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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, 1996
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) (I.R.S. Employer I.D. No.)
or organization)
10900 Nuckols Road, Third Floor, Glen Allen, Virginia 23060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (804) 217-5800
Securities registered pursuant to Section 12(b) of the Act: Title of
each class Name of each exchange on which registered Common Stock, $.01 par
value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Title
of each class Name of each exchange on which registered Series A 9.75%
Cumulative Convertible Nasdaq National Market Preferred Stock, $.01 par value
Series B 9.55% Cumulative Convertible Nasdaq National Market Preferred Stock,
$.01 par value Series C 9.73% Cumulative Convertible Nasdaq National Market
Preferred Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes XX No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of February 28, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $606,673,975 (20,055,338
shares at a closing price on The New York Stock Exchange of $30.25). Common
stock outstanding as of February 28, 1997 was 20,890,742 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be filed pursuant to Regulation
14A within 120 days from December 31, 1996, are incorporated by reference into
Part III.
RESOURCE MORTGAGE CAPITAL, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I
Item 1. BUSINESS................................................ 3
Item 2. PROPERTIES.............................................. 15
Item 3. LEGAL PROCEEDINGS....................................... 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... 15
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS......................... 16
Item 6. SELECTED FINANCIAL DATA................................. 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 38
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.................. 38
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...... 38
Item 11. EXECUTIVE COMPENSATION.................................. 38
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................... 38
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 38
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K................................. 38
Item 1. BUSINESS
General
Resource Mortgage Capital, Inc. (the "Company") is a mortgage and consumer
finance company which uses its production operations to create investments for
its portfolio. Currently, the Company's primary production operations include
the origination of mortgage loans secured by multi-family properties and the
origination of loans secured by manufactured homes. The Company intends to
expand its production sources in the future to include other financial products,
such as commercial real estate loans. The Company will generally securitize the
loans funded as collateral for collateralized bonds, limiting its credit risk
and providing long-term financing for its portfolio. The majority of the
Company's current investment portfolio is comprised of loans or securities (ARM
loans or ARM securities) that have coupon rates which adjust over time (subject
to certain limitations) in conjunction with changes in short-term interest
rates. The Company has elected to be treated as a real estate investment trust
(REIT) for federal income tax purposes and, as such, must distribute
substantially all of its taxable income to shareholders and will generally not
be subject to federal income tax.
The Company's principal sources of earnings are net interest income on its
investment portfolio. The Company's investment portfolio consists principally of
collateral for collateralized bonds, ARM securities and loans held for
securitization. The Company funds its portfolio investments with both borrowings
and cash raised from the issuance of equity. For the portion of the
portfolio investments funded with borrowings, the Company generates net interest
income to the extent that there is a positive spread between the yield on the
earning assets and the cost of borrowed funds. For that portion of the balance
sheet that is funded with equity, net interest income is primarily a
function of the yield generated from the interest-earning asset. The cost of the
Company's borrowings may be increased or decreased by interest rate swap, cap,
or floor agreements.
Business Focus and Strategy
The Company strives to create a diversified portfolio of investments 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 seeks to generate growth in earnings and dividends per share in a
variety of ways, including (i) developing production capabilities to originate
and acquire financial assets in order to create attractively priced investments
for its portfolio, as well as controlling the underwriting and servicing of such
financial assets; (ii) adding investments to its portfolio when opportunities in
the market are favorable and (iii) increasing the efficiency with which the
Company utilizes its equity capital over time. To increase potential returns to
shareholders, the Company also employs leverage through the use of secured
borrowings (such as collateralized bonds) and repurchase agreements to fund a
portion of its portfolio investments. As mentioned previously, the Company's
current production operations are comprised primarily of multi-family and
manufactured housing lending. The Company's strategy is to expand these
production sources as well as to diversify into other financial products such as
commercial real estate loans. The Company also intends to selectively purchase
single-family loans in bulk with the intent to securitize such loans as
collateral for collateralized bonds. By pursuing these strategies, the Company
believes it can create investments for its portfolio at a lower effective cost
than if investments of comparable risk profiles were purchased in the market,
although there can be no assurance that the Company will be successful in
accomplishing this strategy.
The Company expects to fund the majority of the future growth in its
investment portfolio by the issuance of collateralized bonds, which are debt
securities collateralized by a pool of mortgage and/or manufactured housing
loans. The loans which collateralize the collateralized bonds are treated as
assets of the Company and the collateralized bonds are treated as liabilities of
the Company. The Company generates net interest income to the extent that there
is a positive spread between the yield on the loans which collateralize the
collateralized bonds and the cost of the collateralized bond financing. The net
interest spread will be directly impacted by the level of prepayments and credit
losses on the underlying loans. The collateralized bond structure utilized by
the Company generally limits its credit risk to the overcollateralization
portion in each securitization, represented primarily by its net investment in
the securitization (collateral for collateralized bonds less the collateralized
bonds) and which amounts to between 2% and 5% of the initial loan pool. In
addition, the collateralized bonds are non-recourse to the Company, although the
Company may invest in a portion of the collateralized bonds issued. The Company
may issue collateralized bonds from time to time based on its current portfolio
management strategy, loan funding volume, market conditions and other factors.
The Company's collateralized bond securitization strategy differs from the
more common pass-through securitization structure used by other companies and
also used primarily by the Company prior to 1995. As mentioned above,
collateralized bond securitizations are recorded as financing transactions and,
as such, there is no gain on sale recognition at securitization. Rather, income
from these securities is recognized over their lives as net interest margin,
which is generally not taxable to the Company as a REIT. Conversely, prior to
1995, income was primarily recognized as gain on sale of mortgage loans and was
generated primarily by a taxable affiliated entity and, as such, was fully
taxable. The Company believes that recognizing income over time as a result of
utilizing the Company's current collateralized bond securitization strategy will
reduce the earnings volatility that could have been experienced by utilizing
former securitization strategies.
Production Operations
The Company's current production operations consist primarily of the
origination and purchase of loans, and the securitization of such loans. The
production operations enable the Company to enhance its return on shareholders'
equity (ROE) by earning a favorable net interest spread while loans are being
accumulated for securitization and creating investments for its portfolio at a
lower cost than if such investments were purchased from third parties. The
creation of investments involves the issuance of collateralized bonds or
pass-through securities collateralized by the loans generated from the Company's
production activities and the retention of one or more classes of the
collateralized bonds or securities relating to such issuance. The issuance of
collateralized bonds and pass-through securities generally limits the Company's
credit and interest rate risk in contrast to retaining loans in its investment
portfolio in whole-loan form.
Until May 1996, the Company's production operations were comprised mainly of
its single-family mortgage operations that concentrated on the "non-conforming"
segment of the residential loan market. The Company funded its single-family
loans directly through mortgage brokers (wholesale) and purchased loans through
a network of mortgage companies (correspondents). The single-family loans which
were originated or purchased by the Company were secured by properties that were
geographically-diversified throughout the United States. The Company built this
single-family production operation from a start-up in 1988, funding $18.2
billion in principal amount of loans since inception. Loans originated through
the Company's former single-family mortgage operations constitute the majority
of loans underlying the securities that comprise the Company's current
investment portfolio.
On May 13, 1996, the Company sold its single-family mortgage operations to
Dominion Mortgage Services, Inc. (Dominion), a wholly-owned subsidiary of
Dominion Resources, Inc. (NYSE:D), for $68 million. Included in the sale of the
single-family mortgage operations were the Company's single-family
correspondent, wholesale and servicing operations. The sale resulted in a gain
of $17.3 million, which was net of a provision of $31.0 million for possible
losses on single-family loans where the Company has retained a portion of the
credit risk and where prior to the sale the Company had serviced such
single-family loans. The terms of the sale included an initial cash payment
of $20.5 million, with the remainder of the purchase price to be paid evenly
over the next five years pursuant to a note agreement. As a result of the sale,
the Company is precluded from originating certain types of single-family
mortgage loans through either correspondents or a wholesale network for a period
of five years from the date of the sale. The Company may acquire single-family
mortgage loans through bulk purchases of $25 million or more.
Since the sale, the Company's primary production operations have been focused
on multi-family lending and manufactured housing lending. The Company is
currently broadening its multi-family lending capabilities to include other
types of commercial real estate loans and to expand its manufactured housing
lending to include inventory financing to manufactured housing dealers. The
Company may also purchase single-family loans on a "bulk" basis from time to
time and may originate such loans on a retail basis.
The Company believes that it has been successful in operating its production
activities. Since its initial public offering in February 1988, the Company's
average total ROE has been 17%. The Company estimates that its ROE has averaged
4% higher than it would have otherwise been as a result of its production
operations. For purposes of the above percentages, ROE was calculated on a
weighted average basis prior to unrealized gains or losses on available-for-sale
mortgage securities. The single-family operations have contributed $62 million
to the Company's net earnings since 1988, including the $17.3 million of net
gain recorded in May 1996, and have produced a positive mark-to-market on
related single-family investments of $65.2 million as of December 31, 1996.
While there can be no assurances in this regard, the Company believes that
its future production activities will continue to have a favorable impact on its
ROE and to create investments for its portfolio at a lower all-in cost than if
investments with comparable risk profiles were purchased from third parties.
Multi-family Lending Operations
The Company currently originates multi-family mortgage loans which are
secured by apartment properties that have qualified for low-income housing tax
credits (LIHTCs) under Section 42 of the Internal Revenue Code. Since 1992, the
Company has funded approximately $355 million of multi-family mortgage loans
through a brokerage arrangement with Multi-Family Capital Markets (MCM), a
Richmond, Virginia-based company which the Company acquired in August 1996 for
$4 million. The Company believes the acquisition of MCM will complement the
Company's current strategy of expanding its multi-family lending activities and
will improve its competitive position in the marketplace for such loans. The
Company plans to broaden its income property lending beyond LIHTC apartment
properties during 1997. Such properties may include apartment properties that
have not received LIHTCs, assisted living and retirement housing, limited and
full service hotels, urban or suburban office buildings, retail shopping strips
and centers, light industrial buildings and manufactured housing parks. The
Company contemplates that it would service and securitize such loans
in its multi-family production.
As of December 31, 1996, the Company had $208.2 million in principal balance
of multi-family loans held for securitization. Such loans had an average
principal balance of $3.6 million, and ranged in size from $0.6 million to $11.0
million. The Company has commitments to fund loans through 1998 of approximately
$522 million as of December 31, 1996. As of such date, the Company had 17
employees directly involved in its multi-family lending operations.
Current federal law provides that each state receive an annual allocation of
LIHTCs. Each state then allocates portions of its LIHTC allocation to various
developers for the purpose of constructing or rehabilitating low-income housing
apartment properties. Based upon current allocation amounts, approximately
110,000 apartment units nationwide are constructed or rehabilitated annually.
For property owners to be eligible for, and remain in compliance with the LIHTC
regulations, owners must "set aside" at least 20% of the units for rental to
families with income of 50% or less of the median income for the locality as
determined by the Department of Housing and Urban Development (HUD), or at least
40% of the units to families with income of 60% or less of the HUD median
income. Most owners elect the "40-60 set-aside" and designate 100% of the units
in the project as LIHTC units. Additionally, rents cannot exceed 30% of the
annual HUD median income adjusted for the unit's designated "family size."
Generally, the LIHTCs are sold by the developers to investors prior to
construction in order to provide additional equity for the project. The sale of
the LIHTCs typically provides funds equal to approximately 50% of the
construction costs of the project. The multi-family loans made by the Company
normally fund the difference between the project cost (including a fee to the
developer) and the funds generated from the sale of the LIHTCs. In addition to
providing substantial equity for the apartment project, the Company believes the
LIHTCs provide a strong on-going incentive to the owner of the property to
maintain the property and meet its debt service obligations, since the owner,
upon foreclosure, would lose any LIHTCs not already taken and may be subject to
recapture of a portion of the LIHTCs already taken.
With the acquisition of MCM, the multi-family mortgage loans originated by
the Company are now sourced through the Company's direct relationships with
developers and syndicators. There are no correspondent or broker relationships.
Once a sufficient volume of multi-family loans are accumulated, the Company
plans to securitize such loans through the issuance of collateralized bonds. The
Company anticipates that the issuance of the collateralized bonds will limit the
Company's future credit and interest rate risk on such multi-family loans. The
Company presently intends to accumulate approximately $250 million of
multi-family loans for a collateralized bond series to be issued during the
first half of 1997. The Company has previously issued one series of
collateralized bonds backed by multi-family loans. See "Loan Securitization
Strategy."
Underwriting. The Company underwrites all multi-family loans it originates.
Among other criteria, the Company underwrites each multi-family loan to a
minimum debt service coverage ratio of 1.15 times the property's net operating
income, with a maximum loan to value of 80% of appraised value. The Company
believes that such criteria are consistent with general underwriting standards
for LIHTC multi-family properties. The Company's underwriting criteria are
designed to assess the particular property's current and future capacity to make
all debt service payments on a current basis and to ensure that adequate
collateral value exists to support the loan. Each multi-family loan funded by
the Company is approved by an internal loan committee, with a majority of its
members not directly related to the lending function.
Because the Company funds the loans at fixed-interest rates and also commits
to funding future loans at fixed-interest rates, the Company is exposed to
interest rate risk to the extent that interest rates increase in the future. The
Company strives to mitigate such risk by the use of futures contracts and
forward contracts of US treasury securities with duration characteristics
similar to the multi-family loans and commitments.
Manufactured Housing Lending Operations
The Company began to build the infrastructure of its manufactured housing
lending operations during the fourth quarter of 1995 and commenced funding loans
on manufactured homes during the second quarter of 1996. The Company believes
that manufactured housing is a growing market with strong customer demand. The
Company entered this business primarily to diversify its existing product line
and to increase its overall production. Manufactured housing lending complements
the Company's residential lending and securitization expertise.
A manufactured home is distinguished from a traditional single-family home in
that the housing unit is constructed in a plant, transported to the site and
secured to a foundation, whereas a single-family home is built on the site.
Loans on manufactured homes may take the form of a consumer installment loan
(i.e., a personal property loan) when the borrower rents or owns the lot
underlying the manufactured home or a traditional mortgage loan when the
borrower owns the lot. To date, the Company has only originated consumer
installment loans on manufactured homes, but plans to originate mortgage loans
in the future. The Company offers both fixed and adjustable rate loans with
terms ranging from 7 to 30 years. As of December 31, 1996, the Company had $41
million in principal balance of manufactured housing loans in inventory and had
commitments outstanding of approximately $15 million. The average funded amount
per loan is approximately $37,000. As of December 31, 1996, the Company had 60
employees directly involved in its manufactured housing lending operations.
The rising cost of site built single-family housing in the United States has
shifted consumer demand toward manufactured housing as an affordable alternative
to traditional single-family homes. According to the December 1996 Manufacturing
Report by the Manufactured Housing Institute, manufactured home sales,
approximately 52% of which were multi-section homes, represented an estimated
24% of all new housing units produced in the United States in 1996. This
represented a 7% increase in all new housing units produced in the United States
since 1991. During 1996, approximately 363,000 manufactured homes were shipped
to retailers (i.e., dealers) which then sell the homes to consumers, with the
majority of such sales being financed as personal property loans using an
installment sales contract. As the manufactured home is generally transported on
public roads, each home is usually titled with the respective state department
of motor vehicles.
The Company's manufactured housing lending business is operated out of the
Company's main office in Glen Allen, Virginia (the "home" office) and is
supported currently with regional offices in North Carolina, Georgia, Texas and
Michigan. The Company is planning to establish a fifth regional office on the
West Coast during the second quarter of 1997. Each regional office supports
three to four district sales managers who establish and maintain relationships
with manufactured housing dealers. By using the home/regional/district office
structure, the Company has created a decentralized customer service and loan
origination organization with centralized controls and support functions. The
Company believes that this approach also provides the Company with a greater
ability to maintain customer service, to respond to market conditions, to enter
and exit local markets and to test new products.
The Company's current sources of originations are its dealer network and
direct marketing to consumers. In the future, the Company plans to expand its
sources of origination to nearly all sources for manufactured housing loans by
establishing relationships with park owners, developers of manufactured housing
communities, manufacturers of manufactured homes, brokers and correspondents.
The Company currently advertises in trade publications to reach dealers and
solicits loans through direct mail and telemarketing.
The Company's dealer qualification criteria includes minimum equity
requirements, minimum years of experience for principal officers, acceptable
historical financial performance and various business references. The dealer
application package is submitted by the dealer to the regional office manager
for review and approval. As of December 31, 1996, the Company had 480 approved
dealers with 752 sales locations. The Company plans to continue to expand its
dealer network.
Inventory Financing. The Company will offer inventory financing, or "lines of
credit," to retail dealers for the purpose of purchasing manufactured housing
inventory to display and sell to customers beginning in 1997. Under such
arrangements, the Company will lend against the dealer's line of credit when an
invoice representing the purchase of a manufactured home by a dealer is
presented to the Company by the manufacturer of the manufactured home. Prior to
approval of the line of credit for the dealer, the Company will perform a
financial review of the manufacturer as well as the dealer. The Company will
perform monthly inspections of the dealer's inventory financed by the Company
and annual reviews of both the dealer and the manufacturer. Entrance into this
area of financing is consistent with the Company's strategy to be a
"full-service" provider to the manufactured housing industry.
Underwriting. The Company underwrites 100% of the manufactured housing
loans it originates. The loans are underwritten at the regional offices based on
guidelines established by the Company. Home office approvals are required when
loan amounts exceed specified lines of credit authority. Turnaround for
approvals are within four to twenty-four hours with fundings usually within
twenty-four to forty eight hours of receipt of complete documentation.
Because of the decentralization of the Company's manufactured housing
business, in addition to the Company's underwriting process and dealer approval
program, the Company also plans to perform regional and district office reviews
on a frequent basis to ensure that required procedures are being followed. These
reviews will include the collections area, the remarketing of foreclosed or
repossessed homes, underwriting, dealer performance and quality control. The
periodic regional quality control reviews are performed to ensure that the
underwriting guidelines are consistently applied. The Company also performs
customer audits both before and after funding of the loan.
Manufactured housing loans are primarily fixed-interest rate with some
adjustable-rate and step-rate loans. To reduce interest rate risk associated
with fixed-rate products, the Company will mitigate such risks through the use
of forward sales, futures and/or swaps until the pool of loans is securitized.
As of December 31, 1996, 95.3% of the loans were fixed-rate.
The Company perfects its security interest on the loans that are in the
form of installment sales contracts by filing title with the department of
motor vehicles or UCC financing statements with the respective state. Such
loans are eligible REIT assets.
Single-family Lending
Pursuant to the terms of the sale of the Company's single-family operations
to Dominion during the second quarter of 1996, the Company is precluded from
originating or purchasing certain types of single-family loans through a
wholesale or correspondent network through April, 2001. However, the Company may
purchase any type of single-family loans on a "bulk" basis, i.e., in blocks of
$25 million or more, and may originate loans on a retail basis. The Company
intends to purchase single-family loans in bulk to the extent that the Company
can generate a favorable return on investment upon securitization. Due to the
sale of its single-family operations, the Company does not currently have the
internal capability to directly underwrite or service single-family mortgage
loans. In the future, the Company may re-establish an internal underwriting and
servicing capability for single-family mortgage loans, similar to that which
existed prior to the sale of its single-family operations. In the interim, the
Company plans to occasionally bulk purchase "A" quality loans and the Company
may utilize independent contractors to assist in the underwriting and servicing
of such loans.
Loan Servicing
During 1996, the Company established the capability to service both
multi-family and manufactured housing loans funded through its production
operations. The purpose of servicing the loans funded through the production
operations is to better manage the Company's credit exposure while the loans are
held for securitization, as well as the exposure which is usually generated when
the Company retains a portion of the credit risk on a pool of the mortgage loans
after securitization. The multi-family servicing function includes collection
and remittance of principal and interest payments, administration of tax and
insurance accounts, management of the replacement reserve funds, collection of
certain insurance claims and, if the loan defaults, the resolution of such
defaulted loan through either a modification or the foreclosure and sale of the
property.
The manufactured housing servicing function was also established in 1996 and is
operated in Fort Worth, Texas. As the servicer of such manufactured housing
loans, the Company is responsible for the collection of monthly payments, and if
the loan defaults, the resolution of such defaulted loan through either a
modification or the repossession and sale of the related property. Minimizing
the time between the date the loan goes in default and the time that the
manufactured home is repossessed and sold is critical to mitigating losses on
these loans.
