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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
//x// ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993
OR
// // TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9819
RESOURCE MORTGAGE CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Virginia 52-1549373
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer I.D. No.)
10500 Little Patuxent Parkway, Columbia, Maryland 21044
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 715-2000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value New York Stock Exchange
Title of each class Name of each exchange on which
registered
Securities registered pursuant to Section 12(g) of the Act: (Title of
class) NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes //XX // No// //
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of January 31, 1994, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $558,517,635
(18,773,702 shares at a closing price on The New York Stock Exchange of
$29.75). Common Stock outstanding as of January 31, 1994 was 19,492,929
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days from December 31, 1993, are incorporated
by reference into Part III.
RESOURCE MORTGAGE CAPITAL, INC.
1993 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. BUSINESS 3
Item 2. PROPERTIES 9
Item 3. LEGAL PROCEEDINGS 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 11
Item 6. SELECTED FINANCIAL DATA 12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 20
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 21
Item 11. EXECUTIVE COMPENSATION 21
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 21
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 21
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 21
Item 1. BUSINESS
General
Resource Mortgage Capital, Inc. ("the Company"), incorporated in
Virginia in 1987, operates a mortgage conduit and invests in a portfolio
of residential mortgage securities. The Company's primary strategy is
to use its mortgage conduit operations, which involve the purchase and
securitization of residential mortgage loans, to create investments for
its portfolio. The Company's principal sources of income are net
interest income on its investment portfolio, gains on the securitization
and sale of mortgage loans and the interest spread realized while the
mortgage loans are being accumulated for securitization. The Company
and its wholly-owned subsidiaries elect to be taxed as a real estate
investment trust.
Mortgage Conduit Operations
As a "mortgage conduit," the Company acts as an intermediary between
the originators of mortgage loans and the permanent investors in the
mortgage loans or the mortgage-related securities backed by such
mortgage loans. Historically, the Company's conduit operations
consisted of the purchase and securitization of single-family mortgage
loans that were underwritten for mortgage pool insurance. During 1993,
the Company expanded its single-family conduit operations to include the
purchase of mortgage loans that were underwritten by the Company and
expanded its securitization strategy to include the senior/subordinated
security structure as an alternative to using pool insurance as a source
of credit enhancement. The Company also operates a multi-family
mortgage conduit.
Single-family Mortgage Conduit
The mortgage loans to be acquired through the single-family mortgage
conduit are originated by various sellers that meet the Company's
qualification criteria. These sellers include savings and loan
associations, banks, mortgage bankers and other mortgage lenders. The
Company acquires mortgage loans secured by residential properties
throughout the United States.
Substantially all of the mortgage loans purchased through the single-
family mortgage conduit are "nonconforming" mortgage loans.
Nonconforming mortgage loans will not qualify for purchase by FHLMC or
FNMA or for inclusion in a loan guarantee program sponsored by GNMA.
Nonconforming mortgage loans generally have outstanding principal
balances in excess of the program guidelines of these agencies or are
originated based upon different underwriting criteria than are required
by the agencies' programs. The maximum principal balance of a
conforming loan is currently $203,150 for FHLMC and FNMA. The Company
focuses on the purchase of nonconforming loans because such loans are
not eligible for securitization under the agencies' programs; however,
such nonconforming loans may have higher risks than conforming mortgage
loans due to their lower liquidity, different underwriting or
qualification criteria, and higher loan balances. The average principal
balance of loans acquired through the single-family mortgage conduit
during 1993 was $185,665.
During 1993, the Company purchased mortgage loans through the single-
family mortgage conduit with an aggregate principal balance as of the
respective purchase dates of $4.0 billion. These loans were purchased
from approximately 150 sellers. The top five sellers accounted for
approximately 25% of the total single-family mortgage loan conduit
mortgage loan purchases during the year. Approximately 64% of the
aggregate principal balance of mortgage loans purchased through the
single-family mortgage conduit during 1993 were secured by properties in
California. The Company does not anticipate any significant adverse
impact on its results or its business operations due to the depressed
state of the residential real estate market in California.
Mortgage loans acquired by the Company in its single-family mortgage
conduit are secured by first liens on single (one-to-four) family
residential properties and have either fixed or adjustable interest
rates. Fixed-rate mortgage loans generally have a constant interest
rate over the life of the loan, generally 15 or 30 years. In addition,
fixed-rate mortgage loans purchased by the Company may also have a fixed
interest rate for the first 3,
5, or 7 years and thereafter interest rate adjustments at six or twelve
month intervals, subject to
periodic and lifetime interest rate caps. Adjustable-rate mortgage
("ARM") loans provide for the periodic adjustment to the rate of
interest equal to the sum of a fixed margin and an index, subject to
certain periodic and lifetime interest-rate caps. To date, all mortgage
loans purchased by the Company fully amortize over their remaining
terms.
The Company purchases various types of ARM loans. Approximately 30%
of the ARM loans the Company purchased in 1993 are convertible to a
fixed interest rate at the option of the borrower at certain times and
upon satisfaction of certain conditions. The Company typically sells
the ARM loans in connection with their securitization and upon
securitization generally becomes obligated to purchase out of the
security the fixed-rate loan created upon any conversion of an ARM loan.
Such conversion period commences after the ARM loan is 24 months old,
and ceases after the ARM loan is 60 months old. The fixed rate of
interest to which these ARM loans convert will be at a net rate 1/8%
higher than the rate then offered by the Company for the purchase of
comparable fixed-rate loans.
The Company sets prices at least once every business day for acquiring
loans through the single-family mortgage conduit. The prices posted may
be for immediate delivery of the mortgage loans or for subsequent
delivery (such as within 90 days). The loans' features and
characteristics, such as loan-to-value ratio and insurance coverage, are
set forth in a detailed Seller/Servicer Guide. Commitments will
obligate the Company to purchase mortgage loans from sellers for a
specific period of time at an established yield, in a specified
aggregate principal amount. Following the issuance of commitments, the
Company is exposed to risks of interest rate fluctuations and may enter
into hedging transactions to reduce the change in value of such
commitments caused by changes in interest rates. Gains and losses on
these hedging transactions are deferred as an adjustment to the carrying
value of the related mortgage loans until the mortgage loans are sold.
These hedging transactions have been successful in reducing the decline
in value of the commitments, as well as loans in inventory, when
interest rates have increased, while reducing the increase in value of
the commitments, as well as loans in inventory, when interest rates have
decreased. During the accumulation period prior to securitization,
which is typically 60 days, the Company is at risk for credit losses on
the mortgage loans acquired. The mortgage loans are financed through
lines of credit with warehouse lenders or through repurchase agreements
with investment banks.
During 1993, the Company began purchasing mortgage loans without a
commitment for mortgage pool insurance in addition to purchasing
mortgage loans with a commitment for mortgage pool insurance. The
Company has established an underwriting department and expanded its risk
management department. To the extent that the Company purchases
mortgage loans without a commitment for mortgage pool insurance, the
Company relies upon its own underwriting for credit review and analysis
in deciding to purchase these loans.
When a sufficient volume of mortgage loans is accumulated, the loans
are sold directly to investment banking firms or securitized through the
issuance of mortgage securities. During 1993 the Company sold $1.2
billion directly to investment banking firms as whole loans and
securitized $2.3 billion through the issuance of mortgage securities.
The mortgage-backed securities are structured so that substantially all
of the securities are rated in one of the two highest rating categories
(i.e. AA or AAA) by at least one of the nationally recognized rating
agencies. In contrast to mortgage-backed securities issued by the
federal agencies in which the principal and interest payments are
guaranteed, securities issued by the Company do not have such a
guarantee and derive their rating through adequate levels of credit
enhancement. This credit enhancement can take the form of mortgage pool
insurance or subordination. Each of these securitization structures is
described below.
Historically, the Company exclusively used mortgage pool insurance for
credit enhancement and reserve funds to cover certain risks excluded
under such insurance. With this structure, mortgage loans purchased
through the single-family mortgage conduit have a commitment for
mortgage pool insurance from a mortgage insurance company with a claims
paying ability in one of the two highest rating categories. The Company
relies upon the credit review and analysis of each mortgage loan, which
is performed by the mortgage insurer, in deciding to purchase a mortgage
loan. Credit losses covered by the pool insurance policies are borne by
the pool insurers to the limits of their policies and by the security
holders if losses exceed those limits. The pool insurance is issued
when the loan is subsequently securitized, and the Company is at risk
for credit losses on that loan prior to its securitization. After these
loans are securitized, the Company has only limited exposure to losses
not covered by pool insurance resulting primarily from fraud during the
origination of a mortgage loan. The Company has established reserves
for these potential losses. The balances of these reserves totaled $5.3
million at December 31, 1993.
An alternative method of credit enhancement is used when mortgage
loans are securitized using a senior/subordinated structure. The
Company expects to securitize in the future most of the single-family
loans purchased through the single-family mortgage conduit by the
issuance of mortgage securities in a senior/subordinated structure.
With the senior/subordinated structure, the credit risk is concentrated
in the subordinated classes of the securities, thus allowing the senior
classes of the securities to receive the higher credit ratings. To the
extent losses are greater than expected, the holders of the subordinated
securities will experience a lower yield (which may be negative) than
expected on their investments. Although the Company did not retain any
mortgage securities rated below AA during 1993, the Company may do so in
the future. The securitization structure used by the Company will
depend primarily on which form of credit enhancement (e.g. pool
insurance or subordination) has the lower effective cost. The Company
anticipates that subordination will generally have the lower cost but
may require a greater capital investment by the Company to the extent
any subordinated securities are retained.
Each series of mortgage securities backed by single-family mortgage
conduit loans is expected to be fully payable from the collateral
pledged to secure the series. It is expected that the recourse of
investors in the series generally will be limited to the collateral
underlying the securities. Except in the case of a breach of the
standard representations and warranties made by the Company when loans
are securitized, the securities are non-recourse to the Company. The
Company is at risk for losses on the mortgage loans while in warehouse.
The Company believes that its allowances are adequate to cover any of
its loss exposure on mortgage loans.
Other Conduit Operations
The Company originates multi-family mortgage loans secured by
properties that have qualified for low income housing tax credits
pursuant to Section 42 of the Internal Revenue Code. A significant
amount of the equity used by the developer to build these properties was
raised through the sale of the tax credits. These tax credits, which
are available generally for ten years beginning when the property was
placed in service, provide a substantial incentive for the borrower not
to default on the mortgage loan and to maintain the property in good
condition, as the borrower would lose upon foreclosure any future tax
credits relating to the property and could face recapture of a portion
of the tax credits already taken. During 1993, the Company originated
multi-family mortgage loans with an aggregate principal balance of $91.3
million, and had commitments outstanding at December 31, 1993 to fund an
additional $22.5 million in such mortgage loans. During 1993, the
Company securitized $102.2 principal amount of multi-family loans.
The following schedule summarizes the principal balances as of the
respective funding dates for mortgage loans funded through the Company's
conduit operations during the year ended December 31, 1993.
(amounts in thousands)
Single-family :
Fixed-rate:
3-year $ 167,685
15-year 208,997
30-year 910,414
-------------
Total fixed-rate 1,287,096
Adjustable-rate:
6-month LIBOR 2,465,054
1-year Constant Maturity Treasury 250,234
------------
Total adjustable-rate 2,715,288
------------
Total single-family 4,002,385
Multi-family:
25-year fixed-rate 91,329
-------------
Total mortgage loans funded $ 4,093,714
=============
The Company may pursue other methods of sourcing mortgage loans
for its conduit operations in the future, including the direct
origination of single-family mortgage loans. The Company has recently
established a business unit to pursue the direct origination of non-
conforming loans, initially in the Mid-Atlantic market.
Portfolio of Mortgage Investments
The Company's investment strategy is to create a diversified portfolio
of mortgage securities that in the aggregate generates stable income for
the Company in a variety of interest rate environments and preserves the
capital base of the Company. The Company creates the majority of the
investments for its portfolio by retaining a portion of the mortgage
securities or other assets that are generated from its business
operations. By pursuing these strategies, the Company believes it can
structure the portfolio to have more favorable yields in a variety of
interest rate environments than if it purchased mortgage investments in
the market.
The majority of the Company's portfolio is comprised of investments in
ARM securities. The Company increases the yield on these investments by
pledging the ARM securities as collateral for repurchase agreements.
The interest rates on the majority of the Company's ARM securities reset
every six months, and the rates are subject to both periodic and
lifetime limitations ("caps"). Generally, the repurchase agreements
have terms that range from 30 to 180 days, and the interest rates are
not subject to the periodic and lifetime limitations. Thus, the yield
on the ARM investments could decline if the spread between the yield on
the ARM security versus the interest rate on the repurchase agreement
was to be reduced. To mitigate this risk, the Company (i) lengthens
the term of the repurchase agreement to more closely match the reset
term on the underlying ARM loans, (ii) has established a reserve to
hedge against the impact on earnings when the spread is reduced, and
(iii) has purchased interest rate cap agreements to reduce the risk of
the lifetime interest rate limitation on the ARM securities.
Another segment of the Company's portfolio consists of net investments
in collateralized mortgage obligations ("CMOs"). The net margin on CMOs
is derived primarily from the difference between the cash flow generated
from the CMO collateral, and the amounts required for payment on the
CMOs and administrative expenses. The CMOs are non-recourse to the
Company. The Company's yield on its investment in CMOs is affected
primarily by changes in prepayment rates; such yield will decline with
an increase in prepayment rates, and the yield will increase with a
decrease in prepayment rates.
Fixed-rate mortgage securities consist of securities that have a
fixed-rate of interest for specified periods of time. Certain fixed-
rate mortgage securities have a fixed interest rate for the first 3, 5,
or 7 years and thereafter interest rate adjustments at six or twelve
month intervals, subject to periodic and lifetime interest rate caps.
The Company's yields on these securities are primarily affected by
changes in prepayment rates; such yield will decline with an increase in
prepayment rates, and the yield will increase with a decrease in
prepayment rates. The Company generally borrows against its fixed-rate
mortgage securities. The spread between the interest rate on a
repurchase agreement and the interest rate on any fixed-rate security
that the Company plans to hold is generally fixed by using an interest
rate swap. A portion of fixed-rate mortgage securities in the Company's
portfolio may be financed by short-term repurchase agreements on a
temporary basis as the Company obtains long-term financing or elects to
sell the securities. As a result, the yield on these investments could
decline if the spread between the yield on the fixed-rate mortgage
securities and the interest rate on the repurchase agreements were to be
reduced during this time period.
Other mortgage securities consist of interest-only securities
("I/O"s), principal-only securities ("P/O"s) and residual interests
which were either purchased or created through the Company's conduit
activities. An I/O is a class of a CMO or a mortgage pass-through
security that pays to the holder substantially all interest. A P/O is a
class of a CMO or a mortgage pass-through security that pays to the
holder substantially all principal. Residual interests represent the
excess cash flows on a pool of collateral after payment of principal,
interest, and expenses of the related mortgage-backed security or
repurchase arrangement. Residual interests may have little or no
principal amount and may not receive scheduled interest payments. The
Company may borrow against its other mortgage securities for working
capital purposes. The yields on these securities are affected primarily
by changes in prepayment rates, and to a lesser extent, by changes in
short-term interest rates.
The Company continuously monitors the aggregate projected yield of its
investment portfolio under various interest rate environments. While
certain investments may perform very poorly in an increasing interest
rate environment, certain investments may perform very well, and others
may not be impacted at all. Generally, the Company adds investments to
its portfolio which are designed to increase the diversification
and reduce the variability of the yield produced by the portfolio in
different interest rate environments. The Company may add new types of
mortgage investments to its portfolio in the future.
The Company may enter into transactions to protect its portfolio of
mortgage investments and related debt from interest rate fluctuations.
Such transactions may include the purchase or sale of interest rate
futures, options on interest rate futures and interest rate caps. These
transactions are designed to stabilize the portfolio yield profile in a
variety of interest rate environments.
The Company's portfolio of mortgage assets also includes the
investment in mortgage warehouse participations. The Company provides
mortgage warehouse lines of credit to established mortgage banking
companies by purchasing participations in existing warehouse lines of
credit from approved warehouse lenders. A mortgage warehouse line of
credit provides short-term, revolving financing to a mortgage originator
for mortgage loans during the time period from settlement until the
mortgage loan is sold to a permanent investor. The purchases of
participations are financed by equity and by the issuance of commercial
paper.
Federal Income Tax Considerations
General
The Company and its qualified REIT subsidiaries (collectively
"Resource REIT") believes it has complied, and intends to comply in the
future, with the requirements for qualification as a REIT under the
Internal Revenue Code (the "Code"). To the extent that Resource REIT
qualifies as a REIT for federal income tax purposes, it generally will
not be subject to federal income tax on the amount of its income or gain
that is distributed to shareholders. However, a subsidiary of the
Company, which operates the single-family mortgage conduit and is
included in the Company's consolidated financial statements prepared in
accordance with generally accepted accounting principles ("GAAP"), is
not a qualified REIT subsidiary. Consequently, all of the nonqualified
REIT subsidiary's taxable income is subject to federal and state income
taxes.
The REIT rules generally require that a REIT invest primarily in real
estate-related assets, its activities be passive rather than active, and
it distribute annually to its shareholders a high percentage of its
taxable income. The Company could be subject to a number of taxes if it
failed to satisfy those rules or if it acquired certain types of
income-producing real property through foreclosure. Although no
complete assurances can be given, Resource REIT does not expect that it
will be subject to material amounts of such taxes.
Resource REIT's failure to satisfy certain Code requirements could
cause the Company to lose its status as a REIT. If Resource REIT
failed to qualify as a REIT for any taxable year, it would be subject to
federal income tax (including any applicable minimum tax) at regular
corporate rates and would not receive deductions for dividends paid to
shareholders. As a result, the amount of after-tax earnings available
for distribution to shareholders would decrease substantially. While
the Board of Directors intends to cause Resource REIT to operate in a
manner that will enable it to qualify as a REIT in all future taxable
years, there can be no certainty that such intention will be realized
because, among other things, qualification hinges on the conduct of the
business of Resource REIT.
Qualification of the Company as a REIT
Qualification as a REIT requires that Resource REIT satisfy a variety
of tests relating to its income, assets, distributions and ownership.
The significant tests are summarized below.
Sources of Income
-----------------
To qualify as a REIT in any taxable year, Resource REIT must satisfy
three distinct tests with respect to the sources of its income: the
"75% income test," the "95% income test," and the "30% income test."
The 75% income test requires that Resource REIT derive at least 75% of
its gross income (excluding gross income from prohibited transactions)
from certain real estate related sources.
In order to satisfy the 95% income test, at least an additional 20% of
Resource REIT's gross income for the taxable year must consist either of
income that qualifies under the 75% income test or certain other types of
passive income.
The 30% income test, unlike the other income tests, prescribes a
ceiling for certain types of income. A REIT may not derive more than
30% of its gross income from the sale or other disposition of (i) stock
or securities held for less than one year, (ii) dealer property that is
not foreclosure property, or (iii) certain real estate property held for
less than four years.
If Resource REIT fails to meet either the 75% income test or the 95%
income test, or both, in a taxable year, it might nonetheless continue
to qualify as a REIT, if its failure was due to reasonable cause and not
willful neglect, and the nature and amounts of its items of gross income
were properly disclosed to the Internal Revenue Service. However, in
such a case Resource REIT would be required to pay a tax equal to 100%
of any excess non-qualifying income. No analogous relief is available
to REITs that fail to satisfy the 30% income test.
Nature and Diversification of Assets
- -------------------------------------
At the end of each calendar quarter, three asset tests must be met by
Resource REIT. Under the "75% asset test," at least 75% of the value of
Resource REIT's total assets must represent cash or cash items
(including receivables), government securities or real estate assets.
Under the "10% asset test", Resource REIT may not own more than 10% of
the outstanding voting securities of any single non-governmental issuer,
if such securities do not qualify under the 75% asset test. Under the
"5% asset test," ownership of any stocks or securities that do not
qualify under the 75% asset test must be limited, in respect of any
single non-governmental issuer, to an amount not greater than 5% of the
value of the total assets of Resource REIT.
If Resource REIT inadvertently fails to satisfy one or more of the
asset tests at the end of a calendar quarter, such failure would not
cause it to lose its REIT status, provided that (i) it satisfied all of
the asset tests at the close of a preceding calendar quarter, and (ii)
the discrepancy between the values of Resource REIT's assets and the
standards imposed by the asset tests either did not exist immediately
after the acquisition of any particular asset or was not wholly or
partially caused by such an acquisition. If the condition described in
clause (ii) of the preceding sentence was not satisfied, Resource REIT
still could avoid disqualification by eliminating any discrepancy within
30 days after the close of the calendar quarter in which it arose.
Distributions
-------------
With respect to each taxable year, in order to maintain its REIT
status, Resource REIT generally must distribute to its shareholders an
amount at least equal to 95% of the sum of its "REIT taxable income"
(determined without regard to the deduction for dividends paid and by
excluding any net capital gain) and any after-tax net income from
certain types of foreclosure property minus any "excess noncash income."
