<PAGE> 1
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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: JUNE 30, 1997
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: 0-26436
REDWOOD TRUST, INC.
(Exact name of Registrant as specified in its Charter)
MARYLAND 68-0329422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
591 REDWOOD HIGHWAY, SUITE 3100
MILL VALLEY, CALIFORNIA 94941
(Address of principal executive offices) (Zip Code)
(415) 389-7373
(Registrant's telephone number, including area code)
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.
Yes X No
------ -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of stock, as of the last practicable date.
<TABLE>
<S> <C>
Class B Preferred Stock ($.01 par value) 909,518 as of August 11, 1997
Common Stock ($.01 par value) 14,809,167 as of August 11, 1997
</TABLE>
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<PAGE> 2
REDWOOD TRUST, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 1997 and December 31, 1996 ............................ 3
Consolidated Statements of Operations for the three and six months
ended June 30, 1997 and June 30, 1996 ......................................................... 4
Consolidated Statements of Stockholders' Equity for the three and six months
ended June 30, 1997 and June 30, 1996 ......................................................... 5
Consolidated Statements of Cash Flows for the three and six months
ended June 30, 1997 and June 30, 1996 ......................................................... 6
Notes to Consolidated Financial Statements .................................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ...................................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................................................. 67
Item 2. Changes in Securities .............................................................................. 67
Item 3. Defaults Upon Senior Securities. ................................................................... 67
Item 4. Submission of Matters to a Vote of Security Holders................................................. 67
Item 5. Other Information .................................................................................. 68
Item 6. Exhibits and Reports on Form 8-K. .................................................................. 68
SIGNATURES .................................................................................................... 69
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
REDWOOD TRUST, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
--------------- -----------------
<S> <C> <C>
ASSETS
Mortgage assets:
Mortgage securities $ 2,227,389 $ 1,627,953
Mortgage loans 1,135,765 525,475
--------------- -----------------
3,363,154 2,153,428
Interest rate agreements 4,867 2,601
Cash and cash equivalents 29,425 11,068
Accrued interest receivable 25,818 15,537
Other assets 1,242 1,563
--------------- -----------------
$ 3,424,506 $ 2,184,197
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short-term borrowings $ 3,102,784 $ 1,953,103
Accrued interest payable 18,153 14,060
Accrued expenses and other liabilities 1,743 761
Dividends payable 8,638 5,268
--------------- -----------------
3,131,318 1,973,192
--------------- -----------------
Commitments and contingencies (See Note 11)
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.01 per share;
Class B 9.74% Cumulative Convertible
909,518 and 1,006,250 shares authorized;
909,518 and 1,006,250 shares issued and
outstanding ($28,882 aggregate liquidation
preference) 26,733 29,579
Common stock, par value $0.01 per share;
49,090,482 and 48,993,750 shares authorized;
13,251,847 and 10,996,572 issued and outstanding 133 110
Additional paid-in capital 274,420 187,507
Net unrealized loss on assets available for sale (3,762) (3,460)
Dividends in excess of net income (4,336) (2,731)
--------------- -----------------
293,188 211,005
--------------- -----------------
$ 3,424,506 $ 2,184,197
=============== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Mortgage assets $ 49,243 $ 12,699 $ 87,649 $ 21,613
Cash and investments 266 202 428 419
----------- ----------- ----------- -----------
49,509 12,901 88,077 22,032
INTEREST EXPENSE 38,958 9,075 67,858 15,277
INTEREST RATE AGREEMENTS
Interest rate agreements expense 839 255 1,434 406
----------- ----------- ----------- -----------
NET INTEREST INCOME 9,712 3,571 18,785 6,349
Provision for credit losses 776 477 1,471 808
----------- ----------- ----------- -----------
Net interest income after provision for credit losses 8,936 3,094 17,314 5,541
Operating expenses 1,215 594 2,382 1,087
----------- ----------- ----------- -----------
NET INCOME 7,721 2,500 14,932 4,454
----------- ----------- ----------- -----------
Less cash dividends on Class B preferred stock 687 -- 1,442 --
----------- ----------- ----------- -----------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 7,034 $ 2,500 $ 13,490 $ 4,454
=========== =========== =========== ===========
NET INCOME PER SHARE
Primary $ 0.52 $ 0.29 $ 1.05 $ 0.60
Fully diluted $ 0.52 $ 0.28 $ 1.05 $ 0.58
Weighted average shares of common stock and common stock equivalents:
Primary 13,470,930 8,600,232 12,800,960 7,453,969
Fully diluted 13,470,930 8,789,968 12,805,892 7,643,586
Dividends declared per Class B preferred share $ 0.755 $ -- $ 1.510 $ --
Dividends declared per common share $ 0.600 $ 0.400 $ 1.200 $ 0.860
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
REDWOOD TRUST, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the six months ended June 30, 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
Class B Preferred Stock Common Stock Additional
------------------------------------------------------ Paid-in
Shares Amount Shares Amount Capital
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 1,006,250 $ 29,579 10,996,572 $ 110 $ 187,507
---------- ---------- ---------- ---------- ----------
Net income -- -- -- -- --
Conversion of preferred stock (6,612) (196) 6,612 1 195
Issuance of common stock -- -- 902,773 8 31,759
Dividends declared:
Class B Preferred -- -- -- -- --
Common -- -- -- -- --
Fair value adjustment on
assets available for sale -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, March 31, 1997 999,638 $ 29,383 11,905,957 $ 119 $ 219,461
---------- ---------- ---------- ---------- ----------
Net income -- -- -- -- --
Conversion of preferred stock (90,120) (2,650) 90,120 1 2,649
Issuance of common stock -- -- 1,255,770 13 52,310
Dividends declared:
Class B Preferred -- -- -- -- --
Common -- -- -- -- --
Fair value adjustment on
assets available for sale -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, June 30, 1997 909,518 $ 26,733 13,251,847 $ 133 $ 274,420
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
on Assets Dividends in
Available Excess of
for Sale Net Income Total
---------- ---------- ----------
<S> <C> <C> <C>
Balance, December 31, 1996 $ (3,460) $ (2,731) $ 211,005
---------- ---------- ----------
Net income -- 7,211 7,211
Conversion of preferred stock -- -- 0
Issuance of common stock -- -- 31,767
Dividends declared:
Class B Preferred -- (755) (755)
Common -- (7,144) (7,144)
Fair value adjustment on
assets available for sale 3,578 -- 3,578
---------- ---------- ----------
Balance, March 31, 1997 $ 118 $ (3,419) $ 245,662
---------- ---------- ----------
Net income -- 7,721 7,721
Conversion of preferred stock -- -- 0
Issuance of common stock -- -- 52,323
Dividends declared:
Class B Preferred -- (687) (687)
Common -- (7,951) (7,951)
Fair value adjustment on
assets available for sale (3,880) -- (3,880)
---------- ---------- ----------
Balance, June 30, 1997 $ (3,762) $ (4,336) $ 293,188
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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REDWOOD TRUST, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,721 $ 2,500 $ 14,932 $ 4,454
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of mortgage asset premium and discount, net 5,109 1,023 8,927 1,554
Depreciation and amortization 29 18 55 35
Provision for credit losses on mortgage assets 776 477 1,471 808
Amortization of interest rate cap agreements 756 189 1,067 340
Increase in accrued interest receivable (6,567) (2,796) (10,281) (4,022)
(Increase) decrease in other assets (930) (1,098) 266 (1,164)
Increase in accrued interest payable 3,191 2,436 4,093 2,762
Increase in accrued expenses and other 481 71 982 134
---------- ----------- ------------ ------------
Net cash provided by operating activities 10,566 2,820 21,512 4,901
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage securities (492,416) (447,175) (868,626) (614,027)
Purchases of mortgage loans (470,474) (49,009) (721,339) (49,009)
Principal payments on mortgage securities 135,662 48,909 263,778 80,143
Principal payments on mortgage loans 64,283 4,149 109,529 5,729
Purchases of interest rate cap agreements (5,110) (489) (7,101) (654)
---------- ----------- ------------ ------------
Net cash used in investing activities (768,055) (443,615) (1,223,759) (577,818)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings 729,505 387,493 1,149,681 525,898
Net proceeds from issuance of common stock 52,323 56,544 84,090 56,575
Dividends paid (7,899) (2,540) (13,167) (3,974)
---------- ----------- ------------ ------------
Net cash provided by financing activities 773,929 441,497 1,220,604 578,499
Net increase in cash and cash equivalents 16,440 702 18,357 5,582
Cash and cash equivalents at beginning of period 12,985 9,705 11,068 4,825
---------- ----------- ------------ ------------
Cash and cash equivalents at end of period $29,425 $ 10,407 $ 29,425 $ 10,407
========== =========== ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $35,923 $ 6,639 $ 63,991 $ 12,515
========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
REDWOOD TRUST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 1. THE COMPANY
Redwood Trust, Inc. ("Redwood Trust" or the "Company") was incorporated in
Maryland on April 11, 1994 and commenced operations on August 19, 1994.
The Company acquires and manages real estate mortgage assets ("Mortgage Assets")
which may be acquired as whole loans ("Mortgage Loans") or as mortgage
securities representing interests in or obligations backed by pools of mortgage
loans ("Mortgage Securities"). The Company acquires Mortgage Assets that are
secured by single-family real estate properties throughout the United States.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Redwood Trust,
Inc. and its special-purpose finance subsidiary, Sequoia Mortgage Funding
Corporation (collectively, the Company). All inter-company balances and
transactions have been eliminated.
Certain amounts for prior years have been reclassified to conform with the 1997
presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect 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 revenue and expenses during the reported period.
Actual results could differ from those estimates.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under the Internal Revenue Code (the "Code") and the corresponding provisions of
State law. As a result, the Company generally will not be subject to Federal or
State income taxation at the corporate level to the extent that it distributes
at least 95% of its taxable income to its shareholders and complies with certain
other requirements. Accordingly, no provision has been made for income taxes in
the accompanying consolidated financial statements, as the Company believes it
has met the prescribed distribution requirements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and highly liquid investments
with original maturities of three months or less. The carrying amount of cash
equivalents approximates their fair value.
MORTGAGE ASSETS
The Company's Mortgage Assets may consist of Mortgage Securities and Mortgage
Loans.
7
<PAGE> 8
Mortgage Securities
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"), requires the Company to
classify its Mortgage Securities as either trading investments, available-
for-sale investments or held-to-maturity investments. Although the Company
generally intends to hold most of its Mortgage Securities until maturity, it
may, from time to time, sell any of its Mortgage Securities as part of its
overall management of its balance sheet. Accordingly, to maintain flexibility,
the Company currently classifies all of its Mortgage Securities as available-
for-sale. All assets classified as available-for-sale are reported at fair
value, with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity.
Unrealized losses on Mortgage Securities that are considered other-than-
temporary, as measured by the amount of decline in fair value attributable to
factors other than temporary, are recognized in income and the cost basis of the
Mortgage Security is adjusted. Other-than-temporary unrealized losses are based
on management's assessment of various factors affecting the expected cash flow
from the Mortgage Securities, including an other-than-temporary deterioration of
the credit quality of the underlying mortgages and/or the credit protection
available to the related mortgage pool.
Mortgage Loans
Mortgage Loans are carried at their unpaid principal balance, net of unamortized
discount or premium.
Interest income is accrued based on the outstanding principal amount of the
Mortgage Assets and their contractual terms. Discounts and premiums relating to
Mortgage Assets are amortized into interest income over the lives of the
Mortgage Assets using methods that approximate the effective yield method. Gains
or losses on the sale of Mortgage Assets are based on the specific
identification method.
DEFERRED BOND ISSUANCE COSTS
Costs incurred in connection with the issuance of long-term debt in the form of
collateralized mortgage bonds are deferred and amortized over the estimated
lives of the collateralized mortgage bonds using the interest method adjusted
for the effects of prepayments. Issuance costs are included in the carrying
value of the collateral for collateralized mortgage bonds. At June 30, 1997, the
costs incurred in establishing the Company's long-term debt shelf are reflected
as a component of Other Assets until allocated to the issuance of specific
collateralized mortgage bonds.
INTEREST RATE AGREEMENTS
The rate the Company pays on its short-term and variable borrowings will rise
and fall without limit as short-term market interest rates fluctuate. The rate
the Company earns on its adjustable rate assets, however, is limited by periodic
and lifetime caps.
Statement of Financial Accounting Standards No. 119, Disclosure about Derivative
Financial Instruments, requires the Company to provide certain disclosures
concerning its derivative instruments according to a set of prescribed
guidelines. Under the Company's hedging policy a specific portfolio of assets
and liabilities, with similar economic characteristics including a low life
strike, variable interest rate based on a market-sensitive index, similar
expected prepayment rate behavior and similar periodic caps, exposing the
Company to interest rate risk is identified. The hedge instruments are chosen as
the ones probable of substantially reducing the interest rate risk being hedged,
and a high degree of correlation is maintained on an on-going basis. Currently,
the Company enters into "Interest Rate Agreements" as hedges. Interest Rate
Agreements, which include interest rate cap agreements (the "Cap Agreements"),
interest rate swap agreements (the "Swap Agreements"), interest rate collar
agreements (the "Collar Agreements") and interest rate futures agreements (the
"Futures Agreements"), entered into by the Company are intended to provide
income to offset potential reduced net interest income under certain rising
interest rate scenarios. The Company periodically evaluates the effectiveness of
these hedges under various interest rate scenarios.
8
<PAGE> 9
The Company accounts for the Interest Rate Agreements as hedges. Interest Rate
Agreements that are hedging Mortgage Assets carried at fair value are also
carried at fair value, with unrealized gains and losses reported as a separate
component of equity. Similarly, Interest Rate Agreements that are used to hedge
Mortgage Assets carried at amortized cost are reflected at amortized cost.
The cost of each Cap Agreement and the net cost or payment received on each
Collar Agreement is amortized over the effective period of that Cap or Collar
Agreement using the effective interest method. The income and expense related to
each Swap Agreement is recognized on an accrual basis. Gains and losses on early
termination of Interest Rate Agreements are amortized as a component of net
interest income over the remaining term of the original Interest Rate Agreement,
or, if shorter, over the remaining term of associated Mortgage Assets as
adjusted for estimated future principal repayments. In the event that an
underlying hedged item is sold or extinguished, any related hedging gains or
losses would be recognized in income.
Unrealized losses on Interest Rate Agreements that are considered
other-than-temporary are recognized in income and the cost basis of the Interest
Rate Agreement is adjusted. The other-than-temporary decline is measured as the
amount of the decline in fair value attributable to factors that are
other-than-temporary. Other-than-temporary unrealized losses are based on
management's assessment of various factors affecting the Interest Rate
Agreements, for example, a serious deterioration of the ability of the
counter-party to perform under the terms of the Interest Rate Agreement.
NET INCOME PER SHARE
Net income per share is based on the weighted average shares of common stock
outstanding plus common equivalent shares using the treasury stock method. The
treasury stock method calculation assumes all dilutive common stock equivalents
are exercised and the funds generated by the exercise are used to buy back
outstanding common stock at the average market price during the reporting
period, for primary earnings per share, or at the end of period market price if
higher, for fully diluted earnings per share.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 is designed to improve the earnings per share ("EPS") information provided
in the financial statements by simplifying the existing computational
guidelines, revising the disclosure requirements, and increasing the
comparability of EPS data on an international basis. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. The Company will implement SFAS 128 in its December
31, 1997 financial statements. The following table reflects the impact that SFAS
128 would have had on the current financial statements.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
As Reported:
Primary Earnings Per Share $0.52 $0.29 $1.05 $0.60
Fully Diluted Earnings Per Share $0.52 $0.28 $1.05 $0.58
Under SFAS No. 128:
Basic Earnings Per Share $0.54 $0.32 $1.10 $0.67
Fully Diluted Earnings Per Share $0.52 $0.29 $1.05 $0.60
</TABLE>
CREDIT RISK
The majority of the Company's Mortgage Securities have protection from some
degree of credit loss either through subordination, insurance, third party
guarantees, or other means, whereas, Mortgage Loans do not have such protection.
Many of the Company's Mortgage Securities have received ratings from one or more
of the four nationally recognized credit rating agencies. Based on these
ratings, and on credit criteria similar to those used by
9
<PAGE> 10
rating agencies, the Company assigns a "rating equivalent" to each Mortgage
Security and pool of Mortgage Loans. For purposes of assigning a rating
equivalent to unrated pools of Mortgage Loans or unrated Mortgage Securities,
the Company assigns a series of ratings to different portions of the pool
according to the Company's estimation of how the pool would currently be
structured and rated if it were newly securitized. At June 30, 1997, the
Mortgage Assets held by the Company had rating equivalents ranging from AAA to
unrated, with a weighted average of AA+. At December 31, 1996, the Mortgage
Assets held by the Company had rating equivalents ranging from AAA to unrated,
with a weighted average of AA+. An allowance for credit losses is maintained at
a level deemed appropriate by management to provide for known losses as well as
unidentified potential losses in its Mortgage Asset portfolio. The allowance is
based upon management's assessment of various factors affecting its Mortgage
Assets, including current and projected economic conditions, delinquency status
and credit protection. In determining the allowance for credit losses, the
Company's credit exposure is considered based on its credit risk position in the
mortgage pool. These estimates are reviewed periodically and, as adjustments
become necessary, they are reported in earnings in the periods in which they
become known. The reserve is increased by provisions charged to income from
operations. When a loan or portions of a loan are determined to be
uncollectible, the portion deemed uncollectible is charged against the allowance
and subsequent recoveries, if any, are credited to the allowance. During the
three and six months ended June 30, 1997 the Company provided for $776 and
$1,471 in credit losses and incurred $28 and $70 in charge-offs, respectively,
resulting in a reserve balance of $3,580 at June 30, 1997. During the three and
six months ended June 30, 1996 the Company provided for $477 and $808 in credit
losses, respectively, and incurred no charge-offs, resulting in a reserve
balance of $1,298 at June 30, 1996. The reserve balance at December 31, 1996 was
$2,180.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information about
Capital Structure. This statement establishes standards for disclosing
information about an entity's capital structure. The Company intends to comply
with the disclosure requirements of this statement which is effective for
periods ending after December 15, 1997.
On June 30, 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement requires companies to classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position, and is effective for financial statements issued for fiscal years
beginning after December 15, 1997. The impact of adopting SFAS No. 130 has not
been determined.
NOTE 3. MORTGAGE ASSETS
At June 30, 1997, Mortgage Assets consisted of the following:
<TABLE>
<CAPTION>
AGENCY NON-AGENCY
MORTGAGE MORTGAGE MORTGAGE
SECURITIES SECURITIES LOANS TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Mortgage Assets, Gross $ 1,178,533 $ 1,000,653 $ 1,111,375 $ 3,290,561
Unamortized Discount (194) (14,774) (123) (15,091)
Unamortized Premium 40,249 21,970 25,442 87,661
------------ ------------ ------------ ------------
Amortized Cost 1,218,588 1,007,849 1,136,694 3,363,131
Allowance for Credit Losses 0 (2,651) (929) (3,580)
Gross Unrealized Gains 5,606 2,719 0 8,325
Gross Unrealized Losses (817) (3,905) 0 (4,722)
============ ============ ============ ============
Carrying Value $ 1,223,377 $ 1,004,012 $ 1,135,765 $ 3,363,154
============ ============ ============ ============
</TABLE>
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<PAGE> 11
At December 31, 1996, Mortgage Assets consisted of the following:
<TABLE>
<CAPTION>
AGENCY NON-AGENCY
MORTGAGE MORTGAGE MORTGAGE
SECURITIES SECURITIES LOANS TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mortgage Assets, Gross $ 939,936 $ 662,276 $ 515,033 $ 2,117,245
Unamortized Discount (234) (15,717) (142) (16,093)
Unamortized Premium 26,939 16,366 11,012 54,317
----------- ----------- ----------- -----------
Amortized Cost 966,641 662,925 525,903 2,155,469
Allowance for Credit Losses 0 (1,752) (428) (2,180)
Gross Unrealized Gains 3,173 2,791 0 5,964
Gross Unrealized Losses (873) (4,952) 0 (5,825)
=========== =========== =========== ===========
Carrying Value $ 968,941 $ 659,012 $ 525,475 $ 2,153,428
=========== =========== =========== ===========
</TABLE>
At June 30, 1997 and December 31, 1996, all investments in Mortgage Assets
consisted of interests in adjustable-rate mortgages on residential properties. A
majority of the mortgages in pools in which the Company owns a security interest
rated less than AA are on properties located in California. Agency Mortgage
Securities ("Agency Securities") represent securitized interests in pools of
adjustable-rate mortgages from the Federal Home Loan Mortgage Corporation and
the Federal National Mortgage Association. The Agency Securities are guaranteed
as to principal and interest by those US government agencies. The original
maturity of the majority of the Mortgage Assets is thirty years; the actual
maturity is subject to change based on the prepayments of the underlying
mortgage loans.
At June 30, 1997, the average annualized effective yield on the Mortgage Assets
was 6.89% based on the amortized cost of the assets. At December 31, 1996, the
average annualized effective yield was 7.11% based on the amortized cost of the
assets.
The coupons most of the adjustable-rate mortgage securities and loans owned by
the Company are limited by periodic caps (generally interest rate adjustments
are limited to no more than 1% every six months or 2% every year) and lifetime
caps. At June 30, 1997 and December 31, 1996, the weighted average lifetime cap
was 12.01% and 11.73%, respectively.
NOTE 4. INTEREST RATE AGREEMENTS
The amortized cost and fair value of the Company's Interest Rate Agreements are
summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
Amortized Cost $ 12,233 $ 6,200
Gross Unrealized Gains 6 156
Gross Unrealized Losses (7,372) (3,755)
---------- ----------
Carrying Value $ 4,867 $ 2,601
========== ==========
</TABLE>
The sum of the notional amounts of all of the Company's Interest Rate Agreements
in effect was $2.5 billion at June 30, 1997 and $1.1 billion at December 31,
1996, respectively. The sum of the notional amounts of all of the Interest Rate
Agreements owned by the Company was $5.5 billion at June 30, 1997 and $2.6
billion at December 31, 1996.
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<PAGE> 12
Cap Agreements
The Company had one hundred-seven outstanding Cap Agreements at June 30, 1997
and fifty-seven outstanding Cap Agreements at December 31, 1996. Potential
future earnings from each of these Cap Agreements are based on variations in the
London Inter-Bank Offered Rate ("LIBOR"). The sum of the notional amounts of the
Company's Cap Agreements in effect was $2.1 billion and $703 million at June 30,
1997 and December 31, 1996, respectively. The weighted average cap strike rate
during the three and six months ended June 30, 1997 was 7.14% and 7.29%,
respectively. The weighted average cap strike rate during the three and six
months ended June 30, 1996 was 7.12% and 7.22%, respectively. Under these Cap
Agreements the Company will receive cash payments should an agreed-upon
reference rate, either one-month or three-month LIBOR, increase above the strike
rates of the Cap Agreements.
Information on the Cap Agreements outstanding at June 30, 1997 is summarized
below.