Loan Securitization Strategy
When a sufficient volume of loans is accumulated, the Company will generally
securitize the loans through the issuance of collateralized bonds. The Company
believes that securitization is an efficient and cost effective way for the
Company to (i) reduce capital otherwise required to own the loans in whole loan
form; (ii) limit the Company's exposure to credit risk on the loans; (iii) lower
the overall cost of financing the loans and (iv) depending on the securitization
structure, limit the Company's exposure to interest rate and/or valuation risk.
As a result of the reduction in the availability of mortgage pool insurance, and
the Company's desire to both reduce its recourse borrowings as a percentage of
its overall borrowings, as well as, the variability of its earnings, the Company
has utilized the collateralized bond structure for securitizing substantially
all of its loan production since the beginning of 1995. Prior to 1995, the
Company issued pass-through securities, in a senior-subordinated structure or
with pool insurance.
The securities are structured by the Company so that a substantial portion of
the securities are rated in one of the two highest rating categories (i.e., AA
or AAA) by at least one of the nationally recognized rating agencies. Credit
enhancement for these securities may take the form of over-collateralization,
subordination, reserve funds, mortgage pool insurance, bond insurance,
third-party limited guaranties or any combination of the foregoing. The Company
strives to use the most cost effective security structure and form of credit
enhancement available at the time of securitization. Securities issued by the
Company are not generally guaranteed by a federal agency. Each series of
securities is expected to be fully payable from the collateral pledged to secure
the series. Regardless of the form of credit enhancement, the Company may retain
a limited portion of credit risk related to the loans after securitization. See
"Credit Exposures" in Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Master Servicing
The Company performs the function of master servicer for certain of the
securities it has issued, including all of the securities it issued since 1995.
The master servicer's function typically includes monitoring and reconciling the
loan payments remitted by the servicers of the loans, determining the payments
due on the securities and determining that the funds are correctly sent to a
trustee or investors for each series of securities. Master servicing
responsibilities also include monitoring the servicers' compliance with its
servicing guidelines. As master servicer, the Company is paid a monthly fee
based on the outstanding principal balance of each such loan master serviced or
serviced by the Company as of the last day of each month. The Company has been
master servicing mortgage loans since November 1993.
Investment Portfolio
Strategy
The core of the Company's earnings are derived from its investment portfolio.
The Company's strategy for its investment portfolio is to create a diversified
portfolio of high quality assets that in the aggregate generates stable income
for the Company in a variety of interest rate and prepayment environments and
preserves the capital base of the Company. In many instances, the Company's
investment strategy involves not only the creation of the asset, but structuring
the related borrowing through the securitization process to create a stable
yield profile.
At December 31, 1996, the Company's investments included the following amounts
at their carrying basis:
% of
(amounts in thousands) Balance Total
---------- ----------
Investments:
Portfolio assets:
Collateral for collateralized bonds $2,702,294 68 %
Mortgage securities:
Adjustable-rate mortgage securities 758,946 19
Fixed-rate mortgage 32,535 1
Other mortgage securities 100,556 3
Other portfolio assets 96,236 2
---------- -----------
3,690,567 93
Loans held for securitization 265,537 7
----------- --------
Total investments $ 3,956,104 100 %
========== =========
The Company continuously monitors the aggregate projected net yield of its
investment portfolio under various interest rate and prepayment environments.
While certain investments may perform poorly in an increasing interest rate
environment, certain investments may perform well, and others may not be
impacted at all. Generally, the Company adds investments to its portfolio which
are designed to increase the diversification and reduce the variability of the
yield produced by the portfolio in different interest rate environments. The
Company may add new types of investments to its portfolio in the future.
Approximately $3.2 billion of the Company's portfolio assets as of December
31, 1996 are comprised of loans or securities that have coupon rates which
adjust over time (subject to certain periodic and lifetime limitations) in
conjunction with changes in short-term interest rates. Generally, during a
period of rising interest rates, the Company's net interest spread earned on its
investment portfolio will decrease. The decrease of the net interest spread
results from (i) the lag in resets of the ARM loans underlying the ARM
securities and collateral for collateralized bonds relative to the rate resets
on the associated borrowings and (ii) rate resets on the ARM loans which are
generally limited to 1% every six months, while the associated borrowings have
no such limitation. As interest rates stabilize and the ARM loans reset, the net
interest margin may be restored to its former level as the yields on the ARM
loans adjust to market conditions. Conversely, net interest margin may increase
following a fall in short-term interest rates. This increase may be temporary as
the yields on the ARM loans adjust to the new market conditions after a lag
period. In each case, however, the Company expects that the increase or decrease
in the net interest spread due to changes in the short-term interest rates to be
temporary. The net interest spread may also be increased or decreased by the
cost or proceeds of interest rate swap, cap or floor agreements.
Because of the 1% periodic cap nature of the ARM loans underlying the ARM
securities, these securities may decline in market value in a rising interest
rate environment. In a rapidly increasing rate environment, as was experienced
in 1994, a decline in value may be significant enough to impact the amount of
funds available under repurchase agreements to borrow against these securities.
In order to maintain liquidity, the Company may be required to sell certain
securities. To mitigate this potential liquidity risk, the Company strives to
maintain excess liquidity to cover any additional margin required in a rapidly
increasing interest rate environment, defined as a 3% increase in short-term
interest rates over a twelve-month time period. The Company has also entered
into an interest rate swap transaction aggregating $1.02 billion notional
amount, which is designed to protect the Company's cash flow and earnings on the
ARM securities and certain collateral on collateralized bonds in a rapidly
rising interest rate environment. Under the terms of this interest rate swap
agreement, the Company receives payment if one-month LIBOR increases by 1% or
more in any six-month period. Finally, the Company has purchased $1.5 billion
notional of interest rate cap agreements to reduce the risk of the lifetime
interest rate limitation on the ARM securities and on certain collateralized
bonds owned by the Company. Liquidity risk also exists with all other
investments pledged as collateral for repurchase agreements, but to a lesser
extent.
The remaining portion of the Company's portfolio assets as of December 31,
1996, approximately $0.5 billion, are comprised of loans or securities that have
coupon rates that are either fixed or do not reset within the next 15 months.
The Company has limited its interest rate risk on such investments through (i)
the issuance of fixed-rate collateralized bonds and notes payable, (ii) interest
rate swap agreements (Company receives floating, pays fixed) and (iii) equity,
which in the aggregate totals approximately $0.8 billion as of the same date.
Overall, the Company's interest rate risk is primarily related to the rate of
change in short term interest rates, not the level of short term interest rates.
Investment in collateralized bonds. Collateral for collateralized bonds
represents the single largest investment in the Company's portfolio. Interest
margin on the net investment in collateralized bonds (defined as the principal
balance of collateral for collateralized bonds less the principal balance of the
collateralized bonds outstanding) is derived primarily from the difference
between (i) the cash flow generated from the mortgage collateral pledged to
secure the collateralized bonds and (ii) the amounts required for payment on the
collateralized bonds and related insurance and administrative expenses.
Collateralized bonds are generally non-recourse to the Company. The Company's
yield on its net investment in collateralized bonds is affected primarily by
changes in interest rates and prepayment rates and, to a lesser extent, credit
losses on the underlying loans. The Company may retain for its investment
portfolio certain classes of the collateralized bonds issued and pledge such
classes as collateral for repurchase agreements.
ARM securities. Another segment of the Company's portfolio is the
investments in ARM securities. 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. Generally, the repurchase agreements,
which finance a portion of the ARM securities, have a fixed rate of interest
over a term that ranges from 30 to 90 days and, therefore, are not subject to
repricing limitations. As a result, the net interest margin on the ARM
securities could decline if the spread between the yield on the ARM security
versus the interest rate on the repurchase agreement was to be reduced. The
Company may increase its return on equity by pledging the ARM securities as
collateral for repurchase agreements.
Fixed-rate mortgage securities. 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 an interest rate that adjusts at six- or twelve-month
intervals thereafter, subject to periodic and lifetime interest rate caps. The
Company's yields on these securities are primarily affected by changes in
prepayment rates. Such yields will decline with an increase in prepayment rates
and will increase with a decrease in prepayment rates. The Company generally
borrows against its fixed-rate mortgage securities through the use of repurchase
agreements.
Other mortgage securities. Other mortgage securities consist primarily of
interest-only securities (I/Os), principal-only securities (P/Os) and residual
interests which were either purchased or were created through the Company's
production operations. An I/O is a class of a collateralized bond or a mortgage
pass-through security that pays to the holder substantially all interest. A P/O
is a class of a collateralized bond 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 mortgage 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. Included in the residual interests at
December 31, 1996 was $53.5 million of equity ownership in residual trusts which
own collateral financed with repurchase agreements. The collateral consists
primarily of agency ARM securities. The Company's borrowings against its other
mortgage securities is limited by certain loan covenants to 3% of shareholders'
equity. The yields on these securities are affected primarily by changes in
prepayment rates and by changes in short-term interest rates.
Other portfolio assets. Other portfolio assets consists of an installment
note from Dominion received as part of the consideration for the sale of the
single-family mortgage operations, single-family homes leased to home builders
and other financing lease receivables. The installment note received totaled
$47.5 million in the aggregate and bears interest at a rate of 6.5%, which is
paid quarterly. The principal balance of the note is being paid in five equal
installments of $9.5 million which began January 2, 1997. The single-family
homes leased to builders at December 31, 1996 totaled $33.3 million. The leases
average twelve to eighteen months with the Company selling the home at the end
of the lease. The lease rates are typically based on one-month LIBOR plus a
spread.
Loans held for securitization. Loans held for securitization consist
primarily of loans originated or purchased through the Company's production
operations that have not been securitized. During the accumulation period, the
Company is exposed to risks of interest rate fluctuations and may enter into
hedging transactions to reduce the change in value of such loans caused by
changes in interest rates. The Company is also at risk for credit losses on
these loans during accumulation. This risk is managed through the application of
loan underwriting and risk management standards and procedures and the
establishment of reserves.
Hedging and other portfolio transactions. As part of its asset/liability
management process, the Company enters into interest rate agreements such as
interest rate caps and swaps and financial futures contracts ("hedges"). These
agreements are used to reduce interest rate risk which arises from the lifetime
interest rate caps on the ARM securities, the mismatched repricing of portfolio
investments versus borrowed funds and assets repricing on indices such as the
prime rate which are different than the related borrowing indices. The
agreements are designed to protect the portfolio's cash flow and to stabilize
the portfolio's yield profile in a variety of interest rate environments.
Risks
The Company is exposed to three types of risks inherent in its investment
portfolio. These risks include credit risk (inherent in the security structure),
prepayment/interest rate risk (inherent in the underlying loan) and margin call
risk (inherent in the security if it is used as collateral for borrowings). For
a discussion of credit risk, see "Credit Exposure" in "Management's Discussion
and Analysis of Financial Condition and Results of Operations". For
prepayment/interest rate risk and margin call risk, the Company has developed
analytical tools and risk management strategies to monitor and address these
risks, including (i) weekly mark-to-market of a representative basket of
securities within the portfolio, (ii) monthly analysis using advanced
option-adjusted spread (OAS) methodology to calculate the expected change in the
market value of various representative securities within the portfolio under
various extreme scenarios and (iii) monthly static cash flow and yield
projections under 49 different scenarios. Such tools allow the Company to
continually monitor and evaluate its exposure to these risks and to manage the
risk profile of the investment portfolio in response to changes in the risk
profile. While the Company may use such tools, there can be no assurance the
Company will accomplish the goal of adequately managing the risk profile
of the investment portfolio.
The Company also views its hedging activities as a tool to manage these
identified risks. For the risks associated with the periodic and lifetime
interest rate caps on the ARM securities and certain collateral for
collateralized bonds, the Company uses interest rate cap and interest rate swap
agreements. The purpose of these transactions is to protect the Company in the
event that interest rates increase to levels higher on the index than the
periodic and/or lifetime caps on the underlying ARM loans will allow the ARM
loans to reset. The caps effectively lift the lifetime cap on a portion of the
ARM securities and certain collateral for collateralized bonds in the Company's
portfolio while the various interest rate swap agreements limit the Company's
exposure to changes in the financing rates on a portion of these securities.
Eurodollar financial futures and options contracts may be utilized to hedge
the risks associated with financing a portion of the investment portfolio with
variable-rate repurchase agreements. These instruments synthetically lengthen
the duration of the repurchase agreement financing, typically from one month to
three and six months. The Company will receive additional cash flow if the
related Eurodollar index increases above the contracted rates. If, however, the
Eurodollar index decreases below contracted rates, the Company will pay
additional cash flow. As of December 31, 1996, the Company had lengthened the
duration of $1.0 billion of its repurchase agreements and certain collateralized
bonds to three months.
As the Company uses reverse repurchase agreements to finance a portion of
its ARM investment portfolio, the Company is exposed to liquidity risk in the
form of margin calls if the market value of the securities pledged as collateral
for the repurchase agreements decline. The Company has established equity
requirements for each type of investment to take into account the price
volatility and liquidity of each such investment. The Company models and plans
for the margin call risk related to its repurchase borrowings through the use of
its OAS model to calculate the projected change in market value of its
investments that are pledged as collateral for repurchase borrowings under
various adverse scenarios. The Company generally maintains enough immediate or
available liquidity to meet margin call requirements if short-term interest
rates increased by up to 300 basis points over a one-year period. As of December
31, 1996, the Company had total repurchase agreements outstanding of $756.4
million, secured by ARM securities, fixed-rate mortgage securities and other
mortgage securities at their market values of $757.4 million, $28.5 million and
$20.1million, respectively. The Company also has liquidity risk inherent to its
investment in certain residual trusts. These trusts are subject to margin calls
and the Company, at its option, can provide additional equity to the trust to
meet the margin call. Should the Company not provide the additional equity, the
assets of the trust could be sold to meet the trusts' obligations, resulting in
a potential loss to the Company.
During 1996, the Company structured all of its ARM loan securitizations as
collateralized bonds, with the financing, in effect, incorporated into the bond
structure. This structure eliminates the need for repurchase agreements,
consequently eliminating the margin call risk and to a lesser degree the
interest rate risk. During 1996, the Company issued approximately $2.04 billion
in collateralized bonds, primarily collateralized by ARM loans. The Company
plans to continue to use collateralized bonds as its primary securitization
vehicle.
Federal Income Tax Considerations
General
The Company and its qualified REIT subsidiaries (collectively Resource REIT)
believes it has complied and, intends to comply in the future, with the
requirements for qualification as a REIT under the Internal Revenue Code (the
Code). To the extent that Resource REIT qualifies as a REIT for federal income
tax purposes, it generally will not be subject to federal income tax on the
amount of its income or gain that is distributed to shareholders. However,
various subsidiaries of the Company, which conduct the production operations and
are included in the Company's consolidated financial statements prepared in
accordance with generally accepted accounting principles ("GAAP"), are not
qualified REIT subsidiaries. Consequently, all of the nonqualified REIT
subsidiaries' taxable income is subject to federal and state income taxes.
The REIT rules generally require that a REIT invest primarily in real
estate-related assets, its activities be passive rather than active and it
distribute annually to its shareholders substantially all 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 future taxable
years, there can be no certainty that such intention will be realized.
Qualification of the Company as a REIT
Qualification as a REIT requires that Resource REIT satisfy a variety of
tests relating to its income, assets, distributions and ownership. The
significant tests are summarized below.
Sources of Income
To qualify as a REIT in any taxable year, Resource REIT must satisfy three
distinct tests with respect to the sources of its income: the "75% income test,"
the "95% income test" and the "30% income test." The 75% income test requires
that Resource REIT derive at least 75% of its gross income (excluding gross
income from prohibited transactions) from certain real estate-related sources.
In order to satisfy the 95% income test, at least an additional 20% of
Resource REIT's gross income for the taxable year must consist either of income
that qualifies under the 75% income test or certain other types of passive
income.
The 30% income test, unlike the other income tests, prescribes a ceiling for
certain types of income. A REIT may not derive more than 30% of its gross income
from the sale or other disposition of (i) stock or securities held for less than
one year, (ii) dealer property that is not foreclosure property or (iii) certain
real estate property held for less than four years.
If Resource REIT fails to meet either the 75% income test or the 95% income
test, or both, in a taxable year, it might nonetheless continue to qualify as a
REIT, if its failure was due to reasonable cause and not willful neglect and the
nature and amounts of its items of gross income were properly disclosed to the
Internal Revenue Service. However, in such a case Resource REIT would be
required to pay a tax equal to 100% of any excess non-qualifying income. No
analogous relief is available to REITs that fail to satisfy the 30% income test.
Nature and Diversification of Assets
At the end of each calendar quarter, three asset tests must be met by
Resource REIT. Under the "75% asset test," at least 75% of the value of Resource
REIT's total assets must represent cash or cash items (including receivables),
government securities or real estate assets. Under the "10% asset test",
Resource REIT may not own more than 10% of the outstanding voting securities of
any single non-governmental issuer, if such securities do not qualify under the
75% asset test. Under the "5% asset test," ownership of any stocks or securities
that do not qualify under the 75% asset test must be limited, in respect of any
single non-governmental issuer, to an amount not greater than 5% of the value of
the total assets of Resource REIT.
If Resource REIT inadvertently fails to satisfy one or more of the asset
tests at the end of a calendar quarter, such failure would not cause it to lose
its REIT status, provided that (i) it satisfied all of the asset tests at the
close of a preceding calendar quarter and (ii) the discrepancy between the
values of Resource REIT's assets and the standards imposed by the asset tests
either did not exist immediately after the acquisition of any particular asset
or was not wholly or partially caused by such an acquisition. If the condition
described in clause (ii) of the preceding sentence was not satisfied, Resource
REIT still could avoid disqualification by eliminating any discrepancy within 30
days after the close of the calendar quarter in which it arose.
Distributions
With respect to each taxable year, in order to maintain its REIT status,
Resource REIT generally must distribute to its shareholders an amount at least
equal to 95% of the sum of its "REIT taxable income" (determined without regard
to the deduction for dividends paid and by excluding any net capital gain) and
any after-tax net income from certain types of foreclosure property minus any
"excess noncash income." The 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" will generally 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 1996 the Company's excess inclusion income was
approximately 7.9% 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, 1996,
Resource REIT's estimated taxable income available to common shareholders was
approximately $51.4 million.
A portion of the dividends paid during 1996 was allocated to satisfy 1995
distribution requirements and a portion of the dividends paid in 1997 will be
allocated to satisfy 1996 distribution requirements. Approximately 94.4% of
dividends paid during 1996 represented ordinary income for federal tax purposes.
Regulation
As an approved mortgage and consumer loan originator, the Company is subject
to various federal and state regulations. A violation of such regulations may
result in the Company losing its ability to originate mortgage and consumer
loans in the respective jurisdiction.
The rules and regulations applicable to the production operations, among
other things, prohibit discrimination and establish underwriting guidelines that
include provisions for inspections and appraisals, require credit reports on
prospective borrowers and fix maximum loan amounts. Certain of the Company's
funding activities are subject to, among other laws, the Equal Credit
Opportunity Act, Federal Truth-in-Lending Act and the Real Estate Settlement
Procedures Act and the regulations promulgated thereunder that prohibit
discrimination and require the disclosure of certain basic information to
mortgagors concerning credit terms and settlement costs.
Additionally, there are various state and local laws and regulations
affecting the production operations. The production operations will be licensed
in those states requiring such a license. Production operations may also be
subject to applicable state usury statutes. The Company believes that it is in
present material compliance with all material rules and regulations to which it
is subject.
Competition
The Company competes with a number of institutions with greater financial
resources in originating and purchasing loans through their production
operations. In addition, in purchasing portfolio investments and in issuing
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,
securities issued relative to its production operations will face competition
from other investment opportunities available to prospective purchasers.
Employees
As of December 31, 1996, the Company had 116 employees.
Item 2. PROPERTIES
The Company's executive and administrative offices and operations offices are
both located in Glen Allen, Virginia, on properties leased by the Company. The
address is 10900 Nuckols Road, Glen Allen, Virginia 23060.
Item 3. LEGAL PROCEEDINGS
There were no material pending legal proceedings, outside the normal course of
business, to which the Company was a party or of which any of its property was
subject at December 31, 1996.