The Internal Revenue Code provides that distributions relating to a
particular year may be made early in the following year, in certain
circumstances. The Company will balance the benefit to the shareholders
of making these distributions and maintaining REIT status against their
impact on the liquidity of the Company. In an unlikely situation, it may
benefit the shareholders if the Company retained cash to preserve liquidity
and thereby lose REIT status.
For federal income tax purposes, Resource REIT is required to
recognize income on an accrual basis and to make distributions to its
shareholders when income is recognized. Accordingly, it is possible
that income could be recognized and distributions required to be made in
advance of the actual receipt of such funds by Resource REIT. The
nature of Resource REIT's investments is such that it expects to have
sufficient cash to meet any federal income tax distribution
requirements.
Taxation of Distributions by the Company
Assuming that Resource REIT maintains its status as a REIT, any
distributions that are properly designated as "capital gain dividends''
generally will be taxed to shareholders as long-term capital gains,
regardless of how long a shareholder has owned his shares. Any other
distributions out of Resource REIT's current or accumulated earnings and
profits will be dividends taxable as ordinary income.
Shareholders will not be entitled to dividends-received deductions with
respect to any dividends paid by Resource REIT. Distributions in excess
of Resource REIT's current or accumulated earnings and profits will be
treated as tax-free returns of capital, to the extent of the
shareholder's basis in his shares, and as gain from the disposition of
shares, to the extent they exceed such basis. Shareholders may not
include on their own tax returns any of Resource REIT ordinary or
capital losses. Distributions to shareholders attributable to "excess
inclusion income'' of Resource REIT will be characterized as excess
inclusion income in the hands of the shareholders. Excess inclusion
income can arise from Resource REIT's holdings of residual interests in
real estate mortgage investment conduits and in certain other types of
mortgage-backed security structures created after 1991. Excess
inclusion income constitutes unrelated business taxable income ("UBTI'')
for tax-exempt entities (including employee benefit plans and individual
retirement accounts), and it may not be offset by current deductions or
net operating loss carryovers. In the unlikely event that the Company's
excess inclusion income is greater than its taxable income, the
Company's distribution would be based on the Company's excess inclusion
income. In 1993 the Company's excess inclusion income was approximately
15% of its taxable income. Although Resource REIT itself would be
subject to a tax on any excess inclusion income that would be allocable
to a "disqualified organization'' holding its shares, Resource REIT's
by-laws provide that disqualified organizations are ineligible to hold
Resource REIT's shares.
Dividends paid by Resource REIT to organizations that generally are
exempt from federal income tax under Section 501(a) of the Code should
not be taxable to them as UBTI except to the extent that (i) purchase of
shares of Resource REIT was financed by "acquisition indebtedness'' or
(ii) such dividends constitute excess inclusion income.
Taxable Income
Resource REIT uses the calendar year for both tax and financial
reporting purposes. However, there may be differences between taxable
income and income computed in accordance with GAAP. These differences
primarily arise from timing differences in the recognition of revenue
and expense for tax and GAAP purposes. Additionally, Resource REIT's
taxable income does not include the taxable income of its taxable
affiliate, although the affiliate is included in the Company's GAAP
consolidated financial statements. For the year ended December 31,
1993, Resource REIT's estimated taxable income was approximately $61.5
million.
A portion of the dividends paid during 1993 was allocated to satisfy
1992 distribution requirements and a portion of the dividends paid in
1994 will be allocated to satisfy 1993 distribution requirements. All
of the dividends paid during 1993 represented ordinary income for
federal income tax purposes.
Competition
The Company competes with a number of institutions with greater
financial resources in purchasing mortgage loans through its mortgage
conduit operations. In addition, in purchasing mortgage assets and in
issuing mortgage securities, the Company competes with investment
banking firms, savings and loan associations, banks, mortgage bankers,
insurance companies and other lenders, GNMA, FHLMC and FNMA and other
entities purchasing mortgage assets, many of which have greater
financial resources than the Company. Additionally, mortgage securities
issued relative to its mortgage conduit operations will face competition
from other investment opportunities available to prospective purchasers.
Employees
As of December 31, 1993, the Company had approximately 150 employees.
Item 2. PROPERTIES
----------
The Company's executive and administrative offices are located in
Columbia, Maryland and the Company's operations offices are located in
Glen Allen, Virginia, on properties leased by the Company. The
executive and administrative offices are located at 10500 Little
Patuxent Parkway, Suite 650, Columbia, Maryland, 21044.
Item 3. LEGAL PROCEEDINGS
-----------------
In March 1993, the Company was notified by the Securities and Exchange
Commission (the "Commission") that a formal order of investigation had
been issued to review trading activity in the Company's stock during
April and May of 1992. In this regard, the Company and certain of its
officers and directors have produced documents and testified before the
staff of the Commission. The Company and the subpoenaed officers and
directors are complying with the requests of the Commission. Based on
information available to the Company, and upon advice of counsel,
management does not believe that the investigation will result in any
action that will have a material adverse impact on the Company.
There were no other pending legal proceedings, outside the normal
course of business, to which the Company was a party or of which any of
its property was subject at December 31, 1993.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of 1993.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------
MATTERS
-------
The Company's common stock is traded on the New York Stock Exchange
under the trading symbol RMR. The Company's common stock was held by
approximately 3,900 holders of record as of January 31, 1994. In
addition, depository companies held stock for approximately 25,200
beneficial owners. During the last two years, the high and low closing
stock prices and cash dividends declared on common stock were as
follows:
Cash Dividends
High Low Declared
------ ----- --------
1992
- ----
First quarter $ 12 3/8 $ 9 3/8 $ 0.45 (1)
Second quarter 17 7/8 11 7/8 0.55
Third quarter 22 3/4 17 5/8 0.65
Fourth quarter 22 3/4 19 1/2 0.75 (2)
1993
- ----
First quarter $ 29 7/8 $ 20 3/8 $ 0.85 (2)
Second quarter 28 1/8 26 1/2 0.75
Third quarter 30 7/8 27 3/4 0.77
Fourth quarter 32 1/4 28 5/8 0.78 (3)
- ------------------
(1) The January 1992 dividend of $0.15 was declared in December 1991
and is included in the dividends for the first quarter of 1992.
(2) The $0.35 special dividend declared in December 1992 is included in
the dividends for the first quarter of 1993.
(3) Amount does not include the January 1994 dividend of $0.26 which
was declared in December 1993.
Item 6 SELECTED FINANCIAL DATA
-----------------------
(amounts in thousands except share data)
Year ended December 31, 1993 1992 1991 1990 1989
- ---------------------- ---- ---- ----- ---- -----
Net margin on
mortgage assets $ 45,019 $ 32,655 $ 22,923 $ 14,975 $ 5,811
========= ======== ======= ========= ========
Gain on sale of
mortgage assets, net
of associated costs $ 25,985 $ 26,991 $ 10,218 $ 1,371 $ 1,007
========= ========= ========= ========= =======
Total revenue $ 198,975 $ 177,505 $ 161,229 $ 140,038 $118,407
Total expenses 144,848 139,336 139,593 127,245 118,283
--------- -------- --------- --------- --------
Net income $ 54,127 $ 38,169 $ 21,636 $ 12,793 $ 124
========= ========= ========= ========= ========
Net income per share $ 3.12 $ 2.73 $ 1.60 $ 0.91 $ 0.01
Average number of
shares
outstanding 17,364,309 13,999,047 13,531,290 14,091,783 14,450,100
Dividends declared
per share $ 3.06(1)$ 2.60(2)$ 1.53(3)$ 0.74 $ 0.53
Return on average
shareholders' equity 25.8% 27.7% 17.9% 10.6% 0.1%
Principal balance
of mortgage
loans funded $ 4,093,714$ 5,334,174$ 2,491,434$605,752$ 967,291
Year ended December 31, 1993 1992 1991 1990 1989
- ---------------------- ---- ---- ----- ---- -----
Mortgage Investments:
Collateral
for CMOs $ 434,698$ 571,567$ 820,517$987,856$1,122,378
Adjustable-rate
mortgage
securities (4) 2,021,196 1,199,911 658,311 223,894 90,701
Fixed-rate
mortgage
securities (4) 214,128 165,206 22,062 14,741 8,547
Other mortgage
securities (4) 65,625 36,461 53,176 87,825 100,630
Mortgage
warehouse
participations 156,688 121,624 88,312 - -
Total assets 3,726,762 2,239,656 1,829,632 1,412,257 1,395,199
CMO bonds
payable, net (5) 432,677 561,441 805,493 971,356 1,102,306
Repurchase
agreements 2,754,166 1,315,334 637,599 235,553 99,812
Total
liabilities 3,473,730 2,062,219 1,708,197 1,291,893 1,273,893
Shareholders'
equity 253,032 177,437 121,435 120,364 122,016
Number of shares
outstanding 19,331,932 16,507,100 13,542,137 13,529,700 14,450,100
Book value
per share $ 13.09 $ 10.75 $ 8.97 $ 8.90 $ 8.44
- ---------------------
(1) Includes the January 1994 dividend of $0.26 which was declared in
December 1993.
(2) Includes the January 1993 dividend of $0.35 which was declared in
December 1992.
(3) Includes the January 1992 dividend of $0.15 which was declared in
December 1991.
(4) Includes mortgage securities held for possible sale.
(5) This debt is non-recourse to the Company.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Resource Mortgage Capital, Inc. (the "Company") operates a mortgage
conduit and invests in a portfolio of residential mortgage securities.
The Company's primary strategy is to use its mortgage conduit
operations, which involve the purchase and securitization of residential
mortgage loans, to create investments for its portfolio. The Company's
principal sources of income are net interest income on its investment
portfolio, gains on the securitization and sale of mortgage loans and
the interest spread realized while the mortgage loans are being
accumulated for securitization.
In 1993, the Company's results improved primarily from an increase in
the net margin on its mortgage assets. This improvement in net margin
resulted from the addition of investments created by the Company's
mortgage conduit operations and the rapid paydown of certain lower
yielding investments owned by the Company.
Results of Operations 1993 1992 1991
---- ---- ----
(amounts in thousands except per share information)
Net margin on mortgage assets $ 45,019 $ 32,655 $ 22,923
Net gain on sales 25,985 26,991 10,218
Net income 54,127 38,169 21,636
Net income per share 3.12 2.73 1.60
Dividends declared 53,835 38,197 20,706
Dividends declared per share 3.06 2.60 1.53
Principal balance of mortgage
loans funded 4,093,714 5,334,174 2,491,434
1993 compared to 1992
- ---------------------- The increase in the Company's earnings during
1993 as compared to 1992 is primarily the result of (i) the increase in
net margin on mortgage assets and (ii) the decrease in valuation
adjustments. The increase in earnings was partially offset by (i) a
decrease in the net gain on sale of mortgage assets and (ii) the
increase in general and administrative expenses.
Net margin on mortgage assets increased to $45.0 million for 1993 from
$32.7 million for 1992. This increase resulted primarily from the
overall growth of the portfolio. The Company was able to increase the
size of its portfolio primarily through the use of proceeds from common
stock issued during 1993.
The principal amount of mortgage loans securitized or sold decreased
to $3.4 billion during 1993 from $5.4 billion during the same period in
1992. As a result of the decrease in principal amount of mortgage loans
securitized or sold, the Company's net gains on sales of mortgage assets
decreased to $26.0 million for 1993 from $27.0 million for 1992.
Although the principal amount of mortgage loans securitized decreased
during 1993, the percentage gain realized on such sales or
securitizations increased and generally offset the effects of such
decline in volume.
While the Company did not incur management fee expense in 1993 due to
the termination of its prior management agreement, the Company incurred
$15.2 million of general and administrative expenses for 1993. In
comparison, the Company incurred management fee expense of $4.9 million
and general and administrative expenses of $9.6 million during 1992.
The increase in general and administrative expenses is due primarily to
(i) the addition of an underwriting department in 1993 and (ii) the
change to self management in June 1992.
During 1993 and 1992, the Company recorded valuation adjustments to
certain mortgage investments of $2.4 million and $7.3 million,
respectively. These valuation adjustments were based on expectations
that future prepayment speeds would result in the Company receiving less
cash on certain investments than its amortized cost basis in such
investments.
1992 compared to 1991
- --------------------- The increase in the Company's earnings in 1992
as compared to 1991 is primarily the result of the increase in gain on
sale of mortgage assets to $27.0 million for 1992 from $10.2 million for
1991 and an improvement in net margin on mortgage assets to $32.7
million for 1992 from $22.9 million for 1991.
The principal amount of mortgage loans funded increased substantially
to $5.3 billion in 1992 from $2.5 billion in 1991. As a result of the
increased volume of loans funded and favorable interest rates, the
Company realized significant gains on securitizations and sales of $27.0
million and realized an increase in the spread between interest income
earned on mortgage loans held in warehouse and the interest expense paid
on warehouse borrowings. The increase in the volume of mortgage loans
funded is attributable not only to general market activity arising from
lower interest rates, but also to the continued success of the Company's
funding of adjustable-rate mortgage loans.
The increase in net margin to $32.7 million in 1992 from $22.9 million
in 1991 was partially offset by valuation adjustments which were based
upon projections that the Company would receive less cash on certain
investments than its amortized basis in the investments due to higher
than anticipated rates of mortgage prepayments. During 1992, the
Company recorded valuation adjustments of $7.3 million on certain
mortgage investments. Additionally, while the Company did not incur
management fee expense in the third and fourth quarters of 1992 due to
the termination of the management agreement with Ryland Acceptance
Corporation, the manager of the Company through June 16, 1992, the
Company's general and administrative expenses increased due to this
transition to self-management. General and administrative expenses also
include a one-time charge of $2.0 million related to the cancellation of
a portion of the stock options held by Ryland Acceptance Corporation and
accruals related to the Company's stock incentive plan.
The following table summarizes the average balances of the
Company's interest-earning assets and their average effective yields,
along with the Company's average interest-bearing liabilities and the
related average effective interest rates, for each of the years
presented.
Average Balances and Effective Interest Rates
Year Ended December 31,
(amounts in thousands)
1993 1992 1991
Average Effective Average Effective Average Effective
Balance Rate Balance Rate Balance Rate
Interest-earning assets:
Collateral for CMOs (1) $ 432,715 9.14% $ 590,779 9.77% $ 907,452 10.04%
Adjustable-rate mortgage
securities 1,534,073 4.96 850,151 5.88 364,157 7.90
Fixed-rate mortgage
securities 184,087 7.62 49,804 9.23 18,018 10.57
Other mortgage
securities 43,045 19.22 47,181 16.28 64,075 17.34
Mortgage warehouse
participations 112,537 5.08 105,170 5.57 16,308 7.09
------------ ------ ------- ------ ------- ------
Total portfolio-related
assets 2,306,457 6.23 1,643,085 7.66 1,370,010 9.78
Mortgage loans in
warehouse 460,479 6.22 349,429 6.95 196,021 8.59
------------ ----- --------- ------ --------- ------
Total interest-earning
assets $ 2,766,936 6.23% $ 1,992,514 7.53% $1,566,031 9.63%
============ ====== =========== ===== ========== ======
Interest-bearing
liabilities:(2)
Portfolio-related
liabilities:
CMOs $ 439,488 8.46% $ 603,052 9.18% $ 901,818 9.49%
Repurchase agreements:
Adjustable-rate mortgage
securities 1,443,092 3.62 773,578 4.24 338,719 6.25
Fixed-rate mortgage
securities 173,126 4.90 36,470 5.26 7,680 8.62
Other mortgage
securities 6,668 3.72 11,167 4.63 23,916 6.85
Commercial paper 106,464 3.25 100,057 3.78 14,016 5.39
------------ ----- -------- ------ --------- -----
Total portfolio-related
liabilities 2,168,838 4.68 1,524,324 6.19 1,286,149 8.54
Warehouse-related liabilities:
Repurchase agreements 308,148 4.50 236,728 5.31 83,758 7.03
Notes payable 80,220 5.36 83,398 5.67 88,761 7.77
----------- ----- --------- ------ --------- -----
Total warehouse-related
liabilities 388,368 4.68 320,126 5.40 172,519 7.42
----------- ----- --------- ------ --------- -----
Total interest-bearing
liabilities $ 2,557,206 4.68% $ 1,844,450 6.06% $ 1,458,668 8.41%
=========== ===== =========== ===== =========== =====
Net interest spread 1.55% 1.47% 1.22%
===== ===== =====
Net yield on average
interest earning assets 1.90% 1.93% 1.80%
===== ===== =====
- ------------------
(1) Average balances exclude funds held by trustees of $16,325, $26,338
and $15,198 for the years ended December 31, 1993, 1992 and 1991,
respectively.
(2) "Collateralized mortgage obligations: Other" expense and "Other"
expense as shown on the consolidated statements of operations are
excluded from the calculations of effective interest rates on interest-
bearing liabilities.
Portfolio Activity
The Company's investment strategy is to create a diversified portfolio
of mortgage securities that in the aggregate generate stable income in
a variety of interest rate and prepayment rate environments and preserve
the capital base of the Company. The Company has pursued its strategy
of concentrating on its mortgage conduit activities in order to create
investments with attractive yields and to benefit from potential gains
on securitization. In many instances the Company's investment strategy
involves not only the creation or acquisition of the asset, but also the
related borrowing to pay for a portion of that asset.
1993 compared to 1992
- --------------------- The size of the Company's portfolio of mortgage
investments at December 31, 1993 has increased as compared to December
31, 1992, through the addition of investments created through the
Company's conduit operations and the purchase of mortgage investments.
During 1993 the Company added approximately $728.3 million of
adjustable-rate mortgage securities, $202.3 million of fixed-rate
mortgage securities and $12.2 million of other mortgage securities to
its portfolio through its conduit operations. During 1993, the Company
retained $102.2 million principal amount of mortgage loans as collateral
for CMOs. Also during 1993 the Company purchased approximately
$279.5 million of adjustable-rate mortgage securities, $57.8 million of
fixed-rate mortgage securities and $31.1 million of other mortgage
securities for its portfolio. A portion of these securities were
financed through repurchase agreements with investment banking firms.
Additionally, during 1993, the Company sold $72.5 million and $184.3
million principal amount of adjustable-rate and fixed-rate mortgage
securities, respectively, from its portfolio. During 1992, the Company
sold $282.1 million of adjustable-rate mortgage securities, $19.1
million of other mortgage securities and $38.4 million of collateral for
CMOs, net of $37.3 million of associated borrowings, from its portfolio.
The Company realized net gains of $1.4 million during 1993 and $1.7
million during 1992 on the sale of mortgage securities.
The net margin on the Company's portfolio of mortgage investments
increased to $34.6 million for 1993 from $25.7 million for 1992. This
increase resulted from the overall growth of mortgage investments.
Portfolio results for 1993 and 1992 were partially offset by valuation
adjustments to certain mortgage investments of $2.4 million and $7.3
million, respectively, based on expectations that future prepayment
speeds would result in the Company receiving less cash on certain
investments than its amortized cost basis in such investments.
During 1993, the Company purchased additional LIBOR-based interest
rate cap agreements to limit its exposure to the lifetime interest rate
cap on its adjustable-rate mortgage securities. At December 31, 1993,
the Company had purchased cap agreements with an aggregate notional
amount of $1.3 billion. Pursuant to these agreements, the Company will
receive additional cash flows if six month LIBOR increases above certain
specified levels. The amortization of the cost of the cap agreements
will reduce interest income on adjustable-rate mortgage securities over
the lives of the agreements.
The Company participates in mortgage warehouse lines of credit. The
Company's obligations under the participations are funded primarily by
sales of commercial paper. An agreement with a bond guarantor and a
syndicate of commercial banks provides 100% credit and liquidity support
for the commercial paper and for the Company's obligations under its
participations. As of December 31, 1993, the Company had acquired
$185.0 million of participations and had advanced $156.7 million
pursuant to these participations. Under the Company's liquidity
agreement, which terminates on April 30, 1994, participations are
limited to $250 million.
1992 compared to 1991
- --------------------- The composition of the Company's portfolio of
mortgage investments at December 31, 1992 has changed as compared to
December 31, 1991, primarily through the addition of investments created
through the single-family mortgage conduit. These changes were made in
order to further stabilize the yield on the portfolio of mortgage
investments in different interest rate environments. During 1992 and
1991, the Company retained $749.2 million and $611.4 million,
respectively, of adjustable-rate mortgage securities that were created
as the Company securitized mortgage loans purchased through the single-
family mortgage conduit. These retained securities were financed
through repurchase agreements with investment banking firms. Also
during 1992, the Company retained $170.4 million principal amount of
mortgage loans as collateral for CMOs. No loans were retained during
1991 as collateral for CMOs. Additionally, during 1992 the Company sold
$282.1 million of adjustable-rate mortgage securities, $19.1 million of
other mortgage securities, and $38.4 million of collateral for CMOs,
net of $37.3 million of associated borrowings, from its portfolio.