<TABLE>
<CAPTION>
AVERAGE CAP EXPECTED
NOTIONAL FACE AVERAGE CAP LOW CAP HIGH CAP CAP EXPENSE
YEAR AMOUNT STRIKE RATE STRIKE RATE STRIKE RATE AMORTIZATION
---- ------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1997 (last 6 months) $2,511,586 7.12% 5.50% 12.00% $2,042
1998 1,840,339 7.71% 5.50% 12.00% 4,001
1999 1,360,356 9.05% 6.30% 12.00% 2,679
2000 864,720 9.78% 7.00% 12.00% 1,547
2001 632,932 9.99% 7.00% 11.00% 1,076
2002 112,425 8.59% 7.50% 11.00% 304
2003 32,634 8.31% 7.50% 9.00% 203
2004 31,834 8.30% 7.50% 9.00% 197
2005 13,901 7.75% 7.50% 9.00% 87
2006 10,000 7.50% 7.50% 7.50% 72
2007 (first 4 months) 9,833 7.50% 7.50% 7.50% 25
--------
Total $ 12,233
========
</TABLE>
Collar Agreement
At June 30, 1997, the Company had entered into one outstanding collar agreement,
consisting of the purchase of a cap agreement subsidized by the sale of a floor
agreement. On the cap portion, the Company will receive net hedge income to the
extent that three month LIBOR exceeds 7.50%. On the floor portion, the Company
will incur a net hedge expense to the extent that three month LIBOR falls below
5.91%.
Information on the Collar Agreement outstanding at June 30, 1997 is summarized
below.
<TABLE>
<CAPTION>
EXPECTED
NOTIONAL FACE CAP STRIKE FLOOR COLLAR EXPENSE
EFFECTIVE PERIOD: AMOUNT INDEX RATE STRIKE RATE AMORTIZATION
----------------- ------ ----- ---- ----------- ------------
<S> <C> <C> <C> <C> <C>
July 1997 to July 1999 $20,000 3 mo LIBOR 7.50% 5.91% $0
</TABLE>
Swap Agreements
The Company has entered into three types of Interest Rate Swap Agreements
summarized as follows:
Fixed vs. Floating Rate Swap Agreements:
The Company had four outstanding fixed vs. floating rate Swap Agreements ("Fixed
Pay Rate Swaps") at June 30, 1997 and six outstanding Fixed Pay Rate Swaps at
December 31, 1996. The sum of the notional amounts of the Company's Fixed Pay
Rate Swaps in effect was $95 million at June 30, 1997 and $135 million at
December
12
<PAGE> 13
31, 1996. Under these Swap Agreements, the Company receives the 3 month LIBOR
rate and pays the agreed upon fixed rate.
Information on the Fixed Pay Rate Swaps outstanding at June 30, 1997 is
summarized below.
<TABLE>
<CAPTION>
AVERAGE SWAP
NOTIONAL FACE AVERAGE LOW HIGH
YEAR AMOUNT PAY RATE PAY RATE PAY RATE
---- ------ -------- -------- --------
<S> <C> <C> <C> <C>
1997 (last 6 months) $88,723 6.31% 6.08% 7.18%
1998 (first 5 months) 25,828 6.59% 6.40% 7.18%
</TABLE>
Periodic Swap Agreements:
As of June 30, 1997, the Company had entered into three Periodic Swap Agreements
designed to produce income to the Company in the event that the three month
LIBOR rate rises sharply. In each of these swaps, the Company receives income on
the notional face at a rate equal to three month LIBOR less 0.230% to 0.265% and
pays income on the notional face on the lesser of (a) three month LIBOR or (b)
the prior period's LIBOR plus 0.50%. The average notional face of these swaps is
$110 million, with $90 million maturing in August 1999 and $20 million maturing
in September 1999.
Information on the Periodic Swap Agreements outstanding at June 30, 1997 is
summarized below.
<TABLE>
<CAPTION>
AVERAGE SWAP
NOTIONAL FACE AVERAGE SPREAD LOW SPREAD HIGH SPREAD
YEAR AMOUNT RECEIVED RECEIVED RECEIVED
---- ------ -------- -------- --------
<S> <C> <C> <C> <C>
1997 (last 6 months) $110,000 -0.255% -0.265% -0.230%
1998 110,000 -0.255% -0.265% -0.230%
1999 (first 9 months) 98,242 -0.257% -0.265% -0.230%
</TABLE>
Basis Swap Agreements:
As of June 30, 1997, the Company had entered into five LIBOR/Treasury bill Basis
Swap Agreements totaling $160 million in notional value. These Basis Swap
Agreements, in conjunction with the Company's other Swap and Cap Agreements, are
designed to reduce the potential risks in that portion of the Company's balance
sheet wherein Treasury-based assets are funded with LIBOR-based liabilities. The
Basis Swap Agreements will produce net hedge income for the Company to the
extent that three month LIBOR exceeds the average three month Treasury bill rate
by 0.440% to 0.465% and will produce a net hedge expense for the Company to the
extent that the spread between these two indices is narrower than 0.440% to
0.465%. The maturities of these Basis Swap Agreements are as follows: $30
million in June 1998, $50 million in December 1998, $30 million in June 1999 and
$50 million in December 1999.
Information on Basis Swap Agreements outstanding June 30, 1997 is summarized
below.
<TABLE>
<CAPTION>
AVERAGE SWAP
NOTIONAL FACE AVERAGE SPREAD LOW SPREAD HIGH SPREAD
YEAR AMOUNT PAID PAID PAID
---- ------ ---- ---- ----
<S> <C> <C> <C> <C>
1997 (last 6 months) $160,000 0.453% 0.440% 0.465%
1998 144,877 0.455% 0.440% 0.465%
1999 64,712 0.464% 0.460% 0.465%
</TABLE>
The Company has incurred credit risk to the extent that the counter-parties to
the Interest Rate Agreements do not perform their obligations under the Interest
Rate Agreements. Potential credit write-offs are limited to the amortized cost
of the Cap Agreements. In addition, for Cap, Swap and Collar Agreements, if one
of the counter-parties does not perform, the Company would not receive the cash
to which it would otherwise be entitled under
13
<PAGE> 14
the Interest Rate Agreement. In order to mitigate this risk, the Company has
entered into Interest Rate Agreements only with counter-parties rated A or
better and has entered into Interest Rate Agreements with seventeen different
counter-parties in order to reduce the risk of credit exposure to any one
counter-party.
NOTE 5. SHORT-TERM BORROWINGS
The Company has entered into reverse repurchase agreements, notes payable and a
revolving line of credit (together "Short-Term Borrowings") to finance
acquisitions of a portion of its Mortgage Assets. These Short-Term Borrowings
are collateralized by a portion of the Company's Mortgage Assets.
At June 30, 1997, the Company had $3,102,784 of Short-Term Borrowings
outstanding with a weighted average borrowing rate of 5.978% and a weighted
average maturity of 52 days. These borrowings were collateralized with
$3,227,734 of Mortgage Assets. At December 31, 1996, the Company had $1,953,103
of Short-Term Borrowings outstanding with a weighted average borrowing rate of
5.83% and a weighted average remaining maturity of 98 days. These borrowing were
collateralized with $2,050,813 of Mortgage Assets.
In September 1996, the Company entered into a $20 million, one-year revolving
line of credit agreement with a financial institution. The agreement requires
that the Company maintain certain financial ratios. The Company is in compliance
with all requirements. Interest rates on borrowings under this facility are
based on LIBOR. At June 30, 1997, borrowings under this facility totaled $18.2
million and were committed through July 16, 1997. At December 31, 1996,
borrowings under this facility totaled $19.3 million. These borrowings are
reflected in the $3,102,784 and $1,953,103 of Short-Term Borrowings outstanding
at June 30, 1997 and December 31, 1996.
At June 30, 1997 and December 31, 1996, the Short-Term Borrowings had the
following remaining maturities:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
Within 30 days $ 1,485,307 $ 268,042
30 to 90 days 695,058 667,567
Over 90 days 922,419 1,017,494
------------ ------------
Total Borrowings $ 3,102,784 $ 1,953,103
============ ============
</TABLE>
For the three and six months ended June 30, 1997, the average balance of
Short-Term Borrowings was $2,659,914 and $2,359,650 with a weighted average
interest cost of 5.86% and 5.75%, respectively. For the three and six months
ended June 30, 1996, the average balance of Short-Term Borrowings was $651,643
and $543,811 with a weighted average interest cost of 5.57% and 5.62%,
respectively. The maximum balance outstanding during the six months ended June
30, 1997 was $3,114,770. The maximum balance outstanding during the year ended
December 31, 1996 was $1,953,103.
NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at June 30, 1997 and December 31, 1996.
Statement of Financial Accounting Standards 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 liquidation sale.
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets
Mortgage Assets $ 3,363,154 $ 3,363,393 $ 2,153,428 $ 2,153,428
Interest Rate Agreements 4,867 4,206 2,601 2,601
</TABLE>
14
<PAGE> 15
Management bases its fair value estimates primarily on third party bid price
indications, such as bid indications provided by dealers who make markets in
these assets and asset valuations made by collateralized lenders, when such
indications are available. However, the fair value reported reflects 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,
short-term borrowings, accrued interest payable, accrued expenses and other
liabilities are reflected in the financial statements at their costs, which
approximates their fair value because of the short-term nature of these
instruments.
NOTE 7. CLASS B 9.74% CUMULATIVE CONVERTIBLE PREFERRED STOCK
On August 8, 1996, the Company issued 1,006,250 shares of Class B Preferred
Stock. Each share of the Class B Preferred Stock is convertible at the option of
the holder at any time into one share of Common Stock. After September 30, 1999,
the Company can either redeem or cause a conversion of the Class B Preferred
Stock. The Class B Preferred Stock pays a dividend equal to the greater of (i)
$0.755 per quarter or (ii) an amount equal to the quarterly dividend declared on
the number of shares of the Common Stock into which the Class B Preferred Stock
is convertible. The Class B Preferred Stock ranks senior to the Company's Common
Stock as to the payment of dividends and liquidation rights. The liquidation
preference entitles the holders of the Class B Preferred Stock to receive $31
per share plus any accrued dividends before any distribution is made on the
Common Stock.
As of June 30, 1997, a total of 96,732 shares of the Class B Preferred Stock has
been converted into 96,732 shares of the Company's Common Stock. At June 30,
1997 and December 31, 1996, there were 909,518 and 1,006,250 shares of the Class
B Preferred Stock outstanding, respectively.
NOTE 8. STOCK PURCHASE WARRANTS
At June 30, 1997 and December 31, 1996, there were 236,297 and 412,894 Warrants
outstanding, respectively. Each Warrant entitles the holder to purchase 1.000667
shares of the Company's Common Stock at an exercise price of $15.00 per share.
The Warrants remain exercisable until December 31, 1997.
NOTE 9. STOCK OPTION PLAN
The Company has adopted a Stock Option Plan for executive officers, employees
and non-employee directors (the "Stock Option Plan"). The Stock Option Plan
authorizes the Board of Directors (or a committee appointed by the Board of
Directors) to grant "incentive stock options" as defined under section 422 of
the Code ("ISOs"), options not so qualified ("NQSOs"), deferred stock,
restricted stock, performance shares, stock appreciation rights and limited
stock appreciation rights ("Awards") and dividend equivalent rights ("DERs") to
such eligible recipients other than non-employee directors. Non-employee
directors are automatically provided annual grants of NQSOs with DERs pursuant
to a formula under the Stock Option Plan.
The number of shares of Common Stock available under the Stock Option Plan for
options and Awards, subject to certain anti-dilution provisions, is 15% of the
Company's total outstanding shares of Common Stock. At June 30, 1997 and
December 31, 1996, 1,181,959 and 1,138,743 shares of Common Stock, respectively,
were available for grant. Of the shares of Common Stock available for grant, no
more than 500,000 shares of Common Stock shall be cumulatively available for
grant as ISOs. At June 30, 1997 and December 31, 1996, 317,284 and 299,633 ISOs
had been granted, respectively. The exercise price for ISOs granted under the
Stock Option Plan may not be less than the fair market value of shares of Common
Stock at the time the ISO is granted. All stock options granted under the Stock
Option Plan vest no earlier than ratably over a four year period from the date
of grant and expire within ten years after the date of grant.
15
<PAGE> 16
The Company's Stock Option Plan permits stock options granted under the plan to
accrue stock DERs. For the three and six months ended June 30, 1997, the stock
DERs accrued on NQSOs that had a stock DER feature resulted in non-cash charges
to operating expenses of $80 and $204, respectively. For the three and six
months ended June 30, 1996, the stock DERs accrued on NQSOs that had a stock DER
feature resulted in non-cash charges to operating expenses of $79 and $164,
respectively. Stock DERs represent shares of stock which are issuable to holders
of stock options when the holders exercise the underlying stock options. The
number of stock DER shares accrued are based on the level of the Company's
dividends and on the price of the stock on the related dividend payment date.
Information with respect to stock option and DER activity is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------------------------ ----------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- ---------------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding options at beginning of period: 421,577 $ 19.05 310,857 $ 9.48
Options granted 289,630 39.03 141,300 36.01
Options exercised (4,120) 0.10 (42,083) 0.11
Dividend equivalent rights earned 5,451 0.00 11,503 0.00
----------- -----------
Outstanding options at end of period 712,538 27.14 421,577 19.05
=========== ===========
</TABLE>
NOTE 10. DIVIDENDS
The Company declared and paid the following dividends for the three and six
months ended June 30, 1997 and for the year ended December 31, 1996:
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE
-------------------------------
DECLARATION RECORD PAYABLE TOTAL CLASS B COMMON
DATE DATE DATE DIVIDENDS PREFERRED STOCK STOCK
----------- --------- ---------- --------- --------------- -----
<S> <C> <C> <C> <C> <C>
6/12/97 6/30/97 7/21/97 $8,638 $0.755 $0.600
3/5/97 3/31/97 4/21/97 $7,899 $0.755 $0.600
12/16/96 12/31/96 1/21/97 $5,268 $0.755 $0.410
9/16/96 9/30/96 10/21/96 $4,016 $0.386 $0.400
6/14/96 6/28/96 7/18/96 $3,408 -- $0.400
3/11/96 3/29/96 4/19/96 $2,540 -- $0.460
</TABLE>
Under the Internal Revenue Code of 1986, a dividend declared by a REIT in
December of a calendar year, payable to shareholders of record as of a specified
date in December, will be deemed to have been paid by the Company and received
by the shareholders on that record date if the dividend is actually paid before
February 1st of the following calendar year. Therefore, the dividend declared in
December 1996 which was paid in January 1997 is considered taxable income to
shareholders in the year declared. The Company's dividends are not eligible for
the dividends received deduction for corporations.
NOTE 11. COMMITMENTS AND CONTINGENCIES
As of June 30, 1997, the Company had entered into a conditional commitment to
purchase approximately $150 million of Mortgage Assets for settlement by
September 1997. At June 30, 1997, the Company had no other outstanding
commitments to purchase or sell Mortgage Assets or to purchase, sell or
terminate Interest Rate Agreements. The Company also had no commitments to enter
into additional reverse repurchase agreements or other borrowings.
16
<PAGE> 17
Future minimum rental commitments as of June 30, 1997 under non-cancelable
operating leases with initial or remaining terms of more than one year, are as
follows:
<TABLE>
<CAPTION>
MINIMUM RENTAL
YEAR ENDING COMMITMENT
DECEMBER 31, AS OF JUNE 30, 1997
------------- -------------------
<S> <C>
1997 $ 96
1998 191
1999 191
2000 191
2001 64
---- -----
Total $733
</TABLE>
NOTE 12. SUBSEQUENT EVENTS
On July 25, 1997, the Company issued $534.3 million of long-term debt in the
form of collateralized mortgage bonds which were issued by Sequoia Mortgage
Trust 1, a business trust established by the Company's wholly-owned subsidiary,
Sequoia Mortgage Funding Corporation ("Sequoia"). These bonds are collateralized
by a pool of conventional, adjustable-rate, 30 year mortgage loans secured by
first liens on one- to four- family residential properties which were
transferred from Redwood Trust, Inc. to Sequoia. The initial principal balance
of the bond collateral pool is approximately $543.1 million. The proceeds
received from this issuance are expected to be used to pay down a portion of the
Company's Short-Term Borrowings.
On July 25, 1997, the Company completed a public offering of 1,500,000 shares of
Common Stock at an offering price of $45.00 per share. The Company received
proceeds of $66.8 million, net of an underwriting discount of $0.45 per share
and other offering costs. The proceeds received from this issuance are expected
to be used to pay down a portion of the Company's Short-Term Borrowings.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes.
SAFE HARBOR STATEMENT
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: Statements in this discussion regarding Redwood Trust, Inc. (the
"Company") and its business which are not historical facts are "forward-looking
statements" that involve risks and uncertainties. For a discussion of such risks
and uncertainties, which could cause actual results to differ from those
contained in the forward-looking statements, see "Risk Factors" commencing on
Page 26 of the Company's 1996 Form 10-K.
OVERVIEW
Redwood Trust, Inc. is a financial institution specializing in the single-family
residential mortgage spread lending business. Through its operations of building
and managing a balance sheet of high quality mortgage loans and mortgage
securities, the Company acts as a supplier of funds to families and individuals
seeking to borrow funds in order to own a home. The Company funds its operations
with debt and equity. The Company earns net income to the extent that the
interest income it earns from its mortgages exceeds the cost of borrowed funds,
credit loss expenses and operating expenses.
The Company focuses solely on seeking to earn net interest income from
first-lien single-family residential mortgage loans underwritten to "A" or
"prime" quality standards. The Company believes its primary competitors in the
"A" quality mortgage spread lending business are banks, savings and loans, and
the two government-sponsored mortgage entities (GSE's: Fannie Mae and Freddie
Mac).
The Company has chosen to pursue a wholesale strategy (such as is employed by
the GSEs) rather than a retail strategy (such as is employed by most banks and
savings and loans). Like the GSEs. the Company does not originate loans directly
but rather acquires loans from mortgage origination companies and from the
secondary mortgage market. The Company out-sources the servicing of its mortgage
loans. The Company sources its borrowings on a wholesale basis in the capital
markets rather than seeking retail deposits through a branch banking system. The
Company believes that its wholesale strategy allows the Company to operate in a
highly efficient manner while remaining focused on its core spread lending
business.
The Company has elected to be considered a Real Estate Investment Trust (REIT)
with respect to Federal and State income taxes. This election generally allows
the Company to avoid paying corporate income tax so long as it distributes at
least 95% of its taxable income as dividends and meets the other REIT
requirements.
RESULTS OF OPERATIONS
Mortgage Asset Acquisitions, Principal Repayments and Net Asset Growth
In the second quarter of 1997, the Company acquired $963 million new mortgage
loans and mortgage securities (together, "mortgage assets"). The Company
received mortgage principal repayments of $200 million during the quarter. For
the second quarter of 1997, total assets grew by $785 million, or 30%, to $3.4
billion.
In the second quarter of 1996, the Company acquired $496 million new mortgage
assets. The Company received mortgage principal repayments of $53 million during
the quarter. Net growth of total assets was $447 million, or 76%, for that
quarter.
The Company has increasingly focused on the acquisition of mortgage loans as
opposed to mortgage securities; mortgage loans represented 49% of acquisitions
in the second quarter of 1997 and 10% of acquisitions in the second quarter of
1996. Through June 30, 1997, all mortgage loans acquired have been high quality,
adjustable
18
<PAGE> 19
rate, first lien mortgages on single-family residential properties. All mortgage
securities acquired have represented securitized interests in pools of
adjustable rate, single-family mortgage loans.
Through June 30, 1997, mortgage principal repayment rates for the Company have
remained within management's range of expectations and have been similar to
industry averages for the types of adjustable-rate mortgages owned by the
Company. The average annual rate of prepayment of principal (CPR) for the
Company's mortgage loans and the mortgages contained in the pools underlying its
mortgage securities was 23% in the second quarter of 1997 and 29% in the second
quarter of 1996. The Company also receives scheduled mortgage principal payments
(payments representing the normal principal amortization of a 30-year mortgage
loan). In addition, some mortgage securities owned by the Company are subject to
call and some receive accelerated payments, i.e., a greater than pro-rata share
of principal repayments generated by the underlying mortgage pool. The average
annual rate of mortgage principal repayment from all of these sources was 28% in
the second quarter of 1997 and 29% in the second quarter of 1996.
In the first six months of 1997 (the first half of 1997), the Company acquired
$1.59 billion new mortgage assets. The Company received mortgage principal
repayments of $373 million during this period. Net growth of total assets was
$1.24 billion, or 57%, for the half year.
In the first six months of 1996, the Company acquired $663 million new mortgage
assets. The Company received mortgage principal repayments of $86 million during
the quarter. Net growth of total assets was $586 million, or 131%, for the first
half of 1996.
Mortgage loans represented 45% of acquisitions in the first half of 1997 and 7%
of acquisitions in the first half of 1996. All other asset acquisitions during
these periods were mortgage securities rated AAA and AA.
The Company's average mortgage asset prepayment rate (CPR) was 23% in the first
half of 1997 and 28% in the first half of 1996. The total rate of principal
repayment was 30% in the first half of 1997 and 28% in the first half of 1996.
Interest Income
From the second quarter of 1996 to the second quarter of 1997, interest income
increased by 284%. This increase was driven primarily by a 286% increase in
average earning assets (mortgage assets plus cash). In the second quarter of
1997, the Company's average earning assets of $2.89 billion generated interest
income of $49.5 million. In the second quarter of 1996, the Company's average
earning assets of $748 million generated interest income of $12.9 million.
In the second quarter of 1997, the Company's earning asset yield (interest
income annualized and divided by the average daily amortized cost of earning
assets) was 6.86%. The average mortgage coupon rate (mortgage interest payments
annualized and divided by the average daily principal value of mortgages) was
7.74%. Since the Company's average amortized cost was 102.1% of mortgage
principal value during that quarter, the coupon yield on amortized cost book
value for the Company's mortgages was 7.57%. Net mortgage premium and discount
amortization expenses of $5.1 million reduced the coupon yield by 0.71% for a
net mortgage yield of 6.86%. The yield earned on the Company's cash balances
during the quarter was 5.52%; the blended earning asset yield was 6.86%.
The Company's earning asset yield was 6.90% in the second quarter of 1996. The
average mortgage coupon rate was 7.47%. Since the Company's average amortized
cost for mortgage assets was 99.95% of mortgage principal value during that
quarter, the coupon yield on amortized cost book value for the Company's
mortgages was 7.48%. Net mortgage premium and discount amortization expenses of
$1.0 million reduced the coupon yield by 0.56% for a net mortgage yield of
6.92%. The yield earned on the Company's cash balances during the quarter was
5.61%, bringing the overall second quarter of 1996 blended earning asset yield
to 6.90%.
19
<PAGE> 20
At 6.86% and 6.90% respectively, the Company's earning asset yield was similar
for the second quarters of 1997 and 1996. The total rate of mortgage principal
repayment was similar for these two periods. The mortgage yield in both periods
was depressed by similar amounts due to the temporary effect of lower initial
coupons on newly acquired mortgages. However, the relevant short-term interest
rate index levels (over the six to twelve months prior to the start of the
period) averaged approximately 0.10% higher for the second quarter of 1997 as
compared to the second quarter of 1996. That the Company's earning asset yield
did not increase in step with increases in short-term interest rates primarily
reflects a change in asset mix and strategy.