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 1996.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange under the
trading symbol RMR. The Company's common stock was held by approximately 4,197
holders of record as of February 28, 1997. 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
----- ---- ---------
1996
First quarter $ 22 $18 3/4 $ 0.510
Second quarter 25 1/8 19 1/2 0.550
Third quarter 25 1/2 21 1/4 0.585
Fourth quarter 29 5/8 23 7/8 0.620
1995
First quarter $ 17 3/4 $ 10 3/8 $0.360
Second quarter 20 3/4 15 0.400
Third quarter 21 1/2 16 5/8 0.440
Fourth quarter 21 5/8 18 5/8 0.480
Item 6. SELECTED FINANCIAL DATA
(amounts in thousands except share data)
Years ended December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
Net interest margin $ 74,907 $ 42,419 $ 44,364 $ 40,627 $ 23,357
Gain on sale of single-family mortgage operations 17,285 - - - -
Net gain on sale of assets 503 9,651 27,723 27,977 28,941
Other income 1,116 2,963 1,454 734 426
General and administrative expenses 20,763 18,123 21,284 15,211 14,555
--------------- -------------- --------------- --------------- ---------------
Net income $ 73,048 $ 36,910 $ 52,257 $ 54,127 $ 38,169
=============== ============== =============== =============== ===============
Total revenue $ 330,971 $ 266,496 $ 256,483 $ 200,967 $ 179,455
=============== ============== =============== =============== ===============
Total expenses $ 257,923 $ 146,840 $ 141,286 $229,586 $ 204,226
=============== ============== =============== =============== ===============
Net income per common share
Primary $ 3.08 $ 1.70 $ 2.64 $ 3.12 $ 2.73
Fully-diluted (1) 2.96 - - - -
Dividends declared per share:
Common $ 2.265 $ 1.68 $ 2.76 $ 3.06 $ 2.60
Series A Preferred 2.375 1.17 - - -
Series B Preferred 2.375
0.42 - - -
Series C Preferred 0.600 -
- - -
Return on average common shareholders' equity (2) 21.6% 12.5% 19.2% 25.8% 27.7%
Principal balance of loans funded $ 1,475,461 $ 916,386 $ 2,861,443 $ 4,093,714 $5,334,174
As of December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
Portfolio assets: (3)
Collateral for Collateralized bonds $ 2,702,294 $1,028,935 $ 441,222 $ 434,698 571,567
Mortgage securities 892,037 2,149,416 2,579,759 2,300,949 1,401,578
Other 96,236 27,585 16,859 - -
Loans held for securitization 265,537 220,048 501,272 777,769 123,627
Total assets 3,987,457 3,490,038 3,600,596 3,726,762 2,239,656
Collateralized bonds (4) 2,519,708 949,139 424,800 561,441 432,677
Repurchase agreements 756,448 1,983,358 2,804,946 2,754,166 1,315,334
Total liabilities 3,483,840 3,135,215 3,403,125 3,473,730 2,062,219
Shareholders' equity (2) 439,215 359,582 270,149 177,437 253,032
Number of common shares outstanding 20,653,593 20,198,654 20,078,013 19,331,932 16,507,100
Book value per common share (2) $ 14.52 $ 13.50 $ 13.45 $ 13.09 $ 10.75
Number of employees 116 199 180 150 80
- ------------------------------------------------------------------------------------------------------------------------------
(1) Fully-diluted net income per common share is not presented for 1995 as the Company's cumulative
convertible preferred stock and Stock Appreciation Rights (SARs) outstanding are anti-dilutive.
Prior to 1995, no preferred stock was outstanding, and all SARs outstanding were anti-dilutive.
(2) Excludes unrealized gain/loss on investments available-for-sale.
(3) Collateral for collateralized bonds and mortgage securities are shown at fair value as of December 31, 1996, 1995 and
1994 and at amortized cost as of December 31, 1993 and prior.
(4) Substantially all of 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) is a mortgage and consumer finance
company which uses its production operations to create investments for its
portfolio. Currently, the Company's primary loan production operations include
the origination of mortgage loans secured by multi-family properties and the
origination of loans secured by manufactured homes. The Company will securitize
loans funded principally as collateral for collateralized bonds, limiting its
credit risk and providing long-term financing for those loans securitized. The
Company may also use other securitization vehicles for its loan production, such
as pass-through securities. The Company intends to expand its production sources
in the future to include other financial products, such as commercial real
estate loans. The majority of the Company's current investment portfolio is
comprised of loans or securities ("ARM loans" or "ARM securities") that have
coupon rates which adjust over time (subject to certain limitations) in
conjunction with changes in short-term interest rates. The Company has elected
to be treated as a real estate investment trust (REIT) for federal income tax
purposes and, as such, must distribute substantially all of its taxable income
to shareholders and will generally not be subject to federal income tax.
On May 13, 1996, the Company completed the sale of its single-family mortgage
operations to Dominion Mortgage Services, Inc. (Dominion), a wholly-owned
subsidiary of Dominion Resources, Inc., for $68 million. Included in the
single-family mortgage operations were the Company's single-family
correspondent, wholesale and servicing operations. The sale resulted in a net
gain of $17.3 million. Such amount included a provision of $31.0 million for
possible losses on single-family loans where the Company has retained a portion
of the credit risk and where, prior to the sale, the Company had serviced such
single-family loans.
The Company's principle source of earnings is net interest income on its
investment portfolio. The Company's investment portfolio consists principally of
collateral for collateralized bonds, ARM securities and loans held for
securitization. The Company funds its portfolio investments with both borrowings
and cash raised from the issuance of equity capital. For the portion of
portfolio investments funded with borrowings, the Company generates net interest
income to the extent that there is a positive spread between the yield on the
earning assets and the cost of borrowed funds. For that portion of the balance
sheet that is funded with equity capital, net interest income is primarily a
function of the yield generated from the interest-earning asset. The cost of the
Company's borrowings may be increased or decreased by interest rate swap, cap or
floor agreements.
Approximately $3.2 billion of the Company's investment portfolio as of December
31, 1996, is comprised of ARM loans or ARM securities. Generally, during a
period of rising interest rates, the Company's net interest spread earned on its
investment portfolio will decrease. The decrease of the net interest spread
results from (i) the lag in resets of the ARM loans underlying the ARM
securities and collateral for collateralized bonds relative to the rate resets
on the associated borrowings and (ii) rate resets on the ARM loans which are
generally limited to 1% every six months, while the associated borrowings have
no such limitation. As interest rates stabilize and the ARM loans reset, the net
interest margin may be restored to its former level as the yields on the ARM
loans adjust to market conditions. Conversely, net interest margin may increase
following a fall in short-term interest rates. However, this increase may be
temporary as the yields on the ARM loans adjust to the new market conditions
after a lag period. In each case, however, the Company expects that the increase
or decrease in the net interest spread due to changes in the short-term interest
rates is temporary. The net interest spread may also be increased or decreased
by the cost or proceeds of interest rate swap, cap or floor agreements.
The Company strives to create a diversified portfolio of investments 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
seeks to generate growth in earnings and dividends per share in a variety of
ways, including (i) adding investments to its portfolio when opportunities in
the market are favorable; (ii) developing production capabilities to originate
and acquire financial assets in order to create attractively priced investments
for its portfolio, as well as control the underwriting and servicing of such
financial assets and (iii) increasing the efficiency with which the Company
utilizes its equity capital over time. To increase potential returns to
shareholders, the Company also employs leverage through the use of secured
borrowings and repurchase agreements to fund a portion of its portfolio
investments. Currently, the Company's production operations are comprised of
multi-family and manufactured housing lending. The Company's strategy is to
expand these existing production sources as well as to diversify into other
financial products such as commercial real estate loans. The Company also
intends to selectively purchase single-family loans in bulk with the intent to
securitize such loans as collateral for collateralized bonds. By pursuing these
strategies, the Company believes it can create investments for the portfolio at
a lower effective cost than if investments of comparable risk profiles were
purchased in the market, although there can be no assurance that the Company
will be successful in accomplishing this strategy.
In order to grow its equity base, the Company may issue additional shares of
preferred or common stock. Management strives to issue such additional shares
when it believes existing shareholders are likely to benefit from such offerings
through higher earnings and dividends per share than as compared to the level of
earnings and dividends the Company would likely generate without such offerings.
On August 30, 1996, the Company acquired Multi-Family Capital Markets, Inc.
(MCM), which specializes in the sourcing, underwriting and closing of
multi-family loans secured by first liens on apartment properties that have
qualified for low income housing tax credits. The Company acquired all of the
outstanding stock and assets of MCM for $4.0 million. The Company believes this
acquisition will complement its current strategy of expanding its multi-family
lending business and will improve its competitive position in the marketplace
for such loans.
RESULTS OF OPERATIONS
- ---------------------------------------------------------------------------
For the Year Ended December 31,
----------------------------------------
(amounts in thousands except per 1996 1995 1994
share information)
- ---------------------------------------------------------------------------
Net interest margin $ 74,907 $ 42,419 $ 44,364
Gain on sale of single-family 17,285 - -
mortgage operations
Gain on sale of assets, net 503 9,651 27,723
General and administrative expenses 20,763 18,123 21,284
Net income 73,048 36,910 52,257
Primary net income per common share 3.08 1.70 2.64
Fully-diluted net income per 2.96 - (1) - (1)
common share
Principal balance of loans
funded through production operations 744,001 893,953 2,861,443
Dividends declared per share:
Common $ 2.27 $ 1.68 $ 2.76
Series A Preferred 2.38 1.17 -
Series B Preferred 2.38 0.42 -
Series C Preferred 0.60 - -
- -----------------------------------------------------------------------------
(1) Fully-diluted net income per common share is not presented in 1995 as the
Company's cumulative convertible preferred stock and Stock Appreciation Rights
(SARs) outstanding are anti-dilutive. In 1994, no preferred stock was
outstanding, and all SARs outstanding were anti-dilutive.
1996 Compared to 1995. The increase in the Company's net income and net income
per common share during 1996 as compared to 1995 is primarily the result of the
increase in net interest margin and the gain on the sale of the single-family
operations. This increase was offset partially by a decline in the gain on sale
of assets and an increase in general and administrative expenses.
Net interest margin for 1996 increased to $74.9 million, or 76.6%, over net
interest margin of $42.4 million for 1995. This increase was a result of an
overall increase in the net interest spread on all interest-earning assets which
increased to 1.58% for 1996 versus 1.06% for 1995, as well as the increased
contribution from the net investment in collateralized bonds. The increase in
the net interest spread is attributable to the ARM securities being
fully-indexed during 1996, and the more favorable interest rate environment on
both collateralized bonds and borrowings related to the ARM securities. During
1995, as a result of rising short-term rates during both 1994 and early 1995,
the Company's ARM securities were generally not fully-indexed throughout the
year.
The sale of the Company's single-family mortgage operations in 1996 generated a
net gain of $17.3 million. Previously, the single-family mortgage operations had
contributed to the Company's earnings through the securitization and sale of
loans funded through its production activities, recorded as gain on sale of
assets. In 1995, the Company recorded a net gain on sale of assets related to
the securitization and sale of loans amounting to $4.7 million. No gain on
securitization or sale of loans was recorded in 1996. Net gain on sale of assets
during 1996 resulted primarily from the sale of certain portfolio assets
totaling approximately $2.0 million, offset partially by the write-down of
certain assets for permanent impairment of $1.5 million. In 1995, the Company
sold portfolio assets for a net gain of $3.8 million and recorded no
write-downs. The Company also sold previously purchased mortgage servicing
rights in 1995 for a gain of $1.2 million.
General and administrative expenses increased $2.6 million, or 14.6%, to $20.8
million in 1996, as the Company continued building its infrastructure for its
manufactured housing operations. General and administrative expenses also
increased from 1995 as a result of the Company's continued expansion of its
wholesale origination capabilities for its single-family mortgage operations
prior to their sale. The Company continues to expand its manufactured housing
operations, and in August 1996, acquired MCM to expand its multi-family and
commercial real estate lending businesses. Currently the Company retains the
servicing for all loans funded through its production operations. The growth of
the production operations should continue to cause general and administrative
expenses to increase in 1997.
1995 Compared to 1994. The decrease in the Company's earnings during 1995 as
compared to 1994 is primarily the result of the decrease in net gain on sale of
assets and the decrease in net interest margin. These decreases were partially
offset by a decrease in general and administrative expenses.
Net gain on sale of assets decreased $18.0 million, or 65.2%, to $9.7 million in
1995 from $27.7 million in 1994. This decrease resulted from the combined effect
of (i) the Company's change in securitization strategy in 1995 to the issuance
of collateralized bonds which are accounted for as financing transactions,
versus the use of pass-through mortgage security structures in 1994, which are
accounted for as sales, (ii) the lower mortgage loan funding levels by the
Company as a result of a decrease in overall industry-wide mortgage loan
originations, resulting from a higher level of price competition for mortgage
loans and (iii) the flatter yield curve, which had an adverse impact on the
Company's production of ARM loans.
Net interest margin decreased $2.0 million, or 4.4%, to $42.4 million in 1995
from $44.4 million for 1994. This decrease resulted primarily from the change in
the net interest spread on the interest-earning assets, which declined from
1.12% in 1994 to 1.06% in 1995. The decline in net interest spread was
attributable to a temporary reduction in the net interest spread in ARM
securities. This temporary reduction resulted from the interest rate on
borrowings increasing at a faster rate than the ARM securities which
collateralize these borrowings. In December 1995, the net interest spread had
increased to 1.18% as a result of the upward resets on the ARM securities and
the more favorable short-term interest rate environment. Net interest margin
also declined as a result of the increase in the provision for credit losses,
which was $2.9 million and $2.1 million in 1995 and 1994, respectively.
General and administrative expenses decreased 14.9%, to $18.1 million for 1995
from $21.3 million for 1994. This decline resulted primarily from the Company's
effort to reduce costs in line with the reduced level of mortgage loan
originations.
The following table summarizes the average balances of the Company's
interest-earning assets and their average effective yields, along with the
Company's average interest-bearing liabilities and the related average effective
interest rates, for each of the periods presented.
Average Balances and Effective Interest Rates
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------
(amounts in thousands) 1996 1995 1994
------------------------ ------------------------- -------------------------
Average Effective Average Effective Average Effective
Balance Rate Balance Rate Balance Rate
-------------- --------- ------------- ---------- -------------- ----------
Interest-earning assets: (1)
Collateral for collateralized bonds(2)(3) $ 1,832,141 8.11 % $ 711,316 8.58 % $ 375,147 8.99
Adjustable-rate mortgage securities 1,741,169 6.76 2,137,170 6.81 2,310,047 5.39
Fixed-rate mortgage securities 38,025 10.75 94,102 7.87 205,305 7.31
Other mortgage securities 53,194 14.00 56,644 15.61 72,934 19.76
Other portfolio assets 57,114 8.23 25,403 10.38 8,093 9.45
Loans held for securitization 354,216 8.31 331,995 8.54 602,517 6.45
----------- ----- ------------- ------- -------------- --------
Total interest-earning assets $ 4,075,859 7.66 % $ 3,356,630 7.56 % $ 3,574,043 6.36 %
============== ====== ============= ======= ============== ========
Interest-bearing liabilities:
Collateralized bonds (3) $ 1,742,054 6.50 % $ 679,551 7.21 % $ 380,099 8.28 %
Repurchase agreements:
Adjustable-rate mortgage 1,651,507 5.55 1,986,872 6.20 2,179,775 4.67
securities
Fixed-rate mortgage securities 31,156 5.67 78,486 5.54 192,738 5.23
Other mortgage securities 8,967 5.66 6,392 6.32 6,722 5.00
Loans held for securitization 164,664 6.22 184,910 7.34 6,805 5.98
Notes payable:
Other portfolio assets 1,241 10.42 11,329 8.78 422,979 5.25
Loans held for securitization 65,065 5.13 89,776 6.76 62,078 8.27
Commercial paper - - - - 55,353 3.59
=========== ===== =========== ======= =========== =====
Total interest-bearing liabilities $ 3,664,654 6.08 % $3,037,316 6.50 % $3,306,549 5.24%
============== ====== =========== ======= ============ =======
Net interest spread on all investments(3) 1.58 % 1.06 % 1.12 %
====== ======= ========
Net yield on average interest-earning assets 2.19 % 1.68 % 1.51 %
====== ======= ========
(1) Average balances exclude adjustments made in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", to record available
for sale securities at fair value.
(2) Average balances exclude funds held by trustees of $2,839, $3,815, and $8,855 for the years ended
December 31, 1996, 1995 and 1994, respectively.
(3) Effective rates are calculated excluding non-interest related collateralized bond expenses and provision
for credit losses.
1996 compared to 1995. The increase in net interest spread for 1996 relative to
1995 is primarily the result of the increase in the spread on ARM securities and
an increase in the average balance and spread on the net investment in
collateralized bonds, which for 1996, constituted the largest portion of the
Company's investment portfolio on a weighted average basis. The net interest
spread benefited as a result of the declining short-term interest rate
environment during the first part of 1996, which had the impact of reducing the
Company's borrowing costs faster than it reduced the yields on the Company's
interest-earning assets. The Company's overall weighted average borrowing costs
decreased to 6.08% for 1996 from 6.50% for 1995. The overall yield on
interest-earning assets increased to 7.66% from 7.56% as the Company's portfolio
became more heavily weighted in collateral for collateralized bonds which have
higher effective rates than ARM securities. Collateral for collateralized bonds
increased to an average $1.8 billion for the year ended December 31, 1996, or
158%, from an average $711.3 million for the year ended December 31, 1995. The
net interest spread on the net investment in collateralized bonds increased 24
basis points, from 1.37% for 1995, to 1.61% for 1996. The net interest spread on
ARM securities increased 60 basis points, from 0.61% for 1995 to 1.21% for 1996.
As rates stabilized in the latter half of 1996, the ARM securities and ARM loans
reset downward, causing the net interest spread on these assets to narrow in the
third and fourth quarters of 1996.
1995 compared to 1994. The net interest margin on the Company's investment
portfolio decreased slightly to $42.4 million for 1995 from $44.4 million for
1994. The decrease in net interest margin on the Company's investment portfolio
is generally attributable to a decrease in the spread on such investments during
1995, which was partially offset by a net increase in capital invested by the
Company in the portfolio. The spread on the Company's investment portfolio
decreased from 1.12% for 1994 to 1.06% for 1995. Specifically, the spread on the
Company's ARM securities decreased from 0.72% for 1994 to 0.61% for 1995,
principally as a result of increased repurchase agreement borrowing costs. This
decline was offset by the increase in the spread on the net investment in
collateralized bonds, which increased to 1.37% in 1995 from 0.71% in 1994. The
increase in the net interest spread for the net investment in collateralized
bonds resulted principally from lower financing costs in 1995. The average
balance of collateral for collateralized bonds increased to $711.3 million for
1995 from $375.1 million for 1994, consistent with the Company's current
securitization strategy, while the average balance for ARM securities declined
from $2.3 billion in 1994 to $2.1 billion in 1995.
The following tables summarize the amount of change in interest income and
interest expense due to changes in interest rates versus changes in volume:
1996 to 1995 1995 to 1994
------------------------------------- -------------------------------------
(amounts in thousands) Rate Volume Total Rate Volume Total
----------- ------------ ----------- ------------ ----------- ------------
Collateral for collateralized bonds $ (3,102) $ 90,770 $ 87,668 $ (1,469) $ 28,757 $ 27,288
Adjustable-rate mortgage securities (1,143) (26,782) (27,925) 29,423 (8,349) 21,074
Fixed-rate mortgage securities 5,293 (8,608) (3,315) 1,254 (8,850) (7,596)
Other mortgage securities (878) (518) (1,396) (2,702) (2,871) (5,573)
Other portfolio assets (411) 2,474 2,063 82 1,790 1,872
Loans held for securitization (723) 1,813 1,090 27,404 (37,893) (10,489)
------------ ----------- ------------------------ ------------ ------------
Total interest income (964) 59,149 58,185 53,992 (27,416 ) 26,576
------------ ----------- ------------------------ ------------ ------------
Collateralized bonds (4,314) 68,547 64,233 (3,433) 20,959 17,526
Repurchase agreements:
Adjustable-rate mortgage securities (11,449) (18,501) (29,950) 29,315 (7,913) 21,402
Fixed-rate mortgage securities 102 (2,657) (2,555) 642 (6,375) (5,733)
Other mortgage securities (39) 151 112 84 (16) 68
Loans held for securitization (1,851) (1,319) (3,170) 20,844 (29,484) (8,640)
Notes payable:
Other portfolio assets 222 (1,086) (864) 243 345 588
Loans held for securitization (1,246) (1,426) (2,672) (648 ) 1,580 932
Commercial paper - - - - (1,986) (1,986)
Total interest expense (18,575) 43,709 25,134 47,047 (22,890) 24,157
------------ ----------- ------------------------ ------------ ------------
Net interest income $ 17,611 $ 15,440 $ 33,051 $ 6,945 $ (4,526) $ 2,419
============ =========== ======================== ============ ============
Note: The change in interest income and interest expense due to changes in both volume and rate, which cannot
be segregated, has been allocated proportionately to the change due to volume and the change due to rate. This
table excludes other interest expense and provision for credit losses.