During 1991 the Company sold no adjustable-rate mortgage securities,
$40.2 million of other mortgage securities and no collateral for CMOs.
During 1992 and 1991, the Company realized net gains of $1.7 million on
the sale of mortgage investments in each year.
The net margin on the Company's portfolio of mortgage investments
increased to $25.7 million for 1992 from $18.9 million for 1991. This
increase resulted primarily from the overall growth of the portfolio and
the increase in adjustable-rate mortgage securities and the decrease in
CMOs as a percentage of the total portfolio.
Mortgage Conduit Operations
As a "mortgage conduit," the Company acts as an intermediary between
the originators of mortgage loans and the permanent investors in the
mortgage loans or the mortgage-related securities backed by such
mortgage loans. Historically, the Company's conduit operations
consisted of the purchase and securitization of single-family mortgage
loans that qualified for mortgage pool insurance. During 1993, the
Company expanded its single-family conduit operations to include the
purchase of mortgage loans that were underwritten by the Company
and expanded its securitization strategy to include the
senior/subordinated security structure as an alternative to using pool
insurance as a source of credit enhancement. The Company also operates
other mortgage conduit activities.
Single-family Mortgage Conduit Operations
Through its single-family mortgage conduit, the Company purchases
mortgage loans from approved sellers, primarily mortgage companies,
savings and loan associations and commercial banks. When a sufficient
volume of mortgage loans is accumulated, the Company sells or
securitizes these mortgage loans through the issuance of CMOs or pass-
through securities. During the accumulation period, the Company
finances its purchases of mortgage loans through warehouse lines of
credit or through repurchase agreements.
The following table summarizes single-family conduit activity for 1993,
1992 and 1991.
(amounts in thousands) 1993 1992 1991
Principal amount of loans purchased $4,002,385 $ 5,311,406 $ 2,491,434
Principal amount securitized or sold 3,332,200 5,374,543 2,414,189
Investments added to portfolio from
the single-family conduit,
net of associated borrowings 54,528 77,475 48,634
1993 Compared to 1992
- --------------------- The decrease in the purchase volume of single-
family loans for 1993 as compared to 1992 reflects generally (i) the
greater competition in the secondary mortgage market and (ii) the
underwriting and pricing changes of the mortgage pool insurers. The
Company's net gains on sale of mortgage assets decreased to $26.0
million for 1993 from $27.0 million for 1992. Although the principal
amount of mortgage loans securitized decreased during 1993, the
percentage gain realized on such sales or securitizations increased and
generally offset the effects of such decline in volume. This higher
profitability was partially offset by increased general and
administrative costs related to the establishment of an internal
underwriting department as the Company began to underwrite mortgage
loans purchased without a commitment for mortgage pool insurance. The
Company expects that its general and administrative costs will continue
to increase as a greater percentage of the mortgage loans are
underwritten by the Company. The Company had outstanding commitments to
purchase single-family mortgage loans totaling $381.7 million and $431.1
million at December 31, 1993 and 1992, respectively.
As of December 31, 1993 and December 31, 1992, the Company had $13.2
million and $11.6 million, respectively, of deferred net gains related
to the securitization of certain convertible ARM loans which the Company
has agreed to purchase upon their conversion to a fixed-rate of
interest. The deferred income will be recognized over the remaining
conversion period until the conversion option expires, which is five
years after the origination of each mortgage loan.
1992 compared to 1991. The increase in the single-family mortgage
conduit volume for 1992 as compared to 1991 reflects generally higher
levels of mortgage activity as interest rates have declined, and
increases in the purchase of ARM loans. As the single-family mortgage
conduit volume has increased, the gains related to securitizations and
sales increased to $27.0 million in 1992 from $10.2 million in 1991.
Additionally, the spread (difference between interest income on the
loans and the interest expense on associated short-term borrowings) that
the Company earned on the mortgage loans during the accumulation period
increased to 1.55% in 1992 from 1.17% in 1991.
As of December 31, 1992 and December 31, 1991, the Company had $11.6
million and $4.5 million, respectively, of deferred net gains related to
the securitization of certain convertible ARM loans which the Company
has agreed to purchase upon their conversion to a fixed-rate of
interest. The deferred income will be recognized over the remaining
conversion period until the conversion option expires, which is five
years after the origination of each mortgage loan.
Other Mortgage Conduit Operations
The Company originates multi-family mortgage loans secured by
properties that have qualified for low income housing tax credits
pursuant to Section 42 of the Internal Revenue Code. These tax credits,
which are available generally for ten years beginning when
the property was placed in service, provide a substantial incentive for
the borrower not to default on the mortgage loan, as the borrower would
lose upon foreclosure any future tax credits relating to the property
and could face recapture of a portion of the tax credits already taken.
During 1993, the Company funded multi-family mortgage loans with an
aggregate principal balance of $91.3 million. Also during 1993 the
Company securitized $102.2 million in principal amount of multi-family
loans. At December 31, 1993, mortgage loans in warehouse included
multi-family mortgage loans with an aggregate principal balance of $11.3
million and the Company had commitments outstanding to fund an
additional $22.5 million in such mortgage loans. Due to the delay by
Congress in approving the Omnibus Reconciliation Act of 1993, tax
credits were not allocated to the states for re-allocation to developers
until late 1993. Thus, the Company expects slower origination volume of
multi-family loans during the first half of 1994, with an increase later
in the year.
Other Matters
Upon the securitization of single-family mortgage loans using mortgage
pool insurance, the Company generally retains limited exposure for
special hazard losses and for losses arising from mortgagor bankruptcy
claims. At December 31, 1993, the Company's total exposure for special
hazard and mortgagor bankruptcy losses was $21.2 million and the Company
pledged a comparable amount of mortgage securities as collateral to
provide coverage for these potential losses. An estimate of possible
losses is made at the time loans are securitized and securities are
retained in the portfolio at a discount to compensate the Company for
this risk. The estimate is based on management's judgement, and is
evaluated periodically for factors such as geographic location and
industry loss experience. At December 31, 1993 the discount totaled
$19.7 million of which $17.2 million was included in adjustable-rate
mortgage securities, net and $2.5 million was included in fixed-rate
mortgage securities, net.
The Company has limited exposure to losses due to fraud during the
origination of a mortgage loan. The Company has established a loss
allowance for such losses. An estimate for such losses is made at the
time loans are sold or securitized, and the loss allowance is adjusted
accordingly. This estimate is based on management's judgement and the
allowance is evaluated periodically. At December 31, 1993 the allowance
totaled $5.3 million and was included in other liabilities.
The Company is exposed to losses to the extent that mortgage loans in
warehouse are secured by properties that were damaged as a result of the
January 1994 earthquake in the Los Angeles area. The Company does not
expect that any losses due to this earthquake will have a material
effect on its financial position or results of operations.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, which addresses the
accounting and reporting for investments in debt and equity securities.
This Statement is effective for fiscal years beginning after December
15, 1993 and has not yet been applied by the Company. The Company does
not anticipate that its application of this Statement will have a
material impact on its results of operations or its financial condition.
The Company and its qualified REIT subsidiaries (collectively
"Resource REIT") have elected to be treated as a real estate investment
trust for federal income tax purposes, and therefore is required to
distribute annually substantially all of its taxable income. Resource
REIT estimates that its taxable income for 1993 was approximately $61.5
million. Taxable income differs from the financial statement net income
which is determined in accordance with generally accepted accounting
principles. A portion of the dividends paid in 1993 will be allocated
to satisfy tax distribution requirements of the previous year. Resource
REIT determines its dividend relative to its anticipated taxable income
for the year. Excess inclusion income can arise from Resource REIT's
holdings of residual interests in real estate mortgage investment
conduits and in certain other types of mortgage-backed security
structures created after 1991. In the unlikely event that the Company's
excess inclusion income is greater than its taxable income, the
Company's distribution would be based on the Company's excess inclusion
income. In 1993 the Company's excess inclusion income was approximately
18% of its taxable income.
Liquidity and Capital Resources
The Company uses its cash flow from operations, issuance of CMOs or
pass-through securities, other borrowings and capital resources to meet
its working capital needs. The Company believes that the cash flow from
its portfolio and borrowing arrangements provide sufficient liquidity
for the conduct of its operations.
The Company's borrowings may bear fixed or variable interest rates,
may require additional collateral in the event that the value of the
existing collateral declines, and may be due on demand or upon the
occurrence of certain events. If borrowing costs are higher than the
yields on the mortgage assets purchased with such funds, the Company's
ability to acquire mortgage assets may be substantially reduced and it
may experience losses.
The Company borrows funds on a short-term basis to support the
accumulation of mortgage loans prior to the sale of such mortgage loans
or the issuance of mortgage securities. These short-term borrowings
consist of the Company's warehouse lines of credit and repurchase
agreements and are paid down as the Company securitizes or sells
mortgage loans. The Company had a $115 million revolving warehouse line
of credit to finance the purchase of mortgage loans with a consortium of
commercial banks that expired on March 1, 1994. During February 1994,
the Company replaced the revolving warehouse line of credit with a $150
million credit facility, which also allows the Company to borrow up to
$30 million on an unsecured basis for working capital purposes. This
new credit facility expires in February 1995. The Company presently has
revolving committed repurchase agreements of $300 million and $100
million maturing on June 25, 1994 and September 12, 1994, respectively.
The Company has arranged separate financing for the origination of
multi-family mortgage loans for up to $75 million. The Company expects
that these credit facilities will be renewed if necessary, at their
respective expiration dates, although there can be no assurance of such
renewal. At December 31, 1993 the Company had borrowed $673.7 million
under these credit facilities. The lines of credit contain certain
financial covenants which the Company met as of December 31, 1993.
However, changes in asset levels or results of operations could result
in the violation of one or more covenants in the future.
The Company finances adjustable-rate mortgage securities and certain
other mortgage assets through repurchase agreements. Repurchase
agreements allow the Company to sell mortgage assets for cash together
with a simultaneous agreement to repurchase the same mortgage assets on
a specified date for an increased price, which is equal to the original
sales price plus an interest component. At December 31, 1993, the
Company had outstanding obligations of $2.2 billion under such
repurchase agreements, of which $2.0 billion, $204.4 million and $12.1
million were secured by adjustable-rate mortgage securities, fixed-rate
mortgage securities and other mortgage securities, respectively.
Increases in either short-term interest rates or long-term interest
rates could negatively impact the valuation of these mortgage assets and
may limit the Company's borrowing ability or cause various lenders to
initiate margin calls. Additionally, certain of the Company's
adjustable-rate mortgage securities are AA rated classes that are
subordinate to related AAA rated classes from the same series of
securities. Such AA rated classes have less liquidity than securities
that are not subordinated, and the value of such classes is more
dependent on the credit rating of the related mortgage pool insurer. As
a result of either changes in interest rates or a downgrade of a
mortgage pool insurer, the Company may be required to sell certain
mortgage assets in order to maintain liquidity. If required, these
sales could be made at prices lower than the carrying value of the
assets, which could result in losses.
The Company issues asset-backed commercial paper to support its
purchase of mortgage warehouse participations. An agreement with a
consortium of commercial banks provides 100% liquidity support for the
commercial paper and for the Company's obligation to fund on
participations it has purchased. Based on such liquidity support, the
Company's commercial paper has been rated in the highest category by
two nationally recognized rating agencies.
A substantial portion of the assets of the Company are pledged to
secure indebtedness incurred by the Company. Accordingly, those assets
would not be available for distribution to any general creditors or the
stockholders of the Company in the event of the Company's liquidation,
except to the extent that the value of such assets exceeds the amount of
the indebtedness they secure.
During the third quarter of 1993, the Company issued an additional
2,300,000 shares of common stock through its registration statement
filed with the Securities and Exchange Commission earlier in 1993.
Proceeds from this issuance were used initially to pay down short-term
borrowings and to support the accumulation of mortgage loans. The REIT
provisions of the Internal Revenue Code require Resource REIT to
distribute to shareholders substantially all of its taxable income,
thereby restricting its ability to retain earnings. The Company may
issue additional common stock or other securities in the future in order
to fund growth in its operations, growth in its portfolio of mortgage
investments, or for other purposes.
During 1993 the Company issued 524,832 additional shares of common
stock through its Dividend Reinvestment Plan. Total net proceeds of
$15.0 million were used for general corporate purposes.
During October 1993, the Company filed a shelf registration statement
with the Securities and Exchange Commission for the issuance of up to
$200 million of (i) debt securities, (ii) preferred stock, (iii) common
stock, and (iv) warrants. This shelf registration statement provides
for the issuance, from time to time, of one or more of the foregoing
securities. Proceeds from any offerings pursuant to this shelf
registration statement will be used for general corporate purposes,
which may include the purchase of mortgage loans through the Company's
conduit operations, investment in mortgage securities, and growth of new
business lines.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The consolidated financial statements of the Company and the related
notes, together with the Independent Auditors' Report thereon are set
forth on pages F-3 through F-17 of this Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by Item 10 as to directors and executive
officers of the Company is incorporated herein by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A.
Item 11. EXECUTIVE COMPENSATION
----------------------
The information required by Item 11 is incorporated herein by
reference to the definitive proxy statement to be filed pursuant to
Regulation 14A.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by Item 12 is incorporated herein by
reference to the definitive proxy statement to be filed pursuant to
Regulation 14A.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by Item 13 is incorporated herein by
reference to the definitive proxy statement to be filed pursuant to
Regulation 14A.
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
------------------------------------------------------------
8-K
---
(a) Documents filed as part of this report:
1. and 2. Financial Statements and Financial Statement Schedules
The information required by this section of Item 14 is set forth in
the Consolidated Financial Statements and Independent Auditors' Report
beginning at page F-1 of this Form 10-K. The index to the Financial
Statements and Schedules is set forth at page F-2 of this Form 10-K.
3. Exhibits
Exhibit
Number Exhibit
- ------- -------
3.1 Articles of Incorporation of the Registrant, as amended (A)
3.2 Amended Bylaws of the Registrant (B)
10.1 Selected Portions of the Registrant's Seller/Servicer Guide (C)
10.2 Program Servicing Agreement between the Registrant and Ryland
Mortgage Company, as amended (F)
10.3 Dividend Reinvestment and Stock Purchase Plan (D)
10.4 1992 Stock Incentive Plan (E)
10.5 Executive Deferred Compensation Plan (filed herewith)
11.1 Statement of re Computation of Per Share Earnings (filed
herewith)
21.1 List of subsidiaries and consolidated entities of the Company
(filed herewith)
23.1 Consent of KPMG Peat Marwick (filed herewith)
99.1 Analysis of Projected Yield (filed herewith)
(b) Reports on Form 8-K
None
- ------------------
(A) Incorporated herein by reference to the Company's Registration
Statement on Form S-3 (No. 33-53494) filed October 20, 1992.
(B) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992, as amended.
(C) Incorporated herein by reference to Saxon Mortgage Securities
Corporation's Registration Statement on Form S-11 (No. 33-57204)
filed January 21, 1993.
(D) Incorporated herein by reference to Exhibits to Amendment No. 2
to Company's Registration Statement on Form S-3 (No. 33-52071)
dated September 8, 1988.
(E) Incorporated herein by reference to the Proxy Statement dated
July 13, 1992 for the Special Meeting of Stockholders held August
17, 1992.
(F) Incorporated herein by reference to exhibits to the registrant's
Form 10-K for the year ended December 31, 1991 (No. 1-9819) dated
February 18, 1992.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
RESOURCE MORTGAGE CAPITAL, INC.
(Registrant)
March 21, 1994 Thomas H. Potts
Thomas H. Potts
President
(Principal Executive Officer)
March 21, 1994 Lynn K. Geurin
Lynn K. Geurin
Executive Vice President and Chief
Financial Officer
(Principal Accounting and Financial
Officer)
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Signature Capacity Date
--------- --------- ------
Thomas H. Potts Director March 21, 1994
- --------------------------
Thomas H. Potts
J. Sidney Davenport, IV Director March 21, 1994
- --------------------------
J. Sidney Davenport, IV
Richard C. Leone Director March 21, 1994
- --------------------------
Richard C. Leone
Paul S. Reid Director March 21, 1994
- --------------------------
Paul S. Reid
Donald B. Vaden Director March 21, 1994
- --------------------------
Donald B. Vaden
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Numbered Exhibit Page
- -------- ------- ----
10.5 Executive Deferred Compensation Plan
11.1 Statement of re Computation of per share earnings.
21.1 List of subsidiaries.
23.1 Consent of KPMG Peat Marwick.
99.1 Analysis of Projected Yield.
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
For Inclusion in Form 10-K
Annual Report Filed with
Securities and Exchange Commission
December 31, 1993
RESOURCE MORTGAGE CAPITAL, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements: Page
Independent Auditors' Report F-3
Consolidated Balance Sheets -- December 31, 1993 and 1992 F-4
Consolidated Statements of Operations -- For the years ended
December 31, 1993, 1992 and 1991 F-5
Consolidated Statements of Shareholders' Equity -- For the
years ended December 31, 1993, 1992 and 1991 F-6
Consolidated Statements of Cash Flows -- For the years ended
December 31, 1993, 1992 and 1991 F-7
Notes to Consolidated Financial Statements --
December 31, 1993, 1992 and 1991 F-8
Summary of Quarterly Results F-19
Schedules:
Schedule IX - Short-Term Borrowings F-20
Schedule XII - Mortgage Loans on Real Estate F-21
All other schedules are omitted because they are not applicable or not
required.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Resource Mortgage Capital, Inc.:
We have audited the consolidated financial statements of Resource
Mortgage Capital, Inc. and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedules as
listed in the accompanying index. These consolidated financial
statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Resource Mortgage Capital, Inc. and subsidiaries as of December 31, 1993
and 1992, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1993, in
conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set
forth therein.
KPMG PEAT MARWICK
Baltimore, Maryland
February 7, 1994
CONSOLIDATED BALANCE SHEETS
RESOURCE MORTGAGE CAPITAL, INC.
December 31, 1993 and 1992
(amounts in thousands except share data)
ASSETS 1993 1992
Mortgage investments:
Collateral for CMOs $ 434,698 $ 571,567
Adjustable-rate mortgage securities, net
(includes $437,811 and $203,620
held for possible sale, respectively) 2,021,196 1,199,911
Fixed-rate mortgage securities, net
(includes $19,527 and $148,877 held for
possible sale, respectively) 214,128 165,206
Other mortgage securities (includes $20,554
and $1,803 held for possible sale,
respectively) 65,625 36,461
Mortgage warehouse participations 156,688 121,624
------------- ---------
2,892,335 2,094,769
Mortgage loans in warehouse 777,769 123,627
Cash 1,549 1,135
Accrued interest receivable 13,466 8,422
Other assets 41,643 11,703
----------- ---------
$ 3,726,762 $ 2,239,656
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Collateralized mortgage obligations,
net of discounts of $12,101 and $684,
respectively $ 432,677 $ 561,441
Repurchase agreements 2,754,166 1,315,334
Notes payable 87,451 32,878
Commercial paper 148,672 115,620
Accrued interest payable 14,695 8,217
Deferred income 13,214 11,644
Other liabilities 22,855 17,085
----------- ----------
3,473,730 2,062,219
----------- ----------
SHAREHOLDERS' EQUITY
Common stock: par value $.01 per share,
50,000,000 shares authorized
19,331,932 and 16,507,100 issued and
outstanding, respectively 193 165
Additional paid-in capital 259,622 184,347
Retained earnings (deficit) (6,783) (7,075)
---------- -------
253,032 177,437
---------- -------
$ 3,726,762 $ 2,239,656
=========== ===========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
RESOURCE MORTGAGE CAPITAL, INC.
Years ended December 31, 1993, 1992 and 1991
(amounts in thousands except share data)
1993 1992 1991
---- ---- ----
Interest income:
Collateral for CMOs $ 39,538 $ 57,694 $ 91,108
Adjustable-rate mortgage securities 76,059 49,984 28,771
Fixed-rate mortgage securities 14,033 4,595 1,904
Other mortgage securities 8,275 7,681 11,109
Mortgage warehouse participations 5,719 5,854 1,156
Mortgage loans in warehouse 28,632 24,280 16,830
--------- ---------- ----------
172,256 150,088 150,878
---------- ---------- ----------
Interest and CMO-related expense:
Collateralized mortgage obligations:
Interest 37,198 55,376 85,622
Other 2,067 3,524 4,442
Repurchase agreements 74,822 47,828 29,352
Notes payable 4,299 4,727 6,901
Commercial paper 3,465 3,786 756
Other 5,386 2,192 882
-------- ------- -------
127,237 117,433 127,955
-------- ------- -------
Net margin on mortgage assets 45,019 32,655 22,923
Valuation adjustments on mortgage
assets (2,400) (7,348) (3,021)
Gain on sale of mortgage assets,
net of associated costs 25,985 26,991 10,218
Other income 734 426 133
Management fees - (4,945) (5,713)
General and administrative expenses (15,211) (9,610) (2,904)
--------- -------- --------
Net income $ 54,127 $ 38,169 $ 21,636
========= ========= =========
Net income per share $ 3.12 $ 2.73 $ 1.60
========= ========= ========
Weighted average number of
common shares outstanding 17,364,309 13,999,047 13,531,290
========== ========== ==========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
RESOURCE MORTGAGE CAPITAL, INC.