During 1996 and 1997, the Company generally acquired mortgage assets with lower
risk characteristics than those assets acquired in 1994 and 1995. As a result,
average credit quality improved, with the percentage of the balance sheet
consisting of subordinated mortgage securities rated below AA falling from 5.4%
in the second quarter of 1996 to 1.7% in the second quarter of 1997. Reflecting
this change in asset mix to lower risk assets (as well as certain other
factors), the average equity-to-assets capital adequacy guideline determined by
the Company's Risk-Adjusted Capital Policy fell from 11.4% to 9.5% over the same
period. The lower risk assets acquired by the Company had higher prices; the
Company's earning asset yield was reduced somewhat as compared to short-term
interest rate index levels. At the same time, the reduction in the Company's
capital adequacy guidelines allowed the Company to acquire and manage more
mortgages per dollar of equity. The net result of this strategy was reflected in
a higher return on equity earned in the second quarter of 1997 as compared to
the second quarter of 1996, despite lower earnings asset yields and spreads.
To some degree, the lack of an increase in the earning asset yield in the second
quarter of 1997 also reflects the high pricing levels for all mortgages that
have prevailed in the mortgage market for several quarters. Despite higher
mortgage market pricing, the Company was able to acquire a substantial amount of
new mortgage assets in the second quarter of 1997 which the Company expects will
meet its return on equity criteria. Operational and capital efficiencies have
improved steadily at the Company over time. Due to these efficiencies, the
Company believes that it can pay a higher price for a mortgage today than it
could have in the past and still have the potential to generate acceptable
returns on equity in most scenarios. Nevertheless, there is a risk that mortgage
market pricing may increase further in the future or that the available supply
of mortgages available for sale at acceptable pricing levels will diminish;
asset growth for the Company may then slow.
From the first half of 1996 to the first half of 1997, interest income increased
by 300%. This increase was driven primarily by a 312% increase in average
earning assets. In the first half of 1997, the Company's average earning assets
of $2.57 billion generated interest income of $88.1 million. In the first half
of 1996, the Company's average earning assets of $623 million generated interest
income of $22.0 million.
In the first half of 1997, the Company's earning asset yield was 6.86%. The
average mortgage coupon was 7.72%. Since the Company's average amortized cost
was 102.0% of mortgage principal value during that quarter, the coupon yield on
amortized cost book value for the Company's mortgages was 7.56%. Net mortgage
premium and discount amortization expenses of $8.9 million reduced the coupon
yield by 0.70% for a net mortgage yield of 6.86%. The yield earned on the
Company's cash balances during the half was 5.44%; the blended earning asset
yield was 6.86%.
In the first half of 1996, the Company's earning asset yield was 7.07%. The
average mortgage coupon rate was 7.58%. Since the Company's average amortized
cost for mortgage assets was 99.5% of mortgage principal value during that
quarter, the coupon yield on amortized cost book value for the Company's
mortgages was 7.61%. Net mortgage premium and discount amortization expenses of
$1.6 million reduced the coupon yield by 0.51% for a net mortgage yield of
7.10%. The yield earned on the Company's cash balances during the quarter was
5.77%, bringing the overall first half of 1996 earning asset yield to 7.07%.
Interest Expense
From the second quarter of 1996 to the second quarter of 1997, interest expense
increased by 329%, from $9.1 million to $39.0 million. This increase was driven
primarily by a 308% increase in average borrowings from $652 million to $2.66
billion. Borrowings increased at a faster rate over the last year than did
earning assets (308% versus 286%) as the Company utilized a greater percentage
of debt rather than equity to fund its growing mortgage operations. The average
equity-to-assets ratio for the Company was 9.9% in the second quarter of 1997
and 15.2% in the second quarter of 1996.
An additional factor driving the increase in interest expense was a 0.29%
increase in the Company's cost of funds from 5.57% in the second quarter of 1996
to 5.86% in the second quarter of 1997. This increase reflects higher levels of
short-term interest rates; one, three and six month LIBOR rates over the
relevant time frame (one to six months prior to the end of the period) were
0.20% to 0.30% higher for the second quarter of 1997 than they were for the
second quarter of 1996.
The Company pays interest expense on its borrowings based on the actual number
of days in a quarter. In a non-leap year, the first quarter has 90 days, the
second quarter has 91 days, and the third and fourth quarters each have 92 days.
Thus, all other factors being equal, the Company's cost of funds will have a
seasonal variation pattern; it will be highest in the third and fourth quarters
and will be lowest in the first quarter of the year. The increase in the
Company's cost of funds attributable to this seasonal day count issue from the
first to the second quarter of 1997 was approximately 0.06% (thereby reducing
earnings in the second quarter by $0.032 per share relative to the first
quarter, all other factors being equal).
From the first half of 1996 to the first half of 1997, interest expense
increased by 344%, from $15.3 million to $67.9 million. This increase was driven
primarily by an increase in average borrowings of 334%, from $544 million to
$2.36 billion. Borrowings increased at a faster rate than did earning assets
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(334% versus 312%) as the Company utilized greater leverage. The average
equity-to-assets ratio was 15.0% in the first half of 1996 and was 10.0% in the
first half of 1997.
An additional factor driving the increase in interest expense was a 0.13%
increase in the Company's cost of funds from 5.62% in the first half of 1996 to
5.75% in the first half of 1997. This increase was largely due to higher average
short-term interest rates over the relevant periods.
Interest Rate Agreements Expense
Interest rate agreements are a form of interest rate insurance, or hedging, into
which the Company enters in order to reduce the effects that a large increase in
interest rates could have on its balance sheet and earnings.
In the second quarter of 1997, hedging expenses were $912,000 and hedging income
was $73,000 for a net interest rate agreements expense of $839,000. This net
expense represented 0.11% of assets, 0.13% of borrowings, and 8.0% of net
interest income before hedge expenses.
In the second quarter of 1996, hedging expenses were $255,000 and the Company
earned no hedge income. Net hedge expenses represented 0.13% of assets, 0.16% of
borrowings, and 6.7% of net interest income before hedge expenses for that
quarter.
Hedging expense ratios were generally lower in the second quarter of 1997 as
compared to the second quarter of 1996 as the cost of obtaining new contracts
representing this type of interest rate insurance declined in accordance with
declines in actual and projected rates of interest rate volatility. For similar
reasons, the market value of the Company's existing interest rate agreements
also fell.
In the first half of 1997, hedging expenses were $1.51 million and hedging
income was $0.08 million for a net interest rate agreement expense of $1.43
million. This net expense represented 0.11% of assets, 0.12% of borrowings, and
7.1% of net interest income before hedge expenses.
In the first half of 1996, hedging expenses were $0.41 million and the Company
earned no hedge income. This net expense represented 0.13% of assets, 0.15% of
liabilities, and 6.0% of net interest income before hedge expenses.
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Net Interest Income
Net interest income is interest income less interest expense and net interest
rate agreement hedging expenses. Net interest income increased by 172%, from
$3.6 million in the second quarter of 1996 to $9.7 million in the second quarter
of 1997. This increase was driven by asset growth, although growth in net
interest income was less than the growth in average total assets of 285% over
the same period. Primarily as a result of the increased use of leverage, net
interest income as a percentage of assets (the net interest margin) decreased
from 1.85% to 1.31% while, at the same time, net interest income as a percentage
of equity increased from 12.14% to 13.25%.
The net interest margin also declined (growth in net interest income was lower
than asset growth), and growth in net interest income as a percentage of equity
was not as much as it would otherwise have been, due to a narrowed spread
between the Company's yield on earning assets and the cost of its borrowed funds
and hedging (interest rate spread). The Company's interest rate spread was 1.17%
in the second quarter of 1996 and 0.87% in the second quarter of 1997. The
Company's yield on earning assets fell by 0.04% over the last year while the
cost of funds rose by 0.29% and the cost of hedging fell by 0.03%. The reduced
spread in the second quarter of 1997 was primarily a result of the increase in
short-term interest rates in February, March and April of 1997; the Company's
borrowing costs reacted more quickly to this change than did its mortgage yield.
The increase in short-term rates during that period was not of sufficient
magnitude, however, to produce significant hedge income from the Company's
interest rate agreements.
From the first half of 1996 to the first half of 1997, net interest income
increased by 196%, from $6.3 million to $18.8 million. This increase was driven
by asset growth, although growth in net interest income was less than the growth
in average total assets of 312% over the same period due to the increased use of
debt funding.
Primarily reflecting the increased use of leverage, net interest income as a
percentage of assets (the net interest margin) decreased from 1.98% to 1.42%
while net interest income as a percentage of equity increased from 13.22% to
14.17%.
The net interest margin also declined due to a narrowed spread between the
Company's yield on earning assets and the cost of its borrowed funds and
hedging. The Company's interest rate spread was 1.30% in the first half of 1996
and 0.99% in the first half of 1997. For reasons discussed above, the Company's
yield on earning assets fell by 0.21% while the cost of funds rose by 0.13% and
the cost of hedging fell by 0.03%.
Credit Provision Expense and Actual Credit Losses
The Company establishes credit provisions in order build a reserve for future
credit losses. Provisions were $0.78 million in the second quarter of 1997 and
$0.48 million in the second quarter of 1996.
The Company takes credit provisions for risk of credit loss from its portfolio
of below-BBB rated subordinated mortgage securities as a function of projections
of potential future losses. Loss projections are based on trends in serious
delinquencies and loan loss severities (average % of loan balance written off
for liquidated defaulted loans) in the underlying mortgage pools. Credit
provisions for these assets were $0.48 million in the second quarter of 1997 and
$0.34 million in the second quarter of 1996.
The Company takes credit provisions for its mortgage loan portfolio to provide
for expected credit losses over the life of the portfolio. In the second
quarters of 1997 and 1996, the Company took mortgage loan provisions of $0.30
million and $0.14 million, respectively. The Company's current policy is to set
aside credit provisions for mortgage loans on an on-going basis equaling 0.10%
to 0.20% of its loan portfolio.
Total credit provisions equaled 0.25% of average total assets and 1.62% of
average equity in the second quarter of 1996 and declined to 0.10% of average
assets and 1.06% of average equity in the second quarter of 1997. The decline in
these ratios primarily reflects a change in asset mix towards assets with
reduced credit risk; subordinated securities rated lower than BBB declined over
this period as a percentage of total assets from 2.9% to 0.9%. The Company has
not added to its portfolio of lower-rated subordinated mortgage securities since
1995.
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The Company had no actual realized credit losses in the second quarter of 1996.
Actual credit losses were $28,000 in the second quarter of 1997. All of this
loss came from the Company's subordinated mortgage security portfolio. Total
cumulative actual credit losses from the inception of the Company through June
30, 1997 have been $80,000; actual losses from subordinated mortgage securities
have totaled $69,000 while actual losses from mortgage loans have totaled
$13,000. Based on mortgage default and loss trends, the Company expects realized
credit losses over the next few quarters to increase to levels more consistent
with its provisioning rates and reserve levels, especially for its portfolio of
subordinated mortgage securities.
Credit provisions reduce net income and earnings per share but only actual
credit losses are deducted when calculating taxable income. Dividends from a
REIT are based on taxable income, so future dividends declared by the Company
will be influenced by the rate of actual realized credit loss rather than the
rate of credit provisioning. Net income and earnings per share will be reduced
by actual losses in a direct manner only if they exceed cumulative credit
provisions.
Credit provisions were $1.47 million in the first half of 1997 and $0.81 million
in the first half of 1996. Credit provisions for below-BBB rated mortgage
securities were $0.97 million and $0.67 million while mortgage loan provisions
were $0.50 million and $0.14 million, respectively. Total credit provisions
equaled 0.11% of average total assets and 1.11% of average equity in the first
half of 1997, a decline from 0.25% of average assets and 1.68% of average equity
in the first half of 1996.
Actual realized credit losses were $71,000 in the first half of 1997. The
Company had no actual credit losses in the first half of 1996.
Operating Expenses
Total operating expenses increased by 105%, from $594,000 in the second quarter
of 1996 to $1,215,000 in the second quarter of 1997. The Company expanded its
staff and increased salary and bonus compensation for employees to market
levels. A portion of the stock options granted to management, employees, and
directors have dividend equivalent rights, or DERs, attached (each subject to a
dividend hurdle rate); the dividend equivalent right expense increased as the
dividend rose and the number of stock options with DERs attached increased.
Other operating expenses increased as the scope of Company operations expanded.
Operating expense ratios have improved as the Company realized economies of
scale through growth. From the second quarter of 1996 to the second quarter of
1997, operating expenses as a percentage of assets improved from 0.31% to 0.16%,
operating expenses as a percentage of equity improved from 2.02% to 1.66%, the
efficiency ratio (operating expenses as a percentage of net interest income)
improved from 17% to 13%, and average assets per employee improved from $84
million to $257 million.
From the first half of 1996 to the first half of 1997, total operating expenses
increased by 119%, from $1.09 million to $2.38 million. Operating expenses as a
percentage of assets improved from 0.34% to 0.18%, operating expenses as a
percentage of equity improved from 2.26% to 1.80%, the efficiency ratio improved
from 17% to 13%, and average assets per employee improved from $78 million to
$240 million.
Net Income Before Preferred Dividends
Total net income to common and preferred shareholders increased by 209%, from
$2.5 million in the second quarter of 1996 to $7.7 million in the second quarter
of 1997. The percentage of net interest income brought down to the net income
line increased from 70% to 79%. Return on assets dropped from 1.30% to 1.04% due
the increased use of debt funding while at the same time return on total equity
(common plus preferred) increased from 8.50% to 10.53%. The positive effect of
strong asset growth, along with improved operational and capital efficiencies,
more than offset the temporary spread narrowing caused by the first quarter 1997
increase in short-term interest rates and the lower net interest margin caused
by the increased use of leverage.
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Total net income to common and preferred shareholders increased by 235%, from
$4.5 million in the first half of 1996 to $14.9 million in the first half of
1997. Return on assets dropped from 1.39% to 1.13% due the increased use of debt
funding while at the same time return on total equity (common plus preferred)
increased from 9.28% to 11.26%.
Preferred Dividends
The Company's preferred stock had not yet been issued in the second quarter of
1996. In the second quarter of 1997, preferred dividends were $687,000. The
preferred dividend for the quarter was $0.755 per share; 909,518 preferred
shares were outstanding and received a dividend. The preferred dividend equals
the greater of the common stock dividend or $0.755. After September 1999, the
Company has the right to force the conversion of each share of preferred stock
into one share of common stock, providing the price of the common stock exceeds
$31. At June 30, 1997, the preferred stock represented $26.7 million, or 8.9%,
of the Company's shareholder capitalization.
Preferred dividends were $1.44 million in the first half of 1997, or $1.51 per
share. There were 999,638 preferred shares outstanding at the end of the first
quarter of 1997 and 909,518 shares outstanding at the end of the second quarter;
both quarterly preferred dividends were $0.755 per share.
Net Income to Common Shareholders
Net income available for common shareholders increased by 181% over the last
year, from $2.5 million in the second quarter of 1996 to $7.0 million in the
second quarter of 1997. Over the same period, average common equity increased by
125% to $264.2 million. Return on common equity increased from 8.50% to 10.65%.
Net income available for common shareholders increased from $4.5 million in the
first half of 1996 to $13.5 million in the first half of 1997, an increase of
203%. Over the same period, average common equity increased by 146%. Return on
common equity increased from 9.28% to 11.43%.
Earnings Per Share
The average number of common shares outstanding on a primary basis (including
potential dilution from warrants and options) increased by 57%, from 8.6 million
in the second quarter of 1996 to 13.5 million in the second quarter of 1997.
Since net income to common shareholders increased by 181% over this period,
earnings per share rose by 79%, from $0.29 to $0.52.
The primary factors driving the 79% increase in earnings per share were a 25%
increase in return on common equity and a 35% increase in average book value
(equity) per common share. Return on equity increased for reasons discussed
above. Book value per share increased as the Company issued new common stock at
prices in excess of book value. The Company issued common stock in accretive
offerings in November 1996 and January and April of 1997. These offerings
increased book value per common share by 13%, 8% and 11%, respectively.
The average number of common shares outstanding on a primary basis (including
potential dilution from warrants and options) increased by 72%, from 7.45
million in the first half of 1996 to 12.80 million in the first half of 1997.
Since total net income increased by 203%, earnings per share rose by 75%, from
$0.60 to $1.05. This 75% increase in earnings per share was made possible by a
23% increase in return on common equity and a 33% increase in average book value
(equity) per common share.
Taxable REIT Income
As a REIT, the Company is required to distribute as dividends over time at least
95% of its income as calculated for tax purposes (taxable REIT income). It is
the Company's intention to distribute as dividends 100% of taxable income over
time.
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Taxable REIT income (before preferred dividend) was $3.1 million in the second
quarter of 1996; this exceeded GAAP income of $2.5 million in that period due to
differences in credit expenses of $0.48 million (actual credit losses are
deducted from taxable income rather than credit provisions), premium and
discount amortization of $0.08 million and operating expenses of $0.08 million.
Taxable REIT income (before preferred dividend) was $8.3 million in the second
quarter of 1997; this exceeded GAAP income of $7.7 million in that period due to
differences in credit expenses of $0.75 million, premium and discount
amortization of negative $0.10 million and operating expenses of negative $0.05
million.
On a taxable REIT income basis, return on total equity was 10.69% for the second
quarter of 1996 and 11.34% for the second quarter of 1997. Return on common
equity was 10.69% and 11.55% for the same periods, respectively.
Taxable REIT income (before preferred dividend) was $5.7 million in the first
half of 1996 and $16.2 million in the first half of 1997. On a taxable REIT
income basis, return on total equity was 11.85% for the first half of 1996 and
12.23% for the first half of 1997. Taxable income return on common equity was
11.85% and 12.53% for the same periods, respectively.
Common Share Dividends
Dividends per common share have exceeded primary earnings per common share as
taxable REIT income has exceeded net income in each quarter. In addition, in
most quarters, the number of common shares outstanding at the end of the quarter
receiving a dividend has been lower than the average number of primary common
shares (including potential dilution from warrants and options) used to
calculated earnings per share.
In the second quarter of 1997, the Company declared a common dividend of $0.60
per share, resulting in the distribution of $7.95 million to 13.25 million
common shares outstanding at the end of the period. Together with the preferred
dividend of $0.69 million, the Company distributed 103.9% of the taxable income
it earned in that quarter. Through the end of the second quarter of 1997, the
Company had cumulatively declared dividends equaling 99.8% of cumulative taxable
REIT income earned through June 30, 1997.
In the second quarter of 1996, the Company declared a common dividend of $0.40
per share, resulting in the distribution of $3.41 million to 8.52 million common
shares outstanding at the end of the period. There were no preferred shares
outstanding at June 30, 1996. The Company distributed 108.5% of the taxable
income it earned in that quarter. At the end of the second quarter of 1996, the
Company had cumulatively declared dividends equaling 98.1% of cumulative taxable
REIT income earned through June 30, 1996.
In the first half of 1997, the Company declared a common dividend of $1.20 per
share. The total common dividend was $15.1 million. Together with the preferred
dividend of $1.1 million, the Company distributed 101.9% of the taxable income
it earned in that half.
For the first half of 1996, the Company declared a common dividend of $0.86 per
share, resulting in the distribution of $5.9 million. There were no preferred
shares outstanding in the first half of 1996. The Company distributed 104.5% of
the taxable income it earned in that half.
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FINANCIAL CONDITION
Mortgage Loans
From December 31, 1996 to June 30, 1997, the Company's whole loan portfolio grew
in size by 116% and increased as a percentage of the Company's mortgage assets
from 24.5% to 33.8%. In general over this period, the California concentration
dropped, the average seasoning declined, average loan size increased and
original loan-to-value ratios decreased. The percentage of the loan portfolio on
non-performing status remained steady at low levels.
At June 30, 1997, the Company owned 3,983 adjustable-rate, first-lien mortgage
loans on single-family residential properties with a principal value of $1.111
billion and an amortized cost of $1.137 billion. The Company estimates that the
bid-side market value of the Company's mortgage loan portfolio at June 30, 1997
was approximately $1.136 billion.
As verified by its re-underwriting process, the Company believes that all
mortgage loans owned as of June 30, 1997 were generally originated to "A"
quality, or "Prime" quality, underwriting standards. The average loan size was
$279,000. Loans with current balances less than $214,600 (the current Fannie
Mae/Freddie Mac limit for most loans) made up 20% of the dollar balance of the
Company's mortgage loan portfolio, while loans with current balances in excess
of $500,000 made up 27%. Loans on owner-occupied houses made up 92% of the
dollar balance of the loan portfolio; second homes represented 6% and investment
properties 2%.
At June 30, 1997, 33% of the loans (by dollar balance) had a loan-to-value ratio
(LTV) at origination in excess of 80%. Over 94% of these loans had primary
mortgage insurance (PMI) or additional collateral in the form of a pledged
account, typically serving to bring the effective original LTV for the Company
to 75% or less on those loans. The average original LTV for the Company's
mortgage loan portfolio was 76% as of June 30, 1997; after giving effect to PMI
or additional pledged collateral, the average effective original LTV was 69%. As
of June 30, 1997, the average seasoning of the loan portfolio was 22 months.
At June 30, 1997, 34% of the mortgage loans owned by the Company were on
properties located in California (13% in Northern California and 21% in Southern
California). Loans in Florida were 8% of the total; other states with a greater
than 3% representation in the loan portfolio included New York, Maryland, New
Jersey, Connecticut, Texas, Illinois, and Georgia.
At June 30, 1997, 12 mortgage loans were non-performing assets (NPAs), as they
were over 90 days delinquent, in bankruptcy, in foreclosure, or had become REO
(Real Estate Owned). The loan balance of these NPAs totaled $2,366,000, or 0.2%
of the mortgage loan portfolio. Included in this NPA balance was REO of $346,000
resulting from the default of 3 loans.
The mortgage loan credit reserve as of June 30, 1997 was $929,000. If all of the
NPAs as of June 30, 1997 were to default rather than cure, and the loss severity
experienced on these loans was 10%, 20%, 30%, or 40%, the Company estimates its
realized credit losses from these assets would be $241,000, $481,000, $722,000
or $962,000, respectively. At June 30, 1997, management believed these defaults,
to the extent they occur, would most likely occur over a period of six to twelve
months, during which time the Company planned to take additional credit
provisions to add to its mortgage loan credit reserve. Cumulatively through June
30, 1997, the Company has achieved resolution on one defaulted mortgage loan:
the loss severity on that loan was 7%. The analysis in this paragraph reviews
the risk of loss from NPAs as of June 30, 1997 only; it does not purport to
analyze or measure credit losses from additional NPAs that may arise after June
30, 1997.
At December 31, 1996, the Company owned 2,172 adjustable-rate, first-lien
mortgage loans on single-family residential properties with a principal value of
$0.515 billion and an amortized cost of $0.527 billion. The Company estimates
that the bid-side market value of these mortgage loans at December 31, 1996 was
approximately $0.525 billion.
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The average loan size at December 31, 1996 was $237,000. Loans with current
balances less than $214,600 (the current FNMA/FHLMC limit for most loans) made
up 23% of the dollar balance of the Company's mortgage loan portfolio, while
loans with current balances in excess of $500,000 made up 8%. Loans on
owner-occupied houses made up 94% of the dollar balance of the loan portfolio;
second homes represented 4% and investment properties 2%.
At December 31, 1996, 25% of the loans (by dollar balance) had a loan-to-value
ratio (LTV) at origination in excess of 80%. Over 97% of these loans had primary
mortgage insurance (PMI). The average original LTV for the Company's mortgage
loan portfolio was 77% as of December 31, 1996; after giving effect to PMI, the
average effective original LTV was 73%. As of December 31, 1996, the average
seasoning of the loan portfolio was 37 months.