PORTFOLIO RESULTS
The Company's investment strategy is to create a diversified portfolio of
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. The Company has pursued its strategy of concentrating on its
production activities to create investments with attractive yields. In many
instances, the Company's investment strategy has involved not only the creation
or acquisition of the asset, but also the related long-term, non-recourse
borrowings such as through the issuance of collateralized bonds.
Interest Income and Interest-Earning Assets
The Company's average interest-earning assets grew to $4.1 billion during the
year ended December 31, 1996, an increase of 21% from $3.4 billion of average
interest-earning assets during the year ended December 31, 1995. Average
interest-earning assets at December 31, 1995, decreased slightly from $3.6
billion during the year ended December 31, 1994 as a result of the sale of $0.6
billion of securities during 1995. Total interest income rose 23%, from $253.9
million during the year ended December 31, 1995, to $312.1 million during the
same period of 1996. Total interest income had also risen $26.6 during 1995 from
$227.3 million during the year ended December 31, 1994. Overall, the yield on
average interest-earning assets rose to 7.66% for the year ended December 31,
1996, from 7.56% and 6.36% for the years ended December 31, 1995 and 1994,
respectively. This increase resulted from the ARM securities resetting upwards
to become fully-indexed and the investment in higher yielding collateral for
collateralized bonds continuing to grow. As indicated in the table below, the
average yields were 2.07%, 1.46% and 1.28% higher than the average daily
six-month LIBOR interest rate during 1996, 1995 and 1994, respectively. The
majority of the ARM loans underlying the Company's ARM securities and collateral
for collateralized bonds are indexed to and reset based upon the level of the
London InterBank Offered Rate (LIBOR) for six-month deposits (six-month LIBOR).
Earning Asset Yield
($ in millions)
- -------------- --------------- -- ------------- --- -------------- ---- ------------------ ---------------
Average Asset Yield
Interest-Earning Interest Average Daily Average versus Six
Assets Income Asset Yield Six Month Month LIBOR
- -------------- --------------- -- ------------- --- -------------- ---- ------------------ ---------------
1994 $ 3,574.0 $ 227.3 6.36% 5.08% 1.28%
1995 3,356.6 253.9 7.56% 6.10% 1.46%
1996 4,075.9 312.1 7.66% 5.59% 2.07%
- -------------- -- ------------ --- ------------ --- -------------- ---- ------------------ ---------------
The net yield on average interest-earning assets increased to 2.19% for the year
ended December 31, 1996, compared to 1.68% and 1.51% for the year ended December
31, 1995 and 1994, respectively. This increase is principally due to the
increase in the spread earned on the interest-earning assets, despite an
increase in average interest-earning assets to $4.1 billion for the year ended
December 31, 1996, from $3.4 billion in 1995. Average interest-earning assets
may continue to increase as the Company retains loans funded through its
production operations as collateral for collateralized bonds. Net yield on
average interest-earning assets may decrease as a result. Net yield as a
percentage of net average assets (defined as interest-earning assets less
non-recourse collateralized bonds issued), was 3.16% for the year ended December
31, 1996, versus 1.81% and 1.51% for the same periods in 1995 and 1994,
respectively. Net yield as a percentage of net average assets is expected to
increase due to the continued use of non-recourse collateralized bonds. The net
yield percentages presented below exclude non-interest related expenses such as
provision for credit losses and interest on senior notes payable. For the years
ended December 31, 1996, 1995 and 1994, if these expenses were included, the net
yield on average interest-earning assets would be 1.84%, 1.26% and 1.24%,
respectively and the net yield on net average assets would be 2.65%, 1.36% and
1.24%, respectively.
Net Yield on Average Interest-Earning Assets
($ in millions)
- ----------------- ----------------- --- ---------------- -- --------------- -- ----------------
Net Yield on
Average Average Net Yield on
Interest-Earning Interest-Earning Net Average Net Average
Assets Assets Assets (1) Assets
- ----------------- ----------------- --- ---------------- -- --------------- -- ----------------
1994 $ 3,574.0 1.51% $ 3,574.0 1.51%
1995 3,356.6 1.68% 3,110.2 1.81%
1996 4,075.9 2.19% 2,825.0 3.16%
- ----------------- -- -------------- --- ---------------- -- --------------- -- ----------------
(1) Average interest-earning assets less non-recourse collateralized bonds.
The average asset yield is reduced for the amortization of premiums, net of
discounts on the Company's investment portfolio. By creating its investments
through its production operations, the Company believes that premium amounts are
less than if the investments were acquired in the market. As indicated in the
table below, premiums on the Company's ARM securities, fixed-rate securities and
collateral for collateralized bonds at December 31, 1996 were $54.1 million, or
approximately 1.60% of the aggregate investment portfolio balance. The mortgage
principal repayment rate for the Company (indicated in the table below as "CPR
Annualized Rate") was 24% for the year ended December 31, 1996. The Company
expects that the long-term prepayment speeds will range between 18% and 24%. CPR
stands for "constant prepayment rate" and is a measure of the annual prepayment
rate on a pool of loans.
Premium Basis and Amortization
($ in millions)
- --------------------------------------------------------------------------------
Amortization
Ending Expense
CPR Investment as a % of
Net Amortization Annualized Principal Average
Premium Expense Rate Balance Assets
- --------------------------------------------------------------------------------
1994 $ 37.2 $ 5.6 (1) $ 2,975.0 0.16%
1995 46.6 7.9 (1) 3,048.9 0.24%
1996 54.1 13.8 24% 3,379.0 0.34%
- --------------------------------------------------------------------------------
(1) CPR rates were not available for those periods.
Interest Expense and Cost of Funds
The Company's largest expense is the interest cost on borrowed funds. Funds to
finance the investment portfolio are borrowed primarily in the form of
collateralized bonds or repurchase agreements, both of which are primarily
indexed to LIBOR, principally one-month LIBOR. For the year ended December 31,
1996, interest expense increased to $222.7 million from $197.5 million for the
year ended 1995, while the average cost of funds decreased to 6.08% for 1996
compared to 6.50% for 1995. The Company's cost of funds rose in conjunction with
the increase in the one-month LIBOR rate through the second quarter of 1995 and
then began to decline correspondingly with the decline in interest rates since
that time. The cost of funds for the year ended December 31, 1995, compared to
1994, increased as a result of the low interest rates during the first half of
1994 compared to the rapidly rising interest rates during the first half of
1995.
The Company may use interest rate swaps, caps and financial futures to manage
its interest rate risk. The net costs during the related period of these
instruments are included in the cost of funds table below.
Cost of Funds
($ in millions)
- -------------------------------------------------------------------------
Cost of
GAAP Funds
Average Interest Cost Average versus
Borrowed Expense of One-month One-month
Funds (a) Funds LIBOR LIBOR
- -------------------------------------------------------------------------
1994 $3,306.5 $173.4 5.24% 4.47% 0.77%
1995 3,037.3 197.5 6.50% 5.97% 0.53%
1996 3,664.7 222.7 6.08% 5.45% 0.63%
- -------------------------------------------------------------------------
(a) Excludes non-interest-related expenses and interest on non-portfolio
related notes payable.
Interest Rate Agreements
As part of its asset/liability management process, the Company enters into
interest rate agreements, such as interest rate caps and swaps, and financial
futures contracts ("hedges"). These agreements are used to reduce interest rate
risk which arise from the lifetime yield caps on the ARM securities, the
mismatched repricing of portfolio investments versus borrowed funds and assets
repricing on indices such as the prime rate which are different than the related
borrowing indices, primarily one-month LIBOR. The agreements are designed to
protect the portfolio's cash flow and to provide income and capital appreciation
to the Company in the event that short-term interest rates rise quickly.
The following table includes all interest rate agreements in effect at December
31, 1996, 1995 and 1994 for asset/liability management of the investment
portfolio. This table excludes all hedge agreements in effect for the Company's
production operations. Generally, interest rate swaps and caps are used to
manage the interest rate risk associated with assets that have periodic and
annual reset limitations financed with borrowings that have no such limitations.
Financial futures contracts and options on futures are used to effectively
lengthen the terms of repurchase agreement financing, generally from one month
to three and six months. There were no financial futures contracts and options
on futures outstanding at December 31, 1996. The average notional amount of
futures and options on futures outstanding during 1996 were $738 million and
$533 million, respectively. Amounts presented are aggregate notional amounts. To
the extent any of these agreements are terminated, gains and losses are
generally amortized over the remaining period of the original agreement.
Instruments Used for Interest Rate Risk Management Purposes(1)
($ in millions)
- --------------------------------------------------------------------
Notional Interest Interest Financial Options on
Amounts Rate Caps Rate Swaps Futures Futures
- --------------------------------------------------------------------
1994 $ 1,475 $ - $ - $ -
1995 1,575 1,227 1,000 2,130
1996 1,499 1,453 - -
- --------------------------------------------------------------------
(1) Excludes all hedge agreements in effect for the Company's production
operations.
Net Interest Rate Agreement Expense
The net interest rate agreement expense, or hedging expense, equals the
expenses, net of any benefits received, from these agreements. For the year
ended December 31, 1996, net hedging expense amounted to $6.62 million versus
$3.70 million and $0.40 million for the years ended December 31, 1995 and 1994,
respectively. Such amounts exclude the hedging costs and benefits associated
with the Company's production activities as these amounts are deferred as
additional premium or discount on the loan funded and amortized over the life of
the loan as an adjustment to its yield. The increase in net interest rate
agreement expense for 1996 compared to 1995 is primarily the result of the
addition of an interest rate swap agreements to reduce the Company's exposure to
basis risk for certain collateral for collateralized bonds and to cap the
borrowing costs during any six-month period for a portion of the short-term
borrowings. The increase in the net interest rate agreement expense for 1995
compared to 1994 is due primarily to the addition of an interest rate swap
agreement entered into to reduce the interest rate risk on fixed-rate loans in
the collateral for collateralized bonds.
Net Interest Rate Agreement Expense
($ in millions)
- --------------------------------------------------------------------
Net Expense Net Expense as
Net Interest as Percentage Percentage of
Rate of Average Average
Agreement Assets Borrowings
Expense (annualized) (annualized)
- --------------------------------------------------------------------
1994 $ 0.40 0.011% 0.012%
1995 3.70 0.110% 0.122%
1996 6.62 0.162% 0.181%
- --------------------------------------------------------------------
Fair value
The fair value of the available-for-sale portion of the Company's investment
portfolio as of December 31, 1996, as measured by the net unrealized gain on
investments available-for-sale, was $64.4 million above its amortized cost
basis, which represents a $69.2 million improvement from December 31, 1995. At
December 31, 1995, the fair value Company's investment portfolio was below its
amortized cost basis by $4.8 million. This increase in the portfolio's value is
primarily attributable to the increase in the value of the collateral for
collateralized bonds relative to the collateralized bonds issued during the last
twelve months, as well as an increase in value of the Company's ARM securities
due principally to the ARM securities being fully-indexed. The portfolio also
benefited from the stabilization of interest rates and the reduction in
amortized cost basis of its investments through additional provision for losses.
At December 31, 1994, the fair value of the Company's available-for-sale
investments was $72.7 million below its amortized cost basis, reflecting
market-place volatility due to the rapid increase in short-term interest rates
at the time.
Credit Exposures
The Company has historically securitized its loan production in pass-through or
collateralized bonds securitization structures. With either structure, the
Company may use overcollateralization, subordination, reserve funds, bond
insurance, mortgage pool insurance or any combination of the foregoing for
credit enhancement. Regardless of the form of credit enhancement, the Company
may retain a limited portion of the direct credit risk after securitization.
This risk can include risk of loss related to hazards not covered under standard
hazard insurance policies and credit risks on loans not covered by standard
borrower mortgage insurance, or pool insurance.
Beginning in 1994, the Company issued pass-through securities which used
subordination structures as their form of credit enhancement. The credit risk of
subordinated pass-through securities is concentrated in the subordinated classes
(which may themselves partially be credit enhanced with reserve funds or pool
insurance) of the securities, thus allowing the senior classes of the securities
to receive the higher credit rating. To the extent credit losses are greater
than expected (or exceed the protection provided by any reserve funds or pool
insurance), the holders of the subordinated securities will experience a lower
yield (which may be negative) than expected on their investments. At December
31, 1996, the Company retained $19.4 million in aggregate principal amount of
subordinated securities, which are carried at a value of $2.1 million,
reflecting such potential credit loss exposure.
With collateralized bond structures, the Company also retains credit risk
relative to the amount of overcollateralization required in conjunction with the
bond insurance. Losses are generally first applied to the overcollateralization
amount, with any losses in excess of that amount borne by the bond insurer or
the holders of the various classes of the collateralized bonds. The Company only
incurs credit losses to the extent that losses are incurred in the repossession,
foreclosure and sale of the underlying collateral. Such losses generally equal
the excess of the principal amount outstanding plus servicer advances, less any
proceeds from mortgage or hazard insurance, over the liquidation value of the
collateral. To compensate the Company for retaining this loss exposure, the
Company generally receives an excess yield on the collateralized loans relative
to the yield on the collateralized bonds. At December 31, 1996, the Company
retained $88.0 million in aggregate principal amount of overcollateralization
and had reserves, or otherwise had provided coverage, on $62.1 million of the
potential credit loss exposure. This reserve includes a provision recorded as a
result of the sale of the single-family operations of approximately $31.0
million for possible losses on securitized single-family loans where the
Company, which performed the servicing of such loans prior to the sale, has
retained a portion of the credit risk on these loans. Also as a result from the
sale of the single-family operations, a $30.3 million loss reimbursement
guarantee from Dominion Mortgage Services, Inc. has been included in the
reserves at December 31, 1996.
The Company principally used pool insurance as its means of credit enhancement
for years prior to 1994. Pool insurance has generally been unavailable as a
means of credit enhancement since the beginning of 1994. Pool insurance covered
substantially all credit risk for the security with the exception of fraud in
the origination or certain special hazard risks. Loss exposure due to special
hazards is generally limited to an amount equal to a fixed percentage of the
principal balance of the pool of mortgage loans at the time of securitization.
Fraud in the origination exposure is generally limited to those loans which
default within one year of origination. The reserve for potential losses on
these risks was $6.0 million at December 31, 1996, which the Company believes
represents its potential exposure from these risks.
The following table summarizes the aggregate principal amount of collateral for
collateralized bonds and pass-through securities outstanding which are subject
to credit exposure, the maximum credit exposure held by the Company represented
by the amount of overcollateralization and first loss securities owned by the
Company, the credit reserves available to the Company for such exposure through
provision for losses, indemnifications or insurance and the actual credit losses
incurred. The table excludes reserves and losses due to fraud and special hazard
exposure. Additionally, for purposes of this table, the aggregate principal
amount of subordinated securities held by the Company are included in the
Maximum Credit Exposure column, with the difference between this amount and the
carrying amount of these securities as reported in the Company's consolidated
financial statements, included in Credit Reserves.
Credit Reserves and Actual Credit Losses
($ in millions)
- -----------------------------------------------------------------------------------------------------------------
Credit Credit Reserves
Outstanding Maximum Credit Credit Actual Credit Reserves to to Maximum
Loan Balance Exposure Reserves Losses Average Assets Credit Exposure
- -----------------------------------------------------------------------------------------------------------------
1995 $ 2,405 $ 65.9 $ 18.5 $ 0.0 0.55% 28.07%
1996 3,848 116.0 86.0 5.2 2.11% 74.14%
- -----------------------------------------------------------------------------------------------------------------
The following table summarizes the single-family mortgage loan delinquencies as
a percentage of the outstanding loan balance for the total collateral for
collateralized bonds and pass-through securities outstanding where the Company
has retained a portion of the credit risk either through holding a subordinated
security or through overcollateralization at December 31, 1996. There were no
delinquencies on any multi-family loans where the Company has retained a portion
of the credit risk either through holding a subordinated security or through
overcollateralization.
Delinquency Statistics
- -----------------------------------------------------------------------------------------------------
90 days and over delinquent
60 to 90 days delinquent (includes REO and foreclosures) Total
- -----------------------------------------------------------------------------------------------------
1995 2.50% 3.23% 5.73%
1996 0.88% 3.40% 4.28%
- -----------------------------------------------------------------------------------------------------
The following table summarizes the credit rating for investments held in the
Company's portfolio assets. This table excludes the Company's other mortgage
securities (the risk on such securities is prepayment related, not credit
related) and other portfolio assets. In preparing the table, the carrying
balances of the investments rated below A are net of credit reserves and
discounts. The average credit rating of the Company's portfolio assets at the
end 1996 was AAA. At December 31, 1996, securitized loans with a credit rating
of A or better were $3.5 billion, or 99.1% of the Company's total mortgage
investments compared to 98.5% and 99.6% at December 31, 1995 and 1994,
respectively. At the end of 1996, $332 million of all mortgage investments were
split-rated between rating agencies. Where investments were split-rated, for
purposes of this table, the Company classified such investments based on the
higher credit rating.
Portfolio Assets by Credit Rating (1)
($ in millions)
- ---------- --- ----------- -- ----------- -- ----------- --- ------------ ---------- ----------- ---------- ----------
AAA AA A Below A AAA AA A Below A
Carrying Carrying Carrying Carrying Percent Percent Percent Percent
Value Value Value Value of Total of Total of Total of Total
- ---------- --- ----------- -- ----------- -- ----------- --- ------------ ---------- ----------- ---------- ----------
1994 $ 1,619.2 $ 1,074.7 $ 245.0 $ 12.6 54.9% 36.4% 8.3% 0.4%
1995 2,039.9 1,010.3 23.7 46.8 65.3% 32.4% 0.8% 1.5%
1996 2,708.4 752.8 - 29.9 77.5% 21.6% - 0.9%
- ---------- --- ----------- -- ----------- -- ----------- --- ------------ ---------- ----------- ---------- ----------
(1) Carrying value does not include other mortgage securities and other portfolio assets.
Purchase, Securitization and Sale of Portfolio Assets
During 1996, the Company sold various portfolio investments due in part to
favorable market conditions, and in an attempt to strengthen the Company's
balance sheet by reducing its exposure to recourse short-term borrowings which
financed such investments. The aggregate principal amount of investments sold
during 1996 was $506.6 million, consisting of $479.3 million of ARM securities
and $27.3 million of other mortgage securities. These sales, along with the
re-securitization of certain ARM securities, reduced short-term borrowings by
approximately $1 billion and the Company recognized net losses of $0.9 million.
Also during 1996, the Company added approximately $2.13 billion of collateral
for collateralized bonds, with $2.07 billion of associated borrowings, through
its production operations. The Company also exercised its call right or
otherwise purchased $27.0 million of fixed-rate mortgage securities and $85.3
million of other mortgage securities.
During 1995, the Company sold certain portfolio investments to (i) reduce the
Company's exposure to periodic cap risk as discussed above, (ii) reduce the
Company's exposure to further declines in the market value of such securities
and (iii) increase liquidity. The aggregate principal amount of investments sold
was $632.1 million, consisting of $623.3 million principal amount of ARM
securities and $8.8 million of other mortgage securities from its portfolio.
Additionally, during the first quarter of 1995, the Company sold its repurchase
obligation on all convertible ARM loans previously securitized or sold. The
Company realized a net gain of $3.8 million on these sales of mortgage
securities and its repurchase obligation for 1995. During 1995, the Company
added approximately $851.7 million of collateral for collateralized bonds, with
$803.8 million of associated borrowings, $1.7 million of fixed-rate mortgage
securities and $5.7 million of other mortgage securities to its portfolio
through its mortgage operations. Additionally, the Company purchased
approximately $409.5 million of ARM securities and $6.0 million of fixed-rate
mortgage securities for its investment portfolio.
PRODUCTION ACTIVITIES
Until May 1996, the Company's production operations were comprised mainly of its
single-family mortgage operations that concentrated on the "non-conforming"
segment of the residential loan market. The Company funded its single-family
loans directly through mortgage brokers (wholesale) and purchased loans through
a network of mortgage companies (correspondents). Loans originated through the
Company's former single-family mortgage operations constitute the majority of
loans underlying the securities that comprise the Company's current portfolio
assets. Since the sale of the Company's single-family mortgage operations, the
Company's primary production operations have been focused on multi-family
lending and manufactured housing lending. The Company is in the process of
broadening its multi-family lending capabilities to include other types of
commercial real estate loans and to expand its manufactured housing lending to
include inventory financing to manufactured housing dealers. The Company may
also purchase single-family loans on a "bulk" basis from time to time, and may
originate such loans on a retail basis.