Years ended December 31, 1993, 1992 and 1991
(amounts in thousands
except share data) Additional Retained
Number of Common paid-in earnings
shares stock capital (deficit) Total
Balance at
December 31, 1990 13,529,700 $ 135 $ 128,206 $ (7,977) $ 120,364
Issuance of
common stock 12,437 - 141 - 141
Net income - 1991 - - - 21,636 21,636
Dividends declared
- $ 1.53 per share - - - (20,706) (20,706)
--------- ------ -------- -------- ----------
Balance at
December 31, 1991 13,542,137 135 128,347 (7,047) 121,435
Issuance of
common stock 2,763,931 28 53,542 - 53,570
Options exercised 201,032 2 2,458 - 2,460
Net income - 1992 - - - 38,169 38,169
Dividends declared
- $ 2.60 per share - - - (38,197) (38,197)
--------- ----- ------ -------- --------
Balance at
December 31, 1992 16,507,100 165 184,347 (7,075) 177,437
Issuance of
common stock 2,824,832 28 75,275 - 75,303
Net income - 1993 - - - 54,127 54,127
Dividends declared
- $ 3.06 per share - - - (53,835) (53,835)
---------- ------ ------ -------- --------
Balance at
December 31, 1993 19,331,932 $ 193 $ 259,622 $ (6,783) $ 253,032
========= ===== ========= ========= =========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
RESOURCE MORTGAGE CAPITAL, INC.
Years ended December 31, 1993, 1992 and 1991
(amounts in thousands)
1993 1992 1991
---- ---- ----
Operating activities:
Net income $ 54,127 $ 38,169 $ 21,636
Adjustments to reconcile net
income to net cash provided by
(used for) operating activities:
Amortization 6,763 4,190 4,764
Net (increase) decrease
in mortgage loans in warehouse (654,437) 46,108 (82,200)
Net (increase) decrease in
accrued interest, other
payables and other assets (18,514) 19,932 6,133
Net gain from sales of
mortgage investments (1,420) (1,710) (1,739)
Other 5,927 8,298 3,021
---------- --------- ---------
Net cash provided by (used
for) operating activities (607,554) 114,987 (48,385)
---------- --------- --------
Investing activities:
Collateral for CMOs:
Purchases of mortgage
loans subsequently
securitized (104,650) (171,783) (73,819)
Principal payments on
collateral 226,198 384,222 244,997
Net change in funds held
by trustees 12,909 (7,347) (7,128)
---------- --------- --------
134,457 205,092 164,050
Proceeds from sale of
CMOs, net of noncash items - 1,113 -
Purchase of other mortgage
investments (1,346,580) (1,004,765) (720,627)
Principal payments on other
mortgage investments 141,926 63,084 50,457
Proceeds from sales of other
mortgage investments 263,931 302,394 195,769
Capital expenditures (675) (1,595) -
---------- ---------- --------
Net cash used for investing
activities (806,941) (434,677) (310,351)
---------- ---------- ---------
Financing activities:
Collateralized mortgage
obligations:
Proceeds from issuance
of securities 107,670 169,494 58,544
Principal payments on
securities (235,807) (374,460) (236,534)
--------- --------- ---------
(128,137) (204,966) (177,990)
Proceeds from short-term
borrowings, net 1,526,456 502,166 557,094
Proceeds from stock
offerings 75,303 55,080 141
Dividends paid (58,713) (32,219) (20,026)
---------- -------- --------
Net cash provided by
financing activities 1,414,909 320,061 359,219
--------- ------- --------
Net increase in cash 414 371 483
Cash at beginning of year 1,135 764 281
--------- ------- -------
Cash at end of year $ 1,549 $ 1,135 $ 764
========== ========== ========
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESOURCE MORTGAGE CAPITAL, INC.
December 31, 1993, 1992 and 1991
(amounts in thousands except share data)
NOTE 1 - THE COMPANY
The Company operates a mortgage conduit and invests in a portfolio of
residential mortgage-related assets. The Company's primary strategy
is to use its mortgage conduit operations, which involve the purchase
and securitization of residential mortgage loans, to create
investments for its portfolio.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of
Resource Mortgage Capital, Inc., its wholly owned subsidiaries
(together, Resource Mortgage), and certain other entities
(collectively, the Company). All significant intercompany balances
and transactions have been eliminated in consolidation.
Certain amounts for 1992 and 1991 have been reclassified to conform
to the presentation for 1993.
Federal income taxes
- --------------------
Resource Mortgage has elected to be taxed as a real estate investment
trust (REIT) under the Internal Revenue Code. As a result, Resource
Mortgage generally will not be subject to federal income taxation at
the corporate level to the extent that it distributes at least 95
percent of its taxable income to its shareholders and complies with
certain other requirements. Accordingly, no provision has been made
for income taxes for Resource Mortgage and its qualified REIT
subsidiaries in the accompanying consolidated financial statements.
Mortgage Assets
- ---------------
Collateral for CMOs, adjustable-rate mortgage securities, fixed-rate
mortgage securities, certain of the other mortgage securities and
mortgage warehouse participations held for investment are carried at
their outstanding principal balances, net of adjustments for
premiums, discounts and deferred hedging gains or losses. Mortgage
loans in warehouse, adjustable-rate mortgage securities, fixed-rate
mortgage securities and other mortgage securities held for sale are
carried at the lower of aggregate cost or market value. Other
mortgage securities are carried at the lower of amortized cost or the
estimated future net cash flows to be received on a gross
undiscounted basis. The amortized cost includes deferred hedging
gains and losses.
Income on other mortgage securities is accrued using the effective
yield method based upon estimates of future net cash flows to be
received over the estimated remaining life of the mortgage
securities. Estimated effective yields are changed prospectively
consistent with changes in current interest rates and current
prepayment assumptions on the underlying mortgage collateral used by
various dealers in mortgage-backed securities. Reductions in
carrying value are made when the total projected cash flow is less
than the Company's basis, based on either the dealers' prepayment
assumptions or, if it would accelerate such adjustments, management's
expectations of interest rates and future prepayment rates.
Price premiums and discounts
- ----------------------------
Price premiums and discounts on mortgage investments are deferred as
an adjustment to the carrying value of the investment and are
amortized into interest income over their contractual lives using the
effective yield method adjusted for the effects of prepayments.
Price premiums and discounts on CMOs are deferred as an adjustment to
the carrying value of the investment and are amortized into interest
expense over the lives of the CMOs using the effective yield method.
CMOs are carried at their outstanding principal balance, net of any
unamortized price premiums and discounts.
Deferred issuance costs
- -----------------------
Costs incurred in connection with the issuance of CMOs are deferred
and amortized over the estimated lives of the CMOs using the interest
method adjusted for the effects of prepayments. These costs are
included in other assets in the consolidated balance sheets.
Deferred income
- ---------------
The Company defers the gains related to sales of convertible
adjustable-rate mortgage loans (ARMs) which the Company will
repurchase if the ARM converts to a fixed-rate mortgage loan. The
deferred gains are recognized over the remaining period using the
straight-line method until the conversion option expires, generally
five years.
Net income per share
- --------------------
Net income per share is computed based on the weighted average number
of common shares outstanding during the periods.
Hedging transactions
- --------------------
The Company may enter into forward delivery contracts and into
financial futures and options contracts for the purpose of reducing
exposure to the effect of changes in interest rates on mortgage loans
which the Company has purchased or has committed to purchase. Gains
and losses on such contracts relating to mortgage loans held for
investment are deferred as an adjustment of the carrying value of the
related mortgage loans and amortized into interest income using the
effective yield method over the expected remaining life of the
mortgage loans. Gains and losses on such contracts relating to
mortgage loans which are held for sale are recognized when the loans
are sold.
The Company may enter into financial futures and options contracts in
order to reduce exposure to the effect of changes in short-term
interest rates on a portion of its variable-rate debt. Gains and
losses on these contracts relating to variable-rate debt are deferred
as an adjustment of the carrying value of the debt and are amortized
into interest expense over the period to which such contracts relate.
Cash flows from hedging transactions are included with the cash flows
related to the hedged item in the consolidated statements of cash
flows.
Interest rate cap agreements
- ----------------------------
The Company may enter into interest rate cap agreements to limit the
Company's risks related to certain mortgage investments should short-
term interest rates rise above specified levels. The amortization of
the cost of such cap agreements will reduce interest income on the
related investment over the lives of the cap agreements. The
remaining unamortized cost of the cap agreements is included with the
related investment in the consolidated balance sheets.
Fair value of financial instruments
- -----------------------------------
Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments, requires that the Company
disclose estimated fair values for its financial instruments. Many
factors which affect the determination of fair value estimates are
based on management's judgments as of the respective balance sheet
dates. Therefore, there can be no assurance that fair value amounts
disclosed would be realized in the event of these instruments being
liquidated.
NOTE 3 - MORTGAGE INVESTMENTS
Collateral for CMOs
- -------------------
Collateral for CMOs consists of fixed-rate mortgage loans secured by
first liens on single-family and multi-family residential housing and
fixed-rate mortgage securities guaranteed by U.S. government
agencies. All collateral for CMOs is pledged to secure repayment of
the CMOs. All principal and interest on the collateral is remitted
directly to a trustee and, together with any reinvestment income
earned thereon, is available for payment on the CMOs. The Company's
exposure to loss on collateral for CMOs is limited due to various
types of insurance arrangements on the collateral for CMOs and
because losses not covered by such arrangements are generally borne
by the CMO bondholders. Approximately 42% of the mortgage properties
underlying the whole loan CMO collateral at December 31, 1993 are
located in California.
The components of collateral for CMOs are summarized as follows at
December 31:
1993 1992
----- -----
Mortgage collateral $ 415,378 $ 539,381
Funds held by trustees 12,010 24,919
Accrued interest receivable 3,206 4,280
--------- ---------
430,594 568,580
Unamortized premiums and discounts, net 4,104 2,987
--------- ---------
Collateral for CMOs $ 434,698 $ 571,567
======== ==========
The mortgage collateral, together with certain funds held by
trustees, collateralized 34 series of CMOs at December 31, 1993. As
of December 31, 1993, the net investment in CMOs (collateral for CMOs
of $434,698 plus deferred issuance costs of $2,208 less CMOs of
$432,677) had an estimated fair value of $14,127. As of December 31,
1992, the net investment in CMOs (collateral for CMOs of $571,567
plus deferred issuance costs of $1,352 less CMOs of $561,441) had an
estimated fair value of $11,142. These estimates are determined by
calculating the present value of the projected net cash flows of the
instruments using appropriate discount rates. The discount rates
used are based on management's estimates of market rates, and the net
cash flows are projected utilizing the current interest rate
environment and forecasted prepayment rates.
During the years ended December 31, 1993 and 1992, the Company
pledged $102,194 and $170,380, respectively, of mortgage loans as
collateral for CMOs.
The average effective rate of interest income for all CMO collateral
was 9.1%, 9.8% and 10.0% for the years ended December 31, 1993, 1992
and 1991, respectively.
Adjustable-rate mortgage securities
- -----------------------------------
Adjustable-rate mortgage securities consist of mortgage certificates
secured by adjustable-rate mortgages (ARMs) on single-family
residential housing. During 1993 and 1992, the Company added
$713,678 and $749,162, respectively, aggregate principal of
adjustable-rate mortgage securities from securitizations of mortgage
loans purchased through its conduit operations. These securities had
pass-through rates ranging from 3.5% to 5.7% and 4.9% to 6.4% at the
time of issuance in 1993 and 1992, respectively.
The Company purchases LIBOR-based interest-rate cap agreements to
limit its exposure to the lifetime interest-rate cap on certain of
its adjustable-rate mortgage securities. Under these agreements, the
Company will receive additional cash flow should six month LIBOR
increase above the contract rates of the cap agreements which range
from 9.0% to 11.5%. The aggregate notional amount of the cap
agreements is $1,163,500 and the cap agreements expire from 1999 to
2004. The amortization of the cost of the cap agreements will reduce
interest income on the adjustable-rate mortgage securities over the
lives of the agreements. The Company has credit risk to the extent
that the counterparties to the cap agreements do not perform their
obligation under the agreements. If one of the counterparties does
not perform, the Company would not receive the cash to which it would
otherwise be entitled under the conditions of the agreement. The
carrying value of these agreements at December 31, 1993 and 1992 was
$18,875 and $13,964, respectively.
The fair value of adjustable-rate mortgage securities was estimated
to be $2,040,390 and $1,220,898 at December 31, 1993 and December 31,
1992, respectively. These estimates are based on market prices
provided by certain dealers.
The average effective rate of interest income for adjustable-rate
mortgage securities was 5.0%, 5.9% and 7.9% for the years ended
December 31, 1993, 1992 and 1991, respectively.
Fixed-rate mortgage securities
- ------------------------------
Fixed-rate mortgage securities consist of mortgage certificates
secured by fixed-rate mortgages on single-family residential housing.
The aggregate effective rate of interest income was 7.6%, 9.2% and
10.6% for the years ended December 31, 1993, 1992 and 1991,
respectively. The fair value of fixed-rate mortgage securities was
estimated to be $217,711 and $169,973 at December 31, 1993 and 1992,
respectively. These estimates were based on market prices provided
by certain dealers.
Other mortgage securities
- -------------------------
Other mortgage securities include mortgage derivative securities and
mortgage residual interests. Mortgage derivative securities are
classes of CMOs, mortgage pass-through certificates, or mortgage
certificates that pay to the holder substantially all interest (i.e.,
an interest-only security), or substantially all principal (i.e., a
principal-only security). Mortgage residual interests represent the
right to receive the excess of (i) the cash flow from the collateral
pledged to secure related mortgage-backed securities, together with
any reinvestment income thereon, over (ii) the amount required for
principal and interest payments on the mortgage-backed securities or
repurchase arrangements, together with any related administrative
expenses.
At December 31, 1993 and 1992, the carrying value of the Company's
mortgage derivative securities was $37,816 and $11,905 respectively.
The aggregate effective yield for the mortgage derivative securities
was 30.1% and 29.3% for the years ended December 31, 1993 and 1992,
respectively.
At December 31, 1993 and 1992, the carrying value of the Company's
mortgage residual interests was $27,809 and $25,382, respectively.
The aggregate effective yield for the mortgage residual interests was
11.1% and 12.3% for the years ended December 31, 1993 and 1992,
respectively.
The fair value of other mortgage securities was estimated to be
$61,743 and $30,570 at December 31, 1993 and 1992, respectively.
These estimates were based on both dealer quotes and the present
value of the projected cash flows of the instruments using
appropriate discount rates. The discount rates used are based on
management's estimates of market rates, and the net cash flows are
projected utilizing the current interest rate environment and
forecasted prepayment rates. The estimated undiscounted cash flows
of other mortgage securities exceeded the carrying value at December
31, 1993 and 1992.
In 1993, 1992 and 1991 the Company recorded valuation adjustments of
$2,400, $7,348 and $3,021, respectively, relating to certain mortgage
investments. These adjustments were recorded because the expectation
of future prepayment rates would result in the Company receiving less
cash on those investments than its amortized basis in the
investments.
The average effective rate of interest income for other mortgage
securities was 19.2%, 16.3% and 17.3% for the years ended December
31, 1993, 1992 and 1991, respectively.
Mortgage warehouse participations
- ---------------------------------
The Company invests in participations in existing warehouse lines of
credit from approved warehouse lenders. These revolving lines of
credit provide funds to established mortgage banking companies to
carry mortgage loans from the time of settlement until the loans are
sold to permanent investors. These lines of credit are secured by
the related mortgage loans.
At December 31, 1993 and 1992, the Company had acquired $185,000 and
$146,500, respectively, of participations. The amount funded under
these participations at December 31, 1993 and 1992 was $156,688 and
$121,624 respectively, at a weighted average interest rate of 5.1%
and 5.4%, respectively. The carrying amount of the mortgage
warehouse participations approximates fair value at December 31, 1993
and 1992.
Mortgage investments held for possible sale
- -------------------------------------------
Mortgage investments which the Company may not hold to maturity are
considered investments held for possible sale. These investments
are carried at the lower of cost or estimated market value
determined on an aggregate basis. At December 31, 1993 and 1992,
these investments had an approximate market value of $481,341 and
$355,902. Mortgage investments held for possible sale may be sold
by the Company depending upon market conditions and liquidity
requirements. The fair value of mortgage investments held for
possible sale is estimated as discussed in their respective
categories above.
During 1993, 1992 and 1991, the Company sold $72,473, $282,110 and
$152,520 of aggregate principal of adjustable-rate mortgage
securities and recognized net gains of $285, $1,506 and $3,230 on
these sales, respectively. During 1993, the Company sold $184,332 of
aggregate principal of fixed-rate mortgage securities and recognized
a net gain of $1,135 on these sales. No fixed-rate mortgage
securities were sold during 1992 or 1991. During 1992, the Company
sold $38,447 of collateral for CMOs, net of $37,334 of associated
borrowings for a net loss of $258. No collateral for CMOs was sold
in 1993 or 1991. Additionally, during 1992 and 1991, the Company sold
certain other mortgage securities with aggregate principal amounts of
$19,059 and $34,683 for net gains of $462 and $1,491, respectively.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, which addresses the
accounting and reporting for investments in debt and equity
securities. This Statement is effective for fiscal years beginning
after December 15, 1993 and has not yet been applied by the Company.
The Company does not anticipate that its application of this
Statement will have a material impact on its results of operations or
its financial condition.
Discount on mortgage securities
- -------------------------------
On certain mortgage securities collateralized by mortgage loans
purchased by the Company for which mortgage pool insurance is used as
the primary source of credit enhancement, the Company has limited
exposure to certain risks not covered by such insurance. An estimate
of possible losses is made at the time loans are securitized and
securities are retained in the portfolio at a discount to compensate
the Company for this risk. Such discount results in a reduction in
gain on sale of mortgage assets in the statement of operations. The
estimate is based on management's judgment, and is evaluated
periodically for factors such as geographic location and industry
loss experience. At December 31, 1993 the discount totaled $19,682
of which $17,240 was included in adjustable-rate mortgage securities,
net and $2,442 was included in fixed-rate mortgage securities, net.
In prior periods, these amounts were included with "Reserve for
excluded risks" on the consolidated balance sheets.
NOTE 4 - MORTGAGE LOANS IN WAREHOUSE
The Company purchases fixed-rate and adjustable-rate loans secured by
first mortgages or first deeds of trust on single-family attached or
detached residential properties and originates fixed-rate loans
secured by first mortgages or deeds of trust on multi-family
residential properties. Approximately 37% of the properties
collateralizing mortgage loans in warehouse at December 31, 1993 were
located in California. The Company funded mortgage loans with an
aggregate principal balance of $4,093,714, $5,334,174 and $2,491,434
during 1993, 1992 and 1991, respectively.
During 1993, 1992 and 1991 the Company sold mortgage loans with an
aggregate principal balance of $3,332,200, $5,374,543 and $2,414,189,
respectively, as collateral for mortgage securities and as whole loan
pools. In connection with the issuance of these securities, the
Company retained adjustable-rate mortgage securities, fixed-rate
mortgage securities and other mortgage securities with aggregate
principal amounts of $1,031,086, $992,514 and $643,665 in 1993, 1992
and 1991, respectively. The Company sold the remaining portion of the
securities issuances. The Company recognized net gains on these
securitizations and whole loan sales of $24,565, $25,280 and $8,580
net of related costs and taxes of $3,164, $7,048 and $3,828 in 1993,
1992 and 1991, respectively.
As of December 31, 1993, the Company had entered into commitments to
purchase single-family mortgage loans of approximately $381,654.
These commitments generally had original terms of not more than 60
days. Additionally, the Company had entered into commitments to
purchase multi-family mortgage loans of approximately $22,456. These
had original terms of not more than two years. The Company may hedge
the commitments to limit its exposure to adverse market movements. As
of December 31, 1993, the Company had outstanding for hedging purposes
forward delivery contracts with an aggregate gross contract amount of
$361,000 and futures contracts with an aggregate gross contract amount
of $3,088. At December 31, 1993, the estimated fair value of the
outstanding forward delivery contracts and futures contracts
approximated their carrying amounts. These estimates were determined
using dealer quotes.
The fair value of mortgage loans in warehouse is estimated to be
$779,325 and $125,475 at December 31, 1993 and 1992, respectively.
The fair value of commitments approximates the commitment price.
These estimates are determined by applying an estimated weighted
average price based on actual mortgage loan transactions and dealer
quotes.