At December 31, 1996, 44% of the mortgage loans owned by the Company were on
properties located in California (18% in Northern California and 26% in Southern
California). Loans in Maryland were 8% of the total; other states with a greater
than 3% representation in the portfolio included Florida, Illinois, New York,
and Connecticut.
At December 31, 1996, 7 loans were non-performing assets. The loan balance of
these NPAs totaled $1,249,000, or 0.2% of the mortgage loan portfolio. Included
in this total was one REO of $196,000.
The mortgage loan credit reserve as of December 31, 1997 was $428,000. If all
the NPAs as of December 31, 1996 were to default rather than cure, and the loss
severity experienced on these loans was 10%, 20%, 30%, or 40%, the Company
estimates its realized credit losses from these assets would have been $127,000,
$253,000, $380,000 or $506,000, respectively.
Mortgage Securities
From December 31, 1996 to June 30, 1997, the Company's portfolio of mortgage
securities increased by 37%. Mortgage securities declined as a percentage of
total mortgage assets from 75.5% to 66.2%. All of the Company's mortgage
securities represent interests in pools of adjustable rate, first lien mortgages
on single-family residential properties.
At June 30, 1997, the principal value of the Company's mortgage securities was
$2.18 billion and the amortized cost was $2.23 billion. The Company estimates
that the bid-side market value of the Company's mortgage securities portfolio at
June 30, 1997 was approximately $2.23 billion.
At June 30, 1997, 97.6% of the Company's mortgage securities had a credit rating
equivalent of AAA or AA, 1.1% had a credit rating equivalent of A or BBB and
1.3% had a credit rating equivalent less than BBB. Securities guaranteed by
Fannie Mae or Freddie Mac made up 54.7% of total mortgage securities. Non-agency
mortgage securities structured with large amounts of subordination or other
forms of third-party credit enhancement and rated AAA or AA made up 42.9% of the
mortgage securities portfolio. Based on information available as of June 30,
1997, the Company had no reason to suspect that it would be likely to incur
credit losses in the foreseeable future from its mortgage securities rated BBB
or better.
The Company has taken and expects to continue to take credit losses on its
mortgage securities rated below BBB. Although the loans in the mortgage pools
underlying these securities were, for the most part, originated to "A" quality
standards, these securities have received lower quality credit ratings as they
are subordinated to other securities issued from the same pools and therefore
are subject to leveraged credit risk with respect to the underlying mortgages.
At June 30, 1997, these below-BBB rated securities had a principal value of
$40.3 million and an amortized cost before credit reserve of $29.1 million. The
Company estimates that if all the loans in the underlying mortgage pools which
were over 90 days delinquent, in foreclosure, in bankruptcy, or REO as of June
30, 1997 were to default and have a loss severity of 10%, 20%, 30%, or 40%,
realized credit losses for the Company would be $0.1 million, $1.5 million, $3.7
million or $6.4 million, respectively. Cumulatively from the acquisition dates
of these assets in 1994 and 1995 through June 30, 1997, 138 defaulted mortgage
loans in these
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pools had been liquidated; the average loss severity on these loans was 24%. The
Company's credit reserve for these assets at June 30, 1997 was $2.65 million. At
June 30, 1997, management believed prospective defaults based on serious
delinquencies, to the extent they occur, would most likely occur over a period
of six to twelve months, during which time the Company planned to take
additional credit provisions to add to its mortgage securities credit reserve.
The analysis in this paragraph reviews the risk of loss from seriously
delinquent loans underlying the Company's securities as of June 30, 1997 only;
it does not purport to analyze or measure credit losses from additional serious
delinquencies that may arise after June 30, 1997.
At December 31, 1996, the principal value of the Company's mortgage securities
was $1.60 billion and the amortized cost was $1.63 billion. The Company
estimates that the bid-side market value of the Company's mortgage securities
portfolio at December 31, 1996 was approximately $1.63 billion.
At December 31, 1996, 96.6% of the Company's mortgage securities had a credit
rating equivalent of AAA or AA, 1.6% had a credit rating equivalent of A or BBB
and 1.8% had a credit rating equivalent less than BBB. Securities guaranteed by
Fannie Mae or Freddie Mac made up 59.4% of total mortgage securities. Other AAA
and AA securities made up 37.2% of the mortgage securities portfolio.
At December 31, 1996, below-BBB rated securities had a principal value of $40.8
million and an amortized cost before credit reserve of $28.9 million. The
Company estimates that if all the loans in the underlying mortgage pools which
were over 90 days delinquent, in foreclosure, in bankruptcy, or REO as of
December 31, 1996 were to default and have a loss severity of 10%, 20%, 30%, or
40%, realized credit losses for the Company would be $0.06 million, $0.61
million, $2.04 million, or $3.65 million, respectively. The cumulative realized
loss severity experience in the underlying mortgage pools for the period the
Company owned these securities through December 31, 1996 was 27%. The Company's
credit reserve for these assets at December 31, 1996 was $1.75 million.
Total Mortgage Asset Portfolio Characteristics
At June 30, 1997, the average credit rating equivalent of all of the Company's
mortgage assets (loans plus securities) was AA+, with mortgage loans (the bulk
of the value which would be rated AAA if securitized and rated) representing
33.8% of the total mortgage asset portfolio, AAA and AA securities representing
64.5%, A and BBB rated securities representing 0.8% and below-BBB rated
securities representing 0.9%.
At June 30, 1997, all mortgage assets consisted of adjustable rate mortgages.
The average coupon rate accruing on these assets was 7.73%. The average level of
the short-term interest rate indices which determine coupon adjustments was
5.77%. Since the average net margin was 2.23%, the highest potential average
mortgage coupon rate (the fully-indexed rate) at that time was 8.00%. The actual
coupon rate was lower than the fully-indexed rate by 0.27% due to acquisition of
mortgage assets with initial coupons set at lower than fully-indexed rates and
due to interest rate fluctuations and other factors in the year prior to June
30, 1997.
At June 30, 1997, 36.0% of the Company's mortgage assets had coupon rate
adjustments every six months based on the six month LIBOR or CD index and 8.8%
had monthly adjustments based on the one month LIBOR index. Mortgage assets with
annual coupon adjustments based on the six month or one year U.S. Treasury index
were 52.1% of the portfolio and one year Treasury mortgages with an initial
coupon rate set longer than one year represented 1.8%. Mortgage assets with
other indices made up 1.3% of the total. At June 30, 1997, the average term to
next coupon adjustment for all mortgage assets was 5 months. For most mortgage
assets, coupon rate adjustments are based on the index level 30 to 75 days prior
to the start of a new coupon accrual period.
Potential coupon rate changes can be limited by periodic and life caps. As of
June 30, 1997, the Company's average mortgage asset life time maximum cap rate
was 12.01%. At June 30, 1997, periodic caps limited coupon changes to 2%
annually for 81.9% of mortgage assets; mortgage assets representing 18.0% of the
total had no periodic caps and 0.1% had other periodic cap arrangements.
28
<PAGE> 29
At December 31, 1996, the average mortgage asset credit rating equivalent was
AA+, with mortgage loans representing 24.5% of the total mortgage asset
portfolio, AAA and AA securities representing 73.0%, A and BBB rated securities
representing 1.2% and below-BBB rated securities representing 1.3%.
At December 31, 1996, all mortgage assets consisted of adjustable rate
mortgages. The average coupon rate accruing on these assets was 7.75%. The
average level of the short-term interest rate indices which determine coupon
adjustments was 5.58%. Since the average net margin was 2.24%, the highest
potential average mortgage coupon rate (the fully-indexed rate) at that time was
7.82%. The actual coupon rate was lower than the fully-indexed rate by 0.07%.
At December 31, 1996, 38.4% of the Company's mortgage assets had coupon rate
adjustments every six months based on the six month LIBOR or CD index and 1.4%
had monthly adjustments based on the one month LIBOR index. Six month or one
year U.S. Treasury index mortgage assets made up 58.1% of the total. Mortgage
assets with other indices made up 2.1% of the total. At December 31, 1996, the
average term to next coupon adjustment for all mortgage assets was 5 months.
As of December 31, 1996, the Company's average mortgage asset life time maximum
cap rate was 11.73%. At December 31, 1996, periodic caps limited coupon changes
to 2% annually for 95.7% of mortgage assets; mortgage assets representing 4.2%
of the total had no periodic caps and 0.1% had other periodic cap arrangements.
Interest Rate Agreements
At June 30, 1997, the Company owned $5.5 billion notional face of interest rate
agreements, principally caps and swaps. These interest rate agreements had
various start dates, maturity dates, and interest rate protection features; they
are described in detail in "Note 4. Interest Rate Agreements" in the Notes to
Consolidated Financial Statements.
These agreements are designed to reduce the Company's interest rate and market
value fluctuation risk. They had a historical amortized cost basis of $12.2
million and an estimated bid-side market value of $4.2 million as of June 30,
1997. Market values dropped as compared to amortized cost due to a drop in
interest rate volatility assumptions in the marketplace for interest rate
agreements, a drop in interest rates, the effect of taking bid-ask spread
mark-downs on a substantial amount of new agreements and due to the mis-matched
timing of GAAP amortization methods for premiums paid for interest rate caps and
the rate of actual decay in their market values. Market value fluctuations for
interest rate agreements hedging mortgage securities are reflected in the
Company's interest rate agreement market valuation account of negative $7.4
million at June 30, 1997. Interest rate agreements hedging mortgage loans are
carried on the balance sheet at historical amortized cost.
At December 31, 1996, the Company owned $2.6 billion notional face of interest
rate agreements with a historical amortized cost basis of $6.2 million and an
estimated bid-side market value of $2.6 million. The Company's interest rate
agreement market valuation account was negative $3.6 million at that time.
There is a risk that the counter-parties to the Company's interest rate
agreements will not be able to perform to the terms of these contracts. If this
were to happen, the Company's total accounting credit loss exposure would be
limited to its historical amortized cost basis in these assets, although the
true economic opportunity cost to the Company could be higher. Through June 30,
1997, each of the counter-parties to the Company's interest rate agreements had
a credit rating of at least A.
Net Non-Earning Assets
Increases in net working capital (receivables less payables) and fixed assets
reduce earnings as the Company must fund these non-earning assets with
borrowings.
29
<PAGE> 30
At June 30, 1997, net working capital was negative, as accrued interest payable,
dividend payable, and accrued expenses exceeded interest receivable from
mortgage assets and prepaid expenses. This negative working capital provided
funds at that time to reduce borrowings or increase cash investments by $1.5
million. However, the Company had an average investment in net positive working
capital during the second quarter of 1997 of $55.4 million, requiring additional
borrowings. Total non-earning assets (including total fixed assets of $257,000)
averaged $75.9 million during the second quarter of 1997, representing 2.6% of
total average assets and 25.9% of average equity.
At December 31, 1996, net working capital was negative by $3.0 million,
providing a source of funds at that time. Total fixed assets were $257,000.
Total non-earning assets during the fourth quarter of 1996 averaged $41.4
million, however, representing 2.7% of total average assets and 22.4% of average
equity during that quarter.
Borrowings, Cash Balances and Liquidity
Through June 30, 1997, the Company's borrowings consisted of short-term
collateralized borrowing arrangements such as reverse repurchase agreements,
notes payable, and revolving lines of credit.
Borrowings totaled $3.10 billion with an average interest expense rate of 5.91%
at June 30, 1997 and $1.95 billion with an average interest expense rate of
5.83% at December 31, 1996. In each case, the principal value, historical
amortized cost, carrying value, and estimated bid-side market value of these
borrowings were approximately the same.
As the Company has reduced risks on its balance sheet, it has utilized a greater
amount of leverage: the Company's debt-to-equity ratio was 10.4x at June 30,
1997 and 9.1x at December 31, 1996. The Company has been, on average, more
leveraged at quarter end than it typically has been during the quarter, as the
Company has historically planned common stock equity offerings in the first
month of each quarter and has acquired assets in anticipation of these
offerings. The average debt-to-equity ratio was 7.3x during the fourth quarter
of 1996, 8.7x during the first quarter of 1997 and 9.1x during the second
quarter of 1997.
At June 30, 1997, the Company had borrowings equaling 92.3% of the $3.36 billion
market value of its mortgage assets. The Company estimates it had additional
borrowing capacity at that time of $149 million. In addition, the Company had
$29 million of cash. On average during the second quarter of 1997, the Company
estimates it had additional borrowing capacity of $113 million and cash on hand
of $19 million.
At December 31, 1996, the Company had borrowings equaling 90.7% of the $2.15
billion market value of its mortgage assets. The Company estimates it had
additional borrowing capacity at that time of $124 million, as well as $11
million of cash. During the fourth quarter of 1996, the Company estimates it
had, on average, additional borrowing capacity of $85 million and cash balances
of $16 million. During the first quarter of 1997, the Company estimates it had
$99 million in average unused borrowing capacity and an average cash balance of
$12 million.
The Company's liquidity status, borrowing capacity, and ability to roll over its
borrowings as they mature depend on the market value, liquidity and credit
quality of its assets, the soundness and capitalization of the Company's balance
sheet, the state of the collateralized lending market and other factors. If the
Company's liquidity or borrowing capacity were to become seriously diminished,
the Company would most likely seek to sell its mortgage assets (the sale of
which, in such circumstances, might be difficult and most likely would be at a
loss). In order to avoid such an occurrence, the Company seeks to maintain what
it believes to be a prudent level of capital, i.e., the Company restricts its
asset growth according to its Risk-Adjusted Capital Policy and thereby seeks to
maintain adequate unused borrowing capacity.
At June 30, 1997 and December 31, 1996, the average term to maturity of the
Company's borrowings was 75 days and 98 days and the average term to next rate
adjustment was 36 days and 52 days, respectively; the term to next rate
adjustment was shorter than the term to maturity as some of the Company's
borrowings had a cost of
30
<PAGE> 31
funds that adjusted to market levels on a monthly or daily basis during the term
of the borrowing. At each of these dates, the cost of these borrowings could
adjust to changes in short-term interest rates, on average, several months
faster than coupon rates on the Company's mortgages could adjust to those same
changes. Through its interest rate agreement hedging program, the Company seeks
to mitigate the short-term impact that a large increase in interest rates could
have on its cost of funds and spread earnings
Stockholders' Equity, Capital Efficiency and Capital Adequacy
From December 31, 1996 to June 30, 1997, the Company's equity base (exclusive of
the market valuation account) grew from $214.4 million to $296.9 million. This
equity growth was the result of the Company's January stock offering ($29.2
million), April common stock offering ($46.0 million), proceeds from the
issuance of common stock through the exercise of warrants ($2.7 million),
through the Company's Dividend Reinvestment Plan ($1.3 million) and through the
Company's Optional Cash Investment Plan ($4.9 million). Since taxable REIT
earnings have exceeded GAAP net income, cumulative dividends paid have exceeded
retained GAAP earnings; dividends exceeded GAAP earnings by $1.6 million in the
first half of 1997, thus reducing stockholders' equity as measured on a GAAP
basis by that amount.
Book value, or equity, per share (including common and preferred, excluding the
market valuation account) increased by 17% from $17.87 on December 31, 1996 to
$20.97 on June 30,1997. The primary driver of this book value growth was
accretive stock offerings at prices in excess of book value.
For balance sheet purposes, the Company carries its mortgage securities and
associated interest rate agreements at their estimated bid-side market value
(historical amortized cost less market valuation account). The total market
valuation account for the Company was negative $3.8 million on June 30, 1997 and
negative $3.5 million on December 31, 1996. As a result of this accounting
treatment, the Company's reported equity base and book value per share may
fluctuate due to market conditions and other factors. Mortgage loans and all
other assets and liabilities were carried on the Company's balance sheet at June
30, 1997 at historical amortized cost.
The Company estimated that the bid-side market value (or realizable value) of
all its assets less the cost of paying off all of its obligations was
approximately $211.2 million as of December 31, 1996 and $292.6 million as of
June 30, 1997. As compared to the shareholders' equity of the Company (excluding
the market valuation account), the net total "mark-to-market" value for the
Company was $3.2 million and $4.4 million lower, respectively, on those dates.
Between December 31, 1996 and June 30, 1997, the liquidation value of the
Company's interest rate agreements dropped significantly: See "Interest Rate
Agreements" above. The Company expects that the net total "mark-to-market" value
of the Company will fluctuate significantly over time.
Through its Risk-Adjusted Capital Policy, the Company assigns a guideline
capital adequacy amount (expressed in the form of a guideline equity-to-assets
ratio) to each of its mortgage assets. This ratio will fluctuate over time,
according to a formula, based on changes in that asset's credit quality,
liquidity characteristics, potential for market value fluctuation, interest rate
risk, prepayment risk, the manner in which the asset is funded, and the
over-collateralization requirements for that asset set by the Company's
collateralized lenders. The sum of the capital adequacy amounts for all of the
Company's mortgage assets is the Company's aggregate guideline capital adequacy
amount.
Management believes that the bulk of the capital necessary to manage the Company
prudently is needed due to the liquidity and market value fluctuation risks that
arise from the utilization of short-term collateralized borrowings.
The Company does not expect that its actual capital levels will always exceed
the guideline amount. The Company measures all of its mortgage assets funded
with short-term borrowings at estimated market value for the purpose of making
Risk-Adjusted Capital calculations. For example, if interest rates were to rise
in a significant manner, the Company's capital guideline amount would rise (as
the potential interest rate risk of its mortgages would increase, at least on a
temporary basis, due to periodic and life caps) while its actual capital levels
as determined for the Risk-Adjusted Capital Policy would likely fall as the
market values of its mortgages, net of mark-to-market gains on hedges, fell
(market value declines may be temporary as well, as future coupon
31
<PAGE> 32
adjustments may help to restore some of the lost market value). In this
circumstance, or any other circumstance in which the Company's actual capital
levels fell below the Company's capital adequacy guideline amount, the Company
would cease the acquisition of new mortgage assets until capital balance was
restored.
As expressed as an equity-to-assets ratio, the Company's average guideline
capital amount was 10.2% of assets in the fourth quarter of 1996, 10.1% in first
quarter of 1997 and 9.5% in the second quarter of 1997. Since 1995, the Company
has adjusted its asset mix in a manner that it believes presents the Company
with lower levels of anticipated risk. The capital guideline has dropped
accordingly.
The actual average equity-to-asset ratio for the Company was 11.9% in the fourth
quarter of 1996, 10.3% in the first quarter of 1997, and 9.9% in the second
quarter of 1997. Since actual equity-to-asset ratios in these quarters were
higher than the capital guideline ratios, the Company could have owned more
mortgage assets during these quarters and still met its capital guidelines.
Balance sheet capacity utilization (actual assets divided by potential assets)
is a key measure of capital efficiency for the Company; it was 86% in the fourth
quarter of 1996, 98% in the first quarter of 1997, and 96% in the second quarter
of 1997. Capacity utilization will remain high to the extent that the Company is
able to match the timing of the acquisition of mortgages with its receipt of new
capital.
In October of 1996, the Board of Directors approved an expanded mortgage asset
acquisition authority for the Company. In defined circumstances prior to a
planned equity offering, management is authorized to acquire mortgage assets in
a limited amount beyond the usual constraints of the Company's Risk-Adjusted
Capital Policy. Thus at March 31, 1997, prior to the equity offering of April
1997, the Company's actual equity-to-assets ratio of 9.3% was less than the
normal capital guideline of 10.1% but exceeded the expanded guideline in effect
at that time of 9.2%. With the exception of June 30, 1997, the Company's actual
capital level has always exceeded its capital guideline through such date
(either the normal guideline or the expanded guideline, as appropriate for the
circumstance). At June 30, 1997 and for a short period of time thereafter, the
Company's actual "mark-to-market" capital level was $140,000 (0.05%) less than
the Company's expanded capital guideline level due to market value fluctuations
of its interest rate agreements.
From June 12, 1997 through the common stock equity offering of July 25, 1997,
the Company was at its approximate maximum asset size as determined by its
Risk-Adjusted Capital Policy. Accordingly, the Company ceased making firm
commitments to new asset acquisitions during that period. As a result, the level
of total asset acquisitions for the third quarter of 1997 may be less than
otherwise would have been the case.
In July 1997, the Company completed the placement of $534 million amortizing
long-term bonds. In doing so, liquidity and market value fluctuation risk for
that portion of the Company's balance sheet was substantially eliminated.
Recognizing this risk reduction, the Company significantly lowered its
Risk-Adjusted Capital guideline amounts for the mortgage loans collateralizing
this long-term debt. The Company's overall weighted average Risk-Adjusted
Capital guideline equity-to-assets ratio declined as a result in July 1997.
Risk Management
The Company seeks to manage the potential credit, interest rate, liquidity and
other risks inherent in all financial institutions in a prudent manner designed
to insure the longevity of the corporation while, at the same time, seeking to
provide an opportunity for shareholders to realize attractive total rates of
return through long-term stock ownership in the Company. While the Company does
not seek to avoid risk, it does seek, to the best of its ability, to assume
risks that can be quantified from historical experience, to actively manage such
risk, to earn sufficient compensation to justify the taking of such risks and to
maintain capital levels consistent with the risks it does undertake.
The Company seeks to limit credit risk by maintaining what it believes to be
high quality mortgage loan underwriting standards. The Company is a nationwide
"A" (or "prime") quality lending company: it acquires and owns first mortgages
on single-family family residential properties which have been underwritten to
the highest levels of underwriting standards generally in use for these types of
loans. Credit losses from such mortgages are cyclical. Historically, however,
the magnitude of loss from high quality single-family mortgages
32
<PAGE> 33
has been contained relative to credit losses arising from other forms of
commercial, consumer and mortgage lending.
The Company seeks to manage liquidity risk and short-term borrowing roll-over
risk (which could be caused by market value fluctuations of assets pledged as
collateral or by changes in lending markets) through: (1) maintaining what it
believes to be a high quality and liquid portfolio of mortgage assets, (2)
maintaining a hedging program utilizing interest rate agreements designed to
partially mitigate net changes in the market values of its assets, (3)
maintaining what it believes to be a prudent level of capitalization (and
therefore a prudent level of unused borrowing capacity), and (4) replacing a
portion of its short-term borrowings with long-term borrowings. Liquidity risks
and short-term borrowing roll-over risks cannot be substantially eliminated
unless the Company can replace all of its short-term borrowings with long-term
borrowings. At June 30, 1997, the Company remained exposed to such risk,
particularly in general market environments of rapidly rising interest rates,
market dislocation or illiquidity.
The Company seeks to manage interest rate risk through matching the interest
rate characteristics of its mortgages and its borrowings to the degree that
management believes is likely to be in the best interests of the shareholders in
the long term.
The Company does not seek to be perfectly matched or to eliminate interest rate
risk. Through June 30, 1997, the Company has paired adjustable-rate mortgages
with variable rate liabilities. The Company has generally maintained borrowings
which adjust to market conditions several months faster than its assets. This
short-term mis-match has increased on the Company's balance sheet in 1997
relative to prior periods. For larger interest rate increases, the potential
short-term negative earnings impact resulting from this short-term mis-match
should be partially mitigated by the Company's interest rate agreements. In
addition, since the Company's adjustable-rate earning assets have exceeded its
liabilities to a material degree through June 30, 1997, the longer term impact
of an increase in short-term interest rates may be positive after a lag period
(once the coupon rate on the assets has fully adjusted to the rate increase).
Conversely, while the short-term earnings effect of a decline in short-term
interest rates may be positive, the longer-run effect after a lag period may be
a decline in earnings relative to what they otherwise would have been after the
coupon rates on the assets have adjusted downwards.