The purpose of the Company's production operations is to enhance the return on
shareholders' equity (ROE) by earning a favorable net interest spread while
loans are in warehouse being accumulated for securitization or sale and creating
investments for its portfolio at a lower cost than if such investments were
purchased from third parties. The creation of such investments generally
involves the issuance of pass-through securities or collateralized bonds
collateralized by the loans generated from the Company's production activities,
and the retention of one or more classes of the securities or collateralized
bonds relating to such issuance. The issuance of pass-through securities and
collateralized bonds generally limits the Company's credit and interest rate
risk relating to loans generated by the Company's production operations.
When a sufficient volume of loans is accumulated, the Company generally
securitizes the loans through the issuance of collateralized bonds or
pass-through securities. The Company believes that securitization is an
efficient and cost effective way for the Company to (i) reduce capital otherwise
required to own the loans in whole loan form; (ii) limit the Company's exposure
to credit risk on the loans; (iii) lower the overall cost of financing the
loans; and (iv) depending on the securitization structure, limit the Company's
exposure to interest rate and/or valuation risk. As a result of the reduction in
the availability of mortgage pool insurance, and the Company's desire to both
reduce its recourse borrowings as a percentage of its overall borrowings and the
variability of its earnings, the Company has utilized the collateralized bonds
structure for securitizing substantially all of its loan production since the
beginning of 1995.
The following table summarizes the production activity for the three years ended
December 31, 1996, 1995 and 1994.
Production Activity
($ in thousands)
- -------------------------------------------------------------------
Year Ended
December 31,
---------------------------------
1996 1995 1994
----------- ----------- ----------
Multi-family $ 201,496 $ 18,532 $ 20,626
Manufactured housing 41,031 - -
Single-family 501,474 875,421 2,840,817
========= ======== ========
Total principal amount of
loans funded through $ 744,001 $ 893,953 $2,861,443
production operations
========= ======== ========
Single-family loans bulk $ 731,460 $ 22,433 $ -
purchased
========= ======== ========
Principal amount securitized $1,357,564 $1,172,101 $3,100,595
or sold ========= ======== ==========
- --------------------------------------------------------------------
1996 compared to 1995. The decrease in the overall funding volume of loans for
1996 as compared to 1995 is mainly the result of the sale of the Company's
single-family mortgage operations in May 1996. This decrease was partially
offset by the increase in multi-family loans funded and the commencement of
manufactured housing lending.
The manufactured housing operations began funding loans during the second
quarter of 1996. Since its initial start-up, the Company has opened region
offices in North Carolina, Georgia, Texas and Michigan. The Company is planning
to establish a fifth regional office on the West coast during the second quarter
of 1997. Principally all funding volume has been obtained through relationships
with manufactured housing dealers. As of December 31, 1996, the Company had $41
million in principal balance of manufactured housing loans in inventory, and had
commitments outstanding of approximately $15 million. As of December 31, 1996,
manufactured housing loans that were 60+ day delinquent totaled $0.1 million. In
the future, the Company plans to expand its sources of origination to nearly all
sources for manufactured housing loans by establishing relationships with park
owners, developers of manufactured housing communities, manufacturers of
manufactured homes, brokers and correspondents. In addition, the Company will
begin offering dealer inventory financing during the first quarter 1997. Once
certain volume levels are achieved at a particular region, district offices may
be opened in an effort to further market penetration. The first district office
is expected to be opened in the first quarter of 1997.
As of December 31, 1996, the Company had $208 million in principal balance of
multi-family loans held for securitization compared with $7.8 million at
December 31, 1995. There are no multi-family loan delinquencies as of December
31, 1996. Principally all fundings are under the Company's lending programs for
properties that have been allocated low income housing tax credits. As of
December 31, 1996, commitments to fund multi-family loans over the next 25
months were approximately $522 million. The Company expects that it will have
funded volume sufficient enough to securitize a portion of its multi-family
mortgage loans held for securitization in the first half of 1997 through the
issuance of collateralized bonds. The Company will retain a portion of the
credit risk after securitization and intends to service the loans.
The Company's securitization strategy for 1996 focused on securitizing its loan
production through the issuance of collateralized bonds. These securitizations
are recorded as financing transactions and as such, no gain on sale is recorded
at the time of the securitization. Instead, income related to the net
collateralized bond investment is recognized over time as part of net margin
income. In 1996 the Company securitized approximately $1.4 billion of loans
through the issuance of collateralized bonds compared to $770 million in 1995.
During 1996 there were no whole loan pool sales or pass-through securitizations.
1995 compared to 1994. The decrease in the funding volume of loans in 1995 as
compared to 1994 resulted from the lower overall mortgage loan originations in
the market and an increased level of price competition for mortgage loans.
Additionally, approximately 64% of the mortgage loans funded by the Company were
ARM loans, which declined as a percentage of the overall loan origination market
as a result of the flat yield curve environment during much of 1995.
During 1995, a substantial portion of the Company's loan production was
securitized through the issuance of collateralized bonds. Of the remaining
production in 1995, the Company sold whole loan pools aggregating $124 million,
and securitized $278 million of mortgage loans using a senior/subordinated
structure. The net gain on securitizations and sales of these mortgage loans,
excluding recognition of deferred gains, amounted to $4.7 million for 1995. This
represented a decline of $15.3 million, or 77%, from net gains on sale of
mortgage loans of $20.0 million for 1994.
During 1994, the Company acquired a mortgage servicing company with a servicing
portfolio of approximately $600 million. Through this acquisition, the Company
serviced those mortgage loans where it has retained all or a portion of the
credit risk. During 1995, the Company sold a portion of its purchased mortgage
servicing rights which were acquired in the acquisition. The gain resulting from
this sale totaled $1.2 million, and was included in net gain on sale of assets.
Prior to the sale of the single-family mortgage operations, the Company had
generally serviced mortgage loans which it has originated or purchased and where
it retained all or a portion of the credit risk. Due of the sale of the
Company's single-family mortgage operations, the Company no longer services
these mortgage loans. Therefore, during the second quarter of 1996, as an
adjustment to the gain on sale of the mortgage operations, the Company
recognized a provision for potential losses on these loans of approximately $31
million.
OTHER ITEMS
General and Administrative Expenses
General and administrative expenses (G&A expense) consist of expense incurred in
conducting the Company's production activities, managing the investment
portfolio, and various corporate expenses. The following table summarizes the
Company's efficiency, the ratio of G&A expense to average interest-earning
assets, and the ratio of G&A expense to average total equity.
Operating Expense Ratios
- ---------------------------------------------------------------------
G&A G&A
Expense/Average Expense/Average
G&A Interest-earning Total Equity
Efficiency Assets (b)
Ratio (a) (Annualized) (Annualized)
- -----------------------------------------------------------------------------
1994 9.36% 0.60% 7.84%
1995 7.14% 0.54% 5.92%
1996 6.65% 0.51% 5.28%
- ---------------------------------------------------------------------
(a) G&A expense as a percentage of interest income.
(b) Average total equity excludes unrealized gain (loss) on available-for-sale investments.
G&A expense increased for the year ended December 31, 1996 as compared to the
same period in 1995 primarily due to the expansion of the single-family
wholesale operations and the start up costs related to the manufactured housing
lending operations. The Company continues to expand its manufactured housing
operations, and in August 1996, acquired MCM to expand its multi-family and
commercial lending businesses. The Company currently services all loans funded
through its production operations. Such operations should continue to cause
general and administrative expenses to increase in 1997. G&A related to the
production operations will increase over time as the Company expands its
production activities with current and new product types. G&A expense in 1995
compared to 1994 decreased as a result of the reduction in the workforce due to
the decrease in single-family lending volumes during 1995 compared to 1994.
Net Income and Return on Equity
Net income increased from $36.9 million for the year ended December 31, 1995, to
$73.0 million for the year ended December 31, 1996. Return on common equity
(excluding the impact of the unrealized gain on available-for-sale investments)
also increased from 12.5% for the year ended December 31, 1995 to 21.6% for the
year ended December 31, 1996. The majority of the increase in both the net
income and the return on common equity from 1995 is due to (i) the gain
recognized on the sale of the single-family operations in the second quarter of
1996, (ii) the increased net margin related to increased levels of
interest-earning assets and (iii) the increase in the net interest spread on
interest-earning assets.
Components of Return on Common Equity
- --------------------------------------------------------------------------------------------------------------------------
Gains and G&A
Net Interest Provision Other Expense/ Preferred Return on
Margin/ for Losses Income Average Dividend/ Average Net Income
Average /Average Common /Average Common Average Common Common Available to
Common Equity Equity Common Equity Equity Equity Equity Common
(annualized) (annualized) (annualized) (annualized) (annualized) (annualized) Shareholders
- --------------------------------------------------------------------------------------------------------------------------
1994 17.12% 0.78% 10.74% 7.84% N/A 19.24% $52,257
1995 16.58% 1.06% 4.62% 6.63% 1.01% 12.50% 34,164
1996 26.68% 1.06% 6.47% 7.10% 3.43% 21.56% 63,039
- --------------------------------------------------------------------------------------------------------------------------
The Company and its qualified REIT subsidiaries (collectively "Resource REIT")
have elected to be treated as a real estate investment trust for federal income
tax purposes. The REIT provisions of the Internal Revenue Code require Resource
REIT to distribute to shareholders substantially all of its taxable income,
thereby restricting its ability to retain earnings. The Company may issue
additional common stock, preferred stock or other securities in the future in
order to fund growth in its operations, growth in its portfolio of mortgage
investments or for other purposes.
The Company intends to declare and pay out as dividends 100% of its taxable
income over time. The Company's current practice is to declare quarterly
dividends per share. Generally, the Company strives to declare a quarterly
dividend per share which will result in the distribution of most or all of the
taxable income earned during the quarter. At the time of the dividend
announcement, however, the total level of taxable income for the quarter is
unknown. Additionally, the Company has considerations other than the desire to
pay out most of the taxable earnings for the quarter, which may take precedence
when determining the level of dividends.
Dividend Summary
($ in thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------
Taxable Net
Income Dividend
Available to Taxable Net Declared Dividend Cumulative
Common Income Per Per Common Pay-out Undistributed
Shareholders Common Share Share Ratio Taxable Income
- ---------------------------------------------------------------------------------------------
1994 $ 48,396 $ 2.44 $ 2.76 113% $ 3,665
1995 32,438 1.61 1.68 104% 3,204
1996 51,419 2.52 2.27 90% 8,210
- ---------------------------------------------------------------------------------------------
Taxable income for 1996 is estimated as the Company has not filed its 1996
federal income tax returns. Taxable income differs from the financial statement
net income which is determined in accordance with generally accepted accounting
principles (GAAP). For the year ended December 31, 1996, GAAP net income per
common share exceeded taxable income per common share principally due to
differences related to the sale of the single-family operations. For tax
purposes, the sale will be accounted for on an installment sale basis with
annual taxable income of approximately $10 million. Additionally, the Company
had a capital loss carryforward available from prior years of $9 million which
will offset a portion of the tax gain from the sale of the single-family
operations that will be recognized in 1996. Cumulative undistributed taxable
income represents timing differences in the amounts earned for tax purposes
versus the amounts distributed. Such amounts can be distributed for tax purposes
in the subsequent year as a portion of the normal quarterly dividend.
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (FASB) issued FAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". FAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial components approach
that focuses on control of the respective assets and liabilities. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. FAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996. The impact of this statement on the Company's financial position and
results of operations has not been determined, but is not expected to be
material.
LIQUIDITY AND CAPITAL RESOURCES
The Company has various sources of cash flow upon which it relies for its
working capital needs. Sources of cash flow from operations include primarily
the return of principal on its portfolio investments and the issuance of
collateralized bonds. Other borrowings provide the Company with additional cash
flow in the event that it is necessary. Historically, these sources have
provided sufficient liquidity for the conduct of the Company's operations.
However, if a significant decline in the market value of the Company's portfolio
assets should occur, the Company's available liquidity from these other
borrowings may be reduced. As a result of such a reduction in liquidity, the
Company may be forced to sell certain portfolio assets in order to maintain
liquidity. If required, these sales could be made at prices lower than the
carrying value of such assets, which could result in losses.
The Company borrows funds on a short-term basis to support the accumulation of
loans prior to the sale of such loans or the issuance of mortgage- or
asset-backed securities. These borrowings may bear fixed or variable interest
rates, may require additional collateral in the event that the value of the
existing collateral declines and may be due on demand or upon the occurrence of
certain events. If borrowing costs are higher than the yields on the assets
financed with such funds, the Company's ability to acquire or fund additional
assets may be substantially reduced and it may experience losses. These
short-term borrowings consist of the Company's lines of credit and repurchase
agreements and are paid down as the Company securitizes or sells loans.
A substantial portion of the assets of the Company are pledged to secure
indebtedness incurred by the Company. Accordingly, those assets would not be
available for distribution to any general creditors or the stockholders of the
Company in the event of the Company's liquidation, except to the extent that the
value of such assets exceeds the amount of the indebtedness they secure.
Lines of Credit
At December 31, 1996, the Company has three credit facilities aggregating $500
million to finance loan fundings and for working capital purposes of which $350
million expires in 1997 and $150 million expires in 1998. One of these
facilities includes several sublines aggregating $300 million to serve various
purposes, such as multi-family loan fundings, working capital, and manufactured
housing loan fundings, which may not, in the aggregate, exceed the overall
facility commitment of $150 million at any time. Working capital borrowings are
limited to $30 million. The Company expects that these credit facilities will be
renewed, if necessary, at their respective expiration dates, although there can
be no assurance of such renewal. The lines of credit contain certain financial
covenants which the Company met as of December 31, 1996. However, changes in
asset levels or results of operations could result in the violation of one or
more covenants in the future.
Repurchase Agreements
The Company finances certain of its portfolio assets through repurchase
agreements. Repurchase agreements allow the Company to sell such portfolio
assets for cash together with a simultaneous agreement to repurchase the same
portfolio assets on a specified date for a price which is equal to the original
sales price plus an interest component. At December 31, 1996, the Company had
outstanding obligations of $756.4 million under such repurchase agreements, of
which $717.2 million, $26.3 million and $12.9 million were secured by ARM
securities, fixed-rate mortgage securities and other mortgage securities,
respectively compared to $1.98 billion in repurchase agreements at December 31,
1995, secured by $1.95 billion, $24.2 million and $7.7 million, respectively in
ARM securities, fixed securities and other mortgage securities. Increases in
either short-term interest rates or long-term interest rates could negatively
impact the valuation of these mortgage securities and may limit the Company's
borrowing ability or cause various lenders to initiate margin calls.
Additionally, certain of the Company's ARM securities are AAA or AA rated
classes that are subordinate to related AAA rated classes from the same series
of securities. Such AAA or AA rated classes have less liquidity than securities
that are not subordinated and the value of such classes is more dependent on the
credit rating of the related insurer or the credit performance of the underlying
mortgage loans. In instances of a downgrade of an insurer or the deterioration
of the credit quality of the underlying mortgage collateral, the Company may be
required to sell certain portfolio assets in order to maintain liquidity. If
required, these sales could be made at prices lower than the carrying value of
the assets, which could result in losses.
The Company owns $367 million of its collateralized bonds at December 31, 1996
and has financed such collateralized bonds with $367 million of short-term debt.
This compares to approximately $102 million in collateralized bonds at December
31, 1995 financed with $102 million of short-term debt. For financial statement
presentation purposes, the Company has classified the $367 million and $102
million of short-term debt at December 31, 1996 and 1995, respectively, as
collateralized bonds outstanding.
The Company also may finance a portion of its loans held for securitization with
repurchase agreements on an uncommitted basis. At December 31, 1996, the Company
had no outstanding obligations under such repurchase agreements.
Potential immediate sources of liquidity for the Company include cash balances
and unused availability on the credit facilities. At December 31, 1996, the
Company had an estimated unused borrowing capacity of $131.8 million. The total
immediate sources of liquidity totaled $39.5 million, or 4.24% of recourse
borrowings. Recourse borrowings exclude borrowings, such as collateralized
bonds, that are non-recourse to the Company.
Unsecured Borrowings
The Company issued two series of unsecured notes totaling $50 million in 1994.
The proceeds from this issuance were used for general corporate purposes. At
December 31, 1996, the notes have an outstanding balance at of $44 million
compared to $47 million at December 31, 1995. The first principal repayment of
one of the notes was due October 1995 and annually thereafter, with quarterly
interest payments due. Principal repayment on the second note is contracted to
begin in October 1998. The notes mature between 1999 and 2001 and bear interest
at 9.56% and 10.03%. The note agreements contain certain financial covenants
which the Company met as of December 31, 1996. However, changes in asset levels
or results of operations could result in the violation of one or more covenants
in the future. The Company also has various acquisition notes totaling $2.0
million and $1.4 million at December 31, 1996 and 1995, respectively.
Preferred Stock Offering
In October 1996, the Company issued 1.84 million shares of Series C 9.73%
Cumulative Convertible Preferred Stock at a price of $30 per share. The net
proceeds from this issuance totaled $52.9 million and were used to pay down
short-term debt, as well as for general corporate purposes.
FOURTH QUARTER REVIEW
The Company reported net income of $17.9 million for the fourth quarter of 1996
and earnings per common share of $0.70. These results compare favorably with the
fourth quarter of 1995 net income of $12.1 million and earnings per common share
of $0.51. Compared with the fourth quarter of 1995, the Company's fourth quarter
1996 results reflect mainly an increase in the net interest margin, offset
partially by an increase general and administrative expenses.
Net interest margin totaled $19.8 million for the fourth quarter of 1996
compared with $13.9 million for the fourth quarter of 1995. The increase
resulted primarily from an increase in average interest-earning assets to $4.3
billion for the fourth quarter of 1996 compared to $3.4 billion for the fourth
quarter of 1995. The increase in the average interest-earning assets was
primarily due to the addition of $2.13 billion in collateral for collateralized
bonds during 1996. Additionally, the spread on the net investment in
collateralized bonds increased from 1.47% for the fourth quarter of 1995 to
1.51% for the fourth quarter of 1996. These factors were the major contributors
to the overall increase in the net interest spread on all interest-earning
assets from 1.48% in the fourth quarter of 1995 to 1.56% for the fourth quarter
of 1996.
Annualized return on common shareholders' equity was 19.31% in the fourth
quarter of 1996 compared to 14.96% for the fourth quarter of 1995.
The average borrowed funds increased $800 million to $3.8 billion for the fourth
quarter of 1996 compared to $3.0 billion for the fourth quarter of 1995. This
increase was directly related to the increase in the average interest-earning
assets, primarily collateral for collateralized bonds. While the average
borrowings increased for the fourth quarter of 1996, the average cost of funds
decreased in comparison with the same quarter in 1995. The decrease in the cost
of funds was due to the decrease in the average one-month LIBOR rate in the
fourth quarter of 1996 in comparison to the fourth quarter of 1995.
Loan production for the fourth quarter of 1996 decreased from the fourth quarter
of 1995 primarily as a result of the sale of the single-family mortgage
operations in the second quarter of 1996. This decrease in single-family
mortgage lending during the fourth quarter of 1996 was partially offset by the
increase in multi-family and manufactured housing lending during the fourth
quarter of 1996 in comparison to the same period for 1995.
Summary of Selected Quarterly Results (unaudited)
(amounts in thousands except share data)
- -------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996 First Quarter Second Quarter Third Quarter Fourth Quarter
- -------------------------------------------------------------------------------------------------------------------------
Operating results:
Total revenues $72,982 $91,236 $80,414 $86,339
Net interest margin 17,819 18,292 19,002 19,794
Net income 12,685 25,897 16,558 17,908
Primary net income per common share 0.52 1.16 0.70 0.70
Fully diluted net income per common share 0.52 1.07 0.68 0.69
Cash dividends declared per common share 0.51 0.55 0.585 0.62
Annualized return on common shareholders' equity 15.12% 32.45% 19.17% 19.31%
- -------------------------------------------------------------------------------------------------------------------------
Average interest-earning assets $3,746,326 $4,164,848 $4,106,538 $4,308,551
Average borrowed funds 3,321,060 3,735,776 3,667,944 3,825,116
- -------------------------------------------------------------------------------------------------------------------------
Net interest spread on interest-earning assets 1.53% 1.48% 1.57% 1.56%
Average asset yield 7.70% 7.52% 7.64% 7.72%
Net yield on average interest-earning assets (1) 2.23% 2.11% 2.21% 2.25%
Cost of funds 5.99% 6.04% 6.07% 6.17%
- -------------------------------------------------------------------------------------------------------------------------
Loans funded $ 358,913 $ 233,618 $ 70,757 $ 80,713
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1995 First Quarter Second Quarter Third Quarter Fourth Quarter
- -------------------------------------------------------------------------------------------------------------------------
Operating results:
Total revenues $ 64,426 $ 64,482 $ 69,373 $ 68,215
Net interest margin 7,404 9,215 11,906 13,894
Net income 6,596 8,041 10,128 12,145
Net income per common share (2) 0.33 0.40 0.46 0.51
Cash dividends declared per common share 0.36 0.40 0.44 0.48
Annualized return on common shareholders' equity 9.68% 11.81% 13.52% 14.96%
---------------------------------------------------------------------------------------------------------------------------
Average interest-earning assets $3,406,960 $3,181,363 $3,450,435 $3,360,809
Average borrowed funds 3,058,127 2,906,055 3,159,677 3,025,324
- ---------------------------------------------------------------------------------------------------------------------------
Net interest spread on interest-earning assets 0.56% 1.03% 1.20% 1.48%
Average asset yield 7.14% 7.71% 7.74% 7.67%
Net yield on average interest-earning assets (1) 1.23% 1.60% 1.74% 2.00%
Cost of funds 6.58% 6.68% 6.46% 6.30%
- --------------------------------------------------------------------------------------------------------------------------
Loans funded $ 237,119 $ 197,516 $ 242,213 $ 217,105
- ------------------------------------------------------------------------------------------------------------------------
(1) Computed as net interest margin excluding non-interest collateralized bond expenses and interest on senior notes
payable.