The Company is exposed to losses to the extent that mortgage loans in
warehouse are secured by properties that were damaged as a result of
the January 1994 earthquake in the Los Angeles area. The Company does
not expect that any losses due to this earthquake will have a material
effect on its financial position or results of operations.
NOTE 5 - COLLATERALIZED MORTGAGE OBLIGATIONS
Each series of a CMO may consist of various classes. Payments
received on the mortgage collateral and any reinvestment income
thereon are used to make payments on the CMOs (see Note 3). The
obligations under the CMOs are payable solely from the collateral for
CMOs and are otherwise non-recourse to the Company. The maturity of
each class is directly affected by the rate of principal prepayments
on the related mortgage collateral. Each series is also subject to
redemption according to specific terms of the respective indentures.
As a result, the actual maturity of any class of a CMO series is
likely to occur earlier than its stated maturity.
At December 31, 1993 and 1992, the Company had outstanding, $408,483
and $532,679, respectively, of fixed-rate CMO classes with interest
rates ranging from 6.5% to 11.5%. At December 31, 1993 and 1992, the
Company had outstanding $7,875 and $22,926, respectively, of variable-
rate CMO classes with interest rates of 3.9% and 4.0%, respectively.
The variable-rates are based on LIBOR for one-month deposits. The
total number of CMO series outstanding as of December 31, 1993 and
1992 was 34 and 37, respectively. Stated maturities for these series
ranged from 1998 - 2024 and 1998 - 2023 at December 31, 1993 and 1992,
respectively.
At December 31, 1993 and 1992, accrued interest payable on CMOs was
$4,218 and $6,520, respectively, which is included in collateralized
mortgage obligations in the consolidated balance sheets.
The average effective rate of interest expense for CMOs was 8.5%, 9.2%
and 9.5% for the years ended December 31, 1993, 1992 and 1991,
respectively.
NOTE 6 - REPURCHASE AGREEMENTS AND NOTES PAYABLE
The Company utilizes repurchase agreements to finance certain of its
mortgage investments. These repurchase agreements may be secured by
adjustable-rate mortgage securities, fixed-rate mortgage securities,
mortgage loans, and by certain other mortgage securities. These
agreements bear interest at rates indexed to LIBOR. At December 31,
1993, the repurchase agreements had the following maturities:
Within 30 days $ 1,836,224
30 - 90 days 803,264
over 90 days 114,678
-----------
$ 2,754,166
===========
If the counterparty to the repurchase agreement fails to return the
collateral, the ultimate realization of the security by the Company
may be delayed or limited.
At December 31, 1993, the Company had a $115 million line of credit to
finance the purchase of mortgage loans that expired on March 1, 1994,
and revolving repurchase agreements of $300 million and $100 million
maturing on June 25, 1994 and September 12, 1994, respectively.
During February 1994, the Company replaced the revolving warehouse
line of credit with a $150 million credit facility, which also allows
the Company to borrow up to $30 million on an unsecured basis for
working capital purposes. This new credit facility expires in
February 1995. The Company expects that these credit facilities will
be renewed if necessary, at their respective expiration dates,
although there can be no assurance of such renewal.
The following table summarizes the Company's repurchase agreements and
notes payable outstanding at December 31, 1993 and 1992:
Borrowings
- ----------
Amount Weighted Average Carrying Value
Outstanding Annual Rate of Collateral
----------- ---------------- --------------
December 31, 1993:
Repurchase agreements
secured by:
Mortgage loans in
warehouse $ 586,275 4.36% $ 648,733
Adjustable-rate
mortgage securities 1,951,441 3.67% 2,005,644
Fixed-rate mortgage
securities 204,365 5.09% 209,372
Other mortgage
securities 12,085 3.75% 29,105
------------ ------ ------------
Total repurchase
agreements $ 2,754,166 $ 2,892,854
=========== ===========
Notes payable secured by:
Mortgage loans $ 87,451 5.00% $ 129,036
=========== ===========
December 31, 1992:
Repurchase agreements secured by:
Mortgage loans
in warehouse $ 45,397 4.81% $ 55,004
Adjustable-rate
mortgage securities 1,113,678 3.93% 1,162,118
Fixed-rate mortgage
securities 149,222 4.23% 160,461
Other mortgage
securities 7,037 4.22% 19,294
----------- -----------
Total repurchase
agreements $ 1,315,334 $ 1,396,877
Notes payable secured by:
Mortgage loans $ 32,878 5.99% $ 68,623
=========== ===========
The carrying value of repurchase agreements and notes payable
approximates fair value at December 31, 1993.
The following information relates to repurchase agreements
collateralized by mortgage assets into which the Company had entered
at December 31, 1993.
Excess Market Value
Weighted Average of Assets over
Days to Maturity from Repurchase
Counterparty December 31, 19 Obligation
- ------------------- ------------------------ --------------------
Kidder Peabody 27 $ 33,015
Lehman Brothers 34 70,051
NOTE 7 - COMMERCIAL PAPER
The Company issues commercial paper to support its investments in
mortgage warehouse loans and participations. An agreement with a
bond guarantor and syndicate of commercial banks provides 100%
liquidity support for the commercial paper and for the Company's
obligations under its participations. The liquidity agreement
provides for maximum outstanding commercial paper of $250,000. The
commercial paper is non-recourse to the Company except for the assets
pledged.
At December 31, 1993 and 1992, the Company had outstanding $148,672
and $115,620 of commercial paper, respectively, with weighted average
interest rates of 3.3% and 4.1%, respectively. The remaining
maturity was 3 days at December 31, 1993 and ranged from 4 to 8 days
at December 31, 1992. The outstanding commercial paper, which was
secured by mortgage warehouse participations and other assets with a
carrying value of $156,688 and $121,624 at December 31, 1993 and
1992, respectively, approximates fair value.
NOTE 8 - ALLOWANCE FOR LOSSES
The Company has limited exposure to losses due to fraud during the
origination of a mortgage loan. The Company has established a loss
allowance for such losses. An estimate for losses is made at the
time loans are sold or securitized, and the loss allowance is
adjusted accordingly through a reduction in gain on sale of mortgage
assets. This estimate is based on management's judgment and the
allowance is evaluated periodically. The loss allowance is included
in the consolidated balance sheets in "Other liabilities." This
allowance was included in prior periods with "Reserve for Excluded
Risks" in the consolidated balance sheets.
The Company makes various representations and warranties relating to
the sale or securitization of mortgage loans or other assets secured
by real property. To the extent the Company were to breach any of
these representations or warranties, and such breach could not be
cured within the allowable time period, the Company would be required
to repurchase such mortgage assets, and could incur losses.
The change in the allowance during 1993 is summarized below:
Balance December 31, 1992 $ 4,104
Provision 1,992
Losses charged off (809)
-------
Balance December 31, 1993 $ 5,287
=======
NOTE 9 - DEFERRED INCOME
At December 31, 1993 and 1992, the Company had deferred income of
$13,214 and $11,644, respectively, related to the sale of convertible
ARMs which the Company will repurchase at par if the ARMs convert to
a fixed-rate mortgage loan. Upon conversion, the net interest rate
of the mortgage loan will be 1/8% higher than the Company's then
current par coupon. The deferred amounts are net of related costs
and taxes of $7,815 and $7,404 at December 31, 1993 and 1992
respectively.
NOTE 10 - COMMON STOCK AND RELATED MATTERS
During 1993, the Company issued 2,824,832 new shares of common stock
for net proceeds of $75,303. During 1993, 1992 and 1991, dividends
of $53,835 or $3.06 per share, $38,197 or $2.60 per share and $20,706
or $1.53 per share, respectively, were declared and represent
ordinary income for federal income tax purposes.
Pursuant to the Company's 1992 Stock Incentive Plan (the "Incentive
Plan"), the Compensation Committee of the Board of Directors may
grant to eligible employees of the Company, its subsidiaries and
affiliates for a period of ten years beginning June 17, 1992 stock
options, stock appreciation rights ("SARs") and restricted stock
awards. An aggregate of 675,000 shares of common stock would be
available for distribution pursuant to stock options, SARs and
restricted stock. The shares of common stock subject to any option
or SAR that terminates without a payment being made in the form of
common stock would become available for distribution pursuant to the
Incentive Plan. The Compensation Committee of the Board of
Directors may also grant dividend equivalent rights ("DERs") in
connection with the grant of options or SARs. These SARs and
related DERs generally become exercisable as to 20 percent of the
granted amounts each year after the date of the grant.
The following table presents a summary of the SARs
outstanding at December 31, 1993.
SARs Exercise Price
------ --------------
December 31, 1991 - -
Granted 225,000 $ 8 3/4 - 17 7/8
SARs exercised (2,000) 8 3/4
------- ----------------
December 31, 1992 223,000 8 3/4 - 17 7/8
Granted 45,910 29
Forfeiture (6,000) 8 3/4
SARs exercised (26,600) 8 3/4 - 17 7/8
-------- ---------------
December 31, 1993 236,310 $ 8 3/4 - 29
======= ===============
The Company expensed $1,640 and $404 for SARs and DERs during 1993
and 1992, respectively. There were no stock options outstanding as
of December 31, 1993. The number of SARs exercisable at December 31,
1993 and 1992 was 31,200 and 12,000, respectively.
The Company is authorized to issue up to 50,000,000 shares of
preferred stock. No shares of preferred stock have been issued.
NOTE 11 - EMPLOYEE SAVINGS PLAN
The Company provides an employee savings plan under Section 401(k) of
the Internal Revenue Code. The employee savings plan allows eligible
employees to defer up to 12% of their income on a pretax basis. The
Company matched the employees' contribution, up to 6% of the
employees' income. The Company may also make discretionary
contributions based on the profitability of the Company. The total
expense related to the Company's matching and discretionary
contributions in 1993 and 1992 was $108 and $78, respectively. The
Company does not provide post-employment or post-retirement benefits
to its employees.
NOTE 12 - SUPPLEMENTAL CONSOLIDATED STATEMENTS OF
CASH FLOWS INFORMATION
Year Ended December 31,
1993 1992 1991
---- ---- ----
Supplemental disclosure of cash
flow information:
Cash paid for interest $ 115,608 $ 112,192 $ 120,675
========= ========= =========
Supplemental disclosure of
non-cash activities:
Proceeds from sale of
collateral for CMOs $ - $ 38,447 $ -
Repayment of collateralized
mortgage obligations - 37,334 -
--------- --------- ---------
Proceeds from sale of CMOs, net $ - $ 1,113 $ -
========= ========= =========
Common stock issued for
exercise of stock options $ - $ 950 $ -
========= ========= =========
NOTE 13 - ANALYSIS OF NET INTEREST ON MORTGAGE ASSETS
The following tables summarize the amount of change on interest
income and interest expense due to changes in interest rates versus
changes in volume:
1993 to 1992 Rate Volume Total
- ----------------------------------- --------- -------- ------
Collateral for CMOs $ (3,529) $ (14,627) $ (18,156)
Adjustable-rate mortgage securities (6,302) 32,3772 6,075
Fixed-rate mortgage securities (652) 10,090 9,438
Other mortgage securities 1,151 (557) 594
Mortgage warehouse participations (693) 558 (135)
Mortgage loans in warehouse (2,151) 6,503 4,352
-------- -------- --------
Total interest income (12,176) 34,344 22,168
-------- -------- --------
Collateralized mortgage
obligations (4,078) (14,100) (18,178)
Repurchase agreements:
Adjustable-rate
mortgage securities (3,952) 23,336 19,384
Fixed-rate
mortgage securities (122) 6,692 6,570
Other mortgage securities (88) (181) (269)
Mortgage loans in warehouse (1,326) 2,635 1,309
Notes payable (253) (175) (428)
Commercial paper (593) 272 (321)
------- ------- ------
Total interest expense (10,412) 18,479 8,067
------- ------- ------
Net interest on mortgage assets $ (1,764) $ 15,865 $ 14,101
========= ======== ========
1992 to 1991 Rate Volume Total
- ------------------------------------ --------- --------- -------
Collateral for CMOs $ (2,391) $ (31,023) $ (33,414)
Adjustable-rate
mortgage securities (5,028) 26,241 21,213
Fixed-rate mortgage securities (208) 2,899 2,691
Other mortgage securities (645) (2,783) (3,428)
Mortgage warehouse participations (193) 4,891 4,698
Mortgage loans in warehouse (2,404) 9,854 7,450
-------- ---------- --------
Total interest income (10,869) 10,079 (790)
-------- ---------- ---------
Collateralized mortgage obligations (2,715) (27,531) (30,246)
Repurchase agreements:
Adjustable-rate mortgage securities (3,900) 15,571 11,671
Fixed-rate mortgage securities (146) 1,401 1,255
Other mortgage securities (424) (697) (1,121)
Mortgage loans in warehouse (1,032) 7,703 6,671
Notes payable (1,777) (397) (2,174)
Commercial paper (154) 3,184 3,030
------- --------- ---------
Total interest expense (10,148) (766) (10,914)
------- --------- ---------
Net interest on mortgage assets $ (721) $ 10,845 $ 10,124
======== ======== =========
Note: The change in interest income and interest expense due
to changes in both volume and rate, which cannot be
segregated, has been allocated proportionately to the change
due to volume and the change due to rate.
Summary of Quarterly Results
(unaudited)
(amounts in thousands except share data)
Year ended December 31, 1993
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Operating results:
Total revenues $ 45,051 $ 46,452 $ 52,221 $ 55,251
Net margin on
mortgage assets 10,510 10,594 11,356 12,559
Net income 12,499 12,558 13,848 15,222
Net income
per share 0.76 0.76 0.80 0.80
Cash dividends
declared per share 0.50 0.75 0.77 1.04(1)
Mortgage loans
funded 863,585 847,509 1,192,022 1,190,598
Year ended
December 31, 1992
- ------------------
Operating results:
Total revenues $ 44,194 $ 47,389 $ 44,499 $ 41,423
Net margin on
mortgage assets 5,976 8,413 8,186 10,080
Net income 7,054 8,882 10,824 11,409
Net income
per share 0.52 0.66 0.77 0.78
Cash dividends
declared per share 0.30 0.55 0.65 1.10(2)
Mortgage loans
funded 895,057 1,793,624 1,490,239 1,155,254
- ------------------
(1) Includes a dividend of $0.26 which was declared in
December 1993 and paid in January 1994.
(2) Includes a dividend of $0.35 which was declared in
December 1992 and paid in January 1993.
RESOURCE MORTGAGE CAPITAL, INC. SCHEDULE IX - SHORT-TERM
BORROWINGS
For the Years Ended December 31, 1993, 1992 and 1991
(in thousands)
Maximum Average Weighted
Category of Weighted Amount Amount Average
Aggregate Balance Average Outstanding Outstanding Interest Rate
Short-Term at End Interest During the During the During the
Borrowings of Period Rate Period Period (1) Period (2)
- ------------------------------------------------------------------------
1993
- ----
Notes payable
to banks 87,451 5.00% 129,733 80,220 5.36%
Repurchase
agreements 2,754,166 3.92% 2,754,166 1,931,034 3.87%
Commercial
Paper 148,672(3) 3.45% 148,672 106,464 3.25%
1992
- ----
Notes payable
to banks $ 32,878 5.99% $ 147,601 $ 83,398 5.67%
Repurchase
agreements 1,315,334 4.00% 1,507,767 1,057,943 4.52%
Commercial
Paper 115,620(3) 4.07% 132,325 100,057 3.78%
1991
- ----
Notes payable
to banks $ 147,601 5.86% $ 147,601 $ 88,761 7.77%
Repurchase
agreements 637,599 5.61% 637,599 454,073 6.46%
Commercial
Paper 82,981(3) 5.97% 82,981 14,016 5.39%
- ------------------
(1) Calculation of average amount outstanding during the period based
upon the daily weighted average principal amount of borrowings.
(2) Calculation of weighted average interest rate during the period
based upon the total interest incurred (including the effects of
hedging transactions) divided by the daily weighted average
principal balance of borrowings.
(3) Net of discount.
RESOURCE MORTGAGE CAPITAL, INC.
SCHEDULE XII - MORTGAGE LOANS ON REAL ESTATE
December 31, 1993
(amounts in thousands except number of loans)
Carrying Principal Amount
Number Final Amount of of Loans Subject
of Interest Maturity Mortgage to Delinquent
Description Loans Rate Date Loans Principal or Interest
- ------------------------------------------------------------------------
Outstanding
principal
balance of
Mortgage Loans
$ 0 - $ 50 135 3.80% -
8.38% Varies $ 5,955 -
51 - 100 1,068 3.25% -
11.38% Varies 82,791 252
101 - 150 1,080 3.13% -
10.63% Varies 135,705 660
151 - 200 718 3.25% -
9.00% Varies 124,358 162
201 - 250 660 3.38% -
11.38% Varies 149,526 451
251 - 300 333 3.25% -
11.50% Varies 89,847 1,086
301 - 350 152 3.50% -
8.84% Varies 49,515 318
351 - 400 122 3.63% -
8.75% Varies 45,728 -
401 - 450 67 3.63% -
8.25% Varies 28,304 -
451 - 500 42 4.00% -
8.25% Varies 20,000 -
Over $ 500 59 3.75% -
9.35% Varies 46,040 -
----- ------ ---------- ------------
4,436 $ 777,769 $ 2,929
All mortgage loans in warehouse are conventional mortgage loans secured
by single-family or multi-family dwellings with initial maturities of 15
to 30 years. Of the carrying amount, $348,673 or 45% are fixed-rate and
$429,096 or 55% are adjustable-rate mortgage loans in warehouse. The
Company believes that its mortgage pool insurance and allowance are
adequate to cover any exposure on delinquent mortgage loans in
warehouse. A summary of activity of mortgage loans for the years ended
December 31, 1993, 1992 and 1991 is as follows:
Balance at December 31, 1990 $ 87,079
Mortgage loans purchased 2,498,149
Collection of principal (3,041)
Mortgage loans sold (2,412,561)
Balance at December 31, 1991 169,626
Mortgage loans purchased 5,342,167
Collection of principal (2,388)
Mortgage loans sold (5,385,778)
-------------
Balance at December 31, 1992 123,627
Mortgage loans purchased 4,132,101
Collection of principal (5,516)
Mortgage loans sold (3,472,443)
Balance at December 31, 1993 $ 777,769
The geographic distribution of the Company's mortgage loans
in warehouse at December 31, 1993 is as follows:
State Number of Loans Principal Amount
- ----- --------------- ----------------
Alabama 4 $ 1,042
Arizona 60 12,104
Arkansas 1 180
California 1,868 384,367
Colorado 94 15,544
Connecticut 8 1,808
Delaware 16 2,443
District of Columbia 31 7,975
Florida 663 72,241
Georgia 40 5,876
Hawaii 4 1,204
Idaho 18 1,362
Illinois 49 8,000
Indiana 16 2,447
Louisiana 1 238
Maryland 340 67,920
Massachusetts 7 905
Michigan 8 1,235
Minnesota 20 1,977
Missouri 1 52
Nevada 36 6,757
New Hampshire 1 97
New Jersey 97 15,527
New Mexico 10 1,484
New York 116 21,843
North Carolina 50 7,630
Ohio 22 4,500
Oklahoma 7 698
Oregon 138 15,231
Pennsylvania 33 4,786
Rhode Island 2 777
South Carolina 50 8,314
Tennessee 2 218
Texas 113 18,792
Utah 10 1,404
Virginia 308 57,636
Washington 188 23,489
Wisconsin 2 1,137
Wyoming 2 560
Discount (2,049)
---- ---------
Total 4,436 $ 777,769
Exhibit 10.5
RESOURCE MORTGAGE CAPITAL, INC.
EXECUTIVE DEFERRED COMPENSATION PLAN
Effective July 1, 1993
RESOURCE MORTGAGE CAPITAL, INC.
EXECUTIVE DEFERRED COMPENSATION PLAN
Table of Contents
------------------
Page
----
ARTICLE I PURPOSE AND EFFECTIVE DATE 1
1.1 Purpose 1
1.2 Effective Date 1
ARTICLE II DEFINITIONS 2
2.1 Definitions 2
ARTICLE III ELIGIBILITY 5
3.1 Eligibility 5
ARTICLE IV DEFERRED COMPENSATION 6
4.1 Voluntary Deferrals 6
4.2 Company Matching Deferrals 6
4.3 Company Discretionary Deferrals 6
4.4 Vesting 6
ARTICLE V ACCOUNTING FOR DEFERRED COMPENSATION 8
5.1 Accounts 8
5.2 Deferred Compensation 8
5.3 Value Adjustments 8
ARTICLE VI PAYMENT OF DEFERRED COMPENSATION 9
6.1 Payment Upon Termination of Employment 9
6.2 Payment Upon Death 9
6.3 Value Adjustments Regarding Installment Form
of Distribution 10
6.4 Incapacity of Recipient 10
ARTICLE VII FUNDING 11
ARTICLE VIII ADMINISTRATION 12
8.1 Administration 12
8.2 Determinations 12
ARTICLE IX CLAIMS PROCEDURE 13
9.1 Claim for Benefits 13
9.2 Notice of Denial 13
9.3 Right to Reconsideration 13
9.4 Review of Documents 14
9.5 Decision by the Compensation Committee 14
9.6 Notice by the Compensation Committee 14
ARTICLE X AMENDMENT, DISCONTINUANCE, AND TERMINATION 15
ARTICLE XI MISCELLANEOUS 16
11.1 Non-Guarantee of Employment 16
11.2 Rights of Participants to Benefits 16
11.3 No Assignment 16
11.4 Withholding 16
11.5 Account Statements 16
11.6 Masculine, Feminine, Singular and Plural 16
11.7 Governing Law 16
11.8 Titles 16
11.9 Other Plans 16
11.10 Binding Plan 16
RESOURCE MORTGAGE CAPITAL, INC.