Through June 30, 1997, the Company generally has assumed some other types of
asset/liability mis-matches as well, including some yield curve flattening risk
(the risk of six and twelve month interest rates falling relative to one and
three month interest rates) and some "TED" spread risk (the risk of U.S.
Treasury rates, upon which coupon rate changes for a portion of the Company's
assets are based, falling relative to LIBOR rates, upon which changes in the
cost of funds of all the Company's liabilities are generally correlated). In
addition, the Company has not fully hedged the periodic caps (averaging 2% per
year) and life caps (averaging 12.01% at June 30, 1997) imbedded in its assets.
Certain other sources of interest rate type risks remain partially hedged as
well. Management believes that the assumption of these risks to the extent
undertaken by the Company is more likely than not to result in higher earnings
for the Company in the long-term but also, from time to time, may cause earnings
volatility and opportunity cost from foregone growth potential. Management
believes that retained interest rate risks (to the extent they are separate from
liquidity and market value fluctuation risk) are unlikely to cause a safety and
soundness issue for the Company except in relatively extreme and unexpected
scenarios.
If the rate of mortgage principal repayment of the Company's mortgage assets is
faster than expected, the rate at which the Company amortizes as an expense its
net premium balances will increase and earnings will be reduced relative to what
they would have been otherwise. Changes in principal repayment rates may be a
source of earnings volatility for the Company. In addition, faster principal
repayments may reduce the Company's net asset growth rate; net asset growth is
generally an important component of future earnings growth. Prospects for the
Company may also be reduced by higher than expected mortgage principal
repayments if the potential return characteristics of new assets are less
attractive than those of the existing assets held in portfolio. Conversely,
certain liquidity, market value fluctuation, and interest rate risks may be
exacerbated in a rising interest rate environment due to slowing rates of
mortgage principal repayment.
33
<PAGE> 34
While adjustable rate-mortgage principal repayment rates are not highly
predictable, in the past management believes the strongest influencing factor
has been the absolute level of longer-term interest rates. As long-term rates
drop, adjustable-rate mortgage principal repayments have tended to increase,
particularly if longer-term rates drop relative to short-term interest rates. In
addition, management believes adjustable rate mortgage principal repayments have
been increasing on a secular trend basis due to structural and behavioral
changes in the mortgage origination market. Through June 30, 1997, the Company
has not sought to hedge mortgage principal repayment risk but rather has sought
to analyze, based on individual mortgage characteristics, the propensity of each
acquired mortgage or mortgage pool to experience accelerated principal repayment
rates and to adjust its acquisition price bid accordingly based on the level of
perceived downside (and upside) earnings risk.
Virtually all of the Company's assets and liabilities are financial in nature.
As a result, interest rates and other factors drive the Company's performance
far more than does inflation. Changes in interest rates and other factors drive
the Company's performance far more than does inflation. Changes in interest
rates do not necessarily correlate with inflation rates or changes in inflation
rates. The Company's financial statements are prepared in accordance with
Generally Accepted Accounting Principles and the Company's dividends are
determined by the Company's net income as calculated for tax purposes; in each
case, the Company's activities and balance sheet are measured with reference to
historical cost or fair market value without considering inflation.
34
<PAGE> 35
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 1
INCOME STATEMENT FOR THREE MONTHS ENDING
------------------------------
(ALL DOLLARS IN THOUSANDS) MAR. 31, JUN. 30,
1997 1997
---------- ----------
<S> <C> <C>
Mortgage Loans:
Coupon Income $ 10,784 $ 14,474
Amortization of Discount Balances 11 8
Amortization of Premium Balances (940) (1,462)
---------- ----------
Interest Income: Mortgage Loans 9,855 13,020
Mortgage Securities:
Coupon Income 31,440 39,879
Amortization of Discount Balances 261 409
Amortization of Premium Balances (3,150) (4,065)
---------- ----------
Interest Income: Mortgage Securities 28,551 36,223
Total Interest Income From Mortgage Assets 38,406 49,243
Interest Income: Cash Balances 162 266
---------- ----------
Total Interest Income 38,568 49,509
Interest Expense (28,900) (38,958)
Interest Rate Agreement Expense (602) (912)
Interest Rate Agreement Income 7 73
---------- ----------
Net Interest Rate Agreement Expense (595) (839)
Net Interest Income 9,073 9,712
Gain (Loss) on Sale 0 0
Other Income 0 0
---------- ----------
Total Income 9,073 9,712
Provision for Potential Credit Losses
Mortgage Loans (202) (299)
Mortgage Securities (493) (477)
---------- ----------
Total Credit Provision (695) (776)
Compensation and Benefits Expense (529) (516)
Dividend Equivalent Rights Expense (203) (358)
Other Operating Expenses (435) (341)
---------- ----------
Total Operating Expenses (1,167) (1,215)
Corporate Income Tax Expense 0 0
Net Income Before Preferred Dividends $ 7,211 $ 7,721
Preferred Dividends (755) (687)
---------- ----------
Net Income to Common Shareholders $ 6,456 $ 7,034
========== ==========
Calculation of Taxable REIT Income
GAAP Net Income Before Preferred Dividends $ 7,211 $ 7,721
Mortgage Amortization Differences (87) (103)
Credit Provisions less Actual Losses 653 747
Operating Expense Differences 135 (50)
---------- ----------
Taxable Income Before Preferred Dividend $ 7,912 $ 8,315
========== ==========
</TABLE>
35
<PAGE> 36
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 1 (CONTINUED)
<TABLE>
<CAPTION>
INCOME STATEMENT FOR THREE MONTHS ENDING FOR YEAR
----------------------------------------------- ENDING
(ALL DOLLARS IN THOUSANDS) MAR. 31, JUN. 30, SEP. 30, DEC. 31, DEC. 31,
1996 1996 1996 1996 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Mortgage Loans:
Coupon Income $ 479 $ 749 $ 1,656 $ 2,582 $ 5,466
Amortization of Discount Balances 2 11 7 11 31
Amortization of Premium Balances (19) (43) (62) (189) (313)
-------- -------- -------- -------- --------
Interest Income: Mortgage Loans 462 717 1,601 2,404 5,184
Mortgage Securities:
Coupon Income 8,965 12,973 18,901 25,292 66,131
Amortization of Discount Balances 175 234 264 206 879
Amortization of Premium Balances (688) (1,225) (1,645) (2,236) (5,794)
-------- -------- -------- -------- --------
Interest Income: Mortgage Securities 8,452 11,982 17,520 23,262 61,216
Total Interest Income From Mortgage Assets 8,914 12,699 19,121 25,666 66,400
Interest Income: Cash Balances 217 202 250 215 884
-------- -------- -------- -------- --------
Total Interest Income 9,131 12,901 19,371 25,881 67,284
Interest Expense (6,202) (9,075) (14,447) (19,467) (49,191)
Interest Rate Agreement Expense (151) (255) (350) (403) (1,159)
Interest Rate Agreement Income 0 0 0 1 1
-------- -------- -------- -------- --------
Net Interest Rate Agreement Expense (151) (255) (350) (402) (1,158)
Net Interest Income 2,778 3,571 4,574 6,012 16,935
Gain (Loss) on Sale 0 0 0 0 0
Other Income 0 0 0 0 0
-------- -------- -------- -------- --------
Total Income 2,778 3,571 4,574 6,012 16,935
Provision for Potential Credit Losses
Mortgage Loans 5 (140) (178) (35) (348)
Mortgage Securities (336) (337) (338) (337) (1,348)
-------- -------- -------- -------- --------
Total Credit Provision (331) (477) (516) (372) (1,696)
Compensation and Benefits Expense (234) (305) (309) (343) (1,191)
Dividend Equivalent Rights Expense (85) (79) (81) (137) (382)
Other Operating Expenses (174) (210) (281) (316) (981)
-------- -------- -------- -------- --------
Total Operating Expenses (493) (594) (671) (796) (2,554)
Corporate Income Tax Expense 0 0 0 0 0
Net Income Before Preferred Dividends $ 1,954 $ 2,500 $ 3,387 $ 4,844 $ 12,685
Preferred Dividends 0 0 (388) (760) (1,148)
-------- -------- -------- -------- --------
Net Income to Common Shareholders $ 1,954 $ 2,500 $ 2,999 $ 4,084 $ 11,537
======== ======== ======== ======== ========
Calculation of Taxable REIT Income
GAAP Net Income Before Preferred Dividends $ 1,954 $ 2,500 $ 3,387 $ 4,844 $ 12,685
Mortgage Amortization Differences 175 82 61 131 449
Credit Provisions less Actual Losses 331 477 516 365 1,689
Operating Expense Differences 89 83 84 89 345
-------- -------- -------- -------- --------
Taxable Income Before Preferred Dividend $ 2,549 $ 3,142 $ 4,048 $ 5,429 $ 15,168
======== ======== ======== ======== ========
</TABLE>
36
<PAGE> 37
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 1 (CONTINUED)
<TABLE>
<CAPTION>
INCOME STATEMENT FOR THREE MONTHS ENDING FOR YEAR
----------------------------------------------- ENDING
(ALL DOLLARS IN THOUSANDS) MAR. 31, JUN. 30, SEP. 30, DEC. 31, DEC. 31,
1995 1995 1995 1995 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Mortgage Loans:
Coupon Income $ 0 $ 0 $ 0 $ 379 $ 379
Amortization of Discount Balances 0 0 0 4 4
Amortization of Premium Balances 0 0 0 (4) (4)
-------- -------- -------- -------- --------
Interest Income: Mortgage Loans 0 0 0 379 379
Mortgage Securities:
Coupon Income 1,940 2,737 3,779 6,303 14,759
Amortization of Discount Balances 234 237 280 164 915
Amortization of Premium Balances (19) (34) (123) (383) (559)
-------- -------- -------- -------- --------
Interest Income: Mortgage Securities 2,155 2,940 3,936 6,084 15,115
Total Interest Income From Mortgage Assets 2,155 2,940 3,936 6,463 15,494
Interest Income: Cash Balances 15 20 50 147 232
-------- -------- -------- -------- --------
Total Interest Income 2,170 2,960 3,986 6,610 15,726
Interest Expense (1,533) (2,190) (2,432) (4,453) (10,608)
Interest Rate Agreement Expense (16) (82) (112) (129) (339)
Interest Rate Agreement Income 0 0 0 0 0
-------- -------- -------- -------- --------
Net Interest Rate Agreement Expense (16) (82) (112) (129) (339)
Net Interest Income 621 688 1,442 2,028 4,779
Gain (Loss) on Sale 0 0 0 0 0
Other Income 0 0 0 0 0
-------- -------- -------- -------- --------
Total Income 621 688 1,442 2,028 4,779
Provision for Potential Credit Losses
Mortgage Loans 0 0 0 (79) (79)
Mortgage Securities (19) (40) (84) (271) (414)
-------- -------- -------- -------- --------
Total Credit Provision (19) (40) (84) (350) (493)
Compensation and Benefits Expense (81) (81) (197) (104) (463)
Dividend Equivalent Rights Expense 0 0 (7) (47) (54)
Other Operating Expenses (120) (117) (160) (217) (614)
-------- -------- -------- -------- --------
Total Operating Expenses (201) (198) (364) (368) (1,131)
Corporate Income Tax Expense 0 0 0 0 0
Net Income Before Preferred Dividends $ 401 $ 450 $ 994 $ 1,310 $ 3,155
Preferred Dividends 0 0 0 0 0
-------- -------- -------- -------- --------
Net Income to Common Shareholders $ 401 $ 450 $ 994 $ 1,310 $ 3,155
======== ======== ======== ======== ========
Calculation of Taxable REIT Income
GAAP Net Income Before Preferred Dividends $ 401 $ 450 $ 994 $ 1,310 $ 3,155
Mortgage Amortization Differences (15) 35 49 106 175
Credit Provisions less Actual Losses 19 40 84 347 490
Operating Expense Differences 3 3 (44) 50 12
-------- -------- -------- -------- --------
Taxable Income Before Preferred Dividend $ 408 $ 528 $ 1,083 $ 1,813 $ 3,832
======== ======== ======== ======== ========
</TABLE>
37
<PAGE> 38
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
INCOME STATEMENT FOR THREE MONTHS ENDING FOR YEAR
----------------------- ENDING
(ALL DOLLARS IN THOUSANDS) SEP. 30, DEC. 31, DEC. 31,
1994 1994 1994
------- ------- -------
<S> <C> <C> <C>
Mortgage Loans:
Coupon Income $ 0 $ 0 $ 0
Amortization of Discount Balances 0 0 0
Amortization of Premium Balances 0 0 0
------- ------- -------
Interest Income: Mortgage Loans 0 0 0
Mortgage Securities:
Coupon Income 18 1,084 1,102
Amortization of Discount Balances 0 101 101
Amortization of Premium Balances 0 (19) (19)
------- ------- -------
Interest Income: Mortgage Securities 18 1,166 1,184
Total Interest Income From Mortgage Assets 18 1,166 1,184
Interest Income: Cash Balances 80 32 112
------- ------- -------
Total Interest Income 98 1,198 1,296
Interest Expense (10) (750) (760)
Interest Rate Agreement Expense 0 (8) (8)
Interest Rate Agreement Income 0 0 0
------- ------- -------
Net Interest Rate Agreement Expense 0 (8) (8)
Net Interest Income 88 440 528
Gain (Loss) on Sale 0 0 0
Other Income 0 0 0
------- ------- -------
Total Income 88 440 528
Provision for Potential Credit Losses
Mortgage Loans 0 0 0
Mortgage Securities 0 0 0
------- ------- -------
Total Credit Provision 0 0 0
Compensation and Benefits Expense (15) (48) (63)
Dividend Equivalent Rights Expense 0 0 0
Other Operating Expenses (25) (58) (83)
------- ------- -------
Total Operating Expenses (40) (106) (146)
Corporate Income Tax Expense 0 0 0
Net Income Before Preferred Dividends $ 48 $ 334 $ 382
Preferred Dividends 0 0 0
------- ------- -------
Net Income to Common Shareholders $ 48 $ 334 $ 382
======= ======= =======
Calculation of Taxable REIT Income
GAAP Net Income Before Preferred Dividends $ 48 $ 334 $ 382
Mortgage Amortization Differences 0 (28) (28)
Credit Provisions less Actual Losses 0 0 0
Operating Expense Differences 0 0 0
------- ------- -------
Taxable Income Before Preferred Dividend $ 48 $ 306 $ 354
======= ======= =======
</TABLE>
38
<PAGE> 39
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 2 AT
------------------------------
BALANCE SHEETS MAR. 31, JUN. 30,
(ALL DOLLARS IN THOUSANDS) 1997 1997
------------ ------------
<S> <C> <C>
Cash and Cash Equivalents $ 12,985 $ 29,425
Mortgage Loans:
Principal Value 716,009 1,111,029
Unamortized Premium 15,951 25,442
Unamortized Discount (131) (123)
Real Estate Owned 128 346
Reserve For Credit Losses (630) (929)
Market Valuation Account (1,291) 0
------------ ------------
Total Mortgage Loans 730,035 1,135,765
Mortgage Securities:
Principal Value 1,839,720 2,179,186
Unamortized Premium 49,156 62,219
Unamortized Discount (15,510) (14,968)
Reserve For Credit Losses (2,203) (2,651)
Market Valuation Account 3,516 3,603
------------ ------------
Total Mortgage Securities 1,874,679 2,227,389
Total Mortgage Assets 2,604,714 3,363,154
Interest Rate Agreements 7,879 12,233
Market Valuation Account (2,106) (7,366)
------------ ------------
Total Interest Rate Agreements 5,773 4,867
Accrued Interest Receivable 17,722 24,065
Fixed Assets, Leasehold, Org Costs 259 257
Prepaid Expenses and Other Receivables 1,611 2,738
------------ ------------
Other Assets 19,592 27,060
Total Assets $ 2,643,064 $ 3,424,506
============ ============
Short-Term Borrowings $ 2,373,279 $ 3,102,784
Accrued Interest Payable 14,962 18,153
Accrued Expenses and Other Payables 1,262 1,743
Dividends Payable 7,899 8,638
------------ ------------
Total Liabilities $ 2,397,402 $ 3,131,318
Preferred Stock $ 29,383 $ 26,733
Common Stock 119 133
Additional Paid-in Capital 219,461 274,420
Net Market Valuation Account 118 (3,762)
Retained Earnings after Dividends (3,419) (4,336)
------------ ------------
Total Stockholders' Equity 245,662 293,188
Total Liabilities plus Stockholders' Equity $ 2,643,064 $ 3,424,506
============ ============
</TABLE>
39
<PAGE> 40
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 2 (CONTINUED) AT
---------------------------------------------------------------
BALANCE SHEETS MAR. 31, JUN. 30, SEP. 30, DEC. 31,
(ALL DOLLARS IN THOUSANDS) 1996 1996 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 9,705 $ 10,407 $ 14,599 $ 11,068
Mortgage Loans:
Principal Value 24,831 69,154 126,426 514,837
Unamortized Premium 191 686 1,535 12,389
Unamortized Discount (171) (160) (153) (142)
Real Estate Owned 0 0 0 196
Reserve For Credit Losses (74) (214) (393) (428)
Market Valuation Account 84 200 279 (1,377)
------------ ------------ ------------ ------------
Total Mortgage Loans 24,861 69,666 127,694 525,475
Mortgage Securities:
Principal Value 548,976 936,611 1,234,636 1,602,212
Unamortized Premium 12,599 22,004 31,072 41,928
Unamortized Discount (16,683) (16,448) (16,185) (15,951)
Reserve For Credit Losses (747) (1,084) (1,421) (1,752)
Market Valuation Account (3,847) (3,269) 74 1,516
------------ ------------ ------------ ------------
Total Mortgage Securities 540,298 937,814 1,248,176 1,627,953
Total Mortgage Assets 565,159 1,007,480 1,375,870 2,153,428
Interest Rate Agreements 2,534 2,835 3,286 6,200
Market Valuation Account (1,301) (1,484) (2,413) (3,599)
------------ ------------ ------------ ------------
Total Interest Rate Agreements 1,233 1,351 873 2,601
Accrued Interest Receivable 4,496 7,292 10,781 14,134
Fixed Assets, Leasehold, Org Costs 201 238 270 257
Prepaid Expenses and Other Receivables 519 1,562 1,085 2,709
------------ ------------ ------------ ------------
Other Assets 5,216 9,092 12,136 17,100
Total Assets $ 581,313 $ 1,028,330 $ 1,403,478 $ 2,184,197
============ ============ ============ ============
Short-Term Borrowings $ 508,721 $ 896,214 $ 1,225,094 $ 1,953,103
Accrued Interest Payable 1,616 4,052 10,379 14,060
Accrued Expenses and Other Payables 290 361 472 761
Dividends Payable 2,540 3,408 4,016 5,268
------------ ------------ ------------ ------------
Total Liabilities $ 513,167 $ 904,035 $ 1,239,961 $ 1,973,192
Preferred Stock $ 0 $ 0 $ 29,712 $ 29,579
Common Stock 55 85 91 110
Additional Paid-in Capital 73,926 130,441 138,081 187,507
Net Market Valuation Account (5,065) (4,553) (2,060) (3,460)
Retained Earnings after Dividends (770) (1,678) (2,307) (2,731)
------------ ------------ ------------ ------------
Total Stockholders' Equity 68,146 124,295 163,517 211,005
Total Liabilities plus Stockholders' Equity $ 581,313 $ 1,028,330 $ 1,403,478 $ 2,184,197
============ ============ ============ ============
</TABLE>
40
<PAGE> 41
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 2 (CONTINUED) AT
-----------------------------------------------------------
BALANCE SHEETS MAR. 31, JUN. 30, SEP. 30, DEC. 31,
(ALL DOLLARS IN THOUSANDS) 1995 1995 1995 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 953 $ 1,620 $ 1,150 $ 4,825
Mortgage Loans:
Principal Value 0 0 0 26,411
Unamortized Premium 0 0 0 210
Unamortized Discount 0 0 0 (172)
