporated. In accordance with the Sales Agency Agreement,
PaineWebber agreed to sell up to 1,174,969 additional shares of the Company's
common stock, representing 10% of aggregate market value of the Company's common
stock held by non-affiliates. During the quarter ended March 31, 1996, the
Company sold 207,500 shares under this Sales Agency Agreement and received net
proceeds of $3,118,000.
On April 23, 1996, the Company completed a public offering of 3,000,000 shares
of its common stock pursuant to its Registration Statement on Form S-3 that was
declared effective on September 12, 1995. The Company received net proceeds of
$42,358,000. The offering was managed by PaineWebber Incorporated, EVEREN
Securities, Inc., Principal Financial Securities, Inc., Stifel Nicolaus &
Company, Incorporated and Thornburg Securities Corporation (the "Underwriters").
On April 29, 1996, the Underwriters notified the Company of their intent to
exercise their option to purchase an additional 450,000 shares to cover
over-allotments which will provide the Company with additional net proceeds of
$6,369,000.
Effects of Interest Rate Changes
Changes in interest rates may impact the Company's earnings in various ways.
While the Company only invests in ARM securities, rising short-term interest
rates may temporarily negatively affect the Company's earnings. The rate of
interest on an ARM loan is generally limited in its ability to increase by
either 1% or 2% per adjustment period. Mortgage securities owned by the Company
are subject to such limitations (known as periodic caps) while the Company's
borrowing rates are not subject to such limitations. In periods of rising
interest rates, the Company's net interest income could temporarily decline as a
result of the existence of these periodic caps on its mortgage securities.
The rate of prepayment on the Company's mortgage securities may increase if
interest rates decline, or if the difference between long term and short term
interest rates diminishes. Increased prepayments would cause the Company to
amortize the premiums paid for its mortgage securities faster than currently
anticipated, resulting in a reduced yield on its mortgage securities.
Additionally, to the extent proceeds of prepayments cannot be reinvested at a
rate of interest at least equal to the rate previously earned on such mortgage
securities, the Company's earnings may be adversely affected.
Lastly, because the Company only invests in adjustable-rate mortgage assets and
approximately 10% of such mortgage assets are financed by shareholders' equity,
the Company's earnings over time will tend to increase following periods when
short-term interest rates have risen and decrease following periods when
short-term interest rates have declined.
Other Matters
The Company calculates its Qualified REIT Assets, as defined in the Code, to be
99.6% of its total assets, as compared to the federal tax requirement that at
least 75% of its total assets must be Qualified REIT Assets. The Company also
calculates that 99.5% of its revenue qualifies for the 75% source of income test
and 100% of its revenue qualifies for the 95% source of income test under the
REIT rules. Furthermore, the Company's revenues during the quarter ended March
31, 1996, subject to the 30% income limitation under the REIT rules amounted to
0.18% of total revenue. The Company also met all REIT requirements regarding the
ownership of its common stock and the distributions of its net income.
Therefore, as of March 31, 1996, the Company believed that it was in full
compliance with the REIT tax rules and that it would continue to qualify as a
REIT under the provisions of the Code.
The Company at all times intends to conduct its business so as not to
become regulated as an investment company under the Investment Company Act. If
the Company were to become regulated as an investment company, then the
Company's use of leverage would be substantially reduced. The Investment Company
Act exempts entities that are "primarily engaged in the business of purchasing
or otherwise acquiring mortgages and other liens on and interests in real
estate" ("Qualifying Interests"). Under current interpretation of the staff of
the SEC, in order to qualify for this exemption, the Company must maintain at
least 55% of its assets directly in Qualifying Interests. In addition, unless
certain Mortgage Securities represent all the certificates issued with respect
to an underlying pool of mortgages, such Mortgage Securities may be treated as
securities separate from the underlying Mortgage Loans and, thus, may not be
considered Qualifying Interests for purposes of the 55% requirement. As of March
31, 1996, the Company calculates that it is in compliance with this requirement.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
At March 31, 1996, there were no pending legal proceedings to
which the Company was a party or of which any of its property was
subject.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
None
(b) Reports on Form 8-K
None
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,
THORNBURG MORTGAGE ASSET CORPORATION
Dated: May 1, 1996 By: /s/ H. Garrett Thornburg, Jr.
------------------------------
H. Garrett Thornburg, Jr.,
Chairman of the Board of Directors
authorized officer of registrant)
Dated: May 1, 1996 By: /s/ Richard P. Story
--------------------
Richard P. Story,
Chief Financial Officer and Treasurer
(principal accounting officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from March 31,
1996 Quarterly Report on Form 10-Q and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,012
<SECURITIES> 2,012,151
<RECEIVABLES> 17,172
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 377
<PP&E> 0
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<TOTAL-ASSETS> 2,033,712
<CURRENT-LIABILITIES> 1,868,299
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0
0
<COMMON> 124
<OTHER-SE> 165,289
<TOTAL-LIABILITY-AND-EQUITY> 2,033,712
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<TOTAL-REVENUES> 32,715
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<OTHER-EXPENSES> 1,072
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<INCOME-CONTINUING> 5,131
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<EPS-DILUTED> .42
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