EXECUTIVE DEFERRED COMPENSATION PLAN
ARTICLE I
PURPOSE AND EFFECTIVE DATE
1.1 Purpose. The Plan is intended to provide deferred compensation
for a select group of management or highly compensated employees of the
Company. The Plan is an unfunded plan that is not intended to be (i)
subject to Parts 2, 3 or 4 of Title I, Subtitle B of the Employee
Retirement Income Security Act of 1974, or (ii) qualified under Section
401(a) of the Internal Revenue Code.
1.2 Effective Date. The effective date for this Plan shall be
July 1, 1993.
ARTICLE II
DEFINITIONS
2.1 Definitions.
------------- As used herein, the following terms shall have
the following meanings:
(a) Account.
----------The bookkeeping reserve account established and
maintained for each Participant pursuant to Section 5.1 for purposes of
determining the amount payable to the Participant pursuant to Article
VI.
(b) Beneficiary.
------------- The person or persons designated by a
Participant to receive Plan benefits in the event of the Participant's
death, such designation to be made in writing on a form satisfactory to
the Committee and effective when received by the Committee thereby
revoking any and all prior designations. If the Participant has not
designated a Beneficiary, or if the Beneficiary does not survive the
Participant, the aggregate amount then credited to the Participant's
Account shall be paid in a single sum to the Participant's estate.
(c) Board.
------- The Board of Directors of the Company.
(d) Code.
------ The Internal Revenue Code of 1986, as amended.
(e) Committee.
---------- The compensation committee of the Board authorized
by the Board to administer the Plan, or designees of such compensation
committee. As used herein, in the event that there is not a
compensation committee of the Board from time to time, the Board or its
designees shall constitute the Committee.
(f) Company.
---------- Resource Mortgage Capital, Inc. and any successor
thereto.
(g) Compensation.
------------- With respect to any Plan Year, the total
remuneration payable during the Plan Year to the Participant from the
Employer for personal services rendered, including base salary,
commissions, overtime, bonuses and other extra compensation.
Notwithstanding the foregoing, Compensation shall not include (A)
contributions, credits or benefits paid or accrued under this Plan or
any other qualified or nonqualified retirement plan, deferred
compensation plan, stock-related plan, welfare benefit plan or fringe
benefit plan of the Employer, (B) compensation resulting from grant,
exercise or cancellation of stock options or stock awards or disposition
of the underlying stock, (C) compensation resulting from the grant or
exercise of stock appreciation rights or dividend equivalent rights, and
from any other stock-based compensation arrangements of the Employer,
(D) amounts payable as a tax "gross-up" bonus with respect to Voluntary
Deferrals hereunder, or (E) direct reimbursement for expenses. In all
cases, however, notwithstanding any exclusions specified above,
Compensation shall include any amount which would otherwise be deemed
Compensation but for the fact that it is deferred pursuant to a Payroll
Deduction Agreement or a salary reduction agreement under any plan
described in Section 401(k), 402(h) or 125 of the Code.
(h) Deferred Compensation.
---------------------- The amount of a Participant's
Employer Matching Deferrals and Employer Discretionary Deferrals.
(i) Disability.
------------ The inability to engage in any substantial,
gainful activity by reason of any medically determined physical or
mental impairment that can be expected to result in death or which has
lasted or can be expected to last for a continuous period of not less
than twelve months.
(j) Employer.
--------- The Company, its successors and assigns, any
subsidiary or affiliated organization authorized by the Board to
participate in this Plan with respect to its employees and any
organization into which an Employer may be merged or consolidated or to
which all or substantially all of its assets may be transferred.
(k) Employer Discretionary Deferrals.
----------------------------------- Amounts credited to a
Participant's Account at the discretion of the Committee, as specified
in Section 4.3.
(l) Employer Matching Deferrals.
----------------------------- Matching amounts credited to a
Participant's Account with respect to Voluntary Deferrals, as specified
in Section 4.2.
(m) Normal Retirement Age.
----------------------- The attainment of age sixty-five.
(n) Participant.
------------ An employee who is eligible to participate
pursuant to Article III and who has made an election pursuant to Section
4.1.
(o) Payroll Deduction Agreement.
---------------------------- Written payroll deduction
agreement entered into between the Participant and the Employer pursuant
to Article IV.
(p) Plan.
------ The Resource Mortgage Capital, Inc. Executive Deferred
Compensation Plan, as amended from time to time.
(q) Plan Year.
------------ The one-year period commencing on January 1 and
ending on the succeeding December 31;
provided, however, that the period commencing on July 1, 1993, and
ending on December 31, 1993, shall be a short Plan Year.
(r) Valuation Date.
---------------- The last business day of March, June,
September and December of each Plan Year, or such additional days as the
Committee may deem necessary or appropriate.
(s) Value Adjustments.
------------------- Amounts of interest credited to a
Participant's Account pursuant to Section 5.3.
(t) Voluntary Deferrals.
--------------------- Part or all of a Participant's
after-tax Compensation which, through payroll deduction, is directed to
be applied pursuant to Section 4.1.
(u) Year of Service.
----------------- Year of vesting service that the
Participant would accrue if he were a participant in the Resource
Mortgage Capital, Inc. 401(k) Plan, as the term "vesting service" is
defined therein.
ARTICLE III
ELIGIBILITY
3.1 Eligibility. Eligibility to participate in the Plan will be
limited to a select group of management or highly compensated employees
of the Employer who are designated by the Committee to participate in
the Plan. The Committee shall have sole and absolute discretion as to
the management or highly compensated employees designated as eligible to
participate in the Plan and the date on which such participation shall
commence.
ARTICLE IV
DEFERRED COMPENSATION
4.1 Voluntary Deferrals.
--------------------- An employee who satisfies the
requirements of Section 3.1 may elect to forgo receipt of all or any
portion of the amount of his after-tax Compensation for a Plan Year,
subject to any maximum limitation determined by the Committee in its
sole discretion, pursuant to a Payroll Deduction Agreement entered into
between the Employer and the employee, which forgone amount shall be
applied by the Employer to the payment of premiums on an insurance
policy on the life of the employee and owned by the employee or the
employee's designee. Neither the Employer nor the Plan shall have any
rights, title or interest in said Voluntary Deferrals or said insurance
policy.
4.2 Employer Matching Deferrals.
------------------------------
For each Plan Year for which a Participant elects to make Voluntary
Deferrals, the Employer shall credit to the Participant's Account an
amount equal to 100 percent of the Participant's Voluntary Deferrals;
provided, however, that only those Voluntary Deferrals as are made at a
rate not in excess of six percent of the Participant's Compensation
shall be taken into account for such Participant.
4.3 Employer Discretionary Deferrals.
---------------------------------- For each Plan Year for which
an employee is eligible to participate in the Plan pursuant to the
provisions of Section 3.1 and such employee is employed with the
Employer on the last day of such Plan Year, the Employer may, in the
sole and absolute discretion of the Committee, credit an amount to be
determined by the Committee to the Account of such employee.
Notwithstanding the foregoing, otherwise eligible employees who
terminate employment with the Employer during such Plan Year on account
of retirement, death or Disability shall be entitled to have their
Accounts credited with Employer Discretionary Deferrals hereunder,
regardless of the fact that such employees are not employed by the
Employer on the last day of the Plan Year. Any such Employer
Discretionary Deferrals shall be credited to the Accounts of those
eligible employees in the same ratio as each such employee's
Compensation for the Plan Year bears to the total Compensation of all
such eligible employees for the Plan Year.
4.4 Vesting.
---------
(a) Unless his participation in the Plan shall have terminated
prior thereto, upon a Participant's death, Disability or attainment of
Normal Retirement Age, a Participant shall be fully vested in and have a
nonforfeitable right to the aggregate amount credited to his Account.
(b) Upon termination of his employment with the Employer prior to
his death, Disability or attainment of Normal Retirement Age, a
Participant shall be vested in and have a nonforfeitable right to a
percentage of the amount credited to his Account determined in
accordance with the following schedule:
Years of Service Vested Percentage
---------------- -----------------
Less than 2 0%
2 25%
3 50%
4 75%
5 or more 100%
ARTICLE V
ACCOUNTING FOR DEFERRED COMPENSATION
5.1 Accounts.
----------- The Employer shall establish an Account on behalf
of each Participant which shall be credited or debited with Deferred
Compensation as provided in Section 5.2, Value Adjustments as provided
in Section 5.3 and Payment of Deferred Compensation pursuant to Article
VI. Each such Account may consist of an Employer Matching Deferrals
subaccount, an Employer Discretionary Deferrals subaccount, and such
other subaccounts as are necessary or desirable to the Employer for the
convenient administration of the Plan. The Accounts and subaccounts
shall be bookkeeping reserve accounts only and shall not require
segregation of any funds of the Employer or provide any Participant with
any rights to any assets of the Employer, except as a general creditor
thereof. A Participant shall have no right to receive payment of any
amount credited to his Account except as expressly provided in Article
VI of this Plan.
5.2 Deferred Compensation.
----------------------- A Participant's Account shall be
credited with Employer Matching Deferrals, if any, as of each Valuation
Date based upon Voluntary Deferrals attributable to such Participant
since the immediately preceding Valuation Date; provided, however, that
such Employer Matching Deferrals to be credited as of the September 30,
1993, Valuation Date shall be based upon the aggregate Voluntary
Deferrals attributable to such Participant for the period commencing
January 1, 1993, and ending September 30, 1993. A Participant's Account
shall be credited with Employer Discretionary Deferrals, if any, with
respect to a Plan Year as of the last day of such Plan Year.
5.3 Value Adjustments.
------------------- As of each Valuation Date, the Account of
each Participant shall be credited with interest at a per annum rate
determined from time to time by the Committee in its sole and absolute
discretion, based upon the balance of such Participant's Account as of
the first day of the calendar quarter in which such Valuation Date
falls.
ARTICLE VI
PAYMENT OF DEFERRED COMPENSATION
6.1 Payment Upon Termination of Employment. Upon a Participant's
termination of employment for any reason other than death, the vested
portion, if any, of his Account shall be paid to the Participant as
follows: (a) to the extent that the vested portion of such
Participant's Account does not exceed $500,000, as valued as of the
Valuation Date coincident with or next preceding such date of
termination, the Participant may elect within thirty days following such
termination of employment, subject to approval by the Committee in its
sole and absolute discretion, to receive payment in either a single sum
sixty days following the Participant's termination of employment or in
substantially non-increasing annual installments, commencing as of the
Valuation Date that next follows the sixtieth day after the
Participant's termination of employment, over a period of years not in
excess of five years; and (b) to the extent that the vested portion of
such Participant's Account exceeds $500,000, the Committee in its sole
and absolute discretion shall determine the manner in which payment
shall be made of such vested portion that exceeds $500,000, provided
that the entire vested portion of such Participant's Account is
distributed within five years from the date of the Participant's
termination of employment. Notwithstanding the foregoing, however, if
one or more Valuation Dates have occurred between the date of the
Participant's termination of employment and the actual date of
distribution, then the Participant's Account shall be valued as of the
Valuation Date immediately preceding such distribution.
6.2 Payment Upon Death. Upon a Participant's death prior to his
having received full payment of all vested amounts credited to his
Account, the aggregate vested amount credited to the Participant's
Account, if any, shall be paid to the Participant's Beneficiary as
follows: (a) to the extent that the vested portion of such
Participant's Account does not exceed $500,000, as valued as of the
Valuation Date coincident with or next preceding the date of the
Participant's death, the Participant's Beneficiary may elect within
thirty days following the date of the Participant's death, subject to
approval by the Committee in its sole and absolute discretion, to
receive payment in either a single sum sixty days following the
Participant's date of death or in substantially non-increasing annual
installments, commencing as of the Valuation Date that next follows the
sixtieth day after the Participant's date of death, over a period of
years not in excess of five years; and (b) to the extent that the vested
portion of such Participant's Account exceeds $500,000, the Committee in
its sole and absolute discretion shall determine the manner in which
payment shall be made of such vested portion that exceeds $500,000,
provided that the entire vested portion of such Participant's Account is
distributed within five years from the date of the Participant's death.
Notwithstanding the foregoing, however, if one or more Valuation Dates
have occurred between the date of the Participant's death and the actual
date of distribution, then the Participant's Account shall be valued as
of the Valuation Date immediately preceding such distribution.
6.3 Value Adjustments Regarding Installment Form of Distribution.
Insofar as any portion of the Participant's Account is
not distributed in a single sum within sixty days following the earlier
of the Participant's termination of employment or death, the
Participant's Account shall be credited with interest as of each
Valuation Date occurring after such sixty-day period, based upon the
balance of the Participant's Account as of the first day of the calendar
quarter in which such Valuation Date falls, at a per annum rate equal to
one percent plus the constant maturity yield on five-year U. S. Treasury
Notes for the first month of the calendar quarter in which such
Valuation Date falls as reported in the "Federal Reserve Statistical
Release", or at a per annum rate based upon such other index as the
Committee may determine from time to time. Interest credited pursuant
to this Section 6.3 shall be in lieu of crediting Value Adjustments
pursuant to Section 5.3 as of any Valuation Date occurring subsequent to
sixty days following the Participant's termination of employment or
death.
6.4 Incapacity of Recipient. If any person entitled to a
distribution under the Plan is deemed by the Committee to be incapable
of personally receiving and giving a valid receipt for such payment,
then, unless and until claim therefor shall have been made by a duly
appointed guardian or other legal representative of such person, the
Committee may provide for such payment or any part thereof to be made to
any other person or institution then contributing toward or providing
for the care and maintenance of such person. Any such payment shall be
a payment for the account of such person and a complete discharge of any
liability of the Employer and the Plan therefor.
ARTICLE VII
FUNDING
7.1 The obligation of the Employer to pay benefits under this Plan
shall be interpreted solely as an unfunded, contractual obligation to
pay only those amounts credited to the Participant's Account pursuant to
Article V in the manner and under the conditions prescribed in Article
VI. Any assets set aside, including any assets transferred to a rabbi
trust or purchased by the Employer with respect to amounts payable under
the Plan, shall be subject to the claims of the Employer's general
creditors, and no person other than the Employer shall, by virtue of the
provisions of the Plan, have any interest in such assets. Nothing
contained in this Plan shall constitute a guaranty by the Employer or
any other person or entity that the assets of the Employer will be
sufficient to pay the benefit hereunder.
ARTICLE VIII
ADMINISTRATION
8.1 Administration. The Plan shall be administered by the
Committee, whether or not the members thereof or their designees are
employees of the Employer or are Participants. The Committee shall have
authority to act to the full extent of its absolute discretion to:
(a) interpret the Plan;
(b) resolve and determine all disputes or questions arising under
the Plan, including the power to determine the rights of Participants
and Beneficiaries, and their respective benefits, and to remedy any
ambiguities, inconsistencies or omissions in the Plan;
(c) create and revise rules and procedures for the administration
of the Plan and prescribe such forms as may be required for Participants
to make elections under, and otherwise participate in, the Plan; and
(d) take any other actions and make any other determinations as
it may deem necessary and proper for the administration of the Plan.
Any expenses incurred in the administration of the Plan will be paid by
the Employer.
8.2 Determinations. All decisions and determinations by the
Committee shall be final and binding upon all Participants and
Beneficiaries.
ARTICLE IX
CLAIMS PROCEDURE
9.1 Claim for Benefits. Each person eligible for a benefit under
the Plan shall apply for such benefit by filing a claim with the
Committee on a form or forms prescribed by the Committee. If no form or
forms have been prescribed, a claim for benefits shall be made in
writing to the Committee setting forth the basis for the claim. Each
person making a claim for benefits shall furnish the Committee with such
documents, evidence, data, or information in support of such claim as
the Committee considers necessary or desirable.
9.2 Notice of Denial. If a claim for benefits under this Plan is
denied, either in whole or in part, the Committee shall advise the
claimant in writing of the amount of his benefit, if any, and the
specific reasons for the denial. The Committee shall also furnish the
claimant at that time with a written notice containing:
(a) a specific reference to pertinent Plan provisions;
(b) a description of any additional material or information
necessary for the claimant to perfect his claim, if possible, and an
explanation of why such material or information is needed; and
(c) an explanation of the Plan's claim review procedure.
The written notice of claim denial shall be provided to the claimant
within a reasonable period of time, but not more than 90 days after
receipt of the claim by the Committee, unless special circumstances
require an extension of time for processing the claim, in which case the
Committee shall provide a written notice of such extension to the
claimant before the expiration of the initial 90-day period. In no
event shall such extension exceed 90 days from the end of such initial
period.
9.3 Right to Reconsideration. Within 60 days of receipt of the
information described in Section 9.2 above, the claimant shall, if he
desires further review, file a written request for reconsideration with
the Committee. Such reconsideration shall be conducted by the members
of the compensation committee of the Board (the "Compensation
Committee"), or by the members of the Board if there is no Compensation
Committee in existence when the request for reconsideration is filed.
9.4 Review of Documents. So long as the claimant's request for
review is pending (including the 60-day period described in Section 9.3
above), the claimant or his duly authorized representative may review
pertinent Plan documents (and any pertinent related documents) and may
submit issues and comments in writing to the Compensation Committee.
9.5 Decision by the Compensation Committee. A final and binding
decision shall be made by the Compensation Committee or the
Board, as applicable, within 60 days of the filing by the claimant of
his request for reconsideration; provided, however, that if the
Compensation Committee or the Board, as applicable, in its discretion,
feels that a hearing with the claimant or his representative present is
necessary or desirable, this period shall be extended an additional 60
days.
9.6 Notice by the Compensation Committee. The Compensation
Committee's decision or the Board's, as applicable, shall be conveyed to
the claimant in writing and shall include specific reasons for the
decision, written in a manner calculated to be understood by the
claimant, with specific references to the pertinent Plan provisions on
which the decision is based.
ARTICLE X
AMENDMENT, DISCONTINUANCE, AND TERMINATION
The Committee reserves the right to modify, amend, discontinue or
terminate the Plan or any provision thereof at any time and from time to
time, including specifically the right to make any such amendments or
modifications effective retroactively; provided, however, that no
modification, amendment, discontinuance or termination shall adversely
affect the rights of Participants to amounts credited to the Accounts
maintained on their behalf before such modification, amendment,
discontinuance or termination. Notice of every such modification,
amendment, discontinuance or termination shall be given in writing to
each Participant. In the case of termination of the Plan, any amounts
credited to the Account of a Participant may, in the sole discretion of
the Committee, be distributed in full to such Participant as soon as
reasonably practicable following such termination, or, in the
alternative, may be distributed at such later date and in such manner
pursuant to Article VI hereof as the Committee may determine, but in no
event later than when distributions would otherwise commence pursuant to
Article VI hereof if the Plan were not so terminated.
ARTICLE XI
MISCELLANEOUS
11.1 Non-Guarantee of Employment. Participation in the Plan does
not give any person any right to be retained in the service of the
Employer. The right and power of the Employer to terminate any employee
is expressly reserved.
11.2 Rights of Participants to Benefits. All rights of a
Participant under the Plan to amounts credited to his Account are mere
unsecured contractual rights of the Participant against the Employer.
11.3 No Assignment. No amounts credited to Accounts, rights or
benefits under the Plan shall be subject in any way to voluntary or
involuntary alienation, sale, transfer, assignment, pledge, attachment,
garnishment, execution, or encumbrance, and any attempt to accomplish
the same shall be void.
11.4 Withholding. The Employer shall have the right to deduct from
any payment made hereunder any taxes required by law to be withheld from
a Participant with respect to such payment.
11.5 Account Statements. Periodically (as determined by the
Employer), each Participant shall receive a statement indicating the
amounts credited to and payable from the Participant's Account.
11.6 Masculine, Feminine, Singular and Plural. The masculine shall
be read in the feminine, the singular in the plural, and vice versa,
whenever the context shall so require.
11.7 Governing Law. Except to the extent preempted by applicable
Federal laws, the Plan shall be construed according to the laws of the
Commonwealth of Virginia, other than its conflict of laws principles.
11.8 Titles. The titles to Articles and Sections in this Plan are
placed herein for convenience of reference only, and the Plan is not to
be construed by reference thereto.