Real Estate Owned 0 0 0 0
Reserve For Credit Losses 0 0 0 (79)
Market Valuation Account 0 0 0 80
----------- ----------- ----------- -----------
Total Mortgage Loans 0 0 0 26,450
Mortgage Securities:
Principal Value 143,393 178,429 298,718 417,214
Unamortized Premium 914 1,410 7,498 9,433
Unamortized Discount (2,515) (5,423) (7,322) (16,860)
Reserve For Credit Losses (19) (59) (143) (411)
Market Valuation Account 87 885 34 (3,582)
----------- ----------- ----------- -----------
Total Mortgage Securities 141,860 175,242 298,785 405,794
Total Mortgage Assets 141,860 175,242 298,785 432,244
Interest Rate Agreements 2,069 2,025 2,394 2,521
Market Valuation Account (635) (1,200) (1,585) (1,974)
----------- ----------- ----------- -----------
Total Interest Rate Agreements 1,434 825 809 547
Accrued Interest Receivable 855 1,256 2,008 3,270
Fixed Assets, Leasehold, Org Costs 210 212 225 209
Prepaid Expenses and Other Receivables 128 166 417 462
----------- ----------- ----------- -----------
Other Assets 1,193 1,634 2,650 3,941
Total Assets $ 145,440 $ 179,320 $ 303,394 $ 441,557
=========== =========== =========== ===========
Short-Term Borrowings $ 121,998 $ 155,881 $ 228,826 $ 370,316
Accrued Interest Payable 665 318 811 1,290
Accrued Expenses and Other Payables 92 89 181 227
Dividends Payable 333 500 1,103 1,434
----------- ----------- ----------- -----------
Total Liabilities $ 123,088 $ 156,788 $ 230,921 $ 373,267
Preferred Stock $ 22,781 $ 22,776 $ 0 $ 0
Common Stock 2 2 55 55
Additional Paid-in Capital 19 19 74,028 73,895
Net Market Valuation Account (549) (314) (1,551) (5,476)
Retained Earnings after Dividends 99 50 (60) (184)
----------- ----------- ----------- -----------
Total Stockholders' Equity 22,352 22,533 72,473 68,290
Total Liabilities plus Stockholders' Equity $ 145,440 $ 179,321 $ 303,394 $ 441,557
=========== =========== =========== ===========
</TABLE>
41
<PAGE> 42
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 2 (CONTINUED) AT
-----------------------------
BALANCE SHEETS SEP. 30, DEC. 31,
(ALL DOLLARS IN THOUSANDS) 1994 1994
----------- -----------
<S> <C> <C>
Cash and Cash Equivalents $ 4,038 $ 1,027
Mortgage Loans:
Principal Value 0 0
Unamortized Premium 0 0
Unamortized Discount 0 0
Real Estate Owned 0 0
Reserve For Credit Losses 0 0
Market Valuation Account 0 0
----------- -----------
Total Mortgage Loans 0 0
Mortgage Securities:
Principal Value 41,099 120,627
Unamortized Premium 487 828
Unamortized Discount (108) (1,320)
Reserve For Credit Losses 0 0
Market Valuation Account (138) (2,658)
----------- -----------
Total Mortgage Securities 41,340 117,477
Total Mortgage Assets 41,340 117,477
Interest Rate Agreements 0 1,791
Market Valuation Account 0 101
----------- -----------
Total Interest Rate Agreements 0 1,892
Accrued Interest Receivable 252 743
Fixed Assets, Leasehold, Org Costs 67 201
Prepaid Expenses and Other Receivables 63 188
----------- -----------
Other Assets 382 1,132
Total Assets $ 45,760 $ 121,529
=========== ===========
Short-Term Borrowings $ 28,978 $ 100,376
Accrued Interest Payable 10 676
Accrued Expenses and Other Payables 26 29
Dividends Payable 0 167
----------- -----------
Total Liabilities $ 29,014 $ 101,248
Preferred Stock $ 16,816 $ 22,785
Common Stock 2 2
Additional Paid-in Capital 19 19
Net Market Valuation Account (138) (2,557)
Retained Earnings after Dividends 48 31
----------- -----------
Total Stockholders' Equity 16,746 20,280
Total Liabilities plus Stockholders' Equity $ 45,760 $ 121,528
=========== ===========
</TABLE>
42
<PAGE> 43
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 3 AT OR
MORTGAGE ASSET CHARACTERISTICS FOR THREE MONTHS ENDING
----------------------------------
(ALL DOLLARS IN THOUSANDS) MAR. 31, JUN. 30,
1997 1997
------------- -------------
<S> <C> <C>
Average Characteristics of Mortgage Assets
Single-Family Properties 100% 100%
Adjustable Rate 100% 100%
First Lien 100% 100%
Credit Rating Equivalent AA+ AA+
Amortized Cost as % of Principal Value 101.94% 102.21%
Coupon Rate 7.70% 7.73%
Months to Next Coupon Adjustment 5 5
Level of Index 5.98% 5.77%
Net Margin 2.21% 2.23%
Fully Indexed Coupon Rate 8.19% 8.00%
Coupon Versus Fully-Indexed Rate -0.49% -0.27%
Net Life Cap 11.91% 12.01%
Percentage of Mortgage Assets by Credit Type
Mortgage Loans 28.1% 33.8%
Mortgage Securities: AAA/AA 69.8% 64.5%
Mortgage Securities: A/BBB 1.0% 0.8%
Mortgage Securities: Below BBB 1.1% 0.9%
------------- -------------
Total Mortgage Assets (%) 100.0% 100.0%
Total Mortgage Assets ($) $ 2,605,323 $ 3,363,131
Percentage of Mortgage Assets by Index, Adjustment Frequency,
and Annualized Periodic Cap
1 Month LIBOR, adjusts monthly, no periodic 2.6% 8.8%
6 Month LIBOR, adjusts each 6 months, 2% periodic 32.1% 27.2%
6 Month LIBOR, adjusts each 6 months, no periodic 1.9% 7.4%
6 Month CD, adjusts each 6 months, 2% periodic 1.9% 1.4%
6 Month Treasury, adjusts each 6 months, 2% periodic 0.8% 0.7%
6 Month Treasury, adjusts each 6 months, no periodic 0.7% 0.5%
3/1 Hybrid: 12 Month Treasury with 3 year initial coupon 2.4% 1.8%
12 Month Treasury, adjusts annually, 2% periodic 55.8% 50.8%
12 Month Treasury, adjusts annually, no periodic 0.1% 0.1%
Other 1.7% 1.3%
------------- -------------
Total Mortgage Assets 100.0% 100.0%
Total Mortgage Assets $ 2,605,323 $ 3,363,131
Net Mortgage Asset Growth
Mortgage Acquisitions $ 627,075 $ 962,889
Mortgage Principal Repayments (173,362) (199,945)
Amortization and Other (3,859) (5,136)
------------- -------------
Change in Mortgage Assets (Amort Cost) 449,854 757,808
Net Mortgage Asset Growth versus Prior Quarter 21% 29%
Net Mortgage Asset Growth Over 12 Months 357% 232%
Prepayment Rate of Underlying Mortgages (CPR) 24% 23%
Total Rate of Mortgage Principal Repayment 32% 28%
</TABLE>
43
<PAGE> 44
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 3 (CONTINUED) AT OR
MORTGAGE ASSET CHARACTERISTICS FOR THREE MONTHS ENDING
------------------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1996 1996 1996 1996
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Average Characteristics of Mortgage Assets
Single-Family Properties 100% 100% 100% 100%
Adjustable Rate 100% 100% 100% 100%
First Lien 100% 100% 100% 100%
Credit Rating Equivalent AA+ AA+ AA+ AA+
Amortized Cost as % of Principal Value 99.29% 100.60% 101.20% 101.81%
Coupon Rate 7.59% 7.42% 7.55% 7.75%
Months to Next Coupon Adjustment 3 4 4 5
Level of Index 5.47% 5.72% 5.70% 5.58%
Net Margin 2.11% 2.21% 2.21% 2.24%
Fully Indexed Coupon Rate 7.58% 7.93% 7.91% 7.82%
Coupon Versus Fully-Indexed Rate 0.01% -0.51% -0.36% -0.07%
Net Life Cap 11.53% 11.71% 11.69% 11.73%
Percentage of Mortgage Assets by Credit Type
Mortgage Loans 4.4% 6.9% 9.3% 24.5%
Mortgage Securities: AAA/AA 86.1% 87.7% 86.8% 73.0%
Mortgage Securities: A/BBB 4.6% 2.5% 1.8% 1.2%
Mortgage Securities: Below BBB 4.9% 2.9% 2.1% 1.3%
------------ ------------- ------------- -------------
Total Mortgage Assets (%) 100.0% 100.0% 100.0% 100.0%
Total Mortgage Assets ($) $ 569,743 $ 1,011,847 $ 1,377,331 $ 2,155,469
Percentage of Mortgage Assets by Index, Adjustment Frequency,
and Annualized Periodic Cap
1 Month LIBOR, adjusts monthly, no periodic 6.5% 3.2% 2.2% 1.4%
6 Month LIBOR, adjusts each 6 months, 2% periodic 63.1% 54.2% 45.6% 35.9%
6 Month LIBOR, adjusts each 6 months, no periodic 0.0% 0.0% 0.0% 0.0%
6 Month CD, adjusts each 6 months, 2% periodic 8.8% 3.3% 2.4% 2.5%
6 Month Treasury, adjusts each 6 months, 2% periodic 0.0% 2.5% 1.7% 1.1%
6 Month Treasury, adjusts each 6 months, no periodic 3.6% 1.9% 1.3% 0.9%
3/1 Hybrid: 12 Month Treasury with 3 year initial coupon 0.0% 0.0% 0.0% 0.0%
12 Month Treasury, adjusts annually, 2% periodic 14.8% 33.2% 45.6% 56.1%
12 Month Treasury, adjusts annually, no periodic 0.0% 0.0% 0.0% 0.0%
Other 3.2% 1.7% 1.2% 2.1%
------------ ------------- ------------- -------------
Total Mortgage Assets 100.0% 100.0% 100.0% 100.0%
Total Mortgage Assets $ 569,743 $ 1,011,847 $ 1,377,331 $ 2,155,469
Net Mortgage Asset Growth
Mortgage Acquisitions $ 166,852 $ 496,184 $ 443,860 $ 875,968
Mortgage Principal Repayments (32,814) (53,058) (76,942) (95,610)
Amortization and Other (530) (1,022) (1,434) (2,220)
------------ ------------- ------------- -------------
Change in Mortgage Assets (Amort Cost) 133,508 442,104 365,484 778,138
Net Mortgage Asset Growth versus Prior Quarter 31% 78% 36% 56%
Net Mortgage Asset Growth Over 12 Months 302% 480% 361% 394%
Prepayment Rate of Underlying Mortgages (CPR) 26% 29% 24% 23%
Total Rate of Mortgage Principal Repayment 27% 29% 28% 26%
</TABLE>
44
<PAGE> 45
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 3 (CONTINUED) AT OR
MORTGAGE ASSET CHARACTERISTICS FOR THREE MONTHS ENDING
---------------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1995 1995 1995 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Average Characteristics of Mortgage Assets
Single-Family Properties 100% 100% 100% 100%
Adjustable Rate 100% 100% 100% 100%
First Lien 100% 100% 100% 100%
Credit Rating Equivalent AA+ AA+ AA+ AA+
Amortized Cost as % of Principal Value 98.88% 97.75% 100.06% 98.33%
Coupon Rate 6.53% 6.94% 7.35% 7.50%
Months to Next Coupon Adjustment 3 3 4 3
Level of Index 6.47% 5.99% 5.86% 5.44%
Net Margin 2.24% 2.21% 2.20% 2.08%
Fully Indexed Coupon Rate 8.71% 8.20% 8.06% 7.52%
Coupon Versus Fully-Indexed Rate -2.18% -1.26% -0.71% -0.02%
Net Life Cap 11.57% 11.54% 11.56% 11.54%
Percentage of Mortgage Assets by Credit Type
Mortgage Loans 0.0% 0.0% 0.0% 6.1%
Mortgage Securities: AAA/AA 87.9% 85.8% 87.8% 81.5%
Mortgage Securities: A/BBB 8.0% 6.5% 5.5% 5.8%
Mortgage Securities: Below BBB 4.1% 7.7% 6.7% 6.6%
------------ ------------ ------------ ------------
Total Mortgage Assets (%) 100.0% 100.0% 100.0% 100.0%
Total Mortgage Assets ($) $ 141,792 $ 174,416 $ 298,894 $ 436,236
Percentage of Mortgage Assets by Index, Adjustment
Frequency, and Annualized Periodic Cap
1 Month LIBOR, adjusts monthly, no periodic 3.1% 2.5% 1.4% 7.5%
6 Month LIBOR, adjusts each 6 months, 2% periodic 78.7% 83.1% 66.9% 60.0%
6 Month LIBOR, adjusts each 6 months, no periodic 0.0% 0.0% 0.0% 0.0%
6 Month CD, adjusts each 6 months, 2% periodic 17.3% 13.7% 11.5% 12.5%
6 Month Treasury, adjusts each 6 months, 2% periodic 0.0% 0.0% 0.0% 0.0%
6 Month Treasury, adjusts each 6 months, no periodic 0.0% 0.0% 7.5% 5.0%
3/1 Hybrid: 12 Month Treasury with 3 year initial coupon 0.0% 0.0% 0.0% 0.0%
12 Month Treasury, adjusts annually, 2% periodic 0.9% 0.7% 11.5% 12.5%
12 Month Treasury, adjusts annually, no periodic 0.0% 0.0% 0.0% 0.0%
Other 0.0% 0.0% 1.2% 2.5%
------------ ------------ ------------ ------------
Total Mortgage Assets 100.0% 100.0% 100.0% 100.0%
Total Mortgage Assets $ 141,792 $ 174,416 $ 298,894 $ 436,236
Net Mortgage Asset Growth
Mortgage Acquisitions $ 24,116 $ 35,355 $ 132,640 $ 162,461
Mortgage Principal Repayments (2,673) (2,934) (8,319) (24,898)
Amortization and Other 214 203 157 (221)
------------ ------------ ------------ ------------
Change in Mortgage Assets (Amort Cost) 21,657 32,624 124,478 137,342
Net Mortgage Asset Growth versus Prior Quarter 18% 23% 71% 46%
Net Mortgage Asset Growth Over 12 Months n/a n/a 621% 263%
Prepayment Rate of Underlying Mortgages (CPR) 8% 11% 21% 25%
Total Rate of Mortgage Principal Repayment 9% 7% 16% 28%
</TABLE>
45
<PAGE> 46
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 3 (CONTINUED) AT OR
MORTGAGE ASSET CHARACTERISTICS FOR THREE MONTHS ENDING
-------------------------------
(ALL DOLLARS IN THOUSANDS) SEP. 30, DEC. 31,
1994 1994
------------ ------------
<S> <C> <C>
Average Characteristics of Mortgage Assets
Single-Family Properties 100% 100%
Adjustable Rate 100% 100%
First Lien 100% 100%
Credit Rating Equivalent AA+ AA+
Amortized Cost as % of Principal Value 100.98% 99.59%
Coupon Rate 5.64% 6.00%
Months to Next Coupon Adjustment 3 3
Level of Index 5.74% 6.94%
Net Margin 2.19% 2.25%
Fully Indexed Coupon Rate 7.93% 9.19%
Coupon Versus Fully-Indexed Rate -2.29% -3.19%
Net Life Cap 11.39% 11.48%
Percentage of Mortgage Assets by Credit Type
Mortgage Loans 0.0% 0.0%
Mortgage Securities: AAA/AA 100.0% 92.9%
Mortgage Securities: A/BBB 0.0% 4.3%
Mortgage Securities: Below BBB 0.0% 2.8%
------------ ------------
Total Mortgage Assets (%) 100.0% 100.0%
Total Mortgage Assets ($) $ 41,478 $ 120,135
Percentage of Mortgage Assets by Index, Adjustment Frequency,
and Annualized Periodic Cap
1 Month LIBOR, adjusts monthly, no periodic 0.0% 3.8%
6 Month LIBOR, adjusts each 6 months, 2% periodic 82.7% 78.3%
6 Month LIBOR, adjusts each 6 months, no periodic 0.0% 0.0%
6 Month CD, adjusts each 6 months, 2% periodic 17.3% 17.9%
6 Month Treasury, adjusts each 6 months, 2% periodic 0.0% 0.0%
6 Month Treasury, adjusts each 6 months, no periodic 0.0% 0.0%
3/1 Hybrid: 12 Month Treasury with 3 year initial coupon 0.0% 0.0%
12 Month Treasury, adjusts annually, 2% periodic 0.0% 0.0%
12 Month Treasury, adjusts annually, no periodic 0.0% 0.0%
Other 0.0% 0.0%
------------ ------------
Total Mortgage Assets 100.0% 100.0%
Total Mortgage Assets $ 41,478 $ 120,135
Net Mortgage Asset Growth
Mortgage Acquisitions $ 41,478 $ 79,819
Mortgage Principal Repayments 0 (1,244)
Amortization and Other 0 82
------------ ------------
Change in Mortgage Assets (Amort Cost) 41,478 78,657
Net Mortgage Asset Growth versus Prior Quarter n/a 190%
Net Mortgage Asset Growth Over 12 Months n/a n/a
Prepayment Rate of Underlying Mortgages (CPR) 0% 11%
Total Rate of Mortgage Principal Repayment 0% 7%
</TABLE>
46
<PAGE> 47
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 4 AT
-----------------------------
MORTGAGE LOAN SUMMARY MAR. 31, JUN. 30,
(ALL DOLLARS IN THOUSANDS) 1997 1997
------------ ------------
<S> <C> <C>
Number of Loans 2,795 3,983
Principal Value $ 716,137 $ 1,111,375
Amortized Cost 731,957 1,136,694
Estimated Bid-Side Market Value 729,561 1,136,004
Adjustable-Rate 100% 100%
Single-Family 100% 100%
"A" Quality Underwriting 100% 100%
First Lien 100% 100%
Primary Residence (Owner-Occupied) 94% 92%
Second Home 4% 6%
Investor Property 2% 2%
Average Loan Size $ 256 $ 279
Loan Balance Less Than $214,000 20% 20%
Loan Balance Greater Than $500,000 14% 27%
Original Loan-To-Value Ratio (LTV) 74% 76%
Original LTV ** 80% 24% 33%
% of Original LTV ** 80% with Primary Mortgage 94% 94%
Insurance or Pledged Account Collateral
Effective Average Original LTV Including Primary 68% 69%
Mortgage Insurance or Pledged Account Collateral
1990 and Prior Years' Origination 9% 6%
1991 Origination 1% 1%
1992 3% 2%
1993 9% 6%
1994 41% 23%
1995 4% 2%
1996 30% 18%
1997 2% 42%
Average Seasoning in Months 33 22
Northern California 17% 13%
Southern California 24% 21%
Florida 5% 8%
New York 4% 5%
Maryland 6% 4%
New Jersey 3% 4%
Connecticut 3% 4%
Texas 3% 4%
Illinois 4% 3%
Georgia 2% 3%
Colorado 2% 3%
Arizona 1% 3%
Other States 26% 25%
</TABLE>
*: less than 0.5%
** Non-EDGAR Symbol for Greater Than
47
<PAGE> 48
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 4 (CONTINUED) AT
----------------------------------------------------------
MORTGAGE LOAN SUMMARY MAR. 31, JUN. 30, SEP. 30, DEC. 31,
(ALL DOLLARS IN THOUSANDS) 1996 1996 1996 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Number of Loans 101 257 478 2,172
Principal Value $ 24,831 $ 69,154 $ 126,426 $ 515,033
Amortized Cost 24,851 69,680 127,808 527,280
Estimated Bid-Side Market Value 24,861 69,666 127,694 525,475
Adjustable-Rate 100% 100% 100% 100%
Single-Family 100% 100% 100% 100%
"A" Quality Underwriting 100% 100% 100% 100%
First Lien 100% 100% 100% 100%
Primary Residence (Owner-Occupied) 100% 99% 99% 94%
Second Home 0% 1% 1% 4%
Investor Property 0% 0% 0% 2%
Average Loan Size $ 246 $ 269 $ 264 $ 237
Loan Balance Less Than $214,000 30% 14% 18% 23%
Loan Balance Greater Than $500,000 25% 13% 12% 8%
Original Loan-To-Value Ratio (LTV) 77% 76% 78% 77%
Original LTV ** 80% 27% 23% 32% 25%
% of Original LTV ** 80% with Primary Mortgage 100% 100% 100% 97%
Insurance or Pledged Account Collateral
Effective Average Original LTV Including Primary 73% 73% 73% 73%
Mortgage Insurance or Pledged Account Collateral
1990 and Prior Years' Origination 0% 0% 0% 13%
1991 Origination 0% 0% 0% 2%
1992 0% 0% 0% 4%
1993 0% 1% 7% 14%
1994 2% 2% 43% 52%
1995 98% 63% 32% 7%
1996 0% 34% 18% 8%
1997 0% 0% 0% 0%
Average Seasoning in Months 7 4 9 37
Northern California 30% 30% 34% 18%
Southern California 46% 43% 51% 26%
Florida 1% 1% * 4%
New York 0% * * 3%
Maryland 2% 1% * 8%
New Jersey 1% * * 3%
Connecticut 1% 1% 1% 3%
Texas 4% 1% 1% 2%
Illinois 0% 1% * 4%
Georgia 1% 1% * 2%
Colorado 3% 3% 2% 1%
Arizona 0% 0% 0% 2%
Other States 11% 18% 11% 24%
</TABLE>
*: less than 0.5%
** Non-EDGAR Symbol for Greater Than
48
<PAGE> 49
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 4 (CONTINUED) AT
----------------------------------------------------
MORTGAGE LOAN SUMMARY MAR. 31, JUN. 30, SEP. 30, DEC. 31,
(ALL DOLLARS IN THOUSANDS) 1995 1995 1995 1995
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Number of Loans 0 0 0 109
Principal Value $ 0 $ 0 $ 0 $ 26,411
Amortized Cost 0 0 0 26,449
Estimated Bid-Side Market Value 0 0 0 26,450
Adjustable-Rate n/a n/a n/a 100%
Single-Family n/a n/a n/a 100%
"A" Quality Underwriting n/a n/a n/a 100%
First Lien n/a n/a n/a 100%
Primary Residence (Owner-Occupied) n/a n/a n/a 100%
Second Home n/a n/a n/a 0%
Investor Property n/a n/a n/a 0%
Average Loan Size n/a n/a n/a $ 242
Loan Balance Less Than $214,000 n/a n/a n/a 11%
Loan Balance Greater Than $500,000 n/a n/a n/a 23%
Original Loan-To-Value Ratio (LTV) n/a n/a n/a 76%
Original LTV ** 80% n/a n/a n/a 26%
% of Original LTV ** 80% with Primary Mortgage n/a n/a n/a 100%
Insurance or Pledged Account Collateral
Effective Average Original LTV Including Primary n/a n/a n/a 72%
Mortgage Insurance or Pledged Account Collateral
1990 and Prior Years' Origination n/a n/a n/a 0%
1991 Origination n/a n/a n/a 0%
1992 n/a n/a n/a 0%
1993 n/a n/a n/a 0%
1994 n/a n/a n/a 2%
1995 n/a n/a n/a 98%
1996 n/a n/a n/a 0%
1997 n/a n/a n/a 0%
Average Seasoning in Months n/a n/a n/a 4
Northern California n/a n/a n/a 30%
Southern California n/a n/a n/a 44%
Florida n/a n/a n/a 1%
New York n/a n/a n/a 0%
Maryland n/a n/a n/a 2%
New Jersey n/a n/a n/a 1%
Connecticut n/a n/a n/a 1%
Texas n/a n/a n/a 4%
Illinois n/a n/a n/a 0%
Georgia n/a n/a n/a 1%
Colorado n/a n/a n/a 3%
Arizona n/a n/a n/a 2%
Other States n/a n/a n/a 11%
</TABLE>
*: less than 0.5%
** Non-EDGAR Symbol for Greater Than
49
<PAGE> 50
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 4 (CONTINUED) AT
--------------------
MORTGAGE LOAN SUMMARY SEP. 30, DEC. 31,
(ALL DOLLARS IN THOUSANDS 1994 1994
-------- --------
<S> <C> <C>