(2) Fully diluted net income per share is not presented for 1995 as the Company's preferred stock and outstanding
stock appreciation rights were anti-dilutive.
FORWARD-LOOKING STATEMENTS
Certain written statements in this Form 10-K made by the Company, that are not
historical fact, constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements may
involve factors that could cause the actual results of the Company to differ
materially from historical results or from any results expressed or implied by
such forward-looking statements. The Company cautions the public not to place
undue reliance on forward-looking statements, which may be based on assumptions
and anticipated events that do not materialize. The Company does not undertake,
and the Securities Litigation Reform Act specifically relieves the Company from,
any obligation to update any forward-looking statements.
Factors that may cause actual results to differ from historical results or from
any results expressed or implied by forward-looking statements include the
following:
Economic Conditions. The Company is affected by consumer demand for manufactured
housing, multi-family housing and other products which it finances. A material
decline in demand for these goods and services would result in a reduction in
the volume of loans originated by the Company. The risk of defaults and credit
losses could increase during an economic slowdown or recession. This could have
an adverse effect on the Company's financial performance and the performance on
the Company's securitized loan pools.
Capital Resources. The Company relies on various credit facilities and
repurchase agreements with certain investment banking firms to help meet the
Company's short-term funding needs. The Company believes that as these
agreements expire, they will continue to be available or will be able to be
replaced; however no assurance can be given as to such availability or the
prospective terms and conditions of such agreements or replacements.
Interest Rate Fluctuations. The Company's income depends on its ability to earn
greater interest on its investments than the interest cost to finance these
investments. Interest rates in the markets served by the Company generally rise
or fall with interest rates as a whole. A majority of the loans currently
originated by the Company are fixed-rate. The profitability of a particular
securitization may be reduced if interest rates increase substantially before
these loans are securitized. In addition, the majority of the investments held
by the Company are securities or loans with adjustable rates. These investments
are financed through short-term repurchase agreements and floating rate
collateralized bonds. The net interest spread for these investments could
decrease during a period of rapidly rising interest rates, since the investments
have interest rate caps and the related borrowing have no such interest rate
caps.
Defaults. Defaults may have an adverse impact on the Company's financial
performance, if actual credit losses differ materially from estimates made by
the Company at the time of securitization. The allowance for losses is
calculated on the basis of historical experience and management's best
estimates. Actual defaults may differ from the Company's estimate as a result of
economic conditions. Actual defaults on ARM loans may increase during a rising
interest rate environment. The Company believes that its reserves are adequate
for such risks.
Prepayments. Prepayments may have an adverse impact on the Company's financial
performance, if prepayments differ materially from estimates made by the
Company. The prepayment rate is calculated on the basis of historical experience
and management's best estimates. Actual rates of prepayment may vary as a result
of the prevailing interest rate. Prepayments are expected to increase during a
declining interest rate environment. The Company's exposure to more rapid
prepayments is (i) the faster amortization of premium on the investments and
(ii) the replacement of investments in its portfolio with lower yield
securities.
Competition. The financial services industry is a highly competitive
market. Increased competition in the market could adversely affect the
Company's market share within the industry.
Regulatory Changes. The Company's business is subject to federal and state
regulation which, among other things, require the Company to maintain various
licenses and qualifications and require specific disclosures to borrowers.
Changes in existing laws and regulations or in the interpretation thereof, or
the introduction of new laws and regulations, could adversely affect the
Company's operation and the performance of the Company's securitized loan pools.
New Production Sources. The Company has recently begun originating manufactured
housing loans and anticipates entering other lending businesses that are
complementary to its current multi-family mortgage lending strategy. The Company
is incurring or will incur expenditures related to the start-up of these
businesses, with no guarantee that production targets set by the Company will be
met or that these businesses will be profitable. Various factors such as
economic conditions, interest rates, competition and the lack of the Company's
prior experience in originating manufactured housing or other loans could all
impact these new production sources.
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-1 through F-19 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 included in the Company's proxy statement for its 1997 Annual
Meeting of Stockholders (the 1997 Proxy Statement) in the Election of Directors
and Management of the Company sections on pages 2 and 4 and is incorporated
herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is included in the 1997 Proxy Statement in
the Management of the Company section on pages 4 through 9 and is incorporated
herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is included in the 1997 Proxy Statement in
the Ownership of Common Stock section on page 3 and is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is included in the 1997 Proxy Statement in
the Compensation Committee Interlocks and Insider Participation section on page
8 and is incorporated herein by reference.
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. and 2. Financial Statements and Financial Statement Schedule
The information required by this section of Item 14 is set forth in the
Consolidated Financial Statements and Independent Auditors' Report beginning at
page F-1 of this Form 10-K. The index to the Financial Statements and
Schedule is set forth at page F-2 of this Form 10-K.
3. Exhibits
Exhibit
Number Exhibit
3.1 Articles of Incorporation of the Registrant, as amended, effective as of
February 4, 1988. (Incorporated herein by reference to the
to the Company's Amendment No. 1 to the Registration
Statement on Form S-3 (No. 333-10783) filed March 21, 1997.)
3.2 Amended Bylaws of the Registrant (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31, 1992,
as amended.)
3.3 Amendment to the Articles of Incorporation, effective December 29, 1989
(Incorporated herein by reference to the Company's Amendment No. 1 to
the Registration Statement on Form S-3 (No. 333-10783) filed March 21,
1997.)
3.4 Amendment to the Articles of Incorporation, effective June 27, 1995
(Incorporated herein by reference to the Company's Current Report on
Form 8-K (File No. 1-9819), dated June 26, 1995.)
3.5 Amendment to the Articles of Incorporation, effective October 23, 1995
(Incorporated herein by reference to the Company's
Current Report on Form 8-K (File No. 1-9819), dated October 19, 1995.)
3.6 Amendment to the Articles of Incorporation, effective October 9, 1996
(Incorporated herein by reference to the Registrant's Current Report
on Form 8-K (File No. 1-9819), filed October 15, 1996.)
3.7 Amendment to the Articles of Incorporation, effective October 10, 1996
(Incorporated herein by reference to the Registrant's Current Report
on Form 8-K (File No. 1-9819), filed October 15, 1996.)
3.8 Amendment to the Articles of Incorporation, effective October 19, 1992.
(Incorporated herein by reference to the Company's Amendment No. 1 to the
Registration Statement on Form S-3 (No. 333-10783) file March 21, 1997.)
3.9 Amendment to the Articles of Incorporation, effective August 17, 1992.
(Incorporated herein by reference to the Company's Amendment No. 1 to the
Registration Statement on Form S-3 (No. 333-10783) filed March 21, 1997.)
10.1 Selected Portions of the Registrant's Seller/Servicer Guide
(Incorporated herein by reference to Saxon Mortgage Securities
Corporation's Registration Statement on Form S-11 (No. 33-57204) filed
January 21, 1993.
10.2 Program Servicing Agreement between the Registrant and Ryland Mortgage
Company, as amended (Incorporated herein by reference to Exhibits the
Company's Annual Report on Form 10-K for the year ended December 31, 1991
(File No. 1-9819) dated February 18, 1992).
10.3 Dividend Reinvestment and Stock Purchase Plan (Incorporated herein by
reference to Exhibits to the Company's Registration Statement on Form
S-3 (No. 33-52071).)
10.4 1992 Stock Incentive Plan (Incorporated herein by reference to the Proxy
Statement dated July 13, 1992 for the Special Meeting of Stockholders held
August 17, 1992.)
10.5 Executive Deferred Compensation Plan (Incorporated by reference to
Exhibits the Company's Annual Report on Form 10-K for the year ended
December 31, 1993 (File No. 1-9819) dated March 21, 1994.)
10.6 Employment Agreement: Thomas H. Potts (Incorporated by reference to
Exhibits the Company's Annual Report filed on Form 10-K for the year
ended December 31, 1994 (File No. 1-9819) dated March 31, 1996.)
10.7 Promissory Note, dated as of May 13, 1996, between Resource Mortgage
Capital, Inc. (as Lender) and Dominion Mortgage Services, Inc. (as
Borrower) (Incorporated herein by reference to Exhibits to the
Company's Form 10-Q for the quarter ended June 30, 1996 (File No.
1-9819) dated August 14, 1996.)
10.8 Employment Agreement: William J. Moore dated August 31, 1996 (filed
herewith)
10.9 Resource Mortgage Capital, Inc. Bonus Plan (filed herewith)
21.1 List of subsidiaries and consolidated entities of the Company (filed
herewith)
23.1 Consent of KPMG Peat Marwick LLP (filed herewith)
27.1 Financial Data Schedule (Incorporated herein by reference to the Company's
Amendment No. 1 to the Registration Statement on Form S-3 (No. 333-10783)
filed March 27, 1997.)
(b) Reports on Form 8-K:
Current Report on Form 8-K, filed on Ocober 15, 1996 regarding the
issuance of Series C 9.73% Cumulative Convertible Preferred Stock.
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, 1997 /s/ Thomas H. Potts
-------------------
Thomas H. Potts
President
(Principal Executive Officer)
March 21, 1997 /s/ Lynn K. Geurin
------------------
Lynn K. Geurin
Executive Vice President and Chief
Financial Officer
(Principal Accounting and Financial
Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ Thomas H. Potts Director March 21, 1997
- --------------------
Thomas H. Potts
/s/ J. Sidney Davenport, IV Director March 21, 1997
---------------------------
J. Sidney Davenport, IV
/s/ Richard C. Leone, Director March 21, 1997
- ----------------------
Richard C. Leone
/s/ Paul S. Reid Director March 21, 1997
- -------------------
Paul S. Reid
/s/ Donald B. Vaden Director March 21, 1997
- -------------------
Donald B. Vaden
EXHIBIT INDEX
Seuentially
Numbered
Exhibit Page
10.8 Employment Agreement: William J. Moore dated August 31, 1996.......I
10.9 Resource Mortgage Capital, Inc. Bonus Plan........................II
21.1 List of subsidiaries..................................................III
23.1 Consent of KPMG Peat Marwick LLP.......................................IV
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, 1996
RESOURCE MORTGAGE CAPITAL, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Financial Statements: Page
Independent Auditors' Report................................................................F-3
Consolidated Balance Sheets
December 31, 1996 and 1995..........................................................F-4
Consolidated Statements of Operations
For the years ended December 31, 1996, 1995 and 1994 ..............................F-5
Consolidated Statements of Shareholders' Equity -- For the
years ended December 31, 1996, 1995 and 1994 ...................................F-6
Consolidated Statements of Cash Flows -- For the years ended
December 31, 1996, 1995 and 1994................................................... F-7
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994 .................................................F-8
Schedule IV - Mortgage Loans on Real Estate .....................................................F-20
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 schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Resource Mortgage
Capital, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Richmond, Virginia
February 4, 1997
CONSOLIDATED BALANCE SHEETS
RESOURCE MORTGAGE CAPITAL, INC.
December 31, 1996 and 1995
(amounts in thousands except share data)
ASSETS 1996 1995
--------- ----------
Investments:
Portfolio assets:
Collateral for collateralized bonds $2,702,294 $1,028,935
Mortgage securities 892,037 2,149,416
Other 96,236 27,585
Loans held for securitization 265,537 220,048
--------- ----------
3,956,104 3,425,984
Cash 11,396 22,229
Accrued interest receivable 8,078 14,851
Other assets 11,879 26,974
========= ==========
$3,987,457 $3,490,038
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Collateralized bonds $ 2,519,708 $ 949,139
Repurchase agreements 756,448 1,983,358
Notes payable 177,124 154,041
Accrued interest payable 2,717 5,278
Other liabilities 27,843 43,399
--------- ----------
3,483,840 3,135,215
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share,
50,000,000 shares authorized:
9.75% Cumulative Convertible Series A,
1,552,500 issued and outstanding, respectively 35,460 35,460
9.55% Cumulative Convertible Series B,
2,196,824 issued and outstanding, respectively 51,425 51,425
9.73% Cumulative Convertible Series C,
1,840,000 and none issued and outstanding, 52,740 -
respectively
Common stock, par value $.01 per share, 50,000,000
shares authorized,20,653,593 and 20,198,654
issued and outstanding, respectively 207 202
Additional paid-in capital 291,637 281,508
Net unrealized gain (loss) on investments 64,402 (4,759)
available-for-sale
Retained earnings (deficit) 7,746 (9,013)
--------- ----------
503,617 354,823
--------- ----------
$3,987,457 $3,490,038
=========== ===========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
RESOURCE MORTGAGE CAPITAL, INC.
Years ended December 31, 1996, 1995 and 1994 (amounts in thousands except share
data)
1996 1995 1994
--------- -------- ---------
Interest income:
Collateral for collateralized bonds $148,675 $ 61,007 $ 33,719
Mortgage securities 129,253 161,889 157,701
Other portfolio assets 4,700 2,637 765
Loans held for securitization 29,439 28,349 35,121
--------- -------- ---------
312,067 253,882 227,306
--------- -------- ---------
Interest and related expense:
Collateralized bonds 117,070 50,984 32,840
Repurchase agreements 105,970 142,474 134,791
Notes payable 8,195 11,186 6,189
Other 2,819 3,931 6,998
Provision for losses 3,106 2,888 2,124
--------- -------- ---------
237,160 211,463 182,942
--------- -------- ---------
Net interest margin 74,907 42,419 44,364
Gain on sale of single-family mortgage 17,285 - -
operations
Gain on sale of assets, net of associated costs 503 9,651 27,723
Other income 1,116 2,963 1,454
General and administrative expenses (20,763 ) (18,123 ) (21,284 )
--------- -------- ---------
Net income $73,048 $36,910 $52,257
========= ======== =========
Net income $73,048 $ 36,910 $ 52,257
Dividends on preferred stock (10,009) (2,746) -
========= ======== =========
Net income available to common shareholders $ 63,039 $ 34,164 $ 52,257
========= ======== =========
Per common share:
Primary $ 3.08 $ 1.70 $ 2.64
========= ======== =========
Fully diluted $ 2.96 $ 1.70 $ 2.64
========= ======== =========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
RESOURCE MORTGAGE CAPITAL, INC.
Years ended December 31, 1996, 1995 and 1994 (amounts in thousands except share
data)
Net Unrealized
Additional Gain (Loss) Retained
Preferred Common Paid-in on Investments Earnings
Stock Stock Capital Available-for-Sale (Deficit) Total
------------------------------------------------------------------------------------
Balance at December 31, 1993 $ - $ 193 $259,622 $ - $ (6,783) $ 253,032
Issuance of common stock - 8 19,674 - - 19,682
Net income - 1994 - - - - 52,257 52,257
Change in net unrealized loss
on investments available-for-sale - - - (72,678) - (72,678)
Dividends on common stock
at $2.76 per share - - - - (54,822) (54,822)
---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 - 201 279,296 (72,678) (9,348) 197,471
Issuance of common stock - 1 2,212 - - 2,213
Series A preferred stock issued,
net of issuance costs 35,460 - - - - 35,460
Series B preferred stock issued,
net of issuance costs 51,425 - - - - 51,425
Net income - 1995 - - - - 36,910 36,910
Change in net unrealized loss,
on investments available-for-sale - - - 67,919 - 67,919
Dividends on common stock
at $1.68 per share - - - - (33,829) (33,829)
Dividends on preferred stock - - - - (2,746) (2,746)
------------------------------------------------------------------------------------
Balance at December 31, 1995 86,885 202 281,508 (4,759) (9,013) 354,823
Issuance of common stock - 5 10,129 - - 10,134
Series C preferred stock issued,
net of issuance costs 52,740 - - - - 52,740
Net income - 1996 - - - - 73,048 73,048
Change in net unrealized loss
on investments available-for-sale - - - 69,161 - 69,161
Dividends on common stock
at $2.27 per share - - - - (46,280) (46,280)
Dividends on preferred stock - - - - (10,009) (10,009)
=======================================================================================
Balance at December 31, 1996 $ 139,625 $207 $ 291,637 $ 64,402 $ 7,746 $ 503,617
=======================================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
RESOURCE MORTGAGE CAPITAL, INC.
Years ended December 31, 1996, 1995 and 1994
(amounts in thousands)
1996 1995 1994
--------------- --------------- --------------
Operating activities:
Net income $ 73,048 $ 36,910 $ 52,257
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Provision for losses 3,106 2,888 2,124
Net gain from sale of portfolio assets (503) (2,276) (7,685)
Gain on sale of single-family operations (17,285) - -
Amortization and depreciation 23,046 14,091 8,006
Net increase in accrued interest, other
assets and other liabilities (22,891) (9,920) (3,006)
Other - (2,639) (2,092)
--------------- --------------- -------------
Net cash provided by operating activities 58,521 39,054 49,604
--------------- --------------- --------------
Investing activities:
Collateral for collateralized bonds:
Fundings of loans subsequently securitized (1,571,955) (708,954) (77,917)
Principal payments on collateral 464,478 205,150 120,088
Net change in funds held by trustees 3,056 952 12,917
--------------- --------------- --------------
(1,104,421) (502,852) 55,088
Net (increase) decrease in loans held for securitization (60,005) 307,019 275,700
Purchase of collateralized bonds, net - - (1,890)
Purchase of other portfolio assets (33,319) (15,665) (16,872)
Payments on other portfolio assets 12,117 4,939 13
Purchase of mortgage securities (106,510) (432,885) (890,170)
Principal payments on mortgage securities 305,112 260,850 436,351
Proceeds from sales of mortgage securities 505,708 634,364 251,454
Proceeds from sale of single-family operations 20,413 - -
Capital expenditures (3,162) (911) (1,990)
--------------- --------------- --------------
Net cash (used for) provided by investing activities (464,067) 254,859 107,684
--------------- --------------- --------------
Financing activities:
Collateralized bonds:
Proceeds from issuance of securities 2,060,402 678,121 68,972
Principal payments on securities (448,238) (174,150) (131,452)
--------------- --------------- --------------
1,612,164 503,971 (62,480)
Repayments of borrowings, net (1,228,604) (847,624) (48,283)
Proceeds from stock offerings, net 62,874 89,097 19,682
Dividends paid (51,721) (25,042) (59,842)
--------------- --------------- --------------
Net cash provided by (used for) financing activities 394,713 (279,598) (150,923)
--------------- --------------- --------------
Net (decrease) increase in cash (10,833) 14,315 6,365
Cash at beginning of year 22,229 7,914 1,549
=============== =============== ==============
Cash at end of year $ 11,396 $ 22,229 $ 7,914
=============== =============== ==============
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESOURCE MORTGAGE CAPITAL, INC.
December 31, 1996, 1995 and 1994
(amounts in thousands except share data)
NOTE 1 - THE COMPANY
The Company is a mortgage and consumer finance company which uses its loan
production operations to create investments for its portfolio. The Company
originates or purchases mortgage loans and consumer installment loans throughout
the United States. Currently, the Company's primary production operations
include the origination of mortgage loans secured by multi-family properties and
the origination of loans secured by manufactured homes. The Company will
securitize the loans funded principally as collateral for collateralized bonds,
limiting its credit risk and providing long-term financing for those loans
securitized. The Company may also use other securitization vehicles for its loan
production, such as pass-through securities.
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 affiliated entities (collectively, the Company). All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain amounts for 1995 and 1994 have been reclassified to conform to the
presentation for 1996.