11.9 Other Plans. Nothing in this Plan shall be construed to
affect the rights of a Participant, his beneficiaries, or his estate to
receive any retirement or death benefit under any tax-qualified or
nonqualified pension plan, deferred compensation agreement, insurance
agreement, tax-deferred annuity or other retirement plan of the
Employer.
11.10 Binding Plan. This Plan shall be binding upon and inure to
the benefit of the Employer, its successors and assigns and each
Participant and his heirs, executors, administrators
and legal representatives. Each Employer shall be primarily responsible
for payment of benefits hereunder to the Participants it employs and the
Beneficiaries of such Participants. In the event an Employer fails to
pay such benefits for any reason, the Company shall be jointly and
severally liable for the payment of such benefits.
This Plan was approved and ratified by the Board of Directors of the
Company on the day of , 199 , and is hereby
executed on behalf of the Company this
day of , 199 .
WITNESS: RESOURCE MORTGAGE CAPITAL, INC.
- -------------------------- By:-----------------------------
Corporate Secretary Title:-----------------------------
[SEAL]
APPENDIX A
RESOURCE MORTGAGE CAPITAL, INC.
EXECUTIVE DEFERRED COMPENSATION PLAN
BENEFICIARY DESIGNATION
I, the undersigned Participant, hereby designate the following
primary beneficiary or beneficiaries and contingent beneficiary or
beneficiaries of any benefits payable pursuant to the Resource Mortgage
Capital, Inc. Executive Deferred Compensation Plan (the "Plan") on
account of or after my death.
PRIMARY BENEFICIARY OR BENEFICIARIES
- ------------------------------------------------------------------------
Name Address Percentage
- ------------------------------------------------------------------------
Name Address Percentage
- ------------------------------------------------------------------------
Name Address Percentage
In the event any of the primary beneficiaries designated above
predeceases me or dies before receiving all payments to be made under
the Plan, the amount otherwise payable to such primary beneficiary shall
be paid to the remaining primary beneficiary or beneficiaries
proportionately based upon the percentages specified above (disregarding
the percentage of the deceased primary beneficiary). In the event no
primary beneficiary shall be living at the time any payment is made
pursuant to the Plan on account of my death, such payment and all
remaining payments shall be made to the following contingent
beneficiaries.
CONTINGENT BENEFICIARY
OR BENEFICIARIES
- ------------------------------------------------------------------------
Name Address Percentage
- ------------------------------------------------------------------------
Name Address Percentage
- ------------------------------------------------------------------------
Name Address Percentage
In the further event that none of the persons named above shall be
living at the time of any payment made pursuant to the Plan on account
of my death, such payment and all remaining payments shall be made to my
estate.
This Beneficiary Designation, when properly executed by the
Participant and the Employer, replaces and supersedes all prior
Beneficiary Designations made with respect to the Plan.
WITNESS: PARTICIPANT
- --------------------------------- -------------------------------
[Print Participant's Full Name]
Date: --------------------------- -------------------------------
[Participant's Signature]
ATTEST: RESOURCE MORTGAGE CAPITAL, INC.
[Signature of Authorized Officer]
- --------------------------------- -------------------------------
Date:---------------------------- Its: ---------------------------
[Title of Authorized Officer]
Exhibit 11.1
RESOURCE MORTGAGE CAPITAL, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Computation of Full Diluted Earnings Per Share
(amounts in thousands except share data)
Years ended December 31,
1993 1992 1991
---- ---- -----
Net income $ 54,127 $ 38,169 $ 21,636
Shares:
Weighted average number of
common shares outstanding 17,364,309 13,999,047 13,531,290
Assuming exercise of options
reduced by the number of
shares which could have
been purchased with the
proceeds from the exercise
of the options - - 72,429
--------- ----------- -------
Weighted average of number
of shares outstanding
and adjusted 17,364,309 13,999,047 13,603,719
========== =========== ==========
Net income per share
assuming full dilution $ 3.12 $ 2.73 $ 1.59
========== =========== ==========
This calculation is submitted in accordance with Regulation S-K item 601
(b) (11). In 1991 it is not a required disclosure pursuant to
Accounting Interpretations of APB Opinion No. 15 because the dilution is
less than 3%.
Exhibit 21.1
RESOURCE MORTGAGE CAPITAL, INC.
LIST OF SUBSIDIARIES AND CONSOLIDATED ENTITIES
At December 31, 1993, the consolidated subsidiaries of Resource Mortgage
Capital, Inc. were as follows:
Company Parent State of
Incorporation
Resource Finance Co. One Resource Mortgage Capital, Inc. Virginia
N.D. Holding Co. Resource Finance Co. One Virginia
Resource Finance Co. Two Resource Finance Co. One Virginia
SHF Corp. Resource Finance Co. One Virginia
Saxon Mortgage Capital
Corporation Resource Mortgage Capital, Inc. Virginia
Multi-Family Capital
Resources, Inc. Resource Mortgage Capital, Inc. Virginia
Multi-Family Capital
Access One, Inc. Multi-Family Capital Resources, Inc. Virginia
Camden Home Mortgage
Corporation Resource Mortgage Capital, Inc. Virginia
TC Acquisiton, Inc. Resource Mortgage Capital, Inc. Virginia
At December 31, 1993, the other entities consolidated with Resource
Mortgage Capital, Inc. were as follows:
Saxon Mortgage Funding
Corporation SMFC Holding, Inc. Virginia
Saxon Mortgage Management
Corporation SMFC Holding, Inc. Virginia
SMFC Holding, Inc. N/A Delaware
Saxon Mortgage Securities
Corporation Saxon Mortgage Funding Corporation Virginia
Exhibit 23.1
Accountants' Consent
--------------------
The Board of Directors
Resource Mortgage Capital, Inc.:
We consent to incorporation by reference in the registration statements
(No. 33-50705 and 33-52071) on Form S-3 of Resource Mortgage Capital,
Inc. of our report dated February 7, 1994, relating to the consolidated
balance sheet of Resource Mortgage Capital, Inc. and subsidiaries as of
December 31, 1993 and 1992 and the related consolidated statements of
operations, shareholders' equity and cash flows and related schedules
for each of the years in the three-year period ended December 31, 1993,
which report appears in the December 31, 1993 Form 10-K of Resource
Mortgage Capital, Inc.
KPMG PEAT MARWICK
Baltimore, Maryland
March 21, 1994
Exhibit 99.1
ANALYSIS OF PROJECTED YIELD
This presentation contains an analysis of the projected yield on the
Company's mortgage investments as of December 31, 1993, under the
specific assumptions set forth herein. This presentation does not seek
to predict, nor should it be interpreted as a prediction of, the actual
present or future yield on such investments since the actual interest
rates and prepayment rates in the future will be different than those
assumed in any of the projected scenarios. Capitalized terms used
herein and not defined herein shall have the respective meanings
assigned to them in the Glossary.
Resource Mortgage invests a portion of its equity in a portfolio of
mortgage investments. These investments include mortgage loans and
mortgage securities subject to collateralized mortgage obligations
(CMOs), adjustable-rate mortgage securities, fixed-rate mortgage
securities, other mortgage securities and participations in mortgage
warehouse lines of credit.
The Company has pursued its investment strategy of concentrating on
its mortgage conduit activities in order to create investments for its
portfolio with attractive yields and also to benefit from potential
securitization income. Through its single-family mortgage conduit
activities the Company purchases mortgage loans from approved mortgage
companies, savings and loan associations and commercial banks; in its
multi-family conduit activities, the Company originates the loans
directly. When a sufficient volume of loans is accumulated, the Company
securitizes these mortgage loans through the issuance of mortgage-backed
securities. The mortgage-backed securities are structured so that
substantially all of the securities are rated in one of the two highest
categories (i.e. AA or AAA) by at least one of the nationally recognized
rating agencies.
The yield on the Company's investment portfolio is influenced
primarily by (i) prepayment rates on the underlying mortgage loans, (ii)
the level of short-term interest rates and (iii) the relationship
between short-term financing rates and adjustable-rate mortgage yields.
The following analysis provides a projection of the yield of the
Company's investment portfolio in variety of interest rate and
prepayment rate environments. The Company's investment strategy is to
create a diversified portfolio of mortgage securities that in the
aggregate generate stable income in a variety of interest rate and
prepayment rate environments. For purposes of this analysis only,
certain of the Company's assets and liabilities have been excluded, and
certain liability balances have been reduced to better reflect the
Company's net investment in its investment portfolio.
Summary of Mortgage Investments
For purposes of calculating the projected yield, the Company
calculates its net investment in its mortgage investments as of December
31, 1993 and December 31, 1992 and can be summarized as follows (amounts
in thousands):
December 31, December 31,
1993 1992
----------- ------------
Collateral for CMOs, net of CMO
liabilities $ 8,403 $ 11,582
---------- ----------
Adjustable-rate mortgage securities,
net (1) 132,401 100,661
--------- ----------
Fixed-rate mortgage securities, net (1) 14,520 18,842
--------- ----------
Other mortgage securities:
Mortgage residual interests 22,900 25,082
Mortgage derivative securities 37,494 10,856
-------- -------
Other mortgage securities subtotal 60,394 35,938
Mortgage warehouse participations,
net of related liabilities 9,393 8,941
-------- -------
Net investment $ 225,111 $ 175,964
========= ==========
(1) Net of repurchase borrowings and discounts recorded by the Company
to compensate for certain risks on mortgage securities collateralized by
mortgage loans purchased by the Company for which mortgage pool
insurance is used as the primary source of credit enhancement. At
December 31, 1993 the discount totaled $17.2 million on adjustable-rate
mortgage securities and $2.4 million on fixed-rate mortgage securities.
The following tables list the Company's various investments (and
related information) as of December 31, 1993 that were used in the
calculation of the projected yield.
Collateral Pledged to Secure CMOs
(Dollars in thousands)
Type of Weighted
Mortgage Average Net
Series Collateral Coupon Rate (1) Investment (2)
MCA 1, Series 1, Class D Loans(3) 8.97% $ 1,100
RAC Four, Series 77 Loans 9.55 1,750
RMSC Series 89-1A Loans 11.25 36(89-1A&B)
RMSC Series 89-1B Loans 11.12
RMSC Series 89-3A Loans 11.14 143(89-3A&B)
RMSC Series 89-3B Loans 11.21
RMSC Series 89-4A Loans 10.60 314(89-4A&B)
RMSC Series 89-4B Loans 10.59
RMSC Series 89-5 Loans 10.60 33
RMSC Series 91-2 Loans 9.81 1,135
RMSC Series 92-12 Loans 8.10 1,555
RAC Four, 26 Misc. Series Various 9.90 2,337
------
Total $ 8,403
=======
- ------------------------
(1) Based on the weighted average coupons of the underlying mortgage
loans or mortgage certificates when the CMOs were issued and the current
principal balances of such mortgage collateral. This information is
presented as of December 31, 1993.
(2) Equal to the outstanding principal balance of the mortgage
collateral plus unamortized discounts, premiums, accrued interest
receivable and deferred issuance costs, and net of bond principal,
discounts, premiums and accrued interest payable as of December 31,
1993.
(3) Multi-family loans.
Adjustable-Rate Mortgage Securities
(Dollars in thousands)
Remaining
Principal Interest Net
Description (1) Balance (2) Rate (3) Investment (4)
FNMA Pools, various $ 383,717 3.46-5.21%(A) $ 22,090
FNMA and FHLMC Pools, various 106,848 3.95-5.66 (B) 7,423
FNMA and FHLMC Pools, various 6,525 3.95-5.66 (C) 367
LIBOR ARM Trust 1991-19,
Class B 40,018 5.60 (A) 2,298
LIBOR ARM Trust 1992-1, Class B 40,350 5.46 (A) 2,223
LIBOR ARM Trust 1992-4, Class B 59,940 5.51 (A) 3,408
LIBOR ARM Trust 1992-6, Class B 70,109 5.61 (A) 3,993
LIBOR ARM Trust 1992-8, Class B 105,208 5.54 (A) 6,019
LIBOR ARM Trust 1992-10,
Class B 32,945 5.41 (A) 1,884
RMSC, AHF 1989-1 Trust,
Class A-2 7,051 5.81 (B) 399
RMSC, Series 1991-5 55,476 5.71 (A) 3,174
RMSC, Series 1991-7, Class B 48,003 5.85 (A) 2,768
RMSC, Series 1991-11 76,217 5.68 (A) 4,339
RMSC, Series 1991-12, Class B 45,983 5.59 (A) 2,639
RMSC, Series 1991-15, Class B 39,972 5.67 (A) 2,293
RMSC, Series 1991-16, Class B 57,109 5.79 (A) 3,276
RMSC, Series 1991-17, Class B 39,523 5.62 (A) 2,269
RMSC, Series 1992-5 85,726 5.71 (A) 4,911
RTC M-1, A-4 415 6.97 (C) 23
RTC M-6, A-1, A-2 41,090 5.53, 5.62 (C) 2,375
SMSC, Series 1992-1, Class B 5,000 5.46 (A) 285
SMSC, Series 1992-4, Class B 55,900 5.46 (A) 3,157
SMSC, Series 1992-6, Class B 60,193 5.40 (A) 3,416
SMSC, Series 1993-1,
Class B-1, B-2 9,963 5.49, 5.46 (A) 570
SMSC, Series 1993-3,
Class A-2, B-2 118,194 5.55 (A) 6,753
SMSC, Series 1993-5,
Class A-2, B-2 70,356 5.28 (A) 4,049
SMSC, Series 1993-6, Class B 17,684 4.62 (A) 1,014
SMSC, Series 1993-7, Class B 31,580 4.08 (A) 1,807
SMSC, Series 1993-9,
Class A-2, B-2 98,745 3.99 (A) 5,688
SMSC, Series 1993-11 149,164 3.56 (A) 8,616
LIBOR Cap Agreements (5) 18,875
--------
Total $ 132,401
=========
(A) Index - Six-month LIBOR
(B) Index - 1-yr CMT
(C) Index - COFI
(1) All the "Class B" adjustable-rate mortgage securities were created
from the Company's mortgage conduit operations, and represent a AA rated
class that is subordinated to AAA rated class(es) within the security
offering.
(2) As of December 31, 1993.
(3) Pass-through rate as of December 31, 1993.
(4) Equal to the outstanding principal balance of the adjustable-rate
mortgage securities, plus any unamortized premiums and net of any unamortized
discounts, less repurchase borrowings, if any, calculated at 94% of such
amount.
(5) The Company has purchased various LIBOR cap agreements in regard to
the adjustable-rate mortgage securities. Pursuant to the cap
agreements, the Company will receive additional cash flows should six-
month LIBOR increase above certain levels as specified below.
Notional Amount Cap Rate
--------------- --------
Cap agreements expiring in 2004 $ 100,000 9.00%
Cap agreements expiring between
2001 and 2002 230,500 11.50%
Cap agreements expiring between
2001 and 2002 108,000 10.50%
Cap agreements expiring between
2000 and 2003 490,000 9.50%
Cap agreements expiring in 1999 235,000 10.00%
------------
$ 1,163,500
===========
Fixed-rate Mortgage Securities
(Dollars in thousands)
Remaining
Principal Interest Net
Description Balance (1) Rate Investment (2)
- ----------- ---------- --------- --------------
Citibank, Series 1990-B,
Class B-5 $ 1,175 9.60% $ 721
RMSC, various series 13,029 8.19 822
RMSC, various series 4,233 9.92 259
RMSC, Series 91-2, Class 2-B 11,672 10.00 1,513
SMSC, Series 1993-3,
Class A-1, B-1 88,848 6.76 5,510
SMSC, Series 1993-5,
Class A-1, B-1 55,755 6.53 3,448
SMSC, Series 1993-9,
Class A-1, B-1 34,851 6.09 2,154
LIBOR Cap Agreements(3) 93
---------
Total $14,520
========
(1) As of December 31, 1993.
(2) Equal to the outstanding principal balance of the securities, plus
any unamortized premiums and net of any unamortized discounts at
December 31, 1993.
(3) Equal to the outstanding principal balance of the securities, plus
any unamortized premiums and net of any unamortized discounts, less the
associated repurchase agreement borrowings at December 31, 1993.
(4) The Company has purchased various LIBOR cap agreements in regard to
the repurchase borrowings on SMSC Series 1993-3, Series 1993-5 and
Series 1993-9. Pursuant to the cap agreements, the Company will receive
additional cash flows should six-month LIBOR increase above certain
levels ranging from 6.58%-6.75%. The aggregate notional amount of these
cap agreements was $16 million at December 31, 1993.
Other Mortgage Securities
(Dollars in thousands)
Other Mortgage Securities are comprised of mortgage residual interests
and mortgage derivative securities as set forth below.
Mortgage residual interests:
Type of Weighted
Mortgage Percent Average Net Net
Series Collateral Owned Coupon Rate (1) Investment (2)
FNMA REMIC Trust
1988-22 FNMA 40.00% 9.50% $ 1,691
LIBOR ARM Trust
1991-19 Loans 100.00 5.60 298
LIBOR ARM Trust 1992-1 Loans 100.00 5.46 345
LIBOR ARM Trust 1992-4 Loans 100.00 5.51 382
ML Trust XI FHLMC 49.00 8.50 780
RAC Four, Series 39 FHLMC 49.90 10.20 535
RAC Four, Series 62 GNMA 30.00 10.00 498
RAC Four, Series 73 GNMA 55.00 11.50 5,323
RAC Four, Series 74 GNMA 23.60 10.50 1,953
RAC Four, Series 75 GNMA 36.00 9.50 1,526
RAC Four, 22 Misc.
Series Various Various 11.54 435
RMSC, Series 1991-7 Loans 100.00 6.01 448
RMSC, Series 1991-12 Loans 100.00 6.59 21
RMSC, Series 1991-15 Loans 100.00 6.67 108
RMSC, Series 1991-16 Loans 100.00 6.79 16
RMSC, Series 1991-17 Loans 100.00 5.62 101
Shearson Lehman,
Series K FNMA 50.00 10.00 314
LCPI Various 100.00 9.00 7,948
LIBOR Cap Agreements (3) 178
-------
Total $ 22,900
========
- -------------------
(1) Based on the weighted average coupons of the underlying mortgage
loans or mortgage certificates when the mortgage securities were issued
and the current principal balances of such mortgage collateral. This
information is presented as of December 31, 1993.
(2) Equal to the amortized cost of the mortgage residual interests as
of December 31, 1993.
(3) The Company has purchased LIBOR cap agreements through June 1994 in
regard to portions of the exposure to higher short-term interest rates
of certain of the mortgage residual interests. These cap agreements
reduce the Company's risk should one-month LIBOR exceed 8.50%. The
aggregate notional amount of these cap agreements was $150 million at
December 31, 1993.
Other Mortgage Securities (continued)
Mortgage derivative securities: Weighted
Type of Average
Type of Mortgage Net Coupon Net
Description Securities (1) Collateral Rate (2) Investment (3)
- ------------ ------------- ---------- ---------- -------------
Chemical, Series 1988-4 I/O Loans 9.82% $ 109
FNMA Trust 1 I/O FNMA 9.00 5,539
FNMA Trust 29 I/O GNMA 9.50 9,454
FNMA Trust 151 I/O FNMA 10.00 1,835
Interest-only strips,
various I/O Loans Various 10,295
LIBOR ARM Trust 1992-8,
Class I I/O Loans 5.54 826
LIBOR ARM Trust 1992-9,
Class I I/O Loans 5.46 594
LIBOR ARM Trust 1992-10,
Class I I/O Loans 5.41 500
Principal-only strips,
various P/O Loans Various 3,806
RMSC, Series 89-6, 6F I/O Loans 10.62 308
RMSC, Series 1989-7A, A-2 I/O Loans 10.33 75
RMSC, Series 1989-7B, B-2 I/O Loans 10.39 161
RMSC, Series 1991-14,
Class 14-P P/O Loans 9.77 149
RMSC, Series 1991-16,
Class I I/O Loans 5.79 268
RMSC, Series 1991-20,
Class P P/O Loans 8.96 412
RMSC, Series 1992-2,
Class P P/O Loans 8.47 48
RMSC, Series 1992-18,
Class P P/O Loans 8.18 154
RMSC, Series 1992-18,
Class X I/O Loans 8.18 1,326
SMSC, Series 1992-1,
Class I I/O Loans 5.46 509
SMSC, Series 1992-2,
Class I I/O Loans 5.53 558
SMSC, Series 1992-3,
Class I I/O Loans 5.56 266
SMSC, Series 1992-4,
Class I I/O Loans 5.46 302
------
Total $ 37,494
=========
- -------------------
(1) I/O means an interest-only security; P/O means a principal-only
security.
(2) Based on the weighted average coupons of the underlying mortgage
loans or mortgage certificates when the mortgage securities were issued
and the current principal balances of such mortgage collateral. This
information is presented as of December 31, 1993.
(3) Equal to the amortized cost of the mortgage derivative securities
as of December 31, 1993. The Company owned 100% of each such security,
except for the FNMA Trusts.