Number of Loans 0 0
Principal Value $ 0 $ 0
Amortized Cost 0 0
Estimated Bid-Side Market Value 0 0
Adjustable-Rate n/a n/a
Single-Family n/a n/a
"A" Quality Underwriting n/a n/a
First Lien n/a n/a
Primary Residence (Owner-Occupied) n/a n/a
Second Home n/a n/a
Investor Property n/a n/a
Average Loan Size n/a n/a
Loan Balance Less Than $214,000 n/a n/a
Loan Balance Greater Than $500,000 n/a n/a
Original Loan-To-Value Ratio (LTV) n/a n/a
Original LTV ** 80% n/a n/a
% of Original LTV ** 80% with Primary Mortgage n/a n/a
Insurance or Pledged Account Collateral
Effective Average Original LTV Including Primary n/a n/a
Mortgage Insurance or Pledged Account Collateral
1990 and Prior Years' Origination n/a n/a
1991 Origination n/a n/a
1992 n/a n/a
1993 n/a n/a
1994 n/a n/a
1995 n/a n/a
1996 n/a n/a
1997 n/a n/a
Average Seasoning in Months n/a n/a
Northern California n/a n/a
Southern California n/a n/a
Florida n/a n/a
New York n/a n/a
Maryland n/a n/a
New Jersey n/a n/a
Connecticut n/a n/a
Texas n/a n/a
Illinois n/a n/a
Georgia n/a n/a
Colorado n/a n/a
Arizona n/a n/a
Other States n/a n/a
</TABLE>
*: less than 0.5%
** Non-EDGAR Symbol for Greater Than
50
<PAGE> 51
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 5 AT OR
EARNING ASSET YIELD, INTEREST RATE SPREAD FOR THREE MONTHS ENDING
AND INTEREST RATE MARGIN -----------------------------
MAR. 31, JUN. 30,
1997 1997
---------- ----------
<S> <C> <C>
Average Initial Coupon Rate on Mortgage Acquisitions 7.45% 7.45%
New Acquisitions Last 6 Months/Total Mortgages 58% 47%
Mortgage Coupon Rate (All Mortgage Assets) 7.70% 7.74%
Amortized Cost/ Principal Value 101.84% 102.15%
Coupon Yield on Amortized Cost 7.56% 7.57%
Effect of Premium/Discount Amortization -0.68% -0.71%
Mortgage Yield 6.88% 6.86%
Cash Yield 5.33% 5.52%
Earning Asset Yield (Mortgages plus Cash) 6.87% 6.86%
Cost of Funds 5.62% 5.86%
Cost of Hedging (as % of Borrowings) 0.12% 0.13%
Interest Rate Spread 1.13% 0.87%
Net Interest Margin (Net Interest Income/Assets) 1.57% 1.31%
Net Interest Income/Average Equity 15.30% 13.25%
SELECTED OPERATING RATIOS AND RETURN ON EQUITY
Credit Provisions as a % of Assets 0.12% 0.10%
Credit Provisions as a % of Equity 1.17% 1.06%
Operating Expenses to Average Assets 0.20% 0.16%
Operating Expenses to Average Equity 1.97% 1.66%
Efficiency Ratio (Op Exp/Net Int Income) 12.86% 12.51%
Average Assets Per Employee ($MM) $ 221 $ 257
GAAP Return on Total Equity 12.16% 10.53%
GAAP Return on Common Equity 12.44% 10.65%
Taxable Income Return on Total Equity 13.34% 11.34%
Taxable Income Return on Common Equity 13.79% 11.55%
</TABLE>
51
<PAGE> 52
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 5 (CONTINUED) AT OR
EARNING ASSET YIELD, INTEREST RATE SPREAD FOR THREE MONTHS ENDING
-------------------------------------------------------------
AND INTEREST RATE MARGIN MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1996 1996 1996 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average Initial Coupon Rate on Mortgage Acquisitions 7.60% 7.30% 7.53% 7.81%
New Acquisitions Last 6 Months/Total Mortgages 58% 66% 68% 61%
Mortgage Coupon Rate (All Mortgage Assets) 7.73% 7.47% 7.52% 7.58%
Amortized Cost/ Principal Value 98.85% 99.95% 100.98% 101.41%
Coupon Yield on Amortized Cost 7.82% 7.48% 7.44% 7.48%
Effect of Premium/Discount Amortization -0.44% -0.56% -0.52% -0.59%
Mortgage Yield 7.38% 6.92% 6.92% 6.89%
Cash Yield 5.93% 5.61% 5.30% 5.31%
Earning Asset Yield (Mortgages plus Cash) 7.34% 6.90% 6.90% 6.87%
Cost of Funds 5.69% 5.57% 5.78% 5.76%
Cost of Hedging (as % of Borrowings) 0.14% 0.16% 0.14% 0.12%
Interest Rate Spread 1.51% 1.17% 0.98% 0.99%
Net Interest Margin (Net Interest Income/Assets) 2.17% 1.85% 1.58% 1.55%
Net Interest Income/Average Equity 14.92% 12.14% 12.40% 13.01%
SELECTED OPERATING RATIOS AND RETURN ON EQUITY
Credit Provisions as a % of Assets 0.26% 0.25% 0.18% 0.10%
Credit Provisions as a % of Equity 1.78% 1.62% 1.40% 0.81%
Operating Expenses to Average Assets 0.38% 0.31% 0.23% 0.21%
Operating Expenses to Average Equity 2.64% 2.02% 1.82% 1.72%
Efficiency Ratio (Op Exp/Net Int Income) 17.71% 16.63% 14.69% 13.23%
Average Assets Per Employee ($MM) $ 70 $ 84 $ 115 $ 155
GAAP Return on Total Equity 10.50% 8.50% 9.18% 10.48%
GAAP Return on Common Equity 10.50% 8.50% 9.06% 10.53%
Taxable Income Return on Total Equity 13.69% 10.69% 10.97% 11.75%
Taxable Income Return on Common Equity 13.69% 10.69% 11.06% 12.03%
</TABLE>
52
<PAGE> 53
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 5 (CONTINUED) AT OR
EARNING ASSET YIELD, INTEREST RATE SPREAD FOR THREE MONTHS ENDING
-------------------------------------------------------------
AND INTEREST RATE MARGIN MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1995 1995 1995 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average Initial Coupon Rate on Mortgage Acquisitions 6.78% 6.42% 7.40% 7.39%
New Acquisitions Last 6 Months/Total Mortgages 73% 34% 56% 68%
Mortgage Coupon Rate (All Mortgage Assets) 6.32% 6.82% 7.29% 7.59%
Amortized Cost/ Principal Value 99.47% 98.53% 98.71% 99.27%
Coupon Yield on Amortized Cost 6.35% 6.92% 7.39% 7.64%
Effect of Premium/Discount Amortization 0.70% 0.51% 0.30% -0.25%
Mortgage Yield 7.05% 7.43% 7.69% 7.39%
Cash Yield 4.96% 5.57% 5.53% 5.48%
Earning Asset Yield (Mortgages plus Cash) 7.03% 7.41% 7.66% 7.34%
Cost of Funds 5.96% 6.26% 6.09% 6.04%
Cost of Hedging (as % of Borrowings) 0.06% 0.23% 0.28% 0.18%
Interest Rate Spread 1.01% 0.92% 1.29% 1.12%
Net Interest Margin (Net Interest Income/Assets) 1.96% 1.68% 2.68% 2.17%
Net Interest Income/Average Equity 10.73% 11.96% 10.94% 10.99%
SELECTED OPERATING RATIOS AND RETURN ON EQUITY
Credit Provisions as a % of Assets 0.06% 0.10% 0.16% 0.38%
Credit Provisions as a % of Equity 0.32% 0.70% 0.64% 1.90%
Operating Expenses to Average Assets 0.63% 0.48% 0.68% 0.39%
Operating Expenses to Average Equity 3.48% 3.44% 2.76% 1.99%
Efficiency Ratio (Op Exp/Net Int Income) 32.39% 28.77% 25.25% 18.13%
Average Assets Per Employee ($MM) $ 25 $ 33 $ 39 $ 53
GAAP Return on Total Equity 6.94% 7.82% 7.54% 7.10%
GAAP Return on Common Equity 6.94% 7.82% 7.54% 7.10%
Taxable Income Return on Total Equity 7.05% 9.19% 8.21% 9.83%
Taxable Income Return on Common Equity 7.05% 9.19% 8.21% 9.83%
</TABLE>
53
<PAGE> 54
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 5 (CONTINUED) AT OR
EARNING ASSET YIELD, INTEREST RATE SPREAD FOR THREE MONTHS ENDING
--------------------------
AND INTEREST RATE MARGIN SEP. 30, DEC. 31,
1994 1994
-------- --------
<S> <C> <C>
Average Initial Coupon Rate on Mortgage Acquisitions 5.71% 5.95%
New Acquisitions Last 6 Months/Total Mortgages 100% 101%
Mortgage Coupon Rate (All Mortgage Assets) 6.32% 6.08%
Amortized Cost/ Principal Value 101.12% 100.00%
Coupon Yield on Amortized Cost 6.25% 6.08%
Effect of Premium/Discount Amortization 0.00% 0.46%
Mortgage Yield 6.25% 6.54%
Cash Yield 4.45% 5.63%
Earning Asset Yield (Mortgages plus Cash) 4.69% 6.51%
Cost of Funds 5.48% 5.55%
Cost of Hedging (as % of Borrowings) 0.00% 0.06%
Interest Rate Spread -0.79% 0.90%
Net Interest Margin (Net Interest Income/Assets) 4.14% 2.32%
Net Interest Income/Average Equity 4.68% 8.15%
SELECTED OPERATING RATIOS AND RETURN ON EQUITY
Credit Provisions as a % of Assets 0.00% 0.00%
Credit Provisions as a % of Equity 0.00% 0.00%
Operating Expenses to Average Assets 1.86% 0.56%
Operating Expenses to Average Equity 2.11% 1.97%
Efficiency Ratio (Op Exp/Net Int Income) 45.38% 24.21%
Average Assets Per Employee ($MM) $ 4 $ 15
GAAP Return on Total Equity 2.57% 6.17%
GAAP Return on Common Equity 2.57% 6.17%
Taxable Income Return on Total Equity 2.57% 5.65%
Taxable Income Return on Common Equity 2.57% 5.65%
</TABLE>
54
<PAGE> 55
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 6 AT OR
AVERAGE DAILY BALANCE SHEET FOR THREE MONTHS ENDING
---------------------------------
(ALL DOLLARS IN THOUSANDS) MAR. 31, JUN. 30,
1997 1997
----------- -----------
<S> <C> <C>
Cash $ 12,147 $ 19,307
Mortgage Loans 574,781 758,445
Mortgage Securities 1,658,629 2,111,832
Credit Reserve (2,394) (3,083)
Interest Rate Agreements 6,899 11,185
Other Assets 58,856 75,928
----------- -----------
Total Assets 2,308,918 2,973,614
----------- -----------
Short-Term Borrowings 2,056,051 2,659,914
Other Liabilties 15,691 20,530
----------- -----------
Total Liabilities 2,071,742 2,680,444
----------- -----------
Preferred Stock 29,545 28,946
Common Stock 208,426 265,561
Retained Earnings, after Dividend (795) (1,337)
----------- -----------
Stockholders' Equity 237,176 293,170
----------- -----------
Market Valuation Account, Mortgage Assets $ 1,022 $ 1,914
Market Valuation Account, Interest Rate Agreements (4,004) (4,576)
----------- -----------
Market Valuation Account, Total $ (2,982) $ (2,662)
ESTIMATED PERIOD-END BID-SIDE MARKET VALUE / REALIZABLE VALUE
Cash $ 12,985 $ 29,425
Mortgage Loans 729,561 1,136,004
Mortgage Securities 1,874,679 2,227,389
Interest Rate Agreements 5,773 4,206
Other Assets 19,290 25,857
Short-Term Borrowings 2,373,279 3,102,784
Other Liabilities 23,411 27,515
----------- -----------
"Mark-To-Market" of Equity $ 245,598 $ 292,582
AVERAGE BALANCE SHEET UTILIZATION DURING PERIOD VERSUS
RISK-ADJUSTED CAPITAL GUIDELINES
Actual Average Equity/Assets 10.3% 9.9%
Average Risk-Adjusted Capital Guideline 10.1% 9.5%
Balance Sheet Capacity Utilization 98% 96%
Excess Capital and Asset Growth Potential At Period End
Ending Actual Equity/Assets 9.28% 8.55%
Ending Risk-Adjusted Capital Guideline 10.09% 9.41%
Excess Capital $ (21,504) $ (29,417)
Asset Growth Potential (Same Asset Mix) $ (213,079) $ (312,637)
Expanded Risk-Adjusted Capital Guideline 9.17% 8.55%
Excess Capital vs. Expanded Guideline $ 3,015 $ (140)
Asset Growth Potential (Expanded Guideline) $ 29,398 $ (1,915)
</TABLE>
55
<PAGE> 56
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 6 (CONTINUED) AT OR
AVERAGE DAILY BALANCE SHEET FOR THREE MONTHS ENDING
---------------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1996 1996 1996 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Cash $ 14,639 $ 14,402 $ 18,854 $ 16,137
Mortgage Loans 25,279 45,313 93,991 143,368
Mortgage Securities 457,841 688,697 1,010,853 1,347,617
Credit Reserve (594) (1,002) (1,491) (1,952)
Interest Rate Agreements 2,503 2,737 3,185 4,681
Other Assets 13,094 21,566 30,129 41,430
---------- ---------- ----------- -----------
Total Assets 512,762 771,713 1,155,521 1,551,281
---------- ---------- ----------- -----------
Short-Term Borrowings 435,979 651,643 999,229 1,351,510
Other Liabilties 2,324 2,472 8,728 14,898
---------- ---------- ----------- -----------
Total Liabilities 438,303 654,115 1,007,957 1,366,408
---------- ---------- ----------- -----------
Preferred Stock - - 15,179 29,671
Common Stock 73,998 117,695 132,924 156,594
Retained Earnings, after Dividend 461 (97) (539) (1,392)
---------- ---------- ----------- -----------
Stockholders' Equity 74,459 117,598 147,564 184,873
---------- ---------- ----------- -----------
Market Valuation Account, Mortgage Assets $ (3,880) $ (3,865) $ (2,279) $ 603
Market Valuation Account, Interest Rate Agreements (1,836) (1,080) (1,352) (3,513)
---------- ---------- ----------- -----------
Market Valuation Account, Total $ (5,716) $ (4,945) $ (3,631) $ (2,910)
ESTIMATED PERIOD-END BID-SIDE MARKET VALUE / REALIZABLE VALUE
Cash $ 9,705 $ 10,407 $ 14,599 $ 11,068
Mortgage Loans 24,861 69,666 127,695 525,475
Mortgage Securities 540,298 937,814 1,248,176 1,627,953
Interest Rate Agreements 1,233 1,351 873 2,601
Other Assets 4,983 8,858 11,760 16,778
Short-Term Borrowings 508,721 896,214 1,225,094 1,953,103
Other Liabilities 4,240 7,522 14,457 19,531
---------- ---------- ----------- -----------
"Mark-To-Market" of Equity $ 68,119 $ 124,360 $ 163,552 $ 211,241
AVERAGE BALANCE SHEET UTILIZATION DURING PERIOD VERSUS
RISK-ADJUSTED CAPITAL GUIDELINES
Actual Average Equity/Assets 14.5% 15.2% 12.8% 11.9%
Average Risk-Adjusted Capital Guideline 12.8% 11.4% 10.7% 10.2%
Balance Sheet Capacity Utilization 88% 75% 84% 86%
Excess Capital and Asset Growth Potential At Period End
Ending Actual Equity/Assets 11.72% 12.09% 11.65% 9.66%
Ending Risk-Adjusted Capital Guideline 11.72% 10.77% 10.32% 9.97%
Excess Capital $ 26 $ 13,566 $ 18,664 $ (6,798)
Asset Growth Potential (Same Asset Mix) $ 227 $ 125,972 $ 180,836 $ (68,169)
Expanded Risk-Adjusted Capital Guideline n/a n/a n/a 9.07%
Excess Capital vs. Expanded Guideline n/a n/a n/a $ 14,302
Asset Growth Potential (Expanded Guideline) n/a n/a n/a $ 143,434
</TABLE>
56
<PAGE> 57
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 6 (CONTINUED) AT OR
AVERAGE DAILY BALANCE SHEET FOR THREE MONTHS ENDING
-------------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1995 1995 1995 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash $ 1,217 $ 1,466 $ 3,597 $ 10,709
Mortgage Loans 0 0 0 19,861
Mortgage Securities 122,181 158,183 204,672 329,815
Credit Reserve (6) (31) (82) (249)
Interest Rate Agreements 1,684 1,916 2,120 2,428
Other Assets 1,958 2,559 4,819 11,000
---------- ---------- ---------- ----------
Total Assets 127,034 164,093 215,126 373,564
---------- ---------- ---------- ----------
Short-Term Borrowings 102,894 139,979 159,794 295,089
Other Liabilties 978 1,111 2,585 4,654
---------- ---------- ---------- ----------
Total Liabilities 103,872 141,090 162,380 299,743
---------- ---------- ---------- ----------
Preferred Stock 0 0 0 0
Common Stock 23,455 22,795 52,481 74,175
Retained Earnings, after Dividend (293) 208 266 (354)
---------- ---------- ---------- ----------
Stockholders' Equity 23,162 23,003 52,747 73,821
---------- ---------- ---------- ----------
Market Valuation Account, Mortgage Assets $ (1,058) $ 454 $ 410 $ (132)
Market Valuation Account, Interest Rate Agreements (285) (896) (1,289) (1,698)
---------- ---------- ---------- ----------
Market Valuation Account, Total $ (1,343) $ (442) $ (879) $ (1,830)
ESTIMATED PERIOD-END BID-SIDE MARKET VALUE / REALIZABLE VALUE
Cash $ 953 $ 1,620 $ 1,150 $ 4,825
Mortgage Loans 0 0 0 26,450
Mortgage Securities 141,860 175,242 298,785 405,794
Interest Rate Agreements 1,434 825 809 547
Other Assets 953 1,417 2,329 3,668
Short-Term Borrowings 121,998 155,881 228,826 370,316
Other Liabilities 1,060 847 1,951 2,829
---------- ---------- ---------- ----------
"Mark-To-Market" of Equity $ 22,142 $ 22,376 $ 72,296 $ 68,139
AVERAGE BALANCE SHEET UTILIZATION DURING PERIOD VERSUS
RISK-ADJUSTED CAPITAL GUIDELINES
Actual Average Equity/Assets 18.2% 14.0% 24.5% 19.8%
Average Risk-Adjusted Capital Guideline 12.9% 13.2% 13.6% 13.6%
Balance Sheet Capacity Utilization 71% 94% 55% 69%
Excess Capital and Asset Growth Potential At Period End
Ending Actual Equity/Assets 15.37% 12.57% 23.89% 15.47%
Ending Risk-Adjusted Capital Guideline 12.41% 12.95% 13.08% 12.59%
Excess Capital $ 3,970 $ (1,069) $ 32,155 $ 12,028
Asset Growth Potential (Same Asset Mix) $ 34,733 $ (5,332) $ 250,789 $ 100,874
Expanded Risk-Adjusted Capital Guideline n/a n/a n/a n/a
Excess Capital vs. Expanded Guideline n/a n/a n/a n/a
Asset Growth Potential (Expanded Guideline) n/a n/a n/a n/a
</TABLE>
57
<PAGE> 58
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 6 (CONTINUED) AT OR
AVERAGE DAILY BALANCE SHEET FOR THREE MONTHS ENDING
--------------------------------
(ALL DOLLARS IN THOUSANDS) SEP. 30, DEC. 31,
1994 1994
----------- -----------
<S> <C> <C>
Cash $ 16,325 $ 2,305
Mortgage Loans 0 0
Mortgage Securities 2,526 71,273
Credit Reserve 0 0
Interest Rate Agreements 0 1,097
Other Assets 270 1,250
----------- -----------
Total Assets 19,121 75,925
----------- -----------
Short-Term Borrowings 1,699 54,048
Other Liabilties 626 252
----------- -----------
Total Liabilities 2,325 54,300
----------- -----------
Preferred Stock 0 0
Common Stock 16,782 22,794
Retained Earnings, after Dividend 14 (1,169)
----------- -----------
Stockholders' Equity 16,796 21,625
----------- -----------
Market Valuation Account, Mortgage Assets $ 3 $ (844)
Market Valuation Account, Interest Rate Agreements 0 45
----------- -----------
Market Valuation Account, Total $ 3 $ (799)
ESTIMATED PERIOD-END BID-SIDE MARKET VALUE / REALIZABLE VALUE
Cash $ 4,038 $ 1,027
Mortgage Loans 0 0
Mortgage Securities 41,340 117,477
Interest Rate Agreements 0 1,892
Other Assets 252 888
Short-Term Borrowings 28,978 100,376
Other Liabilities 36 872
----------- -----------
"Mark-To-Market" of Equity $ 16,616 $ 20,036
AVERAGE BALANCE SHEET UTILIZATION DURING PERIOD VERSUS
RISK-ADJUSTED CAPITAL GUIDELINES
Actual Average Equity/Assets 87.8% 28.5%
Average Risk-Adjusted Capital Guideline 8.7% 11.5%
Balance Sheet Capacity Utilization 10% 40%
Excess Capital and Asset Growth Potential At Period End
Ending Actual Equity/Assets 36.60% 16.69%
Ending Risk-Adjusted Capital Guideline 8.67% 10.84%
Excess Capital $ 12,650 $ 6,716
Asset Growth Potential (Same Asset Mix) $ 147,479 $ 65,519
Expanded Risk-Adjusted Capital Guideline n/a n/a
Excess Capital vs. Expanded Guideline n/a n/a
Asset Growth Potential (Expanded Guideline) n/a n/a
</TABLE>
58
<PAGE> 59
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 7 AT OR
CREDIT PROVISIONS AND CREDIT RESERVES FOR THREE MONTHS ENDING
-----------------------------
(ALL DOLLARS IN THOUSANDS) MAR. 31, JUN. 30,
1997 1997
---------- ----------
<S> <C> <C>
MORTGAGE LOANS
Credit Provision During Period $ 202 $ 299
Actual Losses During Period 13 0
Cumulative Actual Losses 13 13
Mortgage Loan Reserve End of Period 630 929
Annualized Credit Provision/ Ave. Mortgage Loans 0.14% 0.16%
Mortgage Loan Reserve/Ending Mortgage Loans 0.09% 0.08%
Non-Performing Assets: 90+ Days Delinquent, Foreclosures,
Bankruptcies, and REO
Number of Loan 6 12
NPA Loan Balance $ 1,220 $ 2,366
Non-Performing Assets as % of Mortgage Loans 0.2% 0.2%
Non-Performing Assets as % of Total Assets 0.05% 0.09%
Mortgage Loan Reserve as % of NPAs 52% 39%
Credit Experience of Mortgage Loans
Liquidated Defaulted Loans (Cumulative) 1 1
Average Loss Severity Experience (Cumulative) 7% 7%
Scenario Analysis of Potential Credit Losses Over Next 12 Months If
All Current (But No Future) Non-Performing Mortgage Loans Default:
At 10% Loss Severity $ 124 $ 241
At 20% Loss Severity 248 481
At 30% Loss Severity 372 722
At 40% Loss Severity 496 962
MORTGAGE SECURITIES
Credit Provision During Period $ 493 $ 477
Actual Losses During Period 29 29
Cumulative Actual Losses 40 69
Mortgage Securities Reserve End of Period 2,203 2,651
Annualized Credit Provision/Mtg. Sec. Rated *** BBB 6.8% 6.6%
Mortgage Loan Reserve/Ending Mtg. Sec. Rated *** BBB 7.6% 9.1%
Credit Experience of Loans in Pools Underlying Mtg. Sec.