Federal Income Taxes
Resource Mortgage has elected to be taxed as a real estate investment trust
(REIT) under the Internal Revenue Code. As a result, Resource Mortgage generally
will not be subject to federal income taxation at the corporate level to the
extent that it distributes at least 95 percent of its taxable income to its
shareholders and complies with certain other requirements. No provision has been
made for income taxes for Resource Mortgage and its qualified REIT subsidiaries
in the accompanying consolidated financial statements, as Resource Mortgage
believes it has met the prescribed distribution requirements.
Portfolio Assets
Collateral for Collateralized Bonds. Collateral for collateralized bonds
consists of single-family and multi-family mortgage loans which have been
pledged to secure collateralized bonds. Loans are carried at their outstanding
principal balances, net of unamortized premiums and discounts.
Mortgage Securities. Mortgage securities consist of adjustable-rate
mortgage securities (ARMs), fixed-rate mortgage securities, mortgage
derivative securities and mortgage residual interests.
Other Portfolio Assets. Other portfolio assets consists of a note receivable at
December 31, 1996 of $47,500 received in connection with the sale of the
Company's single-family mortgage operations in May 1996 (see Note 11), financing
lease receivables and single-family homes leased to home builders. Other
portfolio assets are considered held to maturity and are therefore reported at
their amortized cost basis.
Available-for-Sale Investments. Pursuant to the requirements of Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, the Company has classified collateral for
collateralized bonds and mortgage securities as available-for-sale. These
portfolio assets are therefore reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity. The basis of any securities sold is computed using the
specific identification method. Any of these investments may be sold prior to
maturity to support the Company's investment strategies.
Loans Held for Securitization
Loans held for securitization at December 31, 1996 include mortgage loans
secured by multi-family and single-family residential properties and installment
loans secured by manufactured homes. These loans were originated through the
Company's loan production operations and will generally be securitized as
collateral for collateralized bonds. These loans are carried at their unpaid
principal balance, net of any unamortized discount or premium and adjusted for
deferred hedging gains or losses, if any.
Price Premiums and Discounts
Price premiums and discounts on mortgage securities, collateral for
collateralized bonds and collateralized bonds are deferred as an adjustment to
the basis of the related investment or obligation and are amortized into
interest income or expense, respectively, over the life of the related
investment or obligation using the effective yield method adjusted for the
effects of prepayments.
Deferred Issuance Costs
Costs incurred in connection with the issuance of collateralized bonds are
deferred and amortized over the estimated lives of the collateralized bonds
using the interest method adjusted for the effects of prepayments. These costs
are included in the carrying value of the collateral for collateralized bonds.
Hedging Instruments
The nature of the Company's investment and financing strategies expose the
Company to interest rate risk. Interest rate cap agreements may be utilized to
limit the Company's risks related to the financing of certain investments should
short-term interest rates rise above specified levels. The amortization of the
cost of such interest rate cap agreements will reduce net interest margin on the
related investment over the lives of the interest rate cap agreements. The
remaining unamortized cost is included with the related investment in the
consolidated balance sheets. The Company may also enter into financial futures
and options contracts and interest rate swaps to moderate the interest rate
risks inherent in the financing of its mortgage securities. Revenues or costs
associated with financial futures and options contracts are recognized in income
or expense in a manner consistent with the accounting for the asset or liability
being hedged. Revenues and costs associated with interest rate swaps are
recorded as adjustments to interest expense on the financing obligation being
hedged.
The Company may also enter into forward delivery contracts and into financial
futures and options contracts for the purpose of reducing exposure to the effect
of changes in interest rates on loans which the Company has funded or committed
to fund. Gains and losses on such contracts are either (i) deferred until such
time the related loans are sold, or (ii) deferred as an adjustment to the
carrying value of the related loan and amortized into income over the life of
the loan using the effective yield method adjusted for the effects of
prepayments.
Cash
Approximately $6,600 and $5,400 of cash at December 31, 1996 and 1995,
respectively, is restricted for the payment of premiums on various insurance
policies related to certain mortgage securities, or is held in trust to cover
losses not otherwise covered by insurance. Cash at December 31, 1995 also
included approximately $15,300 of deposits in-transit from repurchase agreement
counterparties or the trustee for certain mortgage securities pledged as
collateral for repurchase agreements.
Net Income Per Common Share
Net income per common share as shown on the consolidated statements of
operations for the years ended December 31, 1996, 1995 and 1994 is presented on
both a primary net income per common share and fully diluted net income per
common share basis. Fully diluted net income per common share assumes the
conversion of the convertible Preferred Stock into common stock, using the
if-converted method, and dilutive Stock Appreciation Rights, using the Treasury
Stock method. The average number of shares is increased by the assumed
conversion of convertible items, but only if these items are dilutive. For the
year ended December 31, 1996 only, the Company's Preferred Stock and Stock
Appreciation Rights were dilutive. The Preferred Stocks are convertible to
shares of common stock on a one-for-one basis. The following table summarizes
the average number of shares of common stock and equivalents used to compute
primary and fully diluted net income per common share for the years ended
December 31, 1996, 1995 and 1994:
- ---------------------------------------------------------------------
Year ended December 31,
1996 1995 1994
-------------- --------------- -------------
Primary 20,444,790 20,122,772 19,829,609
============= ============== =============
Fully-diluted 24,662,677 20,122,772 19,829,609
============= ============== =============
- ---------------------------------------------------------------------
Stock Appreciation Rights
In January 1996, the Company adopted Financial Accounting Standards Board
Statement No. 123, Accounting for Stock-Based Compensation (FAS No. 123).
FAS No. 123 establishes a fair value based method of accounting for
stock-based compensation plans. FAS No. 123 permits entities to expense an
estimated fair value of employee stock options or to continue to measure
compensation cost for these plans using the intrinsic value accounting
method contained in APB Opinion No. 25. As the Company issues only stock
appreciation rights pursuant to various stock incentive plans which are
currently paid in cash, the impact of adopting FAS No. 123 did not result in
a material change to the Company's financial position or results of
operations.
Use of Estimates
Fair Value. The Company uses estimates in establishing fair value for its
investments available-for-sale. Estimates of fair value for most investments are
based on market prices provided by certain dealers. Estimates of fair value for
certain other investments are determined by calculating the present value of the
projected net cash flows of the instruments using appropriate discount rates and
credit loss assumptions. The discount rates used are based on management's
estimates of market rates, and the net cash flows are projected utilizing the
current interest rate environment and forecasted prepayment rates. Estimates of
fair value for all remaining investments available-for-sale are based primarily
on management's judgment. Since the fair value of the Company's investments
available-for-sale are based on estimates, actual gains and losses recognized
may differ from those estimates recorded in the consolidated financial
statements. The fair value of all on- and off-balance sheet financial
instruments is presented in Notes 3 and 9.
Allowance for Losses. As discussed in Note 4, the Company has retained credit
risk on certain securitized loans. An allowance for losses has been estimated
and established for the credit risk retained based on management's judgment. The
allowance for losses is evaluated and adjusted periodically by management based
on the actual and projected timing and amount of potential credit losses, as
well as industry loss experience. Provisions made to increase the allowance
related to the credit risk retained is presented as "Provision for Losses" in
the accompanying financial statements. The Company's actual credit losses may
differ from those estimates used to establish the allowance.
Other Mortgage Securities. Income on certain other mortgage securities is
accrued using the effective yield method based upon estimates of future net cash
flows to be received over the estimated remaining lives of the mortgage
securities. Estimated effective yields are changed prospectively consistent with
changes in current interest rates and current prepayment assumptions on the
underlying mortgage collateral used by various dealers in mortgage-backed
securities. Reductions in carrying value are made when the total projected cash
flow is less than the Company's basis, based on either the dealers' prepayment
assumptions or, if it would accelerate such adjustments, management's
expectations of interest rates and future prepayment rates.
NOTE 3 - PORTFOLIO ASSETS
Collateral for Collateralized Bonds and Mortgage Securities
The following table summarizes the Company's amortized cost basis and fair
value of portfolio assets classified as available-for-sale at December 31, 1996
and 1995, and the related average effective interest rates (calculated for the
month ended December 31, 1996 and 1995, and excluding unrealized gains and
losses):
- ----------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------
Effective Effective
Fair Interest Fair Interest
Value Rate Value Rate
- ----------------------------------------------------------------------------
Collateral for
collateralized bonds:
Amortized cost $2,668,633 7.9% $1,012,399 8.4%
Allowance for losses (31,732) (1,800)
---------- ----------
Amortized cost, net 2,636,901 1,010,599
Gross unrealized gains 73,696 20,208
Gross unrealized losses (8,303) (1,872)
- ----------------------------------------------------------------------------
$2,702,294 $1,028,935
- ----------------------------------------------------------------------------
Mortgage Securities:
Adjustable-rate mortgage $ 780,259 6.9% $2,087,435 6.8%
securities
Fixed-rate mortgage 29,505 10.9% 35,074 7.9%
securities
Other mortgage securities 88,198 16.4% 56,190 15.6%
---------- ----------
897,962 2,178,699
Allowance for losses (4,934 ) (6,188)
---------- ----------
Amortized cost, net 893,028 2,172,511
Gross unrealized gains 23,591 22,488
Gross unrealized losses (24,582 ) (45,583)
- ----------------------------------------------------------------------------
$ 892,037 $2,149,416
- ----------------------------------------------------------------------------
Collateral for collateralized bonds. Collateral for collateralized bonds
consists of adjustable-rate and fixed-rate mortgage loans secured by first liens
on single-family and multi-family residential housing. All collateral for
collateralized bonds is pledged to secure repayment of the related debt
obligation. All principal and interest (less servicing related fees) on the
collateral is remitted to a trustee and is available for payment on the bond
obligation. The Company's exposure to loss on collateral for collateralized
bonds is limited to its net investment, as collateralized bonds are non-recourse
to the Company. The Company may also be exposed to losses from prepayments of
the underlying loans to the extent of unamortized net premium on the loans or
deferred costs related to the issuance of the collateralized bonds.
The components of collateral for collateralized bonds at December 31, 1996 and
1995 are as follows:
----------------------------------------------------
1996 1995
----------------------------------------------------
Mortgage collateral, net of $2,555,903 $974,380
allowance
Funds held by trustees 2,637 3,056
Accrued interest receivable 18,575 7,801
Unamortized premiums and 55,833 22,107
discounts, net
Deferred issuance costs 3,953 3,255
Unrealized gain 65,393 18,336
----------------------------------------------------
$ 2,702,294 $1,028,935
----------------------------------------------------
Adjustable-Rate Mortgage Securities. ARMs consist of mortgage certificates
secured by adjustable-rate mortgage loans.
Fixed-Rate Mortgage Securities. Fixed-rate mortgage securities consist of
mortgage certificates secured by mortgage loans that have a fixed rate of
interest for at least one year from the balance sheet date.
Other Mortgage Securities. Other mortgage securities include primarily mortgage
derivative securities and mortgage residual interests. Mortgage derivative
securities are classes of collateralized bonds, 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.
Sale of Securities. Proceeds from sales of mortgage securities totaled $505,708
in 1996, compared to $634,364 in 1995. Gross gains of $4,489 in 1996 and $15,513
in 1995, and gross losses of $6,887 in 1996 and $13,237 in 1995, were realized
on those sales. Gross realized losses in 1996 includes the reduction of the
basis in certain other mortgage securities recorded as writedowns for permanent
impairment as expectations of future prepayments rates would result in the
Company receiving less cash than its current basis in those investments. The
adjustment recorded by the Company was $1,460 and is included in the net gain on
sale of assets in the accompanying financial statements. Gross realized gains
for 1995 includes the recognition of the Company's basis in the repurchase
obligation related to convertible adjustable-rate mortgage loans previously
securitized or sold as a result of the transfer of this obligation to a third
party.
NOTE 4 - ALLOWANCE FOR LOSSES ON PORTFOLIO ASSETS
The following table summarizes the activity for the allowance for losses on
portfolio assets for the years ended December 31, 1996 and 1995:
--------------------------------------------------------------------------------------
1996 1995
--------------------------------------------------------------------------------------
Collateral for Collateral for
collateralized Mortgage collateralized Mortgage
bonds Securities bonds Securities
----------------------------------------------------------------------------------------
Beginning balance $ 1,800 $ 6,188 $ - $ 8,703
Provision for losses $ 2,300 700 1,800 1,088
Provision recorded due to
sale of single-family
operations (see Note 11) $ 29,434 $1,600 - -
Losses charged-off, net (3,554) (3,603) - (1,802)
-----------------------------------------------------------------------------------------
$31,732 $4,934 $ 1,800 $ 6,188
-----------------------------------------------------------------------------------------
The Company has limited exposure to credit risk retained on loans which it has
securitized through the issuance of collateralized bonds. The aggregate loss
exposure is generally limited to the Company's net investment in these
collateralized bonds, excluding price premiums and discounts and hedge gains and
losses. The Company only incurs credit losses to the extent that losses are
incurred in the repossession, foreclosure and sale of the underlying collateral.
Such losses generally equal the excess of the principal amount outstanding plus
servicer advances, less any proceeds from mortgage or hazard insurance, over the
liquidation value of the collateral. An allowance for losses, which is based on
industry and Company experience, has been established for estimated potential
losses over the expected life of these securities. The allowance for losses for
collateralized bonds is included in collateral for collateralized bonds in the
accompanying consolidated balance sheets.
On certain mortgage securities collateralized by mortgage loans purchased by the
Company for which mortgage pool insurance is used as the primary source of
credit enhancement, the Company has limited exposure to certain credit risks
such as fraud in the origination and special hazard not covered by such
insurance. An allowance was established based on the estimate of losses at the
time of securitization. The Company has not significantly utilized pool
insurance as a form of credit enhancement since 1993. Accordingly, the Company's
exposure to such potential losses is declining as the remaining outstanding
securities pay-down. The allowance for losses for mortgage securities is
included in mortgage securities in the accompanying consolidated balance sheets.
The allowance for losses is evaluated and adjusted periodically by management
based on the actual and estimated amount of potential credit losses, as well as
industry and Company loss experience.
NOTE 5 - LOANS HELD FOR SECURITIZATION
The following table summarizes the Company's loans held for securitization at
December 31, 1996 and 1995, respectively.
-----------------------------------------------------------------------------------------
1996 1995
-----------------------------------------------------------------------------------------
Secured by multi-family residential properties $ 208,230 $ 7,786
Secured by manufactured homes 40,745 -
Secured by single-family residential properties 21,735 190,898
------------ --------------
270,710 198,684
Net premium (discount) (5,173) 21,364
-----------------------------------------------------------------------------------------
$ 265,537 $ 220,048
-----------------------------------------------------------------------------------------
The Company originates fixed-rate loans secured by first mortgages or deeds of
trust on multi-family residential properties. The Company also originates
fixed-rate and adjustable-rate installment loans on manufactured homes which are
secured by either a UCC filing or a title. Prior to the sale of its
single-family operations (see Note 11), the Company purchased and originated
fixed-rate and adjustable-rate loans secured by first mortgages or first deeds
of trust on single-family attached or detached residential properties.
Subsequent to the sale, the Company is prohibited through March 2001 from
purchasing through correspondent relationships or originating through a
wholesale network certain types of single-family mortgage loans.
Net premium (discount) on loans held for securitization includes premium paid
and discount obtained on loans held for securitization. Additionally, the net
premium (discount) is adjusted by the gains and losses generated from
corresponding hedging transactions, primarily used to protect the pipeline of
commitments to fund loans. The net premium (discount) is deferred as an
adjustment to the carrying value of the loans until the loans are securitized or
sold.
The Company funded mortgage loans with an aggregate principal balance of
$744,001, $893,953 and $2,861,443 during 1996, 1995 and 1994, respectively.
Additionally, the Company made bulk loan purchases totaling $731,460 and $22,433
in 1996 and 1995 respectively.
At December 31, 1996, a portion of the loans secured by single-family
residential properties consists of loans delinquent in excess of 90 days and not
covered by mortgage pool insurance. These loans were funded prior to the sale of
the single-family mortgage operations, and were not subsequently securitized due
to delinquency issues. The Company recorded a provision for losses of $2,636 at
the time of the sale of the single-family mortgage operations in May 1996.
During 1996, losses on loans totaling $520 were charged-off to the allowance,
and the balance of the allowance at December 31, 1996 and 1995 was $2,290 and
$174, respectively. The remaining balance of single-family residential loans
includes loans repurchased from mortgage pass-through securities issued by the
Company in prior years and which have mortgage pool insurance to cover losses.
NOTE 6 - COLLATERALIZED BONDS
The components of collateralized bonds along with certain other information
at December 31, 1996 and 1995 are summarized below:
------------------------------ -------------------------------- -------------------------------
1996 1995
------------------------------ -------------------------------- -------------------------------
Bonds Range of Bonds Range of
Outstanding Interest Rates Outstanding Interest Rates
------------------------------ -------------- ----------------- -------------- ----------------
Variable-rate classes $ 2,288,709 5.5% - 6.0% $ 680,993 5.9% - 6.4%
Fixed-rate classes 220,185 6.5% - 11.5% 253,183 6.5% - 15.0%
Accrued interest payable 4,688 3,021
Unamortized premium 6,126 11,942
------------------------------ -------------- ----------------- -------------- ----------------
$ 2,519,708 $ 949,139
------------------------------ -------------- ----------------- -------------- ----------------
Range of stated maturities 1998-2030 1998 - 2027
Number of series 31 37
------------------------------ -------------- ----------------- -------------- ----------------
Each series of collateralized bonds may consist of various classes of bonds,
either at fixed or variable rates of interest. Payments received on the loans
pledged as collateral for collateralized bonds and any reinvestment income
thereon are used to make payments on the collateralized bonds (see Note 3). The
obligations under the collateralized bonds are payable solely from the
collateral for collateralized bonds 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 collateralized bonds series
is likely to occur earlier than its stated maturity.
Included in the collateralized bond balance are certain bonds which were not
sold, but pledged as collateral for repurchase borrowings. The amount of those
repurchase agreements included in collateralized bonds was $366,689 and $102,027
at December 31, 1996 and 1995, respectively. These amounts are recourse to the
Company.
The variable rate classes are based on 1-month London InterBank Offered Rate
(LIBOR). The average effective rate of interest expense for collateralized bonds
was 6.5%, 7.2% and 8.3% for the years ended December 31, 1996, 1995 and 1994,
respectively.
NOTE 7 - REPURCHASE AGREEMENTS
The Company utilizes repurchase agreements to finance certain of its
investments. These repurchase agreements are generally recourse to the Company.
These repurchase agreements bear interest at rates indexed to LIBOR and may be
secured by adjustable-rate mortgage securities, fixed-rate mortgage securities,
loans held for securitization and certain other mortgage securities. At December
31, 1996, substantially all repurchase agreements had maturities within thirty
days. If the counterparty to the repurchase agreement fails to return the
collateral, the ultimate realization of the security by the Company may be
delayed or limited.
The excess market value of the mortgage assets securing the Company's repurchase
obligations at December 31, 1996 did not exceed 10% of shareholders' equity for
any of the individual counterparties with whom the Company had contracted these
agreements.
The following table summarizes the Company's repurchase agreements outstanding
and the weighted average annual rate for these agreements at December 31, 1996
and 1995:
- -----------------------------------------------------------------------
Weighted Market
Amount Average Value of
Outstanding Annual Rate Collateral
- ------------------------------------------------------------------------
December 31, 1996:
Repurchase agreements secured by:
Adjustable-rate mortgage $ 717,232 5.82% $ 757,389
securities
Fixed-rate mortgage 26,297 5.81% 28,502
securities
Other mortgage securities 12,919 5.96% 20,134
- ------------------------------------------------------------------------
$ 756,448 $ 806,025
- ------------------------------------------------------------------------
December 31, 1995:
Repurchase agreements secured by:
Adjustable-rate mortgage $1,951,492 5.80% $2,040,425
securities
Fixed-rate mortgage 24,165 6.03% 34,582
securities
Other mortgage securities 7,701 6.12% 32,202
- ------------------------------------------------------------------------
$1,983,358 $2,107,209
- ------------------------------------------------------------------------
NOTE 8 - NOTES PAYABLE
The following table summarizes amounts outstanding under the below referenced
notes payable facilities and the weighted average annual rate of these
facilities at December 31, 1996 and 1995:
- -------------------------------------- ------------------ -- -------------- -- ---------------
Weighted Carrying
Amount Average Value of
Outstanding Annual Rate Collateral
- -------------------------------------- ------------------ -- -------------- -- ---------------
December 31, 1996:
Secured:
Loans held for securitization $119,500 6.98% $ 235,845
Other portfolio assets 11,583 7.87% 33,319
Unsecured:
Series A 9.56% senior notes 9,000 9.56% -
Series B 10.03% senior notes 35,000 10.03% -
Acquisition notes due 1997-1999 841 8.00% -
Acquisition notes due 1999-2001 1,200 8.73% -
- -------------------------------------- ------------------ -- -------------- -- ---------------
$177,124 $269,146
- -------------------------------------- ------------------ -- -------------- -- ---------------
December 31, 1995:
Secured:
Loans held for securitization $105,681 5.68% $ 153,298
Unsecured:
Series A 9.56% senior notes 12,000 9.56% -
Series B 10.03% senior notes 35,000 10.03% -
Acquisition notes due 1997-1999 1,360 8.00% -
- -------------------------------------- ------------------ -- -------------- -- ---------------
$154,041 $153,298
- -------------------------------------- ------------------ -- -------------- -- ---------------
Secured. At December 31, 1996, the Company had three credit facilities
aggregating $500,000 to finance the funding of loans, of which $350,000 expires
in 1997 and $150,000 expires in 1998. The interest rates on these facilities
range from 1-month LIBOR plus 1% to 1-month LIBOR plus 1.375%. The contractual
rates paid on these facilities may be reduced by credits for compensating cash
balances. One of these facilities includes a sub-agreement which allows the
Company to borrow up to $30,000 unsecured for working capital purposes. The
Company expects that these credit facilities will be renewed, if necessary, at
their respective expiration dates, although there can be no assurance of such
renewal.