Mortgage Warehouse Participations
(Dollars in thousands)
Description Weighted Average Coupon (1) Net Investment (2)
- ------------ -------------------------- ------------------
Various Participations 5.2% $ 9,393
- ------------------
(1) Based upon the weighted average rate on each participation as of
December 31, 1993.
(2) Equal to equity invested in mortgage warehouse participations as of
December 31, 1993.
YIELD ON MORTGAGE INVESTMENTS
This presentation contains an analysis of the yield sensitivity to
different short-term interest rates and prepayment rates of the
Company's Mortgage Investments (as described in the previous section) as
of January 1, 1994. The Company utilizes this analysis in making
decisions as to the cash flow characteristics of investments that the
Company desires to create or acquire for its investment portfolio. The
Company's investment strategy is to create a diversified portfolio of
mortgage securities that in the aggregate generates stable income in a
variety of interest rate and prepayment rate environments and preserves
the capital base of the Company. Capitalized terms used herein and not
defined within this section are defined in the glossary on page 15 of
this Exhibit.
This presentation does not reflect all of the Company's assets and
liabilities (or income and expenses of such excluded assets or
liabilities) nor any of the general and administrative expenses of the
Company. This presentation also does not purport to reflect the
liquidation or ongoing value of the Company's business or assets. The
yield information presented herein is provided solely for analytical
purposes. This presentation does not seek to predict, nor should it be
interpreted as a prediction of, the actual present or future yield on
such investments.
The table below sets forth the estimated cash yields calculated on a
semi-annual equivalent basis as of December 31, 1993 of the projected
net cash flows on the Company's existing investment portfolio as set
forth in "Mortgage Investments" above, based upon the current balances
of the assets as of January 1, 1994, and upon assumptions set forth
below on pages 10 through 14 for each of the respective cases. The most
important of these assumptions are the prepayment rates applicable to
each mortgage investment and the level of short-term interest rates.
MORTGAGE INVESTMENTS YIELD SENSITIVITY ANALYSIS
------------------------------------------------
PRE-TAX YIELD ON INVESTMENT (%)
Short-Term Interest Rate Assumption Case
----------------------------------------
Prepayment
Assumption
Case Case I Case II Case III Case IV Case V Case VI Case VII
- ----- ------ ------- -------- ------- ------ ------- --------
Case A 24.9% 23.3% 23.0% 21.6% 19.0% 16.1% 12.9%
Case B 26.2 24.6 24.3 23.0 20.4 17.6 14.6
Case C 27.6 26.0* 25.6 24.4 21.9 19.3 16.4
Case D 28.7 27.0 26.6 25.4 23.2 20.8 18.1
Case E 29.7 28.1 27.6 26.4 24.4 22.2 19.6
Case F 30.8 29.2 28.7 27.5 25.6 23.5 21.0
Case G 31.9 30.3 29.8 28.6 26.8 24.8 22.3
The case most representative of short-term interest rates and
prepayment rates as of January 1, 1994, is case C-II, represented by the
"*." This "base case" is not in the center of the table due to the
relatively low levels of short term interest rates and relatively high
projected prepayment speeds as of December 31, 1993.
The yields for each case expressed above are level yields relative to
the Company's aggregate net investment of $225.1 million in the various
listed mortgage investments as shown beginning on page 2. In addition
to the foregoing, the projected yields assume that the Company is able
to reinvest principal received on its investments at the same yield as
the yield in each case; consequently, these yields do not purport to
reflect the return when such reinvestment is not available.
Such yields do not give effect to the operating expenses of the
Company. These yields are also exclusive of the yields on mortgage
assets of the Company not listed in "Mortgage Investments" above. In
particular, the listed mortgage investments do not include (i) mortgage
loans in warehouse, and (ii) certain adjustable-rate and fixed-rate
mortgage securities. These securities are excluded in an amount equal
to the discount which compensates the Company for certain risks on
mortgage securities collateralized by mortgage loans for which mortgage
pool insurance is used as the primary source of credit enhancement.
There is no assurance that any particular yield actually will be
obtained. Prepayment speeds may exceed those shown in the tables on
pages 11 and 12 and/or short-term interest rates may exceed those shown
in the table on page 13. If this happens, the portfolio yields may
differ significantly from those shown below. Also, the table shows
changes in short-term interest rates and prepayment rates occurring on a
gradual basis over one year. If these factors change more rapidly, the
portfolio yields may be significantly affected.
The Company also calculates the MacCauley duration of the aggregate
cash flows on its mortgage investments. The duration is 2.4 years in
Case C-II, the base case, and ranges from a high of 4.4 years in Case G-
VII to a low of 2.2 years in Case A-I.
The assumptions that are set forth below detail certain information
with respect to the mortgage investments as of December 31, 1993, or
other dates as specified.
Factors Affecting Return
The return on the Company's portfolio of investments will be affected
by a number of factors. These include the rate of prepayments of the
mortgage loans directly or indirectly securing the mortgage investments
and the characteristics of the net cash flows available. Prepayments on
mortgage loans commonly are measured by a prepayment standard or model.
Two models are used herein. One such model which is used primarily for
fixed-rate mortgage loans (the "PSA" prepayment assumption model) is
based on an assumed rate of prepayment each month of the unpaid
principal amount of a pool of new mortgage loans expressed on an annual
basis. A prepayment assumption of 100 percent of the PSA assumes that
each mortgage loan (regardless of interest rate, principal amount,
original term to maturity or geographic location) prepays at an annual
compounded rate of 0.2% of its outstanding principal balance in the
first month after origination. The prepayment rate increases by an
additional 0.2% per annum in each month thereafter until the thirtieth
month after origination. In the thirtieth month and each month
thereafter each mortgage loan prepays at a constant prepayment rate of
6% per annum.
The other model used herein is the Constant Prepayment Rate ("CPR"),
which is used primarily to model prepayments on adjustable-rate mortgage
loans. CPR represents an assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of mortgage loans.
A prepayment assumption of 18% CPR assumes a rate of prepayment of the
then outstanding principal balance of such mortgage loans in each month
equal to 18% per annum.
The Prepayment Assumption Model and CPR do not purport to be either an
historical description of the prepayment experience of any pool of
mortgage loans or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including mortgage loans underlying the
mortgage investments. The actual prepayment rate of the mortgage loans
will likely differ from the assumed prepayment rates.
The rate of principal payments on a single-family pool of mortgage
loans is influenced by a variety of economic, geographic, social and
other factors. In general, however, mortgage loans are likely to be
subject to relatively higher prepayment rates if prevailing long-term
interest rates fall significantly below the interest rates on the
mortgage loans. Conversely, the rate of prepayments would be expected
to decrease if long-term interest rates rise above the interest rate on
the mortgage loans. Other factors affecting prepayment of mortgage
loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties,
assumability of mortgage loans and servicing decisions.
The terms of the multi-family mortgage loans that collateralize the
multi-family investments prohibit the prepayment of principal during the
lock-out period, a period generally equal to fifteen years after
origination of the loan. Subsequent to the lock-out period, prepayments
will be subject to a prepayment premium based on 1% of the remaining
principal balance of the multi-family mortgage loan.
The net cash flows on the Company's CMOs will be derived principally
from the difference between (i) the cash flow from the collateral
pledged to secure the CMO together with reinvestment income, and (ii)
the amount required for payment on the CMOs together with related
administrative expenses. Certain of the Company's other mortgage
securities have similar net cash flow characteristics (collectively, net
cash flow investments). Distributions of net cash flows on such net
cash flow investments represent both income relative to the investment
and a return of the principal invested.
Assumptions Employed in Projecting the Net Cash Flows
In calculating the "Mortgage Investments Yield Sensitivity Analysis"
above, the projected net cash flows on the Company's mortgage
investments were calculated on the basis of the following:
(1) Prepayments on the mortgage loans underlying the mortgage
investments (other than adjustable-rate mortgage securities) were
projected to be received in proportion to the PSA model described in
this report. Prepayments on the adjustable-rate mortgage securities
were projected to be received in proportion to the CPR model described
in this report.
The tables below show the prepayment rate projections, expressed as a
percentage of the PSA or CPR, on the mortgage loans underlying the
mortgage investments in which the Company has an interest under the
assumed Case A, Case B, Case C, Case D, Case E, Case F and Case G
scenarios. Neither the prepayment projections used in this report nor
any other prepayment model or projection purports to be a historical
description of prepayment experience or a prediction of the anticipated
rate of prepayment of any pool of mortgage loans. It is unlikely that
actual prepayments on the mortgage collateral will conform to any of the
projected prepayment rates shown in the table below. Prepayment rate
projections for certain of the Company's smaller investments are not
listed in the tables below.
The prepayment rate for each type of mortgage loan is projected to
begin at the prepayment rate used in Case C in the table below. For
cases other than Case C, the applicable rate increases or decreases
ratably over a one-year period to the prepayment rate set forth for the
applicable case. The prepayment rates set forth in Case C are the
average of the published estimates of projected prepayment rates of a
number of major Wall Street firms, excluding the highest and lowest
estimates, as published on Bloomberg on January 1, 1994. Cases A
through B and Cases D through G represent the average of the prepayment
estimates from two investment banking firms multiplied by the ratio of
Case C and the average of the comparable prepayment estimates of the two
investment banking firms.
PREPAYMENT ASSUMPTION TABLE
FIXED-RATE MORTGAGE LOANS OR CERTIFICATES
Pass
Through Percentage of PSA
------------------------------------------------
Mortgage
Certificates Rate (%)Case A Case B Case C* Case D Case E Case F Case G
GNMA Certif. 9.50 715 635 455 355 245 215 190
10.00 640 590 445 365 270 225 200
10.50 575 530 400 350 285 215 190
11.50 475 440 350 320 290 255 205
FNMA Certif. 9.00 810 725 540 410 290 250 230
9.50 830 740 545 465 335 275 250
10.00 795 720 530 465 360 285 255
FHLMC Certif. 8.50 700 635 475 315 235 210 200
10.00 770 705 530 470 370 305 225
10.25 735 680 510 460 380 305 230
10.50 700 655 495 445 390 310 230
Fixed-rate
Mortgage Loans:
MCA 1, Series 1 340 335 330 325 320 315 310
RAC Four, Series 77 735 680 510 460 380 305 230
RMSC, Series 1989-1A
and 89-1B 635 595 435 405 365 300 250
RMSC, Series 1989-3A,
and 89-3B 635 595 435 405 365 300 250
RMSC, Series 1989-4A
and 89-4B 715 660 495 445 380 290 220
RMSC, Series 89-5 715 660 495 445 380 290 220
RMSC, Series 89-6 715 660 495 445 380 290 220
RMSC, Series 91-2** 435 370 300 235 170 100 70
RMSC, Series 92-12 700 635 475 315 235 210 200
* Case C is the case most representative of projected prepayment speeds as
of January 1, 1994. This is representative of the yield on a FNMA 30-year
pass-through security of 6.75%. (Case A represents a FNMA pass-through yield
of 4.75%, Case B 5.75%, Case D 7.75%, Case E 8.75%, Case F 9.75% and Case G
10.75%).
** The mortgage loans underlying the security become adjustable-rate in
1996-1998.
CONSTANT PREPAYMENT RATES (CPR) TABLE (%)
ADJUSTABLE-RATE MORTGAGE LOANS OR CERTIFICATES
Case A Case B Case C*Case D Case E Case F Case G
FNMA Pools, Various 36 32 28 26 22 18 14
FHLMC Pools, Various 26 22 18 14 10 6 2
LIBOR ARM Trust
1991-19 26 22 18 14 10 6 2
LIBOR ARM Trust
1992-1 26 22 18 14 10 6 2
LIBOR ARM Trust
1992-4 26 22 18 14 10 6 2
LIBOR ARM Trust
1992-6 26 22 18 14 10 6 2
LIBOR ARM Trust
1992-8 26 22 18 14 10 6 2
LIBOR ARM Trust
1992-10 26 22 18 14 10 6 2
RMSC, AHF 1989-1 40 36 32 28 26 22 18
RMSC, Series 1991-5 26 22 18 14 10 6 2
RMSC, Series 1991-7 26 22 18 14 10 6 2
RMSC, Series 1991-11 26 22 18 14 10 6 2
RMSC, Series 1991-12 26 22 18 14 10 6 2
RMSC, Series 1991-15 26 22 18 14 10 6 2
RMSC, Series 1991-16 26 22 18 14 10 6 2
RMSC, Series 1991-17 26 22 18 14 10 6 2
RMSC, Series 1992-5 26 22 18 14 10 6 2
RTC M-1 15 13 10 7 5 5 5
RTC M-6 17 15 10 7 5 5 5
SMSC, Series 1992-4 26 22 18 14 10 6 2
SMSC, Series 1992-6 26 22 18 14 10 6 2
SMSC, Series 1993-1 26 22 18 14 10 6 2
SMSC, Series 1993-3**26 22 18 14 10 6 2
SMSC, Series 1993-5**26 22 18 14 10 6 2
SMSC, Series 1993-6 26 22 18 14 10 6 2
SMSC, Series 1993-7 26 22 18 14 10 6 2
SMSC, Series 1993-9**26 22 18 14 10 6 2
SMSC, Series 1993-11 26 22 18 14 10 6 2
- ------------------
* Case C is the case most representative of projected prepayment speeds
as of January 1, 1994.
** The mortgage loans underlying these securities become adjustable-rate
in 1995-1996.
(2) Principal and interest payments on the mortgage collateral was
assumed to be received monthly with interest payments received in
arrears.
(3) The LIBOR, commercial paper, COFI, 1 Yr-CMT, and reinvestment
income rates are assumed to be as set forth in the table set forth
below. The applicable rate is assumed to begin at the rate set forth in
Case II in the table below. For cases other than Case II, the
applicable rate increases or decreases ratably over a one-year period to
the rate set forth for the applicable case. The rates set forth in Case
II are representative of the rates as of January 1, 1994. Case I and
Cases III through VII indicate rates decreasing or increasing,
respectively, from the rates of Case II in equal steps each month over
one year, to the rate indicated and continuing thereafter at that rate.
According to the scheduled resets and subject to the periodic and
lifetime caps, if applicable, the interest rates on the Company's
adjustable-rate mortgage securities, in each case, reset at the defined
margin relative to their respective indices.
SHORT TERM INTEREST RATE ASSUMPTIONS
Case I Case II* Case III Case IV Case V Case VI Case VII
LIBOR
One-month 2.250% 3.250% 4.250% 5.250% 6.250% 7.250% 8.250%
Three-month 2.375 3.375 4.375 5.375 6.375 7.375 8.375
Six-month 2.563 3.563 4.563 5.563 6.563 7.563 8.563
COFI 3.122 3.822 4.522 5.222 5.922 6.622 7.322
1 Yr-CMT 2.630 3.630 4.630 5.630 6.630 7.630 8.630
Reinvestment
Rates 1.813 2.813 3.813 4.813 5.813 6.813 7.813
- -------------------
* Case II is the case most representative of short-term interest rates
as of January 1, 1994.
(4) Principal and interest payments on each mortgage investment were
assumed to be made in accordance with the terms for each such mortgage
investment.
(5) It was assumed that no optional redemptions are exercised on any of
the mortgage investments.
(6) Administrative fees for each series of mortgage securities have
been calculated using the assumptions set forth in the prospectus
relating to each such series. The administrative fee generally is based
upon a fixed percentage of the principal amount of such mortgage
securities outstanding.
(7) For the purposes of calculating the net cash flows on the
adjustable-rate mortgage securities that are subject to repurchase
borrowings, it was assumed that the repurchase borrowings were equal to
94% of the Company's cost basis in such adjustable-rate mortgage
securities, and that such ratio would remain constant. Actual
repurchase borrowings were greater on December 31, 1993 than the amount
used for modeling. If the ratio that the Company was able to borrow
were to decrease to a level below the 94% for adjustable-rate mortgage
securities used in modeling due to either increases in short-term
interest rates or other market conditions, the yield to the Company
would be lower in each case.
(8) For purposes of calculating the net cash flows on the fixed-rate
mortgage securities that are subject to repurchase borrowings, it was
assumed that the repurchase borrowings were equal to 93.5% of the
Company's basis in such fixed-rate mortgage securities, and that such
ratio would remain constant. Actual repurchase borrowings were greater
on December 31, 1993 than the amount used for modeling. If the ratio
that the Company was able to borrow were to decrease to a level below
the 93.5% for fixed-rate mortgage securities used in modeling due to
either increases in short-term interest rates or other market
conditions, the yield to the Company would be lower in each case.
(9) In modeling the mortgage warehouse participations, it was assumed
that each participation had a remaining average life of one year and the
spread between the weighted average coupon, associated costs and the
commercial paper rate remained constant.
(10) No losses are projected on any mortgage loans owned by the Company
or underlying any adjustable-rate mortgage security or other mortgage
security that would not be covered by external sources of insurance or
the Company's allowance for losses. Any losses not covered by such
insurance or allowance would lower the yield in each case to the
Company.
(11) While the cost of the LIBOR cap agreements has been added to the
Company's investment in its portfolio, the projections do not include
any benefit from them, as such caps are above the range of the short-
term interest rate assumptions set forth on page 13.
(12) In modeling certain of the Company's smaller mortgage investments,
the cash flows of the investments were modeled by substituting for the
actual assets and liabilities a small number of representative assets or
liabilities, the characteristics of which summarize the actual mortgage
loans or mortgage securities and the related liabilities that comprise
the investment.
GLOSSARY
AHF - American Home Funding.
Adjustable-rate mortgage loan (ARM) - A mortgage loan that features
adjustments of the loan interest rate at predetermined times based on an
agreed margin to an established index. An ARM is usually subject to
periodic and lifetime interest-rate and/or payment-rate caps.
Adjustable-rate mortgage securities - Mortgage certificates that represent the
pass-through of principal and interest on adjustable-rate mortgage loans.
Bloomberg - Bloomberg Business Services, Inc. information systems.
Chemical - Chemical Acceptance Corporation.
Citibank - Citibank, N.A., REMIC mortgage pass-through certificates.
COFI - Eleventh District Cost of Funds Index.
Collateralized Mortgage Obligations (CMOs) - Debt obligations (bonds) that are
collateralized by mortgage loans or mortgage certificates. CMOs are
structured so that principal and interest payments received on the
collateral are sufficient to make principal and interest payments on the
bonds. The bonds may be issued in one or more classes with specified
interest rates and maturities which are designed for the investment
objectives of different bond purchasers.
Company - Resource Mortgage Capital, Inc.
FHLMC - Federal Home Loan Mortgage Corporation.
Fixed-rate mortgage loan - A mortgage loan which features a fixed interest
rate that does not change during the life of the loan, or does not change
for at least one year from the date of the analysis.
FNMA - Federal National Mortgage Association.
FNMA Yield - FNMA 30-year mortgage certificate yield.
GAAP - Generally accepted accounting principles.
GNMA - Government National Mortgage Association.
LIBOR - The London Inter-Bank Offered Rate for overseas deposits of U.S.
dollars. The LIBOR index generally follows the patterns of the short-term
interest rate environment in the U.S. market.
Long-term interest rates - The interest rates applicable to debt securities
with an average life of 10 years or more.
MCA 1 - Multi-family Capital Access One, Inc., a subsidiary of the Company
ML - Merrill Lynch
Mortgage certificates - Certificates which represent participation in pools of
mortgage loans. The principal and interest payments on the mortgage loans
are passed through to the certificate holders. GNMA, FNMA, or FHLMC may
issue and guarantee the payment of principal and interest on mortgage
certificates issued by them. Mortgage certificates may also be privately
issued.
Mortgage derivative securities - Mortgage securities that generally have a
market price that is substantially below or in excess of the principal
balance of the underlying mortgage loans or mortgage certificates (e.g., a
principal-only or interest-only security).
Mortgage loans - Mortgage loans secured by first liens on single-family
residential properties.
Mortgage residual interests - An investment which entitles the Company to
receive any excess cash flow on a pool of mortgage loans or mortgage
certificates after payment of principal, interest and fees on the related
mortgage securities.
Mortgage warehouse participations - A participation in a line of credit to a
mortgage originator that is secured by recently originated mortgage loans
that are in the process of being sold to permanent investors.
N/A - Not available.
1 Yr-CMT - One-year constant maturity treasury index.
Other mortgage securities - Mortgage derivative securities and mortgage
residual interests.
Prepayment rates - Represent a measure as to how quickly the number of
mortgage loans in a pool are prepaid-in-full.
RAC Four - Ryland Acceptance Corporation Four.
REMIC - A real estate mortgage investment conduit pursuant to the Internal
Revenue Code of 1986, as amended.
RMSC - Ryland Mortgage Securities Corporation.
RTC - Resolution Trust Corporation
SMART - Structured Mortgage Asset Residential Trust.
SMSC - Saxon Mortgage Securities Corporation, an affiliate of the Company.
Short-term interest rates - Short-term interest rates are the interest rates
applicable to debt securities with an average life of six months or less.
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