Rated ***BBB (Since Acquisition)
Resolved Defaulted Loans (Cumulative) 90 138
Average Loss Severity Experience (Cumulative) 25% 24%
Scenario Analysis of Potential Credit Losses Over Next 12 Months If All
Current (But No Future)
Seriously Delinquent Loans in Mortgage Pools Underlying *** BBB Rated
Securities Default:
At 10% Loss Severity $ 80 $ 109
At 20% Loss Severity 792 1,488
At 30% Loss Severity 2,845 3,702
At 40% Loss Severity 5,103 6,410
Average Monthly Mortgage Securities Credit Provision $ 164 $ 159
Reserve in 12 Months at Provisioning Rate If No Losses 4,177 4,558
</TABLE>
*** Non-EDGAR Symbol for Less Than
59
<PAGE> 60
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 7 (CONTINUED) AT OR
CREDIT PROVISIONS AND CREDIT RESERVES FOR THREE MONTHS ENDING
----------------------------------------------------
(ALL DOLLARS IN THOUSANDS) MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1996 1996 1996 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
MORTGAGE LOANS
Credit Provision During Period $ (5) $ 140 $ 178 $ 35
Actual Losses During Period 0 0 0 0
Cumulative Actual Losses 0 0 0 0
Mortgage Loan Reserve End of Period 74 214 393 428
Annualized Credit Provision/ Ave. Mortgage Loans -0.08% 1.23% 0.76% 0.10%
Mortgage Loan Reserve/Ending Mortgage Loans 0.30% 0.31% 0.31% 0.08%
Non-Performing Assets: 90+ Days Delinquent, Foreclosures,
Bankruptcies, and REO
Number of Loan 1 2 3 7
NPA Loan Balance $ 190 $ 279 $ 404 $ 1,249
Non-Performing Assets as % of Mortgage Loans 0.8% 0.4% 0.3% 0.2%
Non-Performing Assets as % of Total Assets 0.03% 0.03% 0.03% 0.06%
Mortgage Loan Reserve as % of NPAs
Credit Experience of Mortgage Loans
Liquidated Defaulted Loans (Cumulative) 0 0 0 0
Average Loss Severity Experience (Cumulative) 0% 0% 0% 0%
Scenario Analysis of Potential Credit Losses Over Next 12 Months If
All Current (But No Future) Non-Performing Mortgage Loans Default:
At 10% Loss Severity $ 19 $ 28 $ 41 $ 127
At 20% Loss Severity 39 56 82 253
At 30% Loss Severity 58 85 123 380
At 40% Loss Severity 77 113 164 506
MORTGAGE SECURITIES
Credit Provision During Period $ 336 $ 337 $ 338 $ 337
Actual Losses During Period 0 0 0 7
Cumulative Actual Losses 4 4 4 11
Mortgage Securities Reserve End of Period 747 1,084 1,421 1,752
Annualized Credit Provision/Mtg. Sec. Rated *** BBB 4.7% 4.7% 4.7% 4.7%
Mortgage Loan Reserve/Ending Mtg. Sec. Rated *** BBB 2.7% 3.8% 4.9% 6.1%
Credit Experience of Loans in Pools Underlying Mtg. Sec. Rated ***BBB
(Since Acquisition)
Resolved Defaulted Loans (Cumulative) 4 15 28 59
Average Loss Severity Experience (Cumulative) 10% 16% 22% 27%
Scenario Analysis of Potential Credit Losses Over Next 12 Months If
All Current (But No Future) Seriously Delinquent Loans in Mortgage Pools
Underlying *** BBB Rated Securities Default:
At 10% Loss Severity $ 20 $ 40 $ 61 $ 63
At 20% Loss Severity 39 91 123 608
At 30% Loss Severity 597 1,364 1,131 2,040
At 40% Loss Severity 2,162 3,148 3,041 3,647
Average Monthly Mortgage Securities Credit Provision $ 112 $ 112 $ 113 $ 112
Reserve in 12 Months at Provisioning Rate If No Losses 2,091 2,431 2,771 3,100
</TABLE>
*** Non-EDGAR Symbol for Less Than
60
<PAGE> 61
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 7 (CONTINUED) AT OR
CREDIT PROVISIONS AND CREDIT RESERVES FOR THREE MONTHS ENDING
------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1995 1995 1995 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
MORTGAGE LOANS
Credit Provision During Period $ 0 $ 0 $ 0 $ 79
Actual Losses During Period 0 0 0 0
Cumulative Actual Losses 0 0 0 0
Mortgage Loan Reserve End of Period 0 0 0 79
Annualized Credit Provision/ Ave. Mortgage Loans n/a n/a n/a 1.60%
Mortgage Loan Reserve/Ending Mortgage Loans n/a n/a n/a 0.30%
Non-Performing Assets: 90+ Days Delinquent, Foreclosures,
Bankruptcies, and REO
Number of Loan 0 0 0 0
NPA Loan Balance $ 0 $ 0 $ 0 $ 0
Non-Performing Assets as % of Mortgage Loans 0.0% 0.0% 0.0% 0.0%
Non-Performing Assets as % of Total Assets 0.00% 0.00% 0.00% 0.00%
Mortgage Loan Reserve as % of NPAs
Credit Experience of Mortgage Loans
Liquidated Defaulted Loans (Cumulative) 0 0 0 0
Average Loss Severity Experience (Cumulative) 0% 0% 0% 0%
Scenario Analysis of Potential Credit Losses Over Next 12 Months If
All Current (But No Future) Non-Performing Mortgage Loans Default:
At 10% Loss Severity $ 0 $ 0 $ 0 $ 0
At 20% Loss Severity 0 0 0 0
At 30% Loss Severity 0 0 0 0
At 40% Loss Severity 0 0 0 0
MORTGAGE SECURITIES
Credit Provision During Period $ 19 $ 40 $ 84 $ 271
Actual Losses During Period 0 0 0 4
Cumulative Actual Losses 0 0 0 4
Mortgage Securities Reserve End of Period 19 59 143 411
Annualized Credit Provision/Mtg. Sec. Rated *** BBB 1.6% 1.7% 2.0% 4.4%
Mortgage Loan Reserve/Ending Mtg. Sec. Rated *** BBB 0.3% 0.4% 0.7% 1.4%
Credit Experience of Loans in Pools Underlying Mtg. Sec
Rated *** BBB (Since Acquisition)
Resolved Defaulted Loans (Cumulative) 0 0 0 2
Average Loss Severity Experience (Cumulative) 0% 0% 0% 9%
Scenario Analysis of Potential Credit Losses Over Next 12 Months If
All Current (But No Future) Seriously Delinquent Loans in Mortgage
Pools Underlying *** BBB Rated Securities Default:
At 10% Loss Severity $ 0 $ 0 $ 0 $ 15
At 20% Loss Severity 0 0 0 29
At 30% Loss Severity 0 0 0 103
At 40% Loss Severity 0 0 0 768
Average Monthly Mortgage Securities Credit Provision $ 6 $ 13 $ 28 $ 90
Reserve in 12 Months at Provisioning Rate If No Losses 93 221 479 1,495
</TABLE>
*** Non-EDGAR Symbol for Less Than
61
<PAGE> 62
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 7 (CONTINUED) AT OR
CREDIT PROVISIONS AND CREDIT RESERVES FOR THREE MONTHS ENDING
---------------------------
(ALL DOLLARS IN THOUSANDS) SEP. 30, DEC. 31,
1994 1994
--------- ---------
<S> <C> <C>
MORTGAGE LOANS
Credit Provision During Period $ 0 $ 0
Actual Losses During Period 0 0
Cumulative Actual Losses 0 0
Mortgage Loan Reserve End of Period 0 0
Annualized Credit Provision/ Ave. Mortgage Loans n/a n/a
Mortgage Loan Reserve/Ending Mortgage Loans n/a n/a
Non-Performing Assets: 90+ Days Delinquent, Foreclosures, Bankruptcies,
and REO Number of Loan 0 0
NPA Loan Balance $ 0 $ 0
Non-Performing Assets as % of Mortgage Loans 0.0% 0.0%
Non-Performing Assets as % of Total Assets 0.00% 0.00%
Mortgage Loan Reserve as % of NPAs
Credit Experience of Mortgage Loans
Liquidated Defaulted Loans (Cumulative) 0 0
Average Loss Severity Experience (Cumulative) 0% 0%
Scenario Analysis of Potential Credit Losses Over Next
12 Months If All Current (But No Future) Non-Performing
Mortgage Loans Default:
At 10% Loss Severity $ 0 $ 0
At 20% Loss Severity 0 0
At 30% Loss Severity 0 0
At 40% Loss Severity 0 0
MORTGAGE SECURITIES
Credit Provision During Period $ 0 $ 0
Actual Losses During Period 0 0
Cumulative Actual Losses 0 0
Mortgage Securities Reserve End of Period 0 0
Annualized Credit Provision/Mtg. Sec. Rated *** BBB n/a 0.0%
Mortgage Loan Reserve/Ending Mtg. Sec. Rated *** BBB n/a 0.0%
Credit Experience of Loans in Pools Underlying Mtg. Sec
Rated ***BBB (Since Acquisition)
Resolved Defaulted Loans (Cumulative) 0 0
Average Loss Severity Experience (Cumulative) 0% 0%
Scenario Analysis of Potential Credit Losses Over
Next 12 Months If All Current (But No Future) Seriously
Delinquent Loans in Mortgage Pools Underlying *** BBB Rated
Securities Default:
At 10% Loss Severity $ 0 $ 0
At 20% Loss Severity 0 0
At 30% Loss Severity 0 0
At 40% Loss Severity 0 0
Average Monthly Mortgage Securities Credit Provision $ 0 $ 0
Reserve in 12 Months at Provisioning Rate If No Losses 0 0
</TABLE>
*** Non-EDGAR Symbol for Less Than
62
<PAGE> 63
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 8 AT OR
SHARES OUTSTANDING AND PER SHARE DATA FOR THREE MONTHS ENDING
-----------------------------
(ALL DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MAR. 31, JUN. 30,
1997 1997
----------- -----------
<S> <C> <C>
Shares Outstanding and Receiving Dividends at Period End
Common (RWTI) 11,905,957 13,251,847
Class A Preferred (converted 9/95) 0 0
Class B Preferred (RWTIP) 999,638 909,518
----------- -----------
Total 12,905,595 14,161,365
Common Dividend Declared $ 0.60 $ 0.60
Class A Preferred Dividend Declared $ - $ -
Class B Preferred Dividends Declared $ 0.755 $ 0.755
Common Dividend Total $ 7,144 $ 7,951
Class A Preferred Dividend Total 0 0
Class B Preferred Dividends Total 755 687
----------- -----------
Total Dividend $ 7,899 $ 8,638
Taxable Income Earned $ 7,912 $ 8,315
Dividend Pay-Out Ratio for Period 99.8% 103.9%
Cumulative Dividend Pay-Out Ratio 98.5% 99.7%
Warrants Outstanding at Period End (RWTIW) 272,304 236,297
Average Shares Outstanding During Period
Common 11,605,171 12,997,566
Class A Preferred 0 0
Class B Preferred 1,005,515 990,725
----------- -----------
Total 12,610,686 13,988,291
Calculation of "Primary" Common Shares
Average Common Shares 11,605,171 12,997,566
Potential Dilution Due to Warrants 258,422 182,137
Potential Dilution Due to Options 253,274 291,227
----------- -----------
Total Average Primary Common Shares 12,116,867 13,470,930
Net Income to Common Shareholders $ 6,456 $ 7,034
Total Average Primary Common Shares 12,116,867 13,470,930
----------- -----------
Earnings Per Share (EPS) $ 0.53 $ 0.52
EPS (Outstanding Common Shares Only) $ 0.56 $ 0.54
Per Share Ratios (Average Outstanding Common and
Preferred Shares)
Average Total Assets $ 183.09 $ 212.58
Average Total Equity $ 18.81 $ 20.96
Net Interest Income $ 0.72 $ 0.70
Credit Expenses $ 0.06 $ 0.06
Operating Expenses $ 0.09 $ 0.09
Net Income $ 0.57 $ 0.55
</TABLE>
63
<PAGE> 64
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 8 (CONTINUED) AT OR
SHARES OUTSTANDING AND PER SHARE DATA FOR THREE MONTHS ENDING
-----------------------------------------------------------------
(ALL DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1996 1996 1996 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares Outstanding and Receiving Dividends
at Period End
Common (RWTI) 5,521,376 8,520,116 9,069,653 10,996,572
Class A Preferred (converted 9/95) 0 0 0 0
Class B Preferred (RWTIP) 0 0 1,006,250 1,006,250
----------- ----------- ----------- -----------
Total 5,521,376 8,520,116 10,075,903 12,002,822
Common Dividend Declared $ 0.46 $ 0.40 $ 0.40 $ 0.41
Class A Preferred Dividend Declared $ - $ - $ 0.00 $ 0.00
Class B Preferred Dividends Declared $ - $ - $ 0.386 $ 0.755
Common Dividend Total $ 2,540 $ 3,408 $ 3,628 $ 4,508
Class A Preferred Dividend Total 0 0 0 0
Class B Preferred Dividends Total 0 0 388 760
----------- ----------- ----------- -----------
Total Dividend $ 2,540 $ 3,408 $ 4,016 $ 5,268
Taxable Income Earned $ 2,549 $ 3,142 $ 4,048 $ 5,429
Dividend Pay-Out Ratio for Period 99.7% 108.5% 99.2% 97.0%
Cumulative Dividend Pay-Out Ratio 93.0% 97.9% 98.3% 97.9%
Warrants Outstanding at Period End (RWTIW) 1,665,063 1,563,957 1,076,431 412,894
Average Shares Outstanding During Period
Common 5,521,376 7,813,974 8,732,326 9,705,138
Class A Preferred 0 0 0 0
Class B Preferred 0 0 514,063 1,006,250
----------- ----------- ----------- -----------
Total 5,521,376 7,813,974 9,246,389 10,711,388
Calculation of "Primary" Common Shares
Average Common Shares 5,521,376 7,813,974 8,732,326 9,705,138
Potential Dilution Due to Warrants 443,984 603,426 621,455 570,415
Potential Dilution Due to Options 164,227 182,832 162,393 176,919
----------- ----------- ----------- -----------
Total Average Primary Common Shares 6,129,587 8,600,232 9,516,174 10,452,472
Net Income to Common Shareholders $ 1,954 $ 2,500 $ 2,999 $ 4,084
Total Average Primary Common Shares 6,129,587 8,600,232 9,516,174 10,452,472
----------- ----------- ----------- -----------
Earnings Per Share (EPS) $ 0.32 $ 0.29 $ 0.32 $ 0.39
EPS (Outstanding Common Shares Only) $ 0.35 $ 0.32 $ 0.34 $ 0.42
Per Share Ratios (Average Outstanding Common and
Preferred Shares)
Average Total Assets $ 92.87 $ 98.76 $ 124.97 $ 144.83
Average Total Equity $ 13.49 $ 15.05 $ 15.96 $ 17.26
Net Interest Income $ 0.50 $ 0.45 $ 0.50 $ 0.55
Credit Expenses $ 0.06 $ 0.06 $ 0.06 $ 0.03
Operating Expenses $ 0.09 $ 0.07 $ 0.07 $ 0.07
Net Income $ 0.35 $ 0.32 $ 0.37 $ 0.45
</TABLE>
64
<PAGE> 65
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 8 (CONTINUED) AT OR
SHARES OUTSTANDING AND PER SHARE DATA FOR THREE MONTHS ENDING
-------------------------------------------------------
(ALL DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1995 1995 1995 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares Outstanding and Receiving Dividends at Period End
Common (RWTI) 208,332 208,332 5,516,313 5,517,299
Class A Preferred (converted 9/95) 1,666,063 1,666,063 0 0
Class B Preferred (RWTIP) 0 0 0 0
---------- ---------- ---------- ----------
Total 1,874,395 1,874,395 5,516,313 5,517,299
Common Dividend Declared $ - $ - $ 0.20 $ 0.26
Class A Preferred Dividend Declared $ 0.20 $ 0.30 $ - $ -
Class B Preferred Dividends Declared $ - $ - $ - $ -
Common Dividend Total $ 0 $ 0 $ 1,103 $ 1,434
Class A Preferred Dividend Total 333 500 0 0
Class B Preferred Dividends Total 0 0 0 0
---------- ---------- ---------- ----------
Total Dividend $ 333 $ 500 $ 1,103 $ 1,434
Taxable Income Earned $ 408 $ 528 $ 1,083 $ 1,813
Dividend Pay-Out Ratio for Period 81.6% 94.6% 101.9% 79.1%
Cumulative Dividend Pay-Out Ratio 89.8% 91.8% 96.4% 88.9%
Warrants Outstanding at Period End (RWTIW) 1,666,063 1,666,063 1,666,063 1,665,063
Average Shares Outstanding During Period
Common 208,332 208,332 3,944,129 5,516,310
Class A Preferred 1,666,063 1,666,063 0 0
Class B Preferred 0 0 0 0
---------- ---------- ---------- ----------
Total 1,874,395 1,874,395 3,944,129 5,516,310
Calculation of "Primary" Common Shares
Average Common Shares 1,874,395 1,874,395 3,944,129 5,516,310
Potential Dilution Due to Warrants 0 0 84,123 413,004
Potential Dilution Due to Options 240,766 188,699 154,886 150,193
---------- ---------- ---------- ----------
Total Average Primary Common Shares 2,115,161 2,063,094 4,183,138 6,079,507
Net Income to Common Shareholders $ 401 $ 450 $ 994 $ 1,310
Total Average Primary Common Shares 2,115,161 2,063,094 4,183,138 6,079,507
---------- ---------- ---------- ----------
Earnings Per Share (EPS) $ 0.19 $ 0.22 $ 0.24 $ 0.22
EPS (Outstanding Common Shares Only) $ 0.21 $ 0.24 $ 0.25 $ 0.24
Per Share Ratios (Average Outstanding Common and Preferred Shares)
Average Total Assets $ 67.77 $ 87.54 $ 54.54 $ 67.72
Average Total Equity $ 12.36 $ 12.27 $ 13.37 $ 13.38
Net Interest Income $ 0.33 $ 0.37 $ 0.37 $ 0.37
Credit Expenses $ 0.01 $ 0.02 $ 0.02 $ 0.06
Operating Expenses $ 0.11 $ 0.11 $ 0.09 $ 0.07
Net Income $ 0.21 $ 0.24 $ 0.26 $ 0.24
</TABLE>
65
<PAGE> 66
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 8 (CONTINUED) AT OR
SHARES OUTSTANDING AND PER SHARE DATA FOR THREE MONTHS ENDING
-----------------------------
(ALL DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEP. 30, DEC. 31,
1994 1994
----------- -----------
<S> <C> <C>
Shares Outstanding and Receiving Dividends at Period End
Common (RWTI) 208,332 208,332
Class A Preferred (converted 9/95) 1,226,465 1,666,063
Class B Preferred (RWTIP) 0 0
----------- -----------
Total 1,434,797 1,874,395
Common Dividend Declared $ - $ -
Class A Preferred Dividend Declared $ - $ 0.25
Class B Preferred Dividends Declared $ - $ -
Common Dividend Total $ 0 $ 0
Class A Preferred Dividend Total 0 350
Class B Preferred Dividends Total 0 0
----------- -----------
Total Dividend $ 0 $ 350
Taxable Income Earned $ 48 $ 306
Dividend Pay-Out Ratio for Period 0.0% 114.7%
Cumulative Dividend Pay-Out Ratio 0.0% 99.2%
Warrants Outstanding at Period End (RWTIW) 1,666,063 1,666,063
Average Shares Outstanding During Period
Common 208,332 208,332
Class A Preferred 1,226,465 1,575,276
Class B Preferred 0 0
----------- -----------
Total 1,434,797 1,783,608
Calculation of "Primary" Common Shares
Average Common Shares 1,434,797 1,783,608
Potential Dilution Due to Warrants 0 0
Potential Dilution Due to Options 0 0
----------- -----------
Total Average Primary Common Shares 1,434,797 1,783,608
Net Income to Common Shareholders $ 48 $ 334
Total Average Primary Common Shares 1,434,797 1,783,608
----------- -----------
Earnings Per Share (EPS) $ 0.03 $ 0.19
EPS (Outstanding Common Shares Only) $ 0.03 $ 0.19
Per Share Ratios (Average Outstanding Common and Preferred Shares)
Average Total Assets $ 13.33 $ 42.57
Average Total Equity $ 11.71 $ 12.12
Net Interest Income $ 0.06 $ 0.25
Credit Expenses $ 0.00 $ 0.00
Operating Expenses $ 0.03 $ 0.06
Net Income $ 0.03 $ 0.19
</TABLE>
66
<PAGE> 67
PART II OTHER INFORMATION
Item 1. Legal Proceedings
At June 30, 1997, there were no pending legal proceedings to which the
Company as 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
(a) The Annual Meeting of Shareholders of the Company was held on
June 12, 1997.
(b) The following matters were voted on at the Annual Meeting:
<TABLE>
<CAPTION>
Votes
-------------------------------------
For Against Abstain
------------ ----------- ----------
<S> <C> <C> <C>
1. Election of Directors
George E. Bull 9,981,581 39,822 0
Dan A. Emmett 9,414,840 606,563 0
</TABLE>
The following Directors' terms of office continue after the
meeting:
Frederick H. Borden
Thomas F. Farb
Nello Gonfiantini
Douglas B. Hansen
Charles J. Toeniskoetter
<TABLE>
<CAPTION>
Votes
-------------------------------------
For Against Abstain
------------- ---------- ----------
<S> <C> <C> <C>
2. Ratification of Coopers & Lybrand L.L.P.
as the Company's independent
public accountants for the fiscal
year ending December 31, 1997. 10,005,687 12,345 3,371
</TABLE>
67
<PAGE> 68
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11.1 to Part I - Computation of Earnings Per Share for
the three and six months ended June 30, 1997.
Exhibit 27 - Financial Data Schedule
(b) Reports
None
68
<PAGE> 69
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
REDWOOD TRUST, INC.
Dated: August 11, 1997 By:/s/ Douglas B. Hansen
--------------------------------
Douglas B. Hansen
President and Chief Financial
Officer
(authorized officer of registrant)
Dated: August 11, 1997 By: /s/ Vickie L. Rath
------------------------------
Vickie L. Rath
Vice President, Treasurer and
Controller
(principal accounting officer)
69
<PAGE> 70
REDWOOD TRUST, INC.
INDEX TO EXHIBIT
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Page
------- ------------
<S> <C>
11.1 Computation of Earnings per Share ............... 71
27 Financial Data Schedule ......................... 73
</TABLE>
70
<PAGE> 1
EXHIBIT 11.1
REDWOOD TRUST, INC
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
------------- -------------
<S> <C> <C>
PRIMARY:
Average common shares outstanding ............................... 12,997,566 12,305,215
Net effect of dilutive stock options outstanding
during the period -- based on the treasury stock method ..... 291,228 274,793
Net effect of dilutive stock warrants outstanding
during the period -- based on the treasury stock method ..... 182,137 220,952
------------- -------------
Total 13,470,930 12,800,960
============= =============
Net Income $ 7,034,308 $ 13,490,546
============= =============
Per Share Amount $ 0.52 $ 1.05
============= =============
FULLY DILUTED:
Average common shares outstanding ............................... 12,997,566 12,305,215
Net effect of dilutive stock options outstanding
during the period -- based on the treasury stock method ..... 291,228 278,601
Net effect of dilutive stock warrants outstanding
during the period -- based on the treasury stock method ..... 182,137 222,077
------------- -------------
Total 13,470,930 12,805,892
============= =============
Net Income $ 7,034,308 $ 13,490,546
============= =============
Per Share Amount $ 0.52 $ 1.05
============= =============
</TABLE>
71
<PAGE> 2
EXHIBIT 11.1
REDWOOD TRUST, INC
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1996 June 30, 1996
------------ ------------
<S> <C> <C>
PRIMARY:
Average common shares outstanding ............................... 7,813,974 6,667,675
Net effect of dilutive stock options outstanding
during the period -- based on the treasury stock method ..... 182,832 182,865
Net effect of dilutive stock warrants outstanding
during the period -- based on the treasury stock method ..... 603,425 603,428
------------ ------------
Total 8,600,232 7,453,969
============ ============
Net Income $ 2,499,891 $ 4,454,079
============ ============
Per Share Amount $ 0.29 $ 0.60
============ ============
FULLY DILUTED:
Average common shares outstanding ............................... 7,813,974 6,667,675
Net effect of dilutive stock options outstanding
during the period -- based on the treasury stock method ..... 202,936 202,850
Net effect of dilutive stock warrants outstanding
during the period -- based on the treasury stock method ..... 773,057 773,061
------------ ------------
Total 8,789,968 7,643,586
============ ============
Net Income $ 2,499,891 $ 4,454,079
============ ============
Per Share Amount $ 0.28 $ 0.58
============ ============
</TABLE>
72
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1997 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 29,425
<SECURITIES> 3,368,021
<RECEIVABLES> 25,818
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,424,506
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,424,506
<CURRENT-LIABILITIES> 3,131,318
<BONDS> 0
0
26,733
<COMMON> 274,553
<OTHER-SE> (8,098)
<TOTAL-LIABILITY-AND-EQUITY> 3,424,506
<SALES> 0
<TOTAL-REVENUES> 49,509
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,054
<LOSS-PROVISION> 776
<INTEREST-EXPENSE> 38,958
<INCOME-PRETAX> 7,721
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,721
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
</TABLE>