Unsecured. The Company's Series A 9.56% senior notes are payable in annual
installments through 1999. The Company's Series B 10.03% senior notes are
payable in annual installments through 2001. The Company also issued various
unsecured notes payable in conjunction with the acquisition of a multi-family
mortgage broker (see Note 10) and the acquisition of a single-family mortgage
servicer which was sold in 1996 along with the single-family mortgage operations
(see Note 11). The aggregate principal payments due under the unsecured notes
for the next five years after December 31, 1996 are $3,406, $12,156, $12,695,
$8,894 and $8,894.
NOTE 9 - ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS
The following table presents the carrying values and estimated fair values of
the Company's recorded financial instruments, as well as information about
certain specific off-balance sheet financial instruments as of December 31, 1996
and 1995:
- ------------------------------------- ---------------------------------------- ----------------------------------------
1996 1995
- ------------------------------------- ------------ ------------- ------------- ------------ ------------- -------------
Notional Notional
Amount Cost Basis Fair Value Amount Cost Basis Fair Value
- ------------------------------------- ------------ ------------- ------------- ------------ ------------- -------------
Recorded financial instruments:
Assets:
Collateral for collateralized $ - $2,628,288 $2,699,687 $ -- $1,010,599 $1,028,935
bonds
Mortgage securities - 882,615 889,542 -- 2,148,759 2,145,670
Interest rate cap agreements 1,499,000 19,025 5,102 1,575,000 23,752 3,746
Loans held for securitization - 265,537 277,710 -- 220,048 223,451
Other portfolio assets - 96,236 98,378 -- 27,585 27,585
Cash - 11,396 11,396 -- 22,229 22,229
Liabilities:
Collateralized bonds - 2,519,708 2,519,708 -- 949,139 949,139
Repurchase agreements - 756,448 756,448 -- 1,983,358 1,983,358
Notes payable - 177,124 177,124 -- 154,041 154,041
Off-balance sheet financial instruments:
Financial futures contracts:
Repurchase agreements - - - 1,000,000 -- (107)
Loans held for securitization 78,170 - 515 274,700 -- (628)
Options on futures contracts:
Repurchase agreements - - - 2,130,000 -- 46
Loans held for securitization 100,000 - (55) 30,000 -- (2)
Interest rate swap agreements:
Mortgage securities 1,020,000 - (1,177) 1,020,000 -- 4,882
Collateralized bonds 432,801 - 334 207,094 -- (3,898)
Forward delivery contracts:
Loans held for securitization 76,280 - 293 - -- --
Commitments to fund loans 536,931 - 554,582 954,900 -- 985,200
- ------------------------------------- ------------ ------------- ------------- ------------ ------------- -------------
The estimated fair values of financial instruments have been determined using
available market information and appropriate valuation methodologies. However, a
degree of judgment is necessary in evaluating market data and forming these
estimates.
Recorded Financial Instruments. The carrying amount of cash and liabilities
considered to be financial instruments approximates fair value at December 31,
1996 and 1995. As discussed in Note 2, the fair value of mortgage securities is
based on actual dealer price quotes, or by determining the present value of the
projected net cash flows using appropriate discount rates and prepayment
assumptions.
The Company has purchased over the past four years LIBOR and One-year Constant
Maturity Treasury Index (CMT) based interest rate cap agreements to limit its
exposure to the lifetime interest rate caps on certain of its adjustable-rate
mortgage securities and collateral for collateralized bonds. Under these
agreements, the Company will receive additional cash flow should the related
index increase above the contracted rates. Contract rates on these cap
agreements range from 8.0% to 11.5%, with expiration dates ranging from 1999 to
2004.
Off-Balance Sheet Financial Instruments. The Company may engage in derivative
financial instrument activities for the purpose of interest rate risk
management. As of December 31, 1996, all of the Company's derivative financial
instruments were for purposes other than trading. The Company has credit risk to
the extent that the counterparties to the derivative financial instruments do
not perform their obligation under the agreements. If one of the counterparties
does not perform, the Company would not receive the cash to which it would
otherwise be entitled under the conditions of the agreement.
The Company may utilize Eurodollar financial futures and options contracts to
moderate the risks inherent in the financing of its mortgage securities with
floating rate repurchase agreements. The Company utilizes these instruments to
synthetically lengthen the terms of the repurchase agreement financing,
generally from one month to three and six months. Under these contracts, the
Company will receive additional cash flow if the related Eurodollar index
increases above the contracted rates. The Company will pay additional cash flow
if the related Eurodollar index decreases below the contracted rates. As of
December 31, 1996, the Company had no such financial futures or option
contracts. As of December 31, 1995, the Company had contracts with a notional
value of $3,130,000 with contract rates ranging from 5.0% to 5.4%.
The Company may enter into various interest rate swap agreements to limit its
exposure to changes in financing rates of certain mortgage securities. The
Company has entered into a series of interest rate swap agreements which
effectively caps the increase in borrowing costs in any six-month period to 1%
for $1,020,000 notional amount of short-term borrowings. Pursuant to the terms
of this agreement, the Company pays the lesser of current 6-month LIBOR, or
6-month LIBOR in effect 180-days prior plus 1%, and receives current 6-month
LIBOR. These agreements expire in 2001. The Company has also entered into a
5-year amortizing interest rate swap agreement related to variable-rate
collateralized bond classes with a remaining notional of $178,045. Under the
terms of this agreement, the Company receives 1-month LIBOR and pays 6.15%. This
agreement expires in 2000. The Company entered into a 7-year amortizing interest
rate swap agreement with remaining notional of $254,756 related to prime-based
loans financed with LIBOR-based variable-rate collateralized bonds. Under the
terms of the agreement, the Company receives 1-month LIBOR plus 2.65% and pays
1-month average prime in effect 3 months prior.
Forward delivery contracts and financial futures and options contracts are used
to reduce exposure to the effect of changes in interest rates on funded mortgage
loans, as well as those mortgage loans which the Company has committed to fund.
As of December 31, 1996, the Company had entered into commitments to fund
multi-family mortgage loans of $521,684 and manufactured housing loans of
$15,247. The multi-family commitments had original terms of not more than 27
months. The manufactured housing commitments generally had original terms of not
more than 60 days. The Company has deferred net hedging gains of $2,022 at
December 31, 1996 and deferred net hedging losses of $16,647 at December 31,
1995 related to these positions.
NOTE 10 - ACQUISITION
On August 30, 1996, the Company acquired Multi-Family Capital Markets, Inc.
(MCM), which specializes in the sourcing, underwriting and closing of
multi-family loans secured by first liens on apartment properties that have
qualified for low income housing tax credits. The Company acquired all of the
outstanding stock and assets of MCM for $4,000. Of this amount, $2,800 was paid
in cash with the remaining $1,200 paid through the issuance of notes to the
sellers, due in installments through September 1, 1999 and September 1, 2001.
The acquisition was accounted for as a purchase, and accordingly, the purchase
price was allocated to the assets and liabilities acquired based on their
estimated fair values as of the date of acquisition. MCM's results of operations
are not material to the Company's consolidated financial statements and proforma
financial information has therefore not been presented.
NOTE 11 - SALE OF SINGLE-FAMILY MORTGAGE OPERATIONS
On May 13, 1996, the Company sold its single-family correspondent, wholesale and
servicing operations (collectively, the single-family mortgage operations) to
Dominion Mortgage Services, Inc. (Dominion), a wholly-owned subsidiary of
Dominion Resources, Inc. (NYSE: D). The purchase price was $67,958 for the stock
and assets of the single-family mortgage operations. The terms of the purchase
included an initial cash payment of $20,458, with the remainder of the purchase
price paid in five annual installments of $9,500 beginning January 2, 1997,
pursuant to a note agreement. The note bears interest at a rate of 6.50%. The
terms of the sale generally prohibit the Company from acquiring single-family,
non-conforming residential mortgages through either correspondent relationships
or a wholesale network for a period of five years. As a result of the sale, the
Company recorded a net gain of $17,285. Such amount includes a provision of
approximately $31,000 for possible losses on securitized single-family loans
where the Company, which performed the servicing of such loans prior to the
sale, has retained a portion of the credit risk on these loans.
NOTE 12 - PREFERRED STOCK
The following table presents a summary of the Company's issued and outstanding
preferred stock:
- ----------------------------------------------------------- -------------- -----------------------
Liquidation Dividends
Preference Per Share
Per Share 1996 1995
- ----------------------------------------------------------- -------------- ------------ ----------
Series A 9.75% Cumulative Convertible Preferred Stock $24.00 $2.375 $1.170
Series B 9.55% Cumulative Convertible Preferred Stock 24.50 2.375 0.423
Series C 9.73% Cumulative Convertible Preferred Stock 30.00 0.600 -
- ----------------------------------------------------------- -------------- ------------ ----------
The Company is authorized to issue up to 50,000,000 shares of preferred stock.
For all series issued, dividends are cumulative from the date of issue and are
payable quarterly in arrears. The dividends are equal, per share, to the greater
of (i) the per quarter base rate of $0.585 for Series A and Series B, and $0.73
for Series C , or (ii) the quarterly dividend declared on the Company's common
stock. Each share of Series A, Series B and Series C is convertible at any time
at the option of the holder into one share of common stock. Each series is
redeemable by the Company, in whole or in part, (i) for one share of common
stock, plus accrued and unpaid dividends, provided that for 20 trading days
within any period of 30 consecutive trading days, the closing price of the
common stock equals or exceeds the issue price, or (ii) for cash at the issue
price, plus any accrued and unpaid dividends beginning after June 30 and October
31, 1998 for Series A and B, respectively and September 30, 1999 for Series C.
Series C was issued in October 1996 with proceeds of $52,740 net of issuance
costs.
In the event of liquidation, the holders of all series of preferred stock will
be entitled to receive out of the assets of the Company, prior to any such
distribution to the common shareholders, the issue price per share in cash, plus
any accrued and unpaid dividends.
NOTE 13 - STOCK INCENTIVE PLAN
Pursuant to the Company's 1993 Stock Incentive Plan (the Employee Incentive
Plan), the Compensation Committee of the Board of Directors may grant to
eligible employees of the Company, its subsidiaries and affiliates for a period
of ten years beginning June 17, 1993, stock options, stock appreciation rights
(SARs) and restricted stock awards. An aggregate of 675,000 shares of common
stock are available for distribution pursuant to stock options, SARs and
restricted stock. The shares of common stock subject to any option or SAR that
terminates without a payment being made in the form of common stock would become
available for distribution pursuant to the Employee Incentive Plan. The
Compensation Committee of the Board of Directors may also grant dividend
equivalent rights (DERs) in connection with the grant of options or SARs. These
SARs and related DERs generally become exercisable as to 20 percent of the
granted amounts each year after the date of the grant.
The following table presents a summary of the SARs outstanding at December
31, 1996 and 1995:
-------------------------------------- ------------ -- ------------------
SARs Exercise Price
-------------------------------------- ------------ -- ------------------
December 31, 1994 211,960 $ 8 3/4 - 29
Granted 122,585 16 1/8
Forfeitures (24,973) 17 7/8 - 29
SARs exercised (3,062) 17 7/8 - 29
-------------------------------------- ------------ -- ------------------
December 31, 1995 306,510 $ 8 3/4 - 29
Granted 72,065 20 3/4-23 5/8
Forfeitures (11,517) 16 1/8 - 20 3/4
SARs exercised (16,114) 8 3/4 - 17 7/8
Terminated at sale of single-family
mortgage operations (67,035) 8 3/4 - 29
-------------------------------------- ------------ -- ------------------
December 31, 1996 283,909 $ 12 3/4 - 29
-------------------------------------- ------------ -- ------------------
The Company expensed $1,664, none and $8 for SARs and DERs during 1996, 1995 and
1994, respectively. There were no stock options outstanding as of December 31,
1996 and 1995. The number of SARs vested and exercisable at December 31, 1996
and 1995 was 106,807 and 94,000, respectively.
In 1995, the Company adopted a Stock Incentive Plan for its Board of Directors
(the Board Incentive Plan) with terms similar to the Employee Incentive Plan. On
May 1, 1995, the date of the initial date of grant under the Board Incentive
Plan, each member of the Board of Directors was granted 7,000 SARs. Each Board
member subsequently received a grant of 1,000 SARs on May 1, 1996 and will
receive an additional grant of 1,000 SARs on May 1, 1997 and 1998, respectively.
The SARs granted on May 1, 1995 will become exercisable as to 33 1/3% of the
granted amount each of the next three years. Each successive award will become
exercisable as to 20% of the granted amounts each year after the date of grant.
The maximum period in which any SAR may be exercised is 73 months from the date
of grant. The maximum number of shares of common stock encompassed by the SARs
granted under the Board Incentive Plan is 100,000. The Company expensed $163 for
SARs and DERs related to the Board Incentive Plan during 1996. There was no such
expense recorded for 1995. The number of SARs vested and exercisable at December
31, 1996 was 9,324. There were no SARs vested and exercisable at December 31,
1995.
NOTE 14 - 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 1996, 1995 and 1994 was $248, $136 and $331, respectively. The Company does
not provide post employment or post retirement benefits to its employees.
NOTE 15 - CONTINGENCIES
The Company makes various representations and warranties relating to the sale or
securitization of mortgage loans. To the extent the Company were to breach any
of these representations or warranties, and such breach could not be cured
within the allowable time period, the Company would be required to repurchase
such mortgage loans, and could incur losses. In the opinion of management, no
material losses are expected to result from any such representations and
warranties.
In connection with the sale of its single-family mortgage operations, the
Company has indemnified the purchaser for a period of up to five years for
various representations and warranties made as part of the sale. One of the
companies included in the sale has been named in a lawsuit seeking class action
status regarding violations of the Real Estate Settlement and Procedures Act
(RESPA). The lawsuit alleges that this entity violated RESPA by payment of
premiums to wholesale brokers for sourcing single-family mortgage loans with
above market rates. The plaintiffs seek compensatory and punitive damages.
Pursuant to the terms of the sale, the Company has indemnified the purchaser
against any such violations of RESPA on loans funded through May 13, 1996. While
the ultimate outcome of this action cannot be presently determined, management
believes that the ultimate settlement of the case will not have a material
adverse impact on the Company's financial condition. Additionally, the Company
believes that any other matters arising as a result of the indemnifications made
at the time of the sale will not have a material adverse effect on the Company's
financial condition.
As of December 31, 1996, the Company is obligated under noncancelable leases
with expiration dates through 2003. The future minimum lease payments under
these noncancelable leases are as follows: 1997--$721; 1998--$825; 1999--$787;
2000--$582; 2001--$600; and thereafter--$1,254.
NOTE 16 - SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION
- ------------------------------------------------------ ----------------------------------------
Year Ended December 31,
1996 1995 1994
- ------------------------------------------------------ ----------- ------------ ---------------
Supplemental disclosure of cash flow information:
Cash paid for interest $228,969 $210,638 $177,943
- ------------------------------------------------------ ----------- ------------ ---------------
Supplemental disclosure of non-cash activities:
Purchase of collateral for collateralized bonds $ -- $ -- $ (54,204)
Assumption of collateral for collateralized bonds -- -- 52,314
- ------------------------------------------------------ ----------- ------------ ---------------
Purchase of collateral for collateralized bonds, net $ -- $ -- $ (1,890)
- ------------------------------------------------------ ----------- ------------ ---------------
RESOURCE MORTGAGE CAPITAL, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
December 31, 1996 (amounts in thousands except number of loans)
- -----------------------------------------------------------------------------------------------------------------------------------
Principal Amount
of Loans
Carrying Subject to
Final Periodic Face Amount of Delinquent
Interest Maturity Payment Prior Amount of Mortgage Principal
Description Rate Date Terms Liens Mortgages Loans Interest
- ------------------------------------------------------------------------------------------------------------------------------------
First mortgage loans:
Single-family residential
174 mortgages, original 7.85% - Varies - - - $ 37,285 $ 21,817
loan amounts ranging from 14.75%
$23 to $ 1,161
Multi-family residential
Siegen Village, Baton 7.95% May 1, Interest - $11,000 $10,947 -
Rouge, Louisiana 2014 and
principal
monthly
Valley Brook, Nashville, 7.95% July 1, Interest - 10,343 10,153 -
Tennessee 2014 and
principal
monthly
Elliot Point, Tempe, 7.85% January 1, Interest - 8,460 8,460 -
Arizona 2015 and
principal
monthly
Columbia Harbison Station, 9.25% October 14, Interest - 7,600 7,592 -
Columbia, South Carolina 2014 and
principal
monthly
66 mortgages, original 7.85% - Varies - - - 171,078 -
loan amounts ranging 10.00%
from $70 to $6,400
- -----------------------------------------------------------------------------------------------------------------------------------
245,515
Net premium/discount (4,797)
Allowance for loan losses (2,290)
- -----------------------------------------------------------------------------------------------------------------------------------
Total mortgage loans on real
estate $ 238,428
- -----------------------------------------------------------------------------------------------------------------------------------
RESOURCE MORTGAGE CAPITAL, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
The loans in the table above are conventional mortgage loans secured by either
single-family or multi-family dwellings with initial maturities ranging from 15
to 30 years. Of the carrying amount, $208 million or 85% are fixed-rate and $37
million or 15% are adjustable-rate loans. The Company believes that its mortgage
pool insurance and allowance of $2,290 are adequate to cover any exposure on
delinquent mortgage loans. A summary of activity of the single- and multi-family
mortgage loans for the years ended December 31, 1996, 1995 and 1994 is as
follows:
----------------------------------------------------------------
Balance at December 31, 1993 $ 777,769
Mortgage loans funded 2,861,443
Collection of principal (20,486)
Mortgage loans sold (3,100,59)
----------------------------------------------------------------
Balance at December 31, 1994 518,131
Mortgage loans funded 893,953
Collection of principal (771,743)
Mortgage loans sold or (392,708)
securitized
----------------------------------------------------------------
Balance at December 31,1995 $ 247,633
Mortgage loans funded or 1,411,161
purchased
Collection of principal (58,397)
Mortgage loans (1,361,96)
securitized
----------------------------------------------------------------
Balance at December 31, 1996 $ 238,428
----------------------------------------------------------------
RESOURCE MORTGAGE CAPITAL, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
The geographic distribution of the Company's single- and multi-family real
estate loans at December 31, 1996 is as follows:
State Number of Loans Principal Amount
Arizona 10 16,401
Arkansas 10 23,302
California 148 27,849
Colorado 1 3,745
Florida 21 19,175
Georgia 5 1,680
Hawaii 1 379
Illinois 5 795
Kentucky 3 11,867
Louisiana 3 18,080
Massachusetts 1 118
Maryland 13 1,984
Minnesota 4 8,928
Mississippi 1 6,396
Nevada 11 1,118
New Jersey 2 531
New York 2 339
North Carolina 3 4,957
Ohio 3 11,385
Pennsylvania 7 7,736
South Carolina 3 12,194
Tennessee 5 31,686
Texas 11 17,734
Utah 2 4,199
Virginia 2 5,584
Washington 1 3,245
Wisconsin 3 4,108
- --------------------------------------------------------------
Total 281 245,515
Net premium/discount (4,797)
Allowance for loan (2,290)
losses
==============================================================
$ 238,428
==============================================================